APPVION, INC. - FORM 10-Q - November 8, 2010

Attached files

file	filename
EX-31.2 - 302 CERTIFICATION OF APPLETON CFO - APPVION, INC.	exhibit31-2.htm
EX-32.4 - 906 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.	exhibit32-4.htm
EX-32.2 - 906 CERTIFICATION OF APPLETON CFO - APPVION, INC.	exhibit32-2.htm
EX-32.1 - 906 CERTIFICATION OF APPLETON CEO - APPVION, INC.	exhibit32-1.htm
EX-31.1 - 302 CERTIFICATION OF APPLETON CEO - APPVION, INC.	exhibit31-1.htm
EX-32.3 - 906 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.	exhibit32-3.htm
EX-31.3 - 302 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.	exhibit31-3.htm
EX-31.4 - 302 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.	exhibit31-4.htm

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: October 3, 2010

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

For The Transition Period From To .

Commission file numbers: 333-82084-01

333-82084

PAPERWEIGHT DEVELOPMENT CORP.	APPLETON PAPERS INC.
(Exact Name of Registrant as Specified in Its Charter)	(Exact Name of Registrant as Specified in Its Charter)
Wisconsin	Delaware
(State or Other Jurisdiction of Incorporation or Organization)	(State or Other Jurisdiction of Incorporation or Organization)

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

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

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

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

Indicate by check mark whether each registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

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

(Do not check if a smaller reporting company)

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

As of November 1, 2010, 9,447,149 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 November 8, 2010, 100 shares of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding. There is no trading market for the common stock of Appleton Papers Inc. No shares of Paperweight Development Corp. or Appleton Papers Inc. were held by non-affiliates.

Documents incorporated by reference: None.

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

INDEX

		Page Number
PART I	FINANCIAL INFORMATION

Item 1	Financial Statements (unaudited)

	a) Condensed Consolidated Balance Sheets	3

	b) Condensed Consolidated Statements of Operations	4

	c) Condensed Consolidated Statements of Cash Flows	5

	d) Consolidated Statements of Redeemable Common Stock, Accumulated Deficit, Accumulated Other Comprehensive Loss and Comprehensive (Loss) Income	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4T	Controls and Procedures	44

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	44

Item 1A	Risk Factors	45

Item 6	Exhibits	46

Signatures		47

PART 1 – FINANCIAL INFORMATION

Item 1 – Financial Statements (unaudited)

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
(dollars in thousands, except share data)
	October 3, 2010			January 2, 2010
ASSETS
Current assets
Cash and cash equivalents	$	9,871		$	9,963
Accounts receivable, less allowance for doubtful accounts of $1,681 and $1,356, respectively		99,099			81,485
Inventories		113,728			112,346
Other current assets		49,015			54,758
Assets of discontinued operations		-			17,772
Total current assets		271,713			276,324

Property, plant and equipment, net of accumulated depreciation of $464,641 and $431,225, respectively		360,541			385,129
Intangible assets, net		49,032			50,780
Environmental indemnification receivable		-			28,600
Other assets		24,352			16,815
Assets of discontinued operations		-			40,332

Total assets	$	705,638		$	797,980

LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	21,280		$	5,955
Accounts payable		52,263			55,384
Accrued interest		16,666			5,218
Other accrued liabilities		74,010			91,363
Liabilities of discontinued operations		-			5,733
Total current liabilities		164,219			163,653

Long-term debt		525,838			544,113
Postretirement benefits other than pension		50,576			50,609
Accrued pension		89,437			101,312
Environmental liability		-			28,600
Other long-term liabilities		6,083			9,087
Commitments and contingencies (Note 13)		-			-
Redeemable common stock, $0.01 par value, shares authorized: 30,000,000, shares issued and outstanding: 9,784,425 and 10,097,099, respectively		112,624			122,087
Accumulated deficit		(143,501	)		(121,764	)
Accumulated other comprehensive loss		(99,638	)		(99,717	)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	705,638		$	797,980

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
(dollars in thousands)

	Three Months Ended October 3, 2010			Three Months Ended October 4, 2009			Nine Months Ended October 3, 2010			Nine Months Ended October 4, 2009

Net sales	$	214,870		$	195,749		$	645,662		$	573,831

Cost of sales		169,535			153,838			523,861			447,565

Gross profit		45,335			41,911			121,801			126,266

Selling, general and administrative expenses		34,644			35,059			104,775			95,179
Environmental expense insurance recovery		-			-			(8,181	)		-

Operating income		10,691			6,852			25,207			31,087

Other expense (income)
Interest expense		16,302			13,987			49,970			38,209
Debt extinguishment (income) expense, net		-			(37,366	)		5,532			(42,746	)
Interest income		(30	)		(10	)		(75	)		(47	)
Foreign exchange (gain) loss		(1,028	)		(403	)		332			(1,005	)
Other income		-			-			-			(820	)

(Loss) income before income taxes		(4,553	)		30,644			(30,552	)		37,496

Provision for income taxes		136			231			90			133

(Loss) income from continuing operations		(4,689	)		30,413			(30,642	)		37,363

Discontinued operations
Income from discontinued operations, net of income taxes		814			1,030			3,668			2,487

Net (loss) income	$	(3,875	)	$	31,443		$	(26,974	)	$	39,850

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED
(unaudited)
(dollars in thousands)
	October 3, 2010			October 4, 2009
Cash flows from operating activities:
Net (loss) income	$	(26,974	)	$	39,850
Adjustments to reconcile net (loss) income to net cash (used) provided by operating activities:
Depreciation		36,754			43,597
Amortization of intangible assets		2,325			2,840
Amortization of financing fees		3,023			2,100
Amortization of bond discount		523			-
Employer 401(k) non-cash matching contributions		2,422			2,979
Foreign exchange loss (gain)		314			(1,247)
Gain on sale of Films		(2,560	)		-
Net gain from involuntary conversion of equipment		(638	)		-
Loss on disposals of equipment		229			175
Accretion of capital lease obligation		31			55
Loss (gain) on debt extinguishment		5,437			(42,746	)
Fox River insurance recoveries		(8,248	)		-
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable		(19,762	)		(13,956	)
Inventories		(2,507	)		12,390
Other current assets		(5,662	)		(749	)
Accounts payable and other accrued liabilities		7,907			11,439
Restructuring reserve		-			(2,115	)
Accrued pension		(9,511	)		(5,970	)
Other, net		(5,770	)		(4,775	)
Net cash (used) provided by operating activities		(22,667	)		43,867

Cash flows from investing activities:
Proceeds from sale of equipment		81			27
Proceeds from sale of Films		56,000			-
Insurance proceeds from involuntary conversion		1,029			-
Additions to property, plant and equipment		(11,511	)		(16,051	)
Net cash provided (used) by investing activities		45,599			(16,024	)

Cash flows from financing activities:
Payments of senior secured notes payable		(211,225	)		(1,687	)
Payments of senior subordinated secured notes payable		-			(1,687	)
Proceeds from senior secured first lien notes payable		299,007			-
Debt acquisition costs		(10,708	)		(8,282	)
Payments relating to capital lease obligations		(588	)		(548	)
Proceeds from old revolving line of credit		21,350			185,341
Payments of old revolving line of credit		(109,575	)		(175,450	)
Proceeds from new revolving line of credit		229,193			-
Payments of new revolving line of credit		(229,193	)		-
Proceeds from State of Ohio loan		-			3,000
Payments of State of Ohio loan		(857	)		(677	)
Payments of secured financing		(2,173	)		(1,715	)
Proceeds from issuance of redeemable common stock		1,924			2,075
Payments to redeem common stock		(7,740	)		(12,586	)
Decrease in cash overdraft		(2,457	)		(16,510	)
Net cash used by financing activities		(23,042	)		(28,726	)

Effect of foreign exchange rate changes on cash and cash equivalents		18			242
Change in cash and cash equivalents		(92	)		(641	)
Cash and cash equivalents at beginning of period		9,963			4,180
Cash and cash equivalents at end of period	$	9,871		$	3,539

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF REDEEMABLE COMMON STOCK,
ACCUMULATED DEFICIT, ACCUMULATED OTHER COMPREHENSIVE LOSS
AND COMPREHENSIVE (LOSS) INCOME
FOR THE NINE MONTHS ENDED
(unaudited)
(dollars in thousands, except share data)


	Redeemable Common Stock
	Shares Outstanding			Amount			Accumulated Deficit			Accumulated Other Comprehensive Loss			Comprehensive (Loss) Income

Balance, January 2, 2010		10,097,099		$	122,087		$	(121,764	)	$	(99,717	)

Comprehensive loss:
Net loss		-			-			(26,974	)		-		$	(26,974	)
Changes in retiree plans, net		-			-			-			894			894
Realized and unrealized loss on derivatives		-			-			-			(815	)		(815	)
Total comprehensive loss													$	(26,895	)
Issuance of redeemable common stock		292,094			3,514			-			-
Redemption of redeemable common stock		(604,768	)		(7,740	)		-			-
Accretion of redeemable common stock		-			(5,237	)		5,237			-

Balance, October 3, 2010		9,784,425		$	(112,624	)	$	(143,501	)	$	(99,638	)

Balance, January 3, 2009		10,643,894		$	147,874		$	(159,650	)	$	(95,169	)

Comprehensive income:
Net income		-			-			39,850			-		$	39,850
Changes in retiree plans, net		-			-			-			(862	)		(862	)
Realized and unrealized gain on derivatives		-			-			-			120			120
Total comprehensive income													$	39,108
Issuance of redeemable common stock		213,730			4,032			-			-
Redemption of redeemable common stock		(614,146	)		(12,586	)		-			-
Accretion of redeemable common stock		-			(5,667	)		5,667			-

Balance, October 4, 2009		10,243,478		$	133,653		$	(114,133	)	$	(95,911	)

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

In the opinion of management, all adjustments necessary for the fair statement of the results of operations for the three and nine months ended October 3, 2010 and October 4, 2009, the cash flows for the nine months ended October 3, 2010 and October 4, 2009 and financial position at October 3, 2010 and January 2, 2010 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 100%-owned subsidiaries (collectively the “Company”) for each of the three years in the period ended January 2, 2010, which are included in the annual report on Form 10-K for the year ended January 2, 2010. The consolidated balance sheet data as of January 2, 2010, 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 100%-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. See Note 2, Discontinued Operations.

2. DISCONTINUED OPERATIONS

On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of American Plastics Company, Inc. (“APC”) and New England Extrusion Inc. (“NEX”) for a cash purchase price of $58 million. This transaction closed on July 22, 2010, with Appleton receiving $56 million at the time of closing and $2 million held in escrow, on behalf of Appleton, for the next 12 months to satisfy potential claims under the stock purchase agreement with Films. The cash proceeds of the sale were used to reduce debt. As a result of the sale, a $0.6 million net gain has been recorded in income from discontinued operations on the Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. APC had been acquired in 2003 and is located in Rhinelander, Wisconsin. NEX was acquired in 2005 and has manufacturing operations in Turners Falls, Massachusetts and Milton, Wisconsin.

During second quarter 2009, Appleton committed to a formal plan to sell C&H Packaging Company, Inc. (“C&H”). C&H, located in Merrill, Wisconsin, had been acquired in 2003. On December 18, 2009, Appleton completed the sale of C&H to The Interflex Group, Inc. receiving $16.9 million of cash and a receivable for $0.2 million relating to a working capital adjustment. This receivable was paid in full in February 2010. As a result of the sale, an $0.8 million gain was recorded in fourth quarter 2009.

Together, APC, NEX and C&H comprised Appleton’s former performance packaging business segment. Since APC, NEX and C&H engage in the manufacture, printing, converting, marketing and sale of high-quality single and multilayer polyethylene films for packaging applications, their operations did not align with Appleton’s strategic, long-term focus on its core competencies of specialty papers and microencapsulation. Despite the December 2009 sale of C&H, the Company had significant continuing involvement in C&H and therefore 2009 operating results were reported as continuing operations. With the July 2010 divestiture of APC and NEX, this continuing involvement ceased. Therefore, C&H’s operating results for the 2009 periods presented have been reclassified and are now reported as discontinued operations. The operating results, assets and liabilities of APC and NEX have also been reclassified and are reported as discontinued operations for all periods presented. As of the end of second quarter 2010, depreciation and amortization expense was suspended for APC and NEX, resulting in a $0.2 million reduction in expense.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

With the July 2010 divestiture of APC and NEX, the Company’s continuing involvement with C&H ceased prior to the issuance of Form 10-Q for the quarter ended July 4, 2010, and therefore, any financial results presented for C&H should have been classified as discontinued operations. This error was not deemed to be material and C&H’s financial results included in the Condensed Consolidated Statements of Operations within this Form 10-Q for the quarter ended October 3, 2010, and included in the results presented for the three and nine months ended October 4, 2009, are now included in discontinued operations.

The following table presents the net sales and operating income before income taxes with respect to APC, NEX and C&H (dollars in thousands):

	For the Three		For the Three		For the Nine		For the Nine
	Months Ended		Months Ended		Months Ended		Months Ended
	October 3, 2010		October 4, 2009		October 3, 2010		October 4, 2009

Net sales	$	4,317	$	26,598	$	51,581	$	74,477

Operating income before income taxes	$	813	$	1,039	$	3,682	$	2,517

3. BUSINESS INTERRUPTION AND PROPERTY LOSS

Manufacturing operations at the Company’s West Carrollton, Ohio paper mill were temporarily interrupted in July 2010 by the collapse of one of its coal silos. The incident caused no injuries. One boiler was extensively damaged as well as the supporting infrastructure for two other boilers. While most of the West Carrollton facility was undamaged, the collapse of the coal silo reduced the mill’s ability to produce the power and steam required to operate its manufacturing equipment. The thermal coater resumed production a few days later and the remainder of the mill resumed production in early August. The boiler that was extensively damaged is expected to be back online sometime during the first half of 2011. Appleton managed customer orders and shifted paper production to other company-owned manufacturing facilities in order to minimize any impact to its customers.

Losses associated with property damage and business interruption are covered by insurance subject to a deductible of $1.0 million. Property damage, cost to repair and business interruption is estimated to be between $27 and $30 million in the aggregate, of which approximately $17 million has been incurred through third quarter 2010. Expenses associated with property damage and business interruption, totaling $14.2 million, have been reported in cost of sales within the Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. As per the terms of the insurance policy, the Company currently expects that recovery of this entire amount is probable and has recorded a $14.2 million recovery as a reduction to cost of sales for the three and nine months ended October 3, 2010.

In addition, Appleton has recorded a $0.4 million loss on disposal of fixed assets associated with this property loss in its Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. Through the end of third quarter 2010, capital spending of approximately $2.8 million has been incurred for work associated with bringing the damaged boiler back online. Of the $2.8 million, $1.0 million, net of the deductible, is recorded in the Condensed Consolidated Statement of Operations as a reduction to cost of sales from insurance recoveries as it is realizable.

As of quarter ended October 3, 2010, Appleton has received an $8.0 million advance from the insurer and expects to be reimbursed for the remaining costs incurred and future cash outlays related to the incident. An insurance recovery receivable of $7.2 million is included in other current assets on the Condensed Consolidated Balance Sheet as of October 3, 2010.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company reviews the carrying value of goodwill and intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. All goodwill of the Company was assigned to the former performance packaging segment. As discussed above, in early July, the Company entered into a stock purchase agreement to sell all of the outstanding capital stock of APC and NEX. This transaction closed on July 22, 2010. As a result, the goodwill assigned to these entities was reclassified at January 2, 2010, as discontinued operations and disposed during third quarter 2010. Also as discussed above, because of this July 2010 divestiture, the Company's continuing involvement with C&H, which was sold in December 2009, ceased. The elimination of C&H's goodwill as a result of its sale is now shown below as discontinued operations for the year ended January 2, 2010. Changes in the carrying value of goodwill are as follows (dollars in thousands):

	October 3, 2010			January 2, 2010
Beginning of year balance
Goodwill	$	48,896		$	50,246
Accumulated impairment losses		(45,986	)		(39,645	)
		2,910			10,601
Impairment losses		-			(6,341	)
Goodwill related to discontinued operations of C&H		-			(1,350	)
Goodwill related to discontinued operations of APC and NEX		(2,910	)		(2,910	)
End of year balance
Goodwill		45,986			45,986
Accumulated impairment losses		(45,986	)		(45,986	)
	$	-		$	-

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

	As of October 3, 2010				As of January 2, 2010
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Trademarks	$	44,665	$	21,555	$	44,665	$	19,981
Patents		14,013		14,013		14,013		14,013
Customer relationships		5,365		2,308		5,365		2,134
Subtotal		64,043	$	37,876		64,043	$	36,128
Unamortizable intangible assets:
Trademarks		22,865				22,865
Total	$	86,908			$	86,908

Of the $86.9 million of acquired intangible assets, $67.5 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless paper are being amortized over their estimated useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and are not subject to amortization. Customer relationships are being amortized over their estimated useful life of 25 years.

Amortization expense for the three and nine months ended October 3, 2010 was $0.6 million and $1.7 million, respectively. Amortization expense for the three and nine months ended October 4, 2009 was $0.6 million and $1.7 million, respectively.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

5. INVENTORIES

Inventories consist of the following (dollars in thousands):

	October 3, 2010			January 2, 2010

Finished goods	$	61,251		$	65,575
Raw materials, work in process and supplies		64,378			59,019
		125,629			124,594
Inventory reserve		(3,420	)		(3,767	)
		122,209			120,827
Last-in, first-out ("LIFO") reserve		(8,481	)		(8,481	)
	$	113,728		$	112,346

Stores and spare parts inventory balances of $23.5 million and $24.0 million at October 3, 2010 and January 2, 2010, respectively, are valued at average cost and are included in raw materials, work in process and supplies. Certain other inventories valued using the first-in, first-out ("FIFO") method approximate 1% and 2% of the Company’s total inventory balance at October 3, 2010 and January 2, 2010, respectively.

6. PROPERTY, PLANT AND EQUIPMENT

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

	October 3, 2010			January 2, 2010
Land and improvements	$	8,617		$	8,617
Buildings and improvements		130,598			129,758
Machinery and equipment		639,281			634,502
Software		32,051			31,779
Capital leases		4,929			4,764
Construction in progress		9,706			6,934
		825,182			816,354
Accumulated depreciation/amortization		(464,641	)		(431,225	)
	$	360,541		$	385,129

Depreciation expense for the three and nine months ended October 3, 2010 and October 4, 2009 consists of the following (dollars in thousands):

	For the Three		For the Three		For the Nine		For the Nine
	Months Ended		Months Ended		Months Ended		Months Ended
Depreciation Expense	October 3, 2010		October 4, 2009		October 3, 2010		October 4, 2009

Cost of sales	$	10,499	$	12,045	$	30,885	$	35,443
Selling, general and
administrative expenses		1,579		1,622		4,742		4,868

12,078

13,667

35,627

40,311

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

7. OTHER CURRENT AND NONCURRENT ASSETS

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

	October 3, 2010		January 2, 2010
Environmental indemnification receivable	$	29,480	$	47,100
Alternative fuels tax credit receivable		-		925
Environmental expense insurance recovery		4,216		-
Receivable from sale of Films		2,000		-
Insurance recovery from coal silo accident		7,196		-
Other		6,123		6,733
	$	49,015	$	54,758

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

	October 3, 2010		January 2, 2010
Deferred debt issuance costs	$	15,034	$	12,786
Environmental expense insurance recovery		4,032		-
Other		5,286		4,029
	$	24,352	$	16,815

8. OTHER ACCRUED LIABILITIES

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

	October 3, 2010		January 2, 2010
Compensation	$	10,582	$	10,137
Trade discounts		16,286		16,472
Workers’ compensation		3,533		4,460
Accrued insurance		1,873		1,864
Other accrued taxes		1,460		1,519
Postretirement benefits other than pension		3,609		3,609
Fox River Liabilities		29,480		47,100
Other		7,187		6,202
	$	74,010	$	91,363

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

9. NEW ACCOUNTING PRONOUNCEMENTS

In January 2010, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which amends ASC Subtopic 820-10, “Fair Value Measurements and Disclosures,” requiring new disclosures of significant transfers in and out of Levels 1 and 2 fair value measurements, the reasons for the transfers, and separate reporting of purchases, sales, issuances and settlements in the roll forward of Level 3 fair value measurement activity. The new ASU also clarifies that fair value measurement disclosures should be provided for each class of assets and liabilities and disclosures should also be provided about valuation techniques and inputs used to measure fair value for recurring and nonrecurring fair value measurements. The disclosures are required for either Level 2 or Level 3 fair value measurements. The new disclosures and clarifications of existing disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements which are effective for fiscal years beginning after December 15, 2010 (including interim periods within those fiscal years). During first quarter 2010, the Company adopted the portion of ASU No. 2010-06 relating to Level 2 fair value measurements and is currently evaluating the impact, if any, of the Level 3 disclosures on its financial statements. The disclosures required by adoption are included in Note 15 of Notes to Condensed Consolidated Financial Statements.

In December 2009, the FASB issued ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” This ASU amends previous accounting related to the consolidation of variable interest entities ("VIE") to require an enterprise to qualitatively assess the determination of the primary beneficiary of a VIE based on whether the entity (1) has the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and (2) has the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. Also, this ASU requires an ongoing reconsideration of the primary beneficiary and amends the events that trigger a reassessment of whether an entity is a VIE. Enhanced disclosures are also required to provide information about an enterprise’s involvement in a VIE. This ASU was effective as of the beginning of each reporting entity’s first annual reporting period beginning after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted ASU No. 2009-17 during first quarter 2010 and there was no material impact.

In December 2009, the FASB issued ASU No. 2009-16, “Accounting for Transfers of Financial Assets.” This ASU removes the concept of a qualifying special-purpose entity and establishes a new “participating interest” definition that must be met for transfers of portions of financial assets to be eligible for sale accounting, clarifies and amends the derecognition criteria for a transfer to be accounted for as a sale and changes the amount that can be recognized as a gain or loss on a transfer accounted for as a sale when beneficial interests are received by the transferor. Enhanced disclosures are also required to provide information about transfers of financial assets and a transferor’s continuing involvement with transferred financial assets. This ASU must be applied as of the beginning of an entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. The Company adopted ASU No. 2009-16 during first quarter 2010 and there was no impact on its financial results.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

10. EMPLOYEE BENEFITS

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

Pension Benefits	For the Three Months Ended October 3, 2010			For the Three Months Ended October 4, 2009			For the Nine Months Ended October 3, 2010			For the Nine Months Ended October 4, 2009
Net periodic benefit cost
Service cost	$	1,516		$	1,458		$	4,549		$	4,374
Interest cost		4,900			4,909			14,701			14,726
Expected return on plan assets		(5,318	)		(5,200	)		(15,954	)		(15,599	)
Amortization of prior service cost		134			134			404			404
Amortization of actuarial loss		654			123			1,961			368
Net periodic benefit cost	$	1,886		$	1,424		$	5,661		$	4,273

The Company contributed $15.0 million to its pension plan in fiscal 2010 for plan year 2009. The payment was made during the three months ended October 3, 2010.

11. POSTRETIREMENT BENEFIT PLANS OTHER THAN PENSIONS

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

Other Postretirement Benefits	For the Three Months Ended October 3, 2010			For the Three Months Ended October 4, 2009			For the Nine Months Ended October 3, 2010			For the Nine Months Ended October 4, 2009
Net periodic benefit cost
Service cost	$	197		$	186		$	589		$	556
Interest cost		760			767			2,280			2,301
Amortization of prior service credit		(538	)		(545	)		(1,614	)		(1,635	)
Amortization of actuarial loss		48			-			144			-
Net periodic benefit cost	$	467		$	408		$	1,399		$	1,222

12. LONG-TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan (“LTIP”). In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share Appreciation Rights Plan (“SAR”). These plans, in accordance with the specific terms of each plan, provide officers, key employees and Canadian employees (as they are ineligible for the ESOP) the opportunity to be awarded phantom units, the value of which is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) prior to the grant date or the exercise date, as applicable. As of the quarter ended October 3, 2010, the fair market value of one share of PDC common stock was estimated to be $12.03. The Compensation Committee of the board resolved to discontinue future awards under the LTIP plan beginning in 2010. Similar action was taken regarding the SAR plan beginning in 2007. No expense was recorded for these plans during the three and nine months ended October 3, 2010 and October 4, 2009.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Effective January 3, 2010, the Company adopted a long-term restricted stock unit plan ("RSU") to provide key management employees, who are in a position to make a significant contribution to the growth and profitability of Appleton, the opportunity to be rewarded for performance that aligns with long-term shareholder interests. The RSU provides for future cash payments based on the value of PDC common stock, as determined by the semi-annual valuation provided by the ESOP trustee. The Compensation Committee of the board will establish the number of units granted each year in accordance with the Compensation Committee’s stated goals and policies. The units are valued, as of the date of the grant, at the most recent PDC stock price as determined by the semi-annual ESOP valuation. All units are vested three years after the award date and paid at vesting. The cash payment upon vesting of a unit is equal to the value of PDC common stock at the most recent valuation date times the number of units granted. The Compensation Committee approved an aggregate total for the 2010 year of up to 219,000 units. Actual units granted, as of October 3, 2010, were 213,000. Recipients are required to enter into a non-compete and non-solicitation agreement in order to receive units under the RSU which, if violated following the receipt of units, results in forfeiture of any and all rights to receive payment relating to RSU units. Due to terminations of employment, 4,500 unvested units were forfeited during third quarter 2010. A balance of 208,500 RSU units remains as of October 3, 2010. Approximately $0.2 million and $0.6 million of expense, related to this plan, was recorded during the three and nine months ended October 3, 2010, respectively.

Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as determined by the semi-annual ESOP valuation. This deferred compensation vests coincidentally with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. There was no expense recorded for this plan during the three months ended October 3, 2010 and October 4, 2009. Approximately $0.1 million was recorded as expense, related to this plan, for each of the nine-month periods ended October 3, 2010 and October 4, 2009.

13. COMMITMENTS AND CONTINGENCIES

Lower Fox River

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

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

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

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Appleton and NCR filed a lawsuit in January 2008 in federal court against various defendants, including other PRPs and certain municipalities, in an effort to require contribution to the cost of cleaning up PCB-contaminated sediment in the Fox River. In December 2009, the court granted the defendants’ motion for summary judgment, dismissing the claim. Appleton and NCR intend to appeal this decision.

On October 14, 2010, the United States of America (“US”) and the State of Wisconsin (“SOW”) filed a lawsuit on behalf of the EPA and the DNR, respectively, against ten companies (including the seven PRPs identified in 1997) and two municipalities seeking recovery of unreimbursed response costs and natural resources damages as well as a declaratory judgment that the defendants are liable for future response costs related to the Lower Fox River. At the same time, the US and SOW also lodged a consent decree with Georgia-Pacific (“GP”). Under the consent decree, and in exchange for a covenant not to sue and statutory contribution protection for portions of the Lower Fox River, GP would stipulate liability for performance of the required cleanup of a designated portion of the Lower Fox River, waive any objections to the cleanup remedy selected by EPA and DNR, and pay $7 million toward the government’s unreimbursed past costs and expected future costs. The GP consent decree is subject to a 30-day public comment period, following which the US may withdraw the consent decree or file a motion asking the court to approve and enter the consent decree.

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

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

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

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

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

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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. As of January 2, 2010, this reserve was $75.7 million. During the first nine months of 2010, $46.2 million of payments were made from the reserve. This resulted in a remaining reserve of $29.5 million as of October 3, 2010, all of which is recorded in other accrued liabilities.

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

•

total remediation costs of $690 million, based on the most recent bids received with a range from $594 million to $900 million;

•

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

•

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

•

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

•

$25 million in fees and expenses.

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

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

Under the indemnification agreements, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100 million. During 2008, Appleton paid $25 million in satisfaction of its unindemnified portion of the Fox River Liabilities. AWA has paid $216.5 million in connection with Fox River Liabilities through the first nine months of 2010. At October 3, 2010, the total indemnification receivable from AWA was $29.5 million, all of which is recorded in other current assets.

In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry Insurance Company, an affiliate of American International Group, Inc. The insurance policy provides up to $250 million of coverage for Fox River Liabilities, subject to certain limitations defined in the policy. As of October 3, 2010, the policy had $33.5 million of remaining coverage, which is sufficient to cover Appleton’s currently estimated share of the Fox River Liabilities. AWA’s obligations to maintain indemnity claim insurance covering the Fox River Liabilities are defined in and limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as amended.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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

The insurance policy discussed above is held by a special purpose entity in which the Company is a minority shareholder. An AWA affiliate is the only other shareholder in this entity. The Company adopted ASU No. 2009-17, “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities,” as of January 3, 2010. The Company determined that this entity is not a VIE and there is no requirement to include this entity in its consolidated financial results for the period ended October 3, 2010.

In March 2008, Appleton received favorable jury verdicts in a state court declaratory judgment action relating to insurance coverage of its environmental claims involving the Fox River. A final judgment and order was entered in January 2009, and the insurers appealed the final judgment. On June 8, 2010, the Wisconsin Court of Appeals upheld the final judgment. Settlements have been negotiated between most of the insurers and Appleton. Under the terms of the AWA indemnification agreement, recoveries from insurance are reimbursed to AWA to the extent of its indemnification obligation. Appleton recorded an $8.2 million receivable, representing first quarter 2010 insurance settlements to be received in excess of amounts reimbursable to AWA, in the Condensed Consolidated Balance Sheet as of October 3, 2010. Of this amount, $4.2 million is included in other current assets and $4.0 million is classified as long-term and is included in other assets. An $8.2 million environmental expense insurance recovery was also recorded as a separate line within operating income on the Condensed Consolidated Statement of Operations for the nine months ended October 3, 2010.

West Carrollton Mill

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

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

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Legal Proceedings

In September 2007, Appleton commenced litigation against Andritz BMB AG and Andritz, Inc. The claims asserted included breach of obligations under a February 2007 agreement to perform certain engineering services which also granted Appleton an option to purchase certain equipment and services relating to an off-machine paper coating line. This matter proceeded to trial and, on May 14, 2009, Appleton received a favorable jury verdict. The defendant filed post-trial motions in response to the verdict. On August 11, 2009, an Outagamie County, Wisconsin judge denied the defendant’s post-trial motions seeking to overturn the jury’s verdict and granted Appleton’s motion to enter judgment in favor of Appleton in the amount of $29.1 million plus 12% interest annually beginning as of January 9, 2009. The defendant has appealed the final judgment. The case will be reviewed by the Wisconsin Court of Appeals, which will determine whether the judgment should stand. Due to the pending appeal, no gain has been recorded, though ultimate resolution of the litigation could have a material effect on Appleton’s financial results.

Other

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

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

14. EMPLOYEE STOCK OWNERSHIP PLAN

Appleton’s matching contributions charged to expense were $0.6 million and $0.9 million for the three months ended October 3, 2010 and October 4, 2009, respectively. Appleton’s matching contributions charged to expense were $2.4 million and $3.0 million for the nine months ended October 3, 2010 and October 4, 2009, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 604,768 shares of PDC redeemable common stock were repurchased during the first nine months of 2010 at an aggregate price of approximately $7.7 million. During the same period, the ESOP trustee purchased 159,941 shares of PDC redeemable common stock for an aggregate price of $1.9 million using pre-tax deferrals, rollovers and loan payments made by employees, while Appleton’s matching contribution for this same period resulted in an additional 132,153 shares of redeemable common stock being issued. During the first nine months of 2009, as a result of hardship withdrawals, required diversifications and employee terminations, 614,146 shares of PDC redeemable common stock were repurchased at an aggregate piece of approximately $12.6 million. During the same period, the ESOP trustee purchased 109,964 shares of PDC redeemable common stock for an aggregate price of $2.1 million using pre-tax deferrals, rollovers and loan payments made by employees, while Appleton's matching contribution for this same period resulted in an additional 103,766 shares of PDC common stock being issued.

In accordance with the ASC 480, “Distinguishing Liabilities from Equity,” redeemable equity securities are required to be accreted so the amount in the balance sheet reflects the estimated amount redeemable at the earliest redemption date based upon the redemption value at each period-end. All Company common stock is redeemable common stock. Redeemable common stock is being accreted up to the earliest redemption date, mandated by federal law, based upon the estimated fair market value of the redeemable common stock as of October 3, 2010. Due to a reduction to the share price on June 30, 2010, the Company reduced the redeemable common stock accretion by $5.2 million for the nine months ended October 3, 2010. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $118 million has been determined. The recorded book value of the redeemable common stock as of October 3, 2010, was $113 million.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Due to a reduction in the June 30, 2009 share price, redeemable common stock accretion was reduced by $5.7 million for the nine months ended October 4, 2009. Based upon the estimated fair value of the redeemable common stock, an ultimate redemption liability of approximately $193 million was determined. The recorded book value of the redeemable common stock as of October 4, 2009 was $134 million.

15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs. The fair value of foreign currency forward contracts is based on a valuation model that discounts cash flows resulting from the differential between the contract price and the market-based forward note, also deemed to be categorized as Level 2. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $13.4 million as of October 3, 2010. These contracts have settlement dates extending through March 2011.

Appleton selectively hedges forecasted commodity transactions that are subject to pricing fluctuations by using swap contracts to manage risks associated with market fluctuations in energy prices. These contracts are designated as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheet at fair value using Level 2 observable market inputs based on the New York Mercantile Exchange as measured on the last trading day of the accounting period and compared to the strike price. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the underlying transactions occur and affect earnings or if it becomes probable the forecasted transaction will not occur. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in natural gas prices. At October 3, 2010, the hedged volumes of these contracts totaled 555,000 MMBTU (Million British Thermal Units) of natural gas. These contracts have settlement dates extending through December 2011.

In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. This interest rate swap was being accounted for as a cash flow hedge. As discussed in Note 16, Long-Term Obligations, the covenant violation at January 3, 2009 and subsequent waiver and amendment in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the interest rate swap contract. As amended, the senior secured credit facilities contained interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. Consequently, this derivative was no longer designated as a hedging instrument. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The following table presents the location and fair values of derivative instruments included in the Company’s Condensed Consolidated Balance Sheets (dollars in thousands):

Designated as a Hedge	Balance Sheet Location	October 3, 2010			January 2, 2010
Foreign currency exchange derivatives	Accounts receivable	$	-		$	308
Foreign currency exchange derivatives	Other current liabilities		(358	)		(35	)
Natural gas fixed swap	Other current liabilities		(112	)		-
Natural gas fixed swap	Other long-term liabilities		(43	)		-

Not Designated as a Hedge
Interest rate swap contract	Other long-term liabilities		-			(3,813	)

The following table presents the location and amount of losses (gains) on derivative instruments and related hedge items included in the Company’s Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010 and October 4, 2009 and losses initially recognized in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet at the period-ends presented (dollars in thousands):

Designated as a Hedge	Statement of Operations Location	For the Three Months Ended October 3, 2010		For the Three Months Ended October 4, 2009		For the Nine Months Ended October 3, 2010			For the Nine Months Ended October 4, 2009
Foreign currency exchange derivatives	Net sales	$	65	$	339	$	(32	)	$	479

Losses recognized in accumulated other comprehensive loss as presented on the balance sheet							569			185

Not Designated as a Hedge
Interest rate swap contract	Interest expense		-		527		961			(389)

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

16. LONG-TERM OBLIGATIONS

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

	October 3, 2010			January 2, 2010
The senior secured variable rate notes payable were paid off, in full, and terminated on February 8, 2010. At January 2, 2010 the notes were at 6.625%, $542 due quarterly with $204,184 due June 2013.	$	-		$	211,225
Secured term note payable at 14.25%, approximately $200 due monthly with $6,831 due December 2013		17,521			19,695
At January 2, 2010 the old revolving credit facility was at approximately 6.7%. On February 8, 2010, it was repaid in full and terminated.		-			88,225
Unsecured variable rate industrial development bonds, 0.5% average interest rate at October 3, 2010, $2,650 due in 2013 and $6,000 due in 2027		8,650			8,650
State of Ohio assistance loan at 6%, approximately $100 due monthly and final payment due May 2017		7,325			7,965
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment due May 2019		2,639			2,856
Senior notes payable at 8.125%, due June 2011		17,491			17,491
Senior subordinated notes payable at 9.75%, due June 2014		32,195			32,195
Senior secured first lien notes payable at 10.5%, due June 2015		305,000			-
Unamortized discount on 10.5% senior secured first lien notes payable, due June 2015		(5,469	)		-
Second lien notes payable at 11.25%, due December 2015		161,766			161,766
		547,118			550,068
Less obligations due within one year		(21,280	)		(5,955	)
	$	525,838		$	544,113

During the first nine months of 2010, Appleton made mandatory debt repayments of $3.0 million, plus interest, on its secured term note payable, as amended, and State of Ohio loans. As discussed below, in February 2010, Appleton completed a voluntary refinancing of its debt which included a new five-year, asset-backed $100 million revolving credit facility. Initial borrowing on this revolving credit facility was $20.6 million. During the first nine months of 2010, Appleton borrowed an additional $208.6 million on the revolving credit facility, all of which had been repaid by the end of the third quarter. At October 3, 2010, there was no outstanding revolving credit facility balance. Approximately $16.9 million of the revolving credit facility is used to support outstanding letters of credit.

On November 1, 2010, Appleton voluntarily repaid the $17.5 million balance of the secured term note payable due December 2013, as amended. A payment of $18.9 million represented full and complete payment of all unpaid principal, accrued and unpaid interest and a prepayment fee. These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility. Upon payment, the note was terminated and Appleton was released from all obligations under the note. Debt extinguishment expense of approximately $1.5 million will be recorded during fourth quarter 2010 as a result of the termination of this note. Appleton entered into this five-year, $22 million secured term note payable in November 2008. In February 2010, Appleton and the noteholder of this debt, amended the terms of this note to eliminate a financial covenant and adjust the levels of the remaining financial covenants.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

On February 8, 2010, Appleton completed a voluntary refinancing of its debt to extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility. The refinancing included the sale of $305.0 million of 10.5% senior secured first lien notes due June 2015 and a new five-year, asset-backed $100 million revolving credit facility. Proceeds from the sale of the senior secured notes, less expenses and discounts, were $292.2 million. The new revolving credit facility provides for up to $100 million of revolving loans including a letter of credit sub-facility of up to $25 million and a swing line sub-facility of up to $5 million. It also contains an uncommitted accordion feature that allows the Company to increase the size of the revolving credit facility by up to $25 million if the Company can obtain commitments for the incremental amount. Borrowings under the new revolving credit facility will be limited to the sum of (a) 85% of the net amount of eligible accounts receivable and (b) the lesser of (i) 70% of the net amount of eligible raw materials and finished goods inventory or (ii) 85% of the net orderly liquidation value of such inventory. The Company’s borrowings under the revolving credit facility will initially bear interest at the Company’s option at either base rate plus 3.00% or LIBOR plus 4.00% per annum. Thereafter, the interest rate may be reduced (and subsequently may be increased up to the foregoing levels or reduced from time to time) based on measures of Appleton’s average monthly unused availability as defined in the revolving credit facility. Initial borrowing totaled $20.6 million. A majority of the proceeds from this refinancing transaction were used to repay, and thus terminate, the senior secured credit facilities which included senior secured variable rate notes payable of $211.2 million, plus interest, and the revolving credit facility of $97.1 million, plus interest. Remaining proceeds were used to pay related transaction fees and expenses totaling $10.7 million.

The 10.5% senior secured first lien notes due June 2015 rank senior in right of payment to all existing and future subordinated indebtedness of Appleton and equally in right of payment with all existing and future senior indebtedness of Appleton. The notes are secured by security interests in substantially all of the property and assets of Appleton and are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by all of Appleton’s restricted subsidiaries (other than excluded restricted subsidiaries) and the parent entity. Initially, in addition to Appleton, this includes PDC and Appleton Papers Canada Ltd. as well as American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture.

The revolving credit facility is guaranteed by PDC, each of PDC’s existing and future 100%-owned domestic and Canadian subsidiaries and each other subsidiary of PDC that guarantees the 10.5% senior secured first lien notes due June 2015 including American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture. Lenders hold a senior first-priority interest in (i) substantially all of the accounts, inventory, general intangibles, cash deposit accounts, business interruption insurance, investment property (including, without limitation, all issued and outstanding capital stock of the Company and each revolver guarantor (other than PDC) and all interests in any domestic or Canadian partnership, joint venture or similar arrangement), instruments (including all collateral security thereof), documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired (except for certain general intangibles, instruments, documents, chattel paper and records of the Company or any revolver guarantor, to the extent arising directly in connection with or otherwise directly relating to equipment, fixtures or owned real property), (ii) all other assets and properties of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. Lenders also hold a junior first-priority security interest in (i) substantially all equipment, fixtures and owned real property of the Company and each revolver guarantor now owned or hereafter acquired, (ii) in each case solely to the extent arising directly in connection with or otherwise directly related to any of the foregoing, certain general intangibles, instruments, documents, chattel paper and records of the Company and each revolver guarantor now owned or hereafter acquired, and (iii) all proceeds of the foregoing. This revolving credit facility contains affirmative and negative covenants customary for similar credit facilities, which among other things, require that the Company meet a minimum fixed charge coverage ratio under certain circumstances and restrict the Company’s ability and the ability of the Company’s subsidiaries, subject to certain exceptions, to incur liens, incur or guarantee additional indebtedness, make restricted payments, engage in transactions with affiliates and make investments.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. Also during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional $75.0 million of its variable rate notes with a five-year interest rate swap contract. The covenant violation that occurred at January 3, 2009 and subsequent waiver and amendment in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for these two interest rate swap contracts. As amended, the senior secured credit facilities contained interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, Appleton concluded it was remote that the original forecasted transactions would occur as originally documented and, it reclassified swap losses, originally classified in other comprehensive loss, to interest expense as of year-end 2008. One of these swap contracts was terminated in February 2009. As of January 2, 2010, the remaining swap contract was recorded as a long-term liability of $3.8 million based on a fair value measurement using Level 2 inputs. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

The senior secured term note payable, as amended, and second lien notes, as amended, contain affirmative and negative covenants. Among other restrictions, the covenants contained in the senior secured term note payable, as amended, require Appleton to meet specified financial tests, including leverage and fixed charge coverage ratios, which become more restrictive over the term of the debt. In February 2010, Appleton and the noteholder of the senior secured term note payable, further amended the terms of this debt to eliminate a financial covenant and adjust the levels of the remaining financial covenants. The senior secured term note payable, as amended, also contains covenants which, among other things, restrict Appleton’s ability and the ability of Appleton’s other guarantors of the senior secured term note payable, as amended, to incur liens; engage in transactions with affiliates; incur or guarantee additional indebtedness; declare dividends or redeem or repurchase capital stock; make loans and investments; engage in mergers, acquisitions, consolidations and asset sales; acquire assets, stock or debt securities of any person; amend its debt instruments; repay other indebtedness; use assets as security in other transactions; enter into sale and leaseback transactions; sell equity interests in the Company’s subsidiaries; and engage in new lines of business. The senior secured term note payable, as amended, also contains a provision which defines an event of default to include defaults or events of default under the senior notes, as amended, and the senior subordinated notes, as amended. The senior secured term note payable, as amended, is unconditionally guaranteed by PDC and by substantially all of Appleton’s subsidiaries, other than certain immaterial subsidiaries. In addition, it is secured by a lien on specified manufacturing equipment located in Appleton’s paper mill in West Carrollton, Ohio.

The senior notes, as amended, and senior subordinated notes, as amended, are unconditionally guaranteed by PDC and Rose Holdings Limited as well as American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture. The 11.25% second lien notes due 2015, as amended, are guaranteed by PDC and certain of present and future domestic and foreign subsidiaries. Guarantors include PDC and, American Plastics Company, Inc. and New England Extrusion Inc. until their July 22, 2010 divestiture. The guarantees of these notes are second-priority senior secured obligations of the guarantors. They rank equally in right of payment with all of the guarantors’ existing and future senior debt and rank senior in right of payment to all of the guarantors’ existing and future subordinated debt. The guarantees of these notes are effectively subordinated to all of the first-priority senior secured debt of the guarantors, to the extent of the collateral securing such debt.

The first lien notes and the second lien notes, as amended, contain covenants that restrict Appleton’s ability and the ability of Appleton’s other guarantors to sell assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make other restricted payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter into sale and leaseback transactions; amend particular agreements relating to the transaction with former parent Arjo Wiggins Appleton Limited and the ESOP; and enter into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the 10.5% first lien notes due 2015 and the 11.25% second lien notes due 2015, as amended. On January 29, 2010, Appleton received the requisite consents from the beneficial owners of the second lien notes to certain amendments to the indenture governing these notes in order to (i) permit a transaction pursuant to which the ESOP will cease to own at least 50% of PDC, without triggering a requirement on the part of the Company to make an offer to repurchase the second lien notes, as amended, and (ii) permit a capital contribution or operating lease of the black liquor assets located at the Company’s Roaring Spring, Pennsylvania facilities to a newly formed joint venture with a third-party in exchange for a minority equity interest in such joint venture.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

As of October 3, 2010, Appleton was in compliance with its various amended covenants and is forecasted to remain compliant for the next 12 months. Appleton’s ability to comply with the financial covenants in the future depends on further debt reduction and achieving forecasted operating results. Appleton’s failure to comply with such covenants, or an assessment that it is likely to fail to comply with such covenants, could also lead Appleton to seek amendments to or waivers of the financial covenants. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants. In the event of non-compliance with debt covenants, if the lenders will not amend or waive the covenants, the debt would be due and Appleton would need to seek alternative financing. Appleton cannot provide assurance that it would be able to obtain alternative financing. If Appleton were not able to secure alternative financing, this would have a material adverse impact on the Company.

17. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

	October 3, 2010				January 2, 2010
	Carrying		Fair		Carrying		Fair
Financial Instruments	Amount		Value		Amount		Value
Senior subordinated notes payable	$	32,195	$	15,293	$	32,195	$	19,317
Senior notes payable		17,491		16,966		17,491		17,491
Senior secured first lien notes payable		299,531		280,810		-		-
Second lien notes payable		161,766		116,472		161,766		161,766
Senior credit facility		-		-		211,225		211,225
Secured term note payable		17,521		18,732		19,695		19,695
Revolving credit facility		-		-		88,225		88,225
State of Ohio loans		9,964		10,618		10,821		10,941
Industrial development bonds		8,650		8,650		8,650		8,650
	$	547,118	$	467,541	$	550,068	$	537,310

Interest rate swap derivative	$	-	$	-	$	3,813	$	3,813

The senior subordinated notes payable, the senior notes payable, the senior secured first lien notes payable and the second lien notes payable are traded in public markets and therefore, the fair value was determined based on quoted market prices. The fair value of the secured term note payable represents the Company's November 1, 2010 repayment, in full, at 107% of face. The fair value of the State of Ohio loans was determined based on current rates for similar financial instruments of the same remaining maturity and similar terms. The industrial development bonds have a variable interest rate that reflects current market terms and conditions.

18. SEGMENT INFORMATION

The Company’s reportable segments are as follows: carbonless papers, thermal papers and Encapsys®. Prior to first quarter 2010, the reportable segments were coated solutions, thermal papers, security papers and performance packaging. The financial results of the Encapsys business had previously been included within the coated solutions segment. Encapsys provides encapsulation technologies and encapsulated products both internally for Appleton’s production of carbonless papers and commercially to external customers. It has grown to be an increasingly significant business and is forecasted to continue this trend. As a result of this growth, there is a specific management team in place to oversee the development, marketing and manufacturing of these products. With the breakout of Encapsys, the only remaining product line within coated solutions was carbonless papers. As the result of a business and management realignment of the Company’s paper businesses, previously reported security papers has been combined with carbonless papers to become the carbonless papers reportable segment. The carbonless papers segment and the thermal papers segment each operate under separate management teams to encourage a singular focus on specific markets and customers and their respective needs. All prior period financial information has been restated to conform to this new segment presentation.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of APC and NEX. This transaction closed on July 22, 2010. The operating results for this business for the three and nine months ended October 3, 2010, and October 4, 2009, have been reclassified and are now reported separately as discontinued operations and, therefore, are not included in the segment presentation below. C&H, which was sold in December 2009, is reported as discontinued operations for 2009 and therefore is not included in the segment presentation below.

Management evaluates the performance of the segments based primarily on operating income. Items excluded from the determination of segment operating income are unallocated corporate charges, interest income, interest expense, debt extinguishment (income) expense, foreign exchange (gain) loss and other income. The Company does not allocate total assets internally in assessing operating performance and does not track capital expenditures by segment. Net sales, operating income (loss) and depreciation and amortization, as determined by the Company for its reportable segments, are as follows (dollars in thousands):

		For the Three Months Ended October 3, 2010			For the Three Months Ended October 4, 2009		For the Nine Months Ended October 3, 2010			For the Nine Months Ended October 4, 2009
Net sales
Carbonless papers	$	117,090		$	119,953		$	369,715		$	355,854
Thermal papers		89,052			71,139			256,428			206,624
		206,142			191,092			626,143			562,478

Encapsys		14,163			10,591			37,518			29,310
Intersegment (A)		(5,435	)		(5,934	)		(17,999	)		(17,957	)
Total	$	214,870		$	195,749		$	645,662		$	573,831

Operating income (loss)
Carbonless papers	$	9,056		$	14,078		$	21,781		$	45,953
Thermal papers		520			(1,923	)		(3,841	)		(7,666	)
		9,576			12,155			17,940			38,287
Encapsys		2,986			740			6,133			1,910
Unallocated corporate charges		(1,353	)		(4,975	)		3,879			(6,372	)
Intersegment (A)		(518	)		(1,068	)		(2,745	)		(2,738	)
Total	$	10,691		$	6,852		$	25,207		$	31,087

Depreciation and amortization
Carbonless papers	$	6,879		$	8,233		$	20,618		$	24,723
Thermal papers		4,964			5,013			14,833			15,017
		11,843			13,246			35,451			39,740

Encapsys		751			922			1,760			2,078
Unallocated corporate charges		68			160			165			242
Total	$	12,662		$	14,328		$	37,376		$	42,060

(A) Intersegment represents the portion of the Encapsys segment financial results relating to encapsulated products provided internally for the production of carbonless papers.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

During the nine months ended October 3, 2010, the Company recorded an $8.2 million environmental expense insurance recovery within unallocated corporate charges.

19. GUARANTOR FINANCIAL INFORMATION

Appleton (the “Issuer”) has issued senior notes, as amended, and senior subordinated notes, as amended, which have been guaranteed by PDC (the “Parent Guarantor”), C&H Packaging Company, Inc. (prior to its December 18, 2009 sale), American Plastics Company, Inc. (prior to its July 22, 2010 sale), Rose Holdings Limited and New England Extrusion Inc. (prior to its July 22, 2010 sale), each of which is a 100%-owned subsidiary of Appleton (the “Subsidiary Guarantors”).

Presented below is condensed consolidating financial information for the Parent Guarantor, the Issuer, the Subsidiary Guarantors and a 100%-owned non-guarantor subsidiary (the “Non-Guarantor Subsidiary”) as of October 3, 2010 and January 2, 2010, and for the three and nine months ended October 3, 2010 and October 4, 2009. This financial information should be read in conjunction with the condensed consolidated financial statements and other notes related thereto.

The senior secured credit facilities, as amended (prior to the February 2010 voluntary refinancing), the senior secured term note payable (prior to its repayment in full on November 1, 2010), as amended, the first lien notes and the second lien notes, as amended, place restrictions on the subsidiaries of the Issuer that would limit dividend distributions by these subsidiaries.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET
OCTOBER 3, 2010
(unaudited)
(dollars in thousands)

	Parent Guarantor		Issuer			Subsidiary Guarantors		Non-Guarantor Subsidiary			Eliminations		Consolidated

ASSETS
Current assets
Cash and cash equivalents	$	-	$	8,656		$	-	$	1,215		$	-	$	9,871
Accounts receivable, net		-		92,624			102		6,373			-		99,099
Inventories		-		112,190			-		1,538			-		113,728
Other current assets		29,480		19,469			-		66			-		49,015
Total current assets		29,480		232,939			102		9,192			-		271,713

Property, plant and equipment, net		-		360,537			-		4			-		360,541
Investment in subsidiaries		162,865		12,959			-		-			(175,824)		-
Other assets		12		73,255			-		117			-		73,384
Total assets	$	192,357	$	679,690		$	102	$	9,313		$	(175,824)	$	705,638

LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-	$	21,280		$	-	$	-		$	-	$	21,280
Accounts payable		-		52,177			-		86			-		52,263
Due to (from) parent and affiliated companies		322,872		(316,765	)		102		(6,209	)		-		-
Other accrued liabilities		-		88,387			-		2,289			-		90,676
Total current liabilities		322,872		(154,921	)		102		(3,834	)		-		164,219

Long-term debt		-		525,838			-		-			-		525,838
Other long-term liabilities		-		145,908			-		188			-		146,096
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(130,515)		162,865			-		12,959			(175,824)		(130,515)

Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	192,357	$	679,690		$	102	$	9,313		$	(175,824)	$	705,638

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING BALANCE SHEET

JANUARY 2, 2010

(dollars in thousands)

	Parent Guarantor			Issuer			Subsidiary Guarantors			Non-Guarantor Subsidiary			Eliminations		Consolidated

ASSETS
Current assets
Cash and cash equivalents	$	-		$	9,161		$	1		$	801		$	-	$	9,963
Accounts receivable, net		-			76,248			-			5,237			-		81,485
Inventories		-			110,174			-			2,172			-		112,346
Other current assets		47,100			7,518			-			140			-		54,758
Assets of discontinued operations		-			-			17,772			-			-		17,772
Total current assets		47,100			203,101			17,773			8,350			-		276,324

Property, plant and equipment, net		-			385,120			-			9			-		385,129
Investment in subsidiaries		179,787			96,505			-			-			(276,292)		-
Other assets		28,612			67,430			-			153			-		96,195
Assets of discontinued operations		-			-			40,332			-			-		40,332
Total assets	$	255,499		$	752,156		$	58,105		$	8,512		$	(276,292)	$	797,980

LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	-		$	5,955		$	-		$	-		$	-	$	5,955
Accounts payable		-			55,280			-			104			-		55,384
Due to (from) parent and affiliated companies		354,893			(316,974	)		(31,823	)		(6,096	)		-		-
Other accrued liabilities		-			94,485			-			2,096			-		96,581
Liabilities of discontinued operations		-			-			5,733			-			-		5,733
Total current liabilities		354,893			(161,254	)		(26,090	)		(3,896	)		-		163,653

Long-term debt		-			544,113			-			-			-		544,113
Other long-term liabilities		-			189,510			-			98			-		189,608
Redeemable common stock, accumulated deficit and accumulated other comprehensive loss		(99,394	)		179,787			84,195			12,310			(276,292)		(99,394)

Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	255,499		$	752,156		$	58,105		$	8,512		$	(276,292)	$	797,980


PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	643,474		$	-		$	35,119		$	(32,931	)	$	645,662
Cost of sales		-			523,745			-			33,638			(33,522	)		523,861

Gross profit		-			119,729			-			1,481			591			121,801
Selling, general and administrative expenses		-			103,392			-			1,383			-			104,775
Environmental expense insurance recovery		-			(8,181	)		-			-			-			(8,181)

Operating income		-			24,518			-			98			591			25,207
Interest expense		9,973			50,327			-			-			(10,330	)		49,970
Debt extinguishment expense, net		-			5,532			-			-			-			5,532
Interest income		-			(10,048	)		-			(357	)		10,330			(75)
Loss in equity investments		17,001			24,611			-			-			(41,612	)		-
Other expense (income)		-			558			-			(281	)		55			332

(Loss) income before income taxes		(26,974	)		(46,462	)		-			736			42,148			(30,552)
Provision for income taxes		-			4			-			86			-			90

(Loss) income from continuing operations		(26,974	)		(46,466	)		-			650			42,148			(30,642)
Income (loss) from discontinued operations, net of income taxes		-			29,465			(25,797	)		-			-			3,668

Net (loss) income	$	(26,974	)	$	(17,001	)	$	(25,797	)	$	650		$	42,148		$	(26,974)

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 4, 2009
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	572,605		$	-		$	33,428		$	(32,202	)	$	573,831
Cost of sales		-			447,303			-			32,761			(32,499	)		447,565

Gross profit		-			125,302			-			667			297			126,266
Selling, general and administrative expenses		-			94,045			-			1,134			-			95,179


Operating income (loss)		-			31,257			-			(467	)		297			31,087
Interest expense		9,378			38,209			25			-			(9,403	)		38,209
Debt extinguishment income, net		-			(42,746	)		-			-			-			(42,746	)
Interest income		-			(9,423	)		(25	)		(2	)		9,403			(47	)
Income in equity investments		(49,228	)		(2,913	)		-			-			52,141			-
Other income		-			(699	)		-			(1,254	)		128			(1,825	)

Income before income taxes		39,850			48,829			-			789			(51,972	)		37,496
Provision (benefit) for income taxes		-			311			-			(178	)		-			133

Income from continuing operations		39,850			48,518			-			967			(51,972	)		37,363
Income from discontinued operations, net of income taxes		-			710			1,777			-			-			2,487

Net income	$	39,850		$	49,228		$	1,777		$	967		$	(51,972)		$	39,850

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	213,786		$	-		$	11,628		$	(10,544	)	$	214,870
Cost of sales		-			169,684			-			10,681			(10,830	)		169,535

Gross profit		-			44,102			-			947			286			45,335
Selling, general and administrative expenses		-			34,180			-			464			-			34,644


Operating income		-			9,922			-			483			286			10,691
Interest expense		3,327			16,359			-			-			(3,384	)		16,302
Interest income		-			(3,357	)		-			(57	)		3,384			(30	)
Loss in equity investments		548			27,564			-			-			(28,112	)		-
Other income		-			(695	)		-			(374	)		41			(1,028	)

(Loss) income before income taxes		(3,875	)		(29,949	)		-			914			28,357			(4,553	)
(Benefit) provision for income taxes		-			(40	)		-			176			-			136

(Loss) income from continuing operations		(3,875	)		(29,909	)		-			738			28,357			(4,689	)
Income (loss) from discontinued operations, net of income taxes		-			29,361			(28,547	)		-			-			814

Net (loss) income	$	(3,875	)	$	(548	)	$	(28,547	)	$	738		$	28,357		$	(3,875	)

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 4, 2009
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated
Net sales	$	-		$	194,564		$	-		$	11,428		$	(10,243	)	$	195,749
Cost of sales		-			153,486			-			10,799			(10,447	)		153,838

Gross profit		-			41,078			-			629			204			41,911
Selling, general and administrative expenses		-			34,664			-			395			-			35,059


Operating income		-			6,414			-			234			204			6,852
Interest expense		3,194			13,987			8			-			(3,202	)		13,987
Debt extinguishment income, net		-			(37,366	)		-			-			-			(37,366	)
Interest income		-			(3,203	)		(8	)		(1	)		3,202			(10	)
Income in equity investments		(34,637	)		(1,591	)		-			-			36,228			-
Other expense (income)		-			160			-			(769	)		206			(403	)

Income before income taxes		31,443			34,427			-			1,004			(36,230	)		30,644
Provision for income taxes		-			151			-			80			-			231

Income from continuing operations		31,443			34,276			-			924			(36,230	)		30,413
Income from discontinued operations, net of income taxes		-			361			669			-			-			1,030

Net income	$	31,443		$	34,637		$	669		$	924		$	(36,230	)	$	31,443

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 3, 2010
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated

Cash flows from operating activities:
Net (loss) income	$	(26,974	)	$	(17,001	)	$	(25,797	)	$	650		$	42,148		$	(26,974	)
Adjustments to reconcile net (loss) income to net cash provided (used) by operating activities:
Depreciation and amortization		-			37,349			1,726			4			-			39,079
Other		-			814			-			(281	)		-			533
Change in assets and liabilities, net		64,811			(50,857	)		(7,265	)		154			(42,148	)		(35,305	)
Net cash provided (used) by operating activities		37,837			(29,695	)		(31,336	)		527			-			(22,667	)
Cash flows from investing activities:
Proceeds from sale of equipment		-			81			-			-			-			81
Proceeds from sale of Films		-			56,000			-			-			-			56,000
Insurance proceeds from involuntary conversion		-			1,029			-			-			-			1,029
Additions to property, plant and equipment		-			(10,921	)		(590	)		-			-			(11,511	)

Net cash provided (used) by investing activities		-			46,189			(590	)		-			-			45,599
Cash flows from financing activities:
Payments of senior secured notes payable		-			(211,225	)		-			-			-			(211,225	)
Proceeds from senior secured first lien notes payable		-			299,007			-			-			-			299,007
Debt acquisition costs		-			(10,708	)		-			-			-			(10,708	)
Payments relating to capital lease obligations		-			(588	)		-			-			-			(588	)
Proceeds from old revolving line of credit		-			21,350			-			-			-			21,350
Payments of old revolving line of credit		-			(109,575	)		-			-			-			(109,575	)
Proceeds from new revolving line of credit		-			229,193			-			-			-			229,193
Payments of new revolving line of credit		-			(229,193	)		-			-			-			(229,193	)
Payments of State of Ohio loans		-			(857	)		-			-			-			(857	)
Payments of secured financing		-			(2,173	)		-			-			-			(2,173	)
Due to parent and affiliated companies, net		(32,021	)		209			31,925			(113	)		-			-
Proceeds from issuance of redeemable common stock		1,924			-			-			-			-			1,924
Payments to redeem common stock		(7,740	)		-			-			-			-			(7,740	)
Decrease in cash overdraft		-			(2,457	)		-			-			-			(2,457	)

Net cash (used) provided by financing activities		(37,837	)		(17,017	)		31,925			(113	)		-			(23,042	)

Effect of foreign exchange rate changes on cash and cash equivalents		-			18			-			-			-			18
Change in cash and cash equivalents		-			(505	)		(1	)		414			-			(92	)
Cash and cash equivalents at beginning of period		-			9,161			1			801			-			9,963
Cash and cash equivalents at end of period	$	-		$	8,656		$	-		$	1,215		$	-		$	9,871

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED OCTOBER 4, 2009
(unaudited)
(dollars in thousands)

	Parent						Subsidiary			Non-Guarantor
	Guarantor			Issuer			Guarantors			Subsidiary			Eliminations			Consolidated

Cash flows from operating activities:
Net income	$	39,850		$	49,228		$	1,777		$	967		$	(51,972	)	$	39,850
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Depreciation and amortization		-			42,055			4,378			4			-			46,437
Other		-			(37,430	)		-			(1,254	)		-			(38,684	)
Change in assets and liabilities, net		28,904			(90,657	)		4,479			1,566			51,972			(3,736	)
Net cash provided (used) by operating activities		68,754			(36,804	)		10,634			1,283			-			43,867
Cash flows from investing activities:
Proceeds from sale of equipment		-			27			-			-			-			27
Additions to property, plant and equipment		-			(15,164	)		(887	)		-			-			(16,051	)

Net cash used by investing activities		-			(15,137	)		(887	)		-			-			(16,024	)
Cash flows from financing activities:
Payments of senior secured notes payable		-			(1,687	)		-			-			-			(1,687	)
Payments of senior subordinated secured notes payable		-			(1,687	)		-			-			-			(1,687	)
Debt acquisition costs		-			(8,282	)		-			-			-			(8,282	)
Payments relating to capital lease obligations		-			(548	)		-			-			-			(548	)
Proceeds from old revolving line of credit		-			185,341			-			-			-			185,341
Payments of old revolving line of credit		-			(175,450	)		-			-			-			(175,450	)
Proceeds from State of Ohio loan		-			3,000			-			-			-			3,000
Payments of State of Ohio loan		-			(677	)		-			-			-			(677	)
Payments of secured financing		-			(1,715	)		-			-			-			(1,715	)
Due to parent and affiliated companies, net		(58,243	)		70,158			(9,563	)		(2,352	)		-			-
Proceeds from issuance of redeemable common stock		2,075			-			-	-		-			-			2,075
Payments to redeem common stock		(12,586	)		-			-			-			-			(12,586	)
Decrease in cash overdraft		-			(16,510	)		-			-			-			(16,510	)

Net cash (used) provided by financing activities		(68,754	)		51,943			(9,563	)		(2,352	)		-			(28,726	)

Effect of foreign exchange rate changes on cash and cash equivalents		-			242			-			-			-			242
Change in cash and cash equivalents		-			244			184			(1,069	)		-			(641	)
Cash and cash equivalents at beginning of period		-			2,111			65			2,004			-			4,180
Cash and cash equivalents at end of period	$	-		$	2,355		$	249		$	935		$	-		$	3,539

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

Unless stated to the contrary or the context requires otherwise, all references to “Paperweight Development,” “PDC” or “Company” refer to Paperweight Development Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is a 100%-owned subsidiary of Paperweight Development, which is referred to as “Appleton” in this report.

Overview

This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity of PDC and Appleton for the quarter ended October 3, 2010. This discussion should be read in conjunction with the accompanying Condensed Consolidated Financial Statements and related Notes. Reference should also be made to the Annual Report on Form 10-K for the year ended January 2, 2010, the consolidated financial statements and related notes included therein.

On July 2, 2010, Appleton entered into a stock purchase agreement with NEX Performance Films Inc. (“Films”), an entity affiliated with Mason Wells Buyout Fund II, Limited Partnership, whereby Appleton agreed to sell all of the outstanding capital stock of American Plastics Company, Inc. (“APC”) and New England Extrusion Inc. (“NEX”) for a cash purchase price of $58 million. This transaction closed on July 22, 2010, with Appleton receiving $56 million at the time of closing and $2 million held in escrow, on behalf of Appleton, for the next 12 months to satisfy potential claims under the stock purchase agreement with Films. The cash proceeds of the sale were used to reduce debt. As a result of the sale, a $0.6 million net gain has been recorded in income from discontinued operations on the Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. APC was acquired in 2003 and is located in Rhinelander, Wisconsin. NEX had been acquired in 2005 and has manufacturing operations in Turners Falls, Massachusetts and Milton, Wisconsin.

Together, APC, NEX and C&H comprised Appleton’s former performance packaging business segment. Since APC, NEX and C&H engage in the manufacture, printing, converting, marketing and sale of high-quality single and multilayer polyethylene films for packaging applications, their operations did not align with Appleton’s strategic, long-term focus on its core competencies of specialty papers and microencapsulation. Despite the December 2009 sale of C&H, the Company had significant continuing involvement in C&H and therefore 2009 operating results were reported as continuing operations. With the July 2010 divestiture of APC and NEX, this continuing involvement ceased. Therefore, C&H’s operating results for the 2009 periods presented have been reclassified and are now reported as discontinued operations. The operating results, assets and liabilities of APC and NEX have also been reclassified and are reported as discontinued operations for all periods presented. The discussion below relates only to the operating results of continuing operations.

Losses associated with property damage and business interruption are covered by insurance subject to a deductible of $1.0 million. Property damage, cost to repair and business interruption is estimated to be between $27 and $30 million in the aggregate, of which approximately $17 million has been incurred through third quarter 2010. Expenses associated with property damage and business interruption, totaling $14.2 million, has been reported in cost of sales within the Condensed Consolidated Statement of Operations for the three and nine months ended October 3, 2010. As per the terms of the insurance policy, the Company currently expects that recovery of this entire amount is probable and has recorded a $14.2 million recovery as a reduction to cost of sales for the three and nine months ended October 3, 2010.

In March 2009, the Mexican government began imposing tariffs on 90 U.S. products sold into Mexico, including carbonless paper. The tariff on carbonless paper had been 10%. Beginning January 1, 2010, all U.S. sales of carbonless paper into Mexico were assessed a 5% tariff. In August 2010, carbonless paper was dropped from Mexico’s rotating list of 99 U.S. products upon which Mexico will assess tariffs.

Appleton's business and results of operations are impacted by various factors, including raw materials pricing and availability. As discussed below, raw material prices continued to negatively impact the business. During the quarter, Appleton did realize benefit from various price increases it initiated during the first nine months of 2010. Appleton's business and financial results may continue to be adversely affected as it waits for raw material prices to stabilize.

Financial Highlights

Third quarter 2010 net sales totaled $214.9 million, compared to $195.7 million for third quarter 2009. This nearly 10% increase in net sales was due to an increase in shipment volumes coupled with the positive impact realized during the quarter of price increases initiated during the first three quarters of the year. In total, shipments of carbonless papers and thermal papers were approximately 4% higher, of which thermal papers contributed a 26% volume gain. Third quarter 2010 Encapsys net sales of $14.2 million were $3.6 million higher than third quarter 2009 net sales. Encapsys third quarter 2010 volumes were approximately 60% higher than third quarter 2009.

A loss from continuing operations of $4.7 million was recorded during third quarter 2010 compared to income from continuing operations of $30.4 million in third quarter 2009. Third quarter 2009 operating income included a $5.0 million alternative fuels tax credit as a reduction to cost of sales as well as $37.4 million of debt extinguishment income and $4.2 million of additional selling, general and administrative (“SG&A”) expense as a result of the September 2009 voluntary debt-for-debt exchange.

Comparison of Unaudited Results of Operations for the Quarters Ended October 3, 2010 and October 4, 2009

	For the Quarter Ended
	October 3,			October 4,			Increase
	2010			2009			(Decrease)
	(dollars in millions)

Net sales	$	214.9		$	195.7			9.8	%
Cost of sales		169.6			153.8			10.3	%

Gross profit		45.3			41.9			8.1	%

Selling, general and administrative expenses		34.6			35.1			-1.4	%

Operating income		10.7			6.8			57.4	%

Interest expense, net		16.3			14.0			16.4	%
Debt extinguishment income, net		-			(37.4	)	-100.0		%
Other non-operating income, net		(1.0	)		(0.4	)	150.0		%

(Loss) income from continuing operations before income taxes		(4.6	)		30.6		nm
Provision for income taxes		0.1			0.2			-50.0	%

(Loss) income from continuing operations		(4.7	)		30.4		nm
Income from discontinued operations, net of income taxes		0.8			1.0		-20.0		%
Net (loss) income	$	(3.9	)	$	31.4		nm
Comparison as a percentage of net sales
Cost of sales		78.9	%		78.6	%		0.3	%
Gross margin		21.1	%		21.4	%		-0.3	%
Selling, general and administrative expenses		16.1	%		17.9	%		-1.8	%
Operating margin		5.0	%		3.5	%		1.5	%
(Loss) income from continuing operations before income taxes		-2.1	%		15.6	%		-17.7	%
(Loss) income from continuing operations		-2.2	%		15.5	%		-17.7	%
Income from discontinue operations, net of income taxes		0.4	%		0.5	%		-0.1	%
Net (loss) income		-1.8	%		16.0	%		-17.8	%

Net sales for third quarter 2010 were $214.9 million, an increase of $19.2 million, or 9.8%, compared to the prior year period. This increase was largely due to higher shipment volumes and the positive impact of price increases initiated during the first three quarters of the year.

Third quarter 2010 operating income of $10.7 million increased $3.9 million, or 57.4%, from third quarter 2009 operating income of $6.8 million. Appleton’s paper business was positively impacted by favorable price and mix of $6.2 million as well as reduced manufacturing costs totaling $5.3 million. This was partially offset by higher costs of raw materials and utilities of $8.6 million. Third quarter 2009 operating income also included a $5.0 million alternative fuels tax credit as a reduction to cost of sales. This tax credit expired at the end of 2009. As mentioned earlier, excluding the favorable impact of the alternative fuels tax credit on third quarter 2009 gross profit, third quarter 2010 gross profit is higher by $8.4 million. Third quarter 2010 SG&A spending was $0.5 million lower than the same period last year. Third quarter 2010 SG&A expense included higher outsourcing, professional and consulting fees of $1.3 million, higher distribution costs of $0.7 million, a $0.5 million increase in pension expense, a $0.4 million additional loss on fixed asset disposals as a result of the coal silo collapse at the West Carrollton, Ohio paper mill and a $0.8 million increase in all other spending because of the proactive limitations enforced on discretionary spending during 2009. Third quarter 2009 included $4.2 million of additional SG&A expense as a result of the September 2009 voluntary debt-for-debt exchange. Growth of the Encapsys business contributed a quarter-on-quarter $2.2 million increase to operating income.

Third quarter 2010 loss from continuing operations of $4.7 million compares to income from continuing operations of $30.4 million recorded in third quarter 2009. In addition to the items noted above, third quarter 2009 included $37.4 million of debt extinguishment income also as a result of the September 2009 voluntary debt-for-debt exchange. Third quarter 2010 net interest expense was $2.3 million higher than the prior year quarter due to higher interest rates resulting from the debt refinancings and the debt exchange that occurred since first quarter 2009. As a result of these debt transactions, Appleton was able to decrease its debt, extend debt maturities, increase liquidity, eliminate certain financial covenants and increase financial flexibility.

Comparison of Unaudited Results of Operations for the Nine Months Ended October 3, 2010 and October 4, 2009

	For the Nine Months Ended
	October 3,			October 4,			Increase
	2010			2009			(Decrease)
	(dollars in millions)

Net sales	$	645.7		$	573.8			12.5	%
Cost of sales		523.9			447.5			17.1	%

Gross profit		121.8			126.3			-3.6	%

Selling, general and administrative expenses		104.8			95.2			10.1	%
Environmental expense insurance recovery		(8.2	)		-			nm

Operating income		25.2			31.1			-19.0	%

Interest expense, net		49.9			38.1			31.0	%
Debt extinguishment expense (income), net		5.5			(42.7	)	nm
Other non-operating expense (income), net		0.3			(1.8	)	nm

(Loss) income from continuing operations before income taxes		(30.5	)		37.5		nm
Provision for income taxes		0.1			0.1			-

(Loss) income from continuing operations		(30.6	)		37.4		nm
Income from discontinued operations, net of income taxes		3.6			2.5		44.0		%
Net (loss) income	$	(27.0	)	$	39.9		nm
Comparison as a percentage of net sales
Cost of sales		81.1	%		78.0	%		3.1	%
Gross margin		18.9	%		22.0	%		-3.1	%
Selling, general and administrative expenses		16.2	%		16.6	%		-0.4	%
Operating margin		3.9	%		5.4	%		-1.5	%
(Loss) income from continuing operations before income taxes		-4.7	%		6.5	%		-11.2	%
(Loss) income from continuing operations		-4.7	%		6.5	%		-11.2	%
Income from discontinue operations, net of income taxes		0.5	%		0.4	%		0.1	%
Net (loss) income		-4.2	%		6.9	%		-11.1	%

Net sales for the first nine months of 2010 were $645.7 million, an increase of $71.9 million, or 12.5%, compared to the prior year period. This increase was largely due to higher shipment volumes, though during the current quarter of 2010, the Company began to realize the positive impact of 2010 price increases.

Operating income in the first nine months of 2010 decreased $5.9 million, or 19.0%, to $25.2 million. Appleton’s paper business was negatively impacted by unfavorable price and mix, primarily during the first half of the year, of $23.1 million as well as higher costs of raw materials and utilities of $19.2 million. These were partially offset by $29.5 million of reduced manufacturing costs and a $7.6 million positive impact of higher shipment volumes. During the first nine months of 2009, the Company recorded a $13.0 million alternative fuels tax credit as a reduction to cost of sales. This tax credit expired at the end of 2009. After eliminating the $13.0 million tax credit from 2009 year-to-date gross profit, 2010 year-to-date gross profit is higher by $8.5 million. Year-to-date 2010 SG&A expenses were $9.6 million higher than the same period of 2009 though, as mentioned above, third quarter 2009 costs included $4.2 million of additional SG&A expense as a result of the September 2009 voluntary debt-for-debt exchange. The increase in 2010 year-to-date spending was largely due to higher distribution costs of $6.2 million caused by increased shipment volumes. Spending related to professional fees, including outsourcing and consulting fees, was $2.7 million higher. Incentive compensation was also higher by $1.7 million. Salaries expense was $1.2 million higher as the result of severance costs associated with outsourcing 28 finance and IT positions and the first nine months of 2009 realizing the benefit of salaried furloughs. Year-to-date 2010 pension expense increased by $0.6 million, as did current year group health expense and promotional costs. All other 2010 SG&A expenses were up by $0.2 million. This increase in SG&A expense was offset by an $8.2 million environmental expense insurance recovery recorded during first quarter 2010.

A loss from continuing operations of $30.6 million was recorded for the first nine months of 2010. This compares to income from continuing operations of $37.4 million for the same period last year. In addition to the items noted above, net interest expense was higher by $11.8 million due to higher interest rates resulting from the debt refinancings and the debt exchange that occurred since first quarter 2009. During 2010, $5.5 million of debt extinguishment expenses were recorded as a result of the February 2010 voluntary refinancing. This compares to $42.7 million of debt extinguishment income recorded during the same period of 2009.

Business Segment Discussion

Prior to first quarter 2010, the Company’s paper business included coated solutions, thermal papers and security papers. Coated solutions included carbonless papers and Encapsys. Encapsys provides encapsulation technologies and encapsulated products both internally for Appleton’s production of carbonless papers and commercially to external customers. It has grown to be an increasingly significant business and is forecasted to continue this trend. As a result of this growth, there is a specific management team in place to oversee the development, marketing and manufacturing of these products. Due to a business and management realignment of the Company’s paper businesses, previously reported security papers has been combined with carbonless papers to become the carbonless papers reportable segment. The carbonless papers segment and the thermal papers segment each operate under separate management teams to encourage a singular focus on specific markets and customers and their respective needs.

Third quarter 2010 net sales within the Company’s paper business were $206.1 million or $15.1 million higher than third quarter 2009 net sales. Year-to-date 2010 paper business net sales were $626.1 million or $63.7 million higher than the same period last year. Third quarter 2010 operating income of $9.6 million was $2.6 million lower than third quarter 2009 operating income. Year-to-date 2010 operating income of $17.9 million was $20.3 million lower than the same period last year. The year-on-year operating income variances were the result of the following (dollars in millions):

	For the Three		For the Nine
	Months Ended		Months Ended
	October 3, 2010 v.		October 3, 2010 v.
	the Three Months		the Nine Months
	Ended October 4, 2009		Ended October 4, 2009
Favorable (unfavorable) price and mix	$	6.2	$	(23.1)
Net inflation of raw material and utilities pricing		(8.6)		(19.2)
Alternative fuels tax credit		(5.0)		(13.0)
Higher distribution costs		(0.4)		(2.0)
Reduced manufacturing costs		2.1		14.6
Reduction in mill curtailments to match customer demand		1.4		7.7
Gross profit impact of shifts in shipment volumes		(1.7)		7.6
Reduced start-up costs related to the thermal coater at the West Carrollton, Ohio paper mill		1.8		7.2
Other		1.6		(0.1)
	$	(2.6)	$	(20.3)

A segment analysis follows.

Carbonless Papers

•

Third quarter 2010 carbonless papers net sales totaled $117.1 million, a decrease of $2.9 million, or 2.4%, from prior year levels. Third quarter 2010 carbonless shipment volumes were approximately 6% lower than third quarter 2009. Volumes declined largely due to a disruption in supply as a result of the temporary interruption of paper mill operations at the West Carrollton, Ohio mill because of the collapse of the coal silo in early July. Because of diminished capacity, domestic sales were emphasized over international. The negative impact of lower shipment volumes was partially offset by the benefit realized from various price increases initiated since the beginning of 2010 in response to escalating raw material costs. During the first nine months of 2010, carbonless net sales totaled $369.7 million, an increase of $13.9 million, or 3.9%, from prior year levels. Current year carbonless shipment volumes were approximately 7% higher than year-to-date 2009 volumes primarily due to strong international demand as well as the launch of the Company’s new Superior carbonless sheet product.

•

Third quarter 2010 carbonless papers operating income of $9.1 million decreased $5.0 million compared to third quarter 2009. During the first nine months of 2010, operating income of $21.8 million decreased $24.2 million compared to the same 2009 period. The operating income for the three and nine months ended October 4, 2009, included a $5.0 million and $13.0 million, respectively, alternative fuels tax credit recorded as a reduction to cost of sales. This tax credit expired at the end of 2009. Despite higher year-to-date shipment volumes, mix was unfavorably impacted by strong international demand, because profit margins are lower on international sales, and low sheet mix. Higher raw material costs also drove down operating results and distribution costs were higher due to increased fuel costs and international shipments.

Thermal Papers

•

Third quarter 2010 thermal papers net sales totaled $89.1 million, an increase of $17.9 million, or 25.2%, over the same prior year period. The segment benefited from increased shipment volumes of approximately 26%. Demand continues to be strong for light weight non-top coat (“LWNTC”) product offerings. During the first nine months of 2010, thermal paper net sales totaled $256.4 million, an increase of $49.8 million, or 24.1%, when compared to the same period last year.

•

The thermal papers segment recorded operating income of $0.5 million for third quarter 2010. This compared to a third quarter 2009 operating loss of $1.9 million. The operating loss recorded during the first nine months of 2010 was $3.8 million less than the operating loss recorded for the first nine months of 2009. Increased net sales and the elimination of the new thermal coater start-up costs, incurred during 2009, contributed favorably to 2010 operating results. During much of 2010, competitive pricing continued to narrow LWNTC gross margins though, during third quarter 2010, LWNTC pricing began to rebound slightly due to the initiation of multiple price increases. Higher raw material costs were also unfavorably impacting 2010 margins.

Encapsys

•

Encapsys third quarter 2010 net sales of $14.2 million were $3.6 million, or 33.7%, higher than third quarter 2009. Third quarter 2010 volumes were approximately 60% higher than the prior year quarter. During the first nine months of 2010, Encapsys net sales totaled $37.5 million which was $8.2 million, or 28.0%, higher than the same period of 2009.

•

As a result of higher shipment volumes and a reduction in SG&A expense, Encapsys third quarter 2010 operating income was $3.0 million compared to $0.7 million of operating income for the same quarter of 2009. Year-to-date 2010 operating income was $6.1 million compared to $1.9 million for the first nine months of 2009.

Unallocated Corporate Charges

•

Unallocated corporate charges decreased $3.6 million in third quarter 2010 compared to third quarter 2009. Year-to-date 2010 expense was $10.3 million lower than that of 2009 due to the recording of the $8.2 million Fox River insurance recovery during first quarter 2010. Also, third quarter 2009 charges included $4.2 million of additional expense as a result of the September 2009 voluntary debt-for-debt exchange.

Liquidity and Capital Resources

Overview. Appleton’s primary sources of liquidity and capital resources are cash provided by operations and available borrowings under its revolving credit facility. Appleton generally expects that cash on hand, internally-generated cash flow and available credit from its revolving credit facility will provide the necessary funds for the reasonably foreseeable operating and recurring cash needs (e.g., working capital, debt service, other contractual obligations and capital expenditures). At October 3, 2010, Appleton had $9.9 million of cash and all outstanding borrowings against the revolving credit facility had been repaid. After considering the $16.9 million of letters of credit supported by the facility, Appleton's liquidity at the end of third quarter 2010 was approximately $93 million.

Cash Flows from Operating Activities. Net cash of $22.7 million was used by operating activities during the first nine months of 2010. This was a $66.5 million decrease in operating cash when compared to net cash provided by operating activities during the first nine months of 2009. The net loss of $27.0 million, adjusted for non-cash charges, provided $12.6 million in operating cash for the period. Non-cash charges included $39.1 million of depreciation and amortization, $5.4 million of debt extinguishment expense associated with the February 2010 refinancing, $2.4 million of non-cash employer matching contributions to the KSOP, $0.3 million of foreign exchange loss and $3.8 million of other non-cash charges. These non-cash charges were decreased by the $8.2 million Fox River insurance recovery, the proceeds of which are expected to be received during 2011 and 2012, a $2.6 million gain on the sale of Films and a $0.6 million net gain from involuntary conversion of equipment. Uses of cash included a $20.0 million change in working capital, $9.5 million change in pension which included a $15.0 million pension payment for the 2009 plan year and a net $5.8 million of other uses.

A major component of the $20.0 million increase in working capital was a $19.8 million increase in accounts receivable. This increase was the result of third quarter 2010 net sales being approximately 14% higher than fourth quarter 2009 net sales and increased international sales which carry longer payment terms. Other components of the increase in working capital were a $5.6 million increase in other current assets and a $2.5 million increase in inventories offset by an $7.9 million increase in accounts payable and other accrued liabilities. The increase in other current assets was largely the result of a $7.2 million insurance recovery recorded for the West Carrollton silo collapse.

Cash Flows from Investing Activities. As a result of the $56.0 million of cash proceeds from the July 2010 sale of American Plastics Company, Inc. and New England Extrusion Inc., cash provided by investing activities was $45.6 million for the first nine months of 2010. This compared to $16.0 million of cash used for investing activities during the same period of 2009. Included in both amounts is additions to property, plant and equipment of $11.5 million in 2010 and $16.1 million in 2009. Current year cash flows from investing also included $1.0 million of insurance recovery, related to fixed assets, as a result of the West Carrollton coal silo collapse.

Cash Flows from Financing Activities. Net cash used by financing activities was $23.0 million for 2010 compared to $28.7 million of cash used during the prior year. During the first nine months of 2010, Appleton made mandatory debt repayments of $3.0 million, plus interest, on its secured term note payable, as amended, and State of Ohio loans. As discussed below, in February 2010, Appleton completed a voluntary refinancing of its debt which included a new five-year, asset-backed $100 million revolving credit facility. As of October 3, 2010, all outstanding borrowings against the revolving credit facility have been repaid. Prior to the refinancing, Appleton had borrowed an additional $8.9 million, net, from the old revolving credit facility, which, as discussed below, was repaid in full.

Year-to-date 2010 proceeds from the issuance of PDC redeemable common stock totaled $1.9 million. The ESOP trustee purchased this stock using pre-tax deferrals, rollovers and loan payments made by employees during 2010. Current year payments to redeem PDC common stock were $7.7 million. The net cash decrease realized from these proceeds and redemptions was $4.7 million less than in the comparable period of 2009.

Cash overdrafts decreased $2.5 million during the first three quarters of 2010. Cash overdrafts represent short-term obligations, in excess of deposits on hand, that have not yet cleared through the banking system. Fluctuations in the balance are a function of quarter-end payment patterns and the speed with which the payees deposit the checks. Other net payments made during this period totaled $0.6 million.

On November 1, 2010, Appleton voluntarily repaid the $17.5 million balance of the secured term note payable due December 2013, as amended. A payment of $18.9 million represented full and complete payment of all unpaid principal, accrued and unpaid interest and a prepayment fee. These funds were sourced from a combination of cash from operations and borrowing on the revolving credit facility. Upon payment, the note was terminated and Appleton was released from all obligations under the note. Debt extinguishment expense of approximately $1.5 million will be recorded during fourth quarter 2010 as a result of the termination of this note. Appleton entered into this five-year, $22 million secured term note payable in November 2008. In February 2010, Appleton and the noteholder of this debt, further amended the terms of this note to eliminate a financial covenant and adjust the levels of the remaining financial covenants.

In February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of its variable rate notes with a five-year interest rate swap contract. Also during first quarter 2008, Appleton fixed the interest rate, at 5.4%, on an additional $75.0 million of its variable rate notes with a five-year interest rate swap contract. The covenant violation that occurred at January 3, 2009 and subsequent waiver and amendment in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for these two interest rate swap contracts. As amended, the senior secured credit facilities contained interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, Appleton concluded it was remote that the original forecasted transactions would occur as originally documented and, it reclassified swap losses, originally classified in other comprehensive loss, to interest expense as of year-end 2008. One of these swap contracts was terminated in February 2009. As of January 2, 2010, this remaining swap contract was recorded as a long-term liability of $3.8 million based on a fair value measurement using Level 2 inputs. As a result of the February 2010 voluntary refinancing, Appleton paid $5.0 million, including interest, to settle this derivative.

Health Care Reform Legislation

In March 2010, the President signed into law comprehensive health care reform legislation under the Patient Protection and Affordable Care Act (HR 3590) and the Health Care Education and Affordability Reconciliation Act (HR 4872) (together, the "Acts"). The Acts contain provisions which could impact the Company's accounting for retiree medical benefits in future periods. However, the extent of that impact, if any, cannot be determined until regulations are promulgated under the Acts and additional interpretations of the Acts become available. Elements of the Acts, the impact of which are currently not determinable, include reduced subsidies for Medicare Advantage programs, the elimination of lifetime or annual coverage limits on participant medical coverage and an excise tax, beginning in 2018, on excess benefits provided under certain plans. The Company will continue to assess the accounting implications of the Acts as related regulations and interpretations of the Acts become available. Based on the analysis to date of the provisions in the Acts, the impact of which are reasonably determinable, a re-measurement of the Company's retiree plan liabilities is not required at this time. In addition, the Company may consider plan amendments in future periods that may have accounting implications.

New Accounting Pronouncements

Item 3—Quantitative and Qualitative Disclosures About Market Risk

For information regarding quantitative and qualitative disclosures about market risk, see the Annual Report on Form 10-K for the year ended January 2, 2010. There have been no other material changes in the quantitative or qualitative exposure to market risk from that described in the Form 10-K.

Item 4T—Controls and Procedures

Internal Controls Over Financial Reporting

There were no changes in the internal control over financial reporting of Appleton or PDC as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrants’ internal control over financial reporting.

Disclosure Controls and Procedures

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

PART II – OTHER INFORMATION

Item 1 – Legal Proceedings

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

Item 1A – Risk Factors

Other than with respect to the risk factor 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 January 2, 2010.

Future greenhouse gas/carbon regulations or legislation and future Boiler Maximum Achievable Control Technology (“MACT”) regulations could adversely affect Appleton’s costs of compliance with environmental laws.

In 2009, the U.S. Environmental Protection Agency (“EPA”) finalized its finding that greenhouse gas (“GHG”) emissions endanger the public health and welfare. Since then, the EPA has finalized rules to regulate GHG emissions under the federal Clean Air Act. Also in 2009, several bills were introduced in the U.S. Congress concerning climate change and the emission into the environment of carbon dioxide and other GHGs. It is expected that eventual legislation will take the form of a cap-and-trade program where generators will be required to purchase allowances to emit in excess of mandated limits. As a result, Appleton could be required, among other things, to purchase allowances or offsets to emit GHGs or other regulated pollutants or to pay taxes on such emissions. In April 2010, the EPA proposed three related air rules commonly known as the Industrial Boiler MACT under the Clean Air Act. It is expected that these air rules will be finalized by the EPA by the end of 2010, but it is uncertain what the final rules will look like. At this time, there is no basis for estimating the effect of such legislation or regulations on the costs Appleton will incur to comply with environmental laws, although the Company is investigating ways to reduce carbon emissions as well as complying with the proposed Boiler MACT.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements. The words “will,” “may,” “should,” “believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,” “plans,” “seek” or similar expressions are intended to identify forward-looking statements. All statements in this report other than statements of historical fact, including statements which address Appleton’s strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that Appleton expects or anticipates will occur, are forward-looking statements. All forward-looking statements speak only as of the date on which they are made. They rely on a number of assumptions concerning future events and are subject to a number of risks and uncertainties, many of which are outside the Company’s control that could cause actual results to differ materially from such statements. These risks and uncertainties include, but are not limited to, the factors listed under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year ended January 2, 2010, as well as in the Quarterly Report on Form 10-Q for the current quarter ended October 3, 2010, which factors are incorporated herein by reference and as updated above. Many of these factors are beyond Appleton’s ability to control or predict. Given these uncertainties, do not place undue reliance on the forward-looking statements. Appleton disclaims any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

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, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.

31.3	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.

31.4	Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange Act of 1934 as amended.

32.1	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.

32.2	Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section 1350.

32.3	Certification of Mark R. Richards, Chairman, President and Chief Executive Officer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.

32.4	Certification of Thomas J. Ferree, Senior Vice President Finance, Chief Financial Officer and Treasurer of Paperweight Development Corp., pursuant to 18 U.S.C. Section 1350.

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: November 8, 2010	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Senior Vice President Finance, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

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: November 8, 2010	/s/ Thomas J. Ferree
	Thomas J. Ferree
	Senior Vice President, Chief Financial Officer and Treasurer (Signing on behalf of the Registrant and as the Principal Financial Officer)

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