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: June 29, 2008
  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)
  Registrants’
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 of the registrants is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 Large
accelerated
filer                                                                                             Accelerated
filer  
 Non-accelerated
filer  x
(do not check if a smaller reporting
company)              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
August 1, 2008, 10,794,073 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 August 1, 2008, 100 shares
of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding.
There is no trading market for the common stock of Appleton Papers Inc. No
shares of Paperweight Development Corp. or Appleton Papers Inc. were held by
non-affiliates.
  Appleton
Papers Inc. meets the conditions set forth in General Instruction H(1)(a) and
(b) and is therefore filing this form with the reduced disclosure
format.
 1
 INDEX
  Page
                NumberPART I
              FINANCIAL
      INFORMATIONItem 1
              Financial
      Statements (unaudited)
              3a)
      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 (Loss)
      Income
              6e)
      Notes to Condensed Consolidated Financial Statements
              7Item 2
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              31Item 3
              Quantitative
      and Qualitative Disclosures About Market Risk
              37Item 4
              Controls
      and Procedures
              37PART II
              OTHER
      INFORMATIONItem 1A
              Risk
      Factors
              38Item 6
              Exhibits
              39Signatures
              40
 
  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)June
      29,
              
              
              December
      29,2008
              
              
              2007ASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              16,624
              
              
              $
              44,838Accounts
      receivable, less allowance fordoubtful
      accounts of $1,592 and $1,480, respectively
              
              
              124,106
              
              
              
              116,762Inventories
              
              
              141,236
              
              
              
              124,078Other
      current assets
              
              
              22,903
              
              
              
              12,210Assets
      of discontinued operations
              
              
              30,672
              
              
              
              36,731Total
      current assets
              
              
              335,541
              
              
              
              334,619Property,
      plant and equipment, net of accumulated depreciation of$379,800 and
      $353,975, respectively
              
              
              429,757
              
              
              
              393,742Goodwill
              
              
              50,246
              
              
              
              50,246Intangible
      assets, net
              
              
              74,874
              
              
              
              77,340Environmental
      indemnification receivable
              
              
              149,704
              
              
              
              165,198Other
      assets
              
              
              25,202
              
              
              
              24,617Assets
      of discontinued operations
              
              
              17,633
              
              
              
              57,646Total
      assets
              
              $
              1,082,957
              
              
              $
              1,103,408LIABILITIES,
      REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT ANDACCUMULATED
      OTHER COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
              
              $
              3,538
              
              
              $
              3,138Accounts
      payable
              
              
              81,797
              
              
              
              82,621Accrued
      interest
              
              
              4,018
              
              
              
              4,688Other
      accrued liabilities
              
              
              80,386
              
              
              
              81,348Liabilities
      of discontinued operations
              
              
              20,710
              
              
              
              21,685Total
      current liabilities
              
              
              190,449
              
              
              
              193,480Long-term
      debt
              
              
              578,767
              
              
              
              539,105Postretirement
      benefits other than pension
              
              
              46,722
              
              
              
              47,436Accrued
      pension
              
              
              13,538
              
              
              
              16,857Environmental
      liability
              
              
              149,704
              
              
              
              173,353Other
      long-term liabilities
              
              
              5,168
              
              
              
              6,794Liabilities
      of discontinued operations
              
              
              22,151
              
              
              
              20,750Commitments
      and contingencies  (Note 13)
              
              
              -
              
              
              
              -Redeemable
      common stock, $0.01 par value, shares authorized:
    30,000,000shares
      issued and outstanding: 10,795,448 and 11,116,751,
      respectively
              
              
              170,079
              
              
              
              182,040Accumulated
      deficit
              
              
              (100,017
              )
              
              
              (80,086
              )Accumulated
      other comprehensive income
              
              
              6,396
              
              
              
              3,679Total
      liabilities, redeemable common stock, accumulateddeficit
      and accumulated other comprehensive income
              
              $
              1,082,957
              
              
              $
              1,103,408The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.
  3
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(dollars
      in thousands)Three
      Months Ended
              
              
              Three
      Months Ended
              
              
              Six
      Months Ended
              
              
              Six
      Months EndedJune
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Net
      sales
              
              $
              249,779
              
              
              $
              242,765
              
              
              $
              486,009
              
              
              $
              475,115Cost
      of sales
              
              
              199,159
              
              
              
              188,630
              
              
              
              380,849
              
              
              
              362,177Gross
      profit
              
              
              50,620
              
              
              
              54,135
              
              
              
              105,160
              
              
              
              112,938Selling,
      general and administrative expenses
              
              
              40,182
              
              
              
              42,350
              
              
              
              84,418
              
              
              
              87,246Restructuring
      and other charges
              
              
              -
              
              
              
              234
              
              
              
              -
              
              
              
              1,194Operating
      income
              
              
              10,438
              
              
              
              11,551
              
              
              
              20,742
              
              
              
              24,498Other
      expense (income)Interest
      expense
              
              
              10,212
              
              
              
              12,175
              
              
              
              21,286
              
              
              
              24,437Debt
      extinguishment expenses
              
              
              -
              
              
              
              1,053
              
              
              
              -
              
              
              
              1,053Interest
      income
              
              
              (56
              )
              
              
              (253
              )
              
              
              (237
              )
              
              
              (1,376
              )Litigation
      settlement, net (Note 13)
              
              
              (41
              )
              
              
              -
              
              
              
              (22,274
              )
              
              
              -Foreign
      exchange (gain) loss
              
              
              (6
              )
              
              
              (649
              )
              
              
              226
              
              
              
              (674
              )Income
      (loss) from continuing operations before income taxes
              
              
              329
              
              
              
              (775
              )
              
              
              21,741
              
              
              
              1,058Provision
      for income taxes
              
              
              55
              
              
              
              124
              
              
              
              92
              
              
              
              471Income
      (loss) from continuing operations
              
              
              274
              
              
              
              (899
              )
              
              
              21,649
              
              
              
              587Discontinued
      operationsLoss from discontinued operations, net of income taxes
              
              
              (42,950
              )
              
              
              (848
              )
              
              
              (42,925
              )
              
              
              (2,410
              )Net
      loss
              
              $
              (42,676
              )
              
              $
              (1,747
              )
              
              $
              (21,276
              )
              
              $
              (1,823
              )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 SIX MONTHS ENDED(unaudited)(dollars
      in thousands)June
      29, 2008
              
              
              July
      1, 2007Cash
      flows from operating activities:Net
      loss
              
              $
              (21,276
              )
              
              $
              (1,823
              )Adjustments
      to reconcile net loss to net cashprovided
      by operating activities:Depreciation
              
              
              27,100
              
              
              
              31,943Amortization
      of intangible assets
              
              
              2,466
              
              
              
              4,033Impairment of discontinued operations goodwill and
      long-lived assets
              
              
              40,134
              
              
              
              -Amortization
      of financing fees
              
              
              1,160
              
              
              
              1,286Employer
      401(k) noncash matching contributions
              
              
              3,082
              
              
              
              3,602Foreign
      exchange loss (gain)
              
              
              426
              
              
              
              (587
              )Loss
      on disposals of equipment
              
              
              844
              
              
              
              809Accretion
      of capital lease obligation
              
              
              61
              
              
              
              81Debt
      extinguishment expenses
              
              
              -
              
              
              
              266(Increase)/decrease
      in assets and increase/(decrease) in liabilities:Accounts
      receivable
              
              
              2,875
              
              
              
              9,148Inventories
              
              
              (21,676
              )
              
              
              (3,021
              )Other
      current assets
              
              
              216
              
              
              
              377Accounts
      payable and other accrued liabilities
              
              
              (18,000
              )
              
              
              (19,435
              )Accrued
      pension
              
              
              (2,654
              )
              
              
              (3,778
              )Other,
      net
              
              
              (11,576
              )
              
              
              536Net
      cash provided by operating activities
              
              
              3,182
              
              
              
              23,437Cash
      flows from investing activities:Proceeds
      from sale of equipment
              
              
              4
              
              
              
              4Additions
      to property, plant and equipment
              
              
              (50,728
              )
              
              
              (16,797
              )Net
      cash used by investing activities
              
              
              (50,724
              )
              
              
              (16,793
              )Cash
      flows from financing activities:Payments
      of senior secured notes payable
              
              
              (1,125
              )
              
              
              (195,533
              )Proceeds
      from senior secured notes payable
              
              
              -
              
              
              
              225,000Debt
      acquisition costs
              
              
              -
              
              
              
              (1,869
              )Payments
      relating to capital lease obligation
              
              
              (366
              )
              
              
              (366
              )Proceeds
      from revolving lines of credit
              
              
              178,958
              
              
              
              69,948Payments
      of revolving lines of credit
              
              
              (137,771
              )
              
              
              (67,736
              )Proceeds
      from issuance of redeemable common stock
              
              
              3,721
              
              
              
              4,355Payments
      to redeem common stock
              
              
              (17,429
              )
              
              
              (18,259
              )Decrease
      in cash overdraft
              
              
              (6,819
              )
              
              
              (6,250
              )Net
      cash provided by financing activities
              
              
              19,169
              
              
              
              9,290Effect
      of foreign exchange rate changes on cash and cash
    equivalents
              
              
              159
              
              
              
              (169
              )Change
      in cash and cash equivalents
              
              
              (28,214
              )
              
              
              15,765Cash
      and cash equivalents at beginning of period
              
              
              44,838
              
              
              
              19,975Cash
      and cash equivalents at end of period
              
              $
              16,624
              
              
              $
              35,740The
      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 INCOME (LOSS) AND
      COMPREHENSIVE (LOSS) INCOMEFOR
      THE SIX MONTHS ENDED(unaudited)(dollars
      in thousands, except share data)Redeemable
      Common Stock
                
                
                
                
                
                AccumulatedOtherShares
                
                
                
                
                
                Accumulated
                
                
                Comprehensive
                
                
                ComprehensiveOutstanding
                
                
                Amount
                
                
                Deficit
                
                
                Income
      (Loss)
                
                
                (Loss)
      IncomeBalance, December 29, 2007
                
                
                11,116,751
                
                
                $
                182,040
                
                
                $
                (80,086
                )
                
                $
                3,679Comprehensive
      loss:Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                (21,276
                )
                
                
                -
                
                
                $
                (21,276
                )SFAS
      158 pension liability adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                27
                
                
                
                27Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (41
                )
                
                
                (41
                )Realized
      and unrealized gain on derivatives
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,731
                
                
                
                2,731Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (18,559
                )Issuance
      of redeemable common stock
                
                
                253,936
                
                
                
                6,813
                
                
                
                -
                
                
                
                -Redemption
      of redeemable common stock
                
                
                (575,239
                )
                
                
                (17,429
                )
                
                
                -
                
                
                
                -Accretion
      of redeemable common stock
                
                
                -
                
                
                
                (1,345
                )
                
                
                1,345
                
                
                
                -Balance, June 29, 2008
                
                
                10,795,448
                
                
                $
                170,079
                
                
                $
                (100,017
                )
                
                $
                6,396Balance, December 30, 2006
                
                
                11,550,231
                
                
                $
                190,466
                
                
                $
                (67,885
                )
                
                $
                (5,010
                )Comprehensive
      loss:Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                (1,823
                )
                
                
                -
                
                
                $
                (1,823
                )Foreign
      currency translation adjustment
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                1,222
                
                
                
                1,222Realized
      and unrealized loss on derivatives
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (570
                )
                
                
                (570
                )Total
      comprehensive loss
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                
                $
                (1,171
                )Issuance
      of redeemable common stock
                
                
                241,924
                
                
                
                7,957
                
                
                
                -
                
                
                
                -Redemption
      of redeemable common stock
                
                
                (552,336
                )
                
                
                (18,259
                )
                
                
                -
                
                
                
                -Accretion
      of redeemable common stock
                
                
                -
                
                
                
                4,326
                
                
                
                (4,326
                )
                
                
                -Balance, July 1, 2007
                
                
                11,239,819
                
                
                $
                184,490
                
                
                $
                (74,034
                )
                
                $
                (4,358
                )
  6
  PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 
 1.
              
              BASIS
      OF PRESENTATION
 
 In the opinion of management, all
adjustments necessary for the fair presentation of the results of operations for
the three and six months ended June 29, 2008 and July 1, 2007, the cash flows
for the six months ended June 29, 2008 and July 1, 2007 and financial position
at June 29, 2008 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 December 29, 2007, which are included in the annual report on Form
10-K for the year ended December 29, 2007. The consolidated balance sheet data
as of December 29, 2007, 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. These
reclassifications had no effect on net income.
 
 
 2.           DISCONTINUED
OPERATIONS AND SUBSEQUENT EVENT
 
 Late in 2007, Appleton committed to a
formal plan to sell Bemrose Group Limited (“Bemrose”), its secure and
specialized print services business based in Derby, England. Bemrose is a
leading U.K. provider of mission critical security and specialized print
services. At the time of its acquisition in December 2003, Bemrose was expected
to provide Appleton with a new product entry in the U.K. security print market,
with opportunities to expand into the U.S. market. After conducting a strategic
review in the fourth quarter of 2007, Appleton decided to focus its attention on
core businesses and expand its leadership positions in those markets. The
operating results of this business for the three and six months ended June 29,
2008 and July 1, 2007 have been reclassified and are now reported separately as
discontinued operations.
 
 The following table presents the net
sales and loss before income taxes with respect to Bemrose (dollars in
thousands):
 
 For
      the Three
              
              
              For
      the Three
              
              
              For
      the Six
              
              
              For
      the SixMonths
              
              
              Months
              
              
              Months
              
              
              MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Net
      sales
              
              $
              24,342
              
              
              $
              22,514
              
              
              $
              47,153
              
              
              $
              45,421Operating
      loss
              
              $
              (1,784
              )
              
              $
              (1,684
              )
              
              $
              (2,791
              )
              
              $
              (4,342
              )Impairment
      charge
              
              
              (41,166
              )
              
              
              -
              
              
              
              (40,134
              )
              
              
              -Loss
      before income taxes
              
              $
              (42,950
              )
              
              $
              (1,684
              )
              
              $
              (42,925
              )
              
              $
              (4,342
              )
 
  7
  
 
 
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 On August
1, 2008 Appleton completed the sale of Bemrose Group Limited. In
anticipation of the sale transaction, the Company recorded impairment charges
aggregating $41.2 million related to goodwill and other long-lived assets in the
three-month period ended June 29, 2008. These charges arose in the second
quarter due to a decline in the value of the business arising primarily as the
result of deteriorating economic conditions and tougher markets for Bemrose
products, as well as increased funding requirements of the Bemrose pension plan
arising from negotiations with the plan trustees.
 
 In addition, Appleton reclassified the
assets and liabilities of Bemrose as discontinued operations in the accompanying
balance sheets, the major classes of which are detailed in the following table
(dollars in thousands):
 
 June
      29, 2008
                
                
                December
      29, 2007Current
      assets, excluding cash
                
                $
                30,672
                
                
                $
                36,731Property,
      plant and equipment, net
                
                
                15,394
                
                
                
                28,921Other
      long-term assets
                
                
                2,239
                
                
                
                28,725Current
      liabilities
                
                
                (20,710
                )
                
                
                (21,685
                )Other
      long-term liabilities
                
                
                (22,151
                )
                
                
                (20,750
                )Net
      assets of discontinued operations
                
                $
                5,444
                
                
                $
                51,942
 Bemrose was previously reported as a
separate reportable segment.
 
 
 3.           GOODWILL
AND OTHER INTANGIBLE ASSETS
 
 Goodwill and intangible assets with
indefinite lives are not amortized; however, they must be tested for impairment
annually or more frequently if events or changes in circumstances indicate that
an asset might be impaired. Amortization is recorded for intangible assets with
determinable lives. The carrying amount of goodwill as of June 29, 2008 and
December 29, 2007 was $50.2 million and was assigned entirely to the performance
packaging segment.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  8
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 The Company’s other intangible assets
consist of the following (dollars in thousands):
 
 As
      of June 29, 2008
              
              
              As
      of December 29, 2007Gross
      Carrying
              
              
              Accumulated
              
              
              Gross
      Carrying
              
              
              AccumulatedAmount
              
              
              Amortization
              
              
              Amount
              
              
              AmortizationAmortizable
      intangible assets:Trademarks
              
              $
              49,255
              
              
              $
              17,816
              
              
              $
              49,255
              
              
              $
              16,652Patents
              
              
              30,979
              
              
              
              30,537
              
              
              
              30,979
              
              
              
              29,920Customer
      relationships
              
              
              26,024
              
              
              
              5,912
              
              
              
              26,024
              
              
              
              5,261Non-compete
      agreements
              
              
              932
              
              
              
              916
              
              
              
              932
              
              
              
              882Subtotal
              
              
              107,190
              
              
              $
              55,181
              
              
              
              107,190
              
              
              $
              52,715Unamortizable
      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 lives of 20 years, while the remaining $22.9 million of
trademarks are considered to have indefinite lives and 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 and six months ended June 29, 2008 approximated $1.1 million and
$2.5 million, respectively. Amortization expense for the three and six months
ended July 1, 2007 approximated $1.6 million and $3.6 million,
respectively.
 
 During first quarter 2007, Appleton
received formal notice from the Internal Revenue Service that it agreed to
settle Appleton’s refund claims filed for tax years 1999 and 2000. The total
amount of the refund was $6.3 million, of which, $5.2 million was a refund of
income tax paid and $1.1 million was interest. As this refund related to tax
periods prior to the November 9, 2001 acquisition date, the $5.2 million was
recorded as a reduction in purchase price via a decrease to long-lived
intangible assets. Of the $1.1 million of interest, approximately $1.0 million
pertained to the accrual of interest subsequent to the acquisition date and, as
such, was included in first quarter 2007 interest income. The remaining $0.1
million of interest earned was related to tax periods prior to the acquisition
date and was also recorded as a reduction in purchase price via a decrease to
long-lived intangible assets. This refund was received by Appleton in early
April 2007. During second quarter 2007, Appleton filed claims for the
corresponding state income tax refunds. The total amount of these refund claims
was $0.4 million, of which, $0.3 million was a refund of state income tax paid
and $0.1 million was interest. As this refund also related to tax periods prior
to the acquisition date, $0.3 million of tax and interest was recorded as a
reduction in purchase price via a decrease to long-lived intangible assets. The
remaining $0.1 million of interest pertained to the accrual of interest
subsequent to the acquisition date and was included in second quarter 2007
interest income.
 
 
 
 
 
  9
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 4.           RESTRUCTURING
AND OTHER CHARGES
 
 In order to position itself for
long-term growth, the Company reduced salaried employment in the U.S. during the
years 2005-2007, resulting in the recording of restructuring expense for
employee termination benefits. In 1999, the Company committed to exiting its New
York distribution center in 2001 because it was no longer needed and
recorded $6.0 million of related restructuring and other charges expected to be
incurred until the long-term lease expired in July 2007. During 2005-2007, $1.9
million of additional restructuring expense was recorded for lease payments and
repairs to be made to the facility in accordance with the expiration terms of
the lease agreement. No restructuring expense was recorded during the first half
of 2008. During 2007, $0.2 million and $1.2 million was recorded as
restructuring expense for the three and six months ended July 1, 2007,
respectively.
 
 
 5.           INVENTORIES
 
 Inventories
consist of the following (dollars in thousands):
 
 June
      29, 2008
              
              
              December
      29, 2007Finished
      goods
              
              $
              78,244
              
              
              $
              67,596Raw
      materials, work in process and supplies
              
              
              72,725
              
              
              
              66,575150,969
              
              
              
              134,171Inventory
      reserve
              
              
              (3,376
              )
              
              
              (3,736
              )147,593
              
              
              
              130,435LIFO
      reserve
              
              
              (6,357
              )
              
              
              (6,357
              )$
              141,236
              
              
              $
              124,078
 
 Stores and spare parts inventory
balances of $21.7 million and $22.0 million at June 29, 2008 and December 29,
2007, respectively, are valued at average cost and included in raw materials,
work in process and supplies. Inventories valued using the FIFO method
approximated 15% of the Company’s total inventory balance at June 29, 2008 and
12% of the Company’s total inventory balance at December 29, 2007.
   10
  
 
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 6.           PROPERTY,
PLANT AND EQUIPMENT
 
 Property, plant and equipment balances
consist of the following (dollars in thousands):
 
 June
      29, 2008
              
              
              December
      29, 2007Land
      and improvements
              
              $
              9,772
              
              
              $
              9,603Buildings
      and improvements
              
              
              96,174
              
              
              
              95,421Machinery
      and equipment
              
              
              563,857
              
              
              
              560,323Software
              
              
              33,896
              
              
              
              33,779Capital
      lease
              
              
              4,764
              
              
              
              4,764Construction
      in progress
              
              
              101,094
              
              
              
              43,827809,557
              
              
              
              747,717Accumulated
      depreciation/amortization
              
              
              (379,800
              )
              
              
              (353,975
              )$
              429,757
              
              
              $
              393,742
 
 Depreciation expense for the three
and six months ended June 29, 2008 and July 1, 2007 consists of the following
(dollars in thousands):
 
 For
      the Three
              
              
              For
      the Three
              
              
              For
      the Six
              
              
              For
      the SixMonths
      Ended
              
              
              Months
      Ended
              
              
              Months
      Ended
              
              
              Months
      EndedDepreciation
      Expense
              
              June
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Cost
      of sales
              
              $
              11,752
              
              
              $
              12,663
              
              
              $
              23,304
              
              
              $
              25,063Selling,
      general andadministrative
      expenses
              
              
              1,920
              
              
              
              2,003
              
              
              
              3,796
              
              
              
              3,988$
              13,672
              
              
              $
              14,666
              
              
              $
              27,100
              
              
              $
              29,051
 
 
 7.        OTHER
ASSETS
 
 Other assets consist of the following
(dollars in thousands):
 
 June
      29, 2008
              
              
              December
      29, 2007Deferred
      debt issuance costs
              
              $
              12,740
              
              
              $
              13,900Restricted
      cash for mill expansion
              
              
              5,627
              
              
              
              7,369Other
              
              
              6,835
              
              
              
              3,348$
              25,202
              
              
              $
              24,617
 
 
   11
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 8.        OTHER
ACCRUED LIABILITIES
 
 Other accrued liabilities, as presented
in the current liabilities section of the condensed consolidated balance sheet,
consist of the following (dollars in thousands):
 
 June
      29, 2008
              
              
              December
      29, 2007Payroll
      and bonus
              
              $
              13,951
              
              
              $
              19,596Trade
      discounts
              
              
              17,806
              
              
              
              22,044Workers’
      compensation
              
              
              3,454
              
              
              
              4,306Accrued
      insurance
              
              
              2,557
              
              
              
              2,087Other
      accrued taxes
              
              
              2,020
              
              
              
              2,299Postretirement
      benefits other than pension
              
              
              3,283
              
              
              
              3,283Fox
      River liabilities
              
              
              29,955
              
              
              
              20,645Other
              
              
              7,360
              
              
              
              7,088$
              80,386
              
              
              $
              81,348
 
 
 9.        NEW
ACCOUNTING PRONOUNCEMENTS
 
 In
March 2008, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards ("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. PDC is currently evaluating the impact, if any, on its financial
statements.
 
 In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements.”  SFAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 also
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability. In support of
this principle, the standard establishes a fair value hierarchy that prioritizes
the information used to develop assumptions. The fair value hierarchy gives the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data, for example, the reporting entity’s own data. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, except as it relates to nonrecurring fair value measurements
of nonfinancial assets and liabilities for which the standard is effective for
fiscal years beginning after November 15, 2008. The adoption of SFAS 157 with
respect to financial assets and liabilities, in the first quarter of 2008, did
not have a significant effect on the Company’s financial statements. The Company
is currently evaluating the impact, if any, of SFAS 157 for measuring
nonfinancial assets and liabilities on future results of operations and
financial position.
  12
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 10.           EMPLOYEE
BENEFITS
 
 Appleton has both defined benefit 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 non-bargaining unit employees.
The components of the corresponding net periodic pension cost include the
following (dollars in thousands):
 
 For
      the
              
              
              For
      the
              
              
              For
      the
              
              
              For
      theThree
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedPension
      Benefits
              
              June
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Net
      periodic benefit costService
      cost
              
              $
              1,539
              
              
              $
              1,910
              
              
              $
              3,077
              
              
              $
              3,820Interest
      cost
              
              
              4,488
              
              
              
              4,231
              
              
              
              8,976
              
              
              
              8,463Expected
      return on plan assets
              
              
              (5,186
              )
              
              
              (4,716
              )
              
              
              (10,372
              )
              
              
              (9,432
              )Amortization
      ofPrior
      service cost
              
              
              48
              
              
              
              57
              
              
              
              96
              
              
              
              113Actuarial
      loss
              
              
              --
              
              
              
              471
              
              
              
              --
              
              
              
              943Net
      periodic benefit cost
              
              $
              889
              
              
              $
              1,953
              
              
              $
              1,777
              
              
              $
              3,907
 
 Effective
January 1, 2008, Appleton amended the Appleton Papers Inc. Retirement Plan (the
“Plan”) to provide that no previously eligible non-bargaining unit 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 in a
“Mandatory Profit Sharing Contribution” under the Appleton Papers Inc.
Retirement Savings and Employee Stock Ownership Plan (the “KSOP”) or January 1,
2015, in the case of any other affected non-bargaining unit Plan participants.
These changes resulted in curtailment expense of $0.4 million in fiscal 2007 and
a reduction in the pension benefit obligation of $9.8 million.
 
 Appleton
expects to contribute approximately $10 million to its U.S. pension plan in
fiscal 2008 for plan year 2007. During the first half of 2008, Appleton
contributed $5.0 million to its pension plan for plan year 2007.
Another $1.8 million, for
plan year 2007, was contributed to the pension plan after the close of
second quarter 2008.
 
  13
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 11.           POSTRETIREMENT
BENEFIT PLANS OTHER THAN PENSIONS
 
 Appleton
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):
 
 For
      the
              
              
              For
      the
              
              
              For
      the
              
              
              For
      theThree
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedOther
      Postretirement Benefits
              
              June
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Net
      periodic benefit costService
      cost
              
              $
              233
              
              
              $
              209
              
              
              $
              465
              
              
              $
              417Interest
      cost
              
              
              770
              
              
              
              647
              
              
              
              1,540
              
              
              
              1,295Amortization
      ofPrior
      service cost
              
              
              (539
              )
              
              
              (539
              )
              
              
              (1,078
              )
              
              
              (1,078
              )Actuarial
      loss
              
              
              1
              
              
              
              --
              
              
              
              2
              
              
              
              --Net
      periodic benefit cost
              
              $
              465
              
              
              $
              317
              
              
              $
              929
              
              
              $
              634
 
 
 12.           SHARE-BASED
COMPENSATION
 
 In December 2001, Appleton adopted the
Appleton Papers Inc. Long-Term Incentive Plan. In July 2002, Appleton adopted
the Appleton Papers Canada Ltd. Share Appreciation Rights Plan. These plans
provide officers and key employees the opportunity to earn phantom stock units,
the value of which is related to the change in the fair market value of PDC’s
common stock under the terms of the employee stock ownership plan (the “ESOP”)
prior to the grant date or the exercise date, as applicable. As of January 1,
2008, 365,000 new phantom stock units were issued under the Appleton Papers Inc.
Long-Term Incentive Plan at a share price of $33.41. As a result of a
decline in share price, the Company recorded reductions to compensation
expense of $2.8 million and $2.7 million within selling, general and
administrative expenses for the three and six months ended June 29, 2008,
respectively. The Company also recorded reductions to compensation expense
of $0.5 million and $0.2 million for the three and six months ended July 1,
2007, respectively.
  In
addition, as of January 1, 2008, 3,143 new share units were issued to the
non-employee directors pursuant to agreements containing terms and conditions
substantially similar to the Long-Term Incentive Plan.
 
 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. The
claims generally fall within three categories of potential liability - remedial
action, natural resource damages (“NRDs”) and interim restoration and
remediation.
   14
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 The United States Environmental
Protection Agency (“EPA”) published a notice in 1997 that it intended to list
the Lower Fox River on the National Priorities List of Contaminated Sites
pursuant to the federal Comprehensive Environmental Response, Compensation, and
Liability Act (“CERCLA” or “Superfund”). The EPA identified seven potentially
responsible parties (“PRPs”) for PCB contamination in the Lower Fox River,
including NCR, Appleton, Georgia-Pacific, P.H. Glatfelter Company, WTMI Co.,
owned by Chesapeake Corporation, Riverside Paper Corporation and U.S. Paper
Mills Corp., which is now owned by Sonoco Products Company.
  Remedial
Action.  The EPA and the Wisconsin Department of Natural
Resources (“DNR”) issued two Records of Decision (“ROD”) in 2003 estimating
total costs for the Lower Fox River remedial action plan of approximately $400
million over a 7 to 18-year time period. Other estimates obtained by the PRPs
range from a low of $450 million to as much as $1.6 billion. More recent
estimates place the cost between $594 million and $900 million.
  In February 2007, the EPA issued a
General Notice letter seeking to have one or more of the PRPs enter into an
agreement to implement all remaining remedial action for segments two, three,
four and five of the river. The EPA asked the PRPs to submit a written proposal
to conduct the remedial action as well as to address various governmental
agencies’ (“Intergovernmental Partners” or “IGP”) additional claims for
unreimbursed costs and NRDs. In June 2007, the EPA and DNR issued an amended ROD
which modified the remedial action plan for the Lower Fox River.
  Following several months of discussions
with PRPs, the EPA issued an administrative order in November 2007, directing
the PRPs to implement the remedial action of the Fox River. In response, in
December 2007, the PRPs submitted a work plan to the EPA for the clean up of the
Fox River. After a review, the EPA requested modifications be incorporated into
the work plan. The PRPs have initiated preliminary work under the work plan and
are negotiating to reach a funding arrangement to enable the complete work plan
to be implemented.
 
 Appleton and NCR filed a lawsuit in
January 2008 in federal court against P.H. Glatfelter Company, Menasha
Corporation and George A. Whiting Paper Company in an effort to require
other PRPs to contribute to the cost of cleaning up PCB contamination sediment
in the Fox River. During
the second quarter 2008, the lawsuit was amended to name additional defendants,
including certain municipalities.
  Interim
Restoration and Remediation Consent Decree.  Appleton and NCR
collectively paid $41.5 million for interim restoration and remediation efforts
pursuant to a 2001 consent decree with the IGP. This consent decree expired in
2005. In addition, Appleton and NCR collectively paid approximately $750,000
toward interim restoration efforts and the preparation of a report analyzing
progress toward the restoration goals related to the Lower Fox River pursuant to
a 2006 consent decree with the IGP. The 2006 consent decree expired in 2006.
Appleton and NCR paid $2.8 million in 2007 to fund a land acquisition in partial
settlement of NRD claims. Neither consent decree or the land acquisition
constitutes a final settlement nor provides protection against future claims;
however, Appleton and NCR will receive full credit against remediation costs and
NRD claims for all monies expended pursuant to the consent decrees.
 
 15
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
  Appleton’s
Liability.  The U.S. Fish and Wildlife Service (“FWS”) study
completed in 2000 offered a preliminary conclusion that the discharges from the
Appleton plant and the Combined Locks paper mill were responsible for a
percentage in the range of 36% to 52% of the total PCBs discharged. These
preliminary estimates have not been finalized and are not binding on the PRPs.
Appleton has obtained its own historical and technical analyses which suggest
that the percentage of PCBs discharged from the Appleton and Combined Locks
facilities is less than 20% of the total PCBs discharged.
 
 A portion of Appleton’s potential
liability for the Lower Fox River may be joint and several. If, in the future,
one or more of the other PRPs were to become insolvent or unable to pay its
respective share(s) of the potential liability, Appleton could be responsible
for a portion of its share(s). Based on a review of publicly available financial
information, Appleton believes that the other PRPs will be required, and have
adequate financial resources, to pay their shares of the remediation and natural
resource damage claims for the Lower Fox River.
  Estimates of
Liability.  Appleton cannot precisely estimate its ultimate
share of liability due to uncertainties regarding the scope and cost of
implementing the final remediation plan, the scope of restoration and final
valuation of NRD assessments, the evolving nature of remediation and restoration
technologies and governmental policies, and Appleton’s share of liability
relative to other PRPs. However, the issuance of the RODs, the receipt of bid
proposals and the beginning of remediation activities provide evidence to
reasonably estimate a range of Appleton’s potential liability.
  Accordingly, Appleton has recorded a
reserve for its potential liability for the Lower Fox River. At
December 29, 2007 this reserve approximated $194.0 million. During the
first six months of 2008, $14.3 million of payments were made against this
reserve resulting in a remaining reserve of $179.7 million as of June 29, 2008,
of which $30.0 million is recorded in other accrued liabilities and $149.7
million is recorded as a long-term environmental liability.
 
 The following assumptions were used in
evaluating Appleton’s potential Lower Fox River liability and establishing a
remediation reserve:
  ●
              total
      remediation costs of $600 million, based on the most recent bids received
      with a range from $594 million to $900
million;
  ●
              the
      FWS preliminary estimate that discharges from the Appleton plant and the
      Combined Locks mill represent 36% to 52% of the total PCBs discharged by
      the PRPs, which is substantially greater than Appleton’s
      estimate;
  ●
              costs
      to settle NRD claims against Appleton and NCR, estimated at $20 million or
      less, based on the IGP’s settlement of other NRD
  claims;
  ●
              Appleton’s
      responsibility for over half of the claims asserted against Appleton and
      NCR, based on our interim settlement agreement with NCR and the
      arbitration determination; and
  ●
              $38
      million in fees and expenses through
2010.
  
  16
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 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.
  Arjo Wiggins
Appleton Limited (“AWA”) Indemnification.  PDC and Appleton
entered into two indemnification agreements in conjunction with the 2001
acquisition, under which AWA agreed to indemnify PDC and PDC agreed to indemnify
Appleton for costs, expenses and liabilities related to certain governmental and
third-party environmental claims, which are defined in the indemnification
agreements as the Fox River Liabilities.
 
 Under the indemnification agreements,
Appleton is indemnified for the first $75 million of Fox River Liabilities and
for amounts in excess of $100 million. Appleton is responsible for the $25
million of liabilities between $75 million and $100 million. Pursuant to these
agreements, AWA has paid $75.0 million in connection with Fox River Liabilities
incurred through June 29, 2008.
  In March
2008, Appleton received favorable jury verdicts in a federal court declaratory
judgment relating to insurance coverage of its environmental claims involving
the Fox River. The jury determined:  (1) there is insurance coverage
for Appleton’s liability relating to the Fox River and (2) Appleton did not
provide late notice to the insurers and did not make misrepresentations on its
applications for insurance. Appleton anticipates the insurers may file an
appeal. Under the terms of the indemnification agreement, recoveries from
insurance are reimbursed to AWA to the extent of its indemnification
obligation.
 
 At June 29, 2008, the total
indemnification receivable from AWA was $164.6 million, of which $14.9 million
is recorded in other current assets and $149.7 million is recorded as an
environmental indemnification receivable.
 
 West
Carrollton Mill
 
 The West Carrollton mill operates
pursuant to various state and federal permits for discharges and emissions to
air and water. As a result of the de-inking of carbonless paper containing PCBs
through the early 1970s, there have been releases of PCBs and volatile organic
compounds into the soil in the area of thewastewater impoundments
at the West Carrollton facility and low levels of PCBs have been detected in
groundwater immediately under this area. In addition, PCB contamination is
present in sediment in the adjacent Great Miami River, but it is believed that
this contamination is from a source other than the West Carrollton
mill.
 
 Based on investigation and delineation
of PCB contamination in soil and groundwater in the area of the wastewater
impoundments, Appleton believes that it could be necessary to undertake remedial
action in the future, although Appleton is currently under no obligation to do
so. Appleton has not had any discussions or communications with any federal,
state or local agencies or authorities regarding remedial action to address PCB
contamination at the West Carrollton mill. The cost for remedial action, which
could include installation of a cap, long-term pumping, treating and/or
monitoring of groundwater and removal of sediment in the Great Miami River, was
estimated in 2001 to range up to approximately $10.5 million, with approximately
$3 million in short-term costs and the remainder to be incurred over a period of
30 years. However, costs could exceed this amount if additional contamination is
discovered, if additional remedial action is necessary or if the remedial action
costs are more than expected.
  17
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 Because of the uncertainty surrounding
the ultimate course of action for the West Carrollton mill property, the Great
Miami River remediation and Appleton’s share of these remediation costs, if any,
and since Appleton is currently under no obligation to undertake remedial action
in the future, no provision has been recorded in the accompanying financial
statements for estimated remediation costs. In conjunction with the acquisition
of PDC by the ESOP in 2001, and as limited by the terms of the purchase
agreement, AWA agreed to indemnify PDC for 50% of all environmental liabilities
at the West Carrollton mill up to $5.0 million and 100% of all such
environmental costs exceeding $5.0 million. In addition, the former owners and
operators of the West Carrollton mill may be liable for all or part of the cost
of remediation of historic PCB contamination.
 
 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 $22.3 million of income, net of fees. These proceeds were received in
April 2008.
  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 Roaring Spring facility covers
367 employees and expired in November 2007. On April 8, 2008, Appleton declared
an impasse with respect to the negotiation of a new contract and implemented
its best and final offer effective April 14, 2008. On August 8, 2008,
the employees ratified a four-year labor agreement.
 
 
  18
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
  Anti-dumping
  Prices
for lightweight thermal papers have been adversely affected by increased imports
of low-priced products from China, Germany and Korea. In September 2007,
Appleton filed antidumping petitions against imports of certain lightweight
thermal paper from China, Germany and Korea and a countervailing duty petition
against such imports from China. The U.S. International Trade Commission (“ITC”)
ruled in November 2007, that there is a reasonable indication that the U.S.
industry producing lightweight thermal paper products is being materially
injured or threatened with material injury due to unfairly traded imports from
China and Germany. The ITC further ruled that imports from Korea are negligible
because they represent less than three percent of imports into the United
States. As a result of this ruling, the U.S. Department of Commerce is
investigating Appleton’s allegations that imports from China and Germany are
being dumped in the United States market and that the Chinese government
is subsidizing exports of lightweight thermal paper to the United
States. The U.S. Department of Commerce issued its preliminary
determination regarding the Chinese subsidy on March 10, 2008, finding
margins that range from 0.57% to 59.5%. Interim duties will be imposed to offset
the levels of subsidization found in the amount of these margins. On May 7,
2008, the U.S. Department of Commerce imposed preliminary antidumping duties in
the amount of 133% against China and 6.5% against Germany. We expect a
final determination on injury and duties in September or October 2008. These
duties will not have a direct impact on Appleton's net income.
  Other
 
 From time to time, Appleton may be
subject to various demands, claims, suits or other legal proceedings arising in
the ordinary course of its business. A comprehensive insurance program is
maintained to provide a measure of financial protection against such matters,
though not all such exposures are, or can be, addressed by insurance. Estimated
costs are recorded for such demands, claims, suits or proceedings of this nature
when reasonably determinable. The Company has successfully defended such claims,
settling some for amounts which are not material to the business and obtaining
dismissals in others. While the Company vigorously defends itself and expects to
prevail in any similar cases that may be brought against Appleton in the future,
there can be no assurance that the Company will be successful in its
defense.
 
 Except as
described above, assuming the Company’s expectations regarding defending such
demands, claims, suits or other legal or regulatory proceedings prove accurate,
Appleton does not believe that any pending or threatened demands, claims, suits
or other legal proceedings will have, individually or in the aggregate, a
materially adverse effect on its financial position.
 
 
 14.           EMPLOYEE
STOCK OWNERSHIP PLAN
 
 Appleton’s
matching contributions charged to expense was $1.2 million and $1.4 million for
the three months ended June 29, 2008 and July 1, 2007, respectively. Appleton’s
matching contributions charged to expense was $3.1 million and $3.6 million for
the six months ended June 29, 2008 and July 1, 2007, respectively. As a result
of hardship withdrawals, required diversifications
and employee terminations, 575,239
shares of PDC redeemable common stock were repurchased during the first six
months of 2008 at an aggregate price of approximately $17.4 million. During the
same period, the ESOP trustee purchased 137,861 shares of PDC redeemable common
stock for an aggregate price of $3.7 million from pre-tax deferrals, rollovers
and loan payments made by employees, while Appleton’s matching contribution for
this same period resulted in an additional 116,075shares
of redeemable common stock being issued. During the first six months of 2007,
the ESOP trustee purchased PDC redeemable common stock for an aggregate price of
$4.4 million, also from pre-tax deferrals, rollovers and loan payments made by
employees.
 
 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 June 29, 2008.
Due to a reduction in the share price, redeemable common stock accretion
was reduced by $1.3
million for the six months ended June 29, 2008. Based upon the estimated fair
value of the redeemable common stock, an ultimate redemption liability of
approximately $288
million was determined. The redeemable common stock recorded book value as of
June 29, 2008 was $170
million, which leaves a remaining unrecognized liability to be accreted of
approximately $118
million.
  19
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 15.           LONG-TERM
OBLIGATIONS
 
 Long-term obligations, excluding the
capital lease obligation, consist of the following (dollars in
thousands):
 
 June
      29, 2008
              
              
              December
      29, 2007Senior
      secured variable rate notes payable at LIBOR plus 1.75%,$563
      due quarterly with $209,812 due June 5, 2014
              
              $
              223,313
              
              
              $
              224,438Revolving
      line of credit at LIBOR plus 2.00%
              
              
              41,187
              
              
              
              --264,500
              
              
              
              224,438Less
      obligations due within one year
              
              
              (2,813
              )
              
              
              (2,813
              )261,687
              
              
              
              221,625Unsecured
      variable rate industrial development bonds, 2.5% averageinterest
      rate at June 29, 2008, $2,650 due in 2013 and $6,000 duein
      2027
              
              
              8,650
              
              
              
              8,650State
      of Ohio assistance loan at 6%, approximately $100 duemonthly
      and final payment due May 15, 2017
              
              
              9,105
              
              
              
              9,105Less
      obligations due within one year
              
              
              (725
              )
              
              
              (325
              )8,380
              
              
              
              8,780Senior
      notes payable at 8.125%, due June 15, 2011
              
              
              150,050
              
              
              
              150,050Senior
      subordinated notes payable at 9.75%, due June 15, 2014
              
              
              150,000
              
              
              
              150,000
 
 In each of the first and second
quarters of 2008, Appleton made a $0.6 million mandatory debt repayment, plus
interest, on its senior credit facility. Also during second quarter, Appleton
borrowed $149.7 million and repaid $118.5 million against its revolving line of
credit, leaving an outstanding balance of $41.2 million. Approximately
$14.1 million of the revolving credit facility was used to support outstanding
letters of credit. At June 29, 2008, there was approximately $94.7 million
of unused borrowing capacity under the $150 million revolving credit facility
for working capital and other corporate purposes. A commitment fee of 0.35% per
annum is assessed on the unused borrowing capacity.
 
 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. In March 2008, Appleton fixed the
interest rate, at 5.40%, on an additional $75.0 million of its variable rate
notes with a five-year interest rate swap contract. The interest rate swaps are
being accounted for as cash flow hedges. As of June 29, 2008, these swap
contracts, or derivatives, were recorded as $2.9 million of assets based on fair
value measurements using Level 2 inputs as described in SFAS 157, "Fair Value
Measurements."
 
 In July 2007, Appleton entered into a
new $12.1 million Loan and Security Agreement with the Director of Development
of the State of Ohio, consisting of a $9.1 million State Assistance Loan and a
$3.0 million State Loan (together “the Ohio Loans”). Proceeds of the Ohio Loans
will be used to fund a portion of the costs of acquiring and installing paper
coating and production equipment at the Company’s paper mill in West Carrollton,
Ohio. As of June 29, 2008, Appleton had only received the proceeds of the $9.1
million State Assistance Loan. To date, the Company has spent $3.5 million of
these proceeds with the remaining $5.6 million recorded as restricted cash
within long-term other assets as its use is restricted to funding capital
additions. The Ohio State Assistance Loan provides for monthly principal
payments and interest at 6% and, upon receipt of the funds, the State Loan
provides for monthly principal payments and interest of 1% for the first two
years and 3% thereafter.
  20
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 16.       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 expenses and foreign currency gains and losses.
 
 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
              
              
              For
      the Three
              
              
              For
      the Six
              
              
              For
      the SixMonths
      Ended
              
              
              Months
      Ended
              
              
              Months
      Ended
              
              
              Months
      EndedJune
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Net
      salesTechnical
      PapersCoated
      solutions
              
              $
              142,738
              
              
              $
              145,305
              
              
              $
              280,276
              
              
              $
              285,057Thermal
      papers
              
              
              70,756
              
              
              
              64,007
              
              
              
              133,784
              
              
              
              125,095Security
      papers
              
              
              9,004
              
              
              
              8,040
              
              
              
              17,668
              
              
              
              15,827222,498
              
              
              
              217,352
              
              
              
              431,728
              
              
              
              425,979Performance
      packaging
              
              
              27,281
              
              
              
              25,413
              
              
              
              54,281
              
              
              
              49,136Total
              
              $
              249,779
              
              
              $
              242,765
              
              
              $
              486,009
              
              
              $
              475,115Operating
      income (loss)Technical
      PapersCoated
      solutions
              
              $
              9,584
              
              
              $
              10,288
              
              
              $
              18,916
              
              
              $
              25,892Thermal
      papers
              
              
              1,403
              
              
              
              2,474
              
              
              
              3,732
              
              
              
              4,681Security
      papers
              
              
              1,004
              
              
              
              575
              
              
              
              1,772
              
              
              
              1,44111,991
              
              
              
              13,337
              
              
              
              24,420
              
              
              
              32,014Performance
      packaging
              
              
              1,758
              
              
              
              1,841
              
              
              
              3,221
              
              
              
              2,121Unallocated
      corporate charges and business development costs
              
              
              (3,311
              )
              
              
              (3,627
              )
              
              
              (6,899
              )
              
              
              (9,637
              )Total
              
              $
              10,438
              
              
              $
              11,551
              
              
              $
              20,742
              
              
              $
              24,498
 
  21
  
 PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES
 
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)
 
 
 For
      the Three
              
              
              For
      the Three
              
              
              For
      the Six
              
              
              For
      the SixMonths
      Ended
              
              
              Months
      Ended
              
              
              Months
      Ended
              
              
              Months
      EndedJune
      29, 2008
              
              
              July
      1, 2007
              
              
              June
      29, 2008
              
              
              July
      1, 2007Depreciation
      and amortizationTechnical
      PapersCoated
      solutions
              
              $
              9,227
              
              
              $
              10,325
              
              
              $
              18,342
              
              
              $
              20,563Thermal
      papers
              
              
              3,079
              
              
              
              3,559
              
              
              
              6,295
              
              
              
              7,328Security
      papers
              
              
              761
              
              
              
              701
              
              
              
              1,522
              
              
              
              1,40213,067
              
              
              
              14,585
              
              
              
              26,159
              
              
              
              29,293Performance
      packaging
              
              
              1,687
              
              
              
              1,681
              
              
              
              3,374
              
              
              
              3,362Unallocated
      corporate charges
              
              
              17
              
              
              
              14
              
              
              
              33
              
              
              
              27Total
              
              $
              14,771
              
              
              $
              16,280
              
              
              $
              29,566
              
              
              $
              32,682
 
 No restructuring expense was recorded
during the first half of 2008. During the second quarter of 2007, the Company
recorded restructuring costs of $0.2 million in unallocated corporate charges.
During the first quarter of 2007, the Company recorded restructuring costs
within its reportable segments as follows:  $0.1 million in coated
solutions, $0.3 million in thermal papers, $0.2 million in performance packaging
and $0.4 million in unallocated corporate charges. In addition, Appleton
recorded $1.9 million in unallocated corporate charges during the first half of
2007 for consulting fee expense associated with the income tax refund claims
described in Note 3.
  17.  GUARANTOR
FINANCIAL INFORMATION
 
 Appleton
(the “Issuer”) has issued senior notes and senior subordinated notes which have
been guaranteed by PDC (the “Parent Guarantor”), C&H Packaging Company,
Inc., American Plastics Company, Inc., Rose Holdings Limited, Bemrose Group
Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI Holdings
Limited, Bemrose Security & Promotional Printing Limited and New England
Extrusion Inc., each of which is a wholly-owned subsidiary of Appleton (the
“Subsidiary Guarantors”). These guarantees are full, unconditional and joint and
several.
 
 Presented
below is condensed consolidating financial information for the Parent Guarantor,
the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor
subsidiary (the “Non-Guarantor Subsidiary”) as of June 29, 2008 and December 29,
2007 and for the three and six months ended June 29, 2008 and July 1, 2007. 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 credit facility, the senior notes and the senior subordinated notes place
restrictions on the subsidiaries of the Issuer that would limit dividend
distributions by these subsidiaries.
  
 22
 PAPERWEIGHT DEVELOPMENT CORP. AND
SUBSIDIARIES




NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS – (Continued) 
 CONDENSED
      CONSOLIDATING BALANCE SHEETJUNE
      29, 2008(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              -
              
              
              $
              10,026
              
              
              $
              4,882
              
              
              $
              1,716
              
              
              $
              -
              
              
              $
              16,624Accounts
      receivable, net
              
              
              -
              
              
              
              104,739
              
              
              
              12,886
              
              
              
              6,481
              
              
              
              -
              
              
              
              124,106Inventories
              
              
              -
              
              
              
              120,358
              
              
              
              18,805
              
              
              
              2,073
              
              
              
              -
              
              
              
              141,236Other
      current assets
              
              
              14,870
              
              
              
              7,234
              
              
              
              484
              
              
              
              315
              
              
              
              -
              
              
              
              22,903Assets
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              30,672
              
              
              
              -
              
              
              
              -
              
              
              
              30,672Total
      current assets
              
              
              14,870
              
              
              
              242,357
              
              
              
              67,729
              
              
              
              10,585
              
              
              
              -
              
              
              
              335,541Property,
      plant and equipment, net
              
              
              -
              
              
              
              401,395
              
              
              
              28,337
              
              
              
              25
              
              
              
              -
              
              
              
              429,757Investment
      in subsidiaries
              
              
              318,396
              
              
              
              113,601
              
              
              
              -
              
              
              
              -
              
              
              
              (431,997
              )
              
              
              -Other
      assets
              
              
              149,716
              
              
              
              79,413
              
              
              
              70,848
              
              
              
              49
              
              
              
              -
              
              
              
              300,026Assets
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              17,633
              
              
              
              -
              
              
              
              -
              
              
              
              17,633Total
      assets
              
              $
              482,982
              
              
              $
              836,766
              
              
              $
              184,547
              
              
              $
              10,659
              
              
              $
              (431,997
              )
              
              $
              1,082,957LIABILITIES,
      REDEEMABLE COMMONSTOCK,
      ACCUMULATED DEFICITAND
      ACCUMULATED OTHERCOMPREHENSIVE
      INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
              
              $
              -
              
              
              $
              3,538
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              3,538Accounts
      payable
              
              
              -
              
              
              
              78,436
              
              
              
              3,264
              
              
              
              97
              
              
              
              -
              
              
              
              81,797Due
      to (from) parent and affiliated companies
              
              
              406,524
              
              
              
              (438,461
              )
              
              
              36,150
              
              
              
              (4,213
              )
              
              
              -
              
              
              
              -Other
      accrued liabilities
              
              
              -
              
              
              
              80,918
              
              
              
              1,720
              
              
              
              1,766
              
              
              
              -
              
              
              
              84,404Liabilities
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              20,710
              
              
              
              -
              
              
              
              -
              
              
              
              20,710Total
      current liabilities
              
              
              406,524
              
              
              
              (275,569
              )
              
              
              61,844
              
              
              
              (2,350
              )
              
              
              -
              
              
              
              190,449Long-term
      debt
              
              
              -
              
              
              
              578,767
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              578,767Other
      long-term liabilities
              
              
              -
              
              
              
              215,172
              
              
              
              -
              
              
              
              (40
              )
              
              
              -
              
              
              
              215,132Liabilities
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              22,151
              
              
              
              -
              
              
              
              -
              
              
              
              22,151Redeemable
      common stock,accumulated
      deficit and accumulatedother
      comprehensive income
              
              
              76,458
              
              
              
              318,396
              
              
              
              100,552
              
              
              
              13,049
              
              
              
              (431,997
              )
              
              
              76,458Total
      liabilities, redeemable commonstock,
      accumulated deficitand
      accumulated other comprehensive income
              
              $
              482,982
              
              
              $
              836,766
              
              
              $
              184,547
              
              
              $
              10,659
              
              
              $
              (431,997
              )
              
              $
              1,082,957
 
 23
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING BALANCE SHEETDECEMBER
      29, 2007(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
              
              $
              -
              
              
              $
              33,567
              
              
              $
              9,247
              
              
              $
              2,024
              
              
              $
              -
              
              
              $
              44,838Accounts
      receivable, net
              
              
              -
              
              
              
              97,424
              
              
              
              11,191
              
              
              
              8,147
              
              
              
              -
              
              
              
              116,762Inventories
              
              
              -
              
              
              
              108,721
              
              
              
              13,092
              
              
              
              2,265
              
              
              
              -
              
              
              
              124,078Other
      current assets
              
              
              3,800
              
              
              
              7,565
              
              
              
              447
              
              
              
              398
              
              
              
              -
              
              
              
              12,210Assets
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              36,731
              
              
              
              -
              
              
              
              -
              
              
              
              36,731Total
      current assets
              
              
              3,800
              
              
              
              247,277
              
              
              
              70,708
              
              
              
              12,834
              
              
              
              -
              
              
              
              334,619Property,
      plant and equipment, net
              
              
              -
              
              
              
              363,541
              
              
              
              30,170
              
              
              
              31
              
              
              
              -
              
              
              
              393,742Investment
      in subsidiaries
              
              
              331,128
              
              
              
              155,533
              
              
              
              -
              
              
              
              -
              
              
              
              (486,661
              )
              
              
              -Other
      assets
              
              
              165,274
              
              
              
              80,439
              
              
              
              71,637
              
              
              
              51
              
              
              
              -
              
              
              
              317,401Assets
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              57,646
              
              
              
              -
              
              
              
              -
              
              
              
              57,646Total
      assets
              
              $
              500,202
              
              
              $
              846,790
              
              
              $
              230,161
              
              
              $
              12,916
              
              
              $
              (486,661
              )
              
              $
              1,103,408LIABILITIES,
      REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT AND ACCUMULATEDOTHER
      COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
              
              $
              -
              
              
              $
              3,138
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              3,138Accounts
      payable
              
              
              -
              
              
              
              78,001
              
              
              
              4,387
              
              
              
              233
              
              
              
              -
              
              
              
              82,621Due
      to (from) parent and affiliated companies
              
              
              394,569
              
              
              
              (431,078
              )
              
              
              39,718
              
              
              
              (3,209
              )
              
              
              -
              
              
              
              -Other
      accrued liabilities
              
              
              -
              
              
              
              82,117
              
              
              
              1,942
              
              
              
              1,977
              
              
              
              -
              
              
              
              86,036Liabilities
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              21,685
              
              
              
              -
              
              
              
              -
              
              
              
              21,685Total
      current liabilities
              
              
              394,569
              
              
              
              (267,822
              )
              
              
              67,732
              
              
              
              (999
              )
              
              
              -
              
              
              
              193,480Long-term
      debt
              
              
              -
              
              
              
              539,105
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              539,105Other
      long-term liabilities
              
              
              -
              
              
              
              244,379
              
              
              
              -
              
              
              
              61
              
              
              
              -
              
              
              
              244,440Liabilities
      of discontinued operations
              
              
              -
              
              
              
              -
              
              
              
              20,750
              
              
              
              -
              
              
              
              -
              
              
              
              20,750Redeemable
      common stock,accumulated
      deficit and accumulatedother
      comprehensive income
              
              
              105,633
              
              
              
              331,128
              
              
              
              141,679
              
              
              
              13,854
              
              
              
              (486,661
              )
              
              
              105,633Total
      liabilities, redeemable commonstock,
      accumulated deficitand
      accumulated other comprehensive income
              
              $
              500,202
              
              
              $
              846,790
              
              
              $
              230,161
              
              
              $
              12,916
              
              
              $
              (486,661
              )
              
              $
              1,103,408
  24
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE SIX MONTHS ENDED JUNE 29, 2008(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              433,354
              
              
              $
              54,229
              
              
              $
              29,850
              
              
              $
              (31,424
              )
              
              $
              486,009Cost
      of sales
              
              
              -
              
              
              
              339,473
              
              
              
              43,748
              
              
              
              29,437
              
              
              
              (31,809
              )
              
              
              380,849Gross
      profit
              
              
              -
              
              
              
              93,881
              
              
              
              10,481
              
              
              
              413
              
              
              
              385
              
              
              
              105,160Selling,
      general and administrative expenses
              
              
              -
              
              
              
              75,920
              
              
              
              7,477
              
              
              
              1,021
              
              
              
              -
              
              
              
              84,418Operating
      income (loss)
              
              
              -
              
              
              
              17,961
              
              
              
              3,004
              
              
              
              (608
              )
              
              
              385
              
              
              
              20,742Interest
      expense
              
              
              5,829
              
              
              
              21,286
              
              
              
              -
              
              
              
              -
              
              
              
              (5,829
              )
              
              
              21,286Interest
      income
              
              
              -
              
              
              
              (8,287
              )
              
              
              -
              
              
              
              (33
              )
              
              
              8,083
              
              
              
              (237
              )Loss
      in equity investments
              
              
              15,447
              
              
              
              41,660
              
              
              
              -
              
              
              
              -
              
              
              
              (57,107
              )
              
              
              -Litigation
      settlement, net
              
              
              -
              
              
              
              (22,274
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (22,274
              )Other
      (income) expense
              
              
              -
              
              
              
              (133
              )
              
              
              -
              
              
              
              289
              
              
              
              70
              
              
              
              226(Loss)
      income from continuingoperations
      before income taxes
              
              
              (21,276
              )
              
              
              (14,291
              )
              
              
              3,004
              
              
              
              (864
              )
              
              
              55,168
              
              
              
              21,741Provision
      for income taxes
              
              
              -
              
              
              
              63
              
              
              
              29
              
              
              
              -
              
              
              
              -
              
              
              
              92(Loss)
      income from continuing operations
              
              
              (21,276
              )
              
              
              (14,354
              )
              
              
              2,975
              
              
              
              (864
              )
              
              
              55,168
              
              
              
              21,649Loss
      from discontinued operations, net of income taxes
              
              
              -
              
              
              
              (1,093
              )
              
              
              (44,086
              )
              
              
              -
              
              
              
              2,254
              
              
              
              (42,925
              )Net
      loss
              
              $
              (21,276
              )
              
              $
              (15,447
              )
              
              $
              (41,111
              )
              
              $
              (864
              )
              
              $
              57,422
              
              
              $
              (21,276
              )
 
  25
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE SIX MONTHS ENDED JULY 1, 2007(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              424,183
              
              
              $
              49,076
              
              
              $
              31,345
              
              
              $
              (29,489
              )
              
              $
              475,115Cost
      of sales
              
              
              -
              
              
              
              322,548
              
              
              
              39,819
              
              
              
              29,158
              
              
              
              (29,348
              )
              
              
              362,177Gross
      profit
              
              
              -
              
              
              
              101,635
              
              
              
              9,257
              
              
              
              2,187
              
              
              
              (141
              )
              
              
              112,938Selling,
      general and administrative expenses
              
              
              -
              
              
              
              78,770
              
              
              
              7,194
              
              
              
              1,096
              
              
              
              186
              
              
              
              87,246Restructuring
      and other charges
              
              
              -
              
              
              
              1,054
              
              
              
              140
              
              
              
              -
              
              
              
              -
              
              
              
              1,194Operating
      income
              
              
              -
              
              
              
              21,811
              
              
              
              1,923
              
              
              
              1,091
              
              
              
              (327
              )
              
              
              24,498Interest
      expense
              
              
              5,353
              
              
              
              24,437
              
              
              
              -
              
              
              
              -
              
              
              
              (5,353
              )
              
              
              24,437Debt
      extinguishment expenses
              
              
              -
              
              
              
              1,053
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,053Interest
      income
              
              
              -
              
              
              
              (8,617
              )
              
              
              -
              
              
              
              (27
              )
              
              
              7,268
              
              
              
              (1,376
              )(Income)
      loss in equity investments
              
              
              (3,530
              )
              
              
              1,356
              
              
              
              -
              
              
              
              -
              
              
              
              2,174
              
              
              
              -Other
      income
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (674
              )
              
              
              -
              
              
              
              (674
              )(Loss)
      income from continuingoperations
      before income taxes
              
              
              (1,823
              )
              
              
              3,582
              
              
              
              1,923
              
              
              
              1,792
              
              
              
              (4,416
              )
              
              
              1,058Provision
      for income taxes
              
              
              -
              
              
              
              52
              
              
              
              38
              
              
              
              381
              
              
              
              -
              
              
              
              471(Loss)
      income from continuing operations
              
              
              (1,823
              )
              
              
              3,530
              
              
              
              1,885
              
              
              
              1,411
              
              
              
              (4,416
              )
              
              
              587Loss
      from discontinued operations, net of income taxes
              
              
              -
              
              
              
              -
              
              
              
              (4,511
              )
              
              
              -
              
              
              
              2,101
              
              
              
              (2,410
              )Net
      (loss) income
              
              $
              (1,823
              )
              
              $
              3,530
              
              
              $
              (2,626
              )
              
              $
              1,411
              
              
              $
              (2,315
              )
              
              $
              (1,823
              )
 
  26
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED JUNE 29, 2008(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              223,098
              
              
              $
              27,224
              
              
              $
              14,819
              
              
              $
              (15,362
              )
              
              $
              249,779Cost
      of sales
              
              
              -
              
              
              
              178,670
              
              
              
              21,868
              
              
              
              13,912
              
              
              
              (15,291
              )
              
              
              199,159Gross
      profit
              
              
              -
              
              
              
              44,428
              
              
              
              5,356
              
              
              
              907
              
              
              
              (71
              )
              
              
              50,620Selling,
      general and administrative expenses
              
              
              -
              
              
              
              35,905
              
              
              
              3,829
              
              
              
              448
              
              
              
              -
              
              
              
              40,182Operating
      income
              
              
              -
              
              
              
              8,523
              
              
              
              1,527
              
              
              
              459
              
              
              
              (71
              )
              
              
              10,438Interest
      expense
              
              
              2,976
              
              
              
              10,212
              
              
              
              -
              
              
              
              -
              
              
              
              (2,976
              )
              
              
              10,212Interest
      income
              
              
              -
              
              
              
              (4,142
              )
              
              
              -
              
              
              
              (13
              )
              
              
              4,099
              
              
              
              (56
              )Loss
      in equity investments
              
              
              39,700
              
              
              
              41,654
              
              
              
              -
              
              
              
              -
              
              
              
              (81,354
              )
              
              
              -Litigation
      settlement, net
              
              
              -
              
              
              
              (41
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (41
              )Other
      expense (income)
              
              
              -
              
              
              
              120
              
              
              
              -
              
              
              
              (23
              )
              
              
              (103
              )
              
              
              (6
              )(Loss)
      income from continuingoperations
      before income taxes
              
              
              (42,676
              )
              
              
              (39,280
              )
              
              
              1,527
              
              
              
              495
              
              
              
              80,263
              
              
              
              329Provision
      for income taxes
              
              
              -
              
              
              
              43
              
              
              
              12
              
              
              
              -
              
              
              
              -
              
              
              
              55(Loss)
      income from continuing operations
              
              
              (42,676
              )
              
              
              (39,323
              )
              
              
              1,515
              
              
              
              495
              
              
              
              80,263
              
              
              
              274Loss
      from discontinued operations, net of income taxes
              
              
              -
              
              
              
              (377
              )
              
              
              (43,696
              )
              
              
              -
              
              
              
              1,123
              
              
              
              (42,950
              )Net
      (loss) income
              
              $
              (42,676
              )
              
              $
              (39,700
              )
              
              $
              (42,181
              )
              
              $
              495
              
              
              $
              81,386
              
              
              $
              (42,676
              )
 
  27
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED JULY 1, 2007(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              216,755
              
              
              $
              25,369
              
              
              $
              15,785
              
              
              $
              (15,144
              )
              
              $
              242,765Cost
      of sales
              
              
              -
              
              
              
              168,709
              
              
              
              20,020
              
              
              
              14,927
              
              
              
              (15,026
              )
              
              
              188,630Gross
      profit
              
              
              -
              
              
              
              48,046
              
              
              
              5,349
              
              
              
              858
              
              
              
              (118
              )
              
              
              54,135Selling,
      general and administrative expenses
              
              
              -
              
              
              
              38,254
              
              
              
              3,448
              
              
              
              533
              
              
              
              115
              
              
              
              42,350Restructuring
      and other charges
              
              
              -
              
              
              
              94
              
              
              
              140
              
              
              
              -
              
              
              
              -
              
              
              
              234Operating
      income
              
              
              -
              
              
              
              9,698
              
              
              
              1,761
              
              
              
              325
              
              
              
              (233
              )
              
              
              11,551Interest
      expense
              
              
              2,717
              
              
              
              12,175
              
              
              
              -
              
              
              
              -
              
              
              
              (2,717
              )
              
              
              12,175Debt
      extinguishment expenses
              
              
              -
              
              
              
              1,053
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,053Interest
      income
              
              
              -
              
              
              
              (3,944
              )
              
              
              -
              
              
              
              (13
              )
              
              
              3,704
              
              
              
              (253
              )Income
      in equity investments
              
              
              (970
              )
              
              
              (590
              )
              
              
              -
              
              
              
              -
              
              
              
              1,560
              
              
              
              -Other
      expense (income)
              
              
              -
              
              
              
              8
              
              
              
              -
              
              
              
              (655
              )
              
              
              (2
              )
              
              
              (649
              )(Loss)
      income from continuingoperations
      before income taxes
              
              
              (1,747
              )
              
              
              996
              
              
              
              1,761
              
              
              
              993
              
              
              
              (2,778
              )
              
              
              (775
              )Provision
      for income taxes
              
              
              -
              
              
              
              26
              
              
              
              4
              
              
              
              94
              
              
              
              -
              
              
              
              124(Loss)
      income from continuing operations
              
              
              (1,747
              )
              
              
              970
              
              
              
              1,757
              
              
              
              899
              
              
              
              (2,778
              )
              
              
              (899
              )Loss
      from discontinued operations, net of income taxes
              
              
              -
              
              
              
              -
              
              
              
              (1,951
              )
              
              
              -
              
              
              
              1,103
              
              
              
              (848
              )Net
      (loss) income
              
              $
              (1,747
              )
              
              $
              970
              
              
              $
              (194
              )
              
              $
              899
              
              
              $
              (1,675
              )
              
              $
              (1,747
              )
 
  28
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE SIX MONTHS ENDED JUNE 29, 2008(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net
      loss
              
              $
              (21,276
              )
              
              $
              (15,447
              )
              
              $
              (41,111
              )
              
              $
              (864
              )
              
              $
              57,422
              
              
              $
              (21,276
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      and amortization
              
              
              -
              
              
              
              26,533
              
              
              
              3,027
              
              
              
              6
              
              
              
              -
              
              
              
              29,566Impairment
              
              
              -
              
              
              
              -
              
              
              
              40,134
              
              
              
              -
              
              
              
              -
              
              
              
              40,134Other
              
              
              -
              
              
              
              5,020
              
              
              
              264
              
              
              
              289
              
              
              
              -
              
              
              
              5,573Change
      in assets and liabilities, net
              
              
              23,029
              
              
              
              (15,584
              )
              
              
              (2,103
              )
              
              
              1,265
              
              
              
              (57,422
              )
              
              
              (50,815
              )Net
      cash provided by operating activities
              
              
              1,753
              
              
              
              522
              
              
              
              211
              
              
              
              696
              
              
              
              -
              
              
              
              3,182Cash
      flows from investing activities:Proceeds
      from sale of equipment
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4Additions
      to property, plant and equipment
              
              
              -
              
              
              
              (49,720
              )
              
              
              (1,008
              )
              
              
              -
              
              
              
              -
              
              
              
              (50,728
              )Net
      cash used by investing activities
              
              
              -
              
              
              
              (49,716
              )
              
              
              (1,008
              )
              
              
              -
              
              
              
              -
              
              
              
              (50,724
              )Cash
      flows from financing activities:Payments
      of senior secured notes payable
              
              
              -
              
              
              
              (1,125
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,125
              )Payments
      relating to capital lease obligation
              
              
              -
              
              
              
              (366
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (366
              )Proceeds
      from revolving line of credit
              
              
              -
              
              
              
              178,958
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              178,958Payments
      of revolving line of credit
              
              
              -
              
              
              
              (137,771
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (137,771
              )Due
      to parent and affiliated companies, net
              
              
              11,955
              
              
              
              (7,383
              )
              
              
              (3,568
              )
              
              
              (1,004
              )
              
              
              -
              
              
              
              -Proceeds
      from issuance of redeemable common stock
              
              
              3,721
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3,721Payments
      to redeem common stock
              
              
              (17,429
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (17,429
              )Decrease
      in cash overdraft
              
              
              -
              
              
              
              (6,819
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,819
              )Net
      cash (used) provided by financing activities
              
              
              (1,753
              )
              
              
              25,494
              
              
              
              (3,568
              )
              
              
              (1,004
              )
              
              
              -
              
              
              
              19,169Effect
      of foreign exchange rate changes on cash and cash
    equivalents
              
              
              -
              
              
              
              159
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              159Change
      in cash and cash equivalents
              
              
              -
              
              
              
              (23,541
              )
              
              
              (4,365
              )
              
              
              (308
              )
              
              
              -
              
              
              
              (28,214
              )Cash
      and cash equivalents at beginning of period
              
              
              -
              
              
              
              33,567
              
              
              
              9,247
              
              
              
              2,024
              
              
              
              -
              
              
              
              44,838Cash
      and cash equivalents at end of period
              
              $
              -
              
              
              $
              10,026
              
              
              $
              4,882
              
              
              $
              1,716
              
              
              $
              -
              
              
              $
              16,624
 
  29
  
 PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE SIX MONTHS ENDED JULY 1, 2007(unaudited)(dollars
      in thousands)Parent
              
              
              
              
              
              Subsidiary
              
              
              Non-GuarantorGuarantor
              
              
              Issuer
              
              
              Guarantors
              
              
              Subsidiary
              
              
              Eliminations
              
              
              ConsolidatedCash
      flows from operating activities:Net (loss) income
              
              $
              (1,823
              )
              
              $
              3,530
              
              
              $
              (2,626
              )
              
              $
              1,411
              
              
              $
              (2,315
              )
              
              $
              (1,823
              )Adjustments
      to reconcile net (loss) income to net cash (used) provided by operating
      activities:Depreciation
      and amortization
              
              
              -
              
              
              
              29,572
              
              
              
              6,396
              
              
              
              8
              
              
              
              -
              
              
              
              35,976Other
              
              
              -
              
              
              
              5,564
              
              
              
              567
              
              
              
              (674
              )
              
              
              -
              
              
              
              5,457Change
      in assets and liabilities, net
              
              
              (51,918
              )
              
              
              32,632
              
              
              
              110
              
              
              
              688
              
              
              
              2,315
              
              
              
              (16,173
              )Net
      cash (used) provided by operating activities
              
              
              (53,741
              )
              
              
              71,298
              
              
              
              4,447
              
              
              
              1,433
              
              
              
              -
              
              
              
              23,437Cash
      flows from investing activities:Proceeds
      from sale of equipment
              
              
              -
              
              
              
              4
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4Additions
      to property, plant and equipment
              
              
              -
              
              
              
              (14,009
              )
              
              
              (2,774
              )
              
              
              (14)
              
              
              
              -
              
              
              
              (16,797
              )Net
      cash used by investing activities
              
              
              -
              
              
              
              (14,005
              )
              
              
              (2,774
              )
              
              
              (14
              )
              
              
              -
              
              
              
              (16,793
              )Cash
      flows from financing activities:Payments
      of long-term debt
              
              
              -
              
              
              
              (195,533
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (195,533
              )Proceeds
      from long-term debt
              
              
              -
              
              
              
              225,000
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              225,000Debt
      acquisition costs
              
              
              -
              
              
              
              (1,869
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,869
              )Payments
      relating to capital lease obligation
              
              
              -
              
              
              
              (366
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (366
              )Proceeds
      from revolving lines of credit
              
              
              -
              
              
              
              67,550
              
              
              
              2,398
              
              
              
              -
              
              
              
              -
              
              
              
              69,948Payments
      of revolving lines of credit
              
              
              -
              
              
              
              (67,550
              )
              
              
              (186
              )
              
              
              -
              
              
              
              -
              
              
              
              (67,736
              )Due
      to parent and affiliated companies, net
              
              
              67,645
              
              
              
              (60,886
              )
              
              
              (3,738
              )
              
              
              (3,021
              )
              
              
              -
              
              
              
              -Proceeds
      from issuance of redeemable common stock
              
              
              4,355
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4,355Payments
      to redeem common stock
              
              
              (18,259
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18,259
              )Decrease
      in cash overdraft
              
              
              -
              
              
              
              (6,250
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (6,250
              )Net
      cash provided (used) by financing activities
              
              
              53,741
              
              
              
              (39,904
              )
              
              
              (1,526
              )
              
              
              (3,021
              )
              
              
              -
              
              
              
              9,290Effect
      of foreign exchange rate changes on cash and cash
    equivalents
              
              
              -
              
              
              
              (169
              )
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              (169
              )Change
      in cash and cash equivalents
              
              
              -
              
              
              
              17,220
              
              
              
              147
              
              
              
              (1,602
              )
              
              
              -
              
              
              
              15,765Cash
      and cash equivalents at beginning of period
              
              
              -
              
              
              
              17,249
              
              
              
              817
              
              
              
              1,909
              
              
              
              -
              
              
              
              19,975Cash
      and cash equivalents at end of period
              
              $
              -
              
              
              $
              34,469
              
              
              $
              964
              
              
              $
              307
              
              
              $
              -
              
              
              $
              35,740
  30
   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,” “we,” “us,” or “our” refer to Paperweight
Development Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is
a wholly-owned subsidiary of Paperweight Development, which we refer to as
“Appleton” in this report.
 
 Overview
  This
discussion summarizes significant factors affecting the consolidated operating
results, financial condition and liquidity of PDC and Appleton for the quarter
ended June 29, 2008. 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
December 29, 2007, the consolidated financial statements and related notes
included therein.
  Financial
Highlights
  Net sales
for second quarter 2008 totaled $249.8 million, compared to $242.8 million for
second quarter 2007. The 2.9% year over year increase in net sales for the
quarter included a 2.6% increase due to price improvement, a 0.2% increase due
to improved mix and 0.1% due to increased volumes. As described more completely
below, the Thermal Papers, Security Papers and Performance Packaging segments
reported increased net sales, which offset a decrease in net sales reported by
the Coated Solutions segment. Net sales for the six months ended June 29, 2008
totaled $486.0 million, compared to $475.1 million for the six months ended July
1, 2007
  Income
from continuing operations was $0.3 million for second quarter 2008
compared to a $0.9 million loss from continuing operations in second quarter
2007. A second quarter 2008 net loss of $42.7 million included $41.2
million of impairment charges recorded within discontinued operations. Operating
income in the current period was negatively impacted by higher raw material and
transportation costs which offset price improvements and manufacturing
efficiencies. For the six months ended June 29, 2008, the Company reported a net
loss of $21.3 million compared to a net loss of $1.8 million for the six months
ended July 1, 2007. Current year results were impacted adversely by lower
volumes, higher input costs and the impairment charges in discontinued
operations, which offset favorable pricing and mix, lower manufacturing,
selling, general and administrative costs and a $22.3 million net gain from a
litigation settlement.
    31
 Comparison
of Results of Operations for the Quarters Ended June 29, 2008 and July 1,
2007
 For
      the Quarter EndedJune
      29,
              
              
              July
      1,
              
              
              %2008
              
              
              2007
              
              
              Chg(dollars
      in millions)Net
      sales
              
              $
              249.8
              
              
              $
              242.8
              
              
              
              2.9
              %Cost
      of sales
              
              
              199.2
              
              
              
              188.6
              
              
              
              5.6
              %Gross
      profit
              
              
              50.6
              
              
              
              54.2
              
              
              
              -6.6
              %Selling,
      general and administrative expenses
              
              
              40.2
              
              
              
              42.4
              
              
              
              -5.2
              %Restructuring
      and other charges
              
              
              -
              
              
              
              0.2
              
              
              
              -100.0
              %Operating
      income
              
              
              10.4
              
              
              
              11.6
              
              
              
              -10.3
              %Interest
      expense, net
              
              
              10.2
              
              
              
              13.0
              
              
              
              -21.5
              %Other
      non-operating income, net
              
              
              (0.1)
              
              
              
              (0.6)
              
              
              -83.3
              %Income
      (loss) from continuing operations before income
taxes
              
              
              0.3
              
              
              
              (0.8)
              
              
              137.5
              %Provision
      for income taxes
              
              
              -
              
              
              
              0.1
              
              
              
              -100.0
              %Income
      (loss) from continuing operations
              
              
              0.3
              
              
              
              (0.9)
              
              
              133.3
              %Loss
      from discontinued operations, net of income taxes
              
              
              (43.0)
              
              
              
              (0.8)
              
              
              
              nmNet
      loss
              
              $
              (42.7)
              
              
              $
              (1.7)
              
              
              nmComparison
      as a % of net salesCost
      of sales
              
              
              79.7
              %
              
              
              77.7
              %
              
              
              2.0
              %Gross
      margin
              
              
              20.3
              %
              
              
              22.3
              %
              
              
              -2.0
              %Selling,
      general and administrative expenses
              
              
              16.1
              %
              
              
              17.5
              %
              
              
              -1.4
              %Operating
      margin
              
              
              4.2
              %
              
              
              4.8
              %
              
              
              -0.6
              %Income
      (loss) from continuing operations before income
taxes
              
              
              0.1
              %
              
              
              -0.3
              %
              
              
              0.4
              %Income
      (loss) from continuing operations
              
              
              0.1
              %
              
              
              -0.4
              %
              
              
              0.5
              %Loss
      from discontinued operations, net of income taxes
              
              
              -17.2
              %
              
              
              -0.3
              %
              
              
              -16.9
              %Net
      loss
              
              
              -17.1
              %
              
              
              -0.7
              %
              
              
              -16.4
              %
 
 Net sales
for second quarter 2008 were $249.8 million, an increase of $7.0 million, or
2.9%, compared to the prior year period. Net sales for second quarter 2008
increased relative to the prior year quarter because of improved pricing and net
favorable mix changes.
  Operating
income in second quarter 2008 declined 10.3% to $10.4 million. Operating margins
were adversely affected by reduced gross margins which offset lower selling,
general and administrative expenses and restructuring and other charges. Gross
margins were unfavorably impacted by higher raw material and energy costs which
offset the effects of price improvement, favorable mix and manufacturing gains.
Selling, general and administrative expenses were lower because employee cost
savings of approximately $5.8 million offset 12.7% higher distribution costs
compared to the year earlier period. There were no restructuring and other
charges in second quarter 2008, while the year earlier period included
restructuring charges of $0.2 million for U.S. employee termination
benefits.
  A $0.3
million income from continuing operations was recorded in second quarter 2008
compared to a loss from continuing operations of $0.9 million recorded in second
quarter 2007.  The second quarter 2008 decrease in operating income
was offset by reduced net interest expense.
  In second
quarter 2008, the Company recorded a loss from discontinued operations of
$43.0 million compared to a $0.8 million loss from discontinued operations in
the year earlier period. On August 1, 2008 Appleton completed the sale of
Bemrose Group Limited, its secure and specialized print services business based
in Derby, England. In anticipation of the sale transaction, the Company
recorded impairment charges aggregating $41.2 million related to goodwill and
other long-lived assets in the three-month period ended June 29,
2008. These charges arose in the second quarter due to a decline in the
value of the business arising primarily as the result of deteriorating
economic conditions and tougher markets for Bemrose products, as well as
increased funding requirements of the Bemrose pension plan arising from
negotiations with the plan trustees.
  32
 Comparison
of Results of Operations for the Six Months Ended June 29, 2008 and July 1,
2007
 For
      the Six Months EndedJune
      29,
              
              
              June
      30,
              
              
              %2008
              
              
              2007
              
              
              Chg(dollars
      in millions)Net
      sales
              
              $
              486.0
              
              
              $
              475.1
              
              
              
              2.3
              %Cost
      of sales
              
              
              380.8
              
              
              
              362.2
              
              
              
              5.1
              %Gross
      profit
              
              
              105.2
              
              
              
              112.9
              
              
              
              -6.8
              %Selling,
      general and administrative expenses
              
              
              84.5
              
              
              
              87.2
              
              
              
              -3.1
              %Restructuring
      and other charges
              
              
              -
              
              
              
              1.2
              
              
              
              -100.0
              %Operating
      income
              
              
              20.7
              
              
              
              24.5
              
              
              
              -15.5
              %Interest
      expense, net
              
              
              21.0
              
              
              
              24.1
              
              
              
              -12.9
              %Other
      non-operating income, net
              
              
              (22.0)
              
              
              
              (0.7)
              
              
              nmIncome
      from continuing operations before income taxes
              
              
              21.7
              
              
              
              1.1
              
              
              nmProvision
      for income taxes
              
              
              0.1
              
              
              
              0.5
              
              
              
              -80.0
              %Income
      from continuing operations
              
              
              21.6
              
              
              
              0.6
              
              
              nmLoss
      from discontinued operations, net of income taxes
              
              
              (42.9)
              
              
              
              (2.4)
              
              
              
              nmNet
      loss
              
              $
              (21.3)
              
              
              $
              (1.8)
              
              
              nmComparison
      as a % of net salesCost
      of sales
              
              
              78.4
              %
              
              
              76.2
              %
              
              
              2.2
              %Gross
      margin
              
              
              21.6
              %
              
              
              23.8
              %
              
              
              -2.2
              %Selling,
      general and administrative expenses
              
              
              17.4
              %
              
              
              18.4
              %
              
              
              -1.0
              %Operating
      margin
              
              
              4.2
              %
              
              
              5.2
              %
              
              
              -1.0
              %Income
      from continuing operations before income taxes
              
              
              4.5
              %
              
              
              0.2
              %
              
              
              4.3
              %Income
      from continuing operations
              
              
              4.4
              %
              
              
              0.1
              %
              
              
              4.3
              %Loss
      from discontinued operations, net of income taxes
              
              
              -8.8
              %
              
              
              -0.5
              %
              
              
              -8.3
              %Net
      loss
              
              
              -4.4
              %
              
              
              -0.4
              %
              
              
              -4.0
              %
  33
   Net sales
for the first six months of 2008 were $486.0 million, an increase of $10.9
million, or 2.3%, compared to the prior year period. Net sales for the first six
months of 2008 increased relative to the prior year period because net favorable
mix changes and improved pricing offset lower shipment volumes.
  Operating
income in the first six months of 2008 declined 15.5% to $20.7 million.
Operating margins were adversely affected by reduced gross margins which offset
lower selling, general and administrative expenses and restructuring and other
charges. Gross margins were unfavorably impacted by higher raw material and
energy costs which offset the effects of price improvement, favorable mix
and manufacturing gains. Despite 9.2% higher distribution costs, selling,
general and administrative expenses were lower in the 2008 period as a result of
lower employee costs and a $1.9 million consulting fee expense, incurred in
connection with income tax refunds obtained for the 1999 and 2000 tax periods,
recorded in the prior year period. Appleton had no restructuring and other
charges in the first six months 2008, while the year earlier period included
restructuring charges of $1.2 million largely for U.S. employee termination
benefits.
  In the
first six months of 2008, income from continuing operations increased $21.0
million as the decrease in operating income was offset by an increase in other
non-operating income. Other non-operating income increased, compared to the
prior year period, because Appleton recorded a $22.3 million litigation
settlement gain, net of fees, as the result of prevailing in a lawsuit to
recover previously incurred costs from an insurance carrier.
  During
the first half of 2008, a $42.9 million loss from discontinued operations was
recorded compared to a $2.4 million loss from discontinued operations in the
year earlier period. On August 1, 2008 Appleton completed the sale of
Bemrose Group Limited, its secure and specialized print services business based
in Derby, England. In anticipation of the sale transaction, the Company
recorded impairment charges aggregating $41.2 million related to goodwill and
other long-lived assets in the three-month period ended June 29,
2008. These charges arose in the second quarter due to a decline in the
value of the business arising primarily as the result of deteriorating
economic conditions and tougher markets for Bemrose products, as well as
increased funding requirements of the Bemrose pension plan arising from
negotiations with the plan trustees.
 
 Business
Segment Discussion
  Technical
Papers
  ●
              Second
      quarter 2008 coated solutions net sales totaled $142.7 million, a decrease
      of $2.6 million, or 1.8%, compared to second quarter
      2007.  During the first six months of 2008, coated solutions
      segment net sales totaled $280.3 million, a decrease of $4.8 million, or
      1.7%, from prior year levels.  Both second quarter and first
      half 2008 carbonless shipment volumes were lower than the same periods in
      2007.  The adverse impact of lower shipment volumes and
      unfavorable mix was partially offset by favorable pricing when compared to
      the same period of 2007.
 
 Second
      quarter 2008 coated solutions operating income decreased $0.7 million
      compared to second quarter 2007. During the first six months of 2008,
      coated solutions operating income decreased $7.0 million compared to
      the first six months of 2007. Operating margins in 2008 continue to
      be adversely affected by lower shipment volumes, unfavorable mix and
      higher raw material and distribution costs which offset improved pricing,
      manufacturing gains and lower employee costs compared to the prior year
      periods.
 
 ●
              Second
      quarter 2008 thermal papers net sales were $70.8 million, an increase of
      $6.7 million, or 10.5%, from the prior year period.  During the
      first six months of 2008, thermal papers net sales were $133.8 million, an
      increase of $8.7 million, or 6.9%, over the same period last
      year.  These increases were largely the result of increased
      shipment volumes.
 
 Second
      quarter 2008 thermal papers operating income decreased by $1.1 million, or
      43.3% compared to second quarter 2007.  Thermal papers operating
      income for the first half of 2008 decreased $0.9 million, or
      20.3%.  Despite increased shipment volumes, 2008 operating
      margins continue to be adversely affected by higher raw material and
      distribution costs. In addition, second quarter 2008 margins were impacted
      by start-up costs associated with the expansion project at Appleton's
      paper mill in West Carrollton, Ohio.  Start-up costs are expected to
      continue in the third and fourth quarters of
  2008.
  ●
              Second
      quarter 2008 security papers net sales were $9.0 million, an increase of
      $1.0 million, or 12.0%, from second quarter 2007. First half 2008 security
      papers net sales were $17.6 million, an increase of $1.8 million, or
      11.6%, when compared to the first half of 2007.  These increases
      were due to increased shipment volumes and improved
    pricing.
 
 Security
      papers operating income for second quarter 2008 increased by $0.4 million
      in comparison to second quarter 2007.  Security papers operating
      income for the first half of the year increased by $0.3 million when
      compared to the first half of 2007.  The favorable impact of
      increased shipment volumes, manufacturing gains and improved pricing were
      partially offset by higher raw material and distribution
      costs.
  34
 Performance
Packaging
  ●
              Second
      quarter 2008 performance packaging segment net sales totaled $27.3
      million.  This was a $1.9 million, or 7.4%, increase over second
      quarter 2007.  During the first six months 2008, this segment
      recorded net sales of $54.3 million which was an increase of $5.1 million,
      or 10.5%, over the first six months of 2007.  During 2008, the
      segment has benefited from improved pricing and favorable
    mix.
 
 Operating
      income recorded during second quarter 2008 was $0.1 million, or 4.5%,
      lower than that of second quarter 2007 due to higher raw material
      costs.  Operating income for the first six months 2008 was $1.1
      million, or 51.9%, higher than the same period in 2007.  The
      improved operating results reflect improved pricing, favorable mix and
      manufacturing gains achieved during 2008 as compared to the year earlier
      period.
                
                In accordance with SFAS 142, "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 circumstances indicate an asset
      might be impaired.  As of June 29, 2008, and concurrently with the
      valuation of the Company's redeemable common stock as updated by an
      independent appraiser, an impairment analysis of the performance
      packaging business was performed. It was determined that no impairment
      charge was necessary. To the extent that performance packaging's operating
      performance in the future does not meet Company expectations,
      certain of its assets may not be fully recoverable and, as a result, there
      could be a material impact to the Company's consolidated financial
      statements.
  Unallocated Corporate
Charges and Business Development Costs
  ●
              Unallocated
      corporate charges and business development costs decreased $0.3 million
      and $2.7 million during the three and six months ended June 29, 2008,
      respectively, when compared to the same periods of
      2007.  Charges recorded during the first half of 2007 included
      $1.9 million of consulting fee expense incurred in connection with income
      tax refunds obtained for the 1999 and 2000 tax
  periods.
  Liquidity
and Capital Resources
  Overview. Appleton’s primary
sources of liquidity and capital resources are cash provided by operations and
available borrowings under its credit facility. Appleton expects that cash on
hand, internally generated cash flow and available credit from its credit
facility will provide the necessary funds for the reasonably foreseeable
operating and recurring cash needs (e.g., working capital, debt service, other
contractual obligations and capital expenditures). Appleton currently has
approximately $94.7 million of unused borrowing capacity under its revolving
credit facility. As of June 29, 2008, the Company was in compliance with all of
its debt covenants.
  Cash Flows from Operating
Activities. Net cash provided by operating activities for the first six
months of 2008 was $3.2 million compared to net cash provided of $23.4 million
for the first six months 2007. Net loss, adjusted for non-cash charges, provided
$54.0 million in operating cash for the 2008 period. Non-cash charges included
$29.6 million of depreciation and amortization, $40.1 million
of impairment charges, $3.1 million in non-cash employer matching
contributions to the KSOP and $2.5 million of other non-cash
charges.  Uses of cash included a $36.6 million unfavorable change in
working capital and pension activity of $2.7 million.
  Major
components of the $36.6 million increase in working capital, during the first
six months 2008, were a $21.7 million increase in inventories and an $18.0
million reduction in accounts payable and other accrued liabilities. Inventories
increased during the first six months of 2008 in anticipation of planned reduced
mill output during completion of the expansion project at Appleton’s paper mill
in West Carrollton, Ohio.  The $2.7 million use of cash, related to
the pension, included $5.0 million of pension contributions made during the
first half of 2008 for the 2007 plan year.
 
 Cash
flows from operating activities also included an $11.6 million use of cash
within the other increases/decreases of assets and liabilities.  This
included $9.9 million of payments made against Appleton's $25.0 million Fox
River Liability.
  Cash Flows from Investing
Activities.Net
cash used by investing activities in the first six months 2008 totaled $50.7
million versus $16.8 million in the first six months 2007. The increased 2008
spending is for the expansion project underway at the West Carrollton, Ohio
paper mill. Appleton expects construction spending on this expansion project to
extend into the second half of 2008. The expansion project is being funded
through cash flows from operations, special financing provided by the State of
Ohio and borrowings under Appleton’s senior secured credit
facility.
  Cash Flows from Financing
Activities.Net
cash provided by financing activities was $19.2 million for the first six months
of 2008, while $9.3 million was provided in the comparable 2007 period. During
the first half of 2008, Appleton borrowed a net $41.2 million more on its
revolving credit facility than it paid. In June 2007, Appleton entered into a
new $375 million senior secured credit facility consisting of a seven-year, $225
million term loan and access to a six-year, $150 million revolving line of
credit.  Proceeds of the new term loan were used to repay outstanding
balances on Appleton’s previous senior secured notes payable and revolving line
of credit.
 
   35
 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 5.40%, on an
additional $75.0 million of its variable rate notes with a five-year interest
rate swap contract. As of June 29, 2008, these swap contracts, or derivatives,
were recorded at a combined asset value of $2.9 million based on fair value
measurements using Level 2 inputs as described in SFAS 157, "Fair Value
Measurements."
  First
half 2008 proceeds from the issuance of PDC redeemable common stock totaled $3.7
million.  The ESOP trustee purchased this stock with pre-tax
deferrals, rollovers and loan payments made by employees during the first six
months of 2008.  Payments to redeem PDC common stock were $17.4
million during this same period of 2008.  The net cash decrease
realized from these proceeds and redemptions was $0.2 million less than in the
comparable period of 2007.
  Cash
overdrafts decreased by $6.8 million during the first six months 2008. 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.
  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 Roaring Spring facility
covers 367 employees and expired in November 2007. On April 8, 2008,
Appleton declared an impasse with respect to the negotiation of a new
contract and implemented its best and final offer effective April 14,
2008. On August 8, 2008, the Roaring Spring employees ratified a four-year
labor agreement.
  New
Accounting Pronouncements
  In
March 2008, the Financial Accounting Standards Board (“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. PDC is currently evaluating the impact, if any, on its
financial statements.
 
 In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements.”  SFAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 also
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability. In support of
this principle, the standard establishes a fair value hierarchy that prioritizes
the information used to develop assumptions. The fair value hierarchy gives the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data, for example, the reporting entity’s own data. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, except as it relates to nonrecurring fair value measurements
of nonfinancial assets and liabilities for which the standard is effective for
fiscal years beginning after November 15, 2008. The adoption of SFAS 157 with
respect to financial assets and liabilities, in the first quarter of 2008, did
not have a significant effect on the Company’s financial statements. The Company
is currently evaluating the impact, if any, of SFAS 157 for measuring
nonfinancial assets and liabilities on future results of operations and
financial position.
  36
 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 December 29, 2007. There have been
no other material changes in the quantitative or qualitative exposure to market
risk from that described in the Form 10-K.
  Item 4—Controls and
Procedures
  Internal Controls Over
Financial Reporting
  There were no changes in the
internal control over financial reporting of Appleton or PDC during the fiscal
quarter covered by this report that have materially affected, or are reasonably
likely to materially affect, the 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.
  37
 
 PART
II – OTHER INFORMATION
  Item 1A
– Risk Factors
  Other
than with respect to the risk factors set forth below, there have been no
material changes in the risk factors disclosed in the Annual Report on Form 10-K
for the year ended December 29, 2007.
   We
have competitors in our various markets and we may not be able to maintain
prices and margins for our products.
  We
face strong competition in all of our business segments. Our competitors vary in
size and the breadth of their product offerings and some of our competitors have
significantly greater financial, technical and marketing resources than we do.
Regardless of the continuing quality of our primary products, we may be unable
to maintain our prices or margins due to:
  •
              declining
      overall carbonless market size;
  •
              accelerating
      decline in carbonless sheet sales;
  •
              variations
      in demand for, or pricing of, carbonless
  products;
  •
              increasing
      manufacturing costs;
  •
              increasing
      competition in international markets or from domestic or foreign
      producers; or
  •
              declining
      general economic conditions.
  Our
inability to compete effectively or to maintain our prices and margins could
have a material adverse effect on our earnings and cash flow.
  Our North
American market is highly competitive. We compete based on a number of factors,
including price, product availability, quality and customer service.
Additionally, we compete with domestic production and imports from Europe and
Asia. We believe that competitors in China, Germany and Korea have
illegally dumped lightweight thermal paper into the United States and that
competitors in China have been subsidized by the Chinese Government.
The U.S. Department of Commerce issued its preliminary
determination regarding the Chinese subsidy on March 10, 2008, finding
margins that range from 0.57% to 59.5%. Interim duties have
been imposed to offset the levels of subsidization found in the amount of
these margins. On May 7, 2008, the U.S. Department of Commerce imposed
preliminary antidumping duties in the amount of 133% against China
and 6.5% against Germany. We expect a final determination on injury and
duties in September or October 2008. No assurances can be given that such
illegal dumping and subsidization will not continue or that the U.S. Department
of Commerce will take final actions to offset unfair prices or restore fair
competition in the U.S. market. As a result, our prices for lightweight thermal
paper may continue to be adversely affected and could result in a material
adverse impact on our earnings and cash flow in the future.
 
  38
  
  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 December 29, 2007, 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, you should 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.
  Item 6—Exhibits
  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.
   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.
  APPLETON
      PAPERS INC.
                (Registrant)Date:
      August 11, 2008
              /s/
      Thomas J. FerreeThomas
      J. FerreeVice
      President Finance, Chief Financial
                Officer
      and Treasurer
                (Signing
      on behalf of the Registrant and as the PrincipalFinancial
      Officer)
   40
  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:
      August 11 , 2008
              /s/
      Thomas J. FerreeThomas
      J. FerreeChief
      Financial Officer and Treasurer
                (Signing
      on behalf of the Registrant and as the PrincipalFinancial
      Officer)
  
 41