TABLE OF CONTENTS

Page

Number

PART I

Item 1 Business 3

Item 1A Risk Factors 13

Item 1B Unresolved Staff Comments 21

Item 2 Properties 22

Item 3 Legal Proceedings 23

Item 4 Mine Safety Disclosures 23

PART II

Item 5 Market for Registrant ’ s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 24

Item 6 Selected Financial Data 25

Item 7 Management ’ s Discussion and Analysis of Financial Condition and Results of Operations 27

Item 7A Quantitative and Qualitative Disclosures About Market Risk 47

Item 8 Financial Statements and Supplementary Data 48

Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 107

Item 9A Controls and Procedures 107

Item 9B Other Information 108

PART III

Item 10 Directors, Executive Officers and Corporate Governance 109

Item 11 Executive Compensation 114

Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 133

Item 13 Certain Relationships and Related Transactions and Director Independence 133

Item 14 Principal Accountant Fees and Services 134

PART IV

Item 15 Exhibits and Financial Statement Schedules 135

SIGNATURES

EXHIBITS

2PART I

Unless stated to the contrary or the context requires otherwise, all references in this report to the Company refer to Paperweight Development

Corp. ( “ PDC ” or “ Paperweight ” ) and its 100%

- owned subsidiaries. It includes Appleton Papers Inc. and its 100%

- owned subsidiaries (collectively

“ Appleton ” ).

Item 1. Business

Overview

The Company is a leading manufacturer of specialty, high value

- added coated paper products, including carbonless, thermal and security

papers. The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as

well as microencapsulation and security technologies. Under U.S. generally accepted accounting principles ( “ GAAP ” ), it has three reportable segments:

carbonless papers, thermal papers and Encapsys ®

. The performance of these three 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. ”

Carbonless Papers

The carbonless papers segment, which includes carbonless and security paper products, is the largest component of the Company ’ s paper business.

The Company produces and sells the Appleton and NCR PAPER* brands of carbonless paper. The Company believes it is the world ’ s largest producer of

carbonless paper. Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company produces coated

products for point

- of

- sale displays and other design and print applications and offers custom coating solutions. The Company also produces security

papers with features that resist forgery, tampering and counterfeiting. The Company ’ s portfolio of products incorporates security technologies, including

watermarks, taggants, reactive chemicals, embedded threads and fibers and machine

- readable technologies, to serve global markets. The Company focuses

on financial and identity documents for business and government such as checks, visas, automobile titles and birth certificates.

* NCR PAPER is a registered trademark licensed to the Company.

Thermal Papers

The thermal papers segment focuses on the development of substrates for transaction and item identification markets. The Company believes it is the

largest manufacturer of direct thermal papers in North America. Thermal paper is used in four principal end markets: (1) point

- of

- sale products for retail

receipts and coupons; (2) label products for shipping, warehousing, medical and clean

- room applications; (3) tags and tickets for airline and baggage

applications, event and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and

medical diagnostic charts.

Encapsys

The Encapsys segment discovers, develops and manufactures microencapsulation solutions for external partner companies and for the Company ’ s

carbonless papers segment. Microencapsulation is the process of putting a microscopic wall around a core substance. The Company helped NCR

Corporation ( “ NCR ” ) produce the first commercial application for microencapsulation in 1954 with the introduction of carbonless paper. Since then, the

Company researchers have developed the art and science of microencapsulation and are working with potential partners in industries as diverse as

agriculture, paints and coatings, food, pharmaceuticals, paper, textiles, personal and household care, adhesives, and oil and gas. The Encapsys segment

leverages the Company ’ s extensive technical knowledge and experience with microencapsulation and uses an open innovation process with partner

companies to develop successful technical solutions for those companies.

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 on the

development and production of carbonless paper. In 1954, NCR began marketing its NCR PAPER* brand of carbonless paper, which ACPC manufactured.

3In 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, NCR formed the Appleton Papers division by merging 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, 100%

- owned subsidiary of Arjo

Wiggins Appleton p.l.c. until 2001.

On November 9, 2001, Appleton employees purchased Appleton from Arjo Wiggins Appleton p.l.c. through the use of an employee stock ownership

plan.

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, along with the

proceeds of a senior credit facility, senior subordinated notes, a deferred payment obligation and its available cash, to finance the purchase of the

acquisition described below.

Acquisition from Arjo Wiggins

On November 9, 2001, PDC and a 100%

- owned subsidiary acquired Appleton from Arjo Wiggins Appleton p.l.c., now known as Windward Prospects

Ltd ( “ AWA ” ), and two of its subsidiary holding companies, (the “ sellers ” or “ affiliates of AWA ” ). Appleton is now a 100%

- 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, matters relating to the ESOP, and taking actions required to be taken under ancillary acquisition agreements.

Acquisitions and Dispositions

On April 30, 2003, the Company acquired C&H Packaging Company, Inc. ("C&H") and American Plastics Company, Inc. ("APC"). C&H, located in

Merrill, Wisconsin, prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products

industries. APC, located in Rhinelander, Wisconsin, produces high

- quality, custom multilayered films and commercial packaging.

In December 2003, the Company acquired Bemrose, a privately

- held company headquartered in Derby, England. The group ’ s operating unit,

BemroseBooth Limited ( “ BemroseBooth ” ), produced security printed vouchers and payment cards, mass transit and car parking tickets, variable data

labeling, high

- integrity mailings and printed calendars. BemroseBooth also offered print management services through a network of external suppliers.

In January 2005, the Company acquired New England Extrusion, Inc. ("NEX"), located in Turners Falls, Massachusetts, and Milton, Wisconsin, a

company that produces single and multilayer polyethylene films for packaging applications.

Late in 2007, the Company 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 the Company 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, the Company decided to focus its attention

and expand its leadership positions in its core businesses. On August 1, 2008, the Company completed the sale of Bemrose.

4During second quarter 2009, the Company committed to a formal plan to sell C&H, located in Merrill, Wisconsin. On December 18, 2009, the Company

completed the sale of C&H to The Interflex Group, Inc. During second quarter 2010, the Company committed to a formal plan to sell APC and NEX. On

July 22, 2010, the Company completed the sale of APC and NEX to Mason Wells Buyout Fund II, Limited Partnership. Since C&H, APC and NEX engage in

the manufacture, printing, converting, marketing and sale of high

- quality single and multilayer polyethylene films for packaging applications, their

operations did not align with the Company ’ s strategic, long

- term focus on its core competencies in specialty papers and microencapsulation. The operating

results of APC, NEX and C&H are reported as discontinued operations.

For financial information regarding the Company ’ s business segments, refer to Note 24 of Notes to Consolidated Financial Statements contained below

in “ Item 8. Financial Statements and Supplementary Data. ”

Carbonless Papers

The carbonless papers segment produces carbonless paper and security paper and accounted for approximately 53% of total company net sales in

2011. The Company sells carbonless roll and sheet products under the Appleton and NCR PAPER* brands. The Company believes it has the broadest

carbonless product line in the industry and offers its customers a single source solution for their carbonless paper needs.

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

Carbonless paper is used to make multipart business forms such as invoices and purchase orders. Carbonless paper is used in a variety of end markets,

including government, retail, financial, insurance and manufacturing, with no one predominant end market. 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. Historically, sales of carbonless products

have not been significantly impacted by seasonality.

Since 1994, the North American carbonless market has been in decline as a result of greater use of competing technologies such as digital laser, inkjet

and thermal printers, and electronic communications that do not use impact printing to create images. The Company believes the North American carbonless

paper market declined by approximately 7% to 10% annually from 2006 through 2011, except during the recession period when the decline was estimated at a

16% annual rate. The decline is expected to continue at historical rates over the next several years and eventually to stabilize. The Company believes the

worldwide carbonless market is also in decline, with demand declining at approximately 2% to 4% per year.

In addition to the Company, other significant carbonless paper producers include P.H. Glatfelter Company, Mitsubishi Paper Mills Company Ltd.,

IdemPapers S.A., Asia Pulp and Paper Co. Ltd., Koehler AG, Nippon Industries Co. Ltd. and Oji Paper Co. Ltd. In the carbonless market, the Company

competes primarily on the basis of product quality, service, breadth of product offering and price.

The Company produces security papers with features that resist forgery, tampering and counterfeiting. The Company ’ s portfolio of products

incorporates security technologies, including watermarks, taggants, reactive chemicals, embedded threads and fibers and machine

- readable technologies, to

serve global markets. The Company focuses on financial and identity documents for business and government such as checks, visas, automobile titles and

birth certificates. Sales of the Company ’ s security products have not been significantly impacted by seasonality.

Security paper competitors include P.H. Glatfelter Company, Cascades Resources, Papierfabrik Louisenthal GmbH, ArjoWiggins SAS and De La Rue

International. The Company competes primarily on the basis of product quality, service, breadth of product offering and price.

Thermal Papers

The thermal papers segment focuses on the development of substrates for the transaction and item identification markets and accounted for

approximately 43% of total company net sales in 2011. Thermal paper is used in four principal end markets: (1) point

- of

- sale products for retail receipts and

coupons; (2) label products for shipping, warehousing, medical and clean

- room applications; (3) tags and tickets for airline and baggage applications, event

and transportation tickets and lottery and gaming applications; and (4) printer, calculator and chart paper for engineering, industrial and medical diagnostic

charts. The point

- of

- sale and label market segments, combined, accounted for the majority of thermal paper volume of the North American thermal market in

2011.

5Point

- 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.

The thermal papers market is growing with new applications being developed to use thermal technology. Based on its assessment of the period 2006

through 2011, the Company believes North American thermal markets expanded at a 3% compound average growth rate, with annual rates ranging from a

decline of 2% to increases of 9%. The Company believes demand for thermal paper will continue to grow in North America and around the world. In 2008,

the Company completed an investment of approximately $125 million to expand its mill in West Carrollton, Ohio, in anticipation of that demand. The

expansion project included installation of a state

- of

- the

- art coater to produce thermal paper and enhancements to one of the mill ’ s paper machines. Sales of

thermal papers have not been significantly impacted by seasonality. In addition to the Company, other significant thermal paper producers include Koehler

AG, Kanzaki Specialty Papers, Ricoh Company, Ltd. and Mitsubishi Paper Mills Company Ltd. The Company competes primarily on the basis of product

quality, service, breadth of product offering and price.

Encapsys

The Encapsys segment applies the Company ’ s extensive knowledge of the microencapsulation process to develop and deliver custom

microencapsulation solutions for its partners. The Company uses an open innovation process that typically includes development agreements with partner

companies that seek to protect existing and potential intellectual property. Encapsys is exploring opportunities with potential partners in industries as

diverse as agriculture, paints and coatings, food, pharmaceuticals, paper, textiles, personal and household care, adhesives, and oil and gas. During 2011,

Encapsys accounted for approximately 6% of total company net sales.

Microencapsulation competitors include Southwest Research Institute, Ronald T. Dodge Company, Aveka, Inc., GAT Microencapsulation AG,

Microtek Laboratories, Inc., Lipo Technologies, Inc., Balchem Corporation, Reed Pacific and others. Large chemical producers such as BASF, Firmenich,

Henkel AG & Co., 3M, Dow Chemical Company and Monsanto may also be competitors in some market situations.

Geographical Financial Information

Revenues from sales in the U.S. were $576.7 million in 2011, $579.5 million in 2010, and $546.0 million in 2009. Revenues from sales to customers in

foreign countries were $280.6 million in 2011, $270.4 million in 2010, and $215.8 million in 2009. Substantially all long

- lived assets were located in the U.S. as

of December 31, 2011, January 1, 2011, and January 2, 2010.

Research and Development

Ongoing investment in research and development has enabled the Company to develop core competencies in the microencapsulation 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 $11.4 million in 2011, $12.5 million in 2010 and $12.0 million in 2009.

Sales, Marketing and Distribution

The Company promotes and sells products through its sales and marketing organization. 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.

The Company uses 10 distribution centers to store and distribute products to customers. Distribution centers are located in Appleton, Wisconsin;

Camp Hill, Pennsylvania; Monroe, Ohio; Kansas City, Kansas; Ontario, California; McDonough, Georgia; and Peterborough, Ontario, Canada. Third

- party

logistics services are contracted through distribution facilities at Portland, Oregon, Birmingham, England, and Utrecht, Netherlands.

6Distributors and Customers

The Company currently sells through merchant distributors that stock and redistribute carbonless sheet products globally from over 350 locations.

Carbonless rolls are sold through a variety of channels including merchants, agents and directly to printer and converter customers worldwide. In North

America, some carbonless rolls are sold to forms printers through merchant distributors on a drop

- shipment basis. In those cases, the Company ships

products from distribution centers and provides customer support while the merchant bears the credit risk of nonpayment.

The Company sells thermal papers to converters who cut and rewind large rolls into smaller rolls, print and otherwise further process the paper based

on end

- user needs. The Company sells security products through merchants and to other security printers who print checks, titles, certificates and other

secure documents.

The five largest customers in the carbonless papers segment accounted for approximately 32% of carbonless papers net sales in 2011 and 2010, and

37% of carbonless papers net sales in 2009. The five largest customers in the thermal papers segment accounted for approximately 47% of thermal papers

net sales in 2011, 43% of thermal papers net sales in 2010 and 41% of thermal papers net sales in 2009. The largest external customer in the Encapsys

segment accounted for approximately 59% of Encapsys net sales (which include internal sales to the Company's carbonless papers segment) in 2011, 52% in

2010 and 28% in 2009. Sales to the Company ’ s largest customer accounted for approximately 7% of 2011 total company net sales, 8% of 2010 total company

net sales and 9% of 2009 total company net sales.

Working Capital Practices

The Company maintains finished goods inventories sufficient to provide a high level of available stock items and next day delivery to most

carbonless and thermal papers customers. Raw material inventories are maintained at levels consistent with demand for both stock and custom orders.

Custom order lead times are typically 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.

During fourth quarter 2010, the Company changed its method of inventory accounting, for raw materials, work in process and finished goods

inventories, from the last

- in, first

- out ( “ LIFO ” ) method to the first

- in, first

- out ( “ FIFO ” ) method. This was deemed a preferable method as the key users of

the financial statements, including lenders, creditors and rating agencies, analyze results and require compliance with debt covenants using the FIFO

method of accounting. Further, this conformed all of the Company's inventories to the FIFO method of accounting and promotes greater comparability with

international competitors as the Company expands its global sales. All prior periods presented have been retrospectively adjusted to reflect the period

specific effects of applying the new accounting principle.

Order Backlogs

In the carbonless papers business, customers typically order from stock grades and most orders are delivered the next day. Thermal papers

customers also order primarily stock grades. As of year

- end 2011, the total of carbonless papers and thermal papers products ordered but not shipped was

approximately 4% of annual sales volume. At 2010 year

- end and 2009 year

- end, products ordered but not shipped totaled approximately 4% and 5%,

respectively, of total annual shipments of carbonless papers and thermal papers.

In the Encapsys business, customers typically place orders as needed and product is manufactured after orders are placed. Encapsys tends to carry

very little finished goods inventory and no product backlogs.

Manufacturing

The Appleton plant, located in Appleton, Wisconsin, produces carbonless and thermal papers. The Roaring Spring, Pennsylvania mill is a nearly

fully

- integrated pulp and paper mill with three paper machines and produces carbonless and security products. The West Carrollton, Ohio mill produces

carbonless and thermal base stock and finished carbonless and thermal paper products. The mill includes extensive recycling capabilities featuring

wastepaper processing and de

- inking operations. In 2007, an expansion program of approximately $125 million commenced at 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 was completed in third quarter

2008.

The Encapsys business operates a state

- of

- the art manufacturing plant in Portage, Wisconsin. This facility produces thousands of metric tons of

microencapsulated material annually. Microcapsules are used in the manufacture of carbonless papers at the Appleton, Roaring Spring and West Carrollton

facilities. The Company also supplies microcapsules for other commercial applications. Encapsys research and development laboratories, marketing and

administrative staff are located in Appleton.

7On February 22, 2012, the Company entered into a long

- term supply agreement for the purchase of carbonless and thermal base stock to be coated at

the Company ’ s converting facilities. Under the terms of this supply agreement, the supplier will be the exclusive supplier of certain thermal and carbonless

base stock used by the Company. The term of the agreement is fifteen years. It includes successive five

- year renewal terms unless either party gives notice

of non

- renewal at least two years prior to the expiration of the then current term.

In connection with its approval of this supply agreement, the Company ’ s Board of Directors authorized a plan for the Company to dispose of

papermaking assets at its West Carrollton, Ohio paper mill and move more carbonless coating to the Company ’ s converting plant in Appleton, Wisconsin.

As a result, approximately 330 jobs will be eliminated at the West Carrollton mill and approximately 50 jobs added at the Appleton facility. The Company

plans to continue its thermal coating operations at the West Carrollton facility and retain approximately 100 employees. This plan is expected to result in pre

tax charges associated with this manufacturing capacity rationalization and include employee termination costs (including related pension and benefit

costs), accelerated depreciation on certain equipment and other associated costs. As management has not yet finalized the specific actions to be taken, the

Company is unable to make a good faith estimate of (i) the amount or range of amounts of each major type of cost that will be incurred, or (ii) the amount or

range of amounts of costs that will result in future cash expenditures. In addition, management has concluded that a material charge for impairment and

accelerated depreciation of certain equipment located in West Carrollton, totaling approximately $80 million to $90 million, will be required in 2012 as a result

of the manufacturing rationalization plan. For further information see the disclosures in Management ’ s Discussion and Analysis of Financial Condition and

Results of Operations and Note 3 of Notes to Consolidated Financial Statements.

Raw Materials

Raw materials purchases primarily consist of base stock, chemicals, pulp and wastepaper. In 2011, those materials made up approximately 57% of the

annual cost of goods sold. The largest raw material component, chemicals, comprised 25% of cost of goods sold in 2011. 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 2011 comprised 18% of cost of goods sold.

The Company is party to a significant base stock supply agreement which was signed in June 2010 and expires on December 31, 2012. Purchases

under this agreement were approximately 56% of total 2011 base stock purchases. On February 22, 2012, the Company entered into a new long

- term supply

agreement with this supplier for the purchase of carbonless and thermal base stock for coating at the Company ’ s converting facilities. Under the terms of

this supply agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base stock used by the Company. The term of the

agreement is fifteen years. It includes successive five

- year renewal terms unless either party gives notice of non

- renewal at least two years prior to the

expiration of the then current term. Prices to be paid by the Company are subject to certain rebates and certain adjustments during the term of the agreement

based on volume, changes to raw material pricing, freight prices and productivity gains. The supplier has agreed to be competitive in terms of price,

delivery, quality and services. For further information see the disclosures in Management ’ s Discussion and Analysis of Financial Condition and Results of

Operations and Note 3 of Notes to Consolidated Financial Statements.

Approximately 16% of cost of goods sold in 2011 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, the Company seeks to reduce the

impact of those swings by negotiating price and volume agreements for pulp and by purchasing wastepaper through a national broker.

The Company uses many specialty raw materials which are designed and manufactured to work best with its products and manufacturing processes.

The Company makes purchasing decisions based upon quality, service, value and long

- term strategic importance. There are 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.

8Employees

As of March 1, 2012, the Company employed 1,824 persons, of whom, 1,182 were covered by union contracts. Manufacturing employees at the

Company ’ 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 ” ). Represented employees at the Appleton facility ratified a

three

- year labor agreement in December 2011. The labor contract at the Roaring Spring facility expired in November 2011 and negotiations are currently

underway to ratify a new labor agreement. The labor contract at the West Carrollton facility expires in April 2012.

USW also represents employees at the Appleton, Camp Hill and Kansas City 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, Ohio

and California are not represented.

The Company 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 the Company ’ s

success.

Intellectual Property

As part of the acquisition of the business from NCR in 1978, the Company obtained a 100

- year license to use forms of the NCR PAPER* trademark in

branding for carbonless products. The Company also licenses technology from other companies covering non

- critical articles of manufacture,

manufacturing processes or materials used in such processes. The Company does not believe that any single patent or patent application is material to the

Company ’ s business or operations. The Company believes that the patent duration is consistent with its business needs.

Environmental

General

The Company ’ s operations are subject to comprehensive and frequently changing federal, state and local environmental laws and regulations. These

include 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. In addition, the Company is also

governed by laws and regulations relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous

chemicals in the workplace.

Compliance with environmental laws and regulations is an important facet of the business. The Company expects to incur capital expenditures of

approximately $1.6 million in 2012 and a total of approximately $7.8 million from 2013 through 2017 to maintain compliance with applicable federal, state, local

and foreign environmental laws and regulations and to meet new regulatory requirements. The Company expects to continue to incur expenditures after 2017

to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements.

The Company is 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 it owns or operates and at properties where the Company or its

predecessors have arranged for the disposal of regulated materials. As a result, the Company is involved from time to time in administrative and judicial

proceedings and inquiries relating to environmental matters. The Company could be involved in additional proceedings in the future and the total amount of

these future costs and other environmental liabilities may be material. Appleton has been named a potentially responsible party, or PRP, at one site for

which its 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.

9Based on investigation and delineation of PCB contamination in soil and groundwater in the area of the wastewater impoundments, the Company

believes that it may be necessary to undertake remedial action in the future, although the Company is currently under no obligation to do so. The Company

has not had any discussions or communications with any federal, state or local agencies or authorities regarding remedial action to address PCB

contamination at the West Carrollton mill. The cost for remedial action, which could include installation of a cap, long

- term pumping, treating and/or

monitoring of groundwater and removal of sediment in the Great Miami River, was estimated in 2001 to range up to approximately $10.5 million, with

approximately $3 million in short

- term capital costs and the remainder to be incurred over a period of 30 years. However, costs could exceed this amount if

additional contamination is discovered, if additional remedial action is necessary or if the remedial action costs are more than expected.

Because of the uncertainty surrounding the ultimate course of action for the West Carrollton mill property, the Great Miami River remediation and the

Company ’ s share of these remediation costs, if any, and since the Company is currently under no obligation to undertake remedial action in the future, no

provision has been recorded in its financial statements for estimated remediation costs. In conjunction with the acquisition of PDC by the ESOP in 2001, and

as limited by the terms of the purchase agreement, AWA agreed to indemnify the Company for 50% of all environmental liabilities at the West Carrollton mill

up to $5.0 million and 100% of all such environmental costs exceeding $5.0 million. In addition, the former owners and operators of the West Carrollton mill

may be liable for all or part of the cost of remediation of historic PCB contamination.

Lower Fox River

Introduction. Various federal and state government agencies and Native American tribes have asserted claims against Appleton and others with

respect to historic discharges of PCBs into the Lower Fox River in Wisconsin. Carbonless paper containing PCBs was manufactured at what is currently the

Appleton plant from 1954 until 1971. During this period, wastewater containing PCBs was discharged into the Lower Fox River from a publicly

- owned

treatment works, from the Appleton Coated paper mill and from other local industrial facilities. Wastewater from the Appleton plant was processed through

the publicly

- owned treatment works. As a result, there are allegedly eleven million cubic yards of PCB

- contaminated sediment spread over 39 miles of the

Lower Fox River and Green Bay, which is part of Lake Michigan.

The United States Environmental Protection Agency ( “ EPA ” ) published a notice in 1997 that it intended to list the Lower Fox River on the National

Priorities List of Contaminated Sites pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act, ( “ CERCLA ” or

“ Superfund ” ). The EPA identified seven potentially responsible parties ( “ PRPs ” ) for PCB contamination in the Lower Fox River, including NCR Corporation

( “ NCR ” ), Appleton, Georgia

- Pacific, P.H. Glatfelter Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation, which is now

CBC Coating, Inc., and U.S. Paper Mills Corp., which is now owned by Sonoco Products Company.

Remedial Action. The EPA and the Wisconsin Department of Natural Resources ( “ DNR ” ) issued two Records of Decision ( “ RODs ” ) in 2003,

estimating the total costs for the Lower Fox River remedial action at approximately $400 million. Other estimates obtained by the PRPs range from a low of

$450 million to as much as $1.6 billion. More recent estimates place the cost to remediate operable units 2

- 5 between $594 million and $900 million.

The EPA issued an administrative order in November 2007, directing the PRPs to implement the remedial action of the Fox River pursuant to which

certain of the PRPs commenced remediation in 2008. Remediation activities are continuing and the PRPs are negotiating to obtain additional funding to

complete the work plan.

Litigation. As part of the funding effort, NCR and Appleton filed a lawsuit in January 2008 in federal court against various defendants, including

other PRPs and certain municipalities, to require contribution to the cost of cleaning up PCB

- contaminated sediment in the Fox River. In December 2009, the

court granted the defendants ’ motion for summary judgment dismissing the claim. In February 2011, the same court granted the defendants' motion for

summary judgment determining NCR and Appleton are responsible for costs associated with the remedial action and natural resource damages ("NRDs") on

the Fox River to the extent these costs were not reimbursed by insurance. On September 30, 2011, the court clarified its February 2011 ruling indicating the

defendants could recover costs incurred for NRD claims. NCR and Appleton intend to appeal these decisions.

In October 2010, the United States of America ( “ US ” ) and the State of Wisconsin ( “ SOW ” ) filed a lawsuit on behalf of the EPA and the DNR,

respectively, against ten companies (including the seven PRPs identified in 1997) and two municipalities seeking recovery of unreimbursed response costs

and natural resources damages as well as a declaratory judgment that the defendants are liable for future response costs related to the Lower Fox River

( “ Government Case ” ). At the same time, the US and SOW lodged a consent decree with Georgia

- Pacific ( “ GP ” ). Under the consent decree, and in exchange

for a covenant not to sue and statutory contribution protection for portions of the Lower Fox River, GP would stipulate liability for performance of the

required cleanup of a designated portion of the Lower Fox River, waive any objections to the cleanup remedy selected by EPA and DNR and pay $7 million

toward the government ’ s unreimbursed past costs and expected future costs. The court approved the consent decree in April 2011.

10In June 2011, the EPA and DNR filed a motion for Preliminary Injunction seeking to expand the scope of work on the Fox River for 2011. The court

denied the motion for Preliminary Injunction on July 5, 2011 and indicated in the decision that it was unlikely that the US could show that Appleton is liable

as a PRP under CERCLA. Appleton filed a motion for summary judgment on July 28, 2011 requesting the court determine that Appleton is not liable as a PRP

under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice. The court denied the motion for summary

judgment on December 19, 2011, and Appleton filed a motion for reconsideration on January 10, 2012.

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 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. NCR and Appleton collectively paid $41.5 million for interim restoration and remediation

efforts pursuant to a 2001 consent decree with various governmental agencies (the “ Intergovernmental Parties ” or “ IGP ” ). In addition, NCR and Appleton

collectively paid approximately $750,000 toward interim restoration efforts and the preparation of a progress report pursuant to a 2006 consent decree with

the IGP. NCR and Appleton also paid $2.8 million in 2007 to fund a land acquisition in partial settlement of NRD claims. Neither of the consent decrees nor

the land acquisition constitutes a final settlement or provides protection against future claims; however, NCR and Appleton will receive full credit against

remediation costs and NRD claims for all monies expended.

Appleton ’ s Liability. CERCLA imposes liability on parties responsible, in whole or in part, for the presence of hazardous substances at a site. Under

circumstances prescribed in CERCLA rules, both current and prior owners and operators of a facility may be determined to have liability. 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, long after the use of PCBs in the manufacturing

process was discontinued. Nonetheless, the EPA named both NCR and Appleton as PRPs in connection with remediation of the Lower Fox River. Appleton

maintains the EPA erred in naming Appleton as a PRP as that term is defined in CERCLA. Separately, Appleton is obligated to share defense and liability

costs with NCR as determined by a 2006 arbitration.

The 2000 FWS study offered a preliminary conclusion that discharges from the former NCR properties were responsible for 36% to 52% of the total

PCBs discharged. NCR and Appleton have obtained independent historical and technical analyses which suggest the percentage of PCBs discharged from

the former NCR properties is less than 20% of the total PCBs discharged, and more recent analyses suggest the percentage is only 8% to 10%. These

estimates have not been finalized and are not binding on the PRPs.

A portion of NCR ’ s and Appleton ’ s potential liability for the Lower Fox River may be joint and several. In the future, if one or more of the other PRPs

were to become insolvent or unable to pay its respective share(s) of the potential liability, NCR and Appleton could be responsible for a portion of its share

(s). Based on legal analyses and ongoing reviews of publicly available financial information, Appleton believes that other PRPs will be required, and have

adequate financial resources, to pay their shares of the remediation and NRD claims for the Lower Fox River.

Appleton's liability could also be affected by the outcome of a trial that commenced in February 2012. At issue is whether NCR can be held

responsible for remediation costs in operable unit 1 of the Lower Fox River under the theory of arranger liability. While Appleton is not named in this

litigation, if NCR is unsuccessful, Appleton may be required to share in the liability under the 2006 arbitration.

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 NCR ’ s and Appleton ’ s share of liability relative to other PRPs. Although Appleton believes that it has already

paid more than its estimated share of the liability based on the assumptions below, Appleton anticipates it will fund a portion of the cleanup costs and other

spending for 2012. Accordingly, at December 31, 2011, the reserve for Appleton's liability for the Lower Fox River was $46.0 million. Interim legal

determinations may periodically obligate Appleton to fund portions of the cleanup costs to extents greater than Appleton ’ s ultimate share as finally

determined, and in such instances, Appleton may reserve additional amounts (including appropriate reimbursement under its indemnification agreements as

discussed below).

11The following assumptions were used in evaluating Appleton ’ s Lower Fox River liability:

Although Appleton believes its recorded environmental liability reflects its best estimate of liabilities associated with the Lower Fox River for 2012,

the government is contesting the planned level of 2012 remediation activities.

AWA Indemnification. Pursuant to two indemnification agreements entered in 2001, Arjo Wiggins Appleton Ltd, now known as Windward

Prospects Ltd ( “ AWA ” ), agreed to indemnify PDC and PDC agreed to indemnify Appleton for costs, expenses and liabilities related to certain governmental

and third

- party environmental claims, which are defined in the agreements as the Fox River Liabilities.

Under the indemnification agreements, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100

million. During 2008, Appleton paid $25 million to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA. As

of December 31, 2011, AWA has paid $260.3 million in connection with Fox River Liabilities. At December 31, 2011, PDC's total indemnification receivable

from AWA was $46.0 million, all of which is recorded in other current assets. At December 31, 2011, the total Appleton indemnification receivable from PDC

was $46.0 million, all of which is recorded in other current assets.

In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry

Insurance Company, an affiliate of American International Group, Inc. The insurance policy provided up to $250 million of coverage for Fox River Liabilities,

subject to certain limitations defined in the policy. The insurance policy was held by Arjo Wiggins Appleton Bermuda Ltd ("AWAB"), a special purpose

entity in which the Company is a minority shareholder. An AWA affiliate is the only other shareholder in this entity. The Company determined that this

entity is not a Variable Interest Entity and there is no requirement to include this entity in its consolidated financial results. As of December 31, 2011, there

was no remaining coverage on the policy.

In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment relating to insurance coverage of its environmental

claims involving the Fox River. A final judgment and order was entered in January 2009. The insurers appealed the final judgment. In June 2010, the

Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between the insurers and Appleton. Under the terms of the

indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. During 2010, Appleton

recorded an $8.9 million receivable, representing settlements to be received in excess of amounts reimbursable to AWA, in the Consolidated Balance Sheet

as of January 1, 2011. During 2011, Appleton received $6.2 million of these funds. The remaining receivable is included in other current assets of the

Consolidated Balance Sheet as of December 31, 2011. An $8.9 million environmental expense insurance recovery was also recorded as a separate line item

within operating income on the Consolidated Statement of Operations for the year ended January 1, 2011.

The indemnification agreements negotiated with AWA are designed to ensure that Appleton will not be required to fund any of the indemnified

costs and expenses in relation to the Fox River Liabilities. This arrangement is working as designed and is expected to continue to protect Appleton with

respect to the indemnified costs and expenses, based on Appleton ’ s review of the financial condition of AWA and estimates of Appleton ’ s ultimate

liability. As earlier noted, Appleton's ultimate liability could prove to be significantly larger than the recorded environmental liability and potentially could

exceed the financial capability of AWA. In the event Appleton is unable to secure payment from AWA or its former parent companies, Appleton may be

liable for amounts related to the Lower Fox River and these amounts may be material to Appleton. • Estimated remaining remediation and administration costs of approximately $400 million for operable units 2

– 5, based on the most recent work

plans;

• Technical analyses contending that discharges from the Appleton plant and the Combined Locks mill represent 8% to 10% of the total PCBs

discharged by the PRPs;

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

with NCR and the arbitration determination; and

• legal fees and other expenses.

12Item 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 the Company ’ s strategy, future operations, future financial position, estimated revenues, projected

costs, prospects, plans and objectives of management and events or developments that it expects or anticipates will occur, are forward

- looking statements.

All forward

- looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are

subject to a number of risks and uncertainties, many of which are outside the Company ’ s control, which 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 the Company ’ s

ability to control or predict. Given these uncertainties, undue reliance should not be placed on the forward

- looking statements. The Company disclaims any

obligation to update or revise publicly any forward

- looking statements, whether as a result of new information, future events or otherwise.

The Company is subject to substantial costs and potential liabilities relating to environmental regulation and litigation.

The Company is subject to comprehensive and frequently changing laws and regulations enacted by various federal, state and local authorities

concerning 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 the Company, regardless of whether the contamination is

attributable entirely to prior owners. As described in the following risk factor, Appleton has 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 the Company collectively refers to as the

“ Lower Fox River. ” In addition, the Company makes capital expenditures and incurs operating expenses for environmental obligations and matters arising

from its daily operations.

Including the Lower Fox River, Appleton had approximately $46.0 million of accrued liabilities as of December 31, 2011, for estimated or anticipated

liabilities and legal and consulting costs relating to environmental matters arising from past operations. As of December 31, 2011, PDC had approximately

$46.0 million of indemnification receivables from its former parent company, AWA, with which to indemnify Appleton. While the accrued liabilities reflect its

estimate of the cost of these environmental matters, the amount that the Company has accrued may be inadequate. In addition, the Company may be named

as a PRP at other sites in the future and the costs associated with such future sites may be material. The Company expects 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 the

Company ’ s operating expenses, require continuing capital expenditures and adversely affect the operating flexibility of its manufacturing operations and

may require indeterminable and significant additional expenditures in connection with such compliance.

13Appleton has been named as a potentially responsible party related to the Lower Fox River.

Appleton has been named by the EPA as a PRP under the Comprehensive Environmental Response, Compensation and Liability Act ( “ CERCLA ” ).

Appleton has been named a PRP because of discharges of polychlorinated biphenyls, or PCBs, into the Lower Fox River from its Appleton plant in the

1950s, 1960s and 1970s and because of discharges from the Appleton Coated paper mill in Combined Locks, Wisconsin. Appleton purchased the Appleton

plant and the Combined Locks paper mill from NCR in 1978, long after the use of PCBs in the manufacturing process had been discontinued. Nonetheless,

the EPA named both NCR and Appleton as PRPs in connection with remediation of the Lower Fox River. Appleton maintains the EPA erred in naming

Appleton as a PRP as that term is defined in CERCLA. Separately, Appleton is obligated to share defense and liability costs with NCR as determined by a

2006 arbitration. NCR and Appleton 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 the Company ’ s financial position. The EPA and DNR issued two Records of Decision ( “ RODs ” ) in 2003 estimating the total costs

for the Lower Fox River remedial action at approximately $400 million. Other estimates obtained by the PRPs range from a low of $450 million to as much as

$1.6 billion. More recent estimates place the cost to remediate operable units 2

- 5 between $594 million and $900 million. Various government agencies are

also asserting that NCR and Appleton and the other PRPs are liable for natural resource damages caused by the PCBs. In 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.

In November 2007, the EPA issued an administrative order directing the PRPs to implement the remedial action of the Fox River pursuant to which

certain of the PRPs commenced remediation in 2008. In October 2010, the United States of America ( “ US ” ) and the State of Wisconsin ( “ SOW ” ) filed a

lawsuit on behalf of the EPA and the DNR, respectively, against ten companies, including Appleton, and two municipalities seeking recovery of

unreimbursed response costs and natural resource damages as well as a declaratory judgment that the defendants are liable for future response costs

related to the Lower Fox River.

Appleton cannot precisely estimate its ultimate share of liability for the Lower Fox River 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 NCR ’ s and Appleton ’ s share of liability relative to other PRPs. Although Appleton

believes that it has already paid more than its estimated share of the liability, Appleton anticipates it will fund a portion of the cleanup costs and other

spending for 2012. Accordingly, at December 31, 2011, the reserve for Appleton's liability for the Lower Fox River was $46.0 million. Interim legal

determinations may periodically obligate Appleton to fund portions of cleanup costs to extents greater than Appleton ’ s ultimate share as finally determined,

and in such instances, Appleton may reserve additional amounts.

Although Appleton believes its recorded environmental liability reflects its best estimate of liabilities associated with the Lower Fox River for 2012,

the government is contesting the planned level of 2012 remediation activities. Therefore, Appleton ’ s liabilities associated with the Lower Fox River could

materially adversely affect its business, financial condition and results of operations.

Appleton ’ s former parent, AWA, may fail to comply with its indemnification obligations related to the acquisition of Appleton.

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 (1) inaccuracies in the environmental representations and warranties made by AWA

and its affiliates, (2) certain known environmental matters that existed at the closing of the acquisition, (3) 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 (4) environmental matters relating to the

real property on which the Company ’ s former Camp Hill, Pennsylvania plant and the Company ’ s current distribution center are located that existed prior to

its 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. If the indemnified matters result in significant liabilities for the Company, and AWA and/or its affiliates are unable or

unwilling to honor these indemnification obligations, the Company could be required to pay for these liabilities, which could materially adversely affect its

business, financial condition and results of operations.

14Future greenhouse gas/carbon regulations or legislation and future Boiler Maximum Achievable Control Technology ( “ MACT ” ) regulations could

adversely affect the Company ’ s costs of compliance with environmental laws.

In 2009, the EPA finalized its finding that greenhouse gas ( “ GHG ” ) emissions endanger the public health and welfare. Since then, the EPA has

finalized rules to regulate GHG emissions under the federal Clean Air Act. Also in 2009, several bills were introduced in the U.S. Congress concerning

climate change and the emission into the environment of carbon dioxide and other GHGs. If there is legislation, it may take the form of a cap and trade

program and the Company may then be required, among other things, to purchase allowances or offsets to emit GHGs or other regulated pollutants or to pay

taxes on such emissions. In April 2010, the EPA proposed three related air rules commonly known as the Industrial Boiler MACT under the Clean Air Act.

These air rules have been finalized by the EPA, but it is still uncertain what the actual final rules will look like as the EPA has opened up portions of the rules

for reconsideration and public comment. The Company is currently analyzing the new draft rules, but because of the uncertainty surrounding these rules, at

this time there is no basis for estimating the effect of such legislation or regulations on the costs the Company will incur to comply with environmental laws,

although the Company is investigating ways to reduce carbon emissions as well as complying with the proposed Boiler MACT.

The Company has a substantial amount of indebtedness outstanding and, as a result, it is operating as a highly leveraged company.

The Company ’ s total debt at December 31, 2011, was approximately $511.8 million. For a description of the components of the Company ’ s debt see

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

— Liquidity and Capital Resources ” and Note 11 of the

Notes to Consolidated Financial Statements. This large amount of indebtedness could:

• make it more difficult for the Company to satisfy its financial obligations with respect to the asset

- backed revolving credit facility, as amended, the

senior secured first lien notes, the second lien notes, and senior subordinated notes;

• require the Company 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 or general corporate activities;

• limit the Company ’ s ability to obtain additional financing for working capital, capital expenditures, acquisitions, research and development or general

corporate purposes and

• limit the Company ’ s flexibility in planning for, or reacting to, changes in its businesses and the industries in which it operates.

Furthermore, although the Company ’ s ability to borrow money is restricted by the terms of its various debt agreements, it may be possible for the

Company to incur even more debt and, if it does so, these risks could intensify.

The Company ’ s ability to service its debt is dependent on its future operating results and the Company cannot be sure that it will be able to meet its

debt obligations as they come due.

The Company ’ s ability to meet its payment obligations, relating to its indebtedness, is subject to a variety of factors, including, for example, changes

in:

• demand for and selling prices of the Company ’ s products;

• competition;

• costs of raw materials and operating costs;

• the rate of decline in sales of carbonless paper products;

• environmental regulations and

• general economic conditions.

15The Company expects to use cash flow from operations to pay its expenses and scheduled interest and principal payments due under its outstanding

indebtedness. Its ability to make these payments depends on its future performance, which is affected by financial, business, economic and other factors,

many of which the Company cannot control. The recent recession and credit crisis and related turmoil in the global financial system has had and may

continue to have an adverse effect on the Company ’ s business, financial condition, results of operations and cash flows. Consequently, its business may

not generate sufficient cash flow from operations in the future and its anticipated growth in revenue and cash flow may not be realized, either or both of

which could result in the Company being unable to repay or pay interest on its indebtedness or to fund other liquidity needs. If the Company does not have

enough money, it may be required to refinance all or part of its then

- existing debt, sell assets or borrow more money. The Company cannot make any

assurances that it will be able to accomplish any of these alternatives on terms acceptable to it, or at all. In addition, the terms of existing or future debt

agreements, including the indenture governing the notes and the revolving credit facility, as amended, may restrict the Company from adopting any of these

alternatives. The failure to generate sufficient cash flow or to achieve any of these alternatives could significantly adversely affect the value of its

indebtedness and its ability to pay the amounts due. In addition, if the Company defaults in the payment of amounts due, it would give rise to an event of

default under the note indentures and possible acceleration of amounts due under its outstanding indebtedness. In the event of any acceleration, there can

be no assurance that the Company will have enough cash to repay its outstanding indebtedness.

Compliance with the covenants relating to the Company ’ s indebtedness may limit its operating flexibility.

Certain of the Company ’ s debt agreements contain provisions that require the Company to maintain specified financial ratios as such items are

defined in the debt agreements. The Company ’ s ability to comply with the financial covenants in the future depends on further debt reduction and

achieving forecasted operating results. However, with the volatility being experienced in the current economic environment, it can be difficult to predict the

ultimate impact of current economic trends on the Company ’ s future operating results. Given the uncertain global economies, continued constraints in the

credit markets and other market uncertainties, there are various scenarios, including a reduction from forecasted operating results, under which the

Company could violate its financial covenants. The Company ’ s failure to comply with such covenants or an assessment that it is likely to fail to comply with

such covenants, could also lead the Company to seek amendments to or waivers of the financial covenants. No assurances can be provided that the

Company would be able to obtain any amendments to or waivers of the covenants. In the event of non

- compliance with debt covenants, if the lenders will

not amend or waive the covenants, the debt would be due and the Company would need to seek alternative financing. The Company cannot provide

assurance that it would be able to obtain alternative financing. If the Company were not able to secure alternative financing, this would have a material

adverse impact on the Company.

The market for the primary product in the Company ’ s carbonless papers segment, carbonless paper, may decline more rapidly than anticipated.

The Company ’ s carbonless papers segment, of which the primary product is carbonless paper, accounted for 61% of net sales in 2009, 56% of net

sales in 2010 and 53% of net sales in 2011. The Company ’ s total sales volume of carbonless paper products decreased approximately 11% from 2010 to 2011

despite an increase of approximately 4% from 2009 to 2010 due to increased market share. The Company believes 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. The Company expects

that its total sales volume of carbonless paper products will continue to decline at rates that are consistent with the decline rate of the overall market. If the

decline in the Company ’ s sales of carbonless paper products accelerates, or if it is unable to maintain the prices of its carbonless paper products or if it is

unable to offset reductions in carbonless papers sales with increased sales of thermal papers or other products, then the Company ’ s business, financial

condition and results of operations may be materially adversely affected.

The Company may be unable to develop and introduce new and enhanced products.

The Company ’ s success in developing new products will depend in large part on its ability to use its existing technical and manufacturing

capabilities and knowledge in the development and introduction of new, value

- added products targeted at new markets and customers. If the Company is

unable to utilize its capabilities or, properly identify and address the evolving needs of targeted customers and markets, the Company ’ s 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 the Company ’ s business, financial condition and results of operations

may be materially adversely affected.

16The Company ’ s ability to compete effectively in the marketplace depends, in large part, on its ability to continually improve productivity and reduce

operating costs.

The Company must continually strive to improve the productivity and cost structure of its manufacturing operations and the efficiency of its support

services in order to offer products that are priced competitively and deliver an attractive value proposition to its customers. The Company sets specific

productivity and cost reduction goals each year for each of its production facilities and key staff functions. Accomplishing these goals is essential to its

near

- term competitiveness and long

- term financial viability. If the Company fails to reach these goals, it may experience an erosion of its profit margins, a

decline in net sales or both, which could negatively affect its ability to service its debt and invest in the future growth of its business segments.

The Company currently relies on a relatively small number of customers to generate a significant amount of its net sales from each of its various

businesses.

The five largest customers in the carbonless papers segment accounted for approximately 32% of carbonless papers net sales in 2011 and 2010 and

37% of carbonless papers net sales in 2009. The five largest customers in the thermal papers segment accounted for approximately 47% of thermal papers

net sales in 2011, 43% of thermal papers net sales in 2010 and 41% of thermal papers net sales in 2009. The largest external customer in the Encapsys

segment accounted for approximately 59% of Encapsys net sales (which include internal sales to the Company carbonless papers segment) in 2011, 52% of

Encapsys net sales in 2010 and 28% in 2009.

Many of the Company ’ s customers are under no obligation to purchase its products in the future. Furthermore, some of the Company ’ s customers

have become insolvent or financially distressed in recent years. If the Company loses one or more of its significant customers (e.g., to a competitor or as a

result of their being acquired by a customer of a competitor) or any of the Company ’ s significant customers experience financial difficulty, then its business,

financial condition and results of operations may be materially adversely affected.

The Company currently relies on a small number of third parties to supply several of the key raw materials used to produce its products.

The Company ’ s business depends upon the availability of key raw materials, including base stock and certain chemicals. In 2011, the Company

purchased approximately $114 million of base stock from external suppliers. The Company relied on a single external supplier for approximately 86% of the

base stock it purchased in 2011 to produce carbonless paper products, and a single external supplier for approximately 50% of the base stock the Company

purchased in 2011 to produce thermal papers. For some of the key chemicals the Company uses in its products, it relies on one or two suppliers. If there is a

disruption in the supply of raw materials, including the chemicals that the Company needs to produce its carbonless papers and thermal papers, then the

Company may be required to purchase these raw materials from alternative sources, which may result in a significant increase in its operating costs.

Included in these increased costs would be development costs associated with qualifying new raw materials and suppliers. The Company may not be able

to procure carbonless base stock, thermal base stock, key chemicals or other raw materials from alternative suppliers in the future in amounts sufficient to

meet its needs or at prices consistent with historical prices.

On February 22, 2012, the Company entered into a long

- term supply agreement for the supply of carbonless and thermal base stock to be coated at

the Company ’ s converting facilities. Under the terms of this supply agreement, the supplier will be the exclusive supplier of certain thermal and carbonless

base stock used by the Company. The term of the agreement is fifteen years. Related to this supply agreement, the Company ’ s board of directors approved

a plan to dispose of the papermaking operations at the Company's West Carrollton, Ohio facility, thereby eliminating the Company ’ s capacity to

manufacture base stock in West Carrollton. For further information see the disclosures in "Item 7. Management ’ s Discussion and Analysis of Financial

Condition and Results of Operations" and Note 3 of Notes to Consolidated Financial Statements. This agreement will have the effect of reducing the number

of raw material suppliers to the Company and increasing the Company ’ s dependence on key suppliers. Should this supplier of base stock fail to supply

quantities ordered by the Company, the Company may not be able to procure alternate sources of carbonless and thermal base stock in quantities sufficient

to meet customer requirements or at prices comparable to the terms under this supply agreement.

The lack of available alternative suppliers could subject the Company to significant cost increases and manufacturing delays and its business,

financial condition and results of operations may be materially adversely affected.

17The cessation of papermaking and transition to base stock supplied under the long

- term supply agreement noted above may take longer or cost more

than planned.

The Company has developed preliminary plans to cease papermaking operations in West Carrollton and transition to replacement base stock

supplied under the long

- term supply agreement noted above. Though management has not yet finalized the specific actions to be taken, the Company

expects to incur substantial costs to effect the transition over a defined period and anticipates it will be able to fund those costs with manufacturing cost

savings, working capital reductions and normal operations. However, the success of the transition depends on the ability of this supplier to manufacturer

paper that meets the Company ’ s specifications, the ability of the Company to successfully coat the replacement base stock to meet the requirements of the

Company ’ s customers, and acceptance of the products by customers and the successful use in their businesses. If difficulties develop in the transition

process, the time and expense associated with the transition may expand beyond planned periods and amounts and the Company's business, financial

condition and results of operations may be materially adversely affected.

The global credit market crisis and economic weakness may adversely affect the Company ’ s customers and suppliers.

Global financial and credit markets recently have been extremely unstable and unpredictable. Worldwide economic conditions have been weak and

may deteriorate further. The instability of the markets and weakness of the global economy could affect the demand for the Company ’ s customers ’

products, the amount, timing and stability of their orders from the Company, the financial strength of its customers and suppliers, and/or the Company ’ s

suppliers ’ and customers ’ ability to fulfill their obligations to the Company. These factors could materially adversely affect its business, financial condition

and results of operations.

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

The Company faces strong competition in all of its business segments. Its competitors vary in size and the breadth of their product offerings and

some of its competitors have significantly greater financial, technical and marketing resources than the Company does. Regardless of the continuing quality

of the Company ’ s primary products, the Company may be unable to maintain its prices or margins due to:

• declining overall carbonless market size;

• accelerating decline in carbonless sheet sales;

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

• increasing manufacturing and raw material costs;

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

• declining general economic conditions.

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

flow.

The Company competes based on a number of factors, including price, product availability, quality and customer service. Additionally, the Company

competes with domestic production and imports from Europe and Asia. In 2007, the Company filed antidumping petitions against imports of certain

lightweight thermal paper ( “ LWTP ” ) from China, Germany and Korea and a countervailing duty petition against such imports from China. In 2008, the U.S

Department of Commerce ( “ Department ” ) issued its final determination, affirming that certain Chinese producers and exporters of LWTP sold the product in

the U.S. at prices below fair value, imposing final duties of 19.77% to 115.29%, and that German producers and exporters sold the product in the U.S. at

prices below fair value and imposed final duties on those imports of 6.5%. In addition, for all but one Chinese producer, the Department imposed

countervailing duties of between 13.17% and 137.25%. In 2008, the U.S. International Trade Commission ( “ ITC ” ) determined the U.S. industry producing

LWTP is threatened with material injury due to unfairly traded imports from China and Germany, and final duties went into effect in 2008. These duties do

not have a direct impact on the Company ’ s net income.

A German manufacturer filed an appeal of the ITC determination to the U.S. Court of International Trade ( “ CIT ” ). The appeal was decided in favor of

the Company in 2009, and the German manufacturer filed a further appeal to the U.S. Court of Appeals for the Federal Circuit ( “ CAFC ” ). In 2011, the CAFC

remanded the matter for further consideration by the ITC, and the ITC upheld its original determination. In January 2012, the CIT upheld the ITC ’ s decision

on remand, and the German manufacturer filed another appeal of the matter to the CAFC.

18In addition, for each of the three 12

- month periods following implementation of the final duties, the Company and the German manufacturer have filed

requests for administrative review with the Department, seeking to modify the amount of the duties based on the market practices during each respective 12

- month period. In 2011, the Department issued a final determination in the first 12

- month review period, resulting in a dumping margin of 3.77 percent for

imports from the German manufacturer for the period from November 2008 to October 2009. The German manufacturer has appealed the first review

determination to the CIT. Upon final resolution of the appeal, the second administrative review and the third administrative review, certain of the duties

could be reduced, increased or eliminated.

In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. The tariff on

carbonless paper had been 10%. Beginning January 1, 2010, all U.S. sales of carbonless paper into Mexico were assessed a 5% tariff. In August 2010, the

Mexican government announced a rotating list of 99 U.S. products to receive tariffs of 5%

- 45% . Carbonless paper was eliminated from this list and

currently is not subject to any import tariffs. Though the tariff was paid by the customer, this automatically increased the price of carbonless paper by the

amount of the tariff which could have opened the door for non

- U.S. competitors to enter the Mexican market with their carbonless products and take

advantage of the ability to offer customers more favorable pricing.

Also during 2010, the Mexican government passed legislation requiring all businesses in Mexico to file their invoices electronically with the

government when the transactional value of the invoice is greater than 2000 pesos. In January 2011, this legislation became effective. This legislation allows

a phase

- in period whereby companies can still use paper invoices for up to two years as long as they obtained prior approval from the government to

continue to print sequentially numbered invoices during this phase

- in period. The legislation also permitted companies to begin the transition to electronic

invoicing prior to the effective date of the legislation. This legislation provides that once a company agrees to offer one of its customers the option of

receiving electronic invoices then it needs to extend this option to all customers and thereby no longer issue paper invoices. During 2011, the Company

experienced a decline in its carbonless rolls business in Mexico as a result of this government

- legislated electronic invoicing. As there was a two

- year phase

in, the Company continues to monitor this risk and how it will impact the carbonless business during 2012. Other multipart documents, including delivery

notices, order acknowledgments and other administrative documents, were not addressed in the legislation.

Continued volatility of raw materials costs may adversely impact the Company ’ s margins for its products.

In recent years, the Company has experienced greater volatility in raw materials costs, which comprise a significant portion of the Company ’ s

operating costs. The Company endeavors to recover cost increases through continuous improvements in its business operations and product formulations

and through selected price increases. However, the effects of rising raw materials costs on margins are difficult to match in precise amount or timing with

offsetting price increases or cost reduction activities. To the extent the Company is unable to offset raw materials cost inflation, margins for products may

be adversely impacted.

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.

PDC believes that it qualifies as a subchapter S corporation and that Appleton and other eligible subsidiaries are qualified subchapter S subsidiaries.

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.

PDC ’ s continuing status as a subchapter S corporation and its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and state

income tax purposes will depend upon its, and their ability to continue to meet the eligibility requirements.

19It is possible that the Internal Revenue Service, or IRS, could take the position on audit that PDC is not eligible to be taxed as a subchapter S

corporation and, as a consequence, terminate its subchapter S election. Additionally, the applicable law and regulations may change in a way that results in

PDC 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.

PDC could realize significant tax savings during profitable years due to the subchapter S corporation status. However, if, for any reason, it lost its

subchapter S corporation status, or any of its qualified subchapter S subsidiaries loses its qualified subchapter S subsidiary status, it 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 the Company ’ s

operations, which could have a material adverse effect on its 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, the Company 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 its operations.

The Company ’ s underfunded pension plans require future pension contributions which could limit flexibility in managing the Company.

The total projected benefit obligation of Appleton ’ s defined benefit pension plans exceeded the fair value of the plan assets by $125.8 million at

December 31, 2011. The Company contributed $18.0 million to the pension plan in 2011 and $15.0 million to the pension plan in 2010. The Company is

forecasting a contribution of $25 million in 2012. Among the key assumptions inherent in the actuarially calculated pension plan obligation and pension plan

expense are the discount rate and the expected rate of return on plan assets. If interest rates and actual rates of return on invested plan assets were to

decrease significantly, the pension plan obligation could increase materially. The size of future required pension contributions could result in the Company

dedicating a substantial portion of its cash flow from operations to making the contributions which could materially adversely affect its business, financial

condition and results of operations.

Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan (the “ Plan ” ) to provide that no non

- union individuals

hired or re

- hired on or after January 1, 2008, shall be eligible to participate in the Plan. Also, plan benefits accrued under the Plan were frozen as of April 1,

2008, with respect to Plan participants who elected to participate, effective April 1, 2008, in a “ Mandatory Profit Sharing Contribution ” known as the

Retirement Contribution benefit under the Appleton Papers Inc. Retirement Savings and Employee Stock Ownership Plan (the “ KSOP ” ), or January 1, 2015,

in the case of any other Plan participants. In December 2010, it was announced that the effective date of the freeze would be changed from January 1, 2015 to

March 1, 2011.

Future legislation or regulations intended to reform pension and other employee benefit plans could adversely affect the Company ’ s ability to repay its

debt, reinvest in its operations or grow its 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 the Company 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 the Company may be required to fund the

repurchase of substantial amounts of PDC common stock or take some other action restrictive to its finances. These repurchases or other restrictive actions

could reduce the amount of cash available to repay debt, reinvest in its operations or grow its business through new product development or through

acquisitions. In addition, these repurchases could violate covenants under the Company ’ s outstanding debt agreements, which could lead to a default

under those agreements.

20PDC ’ s legal obligations to repurchase common stock from employees and former employees may lead to a default under the agreements governing the

Company ’ s indebtedness or may constrain the Company's ability to make necessary reinvestments in its operations or invest in new business

opportunities.

It may be necessary for Appleton to make significant distributions to PDC in order for PDC to satisfy its share 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.

PDC incurs obligations to ESOP participants, when they retire or otherwise terminate employment, to repurchase shares of PDC. The ESOP allows PDC to

satisfy its share repurchase obligations by installment payments and PDC currently satisfies its 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 the Company ’ s indebtedness contain

limitations on its ability to satisfy the 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 the Company ’ s indebtedness, may also be limited to

some extent from making payments to the ESOP or its beneficiaries by the terms of its and the Company ’ s indebtedness.

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 the Company ’ s indebtedness, which may ultimately result in defaults under the agreements and

the notes. Defaults on any of its indebtedness could result in acceleration of its indebtedness and cause the Company to dispose of its assets or declare

bankruptcy and, as a result, it may not have sufficient funds to satisfy its obligations under the notes.

Moreover, PDC's legally imposed repurchase obligations are expected to consume a significant portion of the Company's cash flows from operations.

After satisfying repurchase obligations and required debt repayments, the Company's remaining cash flow may be insufficient to make required

reinvestments in its existing business or to invest in potentially desirable new business opportunities.

Item 1B. Unresolved Staff Comments

None.

21Item 2. Properties

The Company owns or leases the facilities reflected in the table below. The Company believes that its 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.

The Company ’ s paper business is primarily operated in Appleton and Portage, Wisconsin, West Carrollton, Ohio and Roaring Spring, Pennsylvania.

During the years 2007 through 2011, the Company invested approximately $201 million in capital improvements, of which, approximately $189 million

was spent at its manufacturing facilities. The primary goal of this capital spending was to improve manufacturing efficiencies, product quality and cycle time.

Of the $189 million spent on manufacturing facilities, approximately $2 million was spent to comply with applicable environmental regulations.

The Company also maintains two field sales offices in the U.S., both of which are in leased premises under short

- term leases. Location Description Approximate

Square Footage Status

Appleton, Wisconsin (Wisconsin Ave.) Headquarters Offices and Manufacturing Plant 1,157,000 Owned

Portage, Wisconsin Capsule Manufacturing Plant 73 ,000 Owned

Roaring Spring, Pennsylvania Pulp and Paper Mill 636,000 Owned

West Carrollton, Ohio Paper Mill 758,000 Owned

Appleton, Wisconsin (East Warehouse Road) Warehouse 272,000 Lease expires 11/30/12

Appleton, Wisconsin (Kensington Drive) Distribution Center 357,000 Lease expires 12/31/12

Monroe, Ohio Distribution Center 220,000 Lease expires 4/30/16

Camp Hill, Pennsylvania Distribution Center 212,000 Lease expires 12/31/13

Ontario, California Distribution Center 102,000 Lease expires 7/31/13

Kansas City, Kansas Distribution Center 103 ,000 Lease expires 1/31/15

McDonough, Georgia Distribution Center 106,000 Lease expires 10/31/14

Peterborough, Ontario, Canada Distribution Center 50,000 Lease expires 12/31/12

Roaring Spring, Pennsylvania Warehouse 89,000 Lease expires 12/31/12

22Item 3. Legal Proceedings

The Company is 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 19 of the Notes to the Consolidated Financial Statements.

Furthermore, from time to time the Company may be subject to various demands, claims, suits or other legal proceedings arising in the ordinary course of

business. The Company maintains a comprehensive insurance program to protect 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 that are not material to its business and obtaining dismissals in others. While

the Company will vigorously defend itself in any similar cases that may be brought against it in the future, there can be no assurance that it will be

successful.

Other than the Lower Fox River matter described in “ Item 1. Business

– Environmental, ” and assuming the Company ’ s expectations regarding

defending such demands, claims, suits or other legal or regulatory proceedings prove accurate, the Company 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

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

Item 4. Mine Safety Disclosures

Not applicable

23PART 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 2,301 active participants who were invested in the Company ’ s Stock Fund as of December 31, 2011. 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 years and neither of these entities currently anticipates

paying dividends in the foreseeable future. Each of these entities is and has been restricted from declaring dividends and repurchasing common stock

pursuant to provisions contained in the Company ’ s indebtedness agreements. For further information, see “ Item 7. Management ’ s Discussion and Analysis

of Financial Condition and Results of Operations

— Description of Outstanding Indebtedness ” and Notes 11 and 26 of Notes to Consolidated Financial

Statements.

During the year ended December 31, 2011, PDC sold approximately 213,502 shares of its common stock to the ESOP. The ESOP acquired the shares

with pre

- tax payroll deferrals, rollovers and employee loan payments made to the ESOP during the period from January 1, 2011, to December 31, 2011, by

employees of the Company who are participants in the KSOP as well as interest received by the trust. The aggregate sales price was $2.9 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. The Company ’ s matching contributions over this same period resulted in an additional 202,715 shares of PDC

redeemable common stock being issued. As a result of hardship withdrawals, diversification elections, employee terminations and employee loan requests,

916,621 shares of PDC redeemable common stock were repurchased during 2011 at an aggregate price of $12.4 million.

24Item 6. Selected Financial Data

The following tables set forth selected historical consolidated financial data for Paperweight Development Corp. and Subsidiaries and Appleton

Papers Inc. and Subsidiaries as of and for each of the five years in the five

- year period ended December 31, 2011. The consolidated financial information

shown below reflects Bemrose (through its sale in 2008), C&H (through its sale in 2009), NEX and APC (through their sale in July 2010) as discontinued

operations for all years presented. The historical consolidated financial data for the years ended December 31, 2011, January 1, 2011, and January 2, 2010,

were derived from the consolidated financial statements included elsewhere in this report, which have been audited by PricewaterhouseCoopers LLP, the

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 previously

- reported consolidated financial statements, not included in this report, revised for the

impact of management ’ s decision during fourth quarter 2010 to change from the LIFO to FIFO method of inventory valuation. This was deemed a preferable

method as the key users of the financial statements, including lenders, creditors and rating agencies, analyze results and require compliance with debt

covenants using the FIFO method of accounting. Further, this conformed all of the Company ’ s inventories to the FIFO method of accounting and promotes

greater comparability with international competitors as the Company expands its global sales.

The historical consolidated financial data presented in this report are not necessarily indicative of the financial position or 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 the historical consolidated financial statements and related notes included elsewhere in this

report.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

2011 2010 2009 2008 2007

(in thousands)

Statement of Operations Data:

Net sales $ 857,329 $ 849,884 $ 761,807 $ 854,923 $ 863,397

Cost of sales 687

, 524 684,488 603,247 683,427 649,560

Gross profit 169

, 805 165,396 158,560 171,496 213,837

Selling, general and administrative expenses 130,574 137,304 128,452 156,106 165,364

Restructuring and other charges (1)

- - - 2,578 1,254

Environmental expense insurance recovery

- (8,947 )

- - - Litigation settlement, net 3,122

- - - -

Operating income 36

, 109 37,039 30,108 12,812 47,219

Interest expense 61,330 65,772 51,291 54,267 48,351

Debt extinguishment expense (income), net

- 7,010 (42,602 ) (11,598 ) 1,572

Interest income (355 ) (327 ) (402 ) (1,071 ) (2,476 )

Litigation settlement, net (23,229 )

- - (22,274 )

- Other (income) expense (102 ) (429 ) (2,326 ) 6,061 (1,112 )

(Loss) income from continuing operations

before income taxes (1,535 ) (34,987 ) 24,147 (12,573 ) 884

Provision (benefit) for income taxes 577 176 333 (317 ) 231

(Loss) income from continuing operations (2

, 112 ) (35,163 ) 23,814 (12,256 ) 653

Discontinued operations

Income (loss) from discontinued operations, net of income taxes

- 3,499 (606 ) (80,965 ) (3,956 )

Net (loss) income $ (2

, 112 ) $ (31,664 ) $ 23,208 $ (93,221 ) $ (3,303 )

Paperweight Development Corp. and Subsidiaries

Other Financial Data:

Depreciation and amortization(2) $ 48,616 $ 49,780 $ 56,460 $ 53,310 $ 58,015

Capital expenditures(2) 15,847 17,250 22,851 95,193 50,068

Balance Sheet Data (at end of period):

Working capital $ 107

, 754 $ 115,743 $ 105,342 $ 111,333 $ 131,573

Total assets 641

, 918 676,999 790,651 924,516 1,093,842

Total debt 511,874 558,950 550,716 605,364 544,174

Redeemable common stock 97

, 615 110,045 122,087 147,874 182,040

Accumulated deficit (15 0, 193 ) (153,765 ) (129,093 ) (165,055 ) (89,652 )

25(2) Amounts exclude information related to discontinued operations. Appleton Papers Inc. and Subsidiaries

Other Financial Data:

Depreciation and amortization(2) $ 48,616 $ 49,780 $ 56,460 $ 53,310 $ 58,015

Capital expenditures(2) 15,847 17,250 22,851 95,193 50,068

Balance Sheet Data (at end of period):

Working capital $ 107,754 $ 115,743 $ 105,342 $ 111,333 $ 131,573

Total assets 641,906 676,987 790,639 924,504 1,093

, 830

Total debt 511,874 558,950 550,716 605,364 544,174

Common stock 10

, 500 10,5 00 10,500 1 0, 500 10,50 0

Paid

- in capital 623,305 623,305 623,305 623,305 623,305

Due from parent (229,100 ) (222,354 ) (217,305 ) (204,272 ) (188,396 )

Accumulated deficit (457,295 ) (455,183 ) (423,519 ) (446,727 ) (353,044 )

(1) The Company continually assesses its staffing requirements for its headquarters operations and for its plants and mills. Reductions occurred

throughout years 2007 through 2008. Due to the continued decline in the Company ’ s carbonless business, as well as the global economic downturn,

additional nonrestructuring headcount reductions were taken during 2009

- 2011.

26Item 7. Management ’ s Discussion and Analysis of Financial Condition and Results of Operations

Unless stated to the contrary or the context requires otherwise, all references in this report to the Company refer to Paperweight Development

Corp. ( “ PDC ” or “ Paperweight ” ) and its 100%

- owned subsidiaries. It includes Appleton Papers Inc. and its 100%

- owned subsidiaries (collectively

“ Appleton ” ).

On February 22, 2012, the Company entered into a long

- term supply agreement for the purchase of carbonless and thermal base stock to be coated at

the Company ’ s converting facilities. Under the terms of the agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base

stock used by the Company. The term of the agreement is fifteen years. It includes successive five

- year renewal terms unless either party gives notice of

non

- renewal at least two years prior to the expiration of the then current term.

Prices to be paid by the Company are subject to certain rebates and certain adjustments during the term of the agreement based on volume, changes

to raw material pricing, freight prices and productivity gains. The supplier has agreed to be competitive in terms of price, delivery, quality and services. The

supply agreement includes certain penalties if either the supplier or the Company fails to fulfill its obligations under the agreement. The supply agreement

may be terminated by either party in the event (i) the other party defaults in the performance of any of its material duties or obligations under the agreement

and fails to cure such default within 20 days after notice or (ii) the other party is in material default in the performance of the supply agreement after certain

specified bankruptcy and reorganization events.

In connection with its approval of this supply agreement, the Company ’ s Board of Directors authorized a plan for the Company to dispose of

papermaking assets at its West Carrollton, Ohio paper mill and move more carbonless coating to the Company ’ s converting plant in Appleton, Wisconsin.

As a result, approximately 330 jobs will be eliminated at the West Carrollton mill and approximately 50 jobs added at the Appleton facility. The Company

plans to continue its thermal coating operations at the West Carrollton facility and retain approximately 100 employees. This plan is expected to result in pre

tax charges associated with this manufacturing capacity rationalization and include employee termination costs (including related pension and benefit

costs), accelerated depreciation on certain equipment and other associated costs. As management has not yet finalized the specific actions to be taken, the

Company is unable to make a good faith estimate of (i) the amount or range of amounts of each major type of cost that will be incurred, or (ii) the amount or

range of amounts of costs that will result in future cash expenditures. In addition, management has concluded that a material charge for impairment and

accelerated depreciation of certain equipment located in West Carrollton, totaling approximately $80 million to $90 million, will be required in 2012 as a result

of the manufacturing rationalization plan.

Overview

This discussion summarizes significant factors affecting the consolidated operating results, financial position and liquidity of PDC and Appleton for

the three

- year period ended December 31, 2011. This discussion should be read in conjunction with the accompanying Consolidated Financial Statements

and related Notes.

The Company creates product solutions for customers and end users through its development and use of coating formulations and applications as

well as microencapsulation and security technologies. The Company has three reportable segments: carbonless papers, thermal papers and Encapsys ®

.

During third quarter 2011, the Company received payment of $23.2 million in damages, including interest and net of related fees and litigation

expenses. This was the result of a favorable jury trial verdict, received in 2009, related to litigation commenced by the Company against Andritz BMB AG

and Andritz, Inc. In March 2011, the Wisconsin Court of Appeals issued a decision unanimously affirming the final judgment. On September 1, 2011, the

Wisconsin Supreme Court denied the defendants ’ petition seeking further review of the matter. This income was recorded in the other expense (income)

section of the Consolidated Statements of Operations for the year ended December 31, 2011.

In June 2011, in accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5 million.

27At the end of March 2011, the Company resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1 million,

including legal fees.

Manufacturing operations at the Company ’ s West Carrollton, Ohio paper mill were temporarily interrupted in July 2010 by the collapse of one of its

coal silos. The incident caused no injuries. One boiler was extensively damaged as well as the supporting infrastructure for two other boilers. While most of

the West Carrollton facility was undamaged, the collapse of the coal silo reduced the mill ’ s ability to produce the power and steam required to operate its

manufacturing equipment. The thermal coater resumed production a few days later and the remainder of the mill resumed production in early August. The

Company managed customer orders and shifted paper production to other company

- owned manufacturing facilities in order to minimize any impact to its

customers. The boiler that was extensively damaged resumed operation just prior to the end of first quarter 2011.

Losses associated with property damage and business interruption were covered by insurance subject to a deductible of $1.0 million. During second

quarter 2011, the corresponding insurance claim was agreed and settled in full with all proceeds received from the insurer. The Company incurred

approximately $24.1 million in property damage, cost to repair and business interruption. After netting the $1.0 million deductible, and $1.7 million of capital

and $1.1 million of expense for safety and efficiency upgrades to the replacement property and other expenses not covered under the policy, the Company

recovered $20.3 million from its insurer.

Expenses associated with property damage and business interruption, totaling $17.1 million, were reported in cost of sales within the Consolidated

Statement of Operations for the year ended January 1, 2011. According to the terms of the insurance policy, the Company recorded a $17.1 million recovery,

less a $0.9 million valuation reserve, as a reduction to cost of sales for the year ended January 1, 2011, and a $0.5 million recovery as a reduction to cost of

sales for the year ended December 31, 2011. Business interruption coverage also included recovery from lost margins related to the accident and therefore,

the Company recorded a gain of $0.6 million in cost of sales within the Consolidated Statement of Operations for the year ended January 1, 2011 and an

additional $0.2 million gain in cost of sales for the year ended December 31, 2011. The Company also recorded a $0.4 million involuntary conversion loss on

fixed assets associated with the property loss in its Consolidated Statement of Operations for the year ended January 1, 2011.

Total capital spending of approximately $5.5 million was incurred for work associated with bringing the damaged boiler back online. At year

- end 2010,

$1.0 million, net of the $1.0 million deductible, was recorded as a gain on the other income line within the Consolidated Statement of Operations. For the year

ended December 31, 2011, the Company recorded an additional $1.4 million of gain on the other income line within the Consolidated Statement of

Operations, which was recorded during the second quarter.

On July 2, 2010, the Company entered into a stock purchase agreement with NEX Performance Films Inc. ( “ Films ” ), an entity affiliated with Mason

Wells Buyout Fund II, Limited Partnership whereby the Company agreed to sell all of the outstanding capital stock of American Plastics Company, Inc.

( “ APC ” ) and New England Extrusion Inc. ( “ NEX ” ) for a cash purchase price of $58 million. This transaction closed on July 22, 2010, with the Company

receiving $56 million at the time of closing and $2 million held in escrow, on behalf of the Company, for 12 months to satisfy potential claims under the stock

purchase agreement with Films. No claims were made against the escrow and the $2 million was paid to the Company on July 25, 2011. The cash proceeds of

the sale were used to reduce debt. A $0.4 million net gain on sale was recorded in income from discontinued operations for the year ended January 1, 2011.

APC was acquired in 2003 and is located in Rhinelander, Wisconsin. NEX was acquired in 2005 and has manufacturing operations in Turners Falls,

Massachusetts, and Milton, Wisconsin.

During second quarter 2009, the Company committed to a formal plan to sell C&H Packaging Company, Inc. ( “ C&H ” ). C&H, located in Merrill,

Wisconsin, was acquired in 2003. On December 18, 2009, the Company completed the sale of C&H to The Interflex Group, Inc. receiving $16.9 million of cash

and a receivable for $0.2 million relating to a working capital adjustment. This receivable was paid in full in February 2010. As a result of the sale, a $0.8

million gain on sale was recorded in fourth quarter 2009.

Slower than expected economic recovery and on

- going raw materials inflation, continued to impact the Company's business and results of operations

during 2011. In response to escalating raw material costs, the Company has been able to initiate and sustain price increases in order to manage its margins.

The Company continues to be proactive and disciplined as it implements manufacturing efficiencies and cost saving measures to help balance the negative

impact of increasing input costs on the business. The Company continues to focus on operational excellence as well as leveraging its innovative products,

strong relationships with customers and its market leadership positions.

28Financial Highlights

Results for 2011 include the following:

Carbonless Papers

The carbonless papers segment, which includes carbonless and security paper products, is the largest component of the Company's paper business.

The Company believes the North American market for carbonless paper products has been in decline as a result of greater use of competing technologies

such as digital laser, inkjet and thermal printers, and electronic communications that do not use impact printing to create images. The Company believes the

North American carbonless paper market declined by approximately 7% to 10% annually from 2006 through 2011, except during the recession period when

the decline was estimated at a 16% annual rate. The decline is expected to continue at historical rates over the next several years and eventually to stabilize.

The Company believes the worldwide carbonless market is also in decline, with demand declining at approximately 2% to 4% per year. The carbonless

papers segment accounted for approximately 53% of total net sales in 2011.

The carbonless paper market is highly competitive. The Company competes based on a number of factors, including price, product availability,

quality and customer service. In addition to declining North American 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 North American carbonless market with low

- price strategies. As a result

of this increased pricing competition, the Company has continued to experience pressure on selling prices for carbonless products. Nevertheless, market

conditions permit the Company to implement price increases from time to time, as was the case during 2011 and 2010, to offset the increasing costs of raw

materials. · Net sales totaled $857.3 million, a $7.4 million, or 0.9%, increase from 2010 net sales. Net sales within the paper business increased $3.0 million,

or 0.4%. The positive impact of price increases initiated in response to escalating raw material costs offset the negative impact of shipment

volumes decreasing nearly 6%. Encapsys net sales increased $2.5 million, or 4.8%, on a volume increase of over 7%.

· Selling, general and administrative expenses ( “ SG&A ” ) of $130.6 million were $6.7 million lower than the prior year primarily due to lower

compensation, benefits and depreciation expense.

· At the end of March 2011, the Company resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1

million, including legal fees.

· During third quarter 2011, the Company received payment of $23.2 million of damages, including interest and net of related fees and litigation

expenses. This was the result of a favorable jury trial verdict, received in 2009, related to litigation commenced by the Company against Andritz

BMB AG and Andritz, Inc. This income was recorded in the other expense (income) section of the Consolidated Statements of Operations for

the year ended December 31, 2011.

· Loss from continuing operations was $2.1 million compared to last year ’ s loss of $35.2 million. As discussed above, these 2011 results include

the $3.1 million litigation settlement and the $23.2 million litigation recovery. In comparison, the 2010 results include an $8.9 million

environmental insurance recovery and $7.0 million of debt extinguishment expense largely related to the February 2010 voluntary debt

refinancing.

· Net debt as of December 31, 2011 was $504.5 million compared to $555.0 million at the end of 2010, a reduction of $50.5 million. In June 2011, in

accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5 million.

· During 2011, the Company generated $68.7 million of cash from operations compared to cash used by operations of $30.0 million in 2010. This

included a decrease in working capital of $23.4 million and the receipt of $23.2 million from the litigation settlement discussed above.

29In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. The tariff on

carbonless paper had been 10%. Beginning January 1, 2010, all U.S. sales of carbonless paper into Mexico were assessed a 5% tariff. In August 2010, the

Mexican government announced a rotating list of 99 U.S. products to receive tariffs of 5%

- 45%. Carbonless paper was eliminated from this list and

currently is not subject to any import tariffs. Though the tariff was paid by the customer, this automatically increased the price of carbonless paper by the

amount of the tariff which could have opened the door for non

- U.S. competitors to enter the Mexican market with their carbonless products and take

advantage of the ability to offer customers more favorable pricing.

During 2010, the Mexican government passed legislation requiring all businesses in Mexico to file their invoices electronically with the government

when the transactional value of the invoice is greater than 2000 pesos. In January 2011, this legislation became effective. This legislation allows a phase

- in

period whereby companies can still use paper invoices for up to two years as long as they obtained prior approval from the government to continue to print

sequentially numbered invoices during this phase

- in period. During 2011, the Company experienced a decline in its carbonless rolls business in Mexico as a

result of this government

- legislated electronic invoicing. As there was a two

- year phase in, the Company continues to monitor this risk and how it will

impact the carbonless business during 2012. Other multipart documents, including delivery notices, order acknowledgments and other administrative

documents, were not addressed in the legislation.

Thermal Papers

The thermal papers market is growing with new applications being developed to use thermal technology. Based on its assessment of the period 2006

through 2011, the Company believes North American thermal markets expanded at a 3% compound average growth rate, with annual rates ranging from a

decline of 2% to increases of 9%. The Company believes demand for thermal paper will continue to grow in North America and around the world. In 2008,

the Company completed an investment of approximately $125 million to expand its mill in West Carrollton, Ohio, in anticipation of that demand. The

expansion project included 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 paper accounted for approximately 43% of total company net sales in 2011.

In 2007, the Company filed antidumping petitions against imports of certain lightweight thermal paper ( “ LWTP ” ) from China, Germany and Korea and

a countervailing duty petition against such imports from China. In 2008, the U.S Department of Commerce ( “ Department ” ) issued its final determination,

affirming that certain Chinese producers and exporters of LWTP sold the product in the U.S. at prices below fair value, imposing final duties of 19.77% to

115.29% and that German producers and exporters sold the product in the U.S. at prices below fair value and imposed final duties on those imports of 6.5%.

In addition, for all but one Chinese producer, the Department imposed counterveiling duties of between 13.17% and 137.25%. In 2008, the U.S. International

Trade Commission ( “ ITC ” ) determined the U.S. industry producing LWTP is threatened with material injury due to unfairly traded imports from China and

Germany and final duties went into effect in 2008. These duties do not have a direct impact on the Company ’ s net income. A German manufacturer filed an

appeal of the ITC determination to the U.S. Court of International Trade ( “ CIT ” ). The appeal was decided in favor of the Company in 2009 and the German

manufacturer filed a further appeal to the U.S. Court of Appeals for the Federal Circuit ( “ CAFC ” ). In 2011, the CAFC remanded the matter for further

consideration by the ITC and the ITC upheld its original determination. In January 2012, the CIT upheld the ITC ’ s decision on remand and the German

manufacturer filed another appeal of the matter to the CAFC. In addition, for each of the three 12

- month periods following implementation of the final duties,

the Company and the German manufacturer have filed requests for administrative review with the Department, seeking to modify the amount of the duties

based on the market practices during each respective 12

- month period. In 2011, the Department issued a final determination in the first 12

- month review

period, resulting in a dumping margin of 3.77 percent for imports from the German manufacturer for the period from November 2008 to October 2009. The

German manufacturer has appealed the first review determination to the CIT. Upon final resolution of the appeal, the second administrative review and the

third administrative review, certain of the duties could be reduced, increased or eliminated.

Encapsys

The Encapsys segment applies the Company ’ s extensive knowledge of the microencapsulation process to develop and deliver custom

microencapsulation solutions for its partners. The Company uses an open innovation process that typically includes development agreements with partner

companies that seek to protect existing and potential intellectual property. Encapsys is exploring opportunities with potential partners in industries as

diverse as agriculture, paints and coatings, food, pharmaceuticals, paper, textiles, personal and household care, adhesives, and oil and gas. During 2011,

Encapsys accounted for approximately 6% of total company net sales.

30Comparison 2011 and 2010

Paperweight Development Corp. and Subsidiaries and

Appleton Papers Inc. and Subsidiaries

Net sales for 2011 were $857.3 million, increasing $7.4 million, or 0.9%, compared to $849.9 million of net sales in 2010. The positive impact of price

increases initiated in response to escalating raw material costs, as well as Encapsys growth, offset the impact of lower shipment volumes. Net sales within

the paper business increased $3.0 million, or 0.4% during 2011 while the Encapsys business continued to grow with net sales surpassing prior year net sales

by $2.5 million, or 4.8%, on a volume increase of over 7%.

Operating income of $36.1 million was $0.9 million, or 2.4%, lower than in 2010. During 2011, raw material and utilities inflation accounted for a $29.9

million increase in cost of sales when compared to the prior year. Lower shipment volumes accounted for decreased operating income of $6.3 million and mill

curtailments to match customer demand added $6.2 million of expense. Unallocated corporate charges were $13.0 million higher than 2010 because of the $3.1

million litigation settlement compared to the 2010 results which included an $8.9 million environmental expense recovery. These were partially offset by

favorable price and mix of $45.0 million and reduced manufacturing costs of $9.4 million.

SG&A decreased $6.7 million, or 4.9%, during 2011. As a percentage of net sales, SG&A decreased by one percentage point. Compensation expense

was approximately $2.2 million lower than in 2010 due to lower headcount as well as decreased severance expense. Employee benefit costs were lower during

2011, largely due to favorable group health claims experience. For the Year Ended Increase

December 31, 2011 January 1,

2011 (Decrease)

(dollars in millions)

Net sales $ 857.3 $ 849.9 0.9 %

Cost of sales 687.5 684.5 0.4 %

Gross profit 169.8 165.4 2.7 %

Selling, general and administrative expenses 130.6 137.3

- 4.9 %

Environmental expense insurance recovery

- (8.9)

- 100.0 %

Litigation settlement, net 3.1

- nm

Operating income 36.1 37.0

- 2.4 %

Interest expense, net 61.0 65.4

- 6.7 %

Debt extinguishment expense, net

- 7.0

- 100.0 %

Recovery from litigation settlement, net (23.2)

- nm

Other non

- operating income, net (0.2) (0.4)

- 50.0 %

Loss from continuing operations before income taxes (1.5) (35.0) 95.7 %

Provision for income taxes 0. 6 0.2 200.0 %

Loss from continuing operations (2.1) (35.2) 94.0 %

Income from discontinued operations, net of income taxes

- 3.5

- 100.0 %

Net loss $ (2.1) $ (31.7) 93.4 %

Comparisons as a % of net sales

Cost of sales 80.2 % 80.5 %

- 0 .3 %

Gross margin 19.8 % 19.5 % 0 .3 %

Selling, general and administrative expenses 15.2 % 16.2 %

- 1.0 %

Operating margin 4.2 % 4.4 %

- 0. 2 %

Loss from continuing operations before income taxes

- 0.2 %

- 4.1 % 3.9 %

Loss from continuing operations

- 0. 2 %

- 4.1 % 3.9 %

Income from discontinued operations, net of income taxes 0.0 % 0.4 %

- 0.4 %

Net loss

- 0. 2 %

- 3.7 % 3.5 %

31The Company recorded a 2011 net loss from continuing operations of $2.1 million compared to a $35.2 million loss from continuing operations

recorded in 2010. Net interest expense was $4.4 million lower in 2011 due to the November 2010 repayment of the secured term note payable, the June 2011

repayment of the 8.125% senior notes payable and lower levels of borrowing on the revolving credit facility, as amended, during 2011. The Company also

received a $23.2 million litigation settlement recovery during third quarter 2011. During 2010, the Company recorded $7.0 million of debt extinguishment

expense associated with the voluntary refinancing completed in February 2010.

Income from discontinued operations of $3.5 million was recorded in 2010 representing income from the Films operations until its sale in July 2010. It

also includes a $0.4 million gain on the sale of the business.

For 2011, the Company recorded a net loss of $2.1 million compared to a net loss of $31.7 million recorded in 2010.

Business Segment Discussion

– 2011

During 2011, the paper business, which includes carbonless papers and thermal papers, recorded net sales of $823.8 million, which were $3.0 million

higher than 2010 net sales. During this same period, paper business operating income of $38.6 million increased $10.4 million compared to 2010. The year

- on

year operating income variance was the result of the following (dollars in millions):

Carbonless Papers

Thermal Papers

Encapsys

Unallocated Corporate Charges

Favorable price and mix $ 44.8

Decreased manufacturing costs 9.3

Net inflation of raw material and utilities pricing (29.9 )

Mill curtailments to match customer demand (6.3 )

Lower shipment volumes (7.5 )

$ 10.4

· Carbonless papers segment 2011 net sales totaled $453.0 million, a decrease of $26.1 million, or 5.4%, from the prior year. Current year shipment

volumes were nearly 10% lower than 2010 shipments. The impact of lower shipment volumes was partially offset by favorable pricing resulting from

various price increases initiated since 2010 in response to rapidly rising raw material costs. Carbonless papers operating income decreased $6.8

million, or 22.3%, during 2011 to $23.7 million. Margins continue to be negatively impacted by continued inflation in raw material and utilities

pricing. While pulp prices came down during the second half of 2011, the cost of chemicals continued to climb. Overall, average pulp prices paid in

2011 were higher than those paid in 2010.

· Thermal papers segment 2011 net sales of $370.8 million were $29.1 million higher than 2010 net sales of $341.8 million. During 2011, shipments of

thermal papers increased approximately 1% over the prior year. In order to improve profitability, the Company has been managing volumes and

price of the point of sale receipt paper ( “ POS ” ) portion of the thermal business. Shipment volumes of POS were approximately 7% lower than 2010

shipment volumes. Demonstrating the strength of the Company ’ s thermal products portfolio, shipment volumes of tag, label and entertainment

( “ TLE ” ) were approximately 12% higher than the prior year. The thermal papers segment also benefited from favorable pricing realized in response

to escalating raw material costs. During 2011, the thermal papers segment recorded operating income of $15.0 million compared to a 2010 operating

loss of $2.3 million. Improved pricing and mix, as well as volume growth, more than offset increases in raw material costs.

· Encapsys segment net sales for 2011 totaled $54.7 million, which was an increase of $2.5 million, or 4.8%, over 2010 net sales. Current year

operating income was $11.4 million compared to 2010 operating income of $10.1 million. These increases were the result of increased shipment

volumes of approximately 7%.

· As of year

- end 2011, unallocated corporate charges totaled $10.7 million. These charges include a $3.1 million litigation settlement. In 2010, due to

the environmental expense insurance recovery of $8.9 million, unallocated corporate charges recorded $2.3 million of income.

32Effects of Inflation. Prices for certain raw materials, including base stock, chemicals and pulp, as well as costs for natural gas, oil and electricity

have been subject to price changes and can have material effects on the business, financial condition and results of operations. Prices for certain raw

materials increased during 2011 and could continue to increase, or decrease, in response to changes in demand. The Company historically has been able to

use price increases to recoup a portion of raw material price increases, but relies on cost

- cutting measures and productivity and efficiency gains to offset

the remaining portion of raw material price increases. While the Company expects that any significant increase in raw materials or energy costs will be offset

by price increases and/or by cost containment and productivity and efficiency initiatives, profitability could be adversely affected if the Company is unable

to pass on or mitigate any future cost increases.

Comparison 2010 and 2009

Paperweight Development Corp. and Subsidiaries and

Appleton Papers Inc. and Subsidiaries

Net sales for 2010 were $849.9 million, increasing $88.1 million, or 11.6%, compared to $761.8 million of net sales in 2009. This increase was largely due

to an increase in shipment volumes and the positive impact of price increases initiated throughout the year. Net sales within the paper business increased

$75.3 million, or 10.1% during 2010 while the Encapsys business continued to grow with net sales surpassing prior year net sales by $11.8 million or 29.1%. For the Year Ended Increase

January 1, 2011 January 2, 2010 (Decrease)

(dollars in millions)

Net sales $ 849.9 $ 761.8 11.6 %

Cost of sales 684.5 603.2 13.5 %

Gross profit 165.4 158.6 4.3 %

Selling, general and administrative expenses 137.3 128.5 6.8 %

Environmental expense insurance recovery (8.9)

- nm

Operating income 37.0 30.1 22.9 %

Interest expense, net 65.4 50.9 28.5 %

Debt extinguishment expense (income), net 7.0 (42.6)

- 116.4 %

Other non

- operating income, net (0.4) (2.3)

- 82.6 %

(Loss) income from continuing operations before income taxes (35.0) 24.1

- 245.2 %

Provision for income taxes 0.2 0.3

- 33.3 %

(Loss) income from continuing operations (35.2) 23.8

- 247.9 %

Income (loss) from discontinued operations, net of income taxes 3.5 (0.6) nm

Net (loss) income $ (31.7) $ 23.2

- 236.6 %

Comparisons as a % of net sales

Cost of sales 80.5 % 79.2 % 1.3 %

Gross margin 19.5 % 20.8 %

- 1.3 %

Selling, general and administrative expenses 16.2 % 16.9 %

- 0.7 %

Operating margin 4.4 % 4.0 % 0.4 %

(Loss) income from continuing operations before income taxes

- 4.1 % 3.2 %

- 7.3 %

(Loss) income from continuing operations

- 4.1 % 3.1 %

- 7.2 %

Income (loss) from discontinued operations, net of income taxes 0.4 %

- 0.1 % 0.5 %

Net (loss) income

- 3.7 % 3.0 %

- 6.7 %

33Operating income of $37.0 million was $6.9 million, or 22.9%, higher than in 2009. Current year operating income included an $8.9 million environmental

expense recovery resulting from an insurance settlement while 2009 results included $17.7 million of alternative fuels tax credit recorded as a reduction of

cost of sales. This tax credit expired on December 31, 2009. During 2010, raw material inflation accounted for a $28.0 million increase in cost of sales when

compared to the prior year. The year saw record high pulp prices which, in turn, also increased the price of base stock purchased externally. In addition,

since profit margins are lower on international sales, strong international demand contributed to unfavorable mix of $14.6 million. The negative impact of

these items was more than offset by reduced manufacturing costs of $22.7 million, reduced start

- up costs of $8.6 million related to the thermal coater at the

West Carrollton, Ohio paper mill and reduced costs of $7.5 million associated with mill curtailments to match customer demand as well as the increased

shipment volumes and pricing mentioned above.

Selling, general and administrative expenses increased $8.8 million, or 6.8%, during 2010. As a percentage of net sales, SG&A actually decreased 0.7

percentage points. Year

- over

- year, distribution costs were $5.6 million higher in 2010 due to an overall increase in shipment volumes, higher fuel costs and

increased international shipments. Outsourcing fees were $1.6 million higher as the result of outsourcing 28 finance and IT positions. Salaries expense

increased by $0.8 million due to the payment of severance benefits to employees whose jobs were outsourced and the fact that 2009 salaries expense was

lower because all salaried employees were required to take two weeks of furlough during the second and third quarters of 2009. Incentive compensation was

$0.9 million higher than 2009 due to the initiation of a long

- term restricted stock unit plan to reward key management employees for improved stock

performance.

The Company recorded a 2010 net loss from continuing operations of $35.2 million in comparison to 2009 income from continuing operations of $23.8

million. Net interest expense was $14.5 million higher in 2010. The Company refinanced its debt in March 2009 and completed a voluntary debt

- for

- debt

exchange in September 2009. Then, again in February 2010, the Company completed another voluntary debt refinancing. Though these transactions enabled

the Company to decrease its debt, extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility, it also

increased the Company ’ s average interest rate by approximately three percentage points. As a result of these debt transactions, as well as other debt

repayment transactions that took place during the past two years, the Company recorded $7.0 million of debt extinguishment expense in 2010 and $42.6

million of debt extinguishment income in 2009.

Income from discontinued operations of $3.5 million was recorded in 2010 representing income from the Films operations until its sale in July 2010. It

also includes a $0.4 million gain on the sale of the business. A $0.6 million loss from discontinued operations was recorded in 2009 which included the

operating results of the former performance packaging segment and the $0.8 million gain on the December 2009 sale of C&H.

For 2010, the Company recorded a net loss of $31.7 million compared to net income of $23.2 million recorded for 2009.

Business Segment Discussion

– 2010

In previous years, the Company ’ s paper business included coated solutions, thermal papers and security papers. Coated solutions included

carbonless papers and Encapsys. Encapsys provides microencapsulation technologies and microencapsulated products for the Company's production

of carbonless papers and commercially to external customers. Encapsys has grown to be an increasingly significant business and is forecasted to continue

this trend. As a result of this growth, there is a specific management team in place to oversee the development, marketing and manufacturing of these

products, and therefore, Encapsys is now reported as a separate segment. In addition, due to a business and management realignment of the Company ’ s

paper business, previously reported security papers has been combined with carbonless papers to become the carbonless papers reportable segment. The

carbonless papers segment and the thermal papers segment each operate under separate management teams to encourage a singular focus on specific

markets and customers and their respective needs.

34During 2010, the paper business, which includes carbonless papers and thermal papers, recorded net sales of $820.8 million, which were $75.3 million

higher than 2009 net sales. During this same period, paper business operating income of $28.2 million decreased $10.0 million compared to 2009. Excluding

$17.7 million of alternative fuels tax credit recorded in 2009, results for 2010 were $7.7 million improved over the prior year. The year

- on

- year operating

income variance was the result of the following (dollars in millions):

Carbonless Papers

Thermal Papers

Encapsys

Unallocated Corporate Charges

Effects of Inflation. Prices for certain raw materials, including base stock, chemicals and pulp, as well as costs for natural gas, oil and electricity have

been subject to price changes and can have material effects on the business, financial condition and results of operations. Prices for certain raw materials

increased during 2010 and could continue to increase, or decrease, in response to changes in demand. The Company historically has been able to use price

increases to recoup a portion of raw material price increases, but relies on cost

- cutting measures and productivity and efficiency gains to offset the

remaining portion of raw material price increases. While the Company expects that any significant increase in raw materials or energy costs will be offset by

price increases and/or by cost containment and productivity and efficiency initiatives, profitability could be adversely affected if the Company is unable to

pass on or mitigate any future cost increases.

Net inflation of raw material and utilities pricing $ (25.7)

Alternative fuels tax credit (17.7)

Unfavorable mix (14.6)

Higher distribution costs (1.7)

Reduced manufacturing costs 22.7

Reduced start

- up costs related to the thermal coater at the West Carrollton, Ohio paper mill 8.6

Reduction in mill curtailments to match customer demand 7.5

Favorable price 5.7

Higher shipment volumes 5.2

$ (10.0)

· Carbonless papers segment net sales totaled $479.0 million for 2010, an increase of $14.7 million, or 3.2%, from prior year. Current year shipment

volumes were nearly 4% higher than 2009 shipments. Net sales were also positively impacted by various price increases initiated throughout 2010

in response to escalating raw material costs, the successful launch of the Company ’ s new Superior carbonless sheet product and strong

international demand. Carbonless papers operating income decreased $18.6 million, or 38.0%, during 2010 to $30.5 million. The current year saw

record high pulp prices which, in turn, also increased the price of base stock purchased externally. In addition, 2009 cost of sales was reduced by

$17.7 million for the alternative fuels tax credit. This tax credit expired on December 31, 2009.

· Thermal papers segment 2010 net sales of $341.8 million were $60.6 million higher than 2009 net sales of $281.2 million. During 2010, shipments of

thermal papers increased approximately 24% over the prior year, of which, the largest volume increase was recorded within the light weight non

- top

coated ( “ LWNTC ” ) product offerings. Net sales were also positively impacted by price increases initiated during 2010 in response to escalating

raw material costs as well as the growing demand for the Company ’ s BPA

- free thermal paper. During 2010, the thermal papers segment recorded an

operating loss of $2.3 million compared to a 2009 operating loss of $10.9 million. Prior year operating income was negatively impacted by $8.7

million of additional costs related to the start

- up of the thermal coater at the West Carrollton, Ohio paper mill.

· Encapsys segment net sales for 2010 totaled $52.3 million, which was an increase of $11.8 million or 29.1% over 2009 net sales. Current year

operating income was $10.1 million compared to 2009 operating income of $2.7 million. These increases were the result of increased shipment

volumes of approximately 50%.

· The environmental expense insurance recovery of $8.9 million was recorded in unallocated corporate charges, resulting in 2010 reported income of

$2.3 million. This compares to $7.2 million of expense recorded during 2009.

35Liquidity and Capital Resources

Overview. The Company ’ s primary sources of liquidity and capital resources are cash provided by operations and available borrowings under its

revolving credit facility, as amended. The Company expects that cash on hand, internally generated cash flow and available credit from its revolving credit

facility, as amended, will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service,

other contractual obligations and capital expenditures). At December 31, 2011, the Company had $7.2 million of cash and approximately $63.6 million of

unused borrowing capacity under its revolving credit facility, as amended. Net debt (total debt net of cash) decreased to $504.5 million compared to $555.0

million at year

- end 2010.

During third quarter 2011, the Company received a $23.2 million net recovery from litigation initiated in September 2007 against Andritz BMB AG and

Andritz, Inc. and used the proceeds to pay down debt on the Company ’ s revolving credit facility, as amended.

In June 2011, in accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5 million.

A payment of $18.2 million represented full and complete payment of all unpaid principal and accrued and unpaid interest. These funds were sourced from a

combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the notes were terminated and the

Company was released from all obligations under the notes.

The Company was in compliance with all debt covenants at December 31, 2011, and is forecasted to remain compliant for the next twelve months. The

Company ’ s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. The Company ’ s failure to comply

with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers of, the

financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of

non

- compliance with debt covenants, if the lenders will not amend or waive the covenants, the debt would be due and the Company would need to seek

alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing. If the Company were not able to secure

alternative financing, this would have a material adverse impact on the Company.

On February 22, 2012, the Company entered into a long

- term supply agreement for the purchase of carbonless and thermal base stock to be coated at

the Company ’ s converting facilities. Under the terms of this agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base

stock used by the Company. The term of the agreement is fifteen years. Prices to be paid by the Company are subject to certain rebates and certain

adjustments during the term of the agreement based on volume, changes to raw material pricing, freight prices and productivity gains. The supplier has

agreed to be competitive in terms of price, delivery, quality and services.

In connection with its approval of this supply agreement, the Company ’ s Board of Directors authorized a plan for the Company to dispose of

papermaking assets at its West Carrollton, Ohio paper mill and move more carbonless coating to the Company ’ s converting plant in Appleton, Wisconsin.

As a result, approximately 330 jobs will be eliminated at the West Carrollton mill and approximately 50 jobs added at the Appleton facility. The Company

plans to continue its thermal coating operations at the West Carrollton facility and retain approximately 100 employees. This plan is expected to result in pre

tax charges associated with this manufacturing capacity rationalization and include employee termination costs (including related pension and benefit

costs), accelerated depreciation on certain equipment and other associated costs. As management has not yet finalized the specific actions to be taken, the

Company is unable to make a good faith estimate of (i) the amount or range of amounts of each major type of cost that will be incurred, or (ii) the amount or

range of amounts of costs that will result in future cash expenditures. In addition, management has concluded that a material charge for impairment and

accelerated depreciation of certain equipment located in West Carrollton, totaling approximately $80 million to $90 million, will be required in 2012 as a result

of the manufacturing rationalization plan. For further information see Note 3 of the Notes to Consolidated Financial Statement.

This supply agreement is expected to provide significant annual financial benefits to the Company over the life of the agreement including

extensions. The agreement also is expected to provide one

- time financial benefits in the form of reduced working capital investment. The Company expects

to fund the cash costs of the cessation of papermaking at West Carrollton and of the transition to the replacement base stock provided under the supply

agreement with cash from normal operations, manufacturing cost savings developed from this supply agreement and reduced working capital investment.

Cash Flows from Operating Activities

- Paperweight Development Corp. and Subsidiaries

. Net cash provided by operating activities during 2011

was $68.7 million compared to $30.0 million net cash used by operating activities in 2010. The net loss, adjusted for non

- cash charges, provided $53.4 million

in operating cash for the period. Non

- cash charges included $48.6 million in depreciation and amortization, $2.7 million of non

- cash employer matching

contributions to the KSOP, $1.1 million of foreign exchange loss and $4.5 million of other non

- cash charges. These non

- cash charges were decreased by a

$1.4 million net gain from involuntary conversion of equipment. A decrease in working capital provided $23.4 million of cash. A major component of this

decrease was a $14.5 million reduction in other current assets due to the receipt of an $8.2 million insurance recovery receivable for the West Carrollton coal

silo collapse. Cash of $3.9 million was also provided by a decrease in other assets which included receiving $2.6 million in December from the sale of foreign

exchange contracts originally set to mature at various points in 2012. Accrued pension decreased by $12.0 million which included 2011 pension payments

totaling $18.0 million.

36Net cash used by operating activities during 2010 was $30.0 million compared to $60.9 million net cash provided by operating activities in 2009. The

net loss, adjusted for non

- cash charges, provided $23.6 million in operating cash for the period. Non

- cash charges included $51.5 million in depreciation and

amortization, $7.0 million of debt extinguishment expense associated with current year debt refinancing and debt repayment, $3.2 million of non

- cash

employer matching contributions to the KSOP, $0.6 million of foreign exchange loss, and $5.3 million of other non

- cash charges. These non

- cash charges

were decreased by the $9.1 million Fox River insurance recovery, proceeds of which are expected to be received during 2011 and 2012, a $2.6 million gain on

the sale of Films and a $0.6 million net gain from involuntary conversion of equipment. Uses of cash included a $36.6 increase in working capital, a $7.3

million change in pension which included a $15.0 million pension payment for the 2009 plan year and a net $9.7 million of other uses. A major component of

the $36.6 million increase in working capital was a $14.6 million increase in accounts receivable. This increase was the result of higher year

- on

- year net sales

and increased international sales which carry longer payment terms. Other components of the increase in working capital were a $9.3 million decrease in

accounts payable and accrued liabilities, a $6.7 million increase in other current assets and a $6.0 million increase in inventories. The increase in other

current assets is largely the result of an $8.2 million insurance recovery receivable recorded for the West Carrollton coal silo collapse.

Net cash provided by operating activities for 2009 was $60.9 million compared to $2.2 million net cash provided by operating activities in 2008. Net

income, adjusted for non

- cash charges, provided $54.2 million in operating cash for the period. Non

- cash charges included $62.0 million in depreciation and

amortization, $6.3 million of goodwill impairment charges, $4.0 million of non

- cash employer matching contributions to the KSOP, $1.8 million of foreign

exchange gain, $0.7 million of gain on the sale of C&H and $3.8 million of other non

- cash charges. A $42.6 million net gain on debt extinguishment, which is

discussed below in C ash Flows from Financing Activities , was also recorded during 2009. The change in working capital provided $19.3 million of cash

largely due to a $14.7 million increase in accounts payable and accrued liabilities. This $14.7 million increase in accounts payable and accrued liabilities was

attributable to a $9.4 million increase in the current portion of the Fox River Liabilities as well as a $5.5 million increase in accrued compensation for incentive

compensation. A net $12.6 million of other uses was also recorded during 2009 which included a net change to the pension reserve of $5.5 million as the

result of a $10.0 million contribution made to the pension fund during 2009 for the 2008 plan year.

Cash Flows from Operating Activities

- Appleton Papers Inc. and Subsidiaries

. Net cash provided by operating activities for 2011 was $91.4 million

and, in 2010 and 2009, cash used by operating activities was $88.3 million and $19.4 million, respectively. As Appleton is the primary operating subsidiary of

the Company, a majority of the components of cash flows from operating activities are the same as those discussed above for Paperweight Development

Corp. and Subsidiaries. As Appleton is the PRP of the Lower Fox River environmental remediation liability, the funding of the remediation is included in

operating activities. This is the main driver of the additional changes in cash flows from operating activities.

Cash Flows from Investing Activities

- Paperweight Development Corp. and Subsidiaries and Appleton Papers Inc. and Subsidiaries. Net cash

used by investing activities in 2011 totaled $12.5 million. During 2011, the Company invested $15.9 million on capital projects. In July 2011, the Company

received the remaining $2.0 million of cash proceeds from the July 2010 sale of APC and NEX which had been in escrow pending any potential buyer claims

resulting from the sale. Insurance proceeds of $1.4 million were received to compensate the Company ’ s loss of property, plant and equipment as the result

of the July 2010 coal silo collapse at the West Carrollton, Ohio paper mill.

As a result of the $56.0 million of cash proceeds from the July 2010 sale of APC and NEX, cash provided by investing activities totaled $39.4 million in

2010. During 2010, the Company invested $17.8 million on capital projects. Current year cash flows from investing also included $1.0 million of insurance

recovery, related to fixed assets, as a result of the West Carrollton coal silo collapse.

Net cash used by investing activities in 2009 totaled $7.6 million. During 2009, the Company invested $24.5 million on capital projects. On

December 18, 2009, the Company completed the sale of C&H and received cash proceeds of $16.9 million.

Cash Flows from Financing Activities

- Paperweight Development Corp. and Subsidiaries

. During 2011, net cash used by financing activities was

$52.8 million. In June 2011, in accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5

million. A payment of $18.2 million represented full and complete payment of all unpaid principal and accrued and unpaid interest. These funds were sourced

from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the notes were terminated and the

Company was released from all obligations under the notes. The Company also made mandatory debt repayments of $1.2 million, plus interest, on its State

of Ohio loans. During the current year, the Company repaid a net $29.3 million on its revolving credit facility, as amended, and as of December 31, 2011, did

not have an unpaid revolver balance. Approximately $18.8 million of the revolving credit facility, as amended, is used to support outstanding letters of

credit.

Current year proceeds from the issuance of PDC redeemable common stock totaled $2.9 million. The ESOP trustee purchased this stock using pre

- tax

deferrals, rollovers and loan payments made by employees during 2011. Current year payments to redeem PDC common stock were $12.4 million.

Cash overdrafts increased $4.7 million during 2011. Cash overdrafts represent short

- term obligations, in excess of deposits on hand, which have not

yet cleared through the banking system. Fluctuations in the balance are a function of quarter

- end payment patterns and the speed with which the payees

deposit the checks.

During 2010, net cash used by financing activities was $15.6 million. The Company made mandatory debt repayments of $3.6 million, plus interest, on

its secured term note payable, as amended, and the State of Ohio loans. As discussed below, in February 2010, the Company completed a voluntary

refinancing of its debt which included a new five

- year, asset

- backed $100 million revolving credit facility. As of year

- end 2010, there was an outstanding

balance on this revolving credit facility of $29.3 million. In addition, approximately $16.8 million of the revolving credit facility was used to support

outstanding letters of credit.

37On November 1, 2010, the Company voluntarily repaid the remaining $17.5 million balance of the secured term note payable, as amended, due

December 2013. A payment of $18.9 million represented full and complete payment of all unpaid principal, accrued and unpaid interest and a prepayment fee.

These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the note

was terminated and the Company was released from all obligations under the note. Debt extinguishment expense of $1.5 million was recorded as a result of

the termination of this note. The Company entered into this five

- year, $22 million secured term note payable in November 2008. In February 2010, the

Company and the noteholder of this debt, further amended the terms of this note to eliminate a financial covenant and adjust the levels of the remaining

financial covenants.

Proceeds from the issuance of PDC redeemable common stock totaled $3.6 million in 2010. The ESOP trustee purchased this stock using pre

- tax

payroll deferrals, rollovers and loan payments made by employees during 2010. Payments to redeem PDC common stock were $11.8 million. The net cash

decrease realized from these proceeds and redemptions was $8.9 million less than in 2009. Cash overdrafts decreased $2.6 million during 2010.

On February 8, 2010, the Company completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain

financial covenants and increase financial flexibility. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June

2015 and a five

- year, asset

- backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts,

were $292.2 million. The new revolving credit facility, as amended, provides for up to $100 million of revolving loans including a letter of credit sub

- facility

of up to $25 million and a swing line sub

- facility of up to $5 million. Initial borrowing totaled $20.6 million. A majority of the proceeds from this refinancing

transaction were used to repay and terminate the senior secured credit facilities which included senior secured variable rate notes payable of $211.2 million,

plus interest, and the revolving credit facility of $97.1 million, plus interest. Remaining proceeds were used to pay related transaction fees and expenses

totaling $10.8 million. Debt extinguishment expenses of $5.5 million were also recorded as a result of this voluntary refinancing. For further information see

Note 11 of Notes to Consolidated Financial Statements.

During 2009, net cash used by financing activities was $47.8 million. The Company made mandatory debt repayments of $6.1 million, plus interest, on

its senior secured variable rate notes payable, secured term note payable, as amended, State of Ohio loans and capital lease obligation. At the end of 2009,

the Company used the proceeds of the sale of C&H to make an $8.1 million payment on the senior secured variable rate notes payable and to reduce the

outstanding balance of the revolving credit facility. During 2009, the Company borrowed $254.2 million and repaid $249.7 million against its revolving credit

facility, leaving an outstanding balance of $88.2 million. Approximately $16.3 million of the revolving credit facility was used to support outstanding letters

of credit. At January 2, 2010 there was approximately $40.5 million of unused borrowing capacity under the revolving credit facility which, in accordance

with the second amendment to the senior secured credit facilities, was permanently reduced to $145 million on December 31, 2009. The Company also

incurred $8.6 million of debt acquisition costs as a result of the March 2009 amendments to the senior secured credit facilities and the senior secured term

note payable and the September 2009 debt

- for

- debt exchange.

Proceeds from the issuance of PDC redeemable common stock totaled $4.1 million. Payments to redeem PDC common stock were $21.2 million. During

first quarter 2009, the Company made market purchases of $7.5 million face value of its senior subordinated notes for a cash outlay of $1.7 million. As these

notes were purchased at a price significantly less than face value, the Company recorded a $5.4 million net gain on these purchases. Cash overdrafts

decreased $13.7 million during the year.

During second quarter 2009, the Company received the proceeds of the $3.0 million Ohio State Loan. During July 2007, the Company had entered into

a new $12.1 million Loan and Security Agreement with the Director of Development of the State of Ohio, consisting of a $9.1 million State Assistance Loan

and a $3.0 million State Loan (together “ the Ohio Loans ” ). The proceeds of the $9.1 million State Assistance Loan were received in 2007. All proceeds of

these Ohio Loans were used to fund a portion of the costs of acquiring and installing paper coating and production equipment at the Company ’ s paper mill

in West Carrollton, Ohio.

Cash Flows from Financing Activities

- Appleton Papers Inc. and Subsidiaries

. During 2011, net cash used by financing activities was $75.5 million

and, during 2010 and 2009, cash provided by financing activities was $42.7 million and $32.5 million, respectively. As Appleton is the primary operating

subsidiary of the Company, a majority of the components of cash flows from financing activities are the same as those discussed above for Paperweight

Development Corp. and Subsidiaries. As Appleton is indemnified by PDC for payments relating to the Lower Fox River environmental remediation liability,

funds due from PDC is recorded as a financing activity. The main driver of the additional changes in cash flows from financing activities is due to this

change in due from PDC.

38Description of Outstanding Indebtedness

. Long

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

2011

As of July 1, 2011, the revolving credit facility was amended to reduce all applicable interest rate spreads by 0.25%. The interest rate assessed on

Eurodollar rate loans is now the Eurodollar rate plus an interest rate spread ranging from 3.25% to 3.75%, depending on defined levels of average excess

availability of the credit facility. The interest rate assessed on base rate loans is now the base rate plus an interest rate spread ranging from 2.25% to 2.75%,

also depending on defined levels of average excess availability.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5

million. A payment of $18.2 million represented full and complete payment of all unpaid principal and accrued and unpaid interest. These funds were sourced

from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the notes were terminated and the

Company was released from all obligations under the notes.

2010

On November 1, 2010, the Company voluntarily repaid the remaining $17.5 million balance of the secured term note payable, as amended, due

December 2013. A payment of $18.9 million represented full and complete payment of all unpaid principal, accrued and unpaid interest and a prepayment fee.

These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the note

was terminated and the Company was released from all obligations under the note. Debt extinguishment expense of $1.5 million was recorded as a result of

the termination of this note. The Company entered into this five

- year, $22 million secured term note payable in November 2008. In February 2010, the

Company and the noteholder of this debt, further amended the terms of this note to eliminate a financial covenant and adjust the levels of the remaining

financial covenants. 2011 2010

Revolving credit facility at approximately 5.5% $

- $ 29.3

Secured variable rate industrial development bonds, 0.5% average interest rate at December 31, 2011, $2.7 million due in

2013 and $6.0 million due in 2027 8.7 8.7

State of Ohio assistance loan at 6%, approximately $0.1 million due monthly and final payment due May 2017 6.2 7.1

State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30,000 due monthly and final payment

due May 2019 2.2 2.5

Senior notes payable at 8.125%, due June 2011

- 17.5

Senior subordinated notes payable at 9.75%, due June 2014 32.2 32.2

Senior secured first lien notes payable at 10.5%, due June 2015 305.0 305.0

Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015 (4.3 ) (5.3 )

Second lien notes payable at 11.25%, due December 2015 161.8 161.8

511.8 558.8

Less obligations due within one year (1.3 ) (18.7 )

$ 510.5 $ 540.1

39On February 8, 2010, the Company completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain

financial covenants and increase financial flexibility. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June

2015 and a five

- year, asset

- backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts,

were $292.2 million. The revolving credit facility, as amended, provides for up to $100 million of revolving loans including a letter of credit sub

- facility of up

to $25 million and a swing line sub

- facility of up to $5 million. It also contains an uncommitted accordion feature that allows the Company to increase the

size of the revolving credit facility, as amended, by up to $25 million if the Company can obtain commitments for the incremental amount. Borrowings under

the revolving credit facility, as amended, are limited to the sum of (a) 85% of the net amount of eligible accounts receivable and (b) the lesser of (i) 70% of

the net amount of eligible raw materials and finished goods inventory or (ii) 85% of the net orderly liquidation value of such inventory. This asset

- backed

revolving credit facility, as amended, contains a debt covenant whereby if the Company ’ s average availability ratio should fall below 20%, the Company is

subject to a fixed charge coverage ratio of not less than 1.10:1.00. The average availability ratio is calculated monthly and is a function of the Company ’ s

average outstanding revolver borrowing as compared to the borrowing base of eligible inventory and accounts receivable as discussed above. Initial

borrowing totaled $20.6 million. A majority of the proceeds from this refinancing transaction were used to repay and terminate the senior secured credit

facilities which included senior secured variable rate notes payable of $211.2 million, plus interest, and the revolving credit facility of $97.1 million, plus

interest. Remaining proceeds were used to pay related transaction fees and expenses totaling $10.8 million. Debt extinguishment expenses of $5.5 million

were also recorded as a result of this voluntary refinancing. For further information, see Note 11 of Notes to Consolidated Financial Statements.

The 10.5% senior secured first lien notes due June 2015 rank senior in right of payment to all existing and future subordinated indebtedness of the

Company and equally in right of payment with all existing and future senior indebtedness of the Company. The notes are secured by security interests in

substantially all of the property and assets of the Company and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by

all of the Company ’ s restricted subsidiaries (other than excluded restricted subsidiaries) and the parent entity. Initially, in addition to Appleton, this

included PDC and Appleton Papers Canada Ltd., as well as American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010

divestiture.

The revolving credit facility, as amended, is guaranteed by PDC, each of PDC ’ s existing and future 100%

- owned domestic and Canadian subsidiaries

and each other subsidiary of PDC that guarantees the 10.5% senior secured first lien notes due June 2015. Lenders hold a senior first

- priority interest in (i)

substantially all of the accounts, inventory, general intangibles, cash deposit accounts, business interruption insurance, investment property (including,

without limitation, all issued and outstanding capital stock of Appleton and each revolver guarantor (other than PDC) and all interests in any domestic or

Canadian partnership, joint venture or similar arrangement), instruments (including all collateral security thereof), documents, chattel paper and records of

Appleton and each revolver guarantor now owned or hereafter acquired (except for certain general intangibles, instruments, documents, chattel paper and

records of Appleton or any revolver guarantor, to the extent arising directly in connection with or otherwise directly relating to equipment, fixtures or owned

real property), (ii) all other assets and properties of Appleton and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the

foregoing. Lenders also hold a junior first

- priority security interest in (i) substantially all equipment, fixtures and owned real property of Appleton and each

revolver guarantor now owned or hereafter acquired, (ii) in each case solely to the extent arising directly in connection with or otherwise directly related to

any of the foregoing, certain general intangibles, instruments, documents, chattel paper and records of Appleton and each revolver guarantor now owned or

hereafter acquired, and (iii) all proceeds of the foregoing. The revolving credit facility, as amended, contains affirmative and negative covenants customary

for similar credit facilities, which among other things, restrict the Company ’ s ability and the ability of the Company ’ s subsidiaries, subject to certain

exceptions, to incur liens, incur or guarantee additional indebtedness, make restricted payments, engage in transactions with affiliates and make

investments.

2009

On September 30, 2009, the Company completed a voluntary debt

- for

- debt exchange of significant portions of its 8.125% senior notes payable due

June 2011 and 9.75% senior subordinated notes payable due June 2014. Weak economic conditions and frozen credit markets caused many corporate bonds,

including those issued by the Company, to trade well below face value. The Company took advantage of the opportunity to significantly reduce its total

indebtedness, plus extend maturities and simplify its debt structure, by exchanging existing debt.

This transaction exchanged $92.0 million of 8.125% senior notes for $92.0 million of newly issued 11.25% second lien notes payable due December

2015. For accounting purposes, this was considered a debt modification. As part of this transaction, the Company paid $1.2 million of fees to the

bondholders which included $0.9 million of additional 11.25% second lien notes issued as in

- kind consent fees to the lenders agreeing to the exchange.

These debt issuance costs will be amortized over the term of the second lien notes along with pre

- existing unamortized debt issuance costs of the

exchanged 8.125% notes. Third

- party costs of $3.8 million were also incurred and recorded as selling, general and administrative expenses.

40The Company also exchanged $110.3 million of 9.75% senior subordinated notes for $66.2 million of newly issued 11.25% second lien notes payable

due December 2015. This resulted in a debt reduction of $44.1 million. For accounting purposes, this exchange was considered debt extinguishment and $3.5

million of previously capitalized debt issuance costs related to the 9.75% notes were written off and recorded as debt extinguishment expense. Transaction

costs of $5.8 million were paid. Of this $5.8 million of costs, $3.0 million was recorded as debt extinguishment expense and $2.8 million was capitalized and

will be amortized over the term of the second lien notes. The $3.0 million of debt extinguishment expense included $2.7 million of additional 11.25% second

lien notes issued as in

- kind consent fees to the noteholders agreeing to the exchange. As a result of this transaction, $68.9 million of second lien notes were

issued. A $37.4 million net gain on debt extinguishment was recorded in the Consolidated Statement of Operations related to the debt

- for

- debt exchange and

the Second Amendment to the senior secured credit facilities (discussed below)

The 11.25% second lien notes due 2015, as amended, will accrue interest from the issue date at a rate of 11.25% per year and interest will be payable

semi

- annually in arrears on each June 15 and December 15, commencing on December 15, 2009. These notes are guaranteed by PDC and certain of present

and future domestic and foreign subsidiaries. Guarantors include PDC and, American Plastics Company, Inc. and New England Extrusion Inc. until their

July 22, 2010 divestiture. The guarantees of these notes are second

- priority senior secured obligations of the guarantors. They rank equally in right of

payment with all of the guarantors ’ existing and future senior debt and rank senior in right of payment to all of the guarantors ’ existing and future

subordinated debt. The guarantees of these notes are effectively subordinated to all of the first priority senior secured debt of the guarantors, to the extent

of the collateral securing such debt. These notes contain covenants that restrict Appleton ’ s ability and the ability of Appleton ’ s other guarantors to sell

assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make other restricted

payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter into sale and

leaseback transactions; amend particular agreements relating to the transaction with former parent Arjo Wiggins Appleton Limited and the ESOP; and enter

into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the

11.25% second lien notes due 2015, as amended. In advance of the voluntary refinancing that took place on February 8, 2010 (discussed above), on

January 29, 2010, the Company received the requisite consents from the beneficial owners of the second lien notes to certain amendments to the indenture

governing these notes in order to (i) permit a transaction pursuant to which the ESOP will cease to own at least 50% of PDC, without triggering a

requirement on the part of the Company to make an offer to repurchase the second lien notes and (ii) permit a capital contribution or operating lease of the

black liquor assets located at the Company ’ s Roaring Spring, Pennsylvania facilities to a newly formed joint venture with a third

- party in exchange for a

minority equity interest in such joint venture.

In order to complete the debt

- for

- debt exchange, the Company and its lenders under the senior secured credit facilities entered into the Second

Amendment to the senior secured credit facilities on September 30, 2009. This Second Amendment cleared the way for the Company to issue the second lien

notes. Under the Second Amendment to the senior secured credit facilities, the Company paid interest rates equal to LIBOR, but not less than 2%, plus 462.5

basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than

2%, plus 462.5 basis points for any amounts outstanding on the revolving credit facility. The Second Amendment to the senior secured credit facilities

provided a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may have been reduced, based on measures

of the Company ’ s total leverage as defined in the senior secured credit facilities. The Second Amendment also provided that the revolving credit

facility would be reduced permanently by $5,000,000 on December 31, 2009, by $10,000,000 on March 31, 2010 and by an additional $15,000,000 on June 30,

2010. For accounting purposes, the amendment to the senior secured credit facilities was treated as a debt modification. The Company paid $2.5 million of

fees to the creditors in conjunction with the amendment to the senior secured credit facilities. The debt issuance costs will be amortized over the term of the

modified agreement along with pre

- existing unamortized debt issuance costs as an adjustment to interest expense. Unamortized debt issuance costs of $0.2

million, relating to the revolving credit facility, were written off and recorded as debt extinguishment expense. Third

- party costs of $0.5 million were also

incurred and recorded as selling, general and administrative expenses.

In addition, on September 9, 2009, a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $17.5 million

of 8.125% senior notes and a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $32.2 million of 9.75%

senior subordinated notes became effective. The supplemental indentures amend the original indentures to, among other things, eliminate substantially all

of the restrictive covenants and certain events of default and related provisions.

41In February 2008, the Company fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five

- year interest rate swap contract.

Also during first quarter 2008, the Company fixed the interest rate, at 5.4%, on an additional $75.0 million of its variable rate notes with a five

- year interest

rate swap contract. As discussed below, one of the swap contracts was terminated in February 2009. The covenant violation at January 3, 2009 and

subsequent waiver and amendment, in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the two

interest rate swap contracts that were placed in 2008. As amended, the senior secured credit facilities contained interest payments based on LIBOR with a

2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, the Company concluded it was remote that the

original forecasted transactions would occur as originally documented and reclassified as a charge against 2008 earnings, within interest expense, $9.4

million of swap losses originally classified in other comprehensive loss. The events of default also triggered an event of default pursuant to a cross

- default

provision under one of the interest rate swap contracts. As a result of the cross

- default, the counterparty elected to terminate the swap contract. In

February 2009, the Company and the counterparty resolved the Company ’ s obligation under the swap contract with an agreement to pay $4.7 million over

the nine

- month period ending October 2009. During 2009, the Company paid $4.7 million in accordance with the termination agreement. As of January 2,

2010, the remaining swap contract was recorded as a long

- term liability of $3.8 million based on a fair value measurement using Level 2 inputs. The fair value

of the interest rate swap derivative was primarily based on models that utilize the appropriate market

- based forward swap curves and zero

- coupon interest

rates to determine the discounted cash flows. In comparison to the fair value reported at year

- end 2008 of $4.7 million, the 2009 year

- end fair value of this

long

- term liability was $0.9 million lower, with the gain recorded in interest expense on the Consolidated Statement of Operations for the year ended

January 2, 2010. As a result of the February 2010 voluntary refinancing, the Company paid $5.0 million, including interest, to settle this derivative.

Off

- Balance Sheet Arrangements. The Company 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 31, 2011.

Disclosures about Contractual Obligations, Commercial Commitments and Contingencies. A summary of significant contractual obligations,

commercial commitments and contingencies as of December 31, 2011, for both Paperweight Development Corp. and Subsidiaries and Appleton Papers Inc.

and Subsidiaries, is as follows:

In addition to the contractual obligations listed above, it will also be necessary for the Company 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.

The Company 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% and 50% 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.

The Company believes that new deferrals from employees into the Company Stock Fund for the five

- year period presented above will aggregate

approximately $14 million and could be used to fund a portion of the repurchase liability set forth in the table above. Payment Due by Period

Contractual Obligations Total Less Than 1

Year 1

- 3 Years 4

- 5 Years After 5 Years

(dollars in millions)

Long

- term debt (1) $ 516.1 $ 1.3 $ 37.6 $ 469.8 $ 7.4

Operating leases 8.6 4.4 3.4 0. 8

- Other long

- term obligations (2) 371.8 83.0 152.4 77.8 58.6

Total contractual cash obligations $ 896.5 $ 88.7 $ 193.4 $ 548.4 $ 66. 0

(1) The senior secured first lien notes payable at 10.5%, due June 2015, are included at face of $305.0 million.

(2) Represents obligations for interest, pension funding, postretirement health benefits and deferred compensation payments.

Estimate of Potential Commitment per Period

Other Commitments Total Less Than 1 Year 1

- 3 Years 4

- 5 Years

(dollars in millions)

Estimated share

repurchase liability $ 85.5 $ 17.0 $ 35.4 $ 33.1

42Deferrals 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.

Collective Bargaining Agreements

Manufacturing employees at the Company ’ s major manufacturing facilities in Appleton, Wisconsin, Roaring Spring, Pennsylvania and West

Carrollton, Ohio, are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers

International Union ( “ USW ” ). Represented employees at the West Carrollton facility ratified a three

- year labor agreement in March 2009. Represented

employees at the Appleton facility ratified a three

- year labor agreement in December 2011. The labor contract at the Roaring Spring facility expired in

November 2011 and negotiations are currently underway to ratify a new labor agreement.

USW also represents employees at the Appleton, Wisconsin, Camp Hill, Pennsylvania and Kansas City, Kansas 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, Ohio and California are not represented.

Disclosures About Certain Trading Activities that Include Non

- Exchange Traded Contracts Accounted for at Fair Value

. The Company 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

PDC and Appleton prepare their consolidated financial statements in conformity with accounting principles generally accepted in the United States

of America ( “ GAAP ” ).

This requires management to make estimates and assumptions that affect reported amounts and related disclosures. Actual results could differ from

those estimates. Accounting policies are disclosed in the Notes to Consolidated Financial Statements in Item 8. Financial Statements and Supplementary

Data. 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 the 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 potentially responsible parties ( “ 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, the Company cannot give any assurances that its 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. Due to reductions in the share price on June 30,

2010 and earlier, partially offset by increases in the share price thereafter, the Company reduced the redeemable common stock accretion by $5.7 million for

the year ended December 31, 2011. 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 31, 2011. 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 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, an ultimate redemption

liability of approximately $138 million has been determined. The accretion is being charged to retained earnings as redeemable common stock is the only

class of shares outstanding.

43Income 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. Appleton ’ s Canadian

subsidiary, Appleton Papers Canada Ltd., is not eligible for treatment as a qualified subchapter S subsidiary. As a result, the Company will incur a foreign

tax liability. The Company ’ s income tax reserve at December 31, 2011, covers various audit issues and provisions for certain non

- U.S. entities. All U.S.

federal C corporation tax years are closed. Various Canadian and state tax years remain open.

Inventories. Inventories are stated at the lower of cost or market. During fourth quarter 2010, the Company changed its method of inventory

accounting, for raw materials, work in process and finished goods inventories, from the LIFO method to the FIFO method. This was deemed a preferable

method as the key users of the financial statements, including lenders, creditors and rating agencies, analyze results and require compliance with debt

covenants using the FIFO method of accounting. Further, this conformed all of the Company's inventories to the FIFO method of accounting and promotes

greater comparability with international competitors as the Company expands its global sales. Stores and spare parts inventories are valued at average cost.

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 customers that could impact the value of inventory are considered when determining the lower of cost or market valuations.

Accounts Receivable. Accounts receivable are valued net of an allowance for uncollectible accounts. This allowance is based on an estimate of the

portion of the receivables that will not be collected in the future. However, the ultimate collectability of a receivable is dependent upon the financial

condition of an individual customer, which could change rapidly and without advance warning.

Intangible Assets. The Company reviews the carrying value of intangible assets with indefinite lives for impairment annually or more frequently if

events or changes in circumstances indicate that an asset might be impaired. A considerable amount of management judgment and assumptions are required

in performing the impairment test, principally in determining the fair value of the respective indefinite

- lived intangible assets.

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 are not amortized.

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; collectability is reasonably assured; and title has transferred to the customer. 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 typically does not invoice its customers for shipping and handling fees, which 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.

Employee Benefit Plans

. The Company provides a range of benefits to its employees and retired employees, including pensions and postretirement

healthcare. The determination of its 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 its 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 GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, may affect recognized expense

and recorded obligations in such future periods. The Company reviews its actuarial assumptions on an annual basis and makes modifications to the

assumptions based on current rates and trends, when appropriate.

The discount rate is developed by selecting a portfolio of high

- quality corporate bonds appropriate to provide for the projected benefit payments of

the plan. This portfolio is selected from a universe of over 500 Aa

- graded noncallable bonds available in the market as of December 31, 2011, further limited

to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the

market value of the bonds selected to the discounted value of the plan ’ s benefit payments. Based on the methodology described above, and a selected

portfolio of 17 bonds, the Company has selected a discount rate of 5.00% for the pension plans to value year

- end liabilities. The discount rate used at year

end 2010 was 5.75%.

44The expected long

- term rate of return on assets assumption is developed considering the relative weighting of plan assets, the historical performance

of total plan assets and individual asset classes and economic and other indicators of future performance. Expected returns for each asset class are

developed using estimates of expected real returns plus expected inflation. Long

- term expected real returns are derived from future expectations for the U.S.

Treasury real yield curve. Based on the assumptions and methodology described above, the Company selected 8.00% at year

- end 2011 and 8.25% at year

end 2010 as its long

- term rate of return on assets assumption.

Significant differences in actual experience or significant changes in assumptions may materially affect its pension and other postretirement

obligations and future expense. As of December 29, 2007, the Company adopted the provisions of ASC 715, “ Compensation

– Retirement Plans. ”

Additionally, this pronouncement, which required the Company to measure the funded status of a plan as of the date of its year

- end no later than 2008, was

adopted during 2008.

Alternative Fuels Tax Credit. The U.S. Internal Revenue Code provided a tax credit for companies that used alternative fuel mixtures to produce

energy to operate their businesses. The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, was refundable to the taxpayer. In

February 2009, the Company began mixing black liquor with diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania. The Company

applied to the Internal Revenue Service to be registered as an alternative fuel mixer and received its registration in May 2009. For the year ended January 2,

2010, the Company filed for and received excise tax refunds totaling $17.7 million. The credits were recorded as a reduction to cost of sales on the

Consolidated Statement of Operations for the year ended January 2, 2010. This credit expired as of December 31, 2009.

Environmental and Legal Matters

The Company ’ s operations are subject to comprehensive and frequently changing federal, state and local environmental laws and regulations. These

include 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. In addition, the Company is also

governed by laws and regulations relating to workplace safety and worker health which, among other things, regulate employee exposure to hazardous

chemicals in the workplace.

Compliance with environmental laws and regulations is an important facet of the business. The Company expects to incur capital expenditures of

approximately $1.6 million in 2012 and a total of approximately $7.8 million from 2013 through 2017 to maintain compliance with applicable federal, state, local

and foreign environmental laws and regulations and to meet new regulatory requirements. The Company expects to continue to incur expenditures after

2017 to maintain compliance with applicable federal, state, local and foreign environmental laws and regulations and to meet new regulatory requirements.

The Company is 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 it owns or operates and at properties where the Company or its

predecessors have arranged for the disposal of regulated materials. As a result, the Company is involved from time to time in administrative and judicial

proceedings and inquiries relating to environmental matters. The Company could be involved in additional proceedings in the future and the total amount of

these future costs and other environmental liabilities may be material. Appleton has been named a PRP at one site for which its liability may be significant,

the Lower Fox River site, which is described elsewhere.

The Company is 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 19 of the Notes to the Consolidated Financial Statements.

Furthermore, from time to time the Company may be subject to various demands, claims, suits or other legal proceedings arising in the ordinary course of

business. The Company maintains a comprehensive insurance program to protect 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 its business and obtaining dismissals in others. While

the Company will vigorously defend itself in any similar cases that may be brought against it in the future, there can be no assurance that it will be

successful.

45In September 2007, the Company commenced litigation against Andritz BMB AG and Andritz, Inc. The claims asserted included breach of obligations

under a February 2007 agreement to perform certain engineering services which also granted the Company an option to purchase certain equipment and

services relating to an off

- machine paper coating line. On May 14, 2009, the Company received a favorable jury verdict, and on August 11, 2009, an

Outagamie County, Wisconsin judge granted the Company ’ s motion to enter judgment in favor of the Company in the amount of $29.1 million plus 12%

interest annually beginning as of January 9, 2009. The defendant appealed the final judgment and in March 2011 the Wisconsin Court of Appeals issued a

decision unanimously affirming the final judgment. On September 1, 2011, the Wisconsin Supreme Court denied the defendants ’ petition seeking further

review of the matter. During the third quarter 2011, the Company received payment of $23.2 million in damages, including interest and net of related fees and

litigation expenses.

Other than the Lower Fox River matter described in “ Item 1. Business

– Environmental, ” and assuming the Company ’ s expectations regarding

defending such demands, claims, suits or other legal or regulatory proceedings prove accurate, the Company 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

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

New Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011

- 09,

"Compensation

- Retirement Benefits

- Multiemployer Plans." The revised standard is intended to address concerns from the users of financial statements on

the lack of transparency about an employer ’ s participation in a multiemployer pension plan. The standard requires employers to provide, on an annual basis,

additional quantitative and qualitative disclosures. These disclosures will provide users with more detailed information about an employer ’ s involvement in

multiemployer pension plans including: the significant multiemployer plans in which an employer participates, the level of an employer ’ s participation in the

significant multiemployer plans, the financial health of the significant multiemployer plans and the nature of the employer commitments to the plans. ASU

2011

- 09 is effective for fiscal years ending after December 15, 2011. Since the Company participates in a multiemployer pension plan, it is including the

expanded disclosures within its consolidated financial statements for the year ended December 31, 2011, in Note 16 of Notes to Consolidated Financial

Statements.

In June 2011, the FASB issued ASU No. 2011

- 05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation

of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two

separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011

- 12, “ Deferral of the Effective Date for Amendments to the

Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011

- 05. ” It defers the

requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net

income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by

component of other comprehensive income, for both interim and annual reporting periods. ASU 2011

- 05 and ASU 2011

- 12 are effective for fiscal years, and

interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its

consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011

- 04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.

GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the

highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c)

quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to

include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships

between those inputs. ASU 2011

- 04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company

is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

46In January 2010, the Financial Accounting Standards Board ( “ FASB ” ) issued ASU No. 2010

- 06, “ Improving Disclosures about Fair Value

Measurements, ” which amends ASC Subtopic 820

- 10, “ Fair Value Measurements and Disclosures, ” requiring new disclosures of significant transfers in and

out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll

forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of

assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and

nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and

clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about

purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning

after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010

- 06

relating to Level 2 fair value measurements. During first quarter 2011, the Company adopted the portion of ASU No. 2010

- 06 relating to Level 3 fair value

measurements. The disclosures required by adoption are included in Note 14 of Notes to Consolidated Financial Statements. Current year adoption had no

impact on its financial statements.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to market risk from changes in interest rates, foreign currency exchange rate fluctuations and commodity prices. To reduce

these risks, it selectively uses financial instruments and other proactive risk management techniques. For additional information, see Note 2 to Consolidated

Financial Statements, Derivative Financial Instruments and Hedging Activities, and Note 14 to Consolidated Financial Statements, Derivative Instruments

and Hedging Activities.

Interest Rate Risk. As of year ended December 31, 2011, the Company had variable rate debt of $8.7 million. As such, a change of 1% to current

interest rates would not have a material impact on interest expense.

Currency Risk. The Company 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 the Company is increasingly exposed to translational foreign exchange risk in coming years.

The Company 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 coincide

with settlement dates of related transactions. Forward exchange contracts are designated as cash flow hedges in accordance with ASC 815, “ Derivatives

and Hedging. ” At December 31, 2011, the Company did not have any outstanding foreign exchange contracts hedging future accounts receivable. A 10%

appreciation or depreciation in the Canadian dollar at December 31, 2011 would not have a significant impact on the Company ’ s consolidated balance sheet,

consolidated statement of operations or consolidated statement of cash flows.

Commodity Prices. The Company is subject to the effects of changing raw material costs caused by movements in underlying commodity prices. The

Company 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 listed within its contractual obligations, the Company enters into contracts

with vendors to lock in commodity prices at various times and for various periods to limit near

- term exposure to fluctuations in raw material prices.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in energy prices. These contracts are recorded in the Consolidated Balance Sheet at fair value using inputs based on the

New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the strike price. The contracts ’ gains or

losses due to changes in fair value are recorded in current period earnings. At December 31, 2011, the hedged volumes of these contracts totaled 488,000

MMBTU (Million British Thermal Units) of natural gas. The contracts have settlement dates extending through December 2012.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in pulp prices. These contracts are recorded in the Consolidated Balance Sheet at fair value using market inputs based

on pricing published by RISI, Inc. ( “ RISI ” ) as measured on the last trading day of the accounting period and compared to the swap ’ s fixed price. Currently,

there are two pulp swap contracts in place. As of December 31, 2011, the first swap contract had a remaining hedge volume of 2,000 tons of pulp with

settlement dates extending through February 2012. It is not designated as a hedge, and therefore, gains or losses due to changes in fair value are recorded in

current period earnings. During third quarter 2011, the Company entered into a second swap contract. As of December 31, 2011, this swap contract hedges

24,000 tons of pulp with settlement dates January through December 2012. It is designated as a cash flow hedge of forecasted pulp purchases, and

therefore, the change in the effective portion of the fair value of the hedge will be deferred in accumulated other comprehensive loss until the inventory

containing the pulp is sold.

47Item 8. Financial Statements and Supplementary Data

1. Report of Independent Registered Public Accounting Firm

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

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of redeemable

common stock, accumulated deficit, accumulated other comprehensive loss and comprehensive income (loss) present fairly, in all material aspects, the

financial position of Paperweight Development Corp. and its subsidiaries at December 31, 2011 and January 1, 2011, and the results of their operations and

their cash flows for each of the three years in the period ended December 31, 2011, 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.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 23, 2012

48To the Shareholder and Board of Directors of Appleton Papers Inc. and Subsidiaries:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of cash flows and of equity present

fairly, in all material aspects, the financial position of Appleton Papers Inc. and its subsidiaries at December 31, 2011 and January 1, 2011, and the results of

their operations and their cash flows for each of the three years in the period ended December 31, 2011, 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.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 23, 2012

49The accompanying notes are an integral part of these consolidated financial statements. PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

December 31,

2011 January 1

,

2011

ASSETS

Current assets

Cash and cash equivalents $ 7,241 $ 3,772

Accounts receivable, less allowance for doubtful accounts of $1,186 and $1,435,

respectively 9 0 ,339 93,374

Inventories 1 0 2,527 110,032

Other current assets 54,724 41,992

Total current assets 254,831 249,170

Property, plant and equipment, net of accumulated depreciation of $513,985 and

$470,676, respectively 324,665 354,601

Intangible assets, net 46,125 48,449

Other assets 16,297 24,779

Total assets $ 641,918 $ 676,999

LIABILITIES, REDEEMABLE COMMON STOCK,

ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS

Current liabilities

Current portion of long

- term debt $ 1,256 $ 18,694

Accounts payable 51,766 48,651

Accrued interest 2,628 3,094

Other accrued liabilities 91,427 62,988

Total current liabilities 147,077 133,427

Long

- term debt 51 0 ,533 540,131

Postretirement benefits other than pension 41,611 45,133

Accrued pension 125,245 88,583

Other long

- term liabilities 7,389 5,716

Commitments and contingencies (Note 19)

- - Redeemable common stock, $0.01 par value,

shares authorized: 30,000,000, shares issued and

outstanding: 9,212,808 and 9,713,212, respectively 97,615 110,045

Accumulated deficit (150,193 ) (153,765 )

Accumulated other comprehensive loss (137,359 ) (92,271 )

Total liabilities, redeemable common stock, accumulated deficit and accumulated other

comprehensive loss $ 641,918 $ 676,999

50The accompanying notes are an integral part of these consolidated financial statements. APPLETON PAPERS INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands, except share data)

December 31,

2011 January 1, 2011

ASSETS

Current assets

Cash and cash equivalents $ 7,241 $ 3,772

Accounts receivable, less allowance for doubtful accounts of $1,186 and $1,435,

respectively 90,339 93,374

Inventories 102,527 110,032

Other current assets 54,724 41,992

Total current assets 254,831 249,170

Property, plant and equipment, net of accumulated depreciation of $513,985 and

$470,676, respectively 324,665 354,601

Intangible assets, net 46,125 48,449

Other assets 16,285 24,767

Total assets $ 641,906 $ 676,987

LIABILITIES AND TOTAL EQUITY

Current liabilities

Current portion of long

- term debt $ 1,256 $ 18,694

Accounts payable 51,766 48,651

Accrued interest 2,628 3,094

Other accrued liabilities 91,427 62,988

Total current liabilities 147,077 133,427

Long

- term debt 510,533 540,131

Postretirement benefits other than pension 41,611 45,133

Accrued pension 125,245 88,583

Other long

- term liabilities 7,389 5,716

Total liabilities 831,855 812,990

Commitments and contingencies (Note 19)

- -

Common stock, $100.00 par value, 130,000 shares authorized, 100 shares issued and outstanding 10,500 10,500

Paid

- in capital 623,305 623,305

Due from parent (229,100 ) (222,354 )

Accumulated deficit (457,295 ) (455,183 )

Accumulated other comprehensive loss (137,359 ) (92,271 )

Total equity (189,949 ) (136,003 )

Total liabilities and equity $ 641,906 $ 676,987

51The accompanying notes are an integral part of these consolidated financial statements. PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

For the For the For the

Year Ended Year Ended Year Ended

December 31,

2011 January 1,

2011 January 2,

2010

Net sales $ 857,329 $ 849,884 $ 761,807

Cost of sales 687,524 684,488 603,247

Gross profit 169,805 165,396 158,560

Selling, general and administrative expenses 13 0 ,574 137,304 128,452

Environmental expense insurance recovery

- (8,947 )

- Litigation settlement, net (Note 19) 3,122

- -

Operating income 36,109 37,039 30,108

Other expense (income)

Interest expense 61,33 0 65,772 51,291

Debt extinguishment expense (income), net

- 7,010 (42,602 )

Interest income (355 ) (327 ) (402 )

Recovery from litigation settlement, net (Note 19) (23,229 )

- - Foreign exchange loss (gain) 1,136 600 (1,506 )

Other income (1,238 ) (1,029 ) (820 )

(Loss) income from continuing operations before income taxes (1,535 ) (34,987 ) 24,147

Provision for income taxes 577 176 333

(Loss) income from continuing operations (2,112 ) (35,163 ) 23,814

Discontinued operations

Income (loss) from discontinued operations, net of income taxes

- 3,499 (606 )

Net (loss) income $ (2,112 ) $ (31,664 ) $ 23,208

52The accompanying notes are an integral part of these consolidated financial statements. APPLETON PAPERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands)

For the For the For the

Year Ended Year Ended Year Ended

December 31,

2011 January 1,

2011 January 2,

2010

Net sales $ 857,329 $ 849,884 $ 761,807

Cost of sales 687,524 684,488 603,247

Gross profit 169,805 165,396 158,560

Selling, general and administrative expenses 13 0 ,574 137,304 128,452

Environmental expense insurance recovery

- (8,947 )

- Litigation settlement, net (Note 19) 3,122

- -

Operating income 36,109 37,039 30,108

Other expense (income)

Interest expense 61,33 0 65,772 51,291

Debt extinguishment expense (income), net

- 7,010 (42,602 )

Interest income (355 ) (327 ) (402 )

Recovery from litigation settlement, net (Note 19) (23,229 )

- - Foreign exchange loss (gain) 1,136 600 (1,506 )

Other income (1,238 ) (1,029 ) (820 )

(Loss) income from continuing operations before income taxes (1,535 ) (34,987 ) 24,147

Provision for income taxes 577 176 333

(Loss) income from continuing operations (2,112 ) (35,163 ) 23,814

Discontinued operations

Income (loss) from discontinued operations, net of income taxes

- 3,499 (606 )

Net (loss) income $ (2,112 ) $ (31,664 ) $ 23,208

53The accompanying notes are an integral part of these consolidated financial statements. PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,

ACCUMULATED DEFICIT, ACCUMULATED OTHER COMPREHENSIVE LOSS

AND COMPREHENSIVE INCOME (LOSS)

(dollars in thousands, except share data)

Redeemable Common Stock

Shares

Outstanding Amount Accumulated

Deficit Accumulated

Other

Comprehensive

Loss Comprehensive

Income (Loss)

Balance, January 3, 2009 10,643,894 $ 147,874 $ (165,055 ) $ (95,169 )

Comprehensive income:

Net income

- - 23,208

- $ 23,208

Changes in retiree plans

- - - (5,099 ) (5,099 )

Realized and unrealized gains on derivatives

- - - 551 551

Total comprehensive income $ 18,660

Issuance of redeemable common stock 522,602 8,129

- - Redemption of redeemable common stock (1,069,397 ) (21,162 )

- -

Accretion of redeemable common stock

- (12,754 ) 12,754

-

Balance, January 2, 2010 10,097,099 $ 122,087 $ (129,093 ) $ (99,717 )

Comprehensive loss:

Net loss

- - (31,664 )

- $ (31,664 )

Changes in retiree plans

- - - 7,306 7,306

Realized and unrealized gains on derivatives

- - - 140 140

Total comprehensive loss $ (24,218 )

Issuance of redeemable common stock 562,003 6,761

- - Redemption of redeemable common stock (945,890 ) (11,811 )

- -

Accretion of redeemable common stock

- (6,992 ) 6,992

-

Balance, January 1, 2011 9,713,212 $ 110,045 $ (153,765 ) $ (92,271 )

Comprehensive loss:

Net loss

- - (2

, 112 )

- $ (2

, 112 )

Changes in retiree plans

- - - (46

, 461 ) (46

, 461 )

Realized and unrealized gains on derivatives

- - - 1

, 373 1

, 373

Total comprehensive loss $ (47

, 200 )

Issuance of redeemable common stock 416

, 217 5

, 605

- - Redemption of redeemable common stock (916,621 ) (12

, 351 )

- -

Accretion of redeemable common stock

- (5

, 684 ) 5

, 684

-

Balance, December 31, 2011 9,212,808 $ 97

, 615 $ (150

, 193 ) $ (137

, 359 )

56The accompanying notes are an integral part of these consolidated financial statements. APPLETON PAPERS INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(dollars in thousands, except share data)

Common Stock

Shares

Outstanding Amount Paid

- in

Capital Due from

Parent Accumulated

Deficit Accumulated

Other

Comprehensive

Loss Comprehensive

Income (Loss)

Balance, January 3, 2009 100 $ 10,500 $ 623,305 $ (204,272) $ (446,727 ) $ (95,169 )

Comprehensive income:

Net income

- - - - 23,208

- $ 23,208

Changes in retiree plans

- - - - - (5,099 ) (5,099)

Realized and unrealized gains on derivatives

- - - - - 551 551

Total comprehensive income $ 18,660

Change in due from parent

- - - (13,033)

- -

Balance, January 2, 2010 100 $ 10,500 $ 623,305 $ (217,305) $ (423,519 ) $ (99,717 )

Comprehensive loss:

Net loss

- - - - (31,664 )

- $ (31,664)

Changes in retiree plans

- - - - - 7,306 7,306

Realized and unrealized gains on derivatives

- - - -

- 140 140

Total comprehensive loss $ (24

, 218)

Change in due from parent

- - - (5,049)

- -

Balance, January 1, 2011 1 00 $ 10,5 00 $ 623,305 $ (222,354) $ (455,183 ) $ (92,271 )

Comprehensive loss:

Net loss

- - - - (2,112 )

- $ (2,112)

Changes in retiree plans

- - - - - (46

, 461 ) (46

, 461)

Realized and unrealized gains on derivatives

- - - -

- 1

, 373 1

, 373

Total comprehensive loss $ (47,200)

Change in due from parent

- - - (6,746)

- -

Balance, December 31, 2011 100 $ 10

, 500 $ 623,305 $ (229,100) $ (457,295 ) $ (137

, 359 )

57PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

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 100%

- owned subsidiaries (collectively the “ Company ” ), which includes the consolidated financial

statements of Appleton Papers Inc. and its 100%

- owned subsidiaries (collectively “ Appleton ” ), for the years ended December 31, 2011, January 1, 2011, and

January 2, 2010. The Company has performed an evaluation of subsequent events (see Note 3, Long

- Term Supply Agreement Subsequent Event). PDC

conducts substantially all of its business through Appleton.

NATURE OF OPERATIONS

Appleton is the primary operating subsidiary of PDC. The Company creates product solutions for customers and end users through its development

and use of coating formulations and applications as well as microencapsulation and security technologies. It has three reportable segments: carbonless

papers, thermal papers and Encapsys (see Note 24, Segment Information).

The carbonless papers segment, which includes carbonless and security paper products, is the largest component of the Company ’ s paper business.

Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company produces coated products for point

- of

- sale

displays and other design and print applications and offers custom coating solutions. Carbonless products are sold to converters, business forms printers

and merchant distributors who stock and sell carbonless paper to printers. The Company produces security papers with features that resist forgery,

tampering and counterfeiting. The Company ’ s portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals,

embedded threads and fibers and machine

- readable technologies, to serve global markets. The Company focuses on financial and identity documents for

business and government such as checks, visas, automobile titles and birth certificates. Sales within the carbonless papers segment accounted for

approximately 53% of consolidated net sales in 2011, 56% of consolidated net sales in 2010 and 61% of consolidated net sales in 2009.

The thermal papers segment focuses on the development of substrates for the transaction and item identification markets. Thermal paper is used in

four principal end markets: (1) point

- of

- sale products for retail receipts and coupons; (2) labels for shipping, warehousing, medical and clean

- room

applications; (3) tags and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer,

calculator and chart products for engineering, industrial and medical diagnostic charts. 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. Sales within the thermal papers segment accounted for approximately

43% of consolidated net sales in 2011, 40% of consolidated net sales in 2010 and 37% of consolidated net sales in 2009.

The Encapsys segment discovers, develops and manufactures microencapsulation solutions for external partner companies and for the Company ’ s

carbonless papers segment. Microencapsulation is the process of putting a microscopic wall around a core substance. The Company helped NCR

Corporation ( “ NCR ” ) produce the first commercial application for microencapsulation in 1954 with the introduction of carbonless paper. Since then, the

Company researchers have developed the art and science of microencapsulation and are working with potential partners in industries as diverse as

agriculture, paints and coatings, food, pharmaceuticals, paper, textiles, personal and household care, adhesives, and oil and gas. The Encapsys segment

leverages the Company ’ s extensive technical knowledge and experience with microencapsulation and uses an open innovation process with partner

companies to develop successful technical solutions for those companies. Sales within the Encapsys segment accounted for approximately 6% of

consolidated net sales in both 2011 and 2010 and 5% of consolidated net sales in 2009.

58PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

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 100%

- owned subsidiary, Appleton Papers Inc.

In conjunction with the acquisition, the Company entered into two indemnification agreements under which Arjo Wiggins Appleton Limited, now

known as Windward Prospects Ltd ( “ AWA ” ), the former parent of Appleton, agreed to indemnify PDC and PDC agreed to indemnify Appleton for 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, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100

million (see Note 19, Commitments and Contingencies). During 2008, Appleton paid $25 million to satisfy its portion of the Fox River Liabilities not covered

by the indemnification agreement with AWA.

In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry

Insurance Company, an affiliate of American International Group, Inc. The insurance policy provided up to $250 million of coverage for Fox River Liabilities,

subject to certain limitations defined in the policy. At December 31, 2011, there was no remaining coverage on the policy.

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 (1) inaccuracies in the environmental representations and warranties made by AWA

and its affiliates, (2) certain known environmental matters that existed at the closing of the acquisition, (3) 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 (4) environmental matters relating to the

real property on which the Company ’ s former Camp Hill, Pennsylvania plant and the Company ’ s current distribution center are located that existed prior to

its sale of the Camp Hill plant to a third

- party.

RELATIONSHIP OF APPLETON PAPERS INC. WITH PARENT

As a result of PDC ’ s November 2001 acquisition of Appleton Papers Inc. Appleton entered into borrowings with a third

- party and transferred the

acquired cash through a subordinated demand note receivable with PDC to fund the acquisition from AWA. The note principal of $167.1 million and

accrued interest at 6% is due on demand. Though the principal and accrued interest is due on demand, PDC does not have the ability or intent to repay the

amounts due. As such, the loan has been classified as a reduction in equity.

As described in Note 22, the ESOP purchased 100% of PDC shares in 2001. All ESOP shares activities, including issuance, deferrals, redemptions, and

accretion, are recorded by PDC. Cash is transacted through intercompany loans from Appleton to PDC in order to fund ESOP redemption activities and

ESOP deferrals are in turn paid back to Appleton. Redemption activities are significantly larger than employee deferrals. The Company has classified the

intercompany loans on Appleton's ledger as a reduction to equity as PDC does not have the ability or intent to repay the amounts due.

As discussed above, in conjunction with the acquisition of Appleton, PDC entered into two indemnification agreements under which AWA agreed

to indemnify PDC and PDC agreed to indemnify Appleton for the costs, expenses and liabilities related to the Fox River Liabilities. The balance sheet of PDC

includes an indemnification receivable from AWA in current assets and a corresponding indemnification payable to Appleton in current liabilities. The

balance sheet of Appleton includes an indemnification receivable from PDC in current assets and a corresponding reserve for Fox River Liabilities in current

liabilities.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

FISCAL YEAR

The Company ’ s fiscal year is the 52

- week or 53

- week period ending the Saturday nearest December 31. Fiscal year 2011 was a 52

- week period ending

December 31, 2011. Fiscal year 2010 was a 52

- week period ending January 1, 2011. Fiscal year 2009 was a 52

- week period ending on January 2, 2010.

59PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires

management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities

at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more critical estimates made by

management relate to environmental contingencies, pension and postretirement assumptions, accrued discounts, intangible and tangible asset impairment

analyses, fair market value of redeemable common stock and receivable reserves. Actual results could differ from those estimates.

RECLASSIFICATIONS

See Note 4, Discontinued Operations, which discusses reclassifications made to the financial statements to present divested subsidiaries as

discontinued operations.

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; collectability is reasonably assured; and title has transferred to the customer. 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 typically does not invoice its customers for shipping and handling fees, which are classified as selling, general and

administrative expenses and totaled approximately $48 million for 2011, $48 million for 2010 and $42 million for 2009.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

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

commodity prices and follows the guidance of ASC 815, “ Derivatives and Hedging. ” The fair values of all derivatives are recorded in the Consolidated

Balance Sheet. The change in a derivative ’ s fair value is recorded each period in current earnings or accumulated other comprehensive loss, depending on

whether the derivative is designated and qualifies as part of a hedge transaction and, if so, the type of hedge transaction.

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange

contracts. These instruments are designated as cash flow hedges in accordance with ASC 815 and are recorded in the Consolidated Balance Sheet at fair

value. The effective portion of the contracts ’ gains or losses due to changes in fair value is initially recorded as a component of accumulated other

comprehensive loss and is subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the

forecasted transaction will not occur. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency

exchange rates.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in energy prices. These contracts are recorded in the Consolidated Balance Sheet at fair value. The contracts ’ gains or

losses due to changes in fair value are recorded in current period earnings.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in pulp prices. These contracts are recorded in the Consolidated Balance Sheet at fair value. Currently, there are two

pulp swap contracts in place. One contract is not designated as a hedge and its gains or losses due to changes in fair value are recorded in current period

earnings. The second contract is designated as a cash flow hedge of forecasted pulp purchases and the change in the effective portion of the fair value of

the hedge is deferred in accumulated other comprehensive loss until the inventory containing the pulp is sold.

60PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

In February 2008, the Company fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five

- year interest rate swap contract.

As a result of the February 2010 voluntary refinancing, the Company paid $5.0 million, including interest, to settle this derivative. See Note 11, Long

- Term

Obligations.

For the three years ended December 31, 2011, the amount recognized in earnings due to ineffectiveness of hedge transactions was immaterial. The

amount reported as realized and unrealized gains on derivatives of $1.4 million for 2011, $0.1 million in 2010 and $0.6 million in 2009, in accumulated other

comprehensive 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 31, 2011 and January 1, 2011, there

were cash overdrafts of approximately $13.7 million and $9.0 million, respectively, which are included in accounts payable within the accompanying

consolidated balance sheets.

INVENTORIES

Inventories are stated at the lower of cost or market. During fourth quarter 2010, the Company changed its method of inventory accounting, for raw

materials, work in process and finished goods inventories, from the last

- in, first

- out ( “ LIFO ” ) method to the first

- in, first

- out ( “ FIFO ” ) method. This was

deemed a preferable method as the key users of the financial statements, including lenders, creditors and rating agencies, analyze results and require

compliance with debt covenants using the FIFO method of accounting. Further, this conformed all of the Company's inventories to the FIFO method of

accounting and promotes greater comparability with international competitors as the Company expands its global sales. Stores and spare parts inventories

are valued at average cost. 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.

INTERNAL USE SOFTWARE

Costs incurred related to the development of internal use software are accounted for in accordance with ASC 350, “ Intangibles

– Goodwill and Other ”

which 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 (customer relationships and the remaining registered trademarks) are

amortized over their estimated useful lives of 20 to 25 years.

61PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

IMPAIRMENT OF GOODWILL, INTANGIBLES AND LONG

- LIVED ASSETS

The Company reviewed the carrying value of goodwill for impairment annually or more frequently if events or changes in circumstances indicated

that the goodwill might be impaired. This impairment analysis consisted of a comparison of the fair value of the related reporting unit with its carrying

amount. If the carrying amount of the reporting unit exceeded its fair value, a second step to test for impairment was performed. With the sale of C&H

Packaging, Inc. ( “ C&H ” ) in 2009 and American Plastics Company, Inc. ( “ APC ” ) and New England Extrusion Inc. ( “ NEX ” ) in 2010, the Company no longer

carries goodwill on its balance sheet.

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 ASC 740, “ 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

Effective December 30, 2007, the Company adopted ASC 820, “ Fair Value Measurements and Disclosures ” for financial assets. Effective January 4,

2009, the Company adopted ASC 820 for nonfinancial assets. ASC 820 establishes a framework for measuring fair value and expands disclosure about fair

value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by

establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and

liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market

- based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

When available, quoted market prices were used to determine fair value and such measurements are classified within Level 1. In some cases where

market prices are not available, observable market

- based inputs were used to calculate fair value, in which case the measurements are classified within Level

2. If quoted or observable market prices are not available, fair value is based upon internally developed models that use, where possible, current market

based parameters such as interest rates, yield curves and currency rates. These measurements are classified within Level 3.

Fair value measurements are classified according to the lowest level input or value

- driver that is significant to the valuation. A measurement may

therefore be classified within Level 3 even though there may be significant inputs that are readily observable.

62PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

ASC 820 expanded the definition of fair value to include the consideration of nonperformance risk. Nonperformance risk refers to the risk that an

obligation (either by a counterparty or by the Company) will not be fulfilled. For financial assets traded in an active market (Level 1 and certain Level 2), the

nonperformance risk is included in the market price. For certain other financial assets and liabilities (Level 2 and 3), fair value calculations have been

adjusted accordingly.

The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market

- based forward swap curves and zero

coupon interest rates to determine the discounted cash flows that result in a measurement that is classified as Level 2. The fair value of foreign currency

forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market

- based

forward rate, also deemed to be categorized as Level 2.

In addition to the methods and assumptions used to record the fair value of financial instruments as discussed above, the following methods and

assumptions are used to estimate the fair value of financial instruments as required by ASC 825, “ 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 are estimated based on market conditions and interest rates available to the Company for similar financial instruments.

ACCUMULATED OTHER COMPREHENSIVE LOSS

The components of the non

- owner changes in equity, or accumulated other comprehensive loss, are as follows (dollars in thousands):

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 totaled $11.4 million in 2011, $12.5 million in 2010 and $12.0 million in 2009.

ACCOUNTING PRONOUNCEMENTS

In September 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011

- 09,

"Compensation

- Retirement Benefits

- Multiemployer Plans." The revised standard is intended to address concerns from the users of financial statements on

the lack of transparency about an employer ’ s participation in a multiemployer pension plan. The standard requires employers to provide, on an annual basis,

additional quantitative and qualitative disclosures. These disclosures will provide users with more detailed information about an employer ’ s involvement in

multiemployer pension plans including: the significant multiemployer plans in which an employer participates, the level of an employer ’ s participation in the

significant multiemployer plans, the financial health of the significant multiemployer plans and the nature of the employer commitments to the plans. ASU

2011

- 09 is effective for fiscal years ending after December 15, 2011. Since the Company participates in a multiemployer pension plan, it is including the

expanded disclosures within its consolidated financial statements for the year ended December 31, 2011, in Note 16 of Notes to Consolidated Financial

Statements

In June 2011, the FASB issued ASU No. 2011

- 05, "Presentation of Comprehensive Income." It provides updated guidance related to the presentation

of other comprehensive income, offering two alternatives for presentation, including (a) a single continuous statement of comprehensive income or (b) two

separate but consecutive statements. In December 2011, the FASB issued ASU No. 2011

- 12, “ Deferral of the Effective Date for Amendments to the

Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011

- 05. ” It defers the

requirement to present reclassification adjustments and the effect of those reclassification adjustments on the face of the financial statements where net

income is presented, by component of net income, and on the face of the financial statements where other comprehensive income is presented, by

component of other comprehensive income, for both interim and annual reporting periods. ASU 2011

- 05 and ASU 2011

- 12 are effective for fiscal years, and

interim periods within those years, beginning after December 15, 2011. The Company expects that adoption will not have a significant impact on its

consolidated financial statements. 2011 2010

Changes in retiree plans $ (139,118) $ (92,657)

Realized and unrealized gains on derivatives 1,759 386

$ (137,359) $ (92,271)

63PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

In May 2011, the FASB issued ASU No. 2011

- 04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S.

GAAP and IFRSs," which amends ASC 820. This updated guidance relates to fair value measurements and disclosures, including (a) the application of the

highest and best use valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's stockholders' equity and (c)

quantitative information required for fair value measurements categorized within Level 3. Additionally, disclosure requirements have been expanded to

include additional disclosure for Level 3 measurements regarding the sensitivity of fair value to changes in unobservable inputs and any interrelationships

between those inputs. ASU 2011

- 04 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company

is evaluating the effects, if any, the adoption of this guidance will have on its consolidated financial statements.

In January 2010, the Financial Accounting Standards Board ( “ FASB ” ) issued ASU No. 2010

- 06, “ Improving Disclosures about Fair Value

Measurements, ” which amends ASC Subtopic 820

- 10, “ Fair Value Measurements and Disclosures, ” requiring new disclosures of significant transfers in and

out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll

forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of

assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and

nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and

clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about

purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning

after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010

- 06

relating to Level 2 fair value measurements. During first quarter 2011, the Company adopted the portion of ASU No. 2010

- 06 relating to Level 3 fair value

measurements. The disclosures required by adoption are included in Note 14 of Notes to Consolidated Financial Statements. Current year adoption had no

impact on its financial statements.

3. LONG

- TERM SUPPLY AGREEMENT SUBSEQUENT EVENT

On February 22, 2012, the Company entered into a long

- term supply agreement for the purchase of carbonless and thermal base stock to be coated at

the Company ’ s converting facilities. Under the terms of the agreement, the supplier will be the exclusive supplier of certain thermal and carbonless base

stock used by the Company. The term of the agreement is fifteen years. It includes successive five

- year renewal terms unless either party gives notice of

non

- renewal at least two years prior to the expiration of the then current term.

Prices to be paid by the Company are subject to certain rebates and certain adjustments during the term of the agreement based on volume, changes

to raw material pricing, freight prices and productivity gains. The supplier has agreed to be competitive in terms of price, delivery, quality and services. The

supply agreement includes certain penalties if either the supplier or the Company fails to fulfill its obligations under the agreement. The supply agreement

may be terminated by either party in the event (i) the other party defaults in the performance of any of its material duties or obligations under the agreement

and fails to cure such default within 20 days after notice or (ii) the other party is in material default in the performance of the supply agreement after certain

specified bankruptcy and reorganization events.

In connection with its approval of this supply agreement, the Company ’ s Board of Directors authorized a plan for the Company to dispose of

papermaking assets at its West Carrollton, Ohio paper mill and move more carbonless coating to the Company ’ s converting plant in Appleton, Wisconsin.

64PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

4. DISCONTINUED OPERATIONS

On July 2, 2010, the Company entered into a stock purchase agreement with NEX Performance Films Inc. ( “ Films ” ), an entity affiliated with Mason

Wells Buyout Fund II, Limited Partnership whereby the Company agreed to sell all of the outstanding capital stock of APC and NEX for a cash purchase

price of $58 million. This transaction closed on July 22, 2010, with the Company receiving $56 million at the time of closing and $2 million held in escrow, on

behalf of the Company, for 12 months to satisfy potential claims under the stock purchase agreement with Films. No claims were made against the escrow

and the $2 million was paid to the Company on July 25, 2011. The cash proceeds of the sale were used to reduce debt and a $0.4 million net gain was

recorded in income from discontinued operations for the year ended January 1, 2011. APC was acquired in 2003 and is located in Rhinelander, Wisconsin.

NEX was acquired in 2005 and has manufacturing operations in Turners Falls, Massachusetts, and Milton, Wisconsin.

During second quarter 2009, the Company committed to a formal plan to sell C&H. C&H, located in Merrill, Wisconsin, was acquired in 2003. On

December 18, 2009, the Company completed the sale of C&H to The Interflex Group, Inc. receiving $16.9 million of cash and a receivable for $0.2 million

relating to a working capital adjustment. This receivable was paid in full in February 2010. As a result of the sale, a $0.8 million gain was recorded in fourth

quarter 2009.

Together, APC, NEX and C&H comprised the Company ’ s former performance packaging business segment. Since APC, NEX and C&H engage in the

manufacture, printing, converting, marketing and sale of high

- quality single and multilayer polyethylene films for packaging applications, their operations

did not align with the Company ’ s strategic, long

- term focus on its core competencies of specialty papers and microencapsulation. Despite the December

2009 sale of C&H, the Company had significant continuing involvement in C&H and therefore historical operating results were reported as continuing

operations. With the July 2010 divestiture of APC and NEX, this continuing involvement ceased. Therefore, C&H ’ s operating results were reclassified and

reported as discontinued operations. The operating results, assets and liabilities of APC and NEX were also reclassified and reported as discontinued

operations. As of the end of second quarter 2010, depreciation and amortization expense was suspended for APC and NEX, resulting in a $0.2 million

reduction in expense.

The following table presents the net sales and income (loss) from discontinued operations for C&H, APC and NEX (dollars in thousands):

In accordance with ASC 350, “ Goodwill and Other Intangible Assets, ” the Company performed its annual goodwill assessment during the fourth

quarter of 2009 and determined goodwill impairments existed at APC and NEX. These impairment charges were recorded in discontinued operations. For the Year For the Year

Ended Ended

January 1,

2011 January 2,

2010

Net sales $ 51,581 $ 99,785

Operating income $ 3,513 $ 5,736

Impairment charge

- (6,341 )

Income (loss) before income taxes 3,513 (605 )

Provision for income taxes 14 1

Income (loss) from discontinued operations $ 3,499 $ (606 )

65PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

Late in 2007, the Company committed to a formal plan to sell Bemrose Group Limited ( “ Bemrose ” ), its secure and specialized print services business

based in Derby, England. On August 1, 2008, the Company completed the sale of Bemrose receiving £ 2.0 million ($3.9 million) of cash and £ 3.2 million ($6.4

million) of notes receivable to be settled within 75 and 180 days after closing. The first tranche of notes receivable was paid in November 2008, however, due

to continuing difficult business conditions in Bemrose markets, the Company established a £ 1.0 million ($1.5 million) reserve against the £ 2.0 million ($3.0

million) remaining principal and interest due at year

- end 2008. During second quarter 2009, the Company and Bemrose negotiated an amendment to the

original sales agreement related to the second tranche of the note receivable. Bemrose agreed to pay the Company £ 1.5 million ($2.5 million). In return, the

Company agreed to release Bemrose from the remaining £ 0.5 million ($0.8 million). During July 2009, £ 1.0 million ($1.6 million) was received from Bemrose.

These renegotiated terms resulted in a partial recovery of the reserve established at year

- end 2008 and the recording of a £ 0.5 million ($0.8 million) gain

during second quarter 2009. This gain is included in other expense (income) from continuing operations in the Consolidated Statement of Operations for the

year ended January 2, 2010. During December 2009, £ 0.5 million ($0.9 million) was received from Bemrose as final payment, including interest due, of this

note.

5. BUSINESS INTERRUPTION AND PROPERTY LOSS

Manufacturing operations at the Company ’ s West Carrollton, Ohio paper mill were temporarily interrupted in July 2010 by the collapse of one of its

coal silos. The incident caused no injuries. One boiler was extensively damaged as well as the supporting infrastructure for two other boilers. While most of

the West Carrollton facility was undamaged, the collapse of the coal silo reduced the mill ’ s ability to produce the power and steam required to operate its

manufacturing equipment. The thermal coater resumed production a few days later and the remainder of the mill resumed production in early August. The

Company managed customer orders and shifted paper production to other company

- owned manufacturing facilities in order to minimize any impact to its

customers. The boiler that was extensively damaged resumed operation just prior to the end of first quarter 2011.

Losses associated with property damage and business interruption were covered by insurance subject to a deductible of $1.0 million. During second

quarter 2011, the corresponding insurance claim was agreed and settled in full with all proceeds received from the insurer. The Company incurred

approximately $24.1 million in property damage, cost to repair and business interruption. After netting the $1.0 million deductible, and $1.7 million of capital

and $1.1 million of expense for safety and efficiency upgrades to the replacement property and other expenses not covered under the policy, the Company

recovered $20.3 million from its insurer.

Expenses associated with property damage and business interruption, totaling $17.1 million, were reported in cost of sales within the Consolidated

Statement of Operations for the year ended January 1, 2011. Expenses associated with property damage and business interruption, totaling $0.7 million, have

been reported in cost of sales within the Consolidated Statement of Operations for the year ended December 31, 2011. According to the terms of the

insurance policy, the Company recorded a $17.1 million recovery, less a $0.9 million valuation reserve, as a reduction to cost of sales for the year ended

January 1, 2011, and a $0.5 million recovery as a reduction to cost of sales for the year ended December 31, 2011. Business interruption coverage also

included recovery from lost margins related to the accident and therefore, the Company recorded a gain of $0.6 million in cost of sales within the

Consolidated Statement of Operations for the year ended January 1, 2011, as this amount was agreed with the insurer. During 2011, the Company recorded

an additional $0.2 million gain in cost of sales related to lost margins. The Company also recorded a $0.4 million involuntary conversion loss on fixed assets

associated with the property loss in its Consolidated Statement of Operations for the year ended January 1, 2011.

Total capital spending of approximately $5.5 million was incurred for work associated with bringing the damaged boiler back online. At year

- end 2010,

$1.0 million, net of the $1.0 million deductible, was recorded as a gain on the other income line within the Consolidated Statement of Operations. For the year

ended December 31, 2011, the Company recorded an additional $1.4 million of gain on the other income line within the Consolidated Statement of

Operations, all of which was recorded during the second quarter.

66PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

6. 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. With the sale of C&H in 2009 and APC and NEX in 2010, the Company no longer

carries goodwill on its balance sheet as it was all assigned to discontinued operations.

During fourth quarter 2009, the Company performed its annual goodwill impairment analysis on the films reporting unit of the performance packaging

business, which was comprised of APC and NEX and reclassified as discontinued operations. In accordance with ASC 350, a Step One analysis was done to

compare the fair value of the reporting unit to the carrying value. In Step One, the fair value of the reporting unit was estimated using a weighting of the

“ market ” and “ income ” valuation approach. The “ income ” valuation approach estimated the enterprise value using a net present value model, which

discounted projected free cash flows of the business at a computed weighted average cost of capital as the discount rate. The “ market ” valuation approach

was based on the market multiple of guideline companies. As a result of performing Step One, it was determined the carrying value of the reporting unit

exceeded the fair value. Step Two was then performed to allocate the fair value of the business to all assets and liabilities of the reporting unit as if the

reporting unit was acquired in a business combination and the fair value of the reporting unit, as determined in the first step of the goodwill impairment test,

was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit, over the amount assigned to its assets and liabilities was

the implied fair value of goodwill. The carrying value of the performance packaging goodwill exceeded the implied fair value of the goodwill and therefore, an

impairment loss was recognized to the extent of the excess of $6.3 million in the fourth quarter of 2009 and was included in loss from discontinued

operations. Due to revised future cash flow projections, the impairment calculation done at year

- end 2009 utilized an EBITDA margin of approximately 11%

compared to an EBITDA margin of approximately 14% at year

- end 2008. The 11.5% discount rate used in the 2009 calculation was 1% lower than the

discount rate used in the prior year calculation.

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

As of December 31, 2011 As of January 1, 2011

Gross Carrying

Amount Accumulated

Amortization Gross Carrying

Amount Accumulated

Amortization

Amortizable intangible assets:

Trademarks $ 44,665 $ 24,177 $ 44,665 $ 22,079

Patents 10,071 10,071 12,376 12,376

Customer relationships 5,365 2,593 5,365 2,367

Subtotal 60,101 $ 36,841 62,406 $ 36,822

Unamortizable intangible assets:

Trademarks 22,865 22,865

Total $ 82,966 $ 85,271

67PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

Of the $83.0 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to

carbonless paper are being amortized over their useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and are not

subject to amortization. Customer relationships are being amortized over their estimated useful lives of 25 years.

Amortization expense for the year ended December 31, 2011 approximated $2.3 million. Amortization expense for each of the years ended January 1,

2011, and January 2, 2010, also approximated $2.3 million. Excluding the impact of any future acquisitions, the Company anticipates annual amortization of

intangible assets will approximate $2.3 million for each of the years 2012 through 2016.

7. INVENTORIES

Inventories consist of the following (dollars in thousands):

Stores and spare parts inventory balances of $25.5 million in 2011 and $23.8 million in 2010 are valued at average cost and are included in raw

materials, work in process and supplies.

During fourth quarter 2010, the Company changed its method of inventory accounting, for raw materials, work in process and finished goods

inventories, from the LIFO method to the FIFO method. This was deemed a preferable method as the key users of the financial statements, including lenders,

creditors and rating agencies, analyze results and require compliance with debt covenants using the FIFO method of accounting. Further, this conformed all

of the Company's inventories to the FIFO method of accounting and promotes greater comparability with international competitors as the Company expands

its global sales.

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment balances consist of the following (dollars in thousands): 2011 2010

Finished goods $ 42,538 $ 44,239

Raw materials, work in process and supplies 59,989 65,793

$ 102,527 $ 110,032

2011 2010

Land and improvements $ 9,279 $ 8,611

Buildings and improvements 133,042 131,512

Machinery and equipment 657,310 643,300

Software 33,349 32,575

Capital lease 165 165

Construction in progress 5,505 9,114

838,650 825,277

Accumulated depreciation (513,985 ) (470,676 )

$ 324,665 $ 354,601

68PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

9. OTHER CURRENT AND NONCURRENT ASSETS

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

The environmental indemnification receivables of $46.0 million and $20.6 million, noted above, for the years ended December 31, 2011 and January 1,

2011, respectively, represent an indemnification receivable from AWA as recorded on the Consolidated Balance Sheet of Paperweight Development Corp.

and subsidiaries and an indemnification receivable from PDC as recorded on the Consolidated Balance Sheet of Appleton Papers Inc. and subsidiaries.

Other noncurrent assets for Paperweight Development Corp. and Subsidiaries consist of the following (dollars in thousands):

Other noncurrent assets for Appleton Papers Inc. and Subsidiaries consist of the following (dollars in thousands):

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): 2011 2010

Environmental indemnification receivable $ 46,000 $ 20,580

Environmental expense insurance recovery 2,96 0 5,008

Escrow from sale of Films

- 2,000

Insurance recovery from coal silo accident

- 8,183

Other 5,764 6,221

$ 54,724 $ 41,992

2011 2010

Deferred debt issuance costs $ 10,381 $ 13,754

Environmental expense insurance recovery

- 4,045

Other 5,916 6,980

$ 16,297 $ 24,779

2011 2010

Deferred debt issuance costs $ 10,381 $ 13,754

Environmental expense insurance recovery

- 4,045

Other 5,904 6,968

$ 16,285 $ 24,767

2011 2010

Compensation $ 9,966 $ 8,997

Trade discounts 15,277 16,035

Workers ’ compensation 5,09 0 3,680

Accrued insurance 2,153 2,375

Other accrued taxes 1,181 1,428

Postretirement benefits other than pension 3,218 3,758

Fox River Liabilities 46,000 20,580

Litigation settlement 750

-

Other 7,792 6,135

$ 91,427 $ 62,988

69PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

11. LONG

- TERM OBLIGATIONS

Long

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

During 2011, the Company made mandatory debt repayments of $1.2 million, plus interest, on its State of Ohio loans. Also, during 2011, the Company

borrowed $202.8 million and repaid $232.1 million on its revolving credit facility, as amended, leaving no outstanding balance at year

- end. Approximately

$18.8 million of the revolving credit facility, as amended, is used to support outstanding letters of credit. As of July 1, 2011, the revolving credit facility was

amended to reduce all applicable interest rate spreads by 0.25%. The interest rate assessed on Eurodollar rate loans is now the Eurodollar rate plus an

interest rate spread ranging from 3.25% to 3.75%, depending on defined levels of average excess availability of the credit facility. The interest rate assessed

on base rate loans is now the base rate plus an interest rate spread ranging from 2.25% to 2.75%, also depending on defined levels of average excess

availability.

During June 2011, in accordance with the terms of its 8.125% senior notes payable, the Company repaid in full the remaining note balance of $17.5

million. These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment,

the notes were terminated and the Company was released from all obligations under the notes.

On November 1, 2010, the Company voluntarily repaid the remaining $17.5 million balance of the secured term note payable, as amended, due

December 2013. A payment of $18.9 million represented full and complete payment of all unpaid principal, accrued and unpaid interest and a prepayment fee.

These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility, as amended. Upon payment, the note

was terminated and the Company was released from all obligations under the note. Debt extinguishment expense of $1.5 million was recorded as a result of

the termination of this note. The Company entered into this five

- year, $22 million secured term note payable in November 2008. In February 2010, the

Company and the noteholder of this debt, further amended the terms of this note to eliminate a financial covenant and adjust the levels of the remaining

financial covenants. December 31,

2011 January 1, 2011

Revolving credit facility at approximately 5.5% $

- $ 29,300

Secured variable rate industrial development bonds, 0.5% average interest rate at December 31, 2011, $2,650 due in

2013 and $6,000 due in 2027 8,65 0 8,65 0

State of Ohio assistance loan at 6%, approximately $100 due monthly and final payment due May 2017 6,185 7,105

State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment

due May 2019 2,283 2,567

Senior notes payable at 8.125%, due June 2011

- 17,491

Senior subordinated notes payable at 9.75%, due June 2014 32,195 32,195

Senior secured first lien notes payable at 10.5%, due June 2015 305,000 305,000

Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015 (4,290 ) (5,249 )

Second lien notes payable at 11.25%, due December 2015 161,766 161,766

511,789 558,825

Less obligations due within one year (1,256 ) (18,694 )

$ 510,533 $ 54 0, 131

70PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

On February 8, 2010, the Company completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain

financial covenants and increase financial flexibility. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June

2015 and a five

- year, asset

- backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts,

were $292.2 million. The revolving credit facility, as amended, provides for up to $100 million of revolving loans including a letter of credit sub

- facility of up

to $25 million and a swing line sub

- facility of up to $5 million. It also contains an uncommitted accordion feature that allows the Company to increase the

size of the revolving credit facility, as amended, by up to $25 million if the Company can obtain commitments for the incremental amount. Borrowings under

the revolving credit facility, as amended, are limited to the sum of (a) 85% of the net amount of eligible accounts receivable and (b) the lesser of (i) 70% of

the net amount of eligible raw materials and finished goods inventory or (ii) 85% of the net orderly liquidation value of such inventory. This asset

- backed

revolving credit facility, as amended, contains a debt covenant whereby if the Company ’ s average availability ratio should fall below 20%, the Company is

subject to a fixed charge coverage ratio of not less than 1.10:1.00. The average availability ratio is calculated monthly and is a function of the Company ’ s

average outstanding revolver borrowing as compared to the borrowing base of eligible inventory and accounts receivable as discussed above. Initial

borrowing totaled $20.6 million. A majority of the proceeds from this refinancing transaction were used to repay and terminate the senior secured credit

facilities which included senior secured variable rate notes payable of $211.2 million, plus interest, and the revolving credit facility of $97.1 million, plus

interest. Remaining proceeds were used to pay related transaction fees and expenses totaling $10.8 million. Debt extinguishment expenses of $5.5 million

were also recorded as a result of this voluntary refinancing.

The revolving credit facility, as amended, is guaranteed by PDC, each of PDC ’ s existing and future 100%

- owned domestic and Canadian subsidiaries

and each other subsidiary of PDC that guarantees the 10.5% senior secured first lien notes due June 2015. Lenders hold a senior first

- priority interest in (i)

substantially all of the accounts, inventory, general intangibles, cash deposit accounts, business interruption insurance, investment property (including,

without limitation, all issued and outstanding capital stock of Appleton and each revolver guarantor (other than PDC) and all interests in any domestic or

Canadian partnership, joint venture or similar arrangement), instruments (including all collateral security thereof), documents, chattel paper and records of

Appleton and each revolver guarantor now owned or hereafter acquired (except for certain general intangibles, instruments, documents, chattel paper and

records of Appleton or any revolver guarantor, to the extent arising directly in connection with or otherwise directly relating to equipment, fixtures or owned

real property), (ii) all other assets and properties of Appleton and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the

foregoing. Lenders also hold a junior first

- priority security interest in (i) substantially all equipment, fixtures and owned real property of Appleton and each

revolver guarantor now owned or hereafter acquired, (ii) in each case solely to the extent arising directly in connection with or otherwise directly related to

any of the foregoing, certain general intangibles, instruments, documents, chattel paper and records of Appleton and each revolver guarantor now owned or

hereafter acquired, and (iii) all proceeds of the foregoing. The revolving credit facility, as amended, contains affirmative and negative covenants customary

for similar credit facilities, which among other things, restrict the Company ’ s ability and the ability of the Company ’ s subsidiaries, subject to certain

exceptions, to incur liens, incur or guarantee additional indebtedness, make restricted payments, engage in transactions with affiliates and make

investments.

The 10.5% senior secured first lien notes due June 2015 rank senior in right of payment to all existing and future subordinated indebtedness of the

Company and equally in right of payment with all existing and future senior indebtedness of the Company. The notes are secured by security interests in

substantially all of the property and assets of the Company and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by

all of the Company ’ s restricted subsidiaries (other than excluded restricted subsidiaries) and the parent entity. Initially, in addition to Appleton, this

included PDC and Appleton Papers Canada Ltd.

In February 2008, the Company fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five

- year interest rate swap contract.

In March 2008, the Company fixed the interest rate, at 5.40%, on an additional $75.0 million of its variable rate notes with a five

- year interest rate swap

contract. The interest rate swaps were being accounted for as cash flow hedges. A covenant violation at January 3, 2009 and subsequent waiver and

amendment in March 2009, to the then senior secured credit facilities, changed the basis of the forecasted transactions for these two interest rate swap

contracts. As a result of amendments to the senior secured credit facilities in place at the time, the Company concluded it was remote that the original

forecasted transactions would occur as originally documented. The events of default also triggered an event of default pursuant to a cross

- default

provision under one of the interest rate swap contracts. As a result of the cross

- default, the counterparty elected to terminate the swap contract. In

February 2009, the Company and the counterparty resolved the Company ’ s obligation under the swap contract with an agreement to pay $4.7 million over

the nine

- month period ending October 2009. This obligation was satisfied in accordance with the agreement. On February 8, 2010, the remaining swap

contract was settled as part of the voluntary refinancing activity.

71PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

On September 30, 2009, the Company completed a voluntary debt

- for

- debt exchange of significant portions of its 8.125% senior notes payable due

June 2011 and 9.75% senior subordinated notes payable due June 2014. Weak economic conditions and frozen credit markets caused many corporate bonds,

including those issued by the Company, to trade well below face value. The Company took advantage of the opportunity to significantly reduce its total

indebtedness, plus extend maturities and simplify its debt structure, by exchanging existing debt.

This transaction exchanged $92.0 million of 8.125% senior notes for $92.0 million of newly issued 11.25% second lien notes payable due December

2015. For accounting purposes, this was considered a debt modification. As part of this transaction, the Company paid $1.2 million of fees to the

bondholders which included $0.9 million of additional 11.25% second lien notes issued as in

- kind consent fees to the lenders agreeing to the exchange.

These debt issuance costs will be amortized over the term of the second lien notes along with pre

- existing unamortized debt issuance costs of the

exchanged 8.125% notes. Third

- party costs of $3.8 million were also incurred and recorded as selling, general and administrative expenses.

The Company also exchanged $110.3 million of 9.75% senior subordinated notes for $66.2 million of newly issued 11.25% second lien notes payable

due December 2015. This resulted in a debt reduction of $44.1 million. For accounting purposes, this exchange was considered a debt extinguishment and

$3.5 million of previously capitalized debt issuance costs related to the 9.75% notes were written off and recorded as debt extinguishment expense.

Transaction costs of $5.8 million were paid. Of this $5.8 million of costs, $3.0 million was recorded as debt extinguishment expense and $2.8 million was

capitalized and will be amortized over the term of the second lien notes. The $3.0 million of debt extinguishment expense included $2.7 million of additional

11.25% second lien notes issued as in

- kind consent fees to the noteholders agreeing to the exchange. As a result of this transaction, $68.9 million of second

lien notes were issued. A $37.4 million net gain on debt extinguishment was recorded in the Consolidated Statement of Operations related to the debt

- for

debt exchange and the Second Amendment to the senior secured credit facilities (discussed below).

The 11.25% second lien notes due 2015, as amended, will accrue interest from the issue date at a rate of 11.25% per year and interest will be payable

semi

- annually in arrears on each June 15 and December 15, commencing on December 15, 2009. These notes are guaranteed by PDC and certain of present

and future domestic and foreign subsidiaries. Guarantors include PDC and, American Plastics Company, Inc. and New England Extrusion Inc. until their

July 22, 2010 divestiture. The guarantees of these notes are second

- priority senior secured obligations of the guarantors. They rank equally in right of

payment with all of the guarantors ’ existing and future senior debt and rank senior in right of payment to all of the guarantors ’ existing and future

subordinated debt. The guarantees of these notes are effectively subordinated to all of the first

- priority senior secured debt of the guarantors, to the extent

of the collateral securing such debt.

The first lien notes and the second lien notes, as amended, contain covenants that restrict Appleton ’ s ability and the ability of Appleton ’ s other

guarantors to sell assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make

other restricted payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter

into sale and leaseback transactions; amend particular agreements relating to the transaction with former parent Arjo Wiggins Appleton Limited and the

ESOP; and enter into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture

governing the 11.25% second lien notes due 2015, as amended. On January 29, 2010, the Company received the requisite consents from the beneficial

owners of the second lien notes to certain amendments to the indenture governing these notes in order to (i) permit a transaction pursuant to which the

ESOP will cease to own at least 50% of PDC, without triggering a requirement on the part of the Company to make an offer to repurchase the second lien

notes and (ii) permit a capital contribution or operating lease of the black liquor assets located at the Company ’ s Roaring Spring, Pennsylvania facilities to a

newly formed joint venture with a third

- party in exchange for a minority equity interest in such joint venture.

72PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

In order to complete the debt

- for

- debt exchange, the Company and its lenders under the senior secured credit facilities entered into the Second

Amendment to the senior secured credit facilities on September 30, 2009. This Second Amendment cleared the way for the Company to issue the second lien

notes. Under the Second Amendment to the senior secured credit facilities, the Company paid interest rates equal to LIBOR, but not less than 2%, plus 462.5

basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than

2%, plus 462.5 basis points for any amounts outstanding on the revolving credit facility. The Second Amendment to the senior secured credit facilities

provided a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may have been reduced, based on measures

of the Company ’ s total leverage as defined in the senior secured credit facilities. The Second Amendment also provided that the revolving credit facility

would be reduced permanently by $5,000,000 on December 31, 2009, by $10,000,000 on March 31, 2010 and by an additional $15,000,000 on June 30, 2010. For

accounting purposes, the amendment to the senior secured credit facilities was treated as a debt modification. The Company paid $2.5 million of fees to the

creditors in conjunction with the amendment to the senior secured credit facilities. The debt issuance costs would be amortized over the term of the modified

agreement along with pre

- existing unamortized debt issuance costs as an adjustment to interest expense. Unamortized debt issuance costs of $0.2 million,

relating to the revolving credit facility, were written off and recorded as debt extinguishment expense. Third

- party costs of $0.5 million were also incurred

and recorded as selling, general and administrative expenses.

On September 9, 2009, a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $17.5 million of 8.125%

senior notes and a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $32.2 million of 9.75% senior

subordinated notes became effective. The supplemental indentures amend the original indentures to, among other things, eliminate substantially all of the

restrictive covenants and certain events of default and related provisions.

During second quarter 2009, the Company received the proceeds of the $3.0 million Ohio State Loan. During July 2007, the Company had entered into

a new $12.1 million Loan and Security Agreement with the Director of Development of the State of Ohio, consisting of a $9.1 million State Assistance Loan

and a $3.0 million State Loan (together “ the Ohio Loans ” ). The proceeds of the $9.1 million State Assistance Loan were received in 2007. All proceeds of

these Ohio Loans were used to fund a portion of the costs of acquiring and installing paper coating and production equipment at the Company ’ s paper mill

in West Carrollton, Ohio.

During first quarter 2009, the Company purchased $7.5 million, plus interest, of the 9.75% senior subordinated notes payable due June 2014. As these

senior subordinated notes were purchased at a price less than face value, the Company recorded a $5.8 million gain on this purchase. Also as a result of this

purchase, $0.4 million of deferred debt issuance costs were written off, resulting in a net gain of $5.4 million.

The first lien notes and the second lien notes, as amended, contain covenants that restrict Appleton ’ s ability and the ability of Appleton ’ s other

guarantors to sell assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make

other restricted payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter

into sale and leaseback transactions; amend particular agreements relating to the transaction with former parent AWA and the ESOP; and enter into

transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the 11.25%

second lien notes due 2015, as amended.

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

As of December 31, 2011, the Company was in compliance with all debt covenants and is forecasted to remain compliant for the next twelve months.

The Company ’ s ability to comply with the financial covenants in the future depends on achieving forecasted operating results. The Company ’ s failure to

comply with its covenants, or an assessment that it is likely to fail to comply with its covenants, could lead the Company to seek amendments to, or waivers

of, the financial covenants. The Company cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the

event of non

- compliance with debt covenants, if the lenders will not amend or waive the covenants, the debt would be due and the Company would need to

seek alternative financing. The Company cannot provide assurance that it would be able to obtain alternative financing. If the Company were not able to

secure alternative financing, this would have a material adverse impact on the Company.

73PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

– ( Continued)

Scheduled repayment of principal on long

- term obligations outstanding at December 31, 2011, is as follows (dollars in thousands):

The senior secured first lien notes payable at 10.5%, due June 2015, are included in the above schedule at face of $305.0 million.

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 2011 the Company recorded a net tax provision of $0.6 million primarily for U.S. state and

local income taxes. For 2010 the Company recorded a net tax provision of $0.2 million primarily for Canadian income taxes. For 2009 the Company recorded a

net tax provision of $0.3 million primarily for U.S. state and local income taxes.

All U.S. federal C corporation tax years are closed. 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 $5.4 million for 2011, $5.7 million for 2010 and $6.9 million for 2009. Obligations

Outstanding at

December 31, 2011

2012 $ 1,256

2013 3,975

2014 33,594

2015 468,244

2016 1,567

Thereafter 7,443

$ 516,079

74PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

Future minimum lease payments as of December 31, 2011, under leases that have initial or remaining non

- cancelable terms in excess of one year are as

follows (dollars in thousands):

14. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

commodity prices. The fair values of all derivatives are recorded in the Consolidated Balance Sheet. The change in a derivative ’ s fair value is recorded each

period in current earnings or accumulated other comprehensive loss, depending on whether the derivative is designated and qualifies as part of a hedge

transaction and, if so, the type of hedge transaction.

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange

contracts. These instruments are designated as cash flow hedges and are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable

market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential

between the contract price and the market

- based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts ’ gains or

losses due to changes in fair value is initially recorded as a component of accumulated other comprehensive loss and is subsequently reclassified into

earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. These contracts are

highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates. As of December 31, 2011, there were no

forward exchange contracts in place.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in energy prices. These contracts are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable

market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the strike price.

The contracts ’ gains or losses due to changes in fair value are recorded in current period earnings. At December 31, 2011, the hedged volumes of these

contracts totaled 488,000 MMBTU (Million British Thermal Units) of natural gas. The contracts have settlement dates extending through December 2012.

The Company selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks

associated with market fluctuations in pulp prices. These contracts are recorded in the Consolidated Balance Sheet at fair value using Level 2 observable

market inputs based on pricing published by RISI, Inc. ( “ RISI ” ) as measured on the last trading day of the accounting period and compared to the swap ’ s

fixed price. Currently, there are two pulp swap contracts in place. As of December 31, 2011, the first swap contract had a remaining hedge volume of 2,000

tons of pulp with settlement dates extending through February 2012. It is not designated as a hedge, and therefore, gains or losses due to changes in fair

value are recorded in current period earnings. During third quarter 2011, the Company entered into a second swap contract. As of December 31, 2011, this

swap contract hedges 24,000 tons of pulp with settlement dates January through December 2012. It is designated as a cash flow hedge of forecasted pulp

purchases, and therefore, the change in the effective portion of the fair value of the hedge will be deferred in accumulated other comprehensive loss until

the inventory containing the pulp is sold.

In February 2008, the Company fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five

- year interest rate swap contract.

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

Leases

2012 $ 4,446

2013 2,147

2014 1,201

2015 637

2016 202

Thereafter 3

Total minimum lease payments $ 8,636

75PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

The following table presents the location and fair values of derivative instruments included in the Company ’ s Consolidated Balance Sheets at year

end 2011 and 2010, respectively (dollars in thousands):

The following table presents the location and amount of (losses)/gains on derivative instruments and related hedge items included in the Company ’ s

Consolidated Statement of Operations for the years ended December 31, 2011 and January 1, 2011 and gains/(losses) initially recognized in accumulated

other comprehensive loss in the Consolidated Balance Sheet at December 31, 2011 and January 1, 2011 (dollars in thousands):

For a discussion of the fair value of financial instruments, see Note 15, Fair Value of Financial Instruments. Designated as a Hedge Balance Sheet Location December 31,

2011 January 1,

2011

Foreign currency exchange derivatives Other current assets $

- $ 393

Foreign currency exchange derivatives Other current liabilities

- (67 )

Pulp fixed swap Other current liabilities (760)

-

Not Designated as a Hedge

Natural gas fixed swap Other current liabilities (599 ) (69 )

Pulp fixed swap Other current liabilities (200 )

-

Designated as a Hedge Statement of

Operations Location December 31,

2011 January 1,

2011 January 2,

2010

Foreign currency exchange derivatives Net sales $ (437 ) $ 918 $ (1,047 )

Gains recognized in accumulated other comprehensive

loss 2,382 386 246

Pulp fixed swap Other income (137 )

- - Losses recognized in accumulated other

comprehensive loss (623 )

- -

Not Designated as a Hedge

Natural gas fixed swap Cost of sales (986 ) (88 )

- Pulp fixed swap Cost of sales (145 )

- - Interest rate swap contract Interest expense

- 961 938

76PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

15. 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):

The senior secured first lien notes payable and the second lien notes payable are traded regularly in public markets and therefore, the fair value was

determined using Level 1 inputs based on quoted market prices. The senior subordinated notes payable are not regularly traded in public markets so fair

value was determined using Level 2 observable market inputs including pricing for similar debt. The fair value of the State of Ohio loans was determined

using Level 2 observable market inputs including current rates for financial instruments of the same remaining maturity and similar terms. The industrial

development bonds have a variable interest rate that reflects current market terms and conditions.

16. EMPLOYEE BENEFITS

The Company has various defined benefit pension plans and defined contribution pension plans. This includes a Supplemental Executive Retirement

Plan ( “ SERP ” ) to provide retirement benefits for management and other highly compensated employees whose benefits are reduced by the tax

- qualified plan

limitations of the pension plan for eligible salaried employees. Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan

(the “ Plan ” ) to provide that any non

- union individuals hired or re

- hired on or after January 1, 2008, would not be eligible to participate in the Plan. Also, plan

benefits accrued under the Plan were frozen as of April 1, 2008, with respect to Plan participants who elected to participate, effective April 1, 2008, in a

“ Mandatory Profit Sharing Contribution ” known as the Retirement Contribution benefit under the Appleton Papers Inc. Retirement Savings and Employee

Stock Ownership Plan (the “ KSOP ” ), or January 1, 2015, in the case of any other Plan participants. In December 2010, it was announced that the effective

date of the freeze would change from January 1, 2015 to March 1, 2011. December 31, 2011 January 1, 2011

Carrying Fair Carrying Fair

Financial Instruments Amount Value Amount Value

Senior subordinated notes payable $ 32,195 $ 23,341 $ 32,195 $ 15,293

Senior notes payable

- - 17,491 16,966

Senior secured first lien notes payable 300,710 303,717 299,751 299,751

Second lien notes payable 161,766 147,207 161,766 130,222

Revolving credit facility

- - 29,300 29,300

State of Ohio loans 8,468 8,530 9,672 10,185

Industrial development bonds 8,650 8,650 8,650 8,650

$ 511,789 $ 491,445 $ 558,825 $ 510,367

77PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

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):

The amounts in accumulated other comprehensive loss on the consolidated balance sheet, net, that have not been recognized as components of net

periodic benefit cost at December 31, 2011 and January 1, 2011, are as follows (dollars in thousands):

The amount in accumulated other comprehensive loss that is expected to be recognized as components of net periodic benefit cost over the next year

is as follows (dollars in thousands): Pension Benefits 2011 2010

Change in benefit obligation

Benefit obligation at beginning of period $ 349,692 $ 328,581

Service cost 3,995 5,769

Interest cost 19,874 19,728

Plan amendments

- 108

Actuarial loss 36,271 17,932

Curtailment gain

- (4,929)

Benefits and expenses paid (18,741 ) (17,497)

Benefit obligation at end of period $ 391,091 $ 349,692

Change in plan assets

Fair value at beginning of period $ 260,606 $ 226,972

Actual return on plan assets 5,007 35,661

Employer contributions 18,469 15,470

Benefits and expenses paid (18,741 ) (17,497)

Fair value at end of period $ 265,341 $ 260,606

Funded status of plans

Funded status at end of period $ (125,750 ) $ (89,086)

Amounts recognized in the consolidated balance sheet consist of:

Accrued benefit liability

- current $ (505 ) $ (503)

Accrued benefit liability

- noncurrent (125,245 ) (88,583)

Net amount recognized $ (125,750 ) $ (89,086)

Key assumptions at end of period (%)

Discount rate 5.00 5.75

Accumulated other comprehensive loss 2011 2010

Net actuarial loss $ (140,882) $ (91,728)

Prior service cost (2,628) (3,115)

Total $ (143,510) $ (94,843)

Actuarial loss $ 9,114

Prior service cost 486

$ 9,600

78PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

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

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

As of the 2011 and 2010 measurement dates, the approximate asset allocations by asset category for the Company ’ s pension plan were as follows: For the For the For the

Year Ended Year Ended Year Ended

December 31, January 1, January 2,

Pension Benefits 2011 2011 2010

Net periodic benefit cost

Service cost $ 3,994 $ 5,769 $ 5,301

Interest cost 19,874 19,728 19,501

Expected return on plan assets (22,687 ) (21,243 ) (20,798 )

Amortization of

Prior service cost 486 550 539

Actuarial loss 4,798 3,168 379

Curtailment charge

- 427

- Net periodic benefit cost $ 6,465 $ 8,399 $ 4,922

Key assumptions (%)

Discount rate 5.75 6.00 6.50

Expected return on plan assets 8.25 8.25 8.25

Rate of compensation increase NA 4.00 4.00

2012 $ 18,204

2013 19,334

2014 20,471

2015 21,498

2016 22,493

2017 thru 2021 126,312

$ 228,312

December 31,

2011 December 31,

2010

U.S. Equity 38 % 39 %

International Equity 16 16

Private Equity 2 3

Emerging Market Equity 10 10

Fixed Income 29 27

Real Estate 5 5

Total 100 % 100 %

79PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. 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:

The investment policy objectives adopted by the Committee are designed to (a) provide benefit security to plan participants, (b) support accounting

policy and funding goals, (c) maintain a target funded ratio to avoid adverse outcomes, and (d) promote stability and growth in funded status. The

Committee is assisted by an investment advisor in managing the fund investments and establishing asset allocations and long

- term return expectations. The

investment advisor develops and maintains long

- term return, risk and correlation expectations for a broad array of capital markets which the Committee uses

in its monitoring activity.

The expected long

- term rate of return on assets assumption is developed considering the relative weighting of plan assets, the historical performance

of total plan assets and individual asset classes and economic and other indicators of future performance. Expected returns for each asset class are

developed using estimates of expected real returns plus expected inflation. Long

- term expected real returns are derived from future expectations for the U.S.

Treasury real yield curve. Based on the assumptions and methodology described above, the Company selected 8.00% at year

- end 2011, and 8.25% at year

end 2010, as its long

- term rate of return on assets assumptions.

The discount rate is developed by selecting a portfolio of high

- quality corporate bonds appropriate to provide for the projected benefit payments of

the plan. This portfolio is selected from a universe of over 500 Aa

- graded noncallable bonds available in the market as of December 31, 2011, further limited

to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the

market value of the bonds selected to the discounted value of the plan ’ s benefit payments. Based on the methodology described above, and a selected

portfolio of 17 bonds, the Company selected a discount rate of 5.00% for 2011 and 5.75% for 2010 to value year

- end liabilities for the pension plans.

Total U.S. Equity (including private equity) 40 %

Total International Equity 25 %

Real Estate 6 %

Bonds 29 %

80PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

In accordance with ASC 820, “ Fair Value Measurements and Disclosures, ” the fair value of the assets within the pension plan as of December 31,

2011 and January 1, 2011 are as follows (dollars in thousands):

Fair Value Measurements at December 31, 2011

Quoted Prices Significant Significant

in Active Observable Unobservable

Markets Inputs Inputs

(Level 1) (Level 2) (Level 3) Total

Asset Category

Cash and cash equivalents $ 683 $ 683

Public equity

U.S. (a) 101,468 101,468

International (a) 41,231 41,231

Emerging markets (b) 27,561 27,561

Private equity (c) 6,475 6,475

Fixed income

Government (d) 474 474

Corporate bonds (d) 75,138 75,138

Real estate (e) 12,311 12,311

$ 683 $ 245,872 $ 18,786 $ 265,341

Fair Value Measurements at January 1, 2011

Quoted Prices Significant Significant

in Active Observable Unobservable

Markets Inputs Inputs

(Level 1) (Level 2) (Level 3) Total

Asset Category

Cash and cash equivalents $ 301 $ 301

Public equity

U.S. (a) 101,308 101,308

International (a) 41,328 41,328

Emerging markets (b) 26,577 26,577

Private equity (c) 7,062 7,062

Fixed income

Government (d) 18,762 18,762

Corporate bonds (d) 51,520 51,520

Real estate (e) 13,748 13,748

$ 301 $ 239,495 $ 20,810 $ 260,606

81PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

(a) U.S. and international equity investments include investments in commingled funds that invest primarily in publicly

- traded equities. Equity investments

are diversified across U.S. and non

- U.S. stocks and are divided by investment style and market capitalization.

(b) Emerging markets equity investments include investments in commingled funds that invest primarily in publicly

- traded equities. Equity investments are

diversified across non

- U.S. stocks and are divided by country, investment style and market capitalization.

(c) Private equity assets consist primarily of investments in limited partnerships that invest in individual companies in the form of non

- public equity or non

public debt positions. The plan ’ s private equity investments are limited to 5% of the total limited partnership and the maximum allowable loss cannot exceed

the commitment amount.

(d) Fixed income securities include investments in commingled funds that invest in a diversified blend of investment grade fixed income securities.

(e) Investment in real estate is designed to provide stable income returns and added diversification based upon the historical low correlation between real

estate and equity or fixed income investments. The plan ’ s real estate assets consist of a commingled fund that invests in a diversified portfolio of direct real

estate investments.

Description of Fair Value Measurements

Level 1

– Quoted, active market prices for identical assets or liabilities. Foreign and domestic common stocks are exchange

- traded and are valued at the

closing price reported by the respective exchanges on the day of valuation. Share prices of the funds, referred to as a fund's Net Asset Value ( “ NAV ” ), are

calculated daily based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by the number of

fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust funds and funds for employee benefit trust shares occur by

contract at the respective fund ’ s redemption date NAV.

Level 2

– Observable inputs other than Level 1 prices, such as quoted active market prices for similar assets or liabilities, quoted prices for identical or

similar assets in inactive markets and model

- derived valuations in which all significant inputs are observable in active markets. The pension plan ’ s Level 2

investments include foreign and domestic common stocks, mutual funds, collective trust funds and funds for employee benefit trust. The NAVs of the

funds are calculated monthly based on the closing market prices and accruals of securities in the fund's total portfolio (total value of the fund) divided by

the number of fund shares currently issued and outstanding. Redemptions of the mutual funds, collective trust fund and funds for employee benefit trust

shares occur by contract at the respective fund ’ s redemption date NAV.

Level 3

– Valuation techniques in which one or more significant inputs are unobservable in the marketplace. The pension plan ’ s Level 3 assets are primarily

investment funds which invest in underlying groups of investment funds or other pooled investment vehicles that are selected by the respective funds ’

investment managers. The investment funds and the underlying investments held by these investment funds are valued at fair value. In determining the fair

value of these assets, management takes into account the estimated NAV of the underlying funds, as well as any other considerations that may increase or

decrease such estimated value.

While the Company believes its valuation methods for plan assets are appropriate and consistent with other market participants, the use of different

methodologies or assumptions, particularly as applied to Level 3 assets described below, could have a material effect on the computation of their estimated

fair values.

82PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

The fair value measurement of plan assets using significant unobservable inputs (Level 3) changed during 2011 and 2010 due to the following (dollars

in thousands):

Effective January 1, 2008, the Company amended the Appleton Papers Inc. Retirement Plan (the “ Plan ” ) to provide that any non

- union individuals

hired or re

- hired on or after January 1, 2008, would not be eligible to participate in the Plan. Also, plan benefits accrued under the Plan were frozen as of

April 1, 2008, with respect to Plan participants who elected to participate, effective April 1, 2008, in a “ Mandatory Profit Sharing Contribution ” known as the

Retirement Contribution benefit under the Appleton Papers Inc. Retirement Savings and Employee Stock Ownership Plan (the “ KSOP ” ), or January 1, 2015,

in the case of any other Plan participants. In December 2010, it was announced that the effective date of the freeze would change from January 1, 2015 to

March 1, 2011. This change resulted in a curtailment charge of $0.4 million in 2010 and a reduction in the pension benefit obligation of $4.9 million.

The Company expects to contribute approximately $25 million to its pension plan in 2012. 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 31, 2011, the accumulated benefit obligation for the defined benefit plans was

approximately $391.1 million. At January 1, 2011, the accumulated benefit obligation for the deferred benefit plans was approximately $349.7 million.

Certain of the Company ’ s hourly employees participate in a multi

- employer defined benefit plan. This is the Pace Industry Union

- Management

Pension Plan (EIN #11

- 6166763). The Company ’ s contributions to this plan were $1.8 million in 2011, $1.7 million in 2010 and $1.6 million in 2009. The 2010

employer contribution to this plan was less than 5% of total contributions to the plan. Participants in this plan include the West Carrollton represented

manufacturing employees, where the collective bargaining agreement expires April 1, 2012. Participants also include the represented employees at the

Kansas City, Kansas distribution center, where the collective bargaining agreement expired December 31, 2011. Contract renewal negotiations are currently

on

- going. For the 2010 plan year, this multi

- employer plan was 74.6% funded. For the 2009 plan year, this plan was 72.5% funded. Though the plan was

between 65% and 80% funded for both plan years, it was subject to a funding improvement plan for the plan year beginning January 1, 2010, and again for

the plan year beginning January 1, 2011, as it is projected there will be an accumulated funding deficiency in the next four years. In an effort to improve the

plan ’ s funding situation, the Trustees adopted a Rehabilitation Plan in July 2010, designed to assist the plan in meeting the applicable benchmarks

established by law. Law requires that all contributing employers pay to the fund a surcharge to help correct the fund ’ s financial situation. The amount of the

surcharge is equal to a percentage of the amount an employer is otherwise required to contribute to the fund under the applicable collective bargaining

agreement. Beginning in July 2010, and extending through the term of the collective bargaining agreement, a 10% surcharge applies for each plan year in

which the fund is in critical status. Changes in Fair Value Using

Significant Unobservable Inputs (Level 3)

Private Real

Equities Estate Total

Balance, January 2, 2010 $ 6,254 $ 12,923 $ 19,177

Realized gains/(losses) 337 (131 ) 206

Unrealized gains 580 298 878

Return of capital (174 ) (99 ) (273 )

Income 65 757 822

Balance, January 1, 2011 7,062 13,748 20,810

Realized gains/(losses) 799 (919 ) (120)

Unrealized gains 14 1,560 1,574

Return of capital (1,464 ) (2,905 ) (4,369 )

Income 64 827 891

Balance, December 31, 2011 $ 6,475 $ 12,311 $ 18,786

83PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

A 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 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 plan. The non

- employee directors are also allowed to

participate in this plan.

17. 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 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):

The discount rate is developed by selecting a portfolio of high

- quality corporate bonds appropriate to provide for the projected benefit payments of

the plan. This portfolio is selected from a universe of over 500 Aa

- graded noncallable bonds available in the market as of December 31, 2011, further limited

to those bonds with average yields between the 10th and 90th percentiles. After the bond portfolio is selected, a single rate is determined that equates the

market value of the bonds selected to the discounted value of the plan ’ s benefit payments. Based on the methodology described above, and a selected

portfolio of 20 bonds, the Company selected a discount rate of 4.64% for the postretirement benefit plan.

The December 31, 2011, accumulated postretirement benefit obligation ( “ APBO ” ) was determined using assumed medical care cost trend rates of

7.5%, decreasing one half percent each year to an ultimate rate of 5% in 2016. The January 1, 2011, APBO was determined using assumed medical care cost

trend rates of 8.0%, decreasing one half percent each year to an ultimate rate of 5% in 2016. Other Postretirement Benefits 2011 2010

Change in benefit obligation

Benefit obligation at beginning of period $ 48,891 $ 54,218

Service cost 498 741

Interest cost 2,511 2,970

Plan amendments (2,616 ) (9,476 )

Actuarial (gain) loss (1,867 ) 4,132

Benefits and expenses paid (2,588 ) (3,694 )

Benefit obligation at end of period $ 44,829 $ 48,891

Funded status of plans

Funded status at end of period $ (44,829 ) $ (48,891 )

Amounts recognized in the consolidated balance sheet consist of:

Accrued benefit liability

- current $ (3,218 ) $ (3,758 )

Accrued benefit liability

- noncurrent (41,611 ) (45,133 )

Net amount recognized $ (44,829 ) $ (48,891 )

Key assumptions at end of period

Discount rate 4.64 % 5.47 %

Valuation year medical trend 7.50 % 8.00 %

Ultimate medical trend 5.00 % 5.00 %

Year ultimate medical trend reached 2016 2016

84PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

The amounts in accumulated other comprehensive loss in the consolidated balance sheet, net, that have not been recognized as components of net

periodic benefit cost at December 31, 2011 and January 1, 2011, are as follows (dollars in thousands):

The amount in accumulated other comprehensive loss expected to be recognized as a component of net periodic benefit cost over the next year is

shown below (dollars in thousands):

As the result of a new labor agreement ratified in December 2011, represented manufacturing and distribution center employees in Appleton,

Wisconsin, will not be eligible for post

- Medicare retiree health plan coverage if they retire after August 31, 2014. This change resulted in an estimated

reduction to the year

- end 2011 benefit obligation of $3.5 million.

As of January 1, 2008, the Company implemented a change to the plan options offered to pre

- Medicare salaried retirees, spouses and surviving

spouses by removing HMO designs and offering a qualified high

- deductible health plan. In December 2010, certain other changes to the postretirement

benefit plan were announced. Upon retirement and after COBRA benefits expire, the Company will continue to provide a subsidy toward the premium paid

for pre

- Medicare retiree medical coverage for those full

- time salaried employees hired prior to April 1, 2003, and who retired before July 1, 2011. Beginning in

2012, the Company ’ s contribution will be capped at $200 per person per month until December 31, 2020, or until Medicare eligible, whichever comes first. In

addition, those Medicare

- eligible salaried retirees, spouses and surviving spouses who currently receive benefits from the Company, beginning in 2012, will

receive $100 per month to be used toward individual insurance coverage or other medical

- related expenses. This change resulted in a curtailment gain of $1.5

million in 2010 and a reduction in the year

- end 2010 benefit obligation of $9.5 million.

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

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

Accumulated other comprehensive loss 2011 2010

Net actuarial loss $ (9,502 ) $ (11,760 )

Prior service credit 13,894 13,946

Total $ 4,392 $ 2,186

Amortization of:

Prior service credit and actuarial loss $ 2,663

Other Postretirement Benefits For the

Year Ended

December 31, 2011 For the

Year Ended

January 1, 2011 For the

Year Ended

January 2, 2010

Net periodic benefit cost

Service cost $ 498 $ 741 $ 664

Interest cost 2,511 2,970 2,990

Amortization of prior service cost (2,668 ) (2,151 ) (2,180 )

Amortization of net actuarial loss 391 113

- Curtailment gain

- (1,450)

-

Net periodic benefit cost $ 732 $ 223 $ 1,474

For the

Year Ended

December 31, 2011 For the

Year Ended

January 1, 2011 For the

Year Ended

January 2, 2010

Discount rate 5.47 % 5.70 % 6.40 %

Valuation year medical trend 8.00 % 8.50 % 9.00 %

Ultimate medical trend 5.00 % 5.00 % 5.00 %

Year ultimate medical trend reached 2017 2017 2017

85PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

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

Expected postretirement benefit payments for each of the next five years, and the aggregate from 2017 through 2021, are as follows (dollars in

thousands):

18. LONG

- TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long

- Term Incentive Plan ( “ LTIP ” ). Effective January 3, 2010, the Company

adopted a long

- term restricted stock unit plan ("RSU"). These plans, in accordance with the specific terms of each plan, provide key management

employees, who are in a position to make a significant contribution to the growth and profitability of the Company, the opportunity to be rewarded

for performance that aligns with long

- term shareholder interests. Both plans utilize phantom units. The value of a unit in the LTIP is based on the change in

the fair market value of PDC ’ s common stock under the terms of the employee stock ownership plan (the “ ESOP ” ) between the grant date and the exercise

date. All units granted under the LTIP may be exercised after three full years. Units expire ten years after the grant date. The value of a unit in the RSU is

based on the value of PDC common stock, as determined by the ESOP trustee. All RSUs vest three years after the award date and are paid at vesting. The

cash payment upon vesting is equal to the value of one share of PDC common stock at the most recent valuation date times the number of units granted.

RSU units can be deferred to the Non

- Qualified Excess Plan if the recipient so elects shortly after the units have been granted. Beginning in 2009, recipients

were required to enter into a non

- compete and non

- solicitation agreement in order to receive units which, if violated following the receipt of units, results in

forfeiture of any and all rights to receive payment relating to the units.

The Compensation Committee of the board establishes the number of units granted each year under these plans in accordance with the

Compensation Committee ’ s stated goals and policies. The Compensation Committee has the discretion to use either, or both, plan(s) as appropriate to

attract, motivate and retain key management employees while managing the expense to the Company. During 2011, all units, totaling 770,500 units, were

granted under the LTIP. In 2010, all units were granted under the RSU. Prior to 2010, all units were granted under the LTIP. The units are valued at the most

recent PDC stock price as determined by the semi

- annual ESOP valuation. As of December 31, 2011, the fair market value of one share of PDC common stock

was $15.01.

During 2011, the Company recorded $0.5 million of expense for the LTIP within selling, general and administrative expenses. During 2010, the

Company recorded $0.1 million of expense within selling, general and administrative expenses. There was no expense activity for this plan during 2009 as a

result of a decline in share price. The Company recorded a reduction to compensation expense of $0.1 million in 2009 within selling, general and

administrative expenses. Based on the Company ’ s common stock price as of December 31, 2011, the Company had $0.5 million of unrecognized

compensation expense related to nonvested phantom units granted under the plans. Since the inception of the Plan, 3,374,170 phantom units have been

granted, 961,693 phantom units have been forfeited and 421,410 phantom units have been exercised, leaving an outstanding balance of 1,991,067 phantom

units at December 31, 2011. A summary of 2009

- 2011 activity within these plans is as follows: 1% Increase 1% Decrease

Aggregate impact on service and interest cost $ 59 $ (55 )

Effect on accumulated plan benefit obligation 1,018 (933 )

2012 $ 3,218

2013 3,418

2014 3,494

2015 3,592

2016 3,639

2017 thru 2021 17,842

$ 35,203

86PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

During 2009, 7,220 phantom units were exercised at an appreciation value of approximately $0.1 million. During 2010, 2,100 phantom units were

exercised with a minimal appreciation value. During 2011, 5,540 phantom units were exercised with a minimal appreciation value. As of December 31, 2011, a

liability of approximately $0.5 million is included in the consolidated balance sheet, all of which is classified as long

- term and represents 726,000 unvested

units. As a result of the decline in share price, there is currently no liability for fully vested units as of December 31, 2011 since the current value is below the

grant price.

The Compensation Committee approved an aggregate total for the 2010 year of up to 219,000 units to be granted, of which, 213,000 units were granted

under the RSU. Due to terminations of employment, 10,500 and 7,500 unvested units were forfeited during 2011 and 2010, respectively. A balance of 195,000

RSU units remains as of December 31, 2011. Approximately $1.1 million and $0.8 million of expense, related to this plan, was recorded during 2011 and 2010,

respectively. In 2011, the Compensation Committee elected to grant awards under the LTIP rather than under the RSU plan. A summary of 2010 and 2011

activity within this plan is as follows: Weighted

Average Grant

Unit Price Grant

Units Weighted

Average

Remaining

Contractual

Life (Years) Aggregate

Intrinsic Value

(dollars in

thousands)

Outstanding, January 3, 2009 $ 30.32 1,132,160

Granted 21.35 477,000

Exercised 10.00 (7,220 )

Forfeited or expired 28.40 (56,600 )

Outstanding, January 2, 2010 $ 27.72 1,545,340 7.3 $ 25

Exercisable, January 2, 2010 $ 29.38 754,340 6.0 $ 25

Outstanding, January 2, 2010 $ 27.72 1,545,340

Granted

- -

Exercised 10.00 (2,100 )

Forfeited or expired 27.91 (144,467 )

Outstanding, January 1, 2011 $ 27.73 1,398,773 6.3 $ 16

Exercisable, January 1, 2011 $ 30.49 976,440 5.5 $ 16

Outstanding, January 1, 2011 $ 27.73 1,398,773

Granted 12.87 770,500

Exercised 10.00 (5,540 )

Forfeited or expired 24.14 (172,666 )

Outstanding, December 31, 2011 $ 22.34 1,991,067 6.6 $

-

Exercisable, December 31, 2011 $ 27.87 1,251,067 5.3 $

-

Weighted

Average Grant

Unit Price Grant

Units Weighted Average

Remaining

Contractual

Life (Years) Aggregate

Intrinsic Value

(dollars in

thousands)

Outstanding, January 2, 2010 $

- -

Granted 13.25 213,000

Forfeited or expired 13.09 (7,500)

Outstanding, January 1, 2011 $ 13.26 205,500 2.0 $ (86)

Outstanding, January 1, 2011 $ 13.26 205,500

Forfeited or expired 13.32 (10,500)

Outstanding, December 31, 2011 $ 13.25 195,000 1.0 $ 343

87PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non

- employee directors. Deferred

compensation is in the form of phantom units and is earned over the course of six

- month calendar periods of service beginning January 1 and July 1. The

number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC

common stock as determined by the semi

- annual ESOP valuation. This deferred compensation vests 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 2011,

expense for this plan was approximately $0.3 million. During 2010, expense for this plan was approximately $0.2 million. During 2009, expense for this plan

was approximately $0.1 million.

On February 22, 2012, the Company's board of directors adopted a special retention incentive program designed to retain certain executives and other

employees who are in a position to make significant contribution in identifying, negotiating and closing one or more of the following transactions or series

of transactions: the issuance of equity securities in connection with an acquisition, a merger or business combination with an unrelated entity, the sale of

equity in a private placement or public offering, a sale of all or substantially all of the assets of Appleton or PDC, an exchange of debt securities for equity,

or any combination of the foregoing transactions. In exchange for continued employment through such transactions, the named executives would receive

payments in the event a change of control occurs, as defined in the Long

- Term Incentive Plan, as a result of any of the transactions listed above. Amounts

payable would be as approved by the board of directors.

19. COMMITMENTS AND CONTINGENCIES

COMMITMENTS

The Company is bound by one contractual arrangement, for which, the future obligation to purchase a set quantity is immaterial.

CONTINGENCIES

Lower Fox River

Introduction. Various federal and state government agencies and Native American tribes have asserted claims against Appleton and others with

respect to historic discharges of PCBs into the Lower Fox River in Wisconsin. Carbonless paper containing PCBs was manufactured at what is currently the

Appleton plant from 1954 until 1971. During this period, wastewater containing PCBs was discharged into the Lower Fox River from a publicly

- owned

treatment works, from the Appleton Coated paper mill and from other local industrial facilities. Wastewater from the Appleton plant was processed through

the publicly

- owned treatment works. As a result, there are allegedly eleven million cubic yards of PCB

- contaminated sediment spread over 39 miles of the

Lower Fox River and Green Bay, which is part of Lake Michigan.

The United States Environmental Protection Agency ( “ EPA ” ) published a notice in 1997 that it intended to list the Lower Fox River on the National

Priorities List of Contaminated Sites pursuant to the federal Comprehensive Environmental Response, Compensation, and Liability Act, ( “ CERCLA ” or

“ Superfund ” ). The EPA identified seven potentially responsible parties ( “ PRPs ” ) for PCB contamination in the Lower Fox River, including NCR Corporation

( “ NCR ” ), Appleton, Georgia

- Pacific, P.H. Glatfelter Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation, which is now

CBC Coating, Inc., and U.S. Paper Mills Corp., which is now owned by Sonoco Products Company.

Remedial Action. The EPA and the Wisconsin Department of Natural Resources ( “ DNR ” ) issued two Records of Decision ( “ RODs ” ) in 2003,

estimating the total costs for the Lower Fox River remedial action at approximately $400 million. Other estimates obtained by the PRPs range from a low of

$450 million to as much as $1.6 billion. More recent estimates place the cost to remediate operable units 2

- 5 between $594 million and $900 million.

The EPA issued an administrative order in November 2007, directing the PRPs to implement the remedial action of the Fox River pursuant to which

certain of the PRPs commenced remediation in 2008. Remediation activities are continuing and the PRPs are negotiating to obtain additional funding to

complete the work plan.

88PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

Litigation. As part of the funding effort, NCR and Appleton filed a lawsuit in January 2008 in federal court against various defendants, including

other PRPs and certain municipalities, to require contribution to the cost of cleaning up PCB

- contaminated sediment in the Fox River. In December 2009, the

court granted the defendants ’ motion for summary judgment dismissing the claim. In February 2011, the same court granted the defendants' motion for

summary judgment determining NCR and Appleton are responsible for costs associated with the remedial action and natural resource damages ("NRDs") on

the Fox River to the extent these costs were not reimbursed by insurance. On September 30, 2011, the court clarified its February 2011 ruling indicating the

defendants could recover costs incurred for NRD claims. NCR and Appleton intend to appeal these decisions.

In October 2010, the United States of America ( “ US ” ) and the State of Wisconsin ( “ SOW ” ) filed a lawsuit on behalf of the EPA and the DNR,

respectively, against ten companies (including the seven PRPs identified in 1997) and two municipalities seeking recovery of unreimbursed response costs

and natural resources damages as well as a declaratory judgment that the defendants are liable for future response costs related to the Lower Fox River

( “ Government Case ” ). At the same time, the US and SOW lodged a consent decree with Georgia

- Pacific ( “ GP ” ). Under the consent decree, and in exchange

for a covenant not to sue and statutory contribution protection for portions of the Lower Fox River, GP would stipulate liability for performance of the

required cleanup of a designated portion of the Lower Fox River, waive any objections to the cleanup remedy selected by EPA and DNR and pay $7 million

toward the government ’ s unreimbursed past costs and expected future costs. The court approved the consent decree in April 2011.

In June 2011, the EPA and DNR filed a motion for Preliminary Injunction seeking to expand the scope of work on the Fox River for 2011. The court

denied the motion for Preliminary Injunction on July 5, 2011 and indicated in the decision that it was unlikely that the US could show that Appleton is liable

as a PRP under CERCLA. Appleton filed a motion for summary judgment on July 28, 2011 requesting the court determine that Appleton is not liable as a PRP

under CERCLA and that all claims against Appleton in the Government Case be dismissed with prejudice. The court denied the motion for summary

judgment on December 19, 2011, and Appleton filed a motion for reconsideration on January 10, 2012.

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 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. NCR and Appleton collectively paid $41.5 million for interim restoration and remediation

efforts pursuant to a 2001 consent decree with various governmental agencies (the “ Intergovernmental Parties ” or “ IGP ” ). In addition, NCR and Appleton

collectively paid approximately $750,000 toward interim restoration efforts and the preparation of a progress report pursuant to a 2006 consent decree with

the IGP. NCR and Appleton also paid $2.8 million in 2007 to fund a land acquisition in partial settlement of NRD claims. Neither of the consent decrees nor

the land acquisition constitutes a final settlement or provides protection against future claims; however, NCR and Appleton will receive full credit against

remediation costs and NRD claims for all monies expended.

Appleton ’ s Liability. CERCLA imposes liability on parties responsible, in whole or in part, for the presence of hazardous substances at a site. Under

circumstances prescribed in CERCLA rules, both current and prior owners and operators of a facility may be determined to have liability. 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, long after the use of PCBs in the manufacturing

process was discontinued. Nonetheless, the EPA named both NCR and Appleton as PRPs in connection with remediation of the Lower Fox River. Appleton

maintains the EPA erred in naming Appleton as a PRP as that term is defined in CERCLA. Separately, Appleton is obligated to share defense and liability

costs with NCR as determined by a 2006 arbitration.

The 2000 FWS study offered a preliminary conclusion that discharges from the former NCR properties were responsible for 36% to 52% of the total

PCBs discharged. NCR and Appleton have obtained independent historical and technical analyses which suggest the percentage of PCBs discharged from

the former NCR properties is less than 20% of the total PCBs discharged, and more recent analyses suggest the percentage is only 8% to 10%. These

estimates have not been finalized and are not binding on the PRPs.

89PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

A portion of NCR ’ s and Appleton ’ s potential liability for the Lower Fox River may be joint and several. In the future, if one or more of the other PRPs

were to become insolvent or unable to pay its respective share(s) of the potential liability, NCR and Appleton could be responsible for a portion of its share

(s). Based on legal analyses and ongoing reviews of publicly available financial information, Appleton believes that other PRPs will be required, and have

adequate financial resources, to pay their shares of the remediation and NRD claims for the Lower Fox River.

Appleton's liability could also be affected by the outcome of a trial that commenced in February 2012. At issue is whether NCR can be held

responsible for remediation costs in operable unit 1 of the Lower Fox River unde the theory of arranger liability. While Appleton is not named in this

litigation, if NCR is unsuccessful, Appleton may be required to share in the liability under the 2006 arbitration.

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 NCR ’ s and Appleton ’ s share of liability relative to other PRPs. Although Appleton believes that it has already

paid more than its estimated share of the liability based on the assumptions below, Appleton anticipates it will fund a portion of the cleanup costs and other

spending for 2012. Accordingly, at December 31, 2011, the reserve for Appleton's liability for the Lower Fox River was $46.0 million. Interim legal

determinations may periodically obligate Appleton to fund portions of the cleanup costs to extents greater than Appleton ’ s ultimate share as finally

determined, and in such instances, Appleton may reserve additional amounts (including appropriate reimbursement under its indemnification agreements as

discussed below).

The following assumptions were used in evaluating Appleton ’ s Lower Fox River liability:

Although Appleton believes its recorded environmental liability reflects its best estimate of liabilities associated with the Lower Fox River for 2012,

the government is contesting the planned level of 2012 remediation activities.

AWA Indemnification. Pursuant to two indemnification agreements entered in 2001, Arjo Wiggins Appleton Ltd, now known as Windward

Prospects Ltd ( “ AWA ” ), agreed to indemnify PDC and PDC agreed to indemnify Appleton for costs, expenses and liabilities related to certain governmental

and third

- party environmental claims, which are defined in the agreements as the Fox River Liabilities.

Under the indemnification agreements, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100

million. During 2008, Appleton paid $25 million to satisfy its portion of the Fox River Liabilities not covered by the indemnification agreement with AWA. As

of December 31, 2011, AWA has paid $260.3 million in connection with Fox River Liabilities. At December 31, 2011, PDC's total indemnification receivable

from AWA was $46.0 million, all of which is recorded in other current assets. At December 31, 2011, the total Appleton indemnification receivable from PDC

was $46.0 million, all of which is recorded in other current assets.

In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry

Insurance Company, an affiliate of American International Group, Inc. The insurance policy provided up to $250 million of coverage for Fox River Liabilities,

subject to certain limitations defined in the policy. The insurance policy was held by Arjo Wiggins Appleton Bermuda Ltd ("AWAB"), a special purpose

entity in which the Company is a minority shareholder. An AWA affiliate is the only other shareholder in this entity. The Company determined that this

entity is not a Variable Interest Entity and there is no requirement to include this entity in its consolidated financial results. As of December 31, 2011, there

was no remaining coverage on the policy. • Estimated remaining remediation and administration costs of approximately $400 million for operable units 2

– 5, based on the most recent work

plans;

• Technical analyses contending that discharges from the Appleton plant and the Combined Locks mill represent 8% to 10% of the total PCBs

discharged by the PRPs;

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

with NCR and the arbitration determination; and

• legal fees and other expenses.

90PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment relating to insurance coverage of its environmental

claims involving the Fox River. A final judgment and order was entered in January 2009. The insurers appealed the final judgment. In June 2010, the

Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between the insurers and Appleton. Under the terms of the

indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. During 2010, Appleton

recorded an $8.9 million receivable, representing settlements to be received in excess of amounts reimbursable to AWA, in the Consolidated Balance Sheet

as of January 1, 2011. During 2011, Appleton received $6.2 million of these funds. The remaining receivable is included in other current assets of the

Consolidated Balance Sheet as of December 31, 2011. An $8.9 million environmental expense insurance recovery was also recorded as a separate line item

within operating income on the Consolidated Statement of Operations for the year ended January 1, 2011.

The indemnification agreements negotiated with AWA are designed to ensure that Appleton will not be required to fund any of the indemnified

costs and expenses in relation to the Fox River Liabilities. This arrangement is working as designed and is expected to continue to protect Appleton with

respect to the indemnified costs and expenses, based on Appleton ’ s review of the financial condition of AWA and estimates of Appleton ’ s ultimate

liability. As earlier noted, Appleton's ultimate liability could prove to be significantly larger than the recorded environmental liability and potentially could

exceed the financial capability of AWA. In the event Appleton is unable to secure payment from AWA or its former parent companies, Appleton may be

liable for amounts related to the Lower Fox River and these amounts may be material to Appleton.

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, the Company

believes that it may be necessary to undertake remedial action in the future, although the Company is currently under no obligation to do so. The Company

has not had any discussions or communications with any federal, state or local agencies or authorities regarding remedial action to address PCB

contamination at the West Carrollton mill. The cost for remedial action, which could include installation of a cap, long

- term pumping, treating and/or

monitoring of groundwater and removal of sediment in the Great Miami River, was estimated in 2001 to range up to approximately $10.5 million, with

approximately $3 million in short

- term capital costs and the remainder to be incurred over a period of 30 years. However, costs could exceed this amount if

additional contamination is discovered, if additional remedial action is necessary or if the remedial action costs are more than expected.

Because of the uncertainty surrounding the ultimate course of action for the West Carrollton mill property, the Great Miami River remediation and the

Company ’ s share of these remediation costs, if any, and since the Company is currently under no obligation to undertake remedial action in the future, no

provision has been recorded in its financial statements for estimated remediation costs. In conjunction with the acquisition of PDC by the ESOP in 2001, and

as limited by the terms of the purchase agreement, AWA agreed to indemnify the Company for 50% of all environmental liabilities at the West Carrollton mill

up to $5.0 million and 100% of all such environmental costs exceeding $5.0 million. In addition, the former owners and operators of the West Carrollton mill

may be liable for all or part of the cost of remediation of historic PCB contamination.

91PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

Litigation Settlements

During first quarter 2011, the Company resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1 million,

including legal fees. Prior to resolution, the Company had assessed the potential for liability as less than reasonably possible. However, during a court

ordered pre

- trial mediation, the parties were able to resolve the litigation to the satisfaction of both parties.

During third quarter 2011, the Company received payment of $23.2 million of damages, including interest and net of related fees and litigation

expenses. This was the result of a favorable jury trial verdict, received in 2009, related to litigation commenced by the Company against Andritz BMB AG

and Andritz, Inc. During the time that followed, the defendants ’ attempts to overturn the verdict were unsuccessful. In March 2011, the Wisconsin Court of

Appeals issued a decision unanimously affirming the final judgment. On September 1, 2011, the Wisconsin Supreme Court denied the defendants ’ petition

seeking further review of the matter. This income was recorded in the other expense (income) section of the Consolidated Statements of Operations for the

year ended December 31, 2011.

Other

From time to time, the Company may be subject to various demands, claims, suits or other legal proceedings arising in the ordinary course of

business. A comprehensive insurance program is maintained to provide a measure of financial protection against such matters, though not all such

exposures are, or can be, addressed by insurance. Estimated costs are recorded for such demands, claims, suits or proceedings of this nature when

reasonably determinable. The Company has successfully defended such claims, settling some for amounts which are not material to the business and

obtaining dismissals in others. While the Company will vigorously defend itself and expects to prevail in any similar cases that may be brought against it in

the future, there can be no assurance that it will be successful.

Except as described above, and assuming the Company ’ s expectations regarding defending such demands, claims, suits or other legal or regulatory

proceedings prove accurate, the Company does not believe that any pending or threatened demands, claims, suits or other legal proceedings will have,

individually or in the aggregate, a materially adverse effect on its business, financial condition and results of operations or cash flows.

20. CONSOLIDATED STATEMENTS OF CASH FLOWS

Supplemental cash flow disclosures (dollars in thousands):

21. 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 7% and 6% of net sales in 2011, 8% and 6% of net sales in 2010 and 9% and 5% of net sales in 2009. For the

Year Ended

December 31, 2011 For the

Year Ended

January 1, 2011 For the

Year Ended

January 2, 2010

Cash paid during the period for:

Interest $ 57,377 $ 63,143 $ 47,631

Income taxes 442 387 137

Cash received during the period for:

Income tax refunds $ 19 $ 1 $ 480

92PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

The Company ’ s five largest customers in the carbonless papers segment accounted for approximately 32% of carbonless papers net sales in 2011 and

2010 and 37% of carbonless papers net sales in 2009. The five largest customers in the thermal papers segment accounted for approximately 47% of thermal

papers net sales in 2011, 43% of thermal papers net sales in 2010 and 41% of thermal papers net sales in 2009. The largest external customer in the Encapsys

segment accounted for approximately 59% of Encapsys net sales (which include internal sales to the Company's carbonless papers segment) in 2011, 52% in

2010 and 28% in 2009.

Base stock is a key raw material in the Company ’ s business. In 2011, the Company purchased approximately $114 million of base stock from external

suppliers. Approximately $17 million of this base stock was purchased for the production of carbonless products with approximately 86% purchased from

one external supplier. The Company purchased approximately $95 million of base stock for the production of thermal products with approximately 50%

purchased from a single external supplier. During 2010, the Company purchased approximately $138 million of base stock from external suppliers.

Approximately $33 million of this base stock was purchased for the production of carbonless products with approximately 42% purchased from one external

supplier. The Company purchased approximately $103 million of base stock for the production of thermal products with approximately 42% purchased from a

single external supplier. During 2009, the Company purchased approximately $99 million of base stock from external suppliers. Approximately $26 million of

this base stock was purchased for the production of carbonless products with approximately 77% purchased from one external supplier. The Company

purchased approximately $56 million of base stock for the production of thermal products with approximately 54% purchased from a single external supplier.

22. 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 in 2001 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 payroll deferrals made by employees. The Company also intends to fund a significant part of its matching contribution commitment with

common stock of PDC. Matching contributions charged to expense amounted to $2.7 million in 2011, $3.2 million in 2010 and $4.0 million in 2009.

Approximately $0.1 million and $0.3 million was recorded in discontinued operations in 2010 and 2009, respectively.

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 (prior to the February 2010 voluntary refinancing) and indentures governing the second lien notes and senior subordinated notes

(prior to the September 2009 amendment) 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 2011, 2010

and 2009, the Company exercised its right to satisfy requests for distributions to former participants using five equal annual installments.

In 2011, the ESOP trustee purchased 213,502 shares of PDC redeemable common stock for an aggregate price of $2.9 million from pre

- tax payroll

deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted

in an additional 202,715 shares of redeemable common stock being issued. As a result of hardship withdrawals, diversification elections, employee

terminations and employee loan requests, 916,621 shares of PDC redeemable common stock were repurchased during 2011 at an aggregate price of $12.4

million.

93PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

In 2010, the ESOP trustee purchased 295,990 shares of PDC redeemable common stock for an aggregate price of $3.6 million from pre

- tax payroll

deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted

in an additional 266,013 shares of redeemable common stock being issued. As a result of hardship withdrawals, diversification elections, employee

terminations and employee loan requests, 945,890 shares of PDC redeemable common stock were repurchased during 2010 at an aggregate price of $11.8

million.

In 2009, the ESOP trustee purchased 265,330 shares of PDC redeemable common stock for an aggregate price of $4.1 million from pre

- tax payroll

deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted

in an additional 257,272 shares of redeemable common stock being issued. As a result of hardship withdrawals, diversification elections, employee

terminations and employee loan requests, 1,069,397 shares of PDC redeemable common stock were repurchased during 2009 at an aggregate price of $21.2

million.

In accordance with the ASC 480, “ Distinguishing Liabilities from Equity, ” redeemable equity securities are required to be accreted so the amount in

the balance sheet reflects the estimated amount redeemable at the earliest redemption date based upon the redemption value at each period end. 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 31, 2011. 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. Excluding the year

- end

2011, the June 30, 2011, and year

- end 2010 stock valuations which resulted in increases to the price of PDC common stock, prior stock valuations resulted in

decreases to the stock price. The impact of these reductions caused the Company to reduce redeemable common stock accretion by $5.7 million for the year

ended December 31, 2011. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $138

million has been determined. The redeemable common stock recorded book value as of December 31, 2011, was $98 million. Since the inception of the ESOP,

approximately $42 million of accretion has been recorded. 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.

23. UNAUDITED QUARTERLY FINANCIAL DATA

Unaudited quarterly financial data for 2011 includes the following (dollars in thousands):

At the end of first quarter 2011, the Company resolved litigation initiated by a supplier over contract terms and recorded a charge to income of $3.1

million, including legal fees. During third quarter 2011, the Company received payment of $23.2 million of damages, including interest and net of related fees

and litigation expenses from a litigation settlement. For the Three

Months Ended

April 3, 2011 For the Three

Months Ended

July 3, 2011 For the Three

Months Ended

October 2, 2011 For the Three

Months Ended

December 31, 2011 For the Year

Ended

December 31, 2011

Net sales $ 218,015 $ 216,586 $ 217,104 $ 2 0 5,624 $ 857,329

Gross profit 46,851 42,426 43,943 36,585 169

, 805

Operating income 10,298 10,736 11,199 3,876 36

, 109

Net (loss) income $ (5,197 ) $ (3,281 ) $ 18,026 $ (11,660 ) $ (2

, 112)

94PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

Unaudited quarterly financial data for 2010 includes the following (dollars in thousands):

The following narrative relates to the quarterly presentation of loss from continuing operations. During 2010, an $8.9 million environmental expense

insurance recovery was recorded, $8.2 million in the first quarter and $0.7 million in the fourth quarter. The Company recorded debt extinguishment expense

of $7.0 million during 2010. Of this, $5.5 million, recorded in the first quarter of 2010, was the result of the Company ’ s voluntary refinancing of its senior

secured credit facilities. Another $1.5 million net loss on debt extinguishment, recorded in the fourth quarter of 2010, was related to the early voluntary

repayment in full and termination of the secured term note payable, as amended.

24. SEGMENT INFORMATION

The Company ’ s reportable segments are as follows: carbonless papers, thermal papers and Encapsys. 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, interest income, interest expense, debt extinguishment expense (income), foreign exchange loss (gain), recovery from litigation and other income.

The carbonless papers segment, which includes carbonless and security paper products, is the largest component of the Company ’ s paper business.

Carbonless paper is used to make multipart business forms such as invoices and purchase orders. The Company produces coated products for point

- of

- sale

displays and other design and print applications and offer custom coating solutions. Carbonless products are sold to converters, business forms printers

and merchant distributors who stock and sell carbonless paper to printers. The Company produces security papers with features that resist forgery,

tampering and counterfeiting. The Company's portfolio of products incorporates security technologies, including watermarks, taggants, reactive chemicals,

embedded threads and fibers and machine

- readable technologies, to serve global markets. The Company focuses on financial and identity documents

for business and government such as checks, visas, automobile titles and birth certificates.

The thermal papers segment focuses on the development of substrates for the transaction and item identification markets. Thermal paper is used in

four principal end markets: (1) point

- of

- sale products for retail receipts and coupons; (2) labels for shipping, warehousing, medical and clean

- room

applications; (3) tag and tickets for airline and baggage applications, event and transportation tickets and lottery and gaming applications; and (4) printer,

calculator and chart products for engineering, industrial and medical diagnostic charts. 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.

The Encapsys segment discovers, develops and manufactures microencapsulation solutions for external partner companies and for the Company ’ s

carbonless papers segment. Microencapsulation is the process of putting a microscopic wall around a core substance. The Company helped NCR produce

the first commercial application for microencapsulation in 1954 with the introduction of carbonless paper. Since then, the Company researchers have

developed the art and science of microencapsulation and are working with potential partners in industries as diverse as agriculture, paints and coatings,

food, pharmaceuticals, paper, textiles, personal and household care, adhesives, and oil and gas. The Encapsys segment leverages the Company ’ s extensive

technical knowledge and experience with microencapsulation and uses an open innovation process with partner customers to develop successful technical

solutions for those companies. For the Three

Months Ended

April 4, 2010 For the Three

Months Ended

July 4, 2010 For the Three

Months Ended

October 3, 2010 For the Three

Months Ended

January 1, 2011 For the Year

Ended

January 1, 2011

Net sales $ 210,008 $ 220,784 $ 214,870 $ 204,222 $ 849,884

Gross profit 39,723 37,419 47,759 40,495 165,396

Operating income 13,091 2,101 13,115 8,732 37,039

Loss from continuing operations (8,999 ) (16,278 ) (2,265) (7,621 ) (35,163)

Income (loss) from discontinued

operations, net of income taxes 1,552 1,302 814 (169 ) 3,499

Net loss $ (7,447 ) $ (14,976 ) $ (1,451) $ (7,790 ) $ (31,664)

95PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net

sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in

thousands):

During the year ended December 31, 2011, the Company recorded a $3.1 million litigation settlement within unallocated corporate charges.

During the year ended January 1, 2011, the Company recorded an $8.9 million environmental expense insurance recovery within unallocated corporate

charges.

During the year ended January 2, 2010, the Company recorded a $17.7 million alternative fuels tax credit as a reduction to cost of sales, all of which

was allocated to carbonless papers. Also during the year ended January 2, 2010, the Company recorded $4.3 million of costs, within unallocated corporate

charges, associated with the debt

- for

- debt exchange.

Revenues from sales in the U.S. were $576.7 million in 2011, $579.5 million in 2010 and $546.0 million in 2009. Revenues from sales to customers in

foreign countries were $280.6 million in 2011, $270.4 million in 2010 and $215.8 million in 2009. Substantially all long

- lived assets were located in the U.S. as of

December 31, 2011, January 1, 2011, and January 2, 2010. For the Year

Ended

December 31, 2011 For the Year

Ended

January 1, 2011 For the Year

Ended

January 2, 2010

Net sales

Carbonless papers $ 453,007 $ 479,058 $ 464,343

Thermal papers 370,832 341,776 281,146

823,839 820,834 745,489

Encapsys 54,733 52,250 40,459

Intersegment (A) (21,243 ) (23,200 ) (24,141 )

Total $ 857,329 $ 849,884 $ 761,807

Operating income (loss)

Carbonless papers $ 23,676 $ 30,474 $ 49,143

Thermal papers 14,975 (2,261 ) (10,911 )

38,651 28,213 38,232

Encapsys 11,448 10,075 2,704

Unallocated corporate charges (10,710 ) 2,296 (7,179 )

Intersegment (A) (3,280 ) (3,545 ) (3,649 )

Total $ 36,109 $ 37,039 $ 30,108

Depreciation and amortization

Carbonless papers $ 26,114 $ 27,377 $ 33,139

Thermal papers 18,454 19,702 20,044

44,568 47,079 53,183

Encapsys 3,898 2,455 2,959

Unallocated corporate charges 15 0 246 318

Total $ 48,616 $ 49,780 $ 56,460

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

production of carbonless papers.

96PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

25. ALTERNATIVE FUELS TAX CREDIT

The U.S. Internal Revenue Code provided a tax credit for companies that used alternative fuel mixtures to produce energy to operate their businesses.

The credit, equal to $0.50 per gallon of alternative fuel contained in the mixture, was refundable to the taxpayer. In February 2009, the Company began mixing

black liquor with diesel fuel and using the mixture at its mill in Roaring Spring, Pennsylvania. The Company applied to the Internal Revenue Service to be

registered as an alternative fuel mixer and received its registration in May 2009. As of January 2, 2010, the Company had filed for excise tax refunds totaling

$17.2 million and accrued $0.5 million for eligible alternative fuel usage through January 2, 2010. Accordingly, the Consolidated Statement of Operations for

the year ended January 2, 2010 included a $17.7 million tax credit as a reduction to cost of sales. Expenses related to this excise tax refund totaled $0.2 million

for the year ended January 2, 2010. As of March 1, 2010, the entire $17.7 million had been received in cash from the Internal Revenue Service. This tax credit

expired on December 31, 2009.

26. GUARANTOR FINANCIAL INFORMATION

Appleton (the “ Issuer ” ) has issued senior subordinated notes, as amended, which have been guaranteed by PDC (the “ Parent Guarantor ” ), as well as

by C&H (prior to its December 18, 2009 sale), APC (prior to its July 22, 2010 sale), Rose Holdings Limited and NEX (prior to its July 22, 2010 sale), each of

which was/is a 100%

- owned subsidiary of Appleton (the “ Subsidiary Guarantors ” ).

Presented below is condensed consolidating financial information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and a 100%

- owned

non

- guarantor subsidiary (the “ Non

- Guarantor Subsidiary ” ) as of December 31, 2011 and January 1, 2011, and for the years ended December 31, 2011,

January 1, 2011, and January 2, 2010. This financial information should be read in conjunction with the consolidated financial statements and other notes

related thereto.

The 2010 Condensed Consolidating Balance Sheet and the 2010 and 2009 Condensed Consolidating Statements of Operations reflect the correction

of an error relating to the classification of intercompany debt and related interest income and expense. Intercompany debt of $297.6 million was corrected

from due to affiliated companies to a reduction to investment in subsidiaries on the Parent Guarantor and $297.6 million was corrected from due from parent

to redeemable common stock, common stock, paid

- in capital, due from parent, accumulated deficit and accumulated other comprehensive loss on the

Issuer. In 2010, $13.3 million was removed from interest expense and loss (income) in equity investments on the Parent Guarantor and $13.3 million was

removed from interest income on the Issuer. In 2009, $12.6 million was removed from interest expense and loss in equity investments on the Parent Guarantor

and $12.6 million was removed from interest income on the Issuer. In 2010, cash flows from operations and financing activities were understated on the

Parent and overstated on the Issuer by $13.3 million. In 2009 cash flows from operations and financing activities were understated on the Parent and

overstated on the Issuer by $12.6 million. These errors had no impact on the consolidated column presented in the preceding tables. Further, the errors had

no impact on the combined results, cash flows or balance sheet of the Parent Guarantor, Issuer and Subsidiary Guarantors after considering

eliminations. The quarterly information for 2011, to be presented in the quarterly Form 10

- Q for 2012, will be corrected when filed.

97The first lien notes and the second lien notes, as amended, place restrictions on the subsidiaries of the Issuer that would limit dividend distributions

by these subsidiaries.

98PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

DECEMBER 31, 2011

(dollars in thousands)

Parent

Guarantor Issuer Subsidiary

Guarantors Non

- Guarantor

Subsidiary Eliminations Consolidated

ASSETS

Current assets

Cash and cash equivalents $

- $ 6,688 $

- $ 553 $

- $ 7,241

Accounts receivable, net

- 85,795

- 4,544

- 9 0 ,339

Inventories

- 101,154

- 1,373

- 1 0 2,527

Due from parent

- 46,000

- - (46,000 )

-

Other current assets 46,000 8,675

- 49

- 54,724

Total current assets 46,000 248,312

- 6,519 (46,000 ) 254,831

Property, plant and equipment, net

- 324,651

- 14

- 324,665

Investment in subsidiaries (189,949 ) 13,713

- - 176,236

-

Other assets 12 62,315

- 95

- 62,422

Total assets $ (143,937 ) $ 648,991 $

- $ 6,628 $ 130,236 $ 641,918

LIABILITIES, REDEEMABLE COMMON STOCK,

COMMON STOCK, PAID

- IN CAPITAL, DUE FROM

PARENT, ACCUMULATED DEFICIT AND

ACCUMULATED OTHER COMPREHENSIVE LOSS

Current liabilities

Current portion of long

- term debt $

- $ 1,256 $

- $

- $

- $ 1,256

Accounts payable

- 51,694

- 72

- 51,766

Due to (from) parent and affiliated

companies 46,000 9,714

- (9,714 ) (46,000 )

-

Other accrued liabilities

- 91,599

- 2,456

- 94,055

Total current liabilities 46,000 154,263

- (7,186 ) (46,000 ) 147,077

Long

- term debt

- 510,533

- - - 51 0 ,533

Other long

- term liabilities

- 174,144

- 1 0 1

- 174,245

Redeemable common stock, common stock,

paid

- in capital, due from parent,

accumulated deficit and accumulated

other comprehensive loss (189,937 ) (189,949 )

- 13,713 176,236 (189,937 )

Total liabilities, redeemable common

stock, common stock, paid

- in capital,

due from parent, accumulated deficit

and accumulated other

comprehensive loss $ (143,937 ) $ 648,991 $

- $ 6,628 $ 130,236 $ 641,918

99PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

JANUARY 1, 2011

(dollars in thousands)

Parent

Guarantor Issuer Subsidiary

Guarantors Non

- Guarantor

Subsidiary Eliminations Consolidated

ASSETS

Current assets

Cash and cash equivalents $

- $ 3,399 $

- $ 373 $

- $ 3,772

Accounts receivable, net

- 85,988 101 7,285

- 93,374

Inventories

- 107,908

- 2,124

- 110,032

Due from parent

- 20,580

- - (20,580 )

-

Other current assets 20,580 21,364

- 48

- 41,992

Total current assets 20,580 239,239 101 9,830 (20,580 ) 249,170

Property, plant and equipment, net

- 354,597

- 4

- 354,601

Investment in subsidiaries (136,003 ) 13,462

- - 122

, 541

-

Other assets 12 73,087

- 129

- 73,228

Total assets $ (115

, 411 ) $ 680,385 $ 101 $ 9,963 $ 101 ,961 $ 676,999

LIABILITIES, REDEEMABLE COMMON STOCK,

COMMON STOCK, PAID

- IN CAPITAL, DUE FROM

PARENT, ACCUMULATED DEFICIT AND

ACCUMULATED OTHER COMPREHENSIVE LOSS

Current liabilities

Current portion of long

- term debt $

- $ 18,694 $

- $

- $

- $ 18,694

Accounts payable

- 48,608

- 43

- 48,651

Due to (from) parent and affiliated

companies 20,580 6,102 101 (6,203 ) (20,580 )

-

Other accrued liabilities

- 63,524

- 2,558

- 66,082

Total current liabilities 20,580 136 ,928 101 (3,602 ) (20,580 ) 133,427

Long

- term debt

- 540,131

- - - 540,131

Other long

- term liabilities

- 139,329

- 103

- 139,432

Redeemable common stock, common stock,

paid

- in capital, due from parent,

accumulated deficit and accumulated

other comprehensive loss (135,991 ) (136

, 003 )

- 13,462 122

, 541 (135,991 )

Total liabilities, redeemable common

stock, common stock, paid

- in capital,

due from parent, accumulated deficit

and accumulated other

comprehensive loss $ (115,411 ) $ 680,385 $ 101 $ 9,963 $ 110 ,96 1 $ 676,999

100PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR DECEMBER 31, 2011

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Net sales $

- $ 854,00 0 $

- $ 51,119 $ (47,790 ) $ 857,329

Cost of sales

- 687, 0 76

- 48,560 (48,112 ) 687,524

Gross profit

- 166,924

- 2,559 322 169,805

Selling, general and administrative

expenses

- 128,4 0 4

- 2,17 0

- 130,574

Litigation settlement, net

- 3,122

- - - 3,122

Operating income

- 35,398

- 389 322 36,109

Interest expense

- 61,677

- - (347 ) 61,330

Interest income

- (355 )

- (347 ) 347 (355 )

Loss (income) in equity investments 2,112 (571 )

- - (1,541 )

- Other (income) loss

- (23,607 )

- 275 1 (23,331 )

(Loss) income before income taxes (2,112 ) (1,746 )

- 461 1,862 (1,535 )

Provision for income taxes

- 366

- 211

- 577

Net (loss) income $ (2,112 ) $ (2,112 ) $

- $ 25 0 $ 1,862 $ (2,112 )

101PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR JANUARY 1, 2011

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Net sales $

- $ 847,623 $

- $ 47,867 $ (45,606 ) $ 849,884

Cost of sales

- 684,381

- 45,771 (45,664 ) 684,488

Gross profit

- 163,242

- 2,096 58 165,396

Selling, general and administrative

expenses

- 135,434

- 1,870

- 137,304

Environmental expense insurance recovery

- (8,947 )

- - - (8,947 )

Operating income

- 36,755

- 226 58 37,039

Interest expense

- 66,190

- - (418 ) 65,772

Debt extinguishment expense, net

- 7,010

- - - 7,010

Interest income

- (326 )

- (419 ) 418 (327 )

Loss in equity investments 31

, 664 24,591

- - (56,255 )

- Other loss (income)

- 230

- (664 ) 5 (429 )

(Loss) income from continuing operations

before income taxes (31,664 ) (60,940 )

- 1,309 56,308 (34,987 )

Provision for income taxes

- 20

- 156

- 176

(Loss) income from continuing operations (31,664 ) (60,960 )

- 1,153 56,308 (35,163 )

Income (loss) from discontinued

operations, net of income taxes

- 29,296 (25,797 )

- - 3,499

Net (loss) income $ (31,664 ) $ (31

, 664 ) $ (25,797 ) $ 1,153 $ 56,308 $ (31,664 )

102PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE YEAR JANUARY 2, 2010

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Net sales $

- $ 759,779 $

- $ 45,240 $ (43,212 ) $ 761,807

Cost of sales

- 602,994

- 43,701 (43,448 ) 603,247

Gross profit

- 156,785

- 1,539 236 158,560

Selling, general and administrative

expenses

- 126,872

- 1,580

- 128,452

Operating income (loss)

- 29,913

- (41 ) 236 30,108

Interest expense

- 51,291 65

- (65 ) 51,291

Debt extinguishment income, net

- (42,602 )

- - - (42,602 )

Interest income

- (400 ) (65 ) (2 ) 65 (402 )

(Income) loss in equity investments (23

, 208 ) 11,486

- - 11,722

-

Other income

- (1,018 )

- (1,633 ) 325 (2,326 )

Income from continuing operations before

income taxes 23,208 11

, 156

- 1,594 (11,811 ) 24,147

Provision for income taxes

- 282

- 51

- 333

Income from continuing operations 23,208 10

, 874

- 1,543 (11,811 ) 23,814

Income (loss) from discontinued

operations, net of income taxes

- 12,334 (12,940 )

- - (606 )

Net income (loss) $ 23,208 $ 23

, 208 $ (12,940 ) $ 1,543 $ (11,811 ) $ 23,208

103PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2011

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Cash flows from operating activities:

Net (loss) income $ (2,112 ) $ (2,112 ) $

- $ 25 0 $ 1,862 $ (2

, 112 )

Adjustments to reconcile net (loss) income

to net cash (used) provided by operating

activities:

Depreciation and amortization

- 48

, 612

- 4

- 48,616

Other

- 6

, 634

- 275

- 6

, 909

Change in assets and liabilities, net (20,578 ) 34,461 101 3,176 (1,862 ) 15,298

Net cash (used) provided by operating

activities (22 ,690 ) 87 ,595 101 3,705

- 68

, 711

Cash flows from investing activities:

Proceeds from sale of equipment

- 6

- - - 6

Proceeds from sale of Films

- 2 ,000

- - - 2 ,000

Insurance proceeds from involuntary

conversion of equipment

- 1,374

- - - 1,374

Additions to property, plant and equipment

- (15

, 833 )

- (14 )

- (15

, 847 )

- Net cash used by investing activities

- (12

, 453 )

- (14 )

- (12

, 467 )

Cash flows from financing activities:

Payments of senior subordinated notes

payable

- (17

, 491 )

- - - (17

, 491 )

Payments relating to capital lease

obligation

- (47 )

- - - (47 )

Proceeds from revolving line of credit

- 202

, 800

- - - 202

, 800

Payments of revolving line of credit

- (232

, 100 )

- - - (232

, 100 )

Payments of State of Ohio loan

- (1,203 )

- - - (1,203 )

Due to parent and affiliated companies, net 32 ,166 (28,554 ) (101 ) (3,511 )

- -

Proceeds from issuance of redeemable

common stock 2,875

- - - - 2

, 875

Payments to redeem common stock (12

, 351 )

- - - - (12

, 351 )

Increase in cash overdraft

- 4

, 749

- - - 4

, 749

Net cash provided (used) by financing

activities 22,690 (71,846 ) (101 ) (3,511 )

- (52

, 768 )

Effect of foreign exchange rate changes on

cash and cash equivalents

- (7 )

- - - (7 )

Change in cash and cash equivalents

- 3,289

- 18 0

- 3

, 469

Cash and cash equivalents at beginning of

period

- 3

, 399

- 373

- 3

, 772

Cash and cash equivalents at end of period $

- $ 6

, 688 $

- $ 553 $

- $ 7,241

104PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 1, 2011

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Cash flows from operating activities:

Net (loss) income $ (31,664 ) $ (31

, 664 ) $ (25,797 ) $ 1,153 $ 56

, 308 $ (31,664 )

Adjustments to reconcile net (loss) income

to net cash provided (used) by operating

activities:

Depreciation and amortization

- 49,755 1,726 5

- 51,486

Other

- 4,468

- (664 )

- 3,804

Change in assets and liabilities, net 89,984 (79

, 208 ) (7,264 ) (815 ) (56

, 308 ) (53,611 )

Net cash provided (used) by operating

activities 58,320 (56

, 649 ) (31,335 ) (321 )

- (29,985 )

Cash flows from investing activities:

Proceeds from sale of equipment

- 208

- - - 208

Net change in cash due to sale of Films

- 56,000

- - - 56,000

Insurance proceeds from involuntary

conversion of equipment

- 1,029

- - - 1,029

Additions to property, plant and equipment

- (17,249 ) (590 )

- - (17,839 )

- Net cash provided (used) by investing

activities

- 39,988 (590 )

- - 39,398

Cash flows from financing activities:

Payments of senior secured notes payable

- (211,225 )

- - - (211,225 )

Proceeds from senior secured first lien

notes payable

- 299,007

- - - 299,007

Debt acquisition costs

- (10,847 )

- - - (10,847 )

Payments relating to capital lease

obligation

- (721 )

- - - (721 )

Proceeds from old revolving line of credit

- 21,350

- - - 21,350

Payments of old revolving line of credit

- (109,575 )

- - - (109,575 )

Proceeds from new revolving line of credit

- 316,993

- - - 316,993

Payments of new revolving line of credit (287,693 )

- - - (287,693 )

Payments of State of Ohio loan

- (1,151 )

- - - (1,151 )

Payments of secured financing

- (20,905 )

- - - (20,905 )

Due to parent and affiliated companies, net (50,070 ) 18,25 3 31,924 (107 )

- -

Proceeds from issuance of redeemable

common stock 3,561

- - - - 3,561

Payments to redeem common stock (11,811 )

- - - - (11,811 )

Decrease in cash overdraft

- (2,628 )

- - - (2,628 )

Net cash (used) provided by financing

activities (58,320 ) 10

, 858 31,924 (107 )

- (15,645 )

Effect of foreign exchange rate changes on

cash and cash equivalents

- 41

- - - 41

Change in cash and cash equivalents

- (5,762 ) (1 ) (428 )

- (6,191 )

Cash and cash equivalents at beginning of

period

- 9,161 1 801

- 9,963

Cash and cash equivalents at end of period $

- $ 3,399 $

- $ 373 $

- $ 3,772

105PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

- (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED JANUARY 2, 2010

(dollars in thousands)

Parent Subsidiary Non

- Guarantor

Guarantor Issuer Guarantors Subsidiary Eliminations Consolidated

Cash flows from operating activities:

Net income (loss) $ 23,208 $ 23

, 208 $ (12,940 ) $ 1,543 $ (11

, 811 ) $ 23,208

Adjustments to reconcile net income (loss)

to net cash provided (used) by operating

activities:

Depreciation and amortization

- 56,456 5,572 6

- 62,034

Impairment of continuing operations

- - 6,341

- - 6,341

Other

- (35,780 )

- (1,633 )

- (37,413 )

Change in assets and liabilities, net 57,086 (66,645 ) 2,728 1,765 11

, 811 6,745

Net cash provided (used) by operating

activities 80,294 (22 ,761 ) 1,701 1,681

- 60,915

Cash flows from investing activities:

Proceeds from sale of equipment

- 27

- - - 27

Net change in cash due to sale of C&H

Packaging, Inc.

- 16,875

- - - 16,875

Additions to property, plant and equipment

- (22,851 ) (1,705 )

- - (24,556 )

Net cash used by investing activities

- (5,949 ) (1,705 )

- - (7,654 )

Cash flows from financing activities:

Payments of senior secured notes payable

- (10,400 )

- - - (10,400 )

Payments of senior subordinated notes

payable

- (1,687 )

- - - (1,687 )

Debt acquisition costs

- (8,642 )

- - - (8,642 )

Payments relating to capital lease

obligation

- (731 )

- - - (731 )

Proceeds from old revolving line of credit

- 254,201

- - - 254,201

Payments of old revolving line of credit

- (249,710 )

- - - (249,710 )

Proceeds from State of Ohio loan

- 3,000

- - - 3,000

Payments of State of Ohio loan

- (958 )

- - - (958 )

Payments of secured financing

- (2,120 )

- - - (2,120 )

Due to parent and affiliated companies, net (63

, 267 ) 66, 211 (60 ) (2,884 )

- -

Proceeds from issuance of redeemable

common stock 4,135

- - - - 4,135

Payments to redeem common stock (21,162 )

- - - - (21,162 )

Decrease in cash overdraft

- (13,717 )

- - - (13,717 )

Net cash (used) provided by financing

activities (80,294 ) 35, 447 (60 ) (2,884 )

- (47,791 )

Effect of foreign exchange rate changes on

cash and cash equivalents

- 313

- - - 313

Change in cash and cash equivalents

- 7,050 (64 ) (1,203 )

- 5,783

Cash and cash equivalents at beginning of

period

- 2,111 65 2,004

- 4,180

Cash and cash equivalents at end of period $

- $ 9,161 $ 1 $ 801 $

- $ 9,963

106None.

Paperweight Development Corp. and Subsidiaries

Disclosure Controls and Procedures

PDC maintains 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 principal executive officer and principal financial officer of both 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

PDC ’ s management is 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 its management, including the Chief Executive Officer and Chief Financial Officer, PDC conducted

an assessment of the effectiveness of its internal control over financial reporting as of December 31, 2011. 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 the internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of PDC ’ s registered public accounting firm regarding internal control over financial

reporting. Management ’ s report was not subject to attestation by PDC ’ s registered public accounting firm pursuant to temporary rules of the Securities and

Exchange Commission that permit PDC 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 quarter that have materially affected, or are reasonably likely to materially affect, the registrants ’ internal

control over financial reporting.

Appleton Papers Inc. and Subsidiaries

Disclosure Controls and Procedures

Appleton maintains 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 principal executive officer and principal financial officer of both 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 ’ s management is 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

107Because 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 its management, including the Chief Executive Officer and Chief Financial Officer, Appleton

conducted an assessment of the effectiveness of its internal control over financial reporting as of December 31, 2011. 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 the internal control over financial reporting was effective as of December 31, 2011.

This annual report does not include an attestation report of Appleton ’ s registered public accounting firm regarding internal control over financial

reporting. Management ’ s report was not subject to attestation by Appleton ’ s registered public accounting firm pursuant to temporary rules of the Securities

and Exchange Commission that permit Appleton 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 quarter that have materially affected, or are reasonably likely to materially affect, the registrants ’ internal

control over financial reporting.

None. Item 9B. Other Information

108PART III

Item 10. Directors, Executive Officers and Corporate Governance

The following table presents information as of March 23, 2012, regarding the executive officers and directors of Appleton and PDC.

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. Mr. Richards has also served as a director

for Neenah Foundry Company since August 2010. Prior to joining the Company, 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. Mr. Richards' extensive business and management experience as division President of a global producer of engineered

products and services, as well as his leadership experience in this position and as a director of a large North American supplier of municipal castings, and

his graduate degree in business, led to the conclusion that he should serve as a director of Appleton and PDC.

Stephen P. Carter

. Mr. Carter joined Appleton and PDC as a Director in July 2004. Mr. Carter is currently a principal in Ingenium Aerospace LLC, a

consultant and a director of Blackhawk Bancorp., Inc., a publicly held bank holding company and a director of Hollister, Incorporated, a privately held

medical device company. Mr. Carter has been a principal in Ingenium Aerospace LLC since March 2010, a director of Blackhawk Bancorp, Inc. since 2003,

and a director of Hollister, Incorporated since 2009. Mr. Carter retired as the Executive Vice President, Chief Financial Officer and Treasurer for Woodward,

Inc. 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. Mr. Carter's financial background as a certified public accountant, a consultant and director of a bank holding company and as the former

Executive Vice President, Chief Financial Officer and Treasurer for a large industrial company, as well as his leadership experience in these positions and as a

director of a medical device company, led to the conclusion that he should serve as a director of Appleton and PDC. Name Age Position

Mark R. Richards 52 Chairman, President, Chief Executive Officer and a Director of Appleton, and Chairman, President,

Chief Executive Officer and a Director of PDC

Stephen P. Carter 60 Director of Appleton and PDC

Terry M. Murphy 63 Director of Appleton and PDC

Andrew F. Reardon 66 Director of Appleton and PDC

Mark A. Suwyn 69 Director of Appleton and PDC

Kathi P. Seifert 62 Director of Appleton and PDC

George W. Wurtz 55 Director of Appleton and PDC

Kerry S. Arent 51 Vice President Human Resources of Appleton

Thomas J. Ferree 54 Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton, and Senior Vice

President Finance, Chief Financial Officer and Treasurer of PDC

Jeffrey J. Fletcher 59 Vice President, Controller and Assistant Treasurer of Appleton, and Vice President, Controller

and Assistant Treasurer of PDC

Kent E. Willetts 54 Senior Vice President of Appleton

109Terry M. Murphy

. Mr. Murphy joined Appleton and PDC as a Director in June 2007. Mr. Murphy is currently a director of Hagerty, LLC, a specialty

insurance company, and has held this position since July 2010. Mr. Murphy is a member of the Board of Trustees of Carroll University located in Waukesha,

Wisconsin, and has held this position since May 2007. Mr. Murphy was Executive Vice President and Chief Financial Officer of A.O. Smith from the time he

joined the company in 2006 until his retirement on May 1, 2011. 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. Mr. 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 Doctor degree from Seton Hall University School of Law in 1980 and is a certified public accountant. Mr. Murphy's financial background as a

certified public accountant, former Senior Vice President and Chief Financial Officer for a large building products manufacturing company, and former

Executive Vice President and Chief Financial Officer for a large diversified manufacturing company, as well as his leadership experience as an executive and

director, and his graduate degree in business and degree in law, led to the conclusion that he should serve as a director of Appleton and PDC.

Andrew F. Reardon

. Mr. Reardon joined Appleton and PDC as a Director in June 2007. Mr. Reardon retired in November 2008 as the Chairman and

Chief Executive Officer of TTX Company, positions he held since June 1, 2008. Prior to June 1, 2008, he was the President and Chief Executive Officer of TTX

Company, positions he held since 2001. He is a principal in the law firm of Reardon & Chasar, L.P.A., located in Cincinnati, Ohio, engaged in business and

transportation law and representation before legislative bodies. 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 President of the company in 2000. TTX is a large supplier of leased railcars in North

America. 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. Mr. Reardon's business and legal experience

as a principal in a law firm, consultant and former Chairman and Chief Executive Officer and Vice President of Law and Human Resources for a major North

American railcar supply company, as well as his leadership experience in these positions and his graduate degree in law, led to the conclusion that he

should serve as a director of Appleton and PDC.

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. She has served as a director of Eli Lilly and Company since

1995 and as a director of Revlon Consumer Products Corporation, Supervalu, Inc. and Lexmark, Inc. since 2006. Ms. Seifert served as a director of

Albertson's, Inc. in 2005. Ms. Seifert also serves on the Board of Directors for the U.S. Fund for UNICEF, the Fox Cities Performing Arts Center, and New

North. Ms. Seifert graduated with a bachelor ’ s degree from Valparaiso University in 1971. Ms. Seifert's business experience as the former Executive Vice

President and division Group President of a global manufacturer of family and personal care products, and as a director of a global pharmaceutical company,

cosmetics and personal care products company, grocery retailing company, and printing and imaging products manufacturing company, as well as her

leadership experience in these positions, led to the conclusion that she should serve as a director of Appleton and PDC.

Mark A. Suwyn. Mr. Suwyn joined Appleton and PDC as a Director in July 2011. Mr. Suwyn is currently the President of Marsuw, LLC, a private

investment and consulting company, and has held this position since March 2000. Mr. Suwyn retired as Chairman of NewPage Corporation, a large coated

paper producer in North America, in June 2010. He had previously served as Chairman and Chief Executive Officer of NewPage Corporation since May 2005.

Mr. Suwyn is also currently a director of Ballard Power Systems, Inc, and Contech Construction Products Inc. He has served as a director of Ballard Power

Systems, Inc. since 2003 and as a director of Contech Construction Products Inc. since 2011. Mr. Suwyn also served as Chairman and Chief Executive

Officer of Louisiana

- Pacific Corporation from January 1996 until November 2004. Prior to that, Mr. Suwyn held executive management positions with

International Paper Company and spent 25 years with E.I. Du Pont where he directed marketing, acquisition and joint venture efforts. Mr. Suwyn earned a

doctorate degree (Inorganic Chemistry) from Washington State University and bachelor ’ s degree (Chemistry) from Hope College, Holland, Michigan. Mr.

Suwyn ’ s extensive business experience in the paper industry, experience as former Chairman and Chief Executive Officer for both a large coated paper

producer and a leading manufacturer of building materials, as well as his leadership experience as an executive and director and his doctorate degree in

chemistry, led to the conclusion that he should serve as a director of Appleton and PDC.

110George W. Wurtz

. Mr. Wurtz joined Appleton and PDC as a Director in July 2011. From November 2006 until November 2011, Mr. Wurtz served as

President and Chief Executive Officer of New WinCup Holdings, Stone Mountain, Georgia, a privately

- held manufacturer and distributor of single

- use cups,

food service containers, lids and straws. Mr. Wurtz is currently a director of the State University of New York at Oswego ( “ SUNY Oswego ” ) Engineering

Advisory Board and Mohawk Fine Papers, Inc. He has served as a director of the SUNY Oswego Engineering Advisory Board since 2009 and as a director

of Mohawk Fine Papers, Inc. since January 2012. Mr. Wurtz retired as Executive Vice President of Georgia

- Pacific Corporation in February 2006 after serving

in several executive management positions including President of Paper, Bleached Board and Kraft Operations. Prior to joining Georgia

- Pacific Corporation

in October 2000, Mr. Wurtz was employed by James River Corporation/Fort James Corporation for 14 years and held executive management positions in

operations, logistics, procurement and manufacturing planning. Mr. Wurtz received his bachelor ’ s degree (Industrial Arts and Technology) from SUNY

Oswego in 1978. Mr. Wurtz ’ s extensive business experience in the paper industry, experience as former President and Chief Executive Officer of a food

service products manufacturer and distributor, as well as his leadership experience as an executive and director of several paper companies, led to the

conclusion that he should serve as a director of Appleton and PDC.

Kerry S. Arent

. Ms. Arent has been Vice President Human Resources of Appleton since July 2009. Ms. Arent previously served as Executive Director

Human Resources of Appleton from February 2008 to 2009 and as Human Resources Director of Appleton since 1997. Ms. Arent joined the Company in

1982 and served in a number of human resources roles from 1982 to 1997. Ms. Arent received her bachelor ’ s degree (Business Administration, Human

Resources) from the University of Wisconsin

- Oshkosh in 1982. Ms. Arent holds a Senior Professional Human Resources certification since 2005.

Thomas J. Ferree

. Mr. Ferree has been the Senior Vice President Finance and Chief Financial Officer of Appleton since February 2010 and Senior Vice

President Finance of PDC since January 2011. Mr. Ferree was the Vice President Finance and Chief Financial Officer of Appleton October 2006 through

January 2010 and Treasurer of Appleton and Chief Financial Officer and Treasurer of PDC since November 2006. Prior to joining the Company, Mr. Ferree

served as Senior Vice President of Finance and Chief Financial Officer of Wells ’ Dairy, Inc. since 2003. 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 Vice President and Controller of Appleton since December 2010, and Assistant Treasurer of Appleton since

January 2010; prior to December, 2010 Mr. Fletcher was Vice President Financial Operations from March 2010, and prior to March 2010, Mr. Fletcher was

Principal Accounting Officer and Controller of Appleton since March 2007. Mr. Fletcher has been Vice President of PDC since January 2011, and Assistant

Treasurer and Controller of PDC since March 2007. Prior to joining the Company 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.

Kent E. Willetts

. Mr. Willetts has been Senior Vice President of Appleton since January 2012. Prior to that, Mr. Willetts was Appleton's Vice

President of Strategic Development from February 2010 through December 2011. Mr. Willetts was Appleton's Vice President of Marketing and Strategy

effective November 2005 when he joined the Company, through January 2010. Prior to joining the Company, 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 Care; Director, Brand Positioning 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

PDC ’ 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.

111The ESOP Trust has agreed that any vote taken to remove a director or to fill vacancies on the boards 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 terms contained in the Company ’ s indebtedness agreements, the security holders

agreement may not be amended except under limited circumstances.

Pursuant to the agreements above, Mr. Murphy, Mr. Reardon, Mr. Richards and Ms. Seifert were nominated by Mr. Richards, Appleton ’ s chief

executive officer, and elected to the boards of directors of PDC and Appleton. Mr. Carter, Mr. Suwyn and Mr. Wurtz were jointly nominated by Mr. Richards

and the ESOP Trust and elected to the boards of directors of PDC and Appleton.

The board of directors of PDC has an Audit Committee responsible for, among other things, providing 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.

Effective March 23, 2012, members of the committee include: Mr. Carter, Mr. Murphy and Mr. Wurtz. Mr. Murphy serves as the Audit Committee Chair. The

boards of directors of PDC and Appleton have determined that Mr. Murphy is an “ audit committee financial expert ” as defined under the applicable rules of

the SEC. Mr. Murphy is an “ independent director ” as that term is defined under the listing standards of the Nasdaq Stock Market, Inc. The charter for the

Audit Committee can be found on the Company ’ s website at www.appletonideas.com (investor information section).

The board of directors of Appleton has a Compensation Committee 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 the

Long

- Term Incentive Plan and the Long

- Term Restricted Stock Unit Plan. Effective March 9, 2012, members of the committee include: Mr. Reardon, Ms.

Seifert and Mr. Suwyn. Ms. Seifert serves as the Compensation Committee Chair. See “ Item 11. Executive Compensation

— Compensation Discussion and

Analysis, ” below. The charter for the Compensation Committee is available at www.appletonideas.com (investor information section).

The board of directors of Appleton has a Corporate Governance Committee for the purpose of developing, recommending and evaluating best

corporate governance practices applicable to the Company, including those related to director compensation, nomination of directors, election of members

to board committees and board education and practices. Effective March 9, 2012, members of the committee include: Mr. Reardon, Mr. Richards, Ms. Seifert

and Mr. Suwyn. Mr. Reardon serves as the Corporate Governance Committee Chair. The charter for the Corporate Governance Committee can be found on

the Company ’ s website at www.appletonideas.com (investor information section).

The Company has 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 controller of PDC and Appleton. This Code of Business Conduct and Ethics is posted

on the Company ’ s Internet web site at www.appletonideas.com (investor information section). The Company intends to timely disclose, on the website, any

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 controller of PDC and Appleton.

112The boards of Appleton and PDC recognize that Related Person Transactions (as defined below) can present potential or actual conflicts of interest

and create the appearance that Company decisions are based on considerations other than the best interests of the Company and its shareholders. The

Corporate Governance Committee and the Audit Committee have the authority to review and approve Related Person Transactions. The Company has

adopted written procedures for the review of Related Person Transactions, which provide for review of all the relevant facts and circumstances for all

Related Person Transactions that require approval. In determining whether to approve or disapprove a Related Person Transaction, the Corporate

Governance Committee and the Audit Committee will take into account, among other factors deemed appropriate, whether the Related Person Transaction is

on terms no less favorable than terms generally available to an unaffiliated third

- party under the same or similar circumstances and the extent of the Related

Person ’ s interest in the transaction. A Related Person Transaction is any transaction, arrangement or relationship (including any indebtedness or guarantee

of indebtedness), or any series of similar transactions, arrangements or relationships, in which (a) the aggregate amount involved will or may be expected to

exceed $120,000 in any fiscal year; (b) the Company is or was a participant; and (c) any Related Person has or will have a direct or indirect interest (other

than solely as a result of being a director or trustee (or any similar position) or a less than 10 percent beneficial owner of another entity). A “ Related Person ”

is any (a) person who is an executive officer, director or nominee for election as a director of the Company; (b) person who owns greater than 5 percent

beneficial ownership of the Company ’ s outstanding common stock; or (c) Immediate Family Member of any of the foregoing. An “ Immediate Family

Member ” includes spouse, parent, grandparents, children, grandchildren, siblings, mothers and fathers

- in

- law, sons and daughters

- in

- law, brothers and

sisters

- in

- law and any person (other than a tenant or employee) sharing the household of a person.

The Company has also adopted other best practices including the following:

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

• The independent directors meet regularly without the CEO present.

The Company maintains 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 the Company ’ s

business objectives. The boards and its committees receive regular reports from the ERM Committee regarding the ERM Committee ’ s activities, findings,

conclusions and recommendations. The charter for the ERM function can be found at the Company ’ s website at www.appletonideas.com (investor

information section).

113Item 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 of Appleton,

establish the objectives of the Company ’ s compensation program as follows:

• enable the Company to attract, motivate and retain highly qualified people;

• provide compensation opportunities that are competitive for similar positions within similar companies when company performance meets

pre

- established goals;

• include a performance

- based variable pay component that supports the Company ’ s strategic business goals; and

• act in the best interests of the Company ’ s beneficial owners, the participants in the ESOP.

Compensation Elements. The Company ’ s 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. The Compensation

Committee believes 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 within the Company ’ s labor market for executive talent, provides an

incentive for executives to achieve the Company ’ s annual performance goals. Long

- term performance

- based incentive pay provides executives with direct

rewards for multi

- year business performance that contributes to shareholder value over several years. Employee benefits provide health, welfare and

retirement income benefits that enable employees, including executives, to maintain good health and provide financial security for employees and families in

order to remain focused on the Company ’ s success. The mix of elements of compensation is based on the proportion of those elements of executive

compensation paid in the market.

Performance

- Based Compensation

. When Company performance exceeds pre

- established target goals for the year, 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, performance

- based pay elements allow for compensation below median market compensation levels.

The Compensation Committee believes that this combination of cash and equity

- based compensation supports the objectives of the executive

compensation program described above. First, these vehicles allow the Company to provide a competitive compensation package based on prevailing

market practices. At the same time, a significant portion of target compensation is variable “ at

- risk ” pay tied to both short

- term performance and long

- term

performance. Variable pay for short

- term performance is capped to protect the business from annual “ windfall ” results. The Compensation Committee

believes these awards support the Company ’ s pay

- for

- performance philosophy by linking pay amounts to the Company ’ s level of performance and the

achievement of the Company ’ s strategic goals. The Compensation Committee believes that the Company ’ s executive compensation program is not

structured to encourage management to take unreasonable or excessive risks relating to the Company ’ s business. Instead, the Compensation Committee

believes that the compensation programs encourage management to take a balanced approach that focuses on delivering annual results and contributing to

shareholder value. The pay that is fixed and at risk varies by position. As shown in the table below, the Company ’ s emphasis on pay

- for

- performance

resulted in performance

- based compensation representing a significant portion of the total target compensation of the named executive officers in fiscal year

2011. Executive compensation includes more pay at risk than that of other employees in the organization.

1142011 Total Direct Compensation Mix at Target Company Performance

Market Survey Process . The Compensation Committee determines competitive 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. The Company ’ s

consultants use a broad

- based survey of general industry companies with a median revenue of approximately $2 billion (243 participating companies),

regressed to the Company ’ s revenue size. The specific identity of these companies was not provided to the Compensation Committee. A second source of

proxy data from forty (40) publicly traded companies, including paper and general manufacturers with revenues between $450 million and $7.8 billion (median

is $2.3 billion), regressed to the Company ’ s revenue size is also used. These companies, which were identified to the Compensation Committee, consisted of

AEP Industries Inc; AptarGroup Inc.; Arctic Cat Inc.; Avery Dennison Corp; Ball Corp; Bemis Co Inc; Briggs&Stratton Corp.; Cenveo Inc.; Crane Co.;

Crown Holdings Inc; Donaldson Co Inc.; Ecolab Inc.; H.B. Fuller Co.; Graco Inc.; Graphic Packaging Corp; Kennametal Inc.; Lennox International Inc.;

MeadWestvaco Corp; Herman Miller Inc; Modine Manufacturing Co; Myers Industries Inc.; NACCO Industries Inc.; Owens

- Illinois Inc.; Packaging Corp

Of America; Pactiv Corp; Pentair Inc.; Polaris Industries Inc.; Rock

- Tenn Co; Sealed Air Corp; Silgan Holdings Inc; Snap

- On Inc; Sonoco Products Co;

Teleflex Inc; Temple

- Inland Inc.; Toro Co (The); Valmont Industries Inc; Valspar Corp (The); West Pharmaceutical Services Inc.; Winnebago Industries

Inc.; and Worthington Industries Inc. This sample was chosen by the compensation consultants because it best represents the Company ’ s labor market for

executive talent, which is broader than the paper industry, and provides a reasonable sample size that allows the Company to track changes in the labor

market for executive talent. The two sources produced similar data.

Appleton ’ s vice president of human resources provides the consultant with descriptions of the Company ’ s executives ’ responsibilities but does not

participate in the market surveys or analyses. The vice president of human resources 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 Chief Executive Officer (the “ CEO ” ) provides a description of the Company ’ s business but does not participate in the market surveys or

analyses. In the years in which the consultant does not conduct a full market survey and analysis, a general rate of market increase is established for

executive compensation and the rate of increase is applied to the market pay determined in the prior year ’ s analysis. A full market survey was conducted in

November 2010 and results were used in 2011 compensation planning. Market analysis shows that the Company is competitive with the market across all

elements of compensation

– base salary, target annual incentive and total compensation (sum of base salary, target annual incentive and target long

- term

incentive). Competitive is defined as above the 25 th percentile and below the 75 th percentile of the survey data. The total target compensation for each

executive in 2011 is between 100% and 114% of the median (50 th percentile) of the survey data, excluding Mr. Fletcher, whose position was not covered in

the 2010 full market survey. Although the Compensation Committee considers executive compensation paid at companies included in the market survey, the

Committee does not attempt to maintain a specified target percentile within the market to determine executive compensation. Fixed (Salary) Pay at Risk

(Annual and

Long

- Term

Incentives) (1)

Mark R. Richards

Chairman, President, Chief Executive Officer and a Director of Appleton, and Chairman, President, Chief Executive

Officer and a Director of PDC 26 % 74 %

Thomas J. Ferree

Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton, and Chief Financial Officer and

Treasurer of PDC 35 % 65 %

Kent E. Willetts

Senior Vice President of Appleton 44 % 56 %

Kerry S. Arent

Vice President, Human Resources of Appleton 42 % 58 %

Jeffrey J. Fletcher

Vice President and Controller of Appleton, and Assistant Treasurer and Controller of PDC 58 % 42 %

Sarah T. Macdonald

Former Vice President, Carbonless Segment of Appleton 38 % 62 %

James C. Tyrone

Former Senior Vice President of Appleton 40 % 60 %

(1) Calculated using annual incentive paid at target and 1 year of long

- term incentive expected value based on Black

- Scholes valuation methodology.

The assumptions used for a January 2, 2011 valuation are: Expected life: 6.5 years (mid

- point of 3 and 10 years vesting period); Dividend yield: 0%

(plan does not pay dividends); Risk Free rate: 1.9% (based on Treasury Constant Maturities yield curve); Volatility 35% (based on peer group

volatility for previous 6.5 years). The LTIP grant as of January 2, 2011 is valued at $5.70 per share with a $12.84 per share grant price.

115In 2011, Towers Watson was paid $647 in fees for executive compensation consulting, and $326,880 in fees for all other retirement consulting,

administrative fees and actuarial services for the Company's plans.

Compensation Decisions. The Compensation Committee reviews and approves 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 market pay for that position. An executive not yet fully performing in a position may receive

less than market pay. An executive new to the role will typically be paid at market within three years. An executive making contributions significantly in

excess of those expected for the position may receive above 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.

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 who report directly to the CEO based on the recommendations of the CEO, and reviewing the

compensation plans applicable to the other executive officers. The CEO is responsible for approving all other pay. The Compensation Committee considers

market analysis and data from Towers Watson 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. In 2011, the Appleton Annual Incentive Plan ’ s annual performance

- based incentive for all eligible

employees outside of the Encapsys segment, including executives, is measured by Earnings Before Interest, Taxes, Depreciation and Amortization

(EBITDA) (80% weighting) and Cash Conversion Days (CCD) (20% weighting). Performance for employees in the Encapsys business segment is measured

by Encapsys EBITDA (60% weighting), Company CCD (10% weighting), and New Customer growth (30% weighting). The Annual Incentive Plan allows for

adjustments, as recommended by the Chief Financial Officer (the “ CFO ” ) and approved by the Compensation Committee, to the calculation of EBITDA.

These adjustments are restricted to special circumstances such as restructuring, refinancing, acquisitions, divestitures or other items the committee

determines should be adjusted and is then referred to as Adjusted EBITDA. Adjustments in 2011 were made for legal settlements, inventory reduction

impact and expenses related to business restructurings. Incentive payouts will reflect performance levels relating to Adjusted EBITDA and CCD

performance measures for the Company or Division level. EBITDA is an indicator of the Company ’ s profitability and financial performance and is calculated

as follows: EBITDA equals Net Income (including incentive accrual expense) plus Interest, Taxes, Depreciation, Amortization and Gains and Losses from

Foreign exchange.

CCD is a measure of the Company ’ s effective cash management by monitoring days outstanding (DO). CCD is calculated as Accounts Receivable

DO plus Inventory DO minus Accounts Payable DO. The cash conversion cycle measures the time between outlay of cash and the cash recovery. Cash

conversion cycles are based on four primary factors: (1) the number of days it takes customers to pay what they owe; (2) the number of days it takes the

Company to make its product; (3) the number of days the product sits in inventory before it is sold; and (4) the length of time the Company has to pay its

vendors.

Performance below Adjusted EBITDA threshold will result in no annual performance

- based incentive compensation. Targets were set at a level of

improvement from the prior year performance as listed below.

2011 All Appleton and Technical Papers Performance Goals ($millions)

All Appleton

Adjusted EBITDA Technical Papers

Adjusted EBITDA CCD

Outstanding $121.5 $111.0 60 days

Target $110.0 $101.0 63 days

Threshold $87.5 $82.0 66 days

1162011 Encapsys Performance Goals ($millions)

* One customer with revenue in 2011 and one customer with commitment to revenue in 2012.

** Number with commitment to revenue in 2012.

The annual performance

- based incentive when performance results are at target is 85% of base salary for the CEO, 55% of base salary for the CFO,

50% of base salary for named executive officer vice presidents and 40% for Corporate Controller. For 2012, the Compensation Committee increased the

annual performance

- based incentive at target to 60% of base salary for the CFO and 55% for the Senior Vice President.

In 2011, EBITDA for “ All Appleton ” calculated per the plan document resulted in a total EBITDA of $109.2 million. Adjustments recommended by the

CFO and approved by the Compensation Committee for legal settlements, inventory reduction impact and expenses related to business restructurings

resulted in Adjusted EBITDA of $94.6 million (38.4% of Target payout

– interpolated between Threshold and Target payout award levels). Actual CCD

performance against target was 62.5 days (103.3% of Target payout

– interpolated between Target and Outstanding payout award levels). The combined

incentive payout results in 51.4% of Target.

In 2011, Adjusted EBITDA for the Technical Papers business segment calculated per the plan document resulted in a total Adjusted EBITDA of $88.0

million (38.4% of Target payout

– interpolated between Threshold and Target payout award levels). Actual CCD performance against target is the same as

All Appleton. The combined incentive payout results in 51.4%of Target.

In 2011, Adjusted EBITDA for the Encapsys business segment calculated per the plan document resulted in a total Adjusted EBITDA of $16.8 million

(56.7% of Target payout

– interpolated between Threshold and Target payout award levels). Actual CCD performance against target is the same as All

Appleton. Actual performance against New Customer growth was slightly above threshold (32.5% of Target payout

– interpolated between Threshold and

Target payout award levels). The combined incentive payout results in 54.1% of Target.

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% of the earned incentive without Compensation Committee approval based on the executive ’ s achievement of strategic business objectives established

by the CEO at the beginning of the fiscal year. These objectives may relate to business segment margin improvement, manufacturing operations

performance, new business growth, or leadership competency. Some of these objectives may be measurable while others may require more judgment and

discretion to evaluate. Mr. Ferree received a discretionary bonus amount in accordance with the terms of the annual incentive plan of 15% of his earned

incentive as a result of his individual performance with balance sheet management and extensive work on special projects during 2011. Mr. Willetts received

a discretionary bonus amount in accordance with the terms of the annual incentive plan of 15% of his earned incentive as a result of his individual

performance on Encapsys strategic planning work and execution of a revised corporate mission during 2011. Ms. Arent received a discretionary bonus

amount in accordance with the terms of the annual incentive plan of 15% of her earned incentive as a result of her individual performance on leadership

development and wellness initiatives during 2011. Mr. Fletcher received a discretionary bonus amount in accordance with the terms of the annual incentive

plan of 19% of his earned incentive as a result of his individual performance of cash management and significant tax recoveries.

Long

- Term Compensation . Prior to 2010, the Company had 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). In 2010, the Compensation Committee

elected to discontinue awards under the LTIP and Performance Cash Plan and introduced a new long

- term compensation plan, the Long

- Term Restricted

Stock Unit Plan (RSU). The Compensation Committee determined that it would be advisable in appropriate cases to consider the award of units under the

RSU, which provide for future cash payments based on the value of PDC common stock, in lieu of or in combination with units under the LTIP, which

produce value only if the PDC common stock price increases over the grant price. This determination reflected the desire to maintain a strong long

- term

equity component in executive compensation, to reduce the number of equity

- based units required to provide such component and to adjust compensation

practices appropriately in light of accounting standards requiring companies to recognize compensation cost related to share

- based payment transactions.

In 2010, the Committee determined to make all of its equity

- based grants under the RSU. In 2011, the Committee determined to make all of its equity

- based

grants under the LTIP. The Compensation Committee has determined that equity

- based grants in 2012 will be a combination of RSU and LTIP grants. All

grants under the RSU and the LTIP are subject to vesting and forfeiture provisions, thereby creating incentives for executives and employees to remain with

the Company. The Compensation Committee believes that long

- term incentive plans are necessary to encourage retention of executive talent and provide

appropriate incentives to increase shareholder value. Individual grant levels for named executive officers are determined so that total targeted

compensation, including base salary, target bonus and most recent grant of long term compensation awards, is competitive with the external market for total

compensation. Adjusted EBITDA New Customer CCD

Outstanding $20.0 2* 60 days

Target $18.5 2** 63 days

Threshold $15.0 1** 66 days

117Long

- Term Incentive Plan. The purpose of the LTIP 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 long

- term shareholder

interests. The LTIP 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. The Compensation Committee of the board will establish the number of units granted each year in accordance with the

Compensation Committee ’ s stated goals and policies. 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. Recipients are required to enter into a non

- compete and non

- solicitation agreement in order to receive units under the LTIP

which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to LTIP units. At present, 105 current or

former executive and management employees participate in the LTIP. Some of these employees also participate in the RSU.

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 a named executive officer under the LTIP during 2011. All named executive officers except Mr. Tyrone have LTIP

units that have been held for more than three years. In the event of a change of control, described below, the LTIP units become immediately exercisable. A

“ change of control ” is defined in the LTIP, and was further clarified in 2010, 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 the Company;

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

• termination of the Company ’ s business, liquidation, dissolving or selling substantially all stock;

• the Company's merger or consolidation with another company and the Company is not the surviving company and the Company

is not controlled by the persons or entities who controlled the Company immediately prior to such merger or consolidation; or

• any other event whereby ownership and control is effectively transferred.

Upon termination of a participant ’ 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 units. 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. Mr. Tyrone and Ms. Macdonald both forfeited

LTIP units upon their departure from the Company.

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,

each January 1 from 2006 through 2009, and January 2, 2011. The Company expects to make additional grants under this plan effective January 1, 2012. 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 the Company ’ s growth and profitability, and of the employees who receive LTIP awards, most receive such awards based

on the Company ’ s succession planning and leadership management process.

Long

- Term Performance Cash Plan. Appleton ’ s board of directors adopted the Performance Cash Plan for the purpose of attracting and retaining

senior executive employees who are in a position to make a significant contribution to the Company ’ s long

- term strategic objectives of revenue growth and

profitability. 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. Targets were set above historical industry medians.

The plan is an unfunded bonus program of the Company and does not permit participants to elect to defer their compensation. No awards have been made

since 2009.

118At, or shortly after, the start of the three

- year performance cycle, a target award is established for each participant. Target awards, based on market

competitive values, are expressed as a fixed dollar amount. The target award was equal to $373,000 for Mr. Richards, $116,000 for Mr. Ferree, $69,000 each for

Mr. Willetts and Ms. Macdonald. At the end of the performance cycle, the award was determined based upon the Compensation Committee ’ s evaluation of

the Company ’ s performance against the pre

- established performance measures. For the 2009

- 2011 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. At

the end of 2011, performance for the 2009

- 2011 cycle was 52.76% of target bonus. Incentives will be paid to Mr. Richards ($196,795), Mr. Ferree ($61,202),

and Mr. Willetts ($36,404). The Compensation Committee approved a prorated incentive to Ms. Macdonald ($33,371). The prorated final award was

determined based on the number of months of employment completed during the performance cycle up to and including the month of separation divided by

the total number of months for the performance cycle (33/36) multiplied by the earned bonus for the 2009

- 2011cycle.

The 2009

- 2011 performance cycle was calculated against equally weighted target metrics of average revenue growth and average return on invested

capital (ROIC) over the same period of time. The 2009

– 2011 performance cycle metrics are set forth below:

2009

– 2011 Performance Cycle Metrics

The first performance cycle was from January 1, 2008, through December 31, 2010. At the end of 2010, actual performance was below threshold, thus

no incentive was paid. The second performance cycle was from January 1, 2009, through December 31, 2011. The Company does not expect to start any new

performance cycles, but reserves the right to do so.

Long

- Term Restricted Stock Unit Plan (RSU). Appleton ’ s board of directors adopted the RSU plan effective January 3, 2010, for the purpose of

attracting and retaining 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 long

- term shareholder interests. The RSU provides for future cash payments based on

the value of PDC common stock, as determined by the semi

- annual valuation provided by the ESOP trustee. The Compensation Committee of the board will

establish the number of units granted each year in accordance with the Compensation Committee ’ s stated goals and policies. 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. All units are vested three years after the award date

and paid at vesting. The cash payment upon vesting of a unit is equal to the value of PDC common stock at the most recent valuation date times the number

of units exercised. No units were granted during 2011. Other current executive and key management employees also participate in the RSU. Recipients are

required to enter into a non

- compete and non

- solicitation agreement in order to receive units under the RSU which, if violated following the receipt of units,

results in forfeiture of any and all rights to receive payment relating to RSU units. At present, 59 executive and management employees participate in the

RSU. Some of these employees also participate in the LTIP.

Termination provisions, including defined change of control events, are the same as those described above in the LTIP.

Equity Ownership. The Company ’ s executives are eligible to participate in the ESOP in the same manner and with the same rights as all other U.S.

employees. Because the ESOP is a tax

- qualified plan subject to ERISA, the Company may not require executive participation in the ESOP at a specified level

nor may the Company take any adverse employment action against an executive for the exercise of his or her right to participate or not participate in the

ESOP. The Company believes, however, that it is in the best interests of the employees, as beneficial owners of the ESOP, to have executives acquire and

maintain equity interests in the Company.

Termination or Change of Control. The Company has entered into Termination Protection Agreements (or TPAs) with Mr. Richards, Mr. Ferree, Mr.

Willetts, Ms. Arent, Ms. Macdonald and Mr. Tyrone. The Company has entered into an Enhanced Severance Agreement with Mr. Fletcher. These

agreements provide for payments to the executive officers in the event of termination whether before or within two years after a “ change of control, ” as

defined in the TPA, the executive officer ’ s employment is terminated 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. These events were chosen by the Company as appropriate events to trigger payment

based on competitive market analysis of such agreements for executive officers. Ms. Macdonald received payments under her TPA as a result of her

termination in 2011. These payments are described in detail under “ Post

- Employment Payments ” below. The TPAs and Enhanced Severance Agreement are

discussed in detail under “ Potential Payments upon Termination or Change of Control ” below. Minimum Target Maximum

3

- Year Average Revenue Growth 0.5% 2.5% 5.0%+

3

- Year Average ROIC 6.0% 8.5% 11.0%+

119On February 22, 2012, Appleton ’ s board of directors adopted a special retention incentive program designed to retain certain executives and other

employees who are in a position to make a significant contribution in identifying, negotiating and closing a Potential Transaction. A Potential Transaction is

defined to include one or more of the following transactions or series of transactions: the issuance of equity securities in connection with an acquisition, a

merger or business combination with an unrelated entity, the sale of equity in a private placement or public offering, a sale of all or substantially all of the

assets of Appleton or PDC, an exchange of debt securities for equity, or any combination of the foregoing transactions. In exchange for continued

employment through a Potential Transaction, the named executives would receive payments in the event a Change of Control occurs as defined in the Long

Term Incentive Plan as a result of a Potential Transaction. Amounts payable would be as approved by the board of directors in consideration of any given

Potential Transaction. This retention incentive is not eligible compensation for retirement income or severance benefit calculations.

Executive Benefits . The Company provides a cash allowance in lieu of perquisites to all named executive officers. The Company believes the

amounts provided to the CEO ($25,000), Senior Vice Presidents or Vice Presidents ($15,000), and Corporate Controller ($10,000) are competitive to the value

provided by other companies for a car allowance, club memberships, etc. The Company also provides the opportunity for the CEO, Senior Vice Presidents or

Vice Presidents to enroll in an individual life insurance policy.

Compensation Committee Report

The 2011 Compensation Committee consisted of three independent directors. Mr. Pace was chairperson until his departure from the board of directors

on July 22, 2011. Effective July 23, 2011, Ms. Seifert serves as the Compensation Committee Chair. Mr. Suwyn joined the Compensation Committee effective

July 22, 2011. Mr. Murphy was replaced by Mr. Reardon effective July 22, 2011.

The Compensation Committee is appointed annually by Appleton ’ s 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 CEO subject to

ratification by the board of directors, approving the compensation of the named executive officers who report directly to the CEO based on the

recommendations of the CEO and reviewing the compensation plans for other executive officers. It is also responsible for adopting and amending the

Company ’ s general compensation policies and benefit plans, including the 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 2011 Compensation Committee

Kathi P. Seifert, chairperson

Andrew F. Reardon

Mark A. Suwyn

120Summary Compensation Table

Name and Principal Position Year Salary

($) (1) Bonus

($) LTIP

Awards

($) (2) RSU

Awards

($) (3) Non

- Equity

Incentive Plan

Compensation

($) (4) Change in

Pension Value

and

Nonqualified

Deferred

Compensation

Earnings ($) (5) All Other

Compensation

($) (6) Total

($) (7)

Mark R. Richards 2011 800,000 0 1,567,500 0 546,179 (8) 133,043 99,937 3,146,659

Chairman, President, Chief Executive 2010 792,308 0 0 861,900 185,202 150,475 39,785 2,029,670

Officer and a Director of Appleton, 2009 721,154 0 0 (9) 0 326,400 114,285 111,287 1,273,126

and Chairman, President, Chief

Executive Officer and a Director

Director of PDC

Thomas J. Ferree 2011 388,500 16,468 (10) 513,000 0 170,988 (8) 44,151 53,944 1,187,051

Senior Vice President Finance, Chief 2010 385,654 0 0 278,460 58,330 66,117 35,785 824,346

Financial Officer and Treasurer of 2009 355,769 21,880 (11) 0 (9) 0 109,402 46,407 34,201 567,659

Appleton, and Chief Financial

Officer and Treasurer of PDC

Kent E. Willetts 2011 272,000 10,290 (10) 213,750 0 105,002 (8) 37,906 34,291 673,239

Senior Vice President of Appleton 2010 270,769 7,446 (12) 0 185,640 37,231 47,388 28,639 577,113

2009 253,846 13,926 (11) 0 (9) 0 69,632 38,676 34,317 410,397

Kerry S. Arent 2011 (13) 238,423 9,184 (10) 208,050 0 61,228 (8) 107,593 35,448 659,926

Vice President, Human Resources

of Appleton

Jeffrey J. Fletcher 2011 (13) 204,000 8,058 (10) 68,400 0 41,942 (8) 23,486 16,554 362,440

Vice President and Controller

of Appleton, and Assistant

Treasurer and Controller of PDC

Sarah T. Macdonald 2011 (14) 228,444 0 253,650 (15) 0 89,957 (8) (4,111 ) (16) 434,667 1,002,607

Former Vice President, Carbonless 2010 295,500 0 0 53,040 40,631 6,487 53,990 449,648

Segment of Appleton 2009 284,135 0 0 (9) 0 75,648 8,971 35,173 403,927

James C. Tyrone 2011 (17) 280,000 0 285,000 (15) 0 0 (320 ) 146,973 711,653

Former Senior Vice President of

Appleton 2010 (17) 253,077 50,000 (18) 0 172,380 34,798 0 133,409 643,664

121All other compensation for 2011 consists of the following for each named executive officer:

Mr. Richards: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $70,241, allowance in

lieu of perquisites $25,000, tax gross up on travel and entertainment for spouse to company events $776, and executive life insurance $2,360.

Mr. Ferree: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $34,835, allowance in

lieu of perquisites $15,000, tax gross up on travel and entertainment for spouse to company events $665, and executive life insurance $2,105.

Mr. Willetts: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $17,385, allowance in

lieu of perquisites $15,000, and executive life insurance $1,906.

Ms. Arent: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $19,068, allowance in

lieu of perquisites $15,000, and executive life insurance $1,380.

Mr. Fletcher: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $6,554, and allowance

in lieu of perquisites $10,000.

Ms. Macdonald: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $20,547, allowance

in lieu of perquisites $11,596, tax gross up on travel and entertainment for spouse to company events $954, and executive life insurance $1,033.

Employment terminated October 3, 2011. As a result of her termination, Ms. Macdonald will receive $398,617 in accrued post employment/severance

payments including $6,819 in unused vacation, $14,440 in SERP benefits, $19,103 in COBRA health benefits, $9,800 in outplacement services, and

$348,455 in accordance with Termination Protection Agreement.

Mr. Tyrone: Company match and company retirement contribution to KSOP defined contribution plan and related Excess Plan $28,332, allowance in

lieu of perquisites $15,000, relocation and temporary living expenses $61,996, tax gross up on temporary living expenses $38,305, and executive life

insurance $3,340. (1) The 2009 fiscal year contains 2 weeks of unpaid furlough.

(2) The LTIP grant date fair value is calculated based on a Black

- Scholes valuation methodology. The assumptions used for January 2, 2011 grant are:

Expected life: 6.5 years (mid

- point of 3 and 10 years vesting period); Dividend yield: 0% (plan does not pay dividends); Risk Free Interest Rate (based

on Treasury Constant Maturities yield curve): 2.71%; Volatility (based on peer group volatility for previous 6.5 years): 40%. The LTIP grant as of

January 2, 2011 is valued at $5.70 per share with a $12.84 per share grant price.

(3) Units awarded for January 3, 2010 under the RSU plan are valued at the grant price ($13.26 per share) multiplied by the number of units granted.

(4) Non

- equity performance

- based incentive plan compensation consists of payments under Appleton ’ s Annual Incentive Plan and the Performance

Cash Plan. Amounts paid under the Annual Incentive Plan are determined based on company and business segment performance and other

extraordinary factors, positive or negative, determined by the CEO and the Compensation Committee. Amounts paid under the Annual Incentive Plan

are earned in 2011 and paid in 2012. The Performance Cash Plan reflects the compensation costs recognized by the Company for financial reporting

purposes and ASC 718 for long

- term non

- equity performance

- based incentives.

(5) The valuation methods and material assumptions used in determining the change in pension value are discussed in detail in Note 16 of the

Consolidated Financial Statements in Item 8, above.

(6) The aggregate incremental costs of all perquisites are stated as actual costs to the Company.

(7) In 2010, the following executives deferred the following indicated amounts into the Nonqualified Excess Plan: Mr. Richards ($65,280). In 2011, the

following executives deferred the following indicated amounts into the Nonqualified Excess Plan: Mr. Richards ($40,000). These deferrals are also

described in the Nonqualified Deferred Compensation table.

(8) In 2011, the value of Non

- Equity Incentive Payments for each of the named executives is as follows:

Mr. Richards: Performance Cash Plan ($196,795); Annual ($349,384)

Mr. Ferree: Performance Cash Plan ($61,202); Annual ($109,786)

Mr. Willetts: Performance Cash Plan ($36,404); Annual ($68,598)

Ms. Arent: Annual ($61,228)

Mr. Fletcher: Annual ($41,942)

Ms. Macdonald: Performance Cash Plan ($33,371); Annual ($56,586)

(9) LTIP grants awarded on January 1, 2009 were actually granted in the 2008 fiscal year. See Note 18 of Notes to Consolidated Financial Statements.

(10) The following executives received a discretionary bonus in the amount of 15% of the earned incentive: Mr. Ferree, Mr. Willetts, and Ms. Arent. Mr.

Fletcher received a discretionary bonus of 19% of the earned incentive.

122(11) Mr. Ferree and Mr. Willetts received discretionary bonus amounts in accordance with the terms of the Annual Incentive Plan of 20% of the earned

incentive as a result of their individual performance during 2009.

(12) Mr. Willetts received a discretionary bonus amount in 2010 of 20% of the earned incentive.

(13) Ms. Arent and Mr. Fletcher became named officers in 2011.

(14) Ms. Macdonald left the Company on October 3, 2011.

(15) LTIPs that were granted were forfeited at departure.

(16) The present value of accumulated pension benefits for Ms. Macdonald decreased $5,388 between December 21, 2010 and December 31, 2011.

(17) Mr. Tyrone was hired February 1, 2010 and became a named officer in 2010. He resigned effective January 30, 2012.

(18) Mr. Tyrone received a sign on bonus in 2010.

123Grants of Plan

- Based Awards

Estimated Future Payouts

Under Non

- Equity Incentive

Plan Awards (2) All Other

Stock Awards:

Number of

Name Plan Grant

Date (1) Approval

Date Threshold

($) Target

($) Maximum

($) Securities

Underlying

Units (#) (3) Grant Date Fair

Value of Stock

Awards($) (4)

Mark R. Richards Annual Performance

- Based Incentive Plan 68,000 680,000 1,360,000

Long Term Incentive Plan 1/2/2011 1/2/2011 275,000 1,567,500

Thomas J. Ferree Annual Performance

- Based Incentive Plan 21,368 213,675 427,350

Long Term Incentive Plan 1/2/2011 1/2/2011 90,000 513,000

Kent E. Willetts Annual Performance

- Based Incentive Plan 13,600 136,000 272,000

Long Term Incentive Plan 1/2/2011 1/2/2011 37,500 213,750

Kerry S. Arent Annual Performance

- Based Incentive Plan 11,921 119,212 238,423

Long Term Incentive Plan 1/2/2011 1/2/2011 36,500 208,050

Jeffrey J. Fletcher Annual Performance

- Based Incentive Plan 8,160 81,600 163,200

Long Term Incentive Plan 1/2/2011 1/2/2011 12,000 68,400

Sarah T. Macdonald Annual Performance

- Based Incentive Plan 11,422 114,222 228,444

Long Term Incentive Plan 1/2/2011 1/2/2011 44,500 (5) 253,650 (5)

James C. Tyrone Annual Performance

- Based Incentive Plan 14,000 140,000 280,000

Long Term Incentive Plan 1/2/2011 1/2/2011 50,000 (5) 285,000 (5)

(1) The Grant Date for units under the Company ’ s Long Term Incentive Plan 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 awards are made under the Company ’ s Annual Incentive Plan. Projected payouts are based, or will be based, on

Company financial performance. The Threshold, Target and Maximum payouts stated are based on 2011 salaries for the Annual Incentive Plan. Actual

amounts earned in 2011 and paid in 2012 are stated in the Non

- Equity Incentive Plan Compensation column of the Summary Compensation Table.

(3) Represents grants of units under the Company ’ s Long Term Incentive Plan.

(4) The units granted under the Company ’ s LTIP ’ s are valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi

annual ESOP valuation. Value is calculated using a Black

- Scholes valuation methodology. The assumptions used for valuation are: Expected life: 6.5

years (mid

- point of 3 and 10 years vested period); Dividend yield: 0% (plan does not pay dividends); Risk Free rate: 2.71% (based on Treasury

Constant maturities yield curve); Volatility 40% (based on peer group volatility for previous 6.5 years). The LTIP grant as of January 2, 2011 is valued at

$5.70 per share with a $12.84 per share grant price.

(5) Units granted were forfeited on departure.

124Cash Compensation . The amounts included in the Summary Compensation Table generally describe the total accrued cost to the Company of

executive compensation, but in some cases describe the SEC prescribed fair value at time of grant. However, in either case much of that compensation was

not paid to the Company ’ s executives in cash in the year reported. The following table sets out the total compensation, the elements which were accrued

but not paid in each year, and the resulting net cash compensation to each of the executives. Some executives elected to defer some of that net cash

compensation.

Cash Compensation Table

Less Non

- Cash Compensation

Name Year Total

Compensation

($) (1) Long Term

Awards

($) (2) Change in

Pension Value

and Nonqualified

Deferred

Compensation

Earnings

($) Other

($) (3) Net Cash

Compensation

($)

Mark R. Richards 2011 3,146,659 1,567,500 133,043 3,136 1,442,980

2010 2,029,670 861,900 150,475 1,017,295

2009 1,273,126 0 114,285 1,158,841

Thomas J. Ferree 2011 1,187,051 513,000 44,151 2,770 627,130

2010 824,346 278,460 66,117 479,769

2009 567,659 0 46,407 521,252

Kent E. Willetts 2011 673,239 213,750 37,906 1,907 419,676

2010 577,113 185,640 47,388 344,085

2009 410,397 0 38,676 371,721

Kerry S. Arent 2011 659,926 208,050 107,593 1,380 342,903

Jeffrey J. Fletcher 2011 362,440 68,400 23,486 0 270,554

Sarah T. Macdonald 2011 1,002,607 253,650 (4,111 ) (4) 311,153 (5) 441,915

2010 449,648 53,040 6,487 390,121

2009 403,927 0 8,971 394,956

James C. Tyrone 2011 711,653 285,000 (320 ) 41,645 385,328

2010 643,664 172,380 0 (6) 471,284

(1) Total Compensation includes the Annual Incentive Pay Plan. Amounts paid under the Annual Incentive Pay Plan are earned in year reported and paid

in following year.

(2) LTIP Option Awards (2011) and RSU Option Awards (2010). Performance Cash Plan (2011) is cash compensation.

(3) Tax gross

- ups and life insurance.

(4) The present value of accumulated pension benefits for Ms. Macdonald decreased $5,388 between December 31, 2010 and December 31, 2011.

(5) Also includes accrued severance.

(6) Mr. Tyrone was not eligible to participate in the pension plan.

125Outstanding Equity Awards at Fiscal Year

- End

Awards in the table describe units issued under the Company ’ s Long

- Term Incentive Plan (LTIP) in 2011 and prior years. Awards in the table

describe units issued under the Company ’ s Restricted Stock Unit Plan (RSU) in 2010. All prior awards granted to Ms. Macdonald and Mr. Tyrone were

forfeited on their departure dates or as of December 31, 2011.

LTIP Awards

Name Grant Number of

Securities

Underlying

Unexercised Units Number of

Securities

Underlying

Unexercised Units Grant

Price($) Date

Fully

Vested (1) Expiration

Date (1) Date Exercisable(#) Unexercisable(#)

Mark R. Richards 01/02/11 0 275,000 12.84 01/02/14 01/02/21

01/01/09 155,000 0 21.43 01/01/12 01/01/19

01/01/08 100,000 0 33.41 01/01/11 01/01/18

01/01/07 90,000 0 33.62 01/01/10 01/01/17

01/01/06 85,000 0 28.56 01/01/09 01/01/16

07/01/05 85,000 0 27.77 07/01/08 07/01/15

Thomas J. Ferree 01/02/11 0 90,000 12.84 01/02/14 01/02/21

01/01/09 45,000 0 21.43 01/01/12 01/01/19

01/01/08 31,000 0 33.41 01/01/11 01/01/18

01/01/07 25,000 0 33.62 01/01/10 01/01/17

Kent E. Willetts 01/02/11 0 37,500 12.84 01/02/14 01/02/21

01/01/09 27,000 0 21.43 01/01/12 01/01/19

01/01/08 18,500 0 33.41 01/01/11 01/01/18

01/01/07 18,500 0 33.62 01/01/10 01/01/17

01/01/06 18,500 0 28.56 01/01/09 01/01/16

11/14/05 18,500 0 27.77 11/14/08 11/14/15

Kerry S. Arent 01/02/11 0 36,500 12.84 01/02/14 01/02/21

07/01/09 0 14,000 18.87 07/01/12 07/01/19

01/01/09 10,000 0 21.43 01/01/12 01/01/19

01/01/08 5,000 0 33.41 01/01/11 01/01/18

01/01/06 3,000 0 28.56 01/01/09 01/01/16

07/01/05 2,000 0 27.77 07/01/08 07/01/15

01/01/04 1,600 0 23.36 01/01/07 01/01/14

01/01/03 1,600 0 21.92 01/01/06 01/01/13

Jeffrey J. Fletcher 01/02/11 0 12,000 12.84 01/02/14 01/02/21

01/01/09 10,000 0 21.43 01/01/12 01/01/19

01/01/08 6,000 0 33.41 01/01/11 01/01/18

02/05/07 6,000 0 33.62 02/05/10 02/05/17

Sarah T. Macdonald 01/02/11 (2) 0 0 12.84 01/02/14 01/02/21

01/01/09 (2) 0 0 21.43 01/01/12 01/01/19

01/01/08 (3) 0 0 33.41 01/01/11 01/01/18

01/01/07 (3) 0 0 33.62 01/01/10 01/01/17

01/01/06 (3) 0 0 28.56 01/01/09 01/01/16

10/10/05 (3) 0 0 27.77 10/10/08 10/10/15

James C. Tyrone 01/02/11 (2) 0 50,000 12.84 01/02/14 01/02/21

126RSU Awards

Name Grant

Date Number of Underlying

Securities That Have

Not Vested (#) (4) Market Value of

Underlying Securities

That Have Not Vested ($) (5)

Mark R. Richards 01/03/10 65,000 975,650

Thomas J. Ferree 01/03/10 21,000 315,210

Kent E. Willetts 01/03/10 14,000 210,140

Kerry S. Arent 01/03/10 9,000 135,090

Jeffrey J. Fletcher 01/03/10 5,000 75,050

Sarah T. Macdonald 01/03/10 0 (2) 0

James C. Tyrone 02/01/10 13,000 (6) 0

(1) 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.

(2) Forfeited upon departure.

(3) Units have zero ($0) value and will not be eligible for exercise beyond the 12/31/11 exercise period. Units were automatically forfeited at the close of the

exercise period.

(4) RSU units are vested three years after the award date and paid at vesting.

(5) The market value of RSU units was calculated by multiplying the number of units granted by the PDC stock price available at December 31, 2011 ($15.01

per unit) as determined by the semi

- annual ESOP valuation.

(6) These RSU units were subsequently forfeited upon Mr. Tyrone ’ s departure effective January 30, 2012.

127Pension Benefits

Pension Plan and Supplemental Executive Retirement Plan ( “ SERP ” )

. The Company maintains a broad

- based tax

- qualified, noncontributory

defined benefit pension plan for eligible salaried employees, referred 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. The Company has 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 defined as less than $20,000). 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. The total combined benefit

under the plans is equal to 1.0% of final average compensation up to Social Security covered compensation, plus 1.4% of final average compensation above

Social Security covered compensation, multiplied by years of benefit service (limited to 35 years). 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 62. 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 termination or March 1, 2011, whichever occurs

first. Compensation covered by the plans includes base salary, bonus and deferred compensation.

In December 2007, it was announced that the Pension Plan covering eligible salaried employees, of which certain named executives officers are

participants, will be frozen effective January 1, 2015 and replaced with a broad

- based tax

- qualified, noncontributory defined contribution benefit which is

referred to as the Retirement Contribution benefit described below. New hires were not permitted in the plan on or after January 1, 2008. All eligible

participants in the Pension Plan, including named executive officers, were given a one

- time opportunity to accelerate participation in the Retirement

Contribution benefit by electing to freeze their benefit in the Pension Plan and begin receiving the Retirement Contribution benefit effective April 1, 2008.

Ms. Macdonald is the only named executive officer who elected to accelerate participation in the Retirement Contribution benefit. In December 2010, it was

announced that the effective date of the freeze would be changed from January 1, 2015 to March 1, 2011. Mr. Tyrone is not a participant in either the

Pension Plan or the SERP since he was hired after January 1, 2008. Name Plan Name Number of Years of

Credited Service(#) Present Value of

Accumulated

Benefit($) (1) Payments

During Last

Fiscal Year($)

Mark R. Richards Pension 6.0 133,039 0

SERP 6.0 547,127 0

Thomas J. Ferree Pension 4.4 115,193 0

SERP 4.4 114,251 0

Kent E. Willetts Pension 5.3 130,097 0

SERP 5.3 86,677 0

Kerry S. Arent Pension 28.8 526,104 0

SERP 28.8 40,542 0

Jeffrey J. Fletcher Pension 4.1 124,788 0

SERP 4.1 8,355 0

Sarah T. Macdonald Pension 2.5 34,845 0

SERP 2.5 0 14,440

James C. Tyrone Pension 0 0 0

SERP 0 0 0

(1) The valuation methods and material assumptions used in determining the present value of accumulated pension benefits are discussed in detail in

Note 16 of the Consolidated Financial Statements in Item 8, above.

128Nonqualified Deferred Compensation

Nonqualified Excess Plan. On February 1, 2006, the Company 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. The Company invests funds

equal to the amounts deferred by participants in the mutual funds which the participants select for their deemed investments. These funds are the

Company's assets to which the participants have no claim other than as general creditors of the Company. The Company pays administrative expenses of

the plan and annually adds funds to the plan to make up for any difference between the participants ’ deemed investments and the actual performance of the

investments.

Retirement Contribution Benefit and Excess Plan . As a replacement to the pension plan, any management employee hired on or after January 1,

2008, or those electing to freeze their accrued benefit under the pension plan on April 1, 2008 or March 1, 2011, 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.

The Company has 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.

Other Nonqualified Deferred Compensation. As part of her initial offer of employment in 2005, Ms. Macdonald was provided with $100,000 of

deferred compensation (3,601 units at $27.77 per share). 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 in cash upon termination in five annual installments at the rate of one

- fifth

of the original units. The first of five installments will be paid in January 2012 in the amount of $10,810.

Accrued Post

- Employment Payments

Upon termination of employment, Ms. Macdonald became entitled to the post

- employment payments set forth below under the terms of a

Termination Protection Agreement which may be paid out over a period of eighteen (18) months. The total accrued payments are included in the All Other

Compensation in the Summary Compensation Table. Mr. Tyrone was not eligible for any post

- employment payments.

Accrued Post

- Employment Payments Name Executive

Contributions

in Last Fiscal

Year($) (1) Company

Contributions in

Last Fiscal

Year($) (2) Aggregate

Earnings

in Last Fiscal

Year($) Aggregate

Withdrawals/

Distributions

($) Aggregate

Balance at

12/31/11($)

Mark R. Richards 40,000 55,541 190 0 921,457

Thomas J. Ferree 0 12,785 0 0 12,785

Kent E. Willetts 0 2,685 (3,795 ) 0 72,658

Kerry S. Arent 0 0 0 0 0

Jeffrey J. Fletcher 0 0 0 0 0

Sarah T. Macdonald 0 0 (4,111 ) (17,272 ) 0

James C. Tyrone 0 6,282 (320 ) 0 11,189

(1) Employee Contributions to the Nonqualified Excess Plan may include base salary and/or annual performance

- based incentive pay. Amounts reported

as deferred under the Nonqualified Excess Plan are included as part of Total Compensation in the Summary Compensation Table.

(2) Excess Plan contribution related to Retirement Contribution Benefit (see below).

Name Unused Vacation Paid at

Termination ($) COBRA Health

Benefits ($) Outplacement

Services ($) Termination

Protection Payments

($) Company FICA To

Be Paid ($) Total ($)

Sarah T. Macdonald $6,819 $19,103 $9,800 $342,666 $5,789 $384,177

129The 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 would be effective December 31, 2011. Ms. Macdonald

and Mr. Tyrone are no longer employed by the Company. 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

($) (1) Outplacement

Services

($) Termination

Protection

Payments

( $) (2) Long

- Term

Incentive Plans

($) (3) Company

FICA To

Be Paid

($) (4) Tax

Gross

- Up

Payments

($) Total

($)

Mark R. Richards Without Change of Control 19,103 9,800 1,549,384 0 22,466 0 1,600,753

Within two years of Change of Control 38,205 9,800 4,782,584 969,750 83,409 0 5,883,748

Thomas J. Ferree Without Change of Control 19,103 9,800 692,536 0 10,041 0 731,480

Within two years of Change of Control 25,470 9,800 1,314,136 311,300 23,569 0 1,684,275

Kent E. Willetts Without Change of Control 19,103 9,800 476,598 0 6,911 0 512,412

Within two years of Change of Control 25,470 9,800 884,598 150,375 15,007 0 1,085,250

Kerry S. Arent Without Change of Control 19,103 9,800 418,863 0 6,074 0 453,840

Within two years of Change of Control 25,470 9,800 776,497 79,205 12,408 0 903,380

Jeffrey J. Fletcher Without Change of Control 12,735 9,800 205,142 0 2,975 0 230,652

Within one year of Change of Control 12,735 9,800 205,142 26,040 3,352 0 257,069

Sarah T. Macdonald Without Change of Control 0 0 0 0 0 0 0

Within two years of Change of Control 0 0 0 0 0 0 0

James C. Tyrone Without Change of Control 0 0 0 0 0 0 0

Within two years of Change of Control 0 0 0 0 0 0 0

(1) COBRA Health Benefits amounts stated in this table are based on cost of high deductible medical and comprehensive dental plan options.

(2) Includes Termination Protection Payments (or Enhanced Severance Payment for Mr. Fletcher) and Prorated Annual Incentive.

(3) In the event of a change of control as defined in the Termination Protection Agreements, the LTIP and RSU become immediately exercisable. The

amount reflects the value of all outstanding awards on December 31, 2011. The value of outstanding RSU units is determined by multiplying the number

of units outstanding for each grant date by the PDC unit value on December 31, 2011. 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, 2011. The Performance Cash

Plan is prorated and a payout is made at Target.

(4) Assumes Medicare rate at 1.45%.

130Termination Protection Agreements

. The Company has entered into Termination Protection Agreements with Mr. Richards, Mr. Ferree, Mr. Willetts

and Ms. Arent that comply with Section 409A of the Internal Revenue Code. The agreements provide that if, at any time other than within two years after a

“ change of control, ” as defined below, the Company terminates 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 the Company ’ s normal payroll practices for 18 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 after twelve

months from the date of termination by amounts he or she earns through other employment during the remaining portion of the 18

- month salary

continuation period. 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, the Company terminates the executive officer ’ s employment other than for misconduct, or permanent

disa bility, 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 (2.99 times for the CEO), plus a multiple of two times his or her targeted bonus (2.99 times for the CEO) 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 for the Company in the year of termination.

The Company entered into an enhanced severance agreement with Mr. Fletcher on July 1, 2010. The agreement provides that if the Company

terminates Mr. Fletcher ’ s employment other than for misconduct, or “ permanent disability, ” or if Mr. Fletcher terminates employment for “ good reason ”

, as

defined below, Mr. Fletcher will continue to receive payments in accordance with the Company ’ s normal payroll practices for 52 weeks. The first 26 weeks

will be paid at a rate of 100% of base salary and the next 26 weeks will be paid at a rate of 60% of base salary. Mr. Fletcher is also entitled to a lump

- sum cash

payment representing a partial bonus for the year of termination, based on the number of full months Mr. Fletcher worked for the Company in the year of

termination. This agreement remains in effect for 12 months following a change of control unless the Company gives 12 months advance notice prior to a

change of control.

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 the Company ’ s 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 the length

of severance.

A “ change of control ” is defined in these agreements as a change in ownership or effective control of the Company or a change in the ownership of a

substantial portion of the assets of the Company, as defined by the occurrence of any one of the following events;

“ 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. • the date upon which a third party acquires ownership of Company stock constituting more than 50% of the total fair market value of total voting

power of the stock of the Company;

• the date upon which any third party acquires (during a 12

- month period ending on the date of the most recent acquisition) ownership of the

Company stock constituting more than 35% of the total voting power of the stock of the Company;

• the date upon which a majority of the Company ’ s Board of Directors are replaced during a 12

- month period, and the new appointments are not

endorsed by a majority of the Board prior to the date of appointment; or

• the date upon which any third party acquires (during a 12

- month period ending on the date of the most recent acquisition) assets of the

Company having a gross fair market value of at least 40% of the total gross fair market value of all assets of the Company immediately prior to

such acquisition.

131“ 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:

“ Major business ” is defined in these agreements as any business segment of the Company (e.g., carbonless 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.

2011 Director Compensation

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 retainer fees and $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 Corporate Governance Committee. Committee chair responsibilities are described in Item 10.

Director fees are paid quarterly in advance of the services being provided. If a director ceases to be a director during a quarter, the cash compensation for

the quarter is not prorated. There are no separate fees paid for participation in committee or board meetings. There are no changes in fees for 2012.

Directors also receive deferred compensation of $35,000 awarded in units which track PDC common stock. Deferred compensation will be calculated

and accrued 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, the 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.

No non

- employee director has a compensation arrangement which differs from these standard compensation arrangements. • 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;

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

• failure by any successor entity to expressly assume and agree to the terms of the Termination Protection Agreement.

Name Fees Earned or

Paid in Cash ($) (1) Stock

Awards ($) (2) Total ($)

Stephen P. Carter 65,000 35,000 100,000

Terry M. Murphy 55,000 35,000 90,000

Ronald A. Pace 45,000 20,417 65,417

Andrew F. Reardon 56,250 35,000 91,250

Susan Scherbel 15,000 8,750 23,750

Kathi P. Seifert 58,750 35,000 93,750

Mark A. Suwyn 22,917 14,583 37,500

George W. Wurtz 22,917 14,583 37,500

(1) Non

- employee directors are entitled to participate in the Company ’ s Nonqualified Excess Plan and may defer 100% of their fees. Mr. Murphy deferred

$55,000 of his cash compensation into that plan.

(2) On January 3, 2011, each of the then non

- employee directors were issued 1362.9 deferred compensation units valued at the December 31, 2010 share

price of $12.84 per share ($17,500). Ms. Scherbel ’ s was prorated upon departure from board. On July 1, 2011, each of the then non

- employee directors

were issued 1241.1 deferred compensation units valued at the June 30, 2011 share price of $14.10 per share ($17,500). Mr. Pace was prorated upon

departure from board. On July 22, 2011, Mr. Suwyn and Mr. Wurtz (new board members) were each issued 1034.2 deferred compensation units valued

at the June 30, 2011 share price of $14.10 per share ($14,583). The amounts reflect the aggregate grant date fair value computed in accordance with

Financial Accounting Standards Codification Topic.

132The 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, 2011, 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 Appleton Stock Fund of the KSOP.

*Less than 1%.

Item 13. Certain Relationships and Related Transactions and Director Independence

None. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Name of Beneficial Owner Amount and

Nature

of Beneficial

Ownership (1) Percent

Mark R. Richards 16,188 *

Thomas J. Ferree 20,571 *

Stephen P. Carter

— ( 2) *

Terry M. Murphy

— ( 2) *

Andrew F. Reardon

— ( 2) *

Kathi P. Seifert

— ( 2) *

Mark A. Suwyn

— ( 2) *

George W. Wurtz

— ( 2) *

Kent E. Willetts 15,141 *

Kerry S. Arent 31,473 *

Jeffrey J. Fletcher 1,809 *

Sarah T. Macdonald 9,304 *

James C. Tyrone 26,391 *

All directors and executive officers as a group (13 persons) 120,877 1.31%

(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,

Executive Officers and Corporate Governance. ” 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.

133Item 14. Principal Accountant Fees and Services

Audit Fees. The aggregate fees billed for professional services rendered by PricewaterhouseCoopers LLP for both the audit of financial statements

as of and for the years ended December 31, 2011 and January 1, 2011, and the review of the financial statements included in the Quarterly Reports on Form

10

- Q and assistance with and review of documents filed with the SEC during those periods were $504,907 in 2011 and $656,980 in 2010. The aggregate fees

billed by PricewaterhouseCoopers LLP for audit

- related services were $77,709 in 2011 and $104,900 in 2010. The 2011 fees consist of certain accounting

consultations. The 2010 fees consist of consultations related to Sarbanes Oxley 404 requirements and certain accounting consultations.

Tax Fees. The aggregate fees billed by PricewaterhouseCoopers LLP for tax services were $5,590 in 2011 and $4,000 in 2010. The 2011 and 2010 tax

fees relate to tax compliance for Rose Holdings Limited in the United Kingdom.

All Other Fees. There were other fees of $1,800 in 2011 and $1,500 in 2010 billed by PricewaterhouseCoopers LLP

.

134PART IV

Item 15. Exhibits and Financial Statement Schedules

(a)(1) Financial Statements.

Report of Independent Registered Public Accounting Firm

Paperweight Development Corp. and Subsidiaries 48

Appleton Papers Inc. and Subsidiaries 49

Consolidated Balance Sheets as of December 31, 2011 and January 1, 2011

Paperweight Development Corp. and Subsidiaries 50

Appleton Papers Inc. and Subsidiaries 51

Consolidated Statements of Operations for the years ended December 31, 2011, January 1, 2011 and January 2, 2010

Paperweight Development Corp. and Subsidiaries 52

Appleton Papers Inc. and Subsidiaries 53

Consolidated Statements of Cash Flows for the years ended December 31, 2011, January 1, 2011 and January 2, 2010

Paperweight Development Corp. and Subsidiaries 54

Appleton Papers Inc. and Subsidiaries 55

Consolidated Statements of Redeemable Common Stock, Accumulated Deficit, Accumulated

Other Comprehensive Loss and Comprehensive Income (Loss) for the years ended

December 31, 2011, January 1, 2011 and January 2, 2010 of Paperweight Development Corp. and Subsidiaries 56

Consolidated Statements of Equity for the years ended December 31, 2011, January 1, 2011

and January 2, 2010 of Appleton Papers Inc. and Subsidiaries 57

Notes to Consolidated Financial Statements 58

Report of Independent Registered Public Accounting Firm on Financial Statement Schedule

Paperweight Development Corp. and Subsidiaries 144

Appleton Papers Inc. and Subsidiaries 145

(a)(2) SCHEDULE II

- Valuation and Qualifying Accounts 146

(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 governing the 8 1/8% Senior Notes due 2011 (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 governing the 9 3/4 Senior Subordinated Notes due 2014 (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.

1354.3 Form of registered Senior Note (included as Exhibit A1 to the Senior Notes Indenture). Incorporated by reference to Exhibit 4.3 to the Registrants ’

Annual Report on Form 10

- K for the fiscal year ended January 2, 2010.

4.4 Form of registered Senior Subordinated Note (included as Exhibit A1 to the Senior Subordinated Notes Indenture). Incorporated by reference to

Exhibit 4.4 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010.

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. Incorporated by reference to Exhibit 4.5 to the Registrant ’ s Annual

Report on Form 10

- K for the fiscal year ended December 29, 2007.

4.6 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 9 3/4% Senior Subordinated Notes due 2014. Incorporated by reference to Exhibit 4.6 to the

Registrant ’ s Annual Report on Form 10

- K for the fiscal year ended December 29, 2007.

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 the Registrant'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 the

Registrant'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 the Registrant'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 the Registrant's current report on Form 8

- K filed on

June 16, 2006.

4.11 Third Supplemental Indenture, dated as of September 9, 2009, among Appleton Papers Inc., as issuer, 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 4.2 to the Registrant's

current report on Form 8

- K filed October 6, 2009.

4.12 Third Supplemental Indenture, dated as of September 9, 2009, among Appleton Papers Inc., as issuer, each of the guarantors named therein and U.S.

Bank National Association, a trustee, governing the 9 3/4% Senior Subordinated Notes due 2011. Incorporated by reference to Exhibit 4.3 to the

Registrant's current report on Form 8

- K filed October 6, 2009.

4.13 Indenture, dated as of September 30, 2009, among Appleton Papers Inc., as issuer, each of the guarantors named therein and U.S. Bank National

Association, as trustee and collateral agent, governing the 11.25% Second Lien Notes due 2015 (the "Second Lien Notes Indenture"). Incorporated

by reference to Exhibit 4.1 to the Registrant's current report on Form 8

- K filed October 6, 2009.

4.14 Form of Second Lien Notes due 2015 (included as Exhibits A1 and A2 to the Second Lien Notes Indenture). Incorporated by reference to Exhibit 4.14

to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010.

4.15 Second Lien Collateral Agreement, dated as of September 30, 2009, among Appleton Papers Inc., Paperweight Development Corp. and each other

Grantor identified therein in favor of U.S. Bank National Association, as Collateral Agent. Incorporated by reference to Exhibit 4.14 to Registrants'

Quarterly Report on Form 10

- Q filed for the quarter ended July 3, 2011

.

4.16 First Supplemental Indenture, dated as of January 29, 2010, among Appleton Papers Inc., as issuer, each of the guarantors identified therein and U.S.

Bank National Association, as trustee and collateral agent, governing the 11.25% Second Lien Notes Due 2015. Incorporated by reference to Exhibit

4.1 to the Registrant ’ s current report on Form 8

- K filed February 3, 2010.

1364.17 Indenture, dated as of February 8, 2010, among Appleton Papers Inc., as issuer, each of the guarantors named therein and U.S. Bank National

Association, as trustee and collateral agent, governing the 10.50% Senior Secured Notes due 2015 (the “ Senior Secured Notes Indenture ” ).

Incorporated by reference to Exhibit 4.1 to the Registrant ’ s current report on Form 8

- K filed February 12, 2010.

4.18 Form of 10 1/2% Senior Secured Notes due 2015 (included as Exhibit A to the Senior Secured Notes Indenture). Incorporated by reference to Exhibit

4.18 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010.

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 10.1 to the Registrants ’ Quarterly Report on Form

10

- Q for the quarter ended October 2, 2011

.

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 3, 2011

.

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.

13710.9 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

the Registrants ’ Quarterly Report on Form 10

- Q for the quarter ended July 1, 2007.

10.9.1 First Amendment to Credit Agreement and Waiver, dated as of March 23, 2009, among Appleton Papers Inc., as the U.S. Borrower, Paperweight

Development Corp. as Holdings certain subsidiaries of Holdings, as Guarantors, Bank of America, N.A. as Administrative Agent, swing line lender

and L/C issuer, and Lenders as identified on the signature pages thereof. Incorporated by reference to Exhibit 4.11.1 to the Registrants' Annual

Report on Form 10

- K for the fiscal year ended January 3, 2009.

10.9.2 Second Amendment to Credit Agreement, dated as of September 30, 2009, among Appleton Papers Inc., as the U.S. Borrower, Paperweight

Development Corp. as Holdings, certain subsidiaries of Holdings, as Guarantors, Bank of America, N.A. as Administrative Agent, swing line lender

and L/C issuer, and Lenders as identified on the signature pages thereof. Incorporated by reference to Exhibit 10.3 to the Registrants' Quarterly

Report on Form 10

- Q for the quarter ended July 3, 2011

.

10.10 Collateral Agreement made by Paperweight Development Corp., Appleton Papers Inc., and certain of its subsidiaries in favor of U.S. Bank National

Association, as collateral agent, dated as of February 8, 2010. Incorporated by reference to Exhibit 4.2 to the Registrants ’ current report on Form 8

- K filed February 12, 2010.

10.11 Collateral Agreement made by Appleton Papers Canada Ltd. in favor of U.S. Bank National Association, as collateral agent, dated as of February 8,

2010. Incorporated by reference to Exhibit 10.4 to the Registrant ’ s Quarterly Report on Form 10

- Q for the quarter ended July 3, 2011

.

10.12 Credit Agreement, dated as of February 8, 2010, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as holdings, Fifth

Third Bank, as administrative agent, swing line lender and an L/C issuer, the other lenders party thereto and Fifth Third Bank, as sole lead arranger

and sole book manager. Incorporated by reference to Exhibit 10.2 to the Registrants ’ Quarterly report on Form 10

- Q for the quarter ended

October 2, 2011

.

10.12.1 First Amendment to Credit Agreement, dated as of August 27, 2010, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as

holdings, Fifth Third Bank, as administrative agent, swing line lender and an L/C issuer, and the other lenders party thereto.

10.12.2 Second Amendment to Credit Agreement, dated as of July 1, 2011, among Appleton Papers Inc., as borrower, Paperweight Development Corp., as

holdings, Fifth Third Bank, as administrative agent, swing line lender and an L/C issuer, and the other lenders party thereto. Incorporated by

reference to Exhibit 10.2.1 to the Registrants ’ Quarterly Report on Form 10

- Q for the quarter ended October 2, 2011.

10.13 Guarantee and Collateral Agreement made by Paperweight Development Corp., Appleton Papers Inc. and certain of its subsidiaries, in favor of

Fifth Third Bank, as administrative agent, dated as of February 8, 2010. Incorporated by reference to Exhibit 10.6 to the Registrants ’ Quarterly

Report on Form 10

- Q for the quarter ended July 3, 2011.

10.14 Guarantee and Collateral Agreement made by Appleton Papers Canada Ltd. in favor of Fifth Third Bank, as administrative agent, dated as of

February 8, 2010. Incorporated by reference to Exhibit 10.7 to the Registrant ’ s Quarterly Report on Form 10

- Q for the quarter ended July 3, 2011

.

10.15 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)

10.16 The Executive Nonqualified Excess Plan of Appleton Papers Inc., as amended and restated on January 1, 2008. Incorporated by reference to Exhibit

10.15 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010. (1)

10.16.1 Adoption Agreement, dated as of February 24, 2009, by Appleton Papers Inc. and Principal Life Insurance Company, as the provider. Incorporated

by reference to Exhibit 10.15.1 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010. (1)

13810.16.2 Adoption Agreement, effective March 1, 2010, by Appleton Papers Inc. and Principal Life Insurance Company, as the provider. Incorporated by

reference to Exhibit 10.15.2 to the Registrants ’ Annual Report on Form 10

- K for the year ended January 1, 2011. (1)

10.16.3 Resolutions of the Board of Directors of Appleton Papers Inc. dated November 11, 2010, adopting clarifying amendments to The Executive

Nonqualified Excess Plan of Appleton Papers Inc., effective November 11, 2010. Incorporated by reference to Exhibit 10.15.3 to the Registrants ’

Annual Report on Form 10

- K for the year ended January 1, 2011. (1)

10.16.4 Adoption Agreement, effective March 1, 2011, by Appleton Papers Inc. and Principal Life Insurance Company, as the provider. Incorporated by

reference to Exhibit 10.2 to the Registrants ’ Quarterly Report on Form 10

- Q for the quarter ended April 3, 2011. (1)

10.17 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)

10.17.1 Amendment to the Appleton Papers Inc. Supplemental Executive Retirement Plan, effective January 1, 2009. Incorporated by reference to Exhibit

10.16.1 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010. (1)

10.18 Form of Termination Protection Agreement. Incorporated by reference to Exhibit 10.13 to the Registrant's Annual Report on Form 10

- K for the fiscal

year ended January 3, 2009. (1)

10.18.1 Clarifying Amendment to Form of Termination Protection Agreement, effective November 11, 2010. Incorporated by reference to Exhibit 10.17.1 to

the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 1, 2011. (1)

10.19 Enhanced Severance Agreement for Jeff Fletcher dated effective July 1, 2010, as amended November 11, 2010. Incorporated by reference to Exhibit

10.18 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 1, 2011. (1)

10.20 Termination Protection Agreement Amended and Restated for Mark R. Richards dated effective December 17, 2008. Incorporated by reference to

Exhibit 10.14 to the Registrant's Annual Report on Form 10

- K for the fiscal year ended January 3, 2009. (1)

10.20.1 Clarifying Amendment to Termination Protection Agreement Amended and Restated for Mark R. Richards, effective November 11, 2010.

Incorporated by reference to Exhibit 10.19.1 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 1, 2011. (1)

10.21 Appleton Papers Inc. Retention Plan, effective February 22, 2012. (1)

10.22 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.

10.23 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.

10.24 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.

10.25 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.

10.26 Appleton Papers Retirement Savings and Employee Stock Ownership Plan, amended and restated generally effective January 1, 2009. Incorporated

by reference to Exhibit 10.23 to the Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 2, 2010. (1)

10.26.1 Resolution by Appleton ’ s Board of Directors dated December 8, 2010, amending the Appleton Papers Inc. Retirement Savings and Employee Stock

Ownership Plan, generally effective March 1, 2011. Incorporated by reference to Exhibit 10.24.2 to the Registrants ’ Annual Report on Form 10

- K for

the fiscal year ended January 1, 2011. (1)

13910.26.2 Resolution by Appleton ’ s ESOP Administrative Committee the Benefit Finance Committee of Appleton Papers Inc. effective October 1, 2011,

amending Appleton Papers Retirement Savings and Employee Stock Ownership Plan, generally effective January 1, 2009.

10.27 Amended and restated Appleton Papers Inc. Retirement Plan as amended through March 9, 2011. Incorporated by reference to Exhibit 10.1 to the

Registrants ’ Quarterly Report on Form 10

- Q for the quarter ended April 3, 2011. (1)

10.27.1 Resolutions by the Benefit Finance Committee of Appleton Papers Inc. dated April 4, 2011 further amending the Appleton Papers Inc. Retirement

Plan as amended through March 9, 2011. Incorporated by reference to Exhibit 10.1.1 to the Registrants ’ Quarterly Report on Form 10

- Q for the

quarter ended April 3, 2011. (1)

10.28 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. (1)

10.29 Appleton Papers Inc. Long

- Term Incentive Plan, as amended and restated, effective as of January 1, 2011

. (1)

10.30 Appleton Papers Inc. Long

- Term Performance Cash Plan, amended and restated, effective November 11, 2010. (1)

10.31 Appleton Papers Inc. Long Term Restricted Stock Unit Plan, revised and restated effective November 11, 2010. (1)

10.32 Stock Purchase Agreement between Appleton Papers Inc. and NEX Performance Films Inc. dated as of July 2, 2010. Incorporated by reference to

Exhibit 2.1 to the Registrant ’ s current report on Form 8

- K/A filed August 9, 2010 (exhibits and schedules have been omitted pursuant to Item 601(b)

(2) of Regulation S

- K, but a copy will be furnished supplementally to the Securities and Exchange Commission upon request)

.

10.33 Supply Agreement dated as of February 22, 2012 between Domtar Paper Company, LLC, Domtar A.W. LLC and Appleton Papers Inc. (with certain

confidential information deleted therefrom).

18.1 Letter of Concurring Opinion from PricewaterhouseCoopers, dated March 11, 2011, to the Board or Directors of Paperweight Development Corp. and

Subsidiaries regarding the preferability of change in accounting principle from the LIFO to the FIFO method. Incorporated by reference to the

Registrants ’ Annual Report on Form 10

- K for the fiscal year ended January 1, 2011.

21.1 Subsidiaries of Paperweight Development Corp.

31.1 Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to Rule 15d

- 14(a) of the

Securities Exchange Act of 1934 as amended.

31.2 Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to Rule 15d

14(a) of the Securities Exchange Act of 1934 as amended.

31.3 Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to Rule 15d

- 14(a) of

the Securities Exchange Act of 1934 as amended.

31.4 Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant

to Rule 15d

- 14(a) of the Securities Exchange Act of 1934 as amended.

32.1 Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.

32.2 Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C.

Section 1350.

32.3 Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to 18 U.S.C. Section

1350.

32.4 Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant

to 18 U.S.C. Section 1350.

140Certain 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

schedule. 101.ins XBRL Instance Document

101.sch XBRL Taxonomy Extension Schema

101.cal XBRL Taxonomy Extension Calculation Linkbase

101.def XBRL Taxonomy Extension Definition Linkbase

101.lab Taxonomy Extension Label Linkbase

101.pre Taxonomy Extension Presentation Linkbase

(1) Management contract or compensatory plan or arrangement.

141SIGNATURES

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.

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:

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 2011. APPLETON PAPERS INC.

By: /s/ Mark R. Richards

Mark R. Richards

President and Chief Executive Officer

Date: March 23, 2012

Name Title Date

/s/ MARK R. RICHARDS

Mark R. Richards Chairman, President, Chief Executive Officer and a Director

(Principal Executive Officer) March 23, 2012

/s/ THOMAS J. FERREE

Thomas J. Ferree Senior Vice President Finance, Chief Financial Officer and Treasurer

(Principal Financial Officer) March 23, 2012

/s/ JEFFREY J. FLETCHER

Jeffrey J. Fletcher Vice President, Controller and Assistant Treasurer March 23, 2012

/s/ STEPHEN P. CARTER

Stephen P. Carter Director March 23, 2012

/s/ TERRY M. MURPHY Director March 23, 2012

Terry M. Murphy

/s/ ANDREW F. REARDON Director March 23, 2012

Andrew F. Reardon

/s/ KATHI P. SEIFERT

Kathi P. Seifert Director March 23, 2012

/s/ MARK A. SUWYN

Mark A. Suwyn Director March 23, 2012

/s/ GEORGE W. WURTZ

George W. Wurtz Director March 23, 2012

142SIGNATURES

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.

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:

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 2011. PAPERWEIGHT DEVELOPMENT CORP.

By: /s/ Mark R. Richards

Mark R. Richards

President and Chief Executive Officer

Date: March 23, 2012

Name Title Date

/s/ MARK R. RICHARDS

Mark R. Richards Chairman, President, Chief Executive Officer and a Director

(Principal Executive Officer) March 23, 2012

/s/ THOMAS J. FERREE

Thomas J. Ferree Senior Vice President Finance, Chief Financial Officer and Treasurer

(Principal Financial Officer) March 23, 2012

/s/ JEFFREY J. FLETCHER

Jeffrey J. Fletcher Vice President, Controller and Assistant Treasurer March 23, 2012

/s/ STEPHEN P. CARTER

Stephen P. Carter Director March 23

, 2012

/s/ TERRY M. MURPHY Director March 23, 2012

Terry M. Murphy

/s/ ANDREW F. REARDON Director March 23, 2012

Andrew F. Reardon

/s/ KATHI P. SEIFERT

Kathi P. Seifert Director March 23, 2012

/s/ MARK A. SUWYN

Mark A. Suwyn Director March 23, 2012

/s/ GEORGE W. WURTZ

George W. Wurtz Director March 23, 2012

143REPORT 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 23, 2012 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 LLP

PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 23, 2012

144REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

ON

FINANCIAL STATEMENT SCHEDULE

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

Our audits of the consolidated financial statements referred to in our report dated March 23, 2012 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 LLP

PricewaterhouseCoopers LLP

Milwaukee, Wisconsin

March 23, 2012

145PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

AND APPLETON PAPERS INC. AND SUBSIDIARIES

SCHEDULE II

— Valuation and Qualifying Accounts

(dollars in thousands)

The amounts above do not include C&H, APC or NEX because they were reclassified as discontinued operations. Their period

- end balance of

allowance for losses on accounts receivable was $405 for 2009.

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 and Appleton or the notes thereto or the

schedules are not required or are inapplicable under the related instructions. Allowances for Losses on Accounts Receivable Balance at

Beginning of

Period Charged

To Costs

and

Expenses Amounts

Written

Off Less

Recoveries Balance at

End of Period

January 2, 2010 $ 1,621 $ 2,425 $ (2,690 ) $ 1,356

January 1, 2011 1,356 734 (655 ) 1,435

December 31, 2011 1,435 679 (928 ) 1,186

146