APPVION, INC. - FORM 10-Q - November 6, 2009

Attached files

file	filename
EX-32.2 - 906 CERTIFICATION OF APPLETON CFO - APPVION, INC.	exhibit32-2.htm
EX-31.4 - 302 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.	exhibit31-4.htm
EX-31.3 - 302 CERTIFICATION OF PAPERWEIGHT CEO - APPVION, INC.	exhibit31-3.htm
EX-32.4 - 906 CERTIFICATION OF PAPERWEIGHT CFO - APPVION, INC.	exhibit32-4.htm
EX-31.2 - 302 CERTIFICATION OF APPLETON CFO - APPVION, INC.	exhibit31-2.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-32.1 - 906 CERTIFICATION OF APPLETON CEO - APPVION, INC.	exhibit32-1.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 4, 2009

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

For The Transition Period From To .

Commission file numbers: 333-82084-01

333-82084

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

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

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

Registrants' telephone number, including area code: (920) 734-9841

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

Indicate by check mark whether each 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 the 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, 2009, 9,806,435 shares of Paperweight Development Corp.'s common stock, $.01 par value, were outstanding. There is no trading market for the common stock of Paperweight Development Corp. As of November 1, 2009, 100 shares of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding. There is no trading market for the common stock of Appleton Papers Inc. No shares of Paperweight Development Corp. or Appleton Papers Inc. were held by non-affiliates.

Documents incorporated by reference: None.

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

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) Income and Comprehensive Income (Loss)	6

	e) Notes to Condensed Consolidated Financial Statements	7

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34

Item 3	Quantitative and Qualitative Disclosures About Market Risk	43

Item 4T	Controls and Procedures	44

PART II	OTHER INFORMATION

Item 1	Legal Proceedings	44

Item 1A	Risk Factors	44

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 4, 2009			January 3, 2009
ASSETS
Current assets
Cash and cash equivalents	$	3,539		$	4,180
Accounts receivable, less allowance for doubtful accounts of $3,068 and $1,715, respectively		103,235			88,218
Inventories		112,471			124,856
Other current assets		46,723			45,920
Assets held for sale		9,073			9,327
Total current assets		275,041			272,501

Property, plant and equipment, net of accumulated depreciation of $435,696 and $394,075, respectively		412,918			439,301
Goodwill		9,251			9,251
Intangible assets, net		68,648			71,404
Environmental indemnification receivable		38,113			114,300
Other assets		17,357			13,909
Assets held for sale		8,806			9,255
Total assets	$	830,134		$	929,921

LIABILITIES, REDEEMABLE COMMON STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Current liabilities
Current portion of long-term debt	$	5,967		$	5,455
Accounts payable		56,823			61,093
Accrued interest		3,661			3,628
Other accrued liabilities		82,469			83,502
Liabilities held for sale		2,198			2,085
Total current liabilities		151,118			155,763

Long-term debt		558,900			598,598
Postretirement benefits other than pension		45,784			45,364
Accrued pension		102,791			109,532
Environmental liability		38,113			114,300
Other long-term liabilities		9,819			13,309
Commitments and contingencies (Note 13)		-			-
Redeemable common stock, $0.01 par value, shares authorized: 30,000,000, shares issued and outstanding: 10,243,478 and 10,643,894, respectively		133,653			147,874
Accumulated deficit		(114,133	)		(159,650	)
Accumulated other comprehensive loss		(95,911	)		(95,169	)
Total liabilities, redeemable common stock, accumulated deficit and accumulated other comprehensive loss	$	830,134		$	929,921

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 4, 2009			Three Months Ended September 28, 2008			Nine Months Ended October 4, 2009			Nine Months Ended September 28, 2008
Net sales	$	222,347		$	255,675		$	648,308		$	742,400

Cost of sales		175,582			211,173			509,582			592,022

Gross profit		46,765			44,502			138,726			150,378

Selling, general and administrative expenses		38,874			40,146			105,122			125,280
Goodwill impairment		-			17,684			-			17,684

Operating income (loss)		7,891			(13,328	)		33,604			7,414

Other expense (income)
Interest expense		13,987			10,748			38,209			32,034
Debt extinguishment income, net		(37,366	)		-			(42,746	)		-
Interest income		(10	)		(128	)		(47	)		(365	)
Litigation settlement, net (Note 13)		-			-			-			(22,274	)
Foreign exchange (gain) loss		(403	)		1,774			(1,005	)		2,000
Other income		-			-			(820	)		-

Income (loss) from continuing operations before income taxes		31,683			(25,722	)		40,013			(3,981	)

Provision for income taxes		240			85			163			177

Income (loss) from continuing operations		31,443			(25,807	)		39,850			(4,158	)

Discontinued operations
Loss from discontinued operations, net of income taxes		-			(4,224	)		-			(47,149	)

Net income (loss)	$	31,443		$	(30,031	)	$	39,850		$	(51,307	)



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 4, 2009			September 28, 2008
Cash flows from operating activities:
Net income (loss)	$	39,850		$	(51,307	)
Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:
Depreciation		43,597			40,893
Amortization of intangible assets		2,840			3,430
Impairment of continuing operations goodwill		-			17,684
Impairment of discontinued operations goodwill and long-lived assets		-			42,207
Amortization of financing fees		2,100			1,765
Employer 401(k) noncash matching contributions		2,979			4,400
Foreign exchange (gain) loss		(1,005	)		2,399
Loss on disposals of equipment		175			1,298
Accretion of capital lease obligation		55			87
Gain on debt extinguishment		(42,746	)		-
(Increase)/decrease in assets and increase/(decrease) in liabilities:
Accounts receivable		(13,956	)		(396	)
Inventories		12,390			(18,978	)
Other current assets		(749	)		(63	)
Accounts payable and other accrued liabilities		11,439			(20,363	)
Restructuring reserve		(2,115	)		(239	)
Accrued pension		(5,970	)		(6,992	)
Fox River liabilities		-			(19,662	)
Other, net		(4,775	)		(1,249	)
Net cash provided (used) by operating activities		44,109			(5,086	)

Cash flows from investing activities:
Proceeds from sale of equipment		27			8
Net change in cash due to sale of Bemrose Group Limited		-			(2,892	)
Additions to property, plant and equipment		(16,051	)		(74,638	)
Net cash used by investing activities		(16,024	)		(77,522	)

Cash flows from financing activities:
Payments of senior secured notes payable		(1,687	)		(1,687	)
Payments of senior subordinated notes payable		(1,687	)		-
Debt acquisition costs		(8,282	)		-
Payments relating to capital lease obligation		(548	)		(548	)
Proceeds from revolving credit facility		185,341			272,607
Payments of revolving credit facility		(175,450	)		(214,272	)
Proceeds from State of Ohio loan		3,000			-
Payments of State of Ohio loan		(677	)		(130	)
Payments of secured financing		(1,715	)		-
Proceeds from issuance of redeemable common stock		2,075			3,721
Payments to redeem common stock		(12,586	)		(17,491	)
(Decrease) increase in cash overdraft		(16,510	)		3,083
Net cash (used) provided by financing activities		(28,726	)		45,283

Effect of foreign exchange rate changes on cash and cash equivalents		-			321
Change in cash and cash equivalents		(641	)		(37,004	)
Cash and cash equivalents at beginning of period		4,180			44,838
Cash and cash equivalents at end of period	$	3,539		$	7,834

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) INCOME AND COMPREHENSIVE INCOME (LOSS)
FOR THE NINE MONTHS ENDED
(unaudited)
(dollars in thousands, except share data)

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

Balance, December 29, 2007		11,116,751		$	182,040		$	(80,086	)	$	3,679

Comprehensive loss
Net loss		-			-			(51,307	)		-		$	(51,307	)
Change in retiree plans, net		-			-			-			7,975			7,975
Foreign currency translation adjustment		-			-			-			(8,112	)		(8,112	)
Realized and unrealized gain on derivatives		-			-			-			1,504			1,504
Total comprehensive loss													$	(49,940	)
Issuance of redeemable common stock		253,936			6,813			-			-
Redemption of redeemable common stock		(577,566	)		(17,491	)		-			-
Accretion of redeemable common stock		-			(2,018	)		2,018			-

Balance, September 28, 2008		10,793,121		$	169,344		$	(129,375	)	$	5,046

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 presentation of the results of operations for the three and nine months ended October 4, 2009 and September 28, 2008, the cash flows for the nine months ended October 4, 2009 and September 28, 2008 and financial position at October 4, 2009 and January 3, 2009 have been made. All adjustments made were of a normal recurring nature.

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

The results of operations for any interim period are not necessarily indicative of the results to be expected for the full year. The Company has performed an evaluation of subsequent events through November 6, 2009, the date the financial statements were issued. Certain immaterial prior year financial statement amounts have been reclassified to conform to their current year presentation.

2. DISPOSITIONS

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, was acquired in 2003 and prints and converts flexible plastic packaging materials for companies in the food processing, household and industrial products industries. The assets and liabilities of C&H are reported as held for sale for the periods ended October 4, 2009 and January 3, 2009. As of the end of second quarter 2009, depreciation and amortization expense was suspended, resulting in a $0.2 million reduction in expense. The sale is expected to be completed prior to the end of 2009. C&H is included within the performance packaging business segment.

Net assets held for sale consist of the following (dollars in thousands):

	October 4, 2009			January 3, 2009
Accounts receivable	$	3,480		$	3,811
Inventories		5,304			5,197
Other current assets		289			319

Property, plant and equipment, net		6,005			6,370

Goodwill		1,350			1,350
Intangible assets, net		1,451			1,535

Accounts payable		(1,604	)		(1,445	)
Other accrued liabilities		(594	)		(640	)

Net assets held for sale	$	15,681		$	16,497

Late in 2007, Appleton committed to a formal plan to sell Bemrose Group Limited (“Bemrose”), its secure and specialized print services business based in Derby, England. After conducting a strategic review in the fourth quarter of 2007, Appleton decided to focus its attention and expand its leadership positions in its core businesses. The operating results of Bemrose for the three and nine months ended September 28, 2008 are reported separately as discontinued operations. For the three and nine months ended September 28, 2008, Bemrose recorded net sales of $8.5 million and $55.7 million, respectively, and losses before income taxes of $4.2 million and $47.1 million, respectively.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

On August 1, 2008, Appleton completed the sale of Bemrose receiving £2.0 million ($3.9 million) of cash and £3.2 million ($6.4 million) of notes receivable to be settled within 75 and 180 days after closing. The first tranche of notes receivable was paid in November 2008, however, due to continuing difficult business conditions in Bemrose markets, Appleton established a £1.0 million ($1.5 million) reserve against the £2.0 million ($3.0 million) remaining principal and interest due at year-end 2008. During second quarter 2009, Appleton and Bemrose negotiated an amendment to the original sales agreement related to the second tranche of the note receivable. Bemrose agreed to pay Appleton £1.5 million ($2.5 million). In return, Appleton agreed to release Bemrose from the remaining £0.5 million ($0.8 million). During July 2009, £1.0 million ($1.6 million) was received from Bemrose. Interest will accrue on the unpaid balance and will be paid in addition to the remaining principal in January 2012. These renegotiated terms resulted in a partial recovery of the reserve established at year-end 2008 and the recording of a £0.5 million ($0.8 million) gain during second quarter 2009. This gain is included in other income from continuing operations in the Condensed Consolidated Statement of Operations for the nine months ended October 4, 2009. The note receivable has been recorded within other long-term assets.

3. GOODWILL AND OTHER INTANGIBLE ASSETS

The Company reviews the carrying value of goodwill and intangible assets with indefinite lives for impairment annually or more frequently if events or changes in circumstances indicate that an asset might be impaired. The carrying amount of goodwill as of October 4, 2009 and January 3, 2009 was $9.3 million and was assigned entirely to the performance packaging segment.

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

	As of October 4, 2009				As of January 3, 2009
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
Amortizable intangible assets:
Trademarks	$	47,835	$	20,283	$	47,835	$	18,590
Patents		30,778		30,720		30,778		30,570
Customer relationships		25,064		6,896		25,064		5,983
Non-compete agreements		691		686		691		686
Subtotal		104,368	$	58,585		104,368	$	55,829
Unamortizable intangible assets:
Trademarks		22,865				22,865
Total	$	127,233			$	127,233

Of the $127.2 million of acquired intangible assets, $70.7 million was assigned to registered trademarks. Trademarks of $44.6 million related to carbonless paper and $3.2 million related to the Company’s 2003 and 2005 acquisitions are being amortized over their estimated useful life of 20 years, while the remaining $22.9 million are considered to have an indefinite life and are not subject to amortization. The remaining acquired intangible assets are being amortized over their estimated useful lives ranging from 3 to 25 years for patents and customer relationships and 1 to 5 years for non-compete agreements.

Total amortization expense for the three and nine months ended October 4, 2009 was $0.9 million and $2.8 million, respectively. Of these amounts, C&H reported amortization expense of $0.1 million for the six months ended July 5, 2009. Amortization expense for the three and nine months ended September 29, 2008 was $0.9 million and $3.4 million, respectively. Of these amounts, C&H recorded amortization expense of $0.2 million for the nine months ended September 28, 2008.

Estimated future amortization expense as of October 4, 2009, consists of the following (dollars in millions):

2009	$	0.9
2010		3.5
2011		3.5
2012		3.4
2013		3.4
2014		3.4

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

4. RESTRUCTURING AND OTHER CHARGES

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

The table below summarizes the restructuring reserve included in the consolidated balance sheets at October 4, 2009 and January 3, 2009 (dollars in thousands):

	January 3, 2009		2009 Additions		2009			October 4, 2009
	Reserve		to Reserve		Utilization			Reserve

U.S. employee termination benefits	$	2,138	$	-	$	(2,115	)	$	23

5. INVENTORIES

Inventories consist of the following (dollars in thousands):

	October 4, 2009			January 3, 2009
Finished goods	$	66,301		$	70,448
Raw materials, work in process and supplies		60,868			69,255
		127,169			139,703
Inventory reserve		(3,510	)		(4,330	)
		123,659			135,373
LIFO reserve		(11,188	)		(10,517	)
	$	112,471		$	124,856

Stores and spare parts inventory balances of $23.4 million and $23.1 million at October 4, 2009 and January 3, 2009, respectively, are valued at average cost and are included in raw materials, work in process and supplies. Inventories valued using the FIFO method approximate 10% and 9% of the Company’s total inventory balance at October 4, 2009, and January 3, 2009, respectively.

6. PROPERTY, PLANT AND EQUIPMENT

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

	October 4, 2009			January 3, 2009
Land and improvements	$	9,693		$	9,880
Buildings and improvements		134,353			132,110
Machinery and equipment		658,824			646,294
Software		32,744			32,112
Capital lease		4,764			4,764
Construction in progress		8,236			8,216
		848,614			833,376
Accumulated depreciation/amortization		(435,696	)		(394,075	)
	$	412,918		$	439,301

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

Depreciation expense for the three and nine months ended October 4, 2009 and September 28, 2008, 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 4, 2009		September 28, 2008		October 4, 2009		September 28, 2008
Cost of sales	$	12,961	$	12,062	$	38,612	$	35,366
Selling, general and administrative expenses		1,649		1,731		4,985		5,527
	$	14,610	$	13,793	$	43,597	$	40,893

Included in the amounts above, C&H recorded depreciation of $0.4 million for the six months ended July 5, 2009. Also included in the above table, C&H recorded depreciation of $0.2 million and $0.6 million for the three and nine months ended September 28, 2008, respectively.

7. OTHER CURRENT AND NONCURRENT ASSETS

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

	October 4, 2009		January 3, 2009
Environmental indemnification receivable	$	37,700	$	37,700
Alternative fuels tax credit receivable		1,167		-
Note receivable from Bemrose		-		1,449
Other		7,856		6,771
	$	46,723	$	45,920

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

	October 4, 2009		January 3, 2009
Deferred debt issuance costs	$	13,809	$	10,968
Other		3,548		2,941
	$	17,357	$	13,909

8. OTHER ACCRUED LIABILITIES

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

	October 4, 2009		January 3, 2009
Compensation	$	8,660	$	4,776
Trade discounts		17,333		18,537
Workers’ compensation		4,017		4,489
Accrued insurance		1,850		1,744
Other accrued taxes		1,251		1,787
Postretirement benefits other than pension		3,329		3,329
Fox River Liabilities		37,700		37,700
Restructuring reserve		23		2,138
Other		8,306		9,002
	$	82,469	$	83,502

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

9. NEW ACCOUNTING PRONOUNCEMENTS

In August 2009, the FASB issued ASU No. 2009-05, "Measuring Liabilities at Fair Value," which amends ASC 820, "Fair Value Measurements and Disclosures." ASU 2009-05 provides clarification and guidance regarding how to value a liability when a quoted price in an active market is not available for that liability. The changes to the ASC as a result of this update are effective for the first reporting period (including interim periods) beginning after issuance, which for the Company, is fourth quarter 2009. Adoption is not expected to have a material impact on its consolidated financial statements.

In June 2009, the Financial Accounting Standards Board (“FASB”) issued the Accounting Standards Codification (“ASC”). The ASC became the single source for all authoritative generally accepted accounting principles (“GAAP”) recognized by the FASB to be applied for financial statements issued for periods ending after September 15, 2009. The ASC does not change GAAP but was intended to simplify user access to all authoritative GAAP by providing all the authoritative literature related to a particular topic in one place. All previously existing accounting standard documents were superseded and all other accounting literature not included in the ASC is considered non-authoritative. Throughout the notes to the condensed consolidated financial statements, references that were previously made to various former authoritative GAAP pronouncements have been changed to coincide with the appropriate section of the ASC.

In May 2009, the FASB issued ASC 855, “Subsequent Events.” This statement is applicable to the accounting for and disclosure of subsequent events not addressed in other GAAP. It provides a definition of subsequent events and guidance as to when subsequent events are recognized or not recognized. It requires the disclosure of the date through which subsequent events have been evaluated, as well as whether the date is the date the financial statements were issued or the date the financial statements were available to be issued. These provisions were effective for interim or annual financial periods ending after June 15, 2009, and are applied prospectively. These provisions were adopted by the Company during its second quarter ended July 5, 2009 and additional disclosures required by this standard are included in Note 1, Basis of Presentation.

In April 2009, the FASB issued ASC 820, “Fair Value Measurements and Disclosures.” Based on the guidance, if an entity determines that the level of activity for an asset or liability has significantly decreased and that a transaction is not orderly, further analysis of transactions or quoted prices is needed, and a significant adjustment to the transaction or quoted prices may be necessary to estimate fair value in accordance with ASC 820, “Fair Value Measurements.” These provisions were adopted by the Company during its second quarter ended July 5, 2009. There was no current period impact on its financial statements.

In April 2009, the FASB issued ASC 825, “Financial Instruments.” It requires an entity to provide disclosures about fair value of financial instruments in interim financial information. These provisions were adopted by the Company during its second quarter ended July 5, 2009. Additional disclosures required by this standard are addressed in Note 17, Fair Value of Financial Instruments.

In December 2008, the FASB issued ASC 715, “Compensation - Retirement Benefits,” to provide guidance on an employers’ disclosures about plan assets of a defined benefit pension or other postretirement plan. This pronouncement is effective for fiscal years ending after December 15, 2009. Upon initial application, the provisions are not required to be adopted for earlier periods as presented for comparative purposes. Earlier application of the provisions is permitted. The Company does not believe adoption will have a material impact on its consolidated financial statements.

In March 2008, the FASB issued ASC 815, “Derivatives and Hedging.” This statement changes the disclosure requirements for derivative instruments and hedging activities. It requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under ASC 815 and its related interpretations and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. These provisions were effective for financial statements issued for fiscal years beginning after November 15, 2008. The Company adopted these provisions during its first quarter 2009. The principal impact to the Company was to require the expansion of its disclosures regarding derivative instruments.

In December 2007, the FASB issued ASC 805, “Business Combinations.” It requires that an acquiring entity recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. It changes the accounting treatment for acquisition costs, non-controlling interests, contingent liabilities, in-process research and development, restructuring costs and income taxes. In addition, it also requires a substantial number of new disclosure requirements. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company adopted ASC 805 during the first quarter of 2009. The adoption did not have a material impact on its consolidated financial statements.

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):

	For the			For the			For the			For the
	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
Pension Benefits	October 4, 2009			September 28, 2008			October 4, 2009			September 28, 2008
Net periodic benefit cost
Service cost	$	1,458		$	1,539		$	4,374		$	4,616
Interest cost		4,909			4,488			14,726			13,464
Expected return on plan assets		(5,200	)		(5,187	)		(15,599	)		(15,559	)
Amortization of
Prior service cost		134			48			404			144
Actuarial loss		123			-			368			-
Net periodic benefit cost	$	1,424		$	888		$	4,273		$	2,665

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

The Company contributed $10.0 million to its pension plan in fiscal 2009 for plan year 2008. This payment was made during the three months ended October 4, 2009.

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):

	For the			For the			For the			For the
	Three Months			Three Months			Nine Months			Nine Months
	Ended			Ended			Ended			Ended
Other Postretirement Benefits	October 4, 2009			September 28, 2008			October 4, 2009			September 28, 2008
Net periodic benefit cost
Service cost	$	186		$	233		$	556		$	698
Interest cost		767			769			2,301			2,309
Amortization of
Prior service cost		(545	)		(539	)		(1,635	)		(1,617	)
Actuarial loss		-			1			-			3
Net periodic benefit cost	$	408		$	464		$	1,222		$	1,393

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

12. LONG-TERM INCENTIVE COMPENSATION

In December 2001, the Company adopted the Appleton Papers Inc. Long-Term Incentive Plan. In July 2002, the Company adopted the Appleton Papers Canada Ltd. Share Appreciation Rights Plan. These plans provide officers and key employees the opportunity to be awarded phantom units, the value of which is based on the change in the fair market value of PDC’s common stock under the terms of the employee stock ownership plan (the “ESOP”) prior to the grant date or the exercise date, as applicable. During the first quarter of 2009, 463,000 new phantom units were issued under the Appleton Papers Inc. Long-Term Incentive Plan at a share price of $21.43 which was the fair market value of one share of PDC common stock as of January 3, 2009. During third quarter 2009, 14,000 new phantom units were issued under the Appleton Papers Inc. Long-Term Incentive Plan at a share price of $18.87 which was the fair market value of one share of PDC common stock as of July 5, 2009. There was no expense recorded for this plan during the three and nine months ended October 4, 2009. There was no expense recorded for this plan during the three months ended September 28, 2008; however, as a result of a decline in share price during the first nine months of 2008, the Company recorded a reduction to compensation expense of $2.7 million within selling, general and administrative expenses.

Beginning in 2006, the Company established a nonqualified deferred compensation agreement with each of its non-employee directors. Deferred compensation is in the form of phantom units and is earned over the course of six-month calendar periods of service beginning January 1 and July 1. The number of units to be earned is calculated using the established dollar value of the compensation divided by the fair market value of one share of PDC common stock as established under the terms of the ESOP as of the prior December 31 and June 30, respectively. This deferred compensation vests coincidental with the board member’s continued service on the board. Upon cessation of service as a director, the deferred compensation will be paid in five equal annual cash installments. On July 1, 2009, 5,564 share units were issued to the non-employee directors. There was no expense recorded for this plan during the three months ended October 4, 2009. Approximately $0.1 million was recorded as expense, related to this plan, for the first nine months of 2009. During the three and nine months ended September 28, 2008, the Company recorded $0.1 million of expense related to this arrangement.

13. COMMITMENTS AND CONTINGENCIES

Lower Fox River

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

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

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

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

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

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

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

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

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

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

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

Accordingly, Appleton has recorded a reserve for its potential liability for the Lower Fox River. At January 3, 2009, this reserve was $152.0 million. During the first nine months of 2009, $76.2 million of payments were made from the reserve. This resulted in a remaining reserve of $75.8 million as of October 4, 2009, of which $37.7 million is recorded in other accrued liabilities and $38.1 million is recorded as a long-term environmental liability.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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

•

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

•

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

•

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

•

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

•

$25 million in fees and expenses.

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

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

Under the indemnification agreements, Appleton is indemnified for the first $75 million of Fox River Liabilities and for amounts in excess of $100 million. During 2008, Appleton paid $25 million in satisfaction of its unindemnified portion of the Fox River Liabilities. Through October 4, 2009, AWA has paid $163.8 million in connection with Fox River Liabilities. At October 4, 2009, the total indemnification receivable from AWA was $75.8 million, of which $37.7 million is recorded in other current assets and $38.1 million is recorded as an environmental indemnification receivable.

In connection with the indemnification agreements, AWA purchased and fully paid for indemnity claim insurance from Commerce & Industry Insurance Company, an affiliate of American International Group, Inc. The insurance policy provides up to $250 million of coverage for Fox River Liabilities, subject to certain limitations defined in the policy. At October 4, 2009, the policy had $86.2 million of remaining coverage which is sufficient to cover Appleton’s currently estimated share of the Fox River Liabilities. AWA’s obligations to maintain indemnity claim insurance covering the Fox River Liabilities are defined in and limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as amended.

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

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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 groundwater immediately under this area. In addition, PCB contamination is present in sediment in the adjacent Great Miami River, but it is believed that this contamination is from a source other than the West Carrollton mill.

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

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

Litigation Settlement

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

Other Litigation

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. The defendant has appealed the final judgment. The case will be reviewed by the Wisconsin Court of Appeals who will determine whether the judgment should stand. 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. The Company has successfully defended such claims, settling some for amounts which are not material to the business and obtaining dismissals in others. While the Company vigorously defends itself and expects to prevail in any similar cases that may be brought against Appleton in the future, there can be no assurance that the Company will be successful in its defense.

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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 $0.9 million and $1.3 million for the three months ended October 4, 2009 and September 28, 2008, respectively. Appleton’s matching contributions charged to expense were $3.0 million and $4.4 million for the nine months ended October 4, 2009 and September 28, 2008, respectively. As a result of hardship withdrawals, required diversifications and employee terminations, 614,146 shares of PDC redeemable common stock were repurchased during the first nine months of 2009 at an aggregate price 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 from 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 redeemable common stock being issued. During the first nine months of 2008, the ESOP trustee purchased PDC redeemable common stock for an aggregate price of $3.7 million, also from pre-tax deferrals, rollovers and loan payments made by employees.

Redeemable common stock is being accreted up to the earliest redemption date based upon the estimated fair market value of the redeemable common stock as of October 4, 2009. Due to a reduction in the July 5, 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 redeemable common stock recorded book value as of October 4, 2009 was $134 million, which leaves a remaining unrecognized liability to be accreted of approximately $59 million.

15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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

The Company selectively hedges forecasted transactions that are subject to foreign currency exchange exposure by using forward exchange contracts. These instruments are designated as cash flow hedges and are recorded in the consolidated balance sheet at fair value. The effective portion of the contracts’ gains or losses due to changes in fair value are initially recorded as a component of accumulated other comprehensive loss and are subsequently reclassified into earnings when the underlying transactions occur and affect earnings. These contracts are highly effective in hedging the variability in future cash flows attributable to changes in currency exchange rates. The notional amount of foreign exchange contracts used to hedge foreign currency transactions was $6.2 million as of October 4, 2009.

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The following table presents the location and fair values of derivative instruments included in the Company’s Condensed Consolidated Balance Sheet at October 4, 2009 (dollars in thousands):

	As of October 4, 2009
	Derivatives		Derivatives Not
	Designated as Hedging Instruments		Designated as Hedging Instruments
Other current liabilities:
Foreign currency exchange derivatives	$	277	$	-

Other long-term liabilities:
Interest rate swap contract		-		4,362
Total liabilities	$	277	$	4,362

The following table presents the location and amount of losses and/or 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 4, 2009 and losses initially recognized in accumulated other comprehensive loss in the Condensed Consolidated Balance Sheet at October 4, 2009 (dollars in thousands):

Effective Portion

Amount of Loss Reclassified from

AOCI into Income

Derivatives in

Cash Flow Hedging

Relationships

Amount of Loss

Recognized in

AOCI on Derivatives

As of October 4, 2009

Location of Loss

Reclassified from

AOCI into Income

For the Three Months

Ended October 4, 2009

For the Nine Months

Ended October 4, 2009

Foreign currency exchange derivatives

185

Net sales

(339

)

(479

)

Amount of (Loss) Gain Recognized

in Income on Derivative

Derivatives Not Designated

Location of (Loss) Gain

Recognized in Income on

For the Three Months

For the Nine Months

as Hedging Instruments

Derivative

Ended October 4, 2009

Interest rate swap contract

Interest expense

(527)

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 obligation, consist of the following (dollars in thousands):

	October 4, 2009			January 3, 2009
At October 4, 2009 the senior secured variable rate notes payable were at 6.625%, $563 due quarterly with $212,062 due June 2013. At January 3, 2009 the notes were at approximately 4.5%, $563 due quarterly with $209,812 due June 2014.	$	219,938		$	221,625
Secured term note payable at 14.25%, approximately $300 due monthly with $6,831 due December 2013. At January 3, 2009 the note was at 12.5%, approximately $200 due monthly with $6,943 due December 2013.		20,099			21,814
At October 4, 2009 the revolving credit facility was at approximately 6.7%. At January 3, 2009 the revolving credit facility was at approximately 4.0%.		93,625			83,734
		333,662			327,173
Less obligations due within one year		(4,828	)		(4,640	)
		328,834			322,533
Unsecured variable rate industrial development bonds, 0.7% average interest rate at October 4, 2009, $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		8,175			8,780
State of Ohio loan at 1% until July 2011, then 3% until May 2019, approximately $30 due monthly and final payment due May 2019		2,928			-
Less obligations due within one year		(1,139	)		(815	)
		9,964			7,965

Senior notes payable at 8.125%, due June 2011		17,491			109,450
Senior subordinated notes payable at 9.75%, due June 2014		32,195			150,000
Second lien notes payable at 11.25%, due December 2015		161,766			-

On September 30, 2009, Appleton completed a voluntary debt-for-debt exchange of significant portions of its 8.125% senior notes payable due June 2011 and 9.75% senior subordinated notes payable due June 2014. Weak economic conditions and frozen credit markets caused many corporate bonds, including those issued by Appleton, to trade well below face value. Appleton took advantage of the opportunity to significantly reduce its total indebtedness, plus extend maturities and simplify its debt structure, by exchanging existing debt.

This transaction exchanged $92.0 million of 8.125% senior notes for $92.0 million of newly issued 11.25% second lien notes payable due December 2015. For accounting purposes, this was considered a debt modification. As part of this transaction, Appleton paid $1.2 million of fees to the bondholders which included $0.9 million of additional 11.25% second lien notes issued as in-kind consent fees to the holders agreeing to the exchange. These debt issuance costs will be amortized over the term of the second lien notes along with pre-existing unamortized debt issuance costs of the exchanged 8.125% notes. As a result of this transaction, $92.9 million of second lien notes were issued. Third-party costs of $3.7 million were also incurred and recorded as selling, general and administrative expenses.

Appleton also exchanged $110.3 million of 9.75% senior subordinated notes for $66.2 million of newly issued 11.25% second lien notes payable due December 2015. This resulted in a debt reduction of $44.1 million. For accounting purposes, this exchange was considered a debt extinguishment and $3.5 million of previously capitalized debt issuance costs related to the 9.75% notes were written off and recorded as debt extinguishment expense. Transaction costs of $5.5 million were paid and $0.2 million were accrued. Of this $5.7 million of costs, $3.0 million was recorded as debt extinguishment expense and $2.7 million was capitalized and will be amortized over the term of the second lien notes. The $3.0 million of debt extinguishment expense included $2.7 million of additional 11.25% second lien notes issued as in-kind consent fees to the holders agreeing to the exchange. As a result of this transaction, $68.9 million of second lien notes were issued. A $37.4 million net gain on debt extinguishment was recorded in the Condensed Consolidated Statement of Operations for the three and nine months ended October 4, 2009 related to the debt-for-debt exchange and the Second Amendment to the senior secured credit facilities (discussed below).

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

The 11.25% second lien notes due 2015 will accrue interest from the issue date at a rate of 11.25% per year and interest will be payable semi-annually in arrears on each June 15 and December 15, commencing on December 15, 2009. These notes are guaranteed by PDC and certain of present and future domestic and foreign subsidiaries that guarantee the senior secured credit facilities. Guarantors include PDC, C&H, American Plastics Company, Inc.and New England Extrusion Inc. 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, including guarantees of the senior secured credit facilities, and rank senior in right of payment to all of the guarantors’ existing and future subordinated debt. The guarantees of the 11.25% 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, including the guarantees of the senior secured credit facilities. These notes contain covenants that restrict Appleton’s ability and the ability of Appleton’s other guarantors to sell assets or merge or consolidate with or into other companies; borrow money; incur liens; pay dividends or make other distributions; make other restricted payments and investments; place restrictions on the ability of certain subsidiaries to pay dividends or other payments to Appleton; enter into sale and leaseback transactions; amend particular agreements relating to the transaction with former parent Arjo Wiggins Appleton Limited and the ESOP; and enter into transactions with certain affiliates. These covenants are subject to important exceptions and qualifications set forth in the indenture governing the 11.25% second lien notes due 2015.

In order to complete the debt-for-debt exchange, Appleton and its lenders under the senior secured credit facilities entered into the Second Amendment to the senior secured credit facilities on September 30, 2009. This Second Amendment cleared the way for Appleton to issue the second lien notes. Under the Second Amendment to the senior secured credit facilities, Appleton will pay interest rates equal to LIBOR, but not less than 2 %, plus 462.5 basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than 2 %, plus 462.5 basis points for any amounts outstanding on the revolving credit facility. The Second Amendment to the senior secured credit facilities provides a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may be reduced, based on measures of Appleton’s total leverage as defined in the senior secured credit facilities. The Second Amendment also provides that the revolving credit facility will be permanently reduced by $5,000,000 on December 31, 2009, by another $10,000,000 on March 31, 2010 and by an additional $15,000,000 on June 30, 2010. For accounting purposes, the amendment to the senior secured credit facilities was treated as a debt modification. The Company paid $2.4 million of fees to the creditors in conjunction with the amendment to the senior secured credit facilities. These debt issuance costs will be amortized over the term of the modified agreement along with pre-existing unamortized debt issuance costs as an adjustment to interest expense over the remaining term of the modified agreement. Unamortized debt issuance costs of $0.2 million, relating to the revolving credit facility, were written off and recorded as debt extinguishment expense. The unamortized debt issuance costs remaining will be deferred and amortized over the term of the modified revolving credit facility. Third-party costs of $0.5 million were also incurred and recorded as selling, general and administrative expenses.

In addition, on September 9, 2009, a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $17.5 million of 8.125% senior notes, and a third supplemental indenture to the indenture dated as of June 11, 2004, and governing the remaining $32.2 million of 9.75% senior subordinated notes, became effective. The supplemental indentures amend the original indentures to, among other things, eliminate substantially all of the restrictive covenants and certain events of default and related provisions.

In the first nine months of 2009, Appleton made mandatory debt repayments of $4.1 million, plus interest, on its senior secured variable rate notes payable, secured term note payable and State of Ohio loans. Also during the first nine months of 2009, Appleton borrowed $185.3 million and repaid $175.4 million against its revolving credit facility, leaving an outstanding balance of $93.6 million that the Company has the ability and intent to finance on a long-term basis. Approximately $16.1 million of the revolving credit facility was used to support outstanding letters of credit. At October 4, 2009, there was approximately $40.3 million of unused borrowing capacity under the $150 million revolving credit facility for working capital and other corporate purposes. A commitment fee of 0.5% per annum is assessed on the unused borrowing capacity.

During July 2007, Appleton entered into a new $12.1 million Loan and Security Agreement with the Director of Development of the State of Ohio, consisting of a $9.1 million State Assistance Loan and a $3.0 million State Loan (together “the Ohio Loans”). The Company received the proceeds of the $3.0 million State Loan during second quarter 2009. The proceeds of the $9.1 million State Assistance Loan were received in 2007. All proceeds of these Ohio Loans were used to fund a portion of the costs of acquiring and installing paper coating and production equipment at the Company’s paper mill in West Carrollton, Ohio.

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

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

•

First Amendment to the senior secured credit facilities and

•

First Amendment to the senior secured term note payable.

Under the First Amendment to the senior secured credit facilities, Appleton paid interest rates equal to LIBOR, but not less than 2%, plus 450 basis points for any amounts outstanding on the senior secured variable rate notes payable and, interest rates initially equal to LIBOR, but not less than 2%, plus 450 basis points for any amounts outstanding on the revolving credit facility. The First Amendment to the senior secured credit facilities provides a grid under which the interest rates payable, for amounts outstanding on the revolving credit facility, may be reduced, based on measures of Appleton’s total leverage as defined in the senior secured credit facilities. Under the First Amendment to the senior secured term note payable, Appleton will pay an interest rate of 14.25 % on the senior secured term note payable. For accounting purposes, the amendments to the senior secured credit facilities and the senior secured term note payable were treated as debt modifications. The Company paid $2.8 million of fees to the creditors in conjunction with the amendment to the senior secured credit facilities. These debt issuance costs will be amortized over the term of the modified agreement along with pre-existing unamortized debt issuance costs as an adjustment to interest expense over the remaining term of the modified agreement. Unamortized debt issuance costs of $0.1 million, relating to the revolving credit facility, were written off. The unamortized debt issuance costs remaining after the writeoff will be deferred and amortized over the term of the modified revolving credit facility.

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

•

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

•

Appleton will be permitted up to $35 million of capital expenditures in 2009 and up to $40 million of capital expenditures in 2010, with no limit in 2011 or thereafter;

•

Appleton may not make acquisitions until December 31, 2010;

•

Other restrictions are imposed on liens, indebtedness, investments, restricted payments and note repurchases;

•

Mandatory prepayments are increased from 50% to 75% of excess cash flow as defined in the senior secured credit facilities;

•

Financial covenants are modified to increase the total leverage ratio, to eliminate the interest coverage ratio, to add a senior secured leverage ratio, and to add a fixed charge coverage ratio, all as defined in the senior secured credit facilities and the First Amendment to the senior secured credit facilities.

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. As discussed below, one of the swap contracts was terminated in February 2009. The covenant violation at January 3, 2009 and subsequent waiver and amendment, in March 2009, to the senior secured credit facilities, changed the basis of the forecasted transactions for the two interest rate swap contracts that were placed in 2008. As amended, the senior secured credit facilities contain interest payments based on LIBOR with a 2% floor, whereas the forecasted transactions assumed interest payments based on LIBOR. As a result, Appleton concluded it was remote that the original forecasted transactions would occur as originally documented and reclassified as a charge against 2008 earnings, within interest expense, $9.4 million of swap losses originally classified in other comprehensive loss. The events of default also triggered an event of default pursuant to a cross-default provision under one of the interest rate swap contracts. As a result of the cross-default, the counterparty elected to terminate the swap contract. In February 2009, Appleton and the counterparty resolved Appleton’s obligation under the swap contract with an agreement to pay $4.7 million over the nine-month period ending October 2009. During the first nine months of 2009, Appleton paid $4.3 million in accordance with the termination agreement thereby reducing its liability to $0.4 million as of October 4, 2009. The remaining swap contract is expected to remain in place and future fluctuations in market value will be reflected as adjustments to interest expense. As of October 4, 2009, the remaining swap contract was recorded as a long-term liability of $4.4 million based on a fair value measurement using Level 2 inputs. The fair value of the interest rate swap derivative is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows. In comparison to the fair value reported at fiscal year-end 2008, the current fair value of this long-term liability is $0.4 million lower, with this change recorded in interest expense on the Condensed Consolidated Statement of Operations for the nine months ended October 4, 2009.

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

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

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

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

PAPERWEIGHT DEVELOPMENT CORP. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)

(unaudited)

As of October 4, 2009, Appleton was in compliance with its various amended covenants as disclosed in the 2008 Form 10-K. Based on Appleton’s forecasted operating results and related debt reductions, Appleton has projected compliance with all covenants for the next twelve-month period. Appleton’s ability to comply with the financial covenants in the future depends on further debt reduction and achieving forecasted operating results, which have become more difficult to project in the current economic environment. Given the uncertain global economic conditions, continued constraints in the credit markets and other market uncertainties, there are various scenarios, including a reduction from forecasted operating results, under which Appleton could violate its financial covenants during 2009 and 2010. Appleton’s failure to comply with such covenants or an assessment that it is likely to fail to comply with such covenants, could also lead Appleton to seek amendments to or waivers of the financial covenants contained in the senior secured credit facilities and senior secured term note payable. Appleton cannot provide assurance that it would be able to obtain any amendments to or waivers of the covenants contained in the senior secured credit facilities and senior secured term note payable. Any such amendment to or waiver of the covenants would likely involve upfront fees, higher annual interest costs and other terms less favorable to the Company than those currently in the senior secured credit facilities and senior secured term note payable. In the event the lenders will not amend or waive the covenants, the debt would be due and Appleton would need to seek alternative financing. Appleton cannot provide assurance that it would be able to obtain alternative financing. If Appleton were not able to secure alternative financing, this would have a material adverse impact on the Company.

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 4, 2009				January 3, 2009
	Carrying		Fair		Carrying		Fair
Financial Instruments	Amount		Value		Amount		Value
Senior subordinated notes payable	$	32,195	$	12,234	$	150,000	$	80,250
Senior notes payable		17,491		12,594		109,450		75,521
Second lien notes payable		161,766		161,766		-		-
Senior credit facility		219,938		195,195		221,625		162,894
Senior secured debt		20,099		20,099		21,814		21,814
Revolving credit facility		93,625		93,625		83,734		83,734
State of Ohio loans		11,103		10,980		8,780		7,978
Industrial development bonds		8,650		8,650		8,650		8,650
	$	564,867	$	515,143	$	604,053	$	440,841
Interest rate swap derivatives	$	4,362	$	4,362	$	9,446	$	9,446

The senior subordinated notes payable, the senior 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 senior credit facility is traded in interbank markets and therefore, the fair value was determined based on quoted market prices. The senior secured debt is not traded in public markets though, based on discussions with market makers for similar debt instruments, the fair value of this debt is equal to its carrying value. 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. The fair value of interest rate swap derivatives is primarily based on models that utilize the appropriate market-based forward swap curves and zero-coupon interest rates to determine the discounted cash flows that result in a measurement that is classified as Level 2.