UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-Q





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




For
the quarterly period ended: April 5, 2009





OR




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


For
The Transition Period
From            To            
..




Commission
file numbers: 333-82084-01


333-82084


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





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




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




Indicate
by check mark whether each registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes      No  




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


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


(Do not
check if a smaller reporting company)




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





As of May
1, 2009, 10,640,818 shares of Paperweight Development Corp. common stock, $.01
par value, were outstanding. There is no trading market for the common stock of
Paperweight Development Corp. As of May 1, 2009, 100 shares of Appleton Papers
Inc.’s common stock, $100.00 par value, were outstanding. There is no trading
market for the common stock of Appleton Papers Inc. No shares of Paperweight
Development Corp. or Appleton Papers Inc. were held by
non-affiliates.




Documents
incorporated by reference: None.




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


1


INDEX





Page
                          NumberPART I
                        FINANCIAL
      INFORMATIONItem 1
                        Financial
      Statements (unaudited)a)
      Condensed Consolidated Balance Sheets
                        3b)
      Condensed Consolidated Statements of Operations
                        4c)
      Condensed Consolidated Statements of Cash Flows
                        5d)
      Consolidated Statements of Redeemable Common Stock, Accumulated Deficit,
      Accumulated
                          Other
      Comprehensive Income (Loss) and Comprehensive Income
                        6e)
      Notes to Condensed Consolidated Financial Statements
                        7Item 2
                        Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                        30Item 3
                        Quantitative
      and Qualitative Disclosures About Market Risk
                        36Item 4T
                        Controls
      and Procedures
                        36PART II
                        OTHER
      INFORMATIONItem
      1
                        Legal
      Proceedings
                        37Item 1A
                        Risk
      Factors
                        37Item
      3
                        Defaults
      Upon Senior Securities
                        37Item 6
                        Exhibits
                        38Signatures
                        
                        39


2


PART 1 – FINANCIAL
INFORMATION


Item 1 – Financial
Statements (unaudited)





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETS(unaudited)(dollars
      in thousands, except share data)April 5, 2009
                            
                            
                            January 3, 2009ASSETSCurrent
      assetsCash
      and cash equivalents
                            
                            $
                            4,857
                            
                            
                            $
                            4,180Accounts
      receivable, less allowance for doubtful accounts of $3,308 and $1,825,
      respectively
                            
                            
                            101,103
                            
                            
                            
                            92,029Inventories
                            
                            
                            129,311
                            
                            
                            
                            130,053Other
      current assets
                            
                            
                            48,793
                            
                            
                            
                            46,239Total
      current assets
                            
                            
                            284,064
                            
                            
                            
                            272,501Property,
      plant and equipment, net of accumulated depreciation of
                              $412,621
      and $398,683, respectively
                            
                            
                            436,288
                            
                            
                            
                            445,671Goodwill
                            
                            
                            10,601
                            
                            
                            
                            10,601Intangible
      assets, net
                            
                            
                            71,979
                            
                            
                            
                            72,939Environmental
      indemnification receivable
                            
                            
                            99,930
                            
                            
                            
                            114,300Other
      assets
                            
                            
                            15,296
                            
                            
                            
                            13,909Total
      assets
                            
                            $
                            918,158
                            
                            
                            $
                            929,921LIABILITIES,
      REDEEMABLE COMMON STOCK,
                              ACCUMULATED
      DEFICIT AND
                              ACCUMULATED
      OTHER COMPREHENSIVE LOSSCurrent
      liabilitiesCurrent
      portion of long-term debt
                            
                            $
                            5,390
                            
                            
                            $
                            5,455Accounts
      payable
                            
                            
                            47,095
                            
                            
                            
                            62,538Accrued
      interest
                            
                            
                            9,610
                            
                            
                            
                            3,628Other
      accrued liabilities
                            
                            
                            80,080
                            
                            
                            
                            84,142Total
      current liabilities
                            
                            
                            142,175
                            
                            
                            
                            155,763Long-term
      debt
                            
                            
                            617,644
                            
                            
                            
                            598,598Postretirement
      benefits other than pension
                            
                            
                            45,504
                            
                            
                            
                            45,364Accrued
      pension
                            
                            
                            110,639
                            
                            
                            
                            109,532Environmental
      liability
                            
                            
                            99,930
                            
                            
                            
                            114,300Other
      long-term liabilities
                            
                            
                            8,076
                            
                            
                            
                            13,309Commitments
      and contingencies (Note 13)
                            
                            
                            -
                            
                            
                            
                            -Redeemable
      common stock, $0.01 par value,
                              shares
      authorized: 30,000,000,
                              shares
      issued and outstanding:  10,643,361 and
                              10,643,894,
      respectively
                            
                            
                            147,392
                            
                            
                            
                            147,874Accumulated
      deficit
                            
                            
                            (158,017
                            )
                            
                            
                            (159,650
                            )Accumulated
      other comprehensive loss
                            
                            
                            (95,185
                            )
                            
                            
                            (95,169
                            )Total
      liabilities, redeemable common stock, accumulated
                              deficit
      and accumulated other comprehensive loss
                            
                            $
                            918,158
                            
                            
                            $
                            929,921

















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





3


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONSFOR
      THE THREE MONTHS ENDED(unaudited)(dollars
      in thousands)April 5,
      2009
                
                
                March 30, 2008Net
      sales
                
                $
                212,550
                
                
                $
                236,612Cost
      of sales
                
                
                170,809
                
                
                
                181,690Gross profit
                
                
                41,741
                
                
                
                54,922Selling,
      general and administrative expenses
                
                
                34,318
                
                
                
                44,618Operating
      income
                
                
                7,423
                
                
                
                10,304Other
      expense (income)Interest
      expense
                
                
                11,392
                
                
                
                11,074Debt
      extinguishment income, net
                
                
                (5,380
                )
                
                
                -Interest
      income
                
                
                (16
                )
                
                
                (181
                )Litigation
      settlement, net (Note 13)
                
                
                -
                
                
                
                (22,233
                )Foreign
      exchange loss
                
                
                279
                
                
                
                232Income
      from continuing operations before income taxes
                
                
                1,148
                
                
                
                21,412(Benefit)
      provision for income taxes
                
                
                (15
                )
                
                
                37Income
      from continuing operations
                
                
                1,163
                
                
                
                21,375Discontinued
      operationsIncome
      from discontinued operations, net of income taxes
                
                
                -
                
                
                
                25Net
      income
                
                $
                1,163
                
                
                $
                21,400









































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





4


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE THREE MONTHS ENDED(unaudited)(dollars
      in thousands)April 5, 2009
                
                
                March 30, 2008Cash
      flows from operating activities:Net
      income
                
                $
                1,163
                
                
                $
                21,400Adjustments
      to reconcile net income to net cash provided (used) by operating
      activities:Depreciation
                
                
                14,429
                
                
                
                13,428Amortization
      of intangible assets
                
                
                960
                
                
                
                1,367Impairment
      of discontinued operations goodwill and long-lived
      assets
                
                
                -
                
                
                
                (1,031
                )Amortization
      of financing fees
                
                
                569
                
                
                
                580Employer
      401(k) noncash matching contributions
                
                
                1,147
                
                
                
                1,869Foreign
      exchange loss
                
                
                279
                
                
                
                14Loss
      on disposals of equipment
                
                
                32
                
                
                
                513Accretion
      of capital lease obligation
                
                
                21
                
                
                
                32Litigation
      settlement, net
                
                
                -
                
                
                
                (22,233
                )Gain
      on debt extinguishment
                
                
                (5,380
                )
                
                
                -(Increase)/decrease
      in assets and increase/(decrease) in liabilities:Accounts
      receivable
                
                
                (9,468
                )
                
                
                12,901Inventories
                
                
                862
                
                
                
                (22,571
                )Other
      current assets
                
                
                (2,537
                )
                
                
                751Accounts
      payable and other accrued liabilities
                
                
                3,549
                
                
                
                (7,290
                )Restructuring
      reserve
                
                
                (1,468
                )
                
                
                (169
                )Accrued
      pension
                
                
                1,364
                
                
                
                (1,736
                )Fox
      River liabilities, net
                
                
                -
                
                
                
                (4,506
                )Other,
      net
                
                
                (5,214
                )
                
                
                2,522Net
      cash provided (used) by operating activities
                
                
                308
                
                
                
                (4,159
                )Cash
      flows from investing activities:Proceeds
      from sale of equipment
                
                
                9
                
                
                
                3Additions
      to property, plant and equipment
                
                
                (4,745
                )
                
                
                (26,007
                )Net
      cash used by investing activities
                
                
                (4,736
                )
                
                
                (26,004
                )Cash
      flows from financing activities:Payments
      of senior secured notes payable
                
                
                (562
                )
                
                
                (562
                )Payments
      of senior subordinated secured notes payable
                
                
                (1,687
                )
                
                
                -Debt
      acquisition costs
                
                
                (2,685
                )
                
                
                -Payments
      relating to capital lease obligation
                
                
                (182
                )
                
                
                (183
                )Proceeds
      from revolving credit facility
                
                
                43,850
                
                
                
                29,300Payments
      of revolving credit facility
                
                
                (16,050
                )
                
                
                (19,300
                )Payments
      of State of Ohio loan
                
                
                (200
                )
                
                
                -Payments
      of secured financing
                
                
                (557
                )
                
                
                -Proceeds
      from issuance of redeemable common stock
                
                
                -
                
                
                
                330Payments
      to redeem common stock
                
                
                (12
                )
                
                
                (49
                )Decrease
      in cash overdraft
                
                
                (16,810
                )
                
                
                (1,916
                )Net
      cash provided by financing activities
                
                
                5,105
                
                
                
                7,620Effect
      of foreign exchange rate changes on cash and cash
      equivalents
                
                
                -
                
                
                
                (254
                )Change
      in cash and cash equivalents
                
                
                677
                
                
                
                (22,797
                )Cash
      and cash equivalents at beginning of period
                
                
                4,180
                
                
                
                44,838Cash
      and cash equivalents at end of period
                
                $
                4,857
                
                
                $
                22,041











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




5


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT, ACCUMULATED OTHER COMPREHENSIVE (LOSS)INCOME
      AND COMPREHENSIVE INCOMEFOR
      THE THREE MONTHS ENDED(unaudited)(dollars
      in thousands, except share data)Redeemable
      Common StockShares
                  Outstanding
                
                
                Amount
                
                
                Accumulated
                  Deficit
                
                
                Accumulated
                  Other
                  Comprehensive
                  (Loss)
      Income
                
                
                Comprehensive
                  IncomeBalance,
      January 3, 2009
                
                
                10,643,894
                
                
                $
                147,874
                
                
                $
                (159,650
                )
                
                $
                (95,169
                )Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                1,163
                
                
                
                -
                
                
                $
                1,163Changes
      in retiree plans, net
                -
                -
                -
                (288
                )
                
                (288
                )Realized
      and unrealized gain on derivatives
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                272
                
                
                
                272Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                1,147Redemption
      of redeemable common stock
                
                
                (533
                )
                
                
                (12
                )
                
                
                -
                
                
                
                -Accretion
      of redeemable common stock
                
                
                -
                
                
                
                (470
                )
                
                
                470
                
                
                
                -Balance,
      April 5, 2009
                
                
                10,643,361
                
                
                $
                147,392
                
                
                $
                (158,017
                )
                
                $
                (95,185
                )Balance,
      December 29, 2007
                
                
                11,116,751
                
                
                $
                182,040
                
                
                $
                (80,086
                )
                
                $
                3,679Comprehensive
      income:Net
      income
                
                
                -
                
                
                
                -
                
                
                
                21,400
                
                
                
                -
                
                
                $
                21,400Changes
      in retiree plans, net
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (36
                )
                
                
                (36
                )Foreign
      currency translationadjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                35
                
                
                
                35Realized
      and unrealized loss on derivatives
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,960
                )
                
                
                (2,960
                )Total
      comprehensive income
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                18,439Issuance
      of redeemable common stock
                
                
                9,881
                
                
                
                330
                
                
                
                -
                
                
                
                -Redemption
      of redeemable common stock
                
                
                (1,460
                )
                
                
                (49
                )
                
                
                -
                
                
                
                -Accretion
      of redeemable common stock
                
                
                -
                
                
                
                2,806
                
                
                
                (2,806
                )
                
                
                -Balance,
      March 30, 2008
                
                
                11,125,172
                
                
                $
                185,127
                
                
                $
                (61,492
                )
                
                $
                718











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


6


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





(unaudited)





1.        BASIS
OF PRESENTATION




In the
opinion of management, all adjustments necessary for the fair presentation of
the results of operations for the three months ended April 5, 2009 and March 30,
2008, the cash flows for the three months ended April 5, 2009 and March 30, 2008
and financial position at April 5, 2009 have been made. All adjustments made
were of a normal recurring nature.





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





The
results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year. Certain prior year financial
statement amounts have been reclassified to conform to their current year
presentation. On the Condensed Consolidated Statement of Operations for the
three months ended March 30, 2008, revenue associated with government contracts
of $0.4 million has been reclassified from selling, general and administrative
expenses to net sales. This reclassification had no effect on net income. This
$0.4 million of revenue is included in the coated solutions segment net sales as
presented in Note 18, Segment Information. The corresponding operating income of
$44,000 has been reclassified out of unallocated corporate charges and business
development costs and included in the coated solutions segment operating income
(loss) of this same Note 18.





2.        DISCONTINUED
OPERATIONS/SALE OF BUSINESS





Late in
2007, Appleton committed to a formal plan to sell Bemrose Group Limited
(“Bemrose”), its secure and specialized print services business based in Derby,
England. After conducting a strategic review in the fourth quarter of 2007,
Appleton decided to focus its attention and expand its leadership positions in
its core businesses. The operating results of Bemrose for the three months ended
March 30, 2008 are reported separately as discontinued operations. For the three
months ended March 30, 2008, Bemrose recorded net sales of $22.8 million and
income before income taxes of $25,000.




On
August 1, 2008, Appleton completed the sale of Bemrose receiving $3.9
million of cash and $6.4 million of notes receivable to be settled within 75 and
180 days after closing. The first tranche of notes receivable was paid in
November 2008, however, due to continuing difficult business conditions in
Bemrose markets, Appleton established a $1.5 million reserve against the $3.0
million remaining principal and interest of the notes receivable at year-end
2008.





3.        GOODWILL
AND OTHER INTANGIBLE ASSETS





The
Company reviews the carrying value of goodwill and intangible assets with
indefinite lives for impairment annually or more frequently if events or changes
in circumstances indicate that an asset might be impaired. The carrying amount
of goodwill as of April 5, 2009 and January 3, 2009 was $10.6 million and was
assigned entirely to the performance packaging segment.








7


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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





As
      of April 5, 2009
                
                
                As
      of January 3, 2009Gross
      Carrying Amount
                
                
                Accumulated
      Amortization
                
                
                Gross
      Carrying Amount
                
                
                Accumulated
      AmortizationAmortizable
      intangible assets:Trademarks
                
                $
                49,255
                
                
                $
                19,562
                
                
                $
                49,255
                
                
                $
                18,980Patents
                
                
                30,979
                
                
                
                30,696
                
                
                
                30,979
                
                
                
                30,643Customer
      relationships
                
                
                26,024
                
                
                
                6,890
                
                
                
                26,024
                
                
                
                6,565Non-compete
      agreements
                
                
                932
                
                
                
                928
                
                
                
                932
                
                
                
                928Subtotal
                
                
                107,190
                
                
                $
                58,076
                
                
                
                107,190
                
                
                $
                57,116Unamortizable
      intangible assets:Trademarks
                
                
                22,865
                
                
                
                
                
                
                
                22,865Total
                
                $
                130,055
                
                
                
                
                
                
                $
                130,055





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





Amortization
expense for the three months ended April 5, 2009 approximated $1.0 million.
Amortization expense for the three months ended March 30, 2008 approximated $1.4
million.





4.        RESTRUCTURING
AND OTHER CHARGES





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





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





January 3, 2009
                          
                          2009
      Additions
                          
                          2009
                          
                          April
      5, 2009Reserve
                          
                          to
      Reserve
                          
                          Utilization
                          
                          Reserve$
                          
                          
                          $U.S.
      employee termination benefits
                          $                 2,138
                          $                             -
                          (1,468
                          )
                          670








8





PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





5.         INVENTORIES





Inventories
consist of the following (dollars in thousands):





April
      5, 2009
                
                
                January 3, 2009Finished
      goods
                
                $
                72,199
                
                
                $
                72,855Raw
      materials, work in process and supplies
                
                
                71,388
                
                
                
                72,196143,587
                
                
                
                145,051Inventory
      reserve
                
                
                (3,759
                )
                
                
                (4,481
                )139,828
                
                
                
                140,570LIFO
      reserve
                
                
                (10,517
                )
                
                
                (10,517
                )$
                129,311
                
                
                $
                130,053





Stores
and spare parts inventory balances of $23.7 million and $23.2 million at April
5, 2009 and January 3, 2009, respectively, are valued at average cost and are
included in raw materials, work in process and supplies. Inventories valued
using the FIFO method approximate 13% of the Company’s total inventory balance
at both April 5, 2009, and January 3, 2009.





6.        PROPERTY,
PLANT AND EQUIPMENT





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





April 5,
      2009
                
                
                January 3, 2009Land
      and improvements
                
                $
                10,099
                
                
                $
                10,071Buildings
      and improvements
                
                
                134,915
                
                
                
                134,761Machinery
      and equipment
                
                
                654,626
                
                
                
                653,543Software
                
                
                32,958
                
                
                
                32,788Capital
      lease
                
                
                4,764
                
                
                
                4,764Construction
      in progress
                
                
                11,547
                
                
                
                8,427848,909
                
                
                
                844,354Accumulated
      depreciation/amortization
                
                
                (412,621
                )
                
                
                (398,683
                )$
                436,288
                
                
                $
                445,671





Depreciation
expense for the three months ended April 5, 2009 and March 30, 2008
consists of the following (dollars in thousands):





For
      the Three
                        Months
      Ended
                        April 5, 2009
                    
                    
                    For
      the Three
                        Months
      Ended
                        March 30, 2008Cost
      of sales
                    
                    $
                    12,761
                    
                    
                    $
                    11,552Selling,
      general and administrative expenses
                    
                    
                    1,668
                    
                    
                    
                    1,876$
                    14,429
                    
                    
                    $
                    13,428





9





PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





7.        OTHER
ASSETS





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




April 5,
      2009
            
            
            January 3,
      2009Deferred
      debt issuance costs
            
            $
            12,651
            
            
            $
            10,968Other
            
            
            2,645
            
            
            
            2,941$
            15,296
            
            
            $
            13,909





8.        OTHER
ACCRUED LIABILITIES





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





April 5,
      2009
              
              
              January 3,
      2009Payroll
      and bonus
              
              $
              7,880
              
              
              $
              5,030Trade
      discounts
              
              
              13,841
              
              
              
              18,537Workers’
      compensation
              
              
              4,072
              
              
              
              4,489Accrued
      insurance
              
              
              1,971
              
              
              
              1,744Other
      accrued taxes
              
              
              1,083
              
              
              
              1,901Postretirement
      benefits other than pension
              
              
              3,329
              
              
              
              3,329Fox
      River Liabilities
              
              
              37,700
              
              
              
              37,700Restructuring
      reserve
              
              
              670
              
              
              
              2,138Other
              
              
              9,534
              
              
              
              9,274$
              80,080
              
              
              $
              84,142





9.        NEW
ACCOUNTING PRONOUNCEMENTS





In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4 “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.” Based on the guidance, if an entity
determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value in
accordance with Statement of Financial Accounting Standards (SFAS) 157 “Fair
Value Measurements.” This FSP is to be applied prospectively and is effective
for interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The Company is currently
evaluating the impact, if any, on its financial statements.





In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1
“Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends
SFAS 107 “Disclosures about Fair Value of Financial Instruments” to require an
entity to provide disclosures about fair value of financial instruments in
interim financial information. This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. The Company is
currently evaluating the impact, if any, on its financial
statements.





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


10





PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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





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





10.      EMPLOYEE
BENEFITS





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





Pension
      Benefits
                        
                        For
      the Three
                            Months
      Ended
                            April 5, 2009
                        
                        
                        For
      the Three
                            Months
      Ended
                            March 30, 2008Net
      periodic benefit costService
      cost
                        
                        $
                        1,458
                        
                        
                        $
                        1,538Interest
      cost
                        
                        
                        4,909
                        
                        
                        
                        4,488Expected
      return on plan assets
                        
                        
                        (5,200
                        )
                        
                        
                        (5,186
                        )Amortization of prior service cost
                        
                        
                        135
                        
                        
                        
                        48Amortization
      of actuarial loss
                        
                        
                        122
                        
                        
                        
                        -Net
      periodic benefit cost
                        
                        $
                        1,424
                        
                        
                        $
                        888





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




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





11


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





11.      POSTRETIREMENT
BENEFIT PLANS OTHER THAN PENSIONS





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





Other
      Postretirement Benefits
                    
                    For
      the Three
                      Months
      Ended
                      April 5, 2009
                    
                    
                    For
      the Three
                      Months
      Ended
                      March 30, 2008Net
      periodic benefit costService
      cost
                    
                    $
                    185
                    
                    
                    $
                    232Interest
      cost
                    
                    
                    767
                    
                    
                    
                    770Amortization
      of prior service cost
                    
                    
                    (545
                    )
                    
                    
                    (539
                    )Amortization
      of actuarial loss
                    
                    
                    -
                    
                    
                    
                    1Net
      periodic benefit cost
                    
                    $
                    407
                    
                    
                    $
                    464





12.      LONG-TERM
INCENTIVE COMPENSATION





In
December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive
Plan. In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share
Appreciation Rights Plan. These plans provide officers and key employees the
opportunity to be awarded phantom units, the value of which is based on the
change in the fair market value of PDC’s common stock under the terms of the
employee stock ownership plan (the “ESOP”) prior to the grant date or the
exercise date, as applicable. As of January 3, 2009, the fair market value
of one share of PDC common stock was $21.43. During the first quarter of 2009,
473,000 new phantom units were issued under the Appleton Papers Inc. Long-Term
Incentive Plan at a share price of $21.43. There was no expense recorded for
this plan during the three months ended April 5, 2009 and March 30,
2008.





Beginning
in 2006, the Company established a nonqualified deferred compensation agreement
with each of its non-employee directors. Deferred compensation is in the form of
phantom units and is earned over the course of six-month calendar periods of
service beginning January 1 and July 1. The number of units to be
earned is calculated using the established dollar value of the compensation
divided by the fair market value of one share of PDC common stock as established
under the terms of the ESOP as of the prior December 31 and June 30,
respectively. This deferred compensation vests coincidental with the board
member’s continued service on the board. Upon cessation of service as a
director, the deferred compensation will be paid in five equal annual cash
installments. Approximately $0.1 million was recorded as expense related to this
plan for each of the three-month periods ended April 5, 2009 and
March 30, 2008.





13.      COMMITMENTS
AND CONTINGENCIES





Lower
Fox River





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




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


12





PAPERWEIGHT DEVELOPMENT CORP. AND
SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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




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




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





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




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





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




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




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




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




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


13





PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At January 3, 2009, this reserve was $152.0 million. During first quarter
2009, $14.4 million of payments were made from the reserve. This resulted in a
remaining reserve of $137.6 million as of April 5, 2009, of which $37.7 million
is recorded in other accrued liabilities and $99.9 million is recorded as a
long-term environmental liability.





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




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




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




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




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




•
            $25
      million in fees and expenses.




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




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




Under the
indemnification agreements, Appleton is indemnified for the first $75 million of
Fox River Liabilities and for amounts in excess of $100 million. During 2008,
Appleton paid $25 million in satisfaction of its unindemnified portion of the
Fox River Liabilities. AWA has paid $102.0 million in connection with Fox River
Liabilities through first quarter 2009. At April 5, 2009, the total
indemnification receivable from AWA was $137.6 million, of which $37.7 million
is recorded in other current assets and $99.9 million is recorded as an
environmental indemnification receivable.




In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from Commerce & Industry Insurance Company, an
affiliate of American International Group, Inc. The insurance policy provides up
to $250 million of coverage for Fox River Liabilities, subject to certain
limitations defined in the policy. At April 5, 2009, the policy had $148.0
million of remaining coverage which is sufficient to cover Appleton’s currently
estimated share of the Fox River Liabilities. AWA’s obligations to maintain
indemnity claim insurance covering the Fox River Liabilities are defined in and
limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as
amended.





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


14


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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





West
Carrollton Mill




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





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





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





Litigation
Settlement





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





Other




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




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


15


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





14.      EMPLOYEE
STOCK OWNERSHIP PLAN


Appleton’s
matching contributions charged to expense were $1.1 million and $1.9 million for
the three months ended April 5, 2009 and March 30, 2008, respectively. The first
quarter 2009 matching contribution of $1.1 million will be made to the Company
Stock Fund upon receipt of the corresponding employee deferrals to be received
from the ESOP trustee at the end of second quarter 2009. As a result of hardship
withdrawals, 533 shares of PDC redeemable common stock were repurchased at an
aggregate price of approximately $12,000 during first quarter 2009.





Redeemable
common stock is being accreted up to the earliest redemption date based upon the
estimated fair market value of the redeemable common stock as of April 5, 2009.
Due to a reduction in the December 31, 2008 share price, redeemable common
stock accretion was reduced by $0.5 million for the three months ended April 5,
2009. Based upon the estimated fair value of the redeemable common stock, an
ultimate redemption liability of approximately $228 million was determined. The
redeemable common stock recorded book value as of April 5, 2009 was $147
million, which leaves a remaining unrecognized liability to be accreted of
approximately $81 million.




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





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





The
Company selectively hedges forecasted transactions, that are subject to foreign
currency exchange exposure, by using forward exchange contracts to reduce its
cash flow exposure to foreign currency fluctuations associated with its
anticipated cash flows. These instruments are designated as cash flow hedges in
accordance with SFAS 133 and are recorded in the consolidated balance sheet at
fair value. The effective portion of the contracts’ gains or losses, due to
changes in fair value, are initially recorded as a component of accumulated
other comprehensive loss and are subsequently reclassified into earnings when
the underlying transactions occur and affect earnings. These contracts are
highly effective in hedging the variability in future cash flows attributable to
changes in currency exchange rates. The notional amount of foreign exchange
contracts used to hedge foreign currency transactions is $5.4 million as of
April 5, 2009.




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





16


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)




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





April
      5, 2009Derivatives
      Designated
                
                
                Derivatives
      Not Designatedas
      Hedging Instruments
                
                
                as
      Hedging Instrumentsunder
      SFAS 133
                
                
                under
      SFAS 133Other
      current liabilitiesForeign
      currency exchange derivatives
                
                $
                57
                
                
                $
                -Other
      long-term liabilitiesInterest
      rate swap contract
                
                
                -
                
                
                
                4,548Total
      liabilities
                
                $
                57
                
                
                $
                4,548





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





As
      of April 5, 2009
                                          
                                          For
      the three months ended April 5, 2009Effective
      Portion
                                          
                                          Effective
      Portion
                                          
                                          Effective
      PortionAmount
      of Loss
                                          
                                          Location
      of Gain
                                          
                                          Amount
      of GainDerivatives
      in SFAS 133 Cash
                                          
                                          Recognized
      in
                                          
                                          Reclassified
      from AOCI
                                          
                                          Reclassified
      fromFlow
      Hedging Relationships
                                          
                                          AOCI
      on Derivative
                                          
                                          into
      Income
                                          
                                          AOCI
      into IncomeForeign
      currency exchange derivatives
                                          
                                          $                                                    33
                                          
                                          Net
      sales
                                          
                                          $                                                  32For
      the three months ended April 5, 2009Derivatives
      Not Designated as
                                          
                                          
                                          
                                          
                                          
                                          Amount
      of GainHedging
      Instruments
                                          
                                          Location
      of Gain Recognized in
                                          
                                          Recognized
      in Incomeunder
      SFAS 133
                                          
                                          Income
      on Derivative
                                          
                                          on
      DerivativeInterest
      rate swap contract
                                          
                                          Interest
      expense
                                          
                                          $                                     
                204





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


17


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





16.     
LONG-TERM OBLIGATIONS





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





April 5,
      2009
                
                January 3,
      2009Senior
      secured variable rate notes payable at LIBOR, but not less than 2.0%, plus
      4.5%, $563 due quarterly with $212,062 due June 2013. At January 3, 2009
      the notes were at LIBOR plus 1.75%, $563 due quarterly with $209,812 due
      June 2014.
                $
                221,063
                
                
                $
                221,625Secured
      term note payable at 14.25%, approximately $300 due monthly with $6,831
      due December 2013. At January 3, 2009 the note was at 12.5%, approximately
      $200 due monthly with $6,943 due December 2013.
                21,257
                
                21,814Revolving
      credit facility at LIBOR, but not less than 2.0%, plus 4.5%. At January 3,
      2009 the revolving credit facility was at LIBOR plus
      2.0%.
                
                111,534
                
                
                
                83,734353,854
                
                327,173Less
      obligations due within one year
                (4,575
                )
                (4,640
                )349,279
                
                322,533Secured
      variable rate industrial development bonds, 0.8% average
      interest rate at April 5, 2009, $2,650 due in 2013 and $6,000 due in
      2027
                8,650
                
                8,650State
      of Ohio assistance loan at 6%, approximately $100 due monthly
      and final payment due May 2017
                8,580
                
                8,780Less
      obligations due within one year
                (815
                )
                (815
                )7,765
                
                7,965Senior
      notes payable at 8.125%, due June 2011
                109,450
                
                109,450Senior
      subordinated notes payable at 9.75%, due
    June 2014
                142,500
                
                150,000





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





During
first quarter 2009, Appleton made mandatory debt repayments of $1.3 million,
plus interest, on its senior secured variable rate notes payable, secured term
note payable and State of Ohio assistance loan. Appleton also borrowed $43.9
million and repaid $16.1 million against its revolving credit facility, leaving
an outstanding balance of $111.5 million that the Company has the ability and
intent to finance on a long-term basis. Approximately $14.9 million of the
revolving credit facility was used to support outstanding letters of
credit. At April 5, 2009, there was approximately $23.6 million of unused
borrowing capacity under the $150 million revolving credit facility for working
capital and other corporate purposes. A commitment fee of 0.5% per annum is
assessed on the unused borrowing capacity.


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





•        First
Amendment to the senior secured credit facilities


•        First
Amendment to the senior secured term note payable





18


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)




Under the
First Amendment to the senior secured credit facilities, Appleton will pay
interest rates equal to LIBOR, but not less than 2 percent, plus 450 basis
points for any amounts outstanding on the senior secured variable rate notes
payable and, interest rates initially equal to LIBOR, but not less than 2
percent, plus 450 basis points for any amounts outstanding on the revolving
credit facility. The First Amendment to the senior secured credit
facilities provides a grid under which the interest rates payable, for amounts
outstanding on the revolving credit facility, may be reduced, based on measures
of Appleton’s total leverage as defined in the senior secured credit facilities.
Under the First Amendment to the senior secured term note payable, Appleton will
pay an interest rate of 14.25 percent on the senior secured term note
payable. For accounting purposes, the amendments to the senior secured
credit facilities and the senior secured term note payable were treated as debt
modifications. The Company paid $2.7 million of fees to the creditors in
conjunction with the amendment to the senior secured credit facilities. These
debt issuance costs will be amortized over the term of the modified agreement
along with pre-existing unamortized debt issuance costs as an adjustment to
interest expense over the remaining term of the modified
agreement. Unamortized debt issuance costs of $0.1 million, relating to the
revolving credit facility, were written off.




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





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


•
              Appleton
      will be permitted up to $35 million of capital expenditures in 2009 and up
      to $40 million of capital expenditures in 2010, with no limit in 2011or
      thereafter;•
              Appleton
      may not make acquisitions until December 31, 2010;•
              Other
      restrictions are imposed on liens, indebtedness, investments, restricted
      payments and note repurchases;•
              Mandatory
      prepayments are increased from 50% to 75% of excess cash flow as defined
      in the senior secured credit facilities;•
              Financial
      covenants are modified to increase the total leverage ratio, to eliminate
      the interest coverage ratio, to add a senior secured leverage ratio, and
      to add a fixed charge coverage ratio, all as defined in the senior secured
      credit facilities and the First Amendment to the senior secured credit
      facilities.








In February
2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its
variable rate notes with a five-year interest rate swap contract. Also during
first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional
$75.0 million of its variable rate notes with a five-year interest rate swap
contract. As discussed below, one of the swap contracts was terminated in
February 2009. The covenant violation at January 3, 2009 and subsequent waiver
and amendment, in March 2009, to the senior secured credit facilities, changed
the basis of the forecasted transactions for the two interest rate swap
contracts that were placed in 2008. As amended, the senior secured credit
facilities contain interest payments based on LIBOR with a 2% floor, whereas the
forecasted transactions assumed interest payments based on LIBOR. As a result,
Appleton concluded it was remote that the original forecasted transactions would
occur as originally documented and reclassified as a charge against 2008
earnings, within interest expense, $9.4 million of swap losses originally
classified in other comprehensive loss. The covenant violation also triggered an
event of default pursuant to a cross-default provision under one of the interest
rate swap contracts. As a result of the cross-default, the counterparty elected
to terminate the swap contract. In February 2009, Appleton and the counterparty
resolved Appleton’s obligation under the swap contract with an agreement to pay
$4.7 million over the nine-month period ending October 2009. During first
quarter 2009, Appleton paid $1.5 million in accordance with the termination
agreement thereby reducing its liability to $3.2 million as of April 5, 2009.
The remaining swap contract is expected to remain in place and future
fluctuations in market value will be reflected as adjustments to interest
expense. As of April 5, 2009, the remaining swap contract was recorded as a
long-term liability of $4.5 million based on a fair value measurement using
Level 2 inputs as described in SFAS 157, "Fair Value Measurements." The fair
value of the interest rate swap derivative is primarily based on models that
utilize the appropriate market-based forward swap curves and zero-coupon
interest rates to determine the discounted cash flows. In comparison to the fair
value reported at fiscal year-end 2008, the current fair value of this long-term
liability is $0.2 million lower, with this change recorded in interest expense
on the Condensed Consolidated Statement of Operations for the three months ended
April 5, 2009.


19


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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




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





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





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





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





20


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





17.      FAIR
VALUE OF FINANCIAL INSTRUMENTS





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





April 5, 2009
                    
                    
                    January 3, 2009Carrying
                    
                    
                    Fair
                    
                    
                    Carrying
                    
                    
                    FairFinancial
      Instruments
                    
                    Amount
                    
                    
                    Value
                    
                    
                    Amount
                    
                    
                    ValueSenior
      subordinated notes payable
                    
                    $
                    142,500
                    
                    
                    $
                    27,075
                    
                    
                    $
                    150,000
                    
                    
                    $
                    80,250Senior
      notes payable
                    
                    
                    109,450
                    
                    
                    
                    66,217
                    
                    
                    
                    109,450
                    
                    
                    
                    75,521Senior
      credit facilities
                    
                    221,063
                    
                    
                    
                    160,271
                    
                    
                    
                    221,625
                    
                    
                    
                    162,894Senior
      secured debt
                    
                    21,257
                    
                    
                    
                    21,257
                    
                    
                    
                    21,814
                    
                    
                    
                    21,814Revolving
      credit facility
                    111,534
                    111,534
                    83,734
                    83,734State
      of Ohio assistance loan
                    8,580
                    7,932
                    8,780
                    7,978Industrial
      development bonds
                    
                    
                    8,650
                    
                    
                    
                    8,650
                    
                    
                    
                    8,650
                    
                    
                    
                    8,650$
                    623,034
                    
                    
                    $
                    402,936
                    
                    
                    $
                    604,053
                    
                    
                    $
                    440,841Lease
      obligation
                    
                    $
                    1,149
                    
                    
                    $
                    1,149
                    
                    
                    $
                    1,311
                    
                    
                    $
                    1,311Interest
      rate swap derivatives
                    
                    $
                    4,548
                    
                    
                    $
                    4,548
                    
                    
                    $
                    9,446
                    
                    
                    $
                    9,446





The
senior subordinated notes payable and the senior notes payable are traded in
public markets and, therefore, the fair value was determined based on quoted
market prices. The senior credit facilities are traded in interbank markets and,
therefore, the fair value was determined based on quoted market prices. As the
proceeds of the senior secured debt were received in November 2008, and the
proceeds represented current market conditions, and since the debt agreement was
amended during March 2009, it was determined that the fair market value of this
debt at April 5, 2009 would not be materially different. The fair value of the
State of Ohio assistance loan was determined based on current rates for similar
financial instruments of the same remaining maturity and similar terms. The
industrial development bonds have a variable interest rate that reflects current
market terms and conditions. The fair value of the lease obligation was
determined based on current rates available to the Company for financial
instruments of the same remaining maturity and similar terms. The fair value of
the interest rate swap derivative is primarily based on models that utilize the
appropriate market-based forward swap curves and zero-coupon interest rates to
determine the discounted cash flows that result in a measurement that is
classified as Level 2 under SFAS 157.





18.      SEGMENT
INFORMATION





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


21


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





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





For
      the Three Months Ended
                  April 5, 2009
                
                
                For
      the Three Months Ended
                  March 30, 2008Net
      salesTechnical
      PapersCoated
      solutions
                
                $
                113,303
                
                
                $
                137,920Thermal
      papers
                
                
                65,030
                
                
                
                63,028Security
      papers
                
                
                10,273
                
                
                
                8,664188,606
                
                
                
                209,612Performance
      packaging
                
                
                23,944
                
                
                
                27,000Total
                
                $
                212,550
                
                
                $
                236,612Operating
      income (loss)Technical
      PapersCoated
      solutions
                
                $
                10,859
                
                
                $
                9,376Thermal
      papers
                
                
                (3,516
                )
                
                
                2,329Security
      papers
                
                
                1,617
                
                
                
                7688,960
                
                
                
                12,473Performance
      packaging
                
                
                344
                
                
                
                1,463Unallocated
      corporate charges and business development costs
                
                
                (1,881
                )
                
                
                (3,632
                )Total
                
                $
                7,423
                
                
                $
                10,304Depreciation
      and amortizationTechnical
      PapersCoated
      solutions
                
                $
                8,099
                
                
                $
                9,115Thermal
      papers
                
                
                4,887
                
                
                
                3,216Security
      papers
                
                
                695
                
                
                
                76113,681
                
                
                
                13,092Performance
      packaging
                
                
                1,602
                
                
                
                1,687Unallocated
      corporate charges
                
                
                106
                
                
                
                16Total
                
                $
                15,389
                
                
                $
                14,795





No
restructuring expense was recorded during the three-month periods ended
April 5, 2009 and March 30, 2008.





22


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)





(unaudited)





19.     
GUARANTOR FINANCIAL INFORMATION





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





Presented
below is condensed consolidating financial information for the Parent Guarantor,
the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor
subsidiary (the “Non-Guarantor Subsidiary”) as of April 5, 2009 and
January 3, 2009, and for the three months ended April 5, 2009 and March 30,
2008. This financial information should be read in conjunction with the
condensed consolidated financial statements and other notes related
thereto.





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





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


23


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING BALANCE SHEETAPRIL
      5, 2009(unaudited)(dollars
      in thousands)


Parent
                        Guarantor
                      
                      
                      Issuer
                      
                      
                      Subsidiary
                        Guarantors
                      
                      
                      Non-Guarantor
                        Subsidiary
                      
                      
                      Eliminations
                      
                      
                      ConsolidatedASSETSCurrent
      assetsCash and cash equivalents
                      
                      $
                      -
                      
                      
                      $
                      4,524
                      
                      
                      $
                      1
                      
                      
                      $
                      332
                      
                      
                      $
                      -
                      
                      
                      $
                      4,857Accounts receivable, net
                      
                      
                      -
                      
                      
                      
                      84,594
                      
                      
                      
                      11,554
                      
                      
                      
                      4,955
                      
                      
                      
                      -
                      
                      
                      
                      101,103Inventories
                      
                      
                      -
                      
                      
                      
                      112,675
                      
                      
                      
                      14,202
                      
                      
                      
                      2,434
                      
                      
                      
                      -
                      
                      
                      
                      129,311Other current assets
                      
                      
                      37,700
                      
                      
                      
                      8,906
                      
                      
                      
                      2,015
                      
                      
                      
                      172
                      
                      
                      
                      -
                      
                      
                      
                      48,793Total
      current assets
                      
                      
                      37,700
                      
                      
                      
                      210,699
                      
                      
                      
                      27,772
                      
                      
                      
                      7,893
                      
                      
                      
                      -
                      
                      
                      
                      284,064Property, plant and equipment, net
                      
                      
                      -
                      
                      
                      
                      408,256
                      
                      
                      
                      28,020
                      
                      
                      
                      12
                      
                      
                      
                      -
                      
                      
                      
                      436,288Investment in subsidiaries
                      
                      
                      150,820
                      
                      
                      
                      124,933
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      (275,753
                      )
                      
                      
                      -Other assets
                      
                      
                      99,942
                      
                      
                      
                      67,769
                      
                      
                      
                      30,055
                      
                      
                      
                      40
                      
                      
                      
                      -
                      
                      
                      
                      197,806Total assets
                      
                      $
                      288,462
                      
                      
                      $
                      811,657
                      
                      
                      $
                      85,847
                      
                      
                      $
                      7,945
                      
                      
                      $
                      (275,753
                      )
                      
                      $
                      918,158LIABILITIES,
      REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
      COMPREHENSIVE LOSSCurrent
      liabilitiesCurrent portion of long-term debt
                      
                      $
                      -
                      
                      
                      $
                      5,390
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      5,390Accounts payable
                      
                      
                      -
                      
                      
                      
                      46,093
                      
                      
                      
                      897
                      
                      
                      
                      105
                      
                      
                      
                      -
                      
                      
                      
                      47,095Due to (from) parent and affiliated companies
                      
                      
                      394,272
                      
                      
                      
                      (360,006
                      )
                      
                      
                      (30,880
                      )
                      
                      
                      (3,386
                      )
                      
                      
                      -
                      
                      
                      
                      -Other accrued liabilities
                      
                      
                      -
                      
                      
                      
                      87,567
                      
                      
                      
                      1,289
                      
                      
                      
                      834
                      
                      
                      
                      -
                      
                      
                      
                      89,690Total current liabilities
                      
                      
                      394,272
                      
                      
                      
                      (220,956
                      )
                      
                      
                      (28,694
                      )
                      
                      
                      (2,447
                      )
                      
                      
                      -
                      
                      
                      
                      142,175Long-term
      debt
                      
                      
                      -
                      
                      
                      
                      617,644
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      617,644Other
      long-term liabilities
                      
                      
                      -
                      
                      
                      
                      264,149
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      -
                      
                      
                      
                      264,149Redeemable
      common stock, accumulated deficit and accumulated other comprehensive
      loss
                      
                      
                      (105,810
                      )
                      
                      
                      150,820
                      
                      
                      
                      114,541
                      
                      
                      
                      10,392
                      
                      
                      
                      (275,753
                      )
                      
                      
                      (105,810
                      )Total
      liabilities, redeemable common stock, accumulated deficit and accumulated
      other comprehensive loss
                      
                      $
                      288,462
                      
                      
                      $
                      811,657
                      
                      
                      $
                      85,847
                      
                      
                      $
                      7,945
                      
                      
                      $
                      (275,753
                      )
                      
                      $
                      918,158


24






PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING BALANCE SHEETJANUARY
      3, 2009(dollars
      in thousands)




Parent
                      Guarantor
                    
                    
                    Issuer
                    
                    
                    Subsidiary
                      Guarantors
                    
                    
                    Non-Guarantor
                      Subsidiary
                    
                    
                    Eliminations
                    
                    
                    ConsolidatedASSETSCurrent
      assetsCash and cash equivalents
                    
                    $
                    -
                    
                    
                    $
                    2,111
                    
                    
                    $
                    65
                    
                    
                    $
                    2,004
                    
                    
                    $
                    -
                    
                    
                    $
                    4,180Accounts receivable, net
                    
                    
                    -
                    
                    
                    
                    73,738
                    
                    
                    
                    12,868
                    
                    
                    
                    5,423
                    
                    
                    
                    -
                    
                    
                    
                    92,029Inventories
                    
                    
                    -
                    
                    
                    
                    113,406
                    
                    
                    
                    14,658
                    
                    
                    
                    1,989
                    
                    
                    
                    -
                    
                    
                    
                    130,053Other current assets
                    
                    
                    37,700
                    
                    
                    
                    6,343
                    
                    
                    
                    1,993
                    
                    
                    
                    203
                    
                    
                    
                    -
                    
                    
                    
                    46,239Total
      current assets
                    
                    
                    37,700
                    
                    
                    
                    195,598
                    
                    
                    
                    29,584
                    
                    
                    
                    9,619
                    
                    
                    
                    -
                    
                    
                    
                    272,501Property, plant and equipment, net
                    
                    
                    -
                    
                    
                    
                    416,630
                    
                    
                    
                    29,028
                    
                    
                    
                    13
                    
                    
                    
                    -
                    
                    
                    
                    445,671Investment in subsidiaries
                    
                    
                    146,562
                    
                    
                    
                    124,971
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (271,533
                    )
                    
                    
                    -Other assets
                    
                    
                    114,312
                    
                    
                    
                    66,964
                    
                    
                    
                    30,432
                    
                    
                    
                    41
                    
                    
                    
                    -
                    
                    
                    
                    211,749Total assets
                    
                    $
                    298,574
                    
                    
                    $
                    804,163
                    
                    
                    $
                    89,044
                    
                    
                    $
                    9,673
                    
                    
                    $
                    (271,533
                    )
                    
                    $
                    929,921LIABILITIES,
      REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
      COMPREHENSIVE LOSSCurrent
      liabilitiesCurrent portion of long-term debt
                    
                    $
                    -
                    
                    
                    $
                    5,455
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    -
                    
                    
                    $
                    5,455Accounts payable
                    
                    
                    -
                    
                    
                    
                    61,674
                    
                    
                    
                    739
                    
                    
                    
                    125
                    
                    
                    
                    -
                    
                    
                    
                    62,538Due to (from) parent and affiliated companies
                    
                    
                    405,519
                    
                    
                    
                    (374,547
                    )
                    
                    
                    (27,760
                    )
                    
                    
                    (3,212
                    )
                    
                    
                    -
                    
                    
                    
                    -Other accrued liabilities
                    
                    
                    -
                    
                    
                    
                    83,916
                    
                    
                    
                    1,861
                    
                    
                    
                    1,993
                    
                    
                    
                    -
                    
                    
                    
                    87,770Total current liabilities
                    
                    
                    405,519
                    
                    
                    
                    (223,502
                    )
                    
                    
                    (25,160
                    )
                    
                    
                    (1,094
                    )
                    
                    
                    -
                    
                    
                    
                    155,763Long-term
      debt
                    
                    
                    -
                    
                    
                    
                    598,598
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    598,598Other
      long-term liabilities
                    
                    
                    -
                    
                    
                    
                    282,505
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    282,505Redeemable
      common stock, accumulated deficit and accumulated other comprehensive
      loss
                    
                    
                    (106,945
                    )
                    
                    
                    146,562
                    
                    
                    
                    114,204
                    
                    
                    
                    10,767
                    
                    
                    
                    (271,533
                    )
                    
                    
                    (106,945
                    )Total
      liabilities, redeemable common stock, accumulated deficit and accumulated
      other comprehensive loss
                    
                    $
                    298,574
                    
                    
                    $
                    804,163
                    
                    
                    $
                    89,044
                    
                    
                    $
                    9,673
                    
                    
                    $
                    (271,533
                    )
                    
                    $
                    929,921


25


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED APRIL 5, 2009(unaudited)(dollars
      in thousands)Parent
                
                
                
                
                
                Subsidiary
                
                
                Non-GuarantorGuarantor
                
                
                Issuer
                
                
                Guarantors
                
                
                Subsidiary
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                188,981
                
                
                $
                23,944
                
                
                $
                11,632
                
                
                $
                (12,007
                )
                
                $
                212,550Cost
      of sales
                
                
                -
                
                
                
                150,649
                
                
                
                20,269
                
                
                
                11,526
                
                
                
                (11,635
                )
                
                
                170,809Gross
      profit
                
                
                -
                
                
                
                38,332
                
                
                
                3,675
                
                
                
                106
                
                
                
                (372
                )
                
                
                41,741Selling,
      general and administrative expenses
                
                
                -
                
                
                
                30,627
                
                
                
                3,327
                
                
                
                364
                
                
                
                -
                
                
                
                34,318Operating
      income (loss)
                
                
                -
                
                
                
                7,705
                
                
                
                348
                
                
                
                (258
                )
                
                
                (372
                )
                
                
                7,423Interest
      expense
                
                
                3,099
                
                
                
                11,392
                
                
                
                -
                
                
                
                -
                
                
                
                (3,099
                )
                
                
                11,392Debt
      extinguishment income, net
                
                
                -
                
                
                
                (5,380
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (5,380
                )Interest
      income
                
                
                -
                
                
                
                (3,114
                )
                
                
                -
                
                
                
                (1
                )
                
                
                3,099
                
                
                
                (16
                )(Income)
      loss in equity investments
                
                
                (4,262
                )
                
                
                250
                
                
                
                -
                
                
                
                -
                
                
                
                4,012
                
                
                
                -Other
      loss
                
                
                -
                
                
                
                228
                
                
                
                -
                
                
                
                211
                
                
                
                (160
                )
                
                
                279Income
      (loss) before income taxes
                
                
                1,163
                
                
                
                4,329
                
                
                
                348
                
                
                
                (468
                )
                
                
                (4,224
                )
                
                
                1,148Provision
      (benefit) for income taxes
                
                
                -
                
                
                
                67
                
                
                
                11
                
                
                
                (93
                )
                
                
                -
                
                
                
                (15
                )Net
      income (loss)
                
                $
                1,163
                
                
                $
                4,262
                
                
                $
                337
                
                
                $
                (375
                )
                
                $
                (4,224
                )
                
                $
                1,163


26


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED MARCH 30, 2008(unaudited)(dollars
      in thousands)Parent
                
                
                
                
                
                Subsidiary
                
                
                Non-GuarantorGuarantor
                
                
                Issuer
                
                
                Guarantors
                
                
                Subsidiary
                
                
                Eliminations
                
                
                ConsolidatedNet
      sales
                
                $
                -
                
                
                $
                210,638
                
                
                $
                27,005
                
                
                $
                15,031
                
                
                $
                (16,062
                )
                
                $
                236,612Cost
      of sales
                
                
                -
                
                
                
                160,803
                
                
                
                21,880
                
                
                
                15,525
                
                
                
                (16,518
                )
                
                
                181,690Gross
      profit (loss)
                
                
                -
                
                
                
                49,835
                
                
                
                5,125
                
                
                
                (494
                )
                
                
                456
                
                
                
                54,922Selling,
      general and administrative expenses
                
                
                -
                
                
                
                40,397
                
                
                
                3,648
                
                
                
                573
                
                
                
                -
                
                
                
                44,618Operating
      income (loss)
                
                
                -
                
                
                
                9,438
                
                
                
                1,477
                
                
                
                (1,067
                )
                
                
                456
                
                
                
                10,304Interest
      expense
                
                
                2,853
                
                
                
                11,074
                
                
                
                -
                
                
                
                -
                
                
                
                (2,853
                )
                
                
                11,074Interest
      income
                
                
                -
                
                
                
                (4,145
                )
                
                
                -
                
                
                
                (20
                )
                
                
                3,984
                
                
                
                (181
                )(Income)
      loss in equity investments
                
                
                (24,253
                )
                
                
                6
                
                
                
                -
                
                
                
                -
                
                
                
                24,247
                
                
                
                -Litigation
      settlement, net
                
                
                -
                
                
                
                (22,233
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (22,233
                )Other
      (income) expense
                
                
                -
                
                
                
                (253
                )
                
                
                -
                
                
                
                312
                
                
                
                173
                
                
                
                232Income
      (loss) from continuing operations before income
taxes
                
                
                21,400
                
                
                
                24,989
                
                
                
                1,477
                
                
                
                (1,359
                )
                
                
                (25,095
                )
                
                
                21,412Provision
      for income taxes
                
                
                -
                
                
                
                20
                
                
                
                17
                
                
                
                -
                
                
                
                -
                
                
                
                37Income
      (loss) from continuing operations
                
                
                21,400
                
                
                
                24,969
                
                
                
                1,460
                
                
                
                (1,359
                )
                
                
                (25,095
                )
                
                
                21,375(Loss)
      income from discontinued operations, net of income
    taxes
                
                
                -
                
                
                
                (716
                )
                
                
                (390
                )
                
                
                -
                
                
                
                1,131
                
                
                
                25Net
      income (loss)
                
                $
                21,400
                
                
                $
                24,253
                
                
                $
                1,070
                
                
                $
                (1,359
                )
                
                $
                (23,964
                )
                
                $
                21,400








27


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE THREE MONTHS ENDED APRIL 5, 2009(unaudited)(dollars
      in thousands)Parent
                
                
                
                
                
                Subsidiary
                
                
                Non-GuarantorGuarantor
                
                
                Issuer
                
                
                Guarantors
                
                
                Subsidiary
                
                
                Eliminations
                
                
                ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                
                $
                1,163
                
                
                $
                4,262
                
                
                $
                337
                
                
                $
                (375
                )
                
                $
                (4,224
                )
                
                $
                1,163Adjustments
      to reconcile net income (loss) to net cash provided (used) by operating
      activities:Depreciation
      and amortization
                
                
                -
                
                
                
                13,825
                
                
                
                1,563
                
                
                
                1
                
                
                
                -
                
                
                
                15,389Other
                
                
                -
                
                
                
                (3,543
                )
                
                
                -
                
                
                
                211
                
                
                
                -
                
                
                
                (3,332
                )Change
      in assets and liabilities, net
                
                
                10,096
                
                
                
                (27,230
                )
                
                
                1,333
                
                
                
                (1,335
                )
                
                
                4,224
                
                
                
                (12,912
                )Net
      cash provided (used) by operating activities
                
                
                11,259
                
                
                
                (12,686
                )
                
                
                3,233
                
                
                
                (1,498
                )
                
                
                -
                
                
                
                308Cash
      flows from investing activities:Proceeds
      from sale of equipment
                
                
                -
                
                
                
                9
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                9Additions
      to property, plant and equipment
                
                
                -
                
                
                
                (4,568
                )
                
                
                (177
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,745
                )Net
      cash used by investing activities
                
                
                -
                
                
                
                (4,559
                )
                
                
                (177
                )
                
                
                -
                
                
                
                -
                
                
                
                (4,736
                )Cash
      flows from financing activities:Payments
      of senior secured notes payable
                
                
                -
                
                
                
                (562
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (562
                )Payments
      of senior notes payable
                
                
                -
                
                
                
                (1,687
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,687
                )Debt
      acquisition costs
                
                
                -
                
                
                
                (2,685
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (2,685
                )Payments
      relating to capital lease obligation
                
                
                -
                
                
                
                (182
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (182
                )Proceeds
      from revolving credit facility
                
                
                -
                
                
                
                43,850
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                43,850Payments
      of revolving credit facility
                
                
                -
                
                
                
                (16,050
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (16,050
                )Payments
      of State of Ohio loan
                
                
                -
                
                
                
                (200
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (200
                )Payments
      of secured financing
                
                
                -
                
                
                
                (557
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (557
                )Due
      to parent and affiliated companies, net
                
                
                (11,247
                )
                
                
                14,541
                
                
                
                (3,120
                )
                
                
                (174
                )
                
                
                -
                
                
                
                -Payments
      to redeem common stock
                
                
                (12
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (12
                )Decrease
      in cash overdraft
                
                
                -
                
                
                
                (16,810
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (16,810
                )Net
      cash (used) provided by financing activities
                
                
                (11,259
                )
                
                
                19,658
                
                
                
                (3,120
                )
                
                
                (174
                )
                
                
                -
                
                
                
                5,105Change
      in cash and cash equivalents
                
                
                -
                
                
                
                2,413
                
                
                
                (64
                )
                
                
                (1,672
                )
                
                
                -
                
                
                
                677Cash
      and cash equivalents at beginning of period
                
                
                -
                
                
                
                2,111
                
                
                
                65
                
                
                
                2,004
                
                
                
                -
                
                
                
                4,180Cash
      and cash equivalents at end of period
                
                $
                -
                
                
                $
                4,524
                
                
                $
                1
                
                
                $
                332
                
                
                $
                -
                
                
                $
                4,857


28


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE THREE MONTHS ENDED MARCH 30, 2008(unaudited)(dollars
      in thousands)Parent
                
                
                
                
                
                Subsidiary
                
                
                Non-GuarantorGuarantor
                
                
                Issuer
                
                
                Guarantors
                
                
                Subsidiary
                
                
                Eliminations
                
                
                ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                
                $
                21,400
                
                
                $
                24,253
                
                
                $
                1,070
                
                
                $
                (1,359
                )
                
                $
                (23,964
                )
                
                $
                21,400Adjustments
      to reconcile net income (loss) to net cash provided (used) by operating
      activities:Depreciation
      and amortization
                
                
                -
                
                
                
                12,306
                
                
                
                2,486
                
                
                
                3
                
                
                
                -
                
                
                
                14,795Impairment
      of discontinued operations
                
                
                -
                
                
                
                -
                
                
                
                (1,031
                )
                
                
                -
                
                
                
                -
                
                
                
                (1,031
                )Other
                
                
                -
                
                
                
                (19,801
                )
                
                
                264
                
                
                
                312
                
                
                
                -
                
                
                
                (19,225
                )Change
      in assets and liabilities, net
                
                
                (21,228
                )
                
                
                (27,285
                )
                
                
                2,651
                
                
                
                1,800
                
                
                
                23,964
                
                
                
                (20,098
                )Net
      cash provided (used) by operating activities
                
                
                172
                
                
                
                (10,527
                )
                
                
                5,440
                
                
                
                756
                
                
                
                -
                
                
                
                (4,159
                )Cash
      flows from investing activities:Proceeds
      from sale of equipment
                
                
                -
                
                
                
                3
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                3Additions
      to property, plant and equipment
                
                
                -
                
                
                
                (25,262
                )
                
                
                (745
                )
                
                
                -
                
                
                
                -
                
                
                
                (26,007
                )Net
      cash used by investing activities
                
                
                -
                
                
                
                (25,259
                )
                
                
                (745
                )
                
                
                -
                
                
                
                -
                
                
                
                (26,004
                )Cash
      flows from financing activities:Payments
      of senior secured notes payable
                
                
                -
                
                
                
                (562
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (562
                )Payments
      relating to capital lease obligation
                
                
                -
                
                
                
                (183
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (183
                )Proceeds
      from revolving credit facility
                
                
                -
                
                
                
                29,300
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                29,300Payments
      of revolving credit facility
                
                
                -
                
                
                
                (19,300
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (19,300
                )Due
      to parent and affiliated companies, net
                
                
                (453
                )
                
                
                5,364
                
                
                
                (4,445
                )
                
                
                (466
                )
                
                
                -
                
                
                
                -Proceeds
      from issuance of redeemable common stock
                
                
                330
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                330Payments
      to redeem common stock
                
                
                (49
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (49
                )Decrease
      in cash overdraft
                
                
                -
                
                
                
                (1,916
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,916
                )Net
      cash (used) provided by financing activities
                
                
                (172
                )
                
                
                12,703
                
                
                
                (4,445
                )
                
                
                (466
                )
                
                
                -
                
                
                
                7,620Effect
      of foreign exchange rate changes on cash and cash
      equivalents
                
                
                -
                
                
                
                (254
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (254
                )Change
      in cash and cash equivalents
                
                
                -
                
                
                
                (23,337
                )
                
                
                250
                
                
                
                290
                
                
                
                -
                
                
                
                (22,797
                )Cash
      and cash equivalents at beginning of period
                
                
                -
                
                
                
                33,567
                
                
                
                9,247
                
                
                
                2,024
                
                
                
                -
                
                
                
                44,838Cash
      and cash equivalents at end of period
                
                $
                -
                
                
                $
                10,230
                
                
                $
                9,497
                
                
                $
                2,314
                
                
                $
                -
                
                
                $
                22,041





29


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




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





Overview




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




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




Financial
Highlights




Net sales
for the first quarter of 2009 totaled $212.5 million, compared to $236.6 million
for first quarter 2008. This 10.2% decrease in net sales was largely due to the
continued economic slowdown which negatively impacted shipment volumes
world-wide. Currency volatility and the ongoing strengthening of the U.S. dollar
continue to weaken the Company’s competitive position in international markets.
Technical Papers first quarter 2009 net sales decreased 10.0% when compared to
net sales during first quarter 2008. First quarter 2009 net sales within the
Packaging business were 11.3% lower than net sales for the same quarter last
year largely due to lower resin prices.




Appleton
reported net income of $1.2 million for first quarter 2009 compared to net
income of $21.4 million in first quarter 2008. Net income for first quarter 2008
included a $22.2 million net gain from a litigation settlement. Despite lower
shipment volumes, reduced mill operations to match customer demand, planned
start-up costs of the thermal coater at the West Carrollton, Ohio paper mill and
increased bad debt expense, operating income in the current period was
positively impacted by cost reductions related to manufacturing costs,
distribution costs and selling, general and administrative expenses. Also during
first quarter 2009, the Company made market purchases of its senior subordinated
notes totaling $7.5 million. As these notes were purchased at a price
significantly less than face value, the Company recorded a $5.5 million net gain
on these purchases.





During
these challenging economic times, the Company continues its efforts to reduce
spending and waste. The Company continually evaluates production output and has
taken steps to reduce crewing levels and temporarily slow down or shut down
production equipment. Beginning in second quarter 2009, all non-union employees
in the company will be required to take two weeks of unpaid leave or furlough
before the end of third quarter 2009. In addition, Appleton has suspended its
company match of employee deferrals made into the 401(k) plan by non-union
employees beginning in second quarter 2009. The company match for deferrals into
the company stock fund will remain intact.




30


Comparison
of Results of Operations for the Quarters Ended April 5, 2009 and March 30,
2008





For
      the Quarter EndedApril
      5,
                
                
                March
      30,
                
                
                %2009
                
                
                2008
                
                
                Chg(dollars
      in millions)Net
      sales
                
                $
                212.5
                
                
                $
                236.6
                
                
                
                -10.2
                %Cost
      of sales
                
                
                170.8
                
                
                
                181.7
                
                
                
                -6.0
                %Gross
      profit
                
                
                41.7
                
                
                
                54.9
                
                
                
                -24.0
                %Selling,
      general and administrative expenses
                
                
                34.3
                
                
                
                44.6
                
                
                
                -23.1
                %Operating
      income
                
                
                7.4
                
                
                
                10.3
                
                
                
                -28.2
                %Interest
      expense, net
                
                
                11.3
                
                
                
                10.9
                
                
                
                3.7
                %Debt
      extinguishment income, net
                
                
                (5.4
                )
                
                
                -
                
                
                100.0
                %Other
      non-operating expense (income), net
                0.3
                
                (22.0
                )
                nmIncome
      from continuing operations before income taxes
                
                
                1.2
                
                
                
                21.4
                
                
                nm(Benefit)
      provision for income taxes
                
                
                -
                
                
                
                -
                
                
                
                -Income
      from continuing operations
                
                
                1.2
                
                
                
                21.4
                
                
                nmIncome
      from discontinued operations, net of income taxes
                
                
                -
                
                
                
                -
                
                
                
                -Net
      income
                
                $
                1.2
                
                
                $
                21.4
                
                
                nmComparison
      as a % of net salesCost
      of sales
                
                
                80.4
                %
                
                
                76.8
                %
                
                
                3.6
                %Gross
      margin
                
                
                19.6
                %
                
                
                23.2
                %
                
                
                -3.6
                %Selling,
      general and administrative expenses
                
                
                16.1
                %
                
                
                18.8
                %
                
                
                -2.7
                %Operating
      margin
                
                
                3.5
                %
                
                
                4.4
                %
                
                
                -0.9
                %Income
      from continuing operations before income taxes
                
                
                0.6
                %
                
                
                9.0
                %
                
                
                -8.4
                %Income
      from continuing operations
                
                
                0.6
                %
                
                
                9.0
                %
                
                
                -8.4
                %Income
      from discontinued operations, net of income taxes
                
                
                -
                
                
                
                -
                
                
                
                -Net
      income
                
                
                0.6
                %
                
                
                9.0
                %
                
                
                -8.4
                %




Net sales
for first quarter 2009 were $212.5 million, a decrease of $24.1 million, or
10.2%, compared to the prior year period. This reduction was largely due to
volume shortfalls and a decrease in resin prices.




Operating
income in first quarter 2009 declined 28.2% to $7.4 million. Operating income
was adversely affected by the decline in net sales and reduced gross margins.
This was partially offset by a 23.1% reduction in selling, general and
administrative expenses. Within selling, general and administrative costs,
distribution costs are 21.1% lower than the year earlier period. Salaries
expense is approximately $2.2 million lower than such expense for the first
quarter of 2008 as a result of headcount reductions made during 2008. Incentive
compensation is also lower than last year by $1.7 million. In comparison to
first quarter 2008, other areas of significantly reduced spending include legal
fees and travel and entertainment. The positive impact of this reduced spending
was partially offset by higher bad debt and pension expenses. As a percent of
net sales, selling, general and administrative expenses were 16.1% during first
quarter 2009, compared to 18.8% during first quarter 2008.




First
quarter 2009 net income of $1.2 million was $20.2 million lower than net income
recorded during first quarter 2008. First quarter 2008 net income included a
$22.2 million net litigation settlement gain as the result of
prevailing in a lawsuit to recover previously incurred costs from an insurance
carrier.


31


Business
Segment Discussion




Technical
Papers







•
            Coated
      solutions segment net sales totaled $113.3 million for first quarter 2009,
      a decrease of $24.6 million, or 17.8%, from prior year levels. First
      quarter 2009 carbonless shipment volumes were 23.3% lower than first
      quarter 2008. Volume shortfalls were recorded in all market channels with
      international declining more than domestic. Current quarter pricing and
      mix were slightly more favorable compared to the prior year quarter. First
      quarter 2009 operating income increased $1.5 million compared to
      first quarter 2008. The adverse impact of lower shipment volumes and
      increased bad debt expense on 2009 operating margins was more than offset
      by lower distribution costs and favorable selling, general and
      administrative spending.




•
            Thermal
      papers segment net sales during first quarter 2009 were $65.0 million, an
      increase of $2.0 million, or 3.2%, from the same prior year period. The
      segment benefited from increased shipment volumes of 9.1%. First quarter
      2009 operating income decreased by $5.8 million compared to first quarter
      2008. Despite higher shipment volumes and lower manufacturing costs and
      selling, general and administrative expenses, unfavorable product mix,
      higher input costs and $2.9 million of planned start-up costs drove gross
      margins down when compared to first quarter
  2008.




•
            Security
      papers segment net sales were $10.3 million in first quarter 2009, an
      increase of $1.6 million, or 18.6%, from first quarter 2008. The increase
      was due to increased shipment volumes of 16.8%. First quarter 2009
      operating income increased by $0.8 million compared to first quarter 2008
      as a result of improved volumes and reduced selling, general and
      administrative spending.




Performance
Packaging




•
            Performance
      packaging segment net sales totaled $23.9 million in first quarter 2009, a
      decrease of $3.1 million, or 11.3%, from first quarter 2008 due to flat
      shipment volumes and lower selling prices resulting from resin price
      declines. First quarter 2009 operating income decreased $1.1 million from
      first quarter 2008 due to margin compression arising from resin pricing
      fluctuations during the quarter.





Unallocated Corporate
Charges and Business Development Costs




•
            Unallocated
      corporate charges and business development costs decreased $1.7 million in
      first quarter 2009 compared to first quarter 2008 due to reduced selling,
      general and administrative
expenses.




Liquidity
and Capital Resources




Overview. Appleton’s primary
sources of liquidity and capital resources are cash provided by operations and
available borrowings under its revolving credit facility. Appleton generally
expects that cash on hand, internally generated cash flow and available credit
from its revolving credit facility will provide the necessary funds for the
reasonably foreseeable operating and recurring cash needs (e.g., working
capital, debt service, other contractual obligations and capital expenditures).
At April 5, 2009, Appleton had $4.9 million of cash and approximately $23.6
million of unused borrowing capacity under its revolving credit facility and was
in compliance with all of its debt covenants.




Cash Flows from Operating
Activities. Net cash provided by operating activities for first quarter
2009, of $0.3 million, was a $4.5 million improvement when compared to net cash
used by operating activities of $4.2 million for first quarter 2008. Net income,
adjusted for non-cash charges, provided $13.2 million in operating cash for the
period. Non-cash charges included $15.4 million in depreciation and
amortization, $1.1 million of non-cash employer matching contributions to the
KSOP and $0.9 million of other non-cash charges. A $5.4 million net gain on debt
extinguishment, which is discussed below in cash flows from financing activities,
was also recorded during the quarter. Uses of cash included a $9.1 million
change in working capital and a net $3.8 million of other uses.


32


A major
component of the $9.1 million increase in working capital was a $9.5 million
increase in accounts receivable as quarter-end receivables returned to a more
normal level compared to year-end 2008 which was impacted by increased
collections because the last day of the year was January 3, 2009. Other
components of the $9.1 million increase in working capital were a $2.5 million
increase in other current assets and $1.5 million of payments made out of the
restructuring reserve. Inventories decreased by $0.9 million and accounts
payable and accrued liabilities increased $3.5 million.





Cash Flows from Investing
Activities.Net cash used by investing activities during first quarter
2009 totaled $4.7 million versus $26.0 million during first quarter 2008. During
2008, Appleton was investing in the expansion project at the West Carrollton,
Ohio paper mill. This expansion project, which was funded through cash flows
from operations, special financing provided by the State of Ohio and borrowings
under Appleton’s revolving credit facility, accounted for $22.2 million of the
capital spending during first quarter 2008. This expansion was put into
operation during the second half of 2008.





Cash Flows from Financing
Activities. Net cash provided by financing activities was $5.1 million
for first quarter 2009, while $7.6 million of cash was provided in the
comparable 2008 period. During first quarter 2009, Appleton borrowed a net $27.8
million on its revolving credit facility. Also during first quarter 2009, the
Company made market purchases of $7.5 million face value of its senior
subordinated notes for a cash outlay of $1.7 million. As these notes were
purchased at a price significantly less than face value, the Company recorded a
$5.5 million net gain on these purchases. Appleton also made $1.5 million of
mandatory debt and capital lease payments.




Cash
overdrafts decreased $16.8 million during first quarter 2009. Cash overdrafts
represent checks issued (thereby eliminating the corresponding accounts payable)
but not yet cleared through the banking system. Fluctuations in the balance are
a function of quarter-end payment patterns and the speed with which the payees
deposit the checks.




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





•        First
Amendment to the senior secured credit facilities


•        First
Amendment to the senior secured term note payable




Under the
First Amendment to the senior secured credit facilities, Appleton will pay
interest rates equal to LIBOR, but not less than 2 percent, plus 450 basis
points for any amounts outstanding on the senior secured variable rate notes
payable and, interest rates initially equal to LIBOR, but not less than 2
percent, plus 450 basis points for any amounts outstanding on the revolving
credit facility. The First Amendment to the senior secured credit
facilities provides a grid under which the interest rates payable, for amounts
outstanding on the revolving credit facility, may be reduced, based on measures
of Appleton’s total leverage as defined in the senior secured credit facilities.
Under the First Amendment to the senior secured term note payable, Appleton will
pay an interest rate of 14.25 percent on the senior secured term note
payable. For accounting purposes, the amendments to the senior secured
credit facilities and the senior secured term note payable were treated as debt
modifications. The Company paid $2.7 million of fees to the creditors in
conjunction with the amendment to the senior secured credit facilities. These
debt issuance costs will be amortized over the term of the modified agreement
along with pre-existing unamortized debt issuance costs as an adjustment to
interest expense over the remaining term of the modified
agreement. Unamortized debt issuance costs of $0.1 million, relating to the
revolving credit facility, were written off.




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





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


•
              Appleton
      will be permitted up to $35 million of capital expenditures in 2009 and up
      to $40 million of capital expenditures in 2010, with no limit in 2011or
      thereafter;•
              Appleton
      may not make acquisitions until December 31, 2010;•
              Other
      restrictions are imposed on liens, indebtedness, investments, restricted
      payments and note repurchases;•
              Mandatory
      prepayments are increased from 50% to 75% of excess cash flow as defined
      in the senior secured credit facilities;•
              Financial
      covenants are modified to increase the total leverage ratio, to eliminate
      the interest coverage ratio, to add a senior secured leverage ratio, and
      to add a fixed charge coverage ratio, all as defined in the senior secured
      credit facilities and the First Amendment to the senior secured credit
      facilities.







33




In February
2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its
variable rate notes with a five-year interest rate swap contract. Also during
first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional
$75.0 million of its variable rate notes with a five-year interest rate swap
contract. As discussed below, one of the swap contracts was terminated in
February 2009. The covenant violation at January 3, 2009 and subsequent waiver
and amendment, in March 2009, to the senior secured credit facilities, changed
the basis of the forecasted transactions for the two interest rate swap
contracts that were placed in 2008. As amended, the senior secured credit
facilities contain interest payments based on LIBOR with a 2% floor, whereas the
forecasted transactions assumed interest payments based on LIBOR. As a result,
Appleton concluded it was remote that the original forecasted transactions would
occur as originally documented and reclassified as a charge against 2008
earnings, within interest expense, $9.4 million of swap losses originally
classified in other comprehensive loss. The covenant violation also triggered an
event of default pursuant to a cross-default provision under one of the interest
rate swap contracts. As a result of the cross-default, the counterparty elected
to terminate the swap contract. In February 2009, Appleton and the counterparty
resolved Appleton’s obligation under the swap contract with an agreement to pay
$4.7 million over the nine-month period ending October 2009. During first
quarter 2009, Appleton paid $1.5 million in accordance with the termination
agreement thereby reducing its liability to $3.2 million as of April 5, 2009.
The remaining swap contract is expected to remain in place and future
fluctuations in market value will be reflected as adjustments to interest
expense. As of April 5, 2009, the remaining swap contract was recorded as a
long-term liability of $4.5 million based on a fair value measurement using
Level 2 inputs as described in SFAS 157, "Fair Value Measurements." The fair
value of the interest rate swap derivative is primarily based on models that
utilize the appropriate market-based forward swap curves and zero-coupon
interest rates to determine the discounted cash flows. In comparison to the fair
value reported at fiscal year-end 2008, the current fair value of this long-term
liability is $0.2 million lower, with this change recorded in interest expense
on the Condensed Consolidated Statement of Operations for the three months ended
April 5, 2009.




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





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




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





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





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


34





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





Collective
Bargaining Unit




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





Alternative
Fuel Credit





In February
2009, Appleton began mixing black liquor with diesel fuel and using the mixture
at its mill in Roaring Spring, Pennsylvania. The Company has applied to the
Internal Revenue Service to be registered as an alternative fuel mixer. Pending
the outcome of that registration, the Company will pursue an excise tax refund
for its use of an alternative fuel mixture in its operation. While there is no
assurance that the Company will receive this excise tax refund, the Company
believes it is eligible to receive this refund and the refund it receives
may materially impact the company’s Consolidated Statement of
Operations.





New
Accounting Pronouncements




In April
2009, the Financial Accounting Standards Board (“FASB”) issued FASB Staff
Position (“FSP”) FAS 157-4 “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly.” Based on the guidance, if an entity
determines that the level of activity for an asset or liability has
significantly decreased and that a transaction is not orderly, further analysis
of transactions or quoted prices is needed, and a significant adjustment to the
transaction or quoted prices may be necessary to estimate fair value in
accordance with Statement of Financial Accounting Standards (SFAS) 157 “Fair
Value Measurements.” This FSP is to be applied prospectively and is effective
for interim and annual periods ending after June 15, 2009 with early adoption
permitted for periods ending after March 15, 2009. The Company is currently
evaluating the impact, if any, on its financial statements.





In April
2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board (“APB”) 28-1
“Interim Disclosures about Fair Value of Financial Instruments.” The FSP amends
SFAS 107 “Disclosures about Fair Value of Financial Instruments” to require an
entity to provide disclosures about fair value of financial instruments in
interim financial information. This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. The Company is
currently evaluating the impact, if any, on its financial
statements.





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


35





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





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




Item 3—Quantitative and
Qualitative Disclosures About Market Risk




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




Item 4T—Controls and
Procedures




Internal Controls Over
Financial Reporting




There
were no changes in the internal control over financial reporting of Appleton or
PDC during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the Registrants’
internal control over financial reporting.




Disclosure Controls
and Procedures




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


36


PART
II – OTHER INFORMATION





Item
1 – Legal Proceedings





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





Item 1A
– Risk Factors




There
have been no material changes in the risk factors disclosed in the Annual Report
on Form 10-K for the year ended January 3, 2009.





Item 3
– Defaults Upon Senior Securities





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





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS





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


37


Item 6—Exhibits







4.1
                  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
      Registrant’s Annual Report on Form 10-K for the fiscal year ended January
      3, 2009.31.1
                  Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities
      Exchange Act of 1934 as amended.31.2
                  Certification
      of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.3
                  Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.4
                  Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange
      Act of 1934 as amended.32.1
                  Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to 18 U.S.C. Section
  1350.32.2
                  Certification
      of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section
      1350.32.3
                  Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to 18 U.S.C. Section
      1350.32.4
                  Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to 18 U.S.C. Section
  1350.








38





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




APPLETON
      PAPERS INC.
              (Registrant)Date:
      May 13, 2009
            /s/
      Thomas J. FerreeThomas
      J. FerreeVice
      President Finance, Chief Financial Officer and Treasurer (Signing on
      behalf of the Registrant and as the Principal Financial
      Officer)










39





SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




PAPERWEIGHT
      DEVELOPMENT CORP.
              (Registrant)Date:
      May 13, 2009
            /s/
      Thomas J. FerreeThomas
      J. FerreeChief
      Financial Officer and Treasurer (Signing on behalf of the Registrant and
      as the Principal Financial Officer)











40