KSOP Guide Introduction

Transcription

1

2 KSOP Guide Introduction Welcome to the Appleton family of companies. As an employee of Appleton, you have a unique ownership opportunity to invest your retirement savings in company stock. The KSOP is our retirement savings plan, made up of two components. The ESOP component, which is called the Company Stock Fund, is invested in the stock of Appleton s parent company, PDC Corp. (PDC). The non-esop component is the 401(k) Fund and can be invested in any of the investment options with The Principal that are available to Appleton employees. There are three parts to this KSOP Guide: Part I Part II Part III Employee ownership at Appleton (an overview) Summary plan description Risk factors The rules of the KSOP are addressed in the Summary Plan Description. If you have questions on distributions, loans, vesting, participation, etc., please refer to the Summary Plan Description. When making a decision to invest in company stock, be sure to review all information provided on the plan, company financials (see Part II, page 6), and the risk factors in Part III.

3 PART I Employee Ownership at Appleton

4 e m p l o y e e o w n e r s h i p a t a p p l e t o n T A B L E O F C O N T E N T S Part I, page SECTION ONE: The initial transaction 1 SECTION TWO: What is stock? What is PDC Corp? 2 SECTION THREE: What is an ESOP? 3 SECTION FOUR: What is an S corporation? 5 SECTION FIVE: Who runs an ESOP company? 6 SECTION SIX: Determining Fair Market Value 9 SECTION SEVEN: What is repurchase obligation? 11

5 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N O N E The initial transaction November 9, 2001 Overview of the initial transaction Arjo Wiggins Appleton was the parent company of Appleton in We refer to Arjo Wiggins Appleton as AWA in this document. In order to purchase the company from AWA, employees were asked to voluntarily transfer money from their 401(k) plan accounts to the ESOP (see Part I, page 3). Approximately 95 percent of all employees transferred a total of $107 million. Initial Transaction Banks $ Paperweight Development Corp. (PDC) Employees in Appleton's 401(k) plan PDC stock $ $ ESOP Using the money from the ESOP, as well as borrowed funds from banks, PDC Corp. (see Part I, page 2) acquired Appleton Papers Inc. from AWA. Appleton Papers Inc. $ Upon completion of the acquisition on November 9, 2001, 100 percent of the common stock of PDC Corp. was issued to the ESOP, which was allocated to employees accounts according to their individual investments. AWA, the seller Today Appleton Papers Inc. is proud to continue to offer employees the opportunity to invest in company stock through the ESOP. PDC Corp. stock may be purchased and allocated to the ESOP accounts of newly hired employees by rolling money over from other retirement plans. All employees may make ongoing payroll deferrals directed to purchase company stock and the company currently matches up to 6 percent of your pay invested in PDC Corp. stock. Appleton Employees Today Employees Invest in Company Stock $ deferrals ESOP $ PDC stock Paperweight Development Corp. (PDC) Part I, page 1

6 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N T W O What is stock? The ownership of a company may be represented by shares of stock (sometimes referred to as employer securities), held in varying amounts among its owners. Stock is the way of showing on paper the amount of the company each person owns, just like a deed to your car shows you own the car. A share is a single unit of stock. The value of each share equals the total value of the company divided by the total number of shares of outstanding stock.? Are all the shares of stock priced the same? Yes. The ESOP owns 100 percent of the company s outstanding stock. As the company has only one class of stock, the price per share applies to all shares of company stock. Our ESOP invests in the common stock of PDC Corp. What is PDC Corp.? PDC Corp. owns 100 percent of the stock of Appleton Papers Inc. and is the holding company or parent of Appleton Papers Inc. We refer to Appleton Papers Inc. as Appleton and PDC Corp. as PDC in this document. PDC was created to purchase Appleton from our former owner, AWA. It is the stock of PDC that was acquired by the KSOP. While PDC Corp. (PDC) may be an unfamiliar name, you can think of PDC as being the holding company and Appleton as the operating company. Part I, page 2

7 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N T H R E E What is an ESOP? Overview An Employee Stock Ownership Plan (ESOP) gives employees of a company sponsoring an ESOP a beneficial ownership interest in the company. That's why participating employees of an ESOP company are referred to as "employee owners." Let's review how the Appleton ESOP works using a simplified example. 1) The company created an ESOP and makes contributions to the ESOP s trust. Employee contributions are in the form of cash from rollovers from other tax-qualified benefit plans, like a 401(k) or profit sharing plan, and deferrals from employees eligible pay. 2) The trustee of the ESOP uses the cash contributions to purchase shares of stock. The cash is used to fund company operations and pay out participants who leave the plan or elect to move money from investments in company stock to other investment options in the 401(k) Fund, that is make a diversification election (see Part II, Section Seven). There are several unique features about employee ownership in an ESOP company. First, the assets in an ESOP, which must be primarily the stock of the sponsoring company, are held in a trust. Inside the trust there are individual accounts for each participant. The fact that the shares are held in trust for the benefit of plan participants is an important concept. Holding the shares in trust ensures that the value of the shares allocated to participants is not taxable until that participant retires or otherwise terminates their employment with the company, or if the participant does not rollover the value to another qualified retirement plan. Second, by law the ESOP is permitted to borrow money to purchase the stock of the sponsoring company. An ESOP that is involved in borrowing money to fund the purchase of employer stock is called a "leveraged" ESOP. Appleton's ESOP is not currently leveraged because the company, not the ESOP, borrowed the money to fund the purchase of the company from our former owner. 3) The value of the stock is allocated to individual accounts of the ESOP participants. When participants retire, leave employment for other reasons, or make a diversification election, they are eligible to be paid the value of the vested stock in their individual account. Part I, page 3

8 e m p l o y e e o w n e r s h i p a t a p p l e t o n Some ESOPs are combined with the company's 401(k) plan, meaning company stock is one of the investment options of the 401(k). When this is done, the ESOP is sometimes referred to as a KSOP.? Can an investor buy company stock outside the ESOP? No. The ESOP will hold 100 percent of the company stock, and company stock will not be available to anyone for purchase outside the ESOP. Usually in ESOP publications and the media, the term "ESOP" is commonly used to refer to both ESOPs and KSOPs. Regardless of the structure of the plan itself, ESOPs provide an opportunity for the employees of a company to share in any increases in value of company stock, creating a direct link between company interests and employee interests.? Are financial returns guaranteed? No. There are risks and rewards associated with ownership of any stock, whether privately held or publicly traded. Financial gains are realized when the company does well and value increases. The risk is that the company, for any number of reasons, does not do as well and the stock value falls. The same is true for publicly traded stocks when investor confidence wanes and the market is in a decline. To learn about risks specific to PDC and Appleton, see Risk Factors located in Part III in this document. 401(k) + ESOP = KSOP With an ESOP, gains in productivity, profits, revenues, repayment of debt, and efficiencies made by employees increase the value of all the accounts within the trust, which is an extra incentive for employee owners to help make the company prosperous. Similarly, reductions in productivity, profits, and revenues can reduce the value of employee accounts. If you have questions about your eligibility to participate in the KSOP, please refer to the Summary Plan Description, Part II. Part I, page 4

9 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N F O U R What is an S corporation? Corporations that meet the eligibility requirements for S corporation status can make an election to be taxed either as a C corporation or as an S corporation. C corporations pay tax on corporate income, while S corporations do not. Rather, the income of the S corporation flows through to the S corporation shareholders. Most large companies are C corporations because they do not meet the requirements for S corporation status. S corporations must have only one class of stock and no more than 100 shareholders. In 1998, Congress passed a law to make it practical for ESOPs to own shares in S corporations. Technically, the ESOP trust is the one shareholder of the company. The individuals with accounts in the ESOP are not considered shareholders, but rather have a beneficial ownership interest in the company. This tax structure significantly improves our cash flow. For example, Appleton paid $30 million in federal income taxes for 1999 and $29 million for Under the ESOP structure, Appleton no longer pays tax on its earnings, so any funds that were used to pay taxes in the past are now used to pay down debt or are reinvested in the company. Although this structure gives Appleton a big break on federal and most state income taxes, other taxes such as property, sales, and employment taxes still apply. Also, taxes are eventually paid when participants receive distributions from the ESOP. With tax law, there is always the possibility of a future change, which could affect this favorable treatment. We used an S corporation as the form of business ownership for Appleton. Since the ESOP owns 100 percent of the company, the S corporation income that flows through to the single shareholder (the ESOP trust) is not currently taxable. The income is not currently taxable because the ESOP is a taxqualified retirement plan. In essence, the income of our S corporation is not taxed until former employees receive distributions from the ESOP. The increase in the value of their accounts is taxable to them individually at that time. Part I, page 5

10 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N F I V E Who runs an ESOP company? When a company decides to establish an ESOP, a frequently asked question is, "Who runs the company?" To answer that question, let's look at how typical companies are governed. Shareholders Every corporation has shareholders who own the company's stock. Individuals typically purchase stock based on whether they believe the projected return is worth the risk of their investment. Shareholders have the right to elect a board of directors, a governing body that has the authority to manage the business and affairs of a corporation and has a "fiduciary obligation," or legal responsibility, to represent the interests of the shareholders. Shareholders may also vote their shares on a number of issues that are defined by corporate law. Company Shareholder ESOP Trust ESOP Trustee Trustee elects board of directors Participants Board appoints company officers Board of directors appoints trustee Officers hire company management team Board of directors and company officers A board of directors is charged with "high level" oversight of the company, its officers and employees, as well as the company's financial performance. The board of directors appoints company officers and the company officers hire the management team who are responsible for the company's dayto-day operations. Management team runs company operations with employees Part I, page 6

11 e m p l o y e e o w n e r s h i p a t a p p l e t o n The board of directors and company officers make many significant decisions, such as establishing the company's financial objectives, reviewing its performance against its objectives, and determining appropriate business strategies. The board of directors and company officers also make the decisions to establish and contribute to company benefit and retirement plans. Employees The management team hires company personnel. Together the officers, management team, and employees are responsible for the daily operations of a corporation, and the profitability of those operations. ESOP trustee In an ESOP company, this governance structure remains the same. The difference is that the shareholder is an ESOP trust. The trust is governed by a trustee. The trustee is considered the ESOP shareholder and has a fiduciary or legal obligation under the Employee Retirement Income Security Act (ERISA) and Department of Labor regulations to act in the best interest of plan participants. The Appleton board of directors hired State Street Trust Company to serve as our ESOP trustee. As the industry leader in independent fiduciary and ESOP transactions, State Street provides ongoing fiduciary services to more than 100 clients with over $65 billion in company stock assets. The trustee votes the shares held in the trust on most routine shareholder issues, including the election of the board of directors. However, for extraordinary transactions, such as a sale of substantially all of the company's assets, mergers and consolidations, recapitalizations and reclassifications, liquidations and dissolutions, the vote is "passed through" to the ESOP participants, who vote the shares as if they held them directly. These transactions occur infrequently and are outside a company's normal operations. Monitoring the financial performance of the investments in the ESOP on behalf of the plan participants is the trustee's primary responsibility. The trustee hires a number of advisors to assist in these duties. Principal Financial Group was hired as recordkeeper to handle the accounting related to the plan, and ensure the plan is run in accordance with the laws and regulations that govern ESOPs. Another important advisor to the trustee is the financial advisor, Stout Risius Ross, an ESOP appraisal firm that conducts the annual valuation of the company's stock. The trustee also retains its own legal counsel, Jones Day. These advisors work as a team with the trustee to determine the fairness and appropriateness of purchasing stock for the ESOP as well as the ongoing valuation of the company. Part I, page 7

12 e m p l o y e e o w n e r s h i p a t a p p l e t o n ESOP committee Companies often establish ESOP administrative committees comprised of members of the management team. The ESOP administrative committee typically has the power and obligation to perform all administrative functions with respect to the operation of the ESOP and provides direction and input to the ESOP trustee. At Appleton, our administrative committee is comprised of the chief executive officer, chief financial officer, general counsel, and vicepresident human resources. This committee directs the trustee with respect to certain issues, such as interpretation of the plan document and its provisions, overseeing the hiring of plan advisors, and other issues related to the ESOP, for example, authorizing and paying plan expenses, reviewing and approving the plan allocation reports, determining the distribution policy, and authorizing any distributions to terminated participants. Because the committee exercises discretionary authority with respect to the management of the ESOP and provides direction to the ESOP trustee, its members also have a fiduciary obligation to act in the best interest of the ESOP.? Does employee ownership mean that all employees will share all the decision-making and profits equally? ESOPs provide an opportunity for employees to share in the successes (or failures) of their employer s performance through changes in the value of company stock, creating a direct link between company interests and employee interests. Our executive team continues to make the strategic decisions about the direction of the company. Managers and support staff manage their responsibilities, and production employees make decisions that affect the quality of our product, the cost effectiveness of the operations, and their own personal safety. Hard work and good decisionmaking increases the probability of the company being profitable. All ESOP participants will realize the rewards related to any increases in the value of company stock. The value of your ESOP account is not tied to your position in the company; it is based on the number of shares of company stock you hold in your ESOP account. For example, if a salaried employee and an hourly production unit employee both invested the same amount at the same time and purchased an ESOP interest of 10 shares of company stock, they would both realize the same return on that investment. Part I, page 8

13 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N S I X Determining Fair Market Value Changes in the value of company stock are, obviously, of great interest to ESOP participants, because the value of a participant's ESOP account is based upon the value of company stock. However, if the stock of a company is not publicly traded, the value of a company's stock must be determined by means other than an open market. When an ESOP owns stock in a private company, an independent appraiser approved by the ESOP trustee must determine the fair market value of the company stock at least once per year. Appleton has made the decision to value stock twice a year, June 30 and December 31. The term fair market value means the price that a willing buyer would pay a willing seller for a company's stock. It assumes that both the buyer and seller are knowledgeable about the company and that neither one has an obligation to buy or sell the stock. experienced in such matters. The complete list of factors that may impact a company's value is too long to be included here. However, factors that often affect value include a company's size, growth, profitability, financing arrangements, market position, and risks relating to its business. The company's customers, suppliers, management, workforce, and facilities relative to their competitors may also be considered. Furthermore, a company's value may be influenced by the current and future state of the company's industry and prospects for the economy as a whole. To determine a company's fair market value, an appraiser may consider several approaches. Two of the most commonly used valuation approaches considered by the appraiser are the market approach and the income approach (see next page). In determining a company's fair market value, the appraiser must consider all facts considered relevant. While a lot of "number crunching" goes into an appraisal, fair market value is ultimately the result of an appraiser's informed judgment. That makes it especially important to have an appraiser who is independent, knowledgeable, and Part I, page 9

14 e m p l o y e e o w n e r s h i p a t a p p l e t o n Market approach method In the market approach method, the first step is to identify publicly traded companies which are as similar as possible to the company being valued. Since the guideline companies are publicly traded, it is possible to determine the price investors are willing to pay for that stock in relation to the company's earnings and market trends in the industry. The price paid for similar publicly traded companies provides a benchmark or guideline for the price investors would pay for the company being valued. The appraiser looks at a variety of factors to determine performance and prospects for the company being valued compared to those for the guideline companies. If the company or business is determined to have better financial performance in terms of revenue and earnings growth than the comparable public companies, that opinion would generally have a positive impact on the stock price. The opposite would occur if the company or business being valued is judged to have less value than the comparable companies. Income approach method The income approach method estimates the value of the company based on the present value of its expected future free cash flow. The appraiser reviews and analyzes the company's future business plan and projections to determine the company's reasonable prospects for growth and profitability. The business plan includes the amount of cash the company should generate in the future to pay its bills, invest in equipment and facilities, conduct research and development, and pay its debts as they become due. Cash remaining after the company meets its obligations is called free cash flow. After adjusting for risk, the amount and timing of the company's free cash flows will permit the appraiser to determine the company's fair market value. Summary In summary, a company's fair market value is determined by a wide variety of both internal and external factors. Decreasing profits or revenues or increased expenses generally have a negative impact on a company's fair market value. Repayment of debt, which may also reduce risk, can also have a significant favorable impact on fair market value. All other things being equal, factors that result in improved profitability for a company, such as increased revenues or decreased expenses, typically have a favorable impact on a company's fair market value. Part I, page 10

15 e m p l o y e e o w n e r s h i p a t a p p l e t o n S E C T I O N S E V E N What is repurchase obligation? One of the primary factors that drives decisions about the ESOP s plan design is repurchase obligation. Repurchase obligation is the company s legal requirement that the stock allocated to participant accounts in an ESOP be repurchased after participants leave the company. Repurchases are also required to satisfy ESOP participants right to diversify their account balances to other investments available within the KSOP. Without this legal obligation, an ESOP would not be a viable benefit plan, since participants would never know who, if anyone, would buy the shares of company stock allocated to their accounts. Participants would also be unsure of the price they would be paid for the stock allocated to their accounts and when they would receive payment in the form of a distribution. Appleton honors its legal obligation by repurchasing the shares from the ESOP that have been allocated to the participant. The company is required to provide the cash to fund the repurchase of shares according to ERISA and Department of Labor regulations within specific timeframes and at the current fair market value. Impact on cash flow Successful companies are managed within the constraints of a budget that permits them to operate knowing what their cash needs are in relation to the cash available. The difficulty that an ESOP company faces is trying to determine when participants will retire, die, become permanently disabled, or otherwise terminate employment, so that they can budget for the cash that is necessary to fund the repurchases of the ESOP shares. In addition to determining which participants might leave and when they must receive a distribution of their ESOP account balance, the company must also project what the value of their stock might be at that time. For example, an employee might have an account valued at $25,000 currently and be projected to retire in 10 years. In order to accurately forecast the cash needed to repurchase that employee s shares at retirement, the company must estimate the fair market value of those shares in 10 years. Every company s cash flow is different, and successful ESOP companies are those that have spent the time to conduct repurchase obligation and cash flow analysis before making decisions about plan design. At Appleton, this forecasting is the responsibility of the Finance Department. Part I, page 11

16 e m p l o y e e o w n e r s h i p a t a p p l e t o n Impact of debt Debt is an additional factor ESOP companies must consider when developing plans to meet the repurchase obligation. Companies that have significant outstanding loans, as Appleton does, are subject to loan covenants that can place certain restrictions on the use of cash in a given semi-annual period. Lenders often add covenants to loan agreements to ensure that the borrower has adequate cash flow to repay the loan while preserving the value of the company. The covenants specify financial ratios within which a company must operate. These ratios provide the lender with a current picture of the company s financial performance and condition. Violating one of these covenants can result in the loans being in default. In Appleton s case, a default could require the company to pay millions of dollars in fees to the banks and bondholders to amend the loan covenants. At worst, Appleton could risk having lenders call in the loans and require immediate repayment. How Plan Design Impacts Repurchase Obligation Two of the most significant issues that give rise to repurchase obligation are diversification elections and distributions to participants who have terminated employment. In addition to a diversification right that permits the participant to diversify his or her account balance at the age of 55 with 10 years of participation, some KSOPs (including ours) contain a design feature that provides participants with the option to move money from investments in company stock to other investment options in the 401(k) feature at an earlier age. Another example of a design decision that affects repurchase obligation is the distribution policy that the company and/or the ESOP administrative committee adopts. ESOP companies have the ability to determine when terminated participants will receive a distribution of the value of their vested account balances within certain timeframes set forth in the ERISA and Department of Labor regulations. Part I, page 12

17 e m p l o y e e o w n e r s h i p a t a p p l e t o n Distribution Policies In designing a distribution policy, actuarial modeling must be used to calculate retirement, mortality, disability, and turnover rates in order to measure the impact on company cash flow. Often it is a company s lenders which dictate a certain distribution policy, especially in ESOP companies that have significant debt, as the lenders may require the company to delay repurchases from terminated participants to ensure that sufficient cash flow is available to pay the loans. These and many other plan design decisions regarding the ESOP and how it will operate have an effect on a company s cash flow. Thus, the committee designing the plan must do so being mindful of the need to ensure that the company will have sufficient cash to operate the business, pay its debt, reinvest in future growth, and still have the cash necessary to meet its obligation to repurchase shares from terminating and diversifying participants. How Deferrals Impact Repurchase Obligation When the plan design includes a feature that permits employees to invest pre-tax deferrals from their pay in company stock, this provides a source of cash available to repurchase stock from employees electing to diversify and those requesting distributions. Similarly, rollovers into the ESOP by new employees add to the amount of cash in the ESOP, and these rollovers, together with the pre-tax deferrals, provide money to help fund the repurchase obligation and lessen the impact to the company's cash flow. Investment by employees of pre-tax deferrals or rollovers also allows new employees to become employee owners. If you have questions about your options for requesting a distribution of your account, please refer to the Summary Plan Description, Part II. Part I, page 13

18 PART II Summary Plan Description

19 T A B L E O F C O N T E N T S Part II, page SECTION ONE: How the KSOP works 1 Overview 1 Plan design 1 Managing the plan 1 SECTION TWO: Eligibility, participation, and vesting 2 Eligibility 2 Participation 2 Vesting 2 Forfeitures 3 Credit for prior service 3 Designating a beneficiary 3 SECTION THREE: Saving in the KSOP 4 Deferral amount 4 Directing your investment 4 Rollovers 5 How pre-tax deferrals work 5 A word about taxes 5 SECTION FOUR: Investing in the KSOP 6 Investment options 6 Company Stock Fund 6 401(k) Fund 6 Investing your deferrals 6 SECTION FIVE: Company match 7 SECTION SIX: Purchasing company stock 9 Timing 9 Price 9 Example 1: Purchase at the beginning semi-annual period price 10 Example 2: Purchase at current fair market value 11 SECTION SEVEN: Diversification 12 Two features 12 For those nearing retirement legal diversification 12 Timing of the legal diversification election 13 Additional diversification right 13 Example 1 of the legal diversification feature 14 Example 2 of the legal diversification feature 15 Example 3 of the legal diversification feature 15

20 T A B L E O F C O N T E N T S Part II, page SECTION EIGHT: Distributions 16 Overview 16 Distributions from the Company Stock Fund 16 Timing of distribution - Company Stock Fund 16 Method of distribution - Company Stock Fund 17 Form of distribution - Company Stock Fund 18 Distribution policy for the Company Stock Fund 18 Distributions from the 401(k) Fund 19 Timing of distribution - 401(k) Fund 19 Method of distribution - 401(k) Fund 19 Form of distribution - 401(k) Fund 19 Direct rollover of distributions 19 Example 1: Resignation; no delay 20 Example 2: Resignation; no delay with installments 20 Distribution summary chart - Retirement, Death, or Disability 21 Distribution summary chart - Resignation, Dismissal, or Permanent Layoff 22 Example 3: Resignation; installments; legal diversification 23 Example 4: Resignation; no delay with installments; additional diversification feature 25 SECTION NINE: Taxation of distributions 27 Overview 27 Net unrealized appreciation 28 SECTION TEN: Participant loans 29 Loan features 30 SECTION ELEVEN: Hardship withdrawals 31 Eligible amount 31 Reasons 31 Requesting a hardship withdrawal 32 SECTION TWELVE: Voting company stock 33 SECTION THIRTEEN: Claims procedures 34 Timing 34 Review procedure 34 SECTION FOURTEEN: Important facts 35 Rights and protections of participants 35 Obtain KSOP and financial statements 36 Plan not responsible for investment decisions 36 Termination 37 Loss of benefits 37 Service of legal process 37 KSOP year 37 Cost 37 Assignment of benefits 38 PBGC status 38 SECTION FIFTEEN: References 39

21 S E C T I O N O N E How the KSOP works Overview This document is called a Summary Plan Description (SPD). It explains the main provisions and features of the KSOP and your rights, obligations, and benefits under the plan. The SPD is an overview only, and you should not try to rely on explanations taken out of context of the entire description. If there are any questions regarding the interpretation of any KSOP provisions or if there are any conflicts between this summary and the plan document, the official plan text is the governing document in all cases. Keep in mind that the ESOP communications committee and our human resources department is available to answer any questions you may have. Plan design As you read through this description of the plan, please consider carefully the various plan elements from two points of view: as a participant in the plan, and as a shareholder with a beneficial interest in the company. As a plan participant, you will want to focus on how the plan meets your retirement savings needs. As a beneficial shareholder, you will also want to focus on those provisions in the plan that will have an impact on the value of company stock. Appleton Papers Inc.'s ( Appleton ) KSOP has two components, a company stock portion and a non-company stock portion, which are referred to as the Company Stock Fund and the 401(k) Fund. Employees may choose to invest in the Company Stock Fund, where the investment option is in the common stock of Appleton's parent company, PDC Corp. (PDC). The company stock is held in trust for the benefit of plan participants. You may also invest in a variety of investment options with The Principal in the 401(k) Fund of the KSOP. Managing the plan The Principal is the recordkeeper for both the Company Stock Fund, invested in company stock, and the 401(k) Fund, invested in various mutual funds. State Street is the trustee of the Company Stock Fund. Trustar Retirement Services is the trustee of the 401(k) Fund. The ESOP Committee is appointed by the Appleton board of directors to be responsible for the financial management of the Company Stock Fund. The ESOP Committee delegates to the Benefits Finance Committee the financial management of the 401(k) Fund. Part II, page 1

22 S E C T I O N T W O Eligibility, participation, and vesting Eligibility Your eligibility to participate in the KSOP depends on your employment status. If you are a union employee, you become eligible on the first day you are eligible for welfare benefits (i.e., medical, life, etc.) according to your union contract. All other full-time employees become eligible on the first day of service. Leased employees and temporary employees are not eligible to participate in the KSOP. Part-time employees (other than union employees) become eligible after completing one year of service. You will have completed one year of service if you work 1,000 hours during your first 12 months with the company. If you do not work 1,000 hours in your first 12 months of employment with the company, your service is measured when you complete one year of service based on the calendar year; that is, you complete one year of service in the first full calendar year in which you work 1,000 hours. Your hours of service generally include each hour that: You are paid for performing your duties; You are paid or entitled to payment even if you did not work; You are on a leave of absence for illness, disability, jury duty, vacation, temporary layoff, or holiday; You are on a military leave; or Participation Once you are eligible, you make the decision to enroll and begin saving in the plan. Simply complete and submit an enrollment form or enroll online before 3:00 p.m. CST on the last Wednesday of each pay period. You may also participate by electing to roll over funds from an Individual Retirement Account (IRA) or another qualified plan. If you are participating in the plan, leave the company, and are later rehired, you may begin participating upon your rehire. However, the rules related to rehires are complex, and you should discuss your particular situation with your human resource representative. Vesting Vesting refers to that portion of your account that you are entitled to receive when you leave the company. You are always 100 percent vested in your own deferrals, any money you roll over to the KSOP from another plan, and earnings on these amounts. Any amounts you invested in company stock during the initial transaction in 2001 are also fully vested. All company contributions, including the company match, are vested at a rate of 20 percent for each year of service with the company (see the following schedule). After five years, you are 100 percent vested in any company contributions to your account. You are due back pay from the company. Part II, page 2

23 Vesting: continued Vesting Schedule Service 1 year 2 years 3 years 4 years 5 years Percent Vested If you were to leave the company after you have completed five years of service, you will be 100 percent vested in the company contributions, and entitled to receive 100 percent of your account balance. If you leave the company after you have completed three years of service, you would be 60 percent vested, and entitled to receive 60 percent of your company contributions in your account balance. There is no prorating of vesting if you leave the company between anniversary dates from your date of employment. You become fully vested in your account balance at the time you retire, die, or become permanently disabled while still employed, even if you haven't completed five years of service. Forfeitures If you leave employment with Appleton before you are 100 percent vested in the company contributions, the portion of the company contributions account that is not vested will be forfeited, and used to offset future company obligations. If you are rehired within five years after your termination, your forfeited balance will be restored to your account if you have not yet received a distribution. If you have taken a distribution and repay it to your account, your forfeited balance will also be restored. Any employee that is rehired more than five years after termination is not eligible for this provision. Credit for prior service In cases of mergers or acquisitions, the board of directors has discretion to determine if years of service with the merged or acquired company will be counted for vesting purposes. These decisions are made on a case by case basis. Affected employees will be notified at the time of the merger or acquisition.? When will I receive my statements? You will receive semi-annual statements from The Principal for your account in the KSOP. However, you can view and print your account information at any time on the Internet at Designating a beneficiary When you enroll in the KSOP, you will be asked to name one or more beneficiaries. A beneficiary is the person or estate you have named to receive the value of your KSOP account if you die before receiving your entire account balance. If you are married, your spouse is automatically your beneficiary. You may name a different beneficiary if your spouse provides consent in a written, notarized statement. You may change your beneficiary at any time by logging on to your account at or by requesting a form from the Client Contact Center at The Principal at (800) Part II, page 3

24 S E C T I O N T H R E E Saving in the KSOP Deferral amount When you enroll in the KSOP, you determine the amount of your pay that you wish to defer into your account on a pre-tax basis, and how your deferral will be invested. You may choose to have your deferrals directed to the Company Stock Fund, the 401(k) Fund, or a combination of both. You should note that some of the rules related to the company stock in your Company Stock Fund are different than those related to your other investments in the 401(k) Fund. Appleton will match your salary deferrals to the KSOP in the form of company stock or cash. The amount of the match varies, depending on the group to which you belong. See the chart on Part II, page 8 to determine the match formula that applies to you. You may defer, in whole percentages, from two percent to 50 percent of your pay into the KSOP each pay period, up to the limits established annually by the IRS. Limits are published each year; please contact human resources for the limits currently in effect. Directing your investment Deferrals directed to the Company Stock Fund are remitted to State Street when deducted from your pay. Your deferrals to the Company Stock Fund will be held in the Government Short Term Investment Fund (GSTIF) at State Street, accruing interest until invested in company stock, which occurs twice each year. Deferrals directed to the 401(k) Fund will be remitted to The Principal when deducted from your pay, and invested according to your most recent investment direction on record with The Principal. You may change the percentage of your deferral or stop it at any time by contacting the Client Contact Center at The Principal at (800) or by logging on to Changes received by 3:00 p.m. CST on the last Wednesday of each pay period will begin on the next pay date.? What are the IRS limits? In 2006, the deferral limit is $15,000 for those under age 50. For those who are age 50 or older in 2006, an additional $5,000 may be deferred. The IRS refers to this as a catch-up contribution limit. Company match does not count toward these limits. Limits may be changed each year. Part II, page 4

25 Rollovers The KSOP will accept rollovers of pre-tax funds from most retirement plans, including employer-sponsored plans, Individual Retirement Accounts (IRAs), and 403(b) annuities. The timing of rollovers to the Company Stock Fund is limited based on terms and conditions established by the ESOP Committee. Rollovers to the 401(k) Fund may occur at any time. How pre-tax deferrals work Your deferrals are made with dollars that are deducted from your pay before federal and most states' income tax withholding is calculated. The tax on your deferrals is not paid until you receive a distribution from the KSOP. A word about taxes Constantly changing tax laws and your particular situation make generalizations about the tax implications of the KSOP difficult. You should consult your tax advisor if you have any questions regarding the taxation of your benefits.? What if I discover an error with the deferral amounts that are being withheld from my paycheck? You must notify human resources of the error within 30 days of receipt of your account statement on which the error was discovered. The error will be corrected retroactively only if you give notification within this timeframe. Part II, page 5

26 S E C T I O N F O U R Investing in the KSOP Investment options Pre-tax deferrals are deducted from your paycheck each pay period and deposited into your KSOP accounts on a biweekly basis. You may direct that your deferral be invested in the Company Stock Fund, the 401(k) Fund, or a combination of both. Company Stock Fund As part of the initial transaction in 2001, the Company Stock Fund acquired 100 percent of the stock of PDC Corp. ( PDC ). Under the terms of the KSOP, PDC stock is considered company stock and when you invest in the Company Stock Fund, you are investing in PDC stock. To make the decision to invest in PDC stock in the Company Stock Fund, you will want to consider the plan provisions governing the Company Stock Fund and risk factors as described in this KSOP Guide. You should also review the most current copy of PDC s 10-K, which will include, among other things, information about Appleton's business, management, and historical results, together with the risks related to investment in the Company Stock Fund. You will find the 10-K and the most current quarterly financial results, the 10-Q, that are filed with the Securities and Exchange Commission, on Appleton's web site at under the menu item titled, "Investor Information." 401(k) Fund Below is a list of the current investment options offered in the 401(k) Fund. The Benefits Finance Committee may change the number and type of investment options that are available. Principal Investors LifeTime Strategic Income Pref Fund Principal Investors LifeTime 2010 Pref Fund Principal Investors LifeTime 2020 Pref Fund Principal Investors LifeTime 2030 Pref Fund Principal Investors LifeTime 2040 Pref Fund Principal Investors LifeTime 2050 Pref Fund Principal Fixed Income Option PIMCO Total Return Admin Fund Principal Investors Partners LargeCap Value Pref Fund Vanguard Institutional Index Fund Principal Investors Partners LargeCap Growth II Pref Fund Principal Investors MidCap S&P 400 Index Pref Fund Principal Investors Partners Small Cap Value I Pref Fund Principal Investors SmallCap S&P 600 Index Pref Fund Principal Investors Partners SmallCap Growth II Pref Fund American Funds EuroPacific Growth R4 Fund Investing your deferrals Since you have a number of options from which to choose, you will want to consider which of these options best meet your expected financial needs after you retire. Each investment option provides different investment opportunities for you, and each has different risk and earnings characteristics. You may change the investment direction for your deferrals at any time or request a prospectus of each fund by contacting the Client Contact Center at The Principal at (800) or by logging on to Changes to deferral percentages received by 3:00 p.m. CST on the last Wednesday of each pay period will begin on the next pay date. Part II, page 6

27 S E C T I O N F I V E Company match Appleton will match your pre-tax deferrals at the rate described for your employee group as listed in the chart on Part II, page 8. This match will be made in the form of company stock or cash. Company match contributions made in the form of company stock will be invested in the Company Stock Fund. Any match contribution made in the form of cash will be invested in the 401(k) Fund, according to your current direction on record with The Principal. Your deferrals will be matched at the rate listed for your employer group in the chart in Part II, page 8, up to a maximum of the first six percent of your pay that you defer into the KSOP. There is no match on the amounts you defer exceeding six percent of your pay. The company match contributed to the Company Stock Fund will be made to your account as of each valuation date of the company stock. These valuation dates are semi-annual, occurring June 30 and December 31 each year. The company match is based on the value of a share of company stock at the beginning of the semi-annual valuation period or the ending of the period, whichever is less. Any match made in cash to the 401(k) Fund will be made to your account in accordance with the biweekly payroll cycle. The board of directors has sole discretion to determine the form (cash or company stock) of company match contributions (subject to applicable union labor agreements). These match provisions were established as part of a broader retirement benefit package and vary by group. If your employment location is not listed, your group is the one titled "Salaried and Non Union Hourly". See your applicable match formula below.? I want to maximize my company match, but I also want to diversify my deferrals. How do I do that? Consider deferring six percent into the Company Stock Fund and as much as possible (up to an additional 44 percent) into the 401(k) Fund. Then you would maximize your match, plus your additional deferrals to the 401(k) Fund would provide the opportunity to diversify your plan investments. Part II, page 7

28 Employee Group Your Deferral up to 6% Directed to Company Match Match Made in Salaried & Non-Union Hourly All locations Company stock 401(k) funds $1 50 cents Company stock 401(k) funds West Carrollton & Roaring Spring Union* Company stock 401(k) funds $1 None Company stock None Roaring Spring Union** Company stock 401(k) funds $ cents Company stock 401(k) funds Harrisburg Union Company stock 401(k) funds $1 75 cents Company stock 401(k) funds Appleton Plant & Kansas City Union Company stock 401(k) funds $1 50 cents Company stock 401(k) funds * Roaring Spring Union employees who DO receive a contribution toward retiree medical. ** Roaring Spring Union employees who DO NOT receive a contribution toward retiree medical. Part II, page 8

29 S E C T I O N S I X Purchasing company stock Timing Payroll deferrals you direct to be invested in company stock are sent biweekly to State Street and invested in the Government Short Term Investment Fund (GSTIF). In order to comply with applicable legal requirements that all stock purchases be made at no more than the current fair market value, the trustee must wait until the next valuation date before investing your deferrals in company stock. Appleton will have the company stock valued two times each year, as of December 31 and June 30. This means that your pre-tax deferrals will accumulate in the trust and earn interest until the trustee receives the new value and purchases company stock on your behalf. The company match, made in the form of company stock, will also be made to your account in the Company Stock Fund twice each year. The company match is made at the same time the trustee purchases stock with your pre-tax deferrals. Price Your pre-tax deferrals and the company match contributions will purchase stock at the value of the shares at the beginning of the semi-annual valuation period or the end of the semi-annual valuation period, whichever is less. Let's look at an example on the next page to better understand how the trustee purchases company stock with your pre-tax deferrals directed to the Company Stock Fund.? Why is company stock only purchased twice a year? The trustee can only purchase stock immediately following a valuation of the share price, as determined by a third-party appraiser. The law says that company stock must be valued at least once a year. Appleton has chosen to have our stock valued twice per year, June 30 and December 31. Part II, page 9

30 eg Example 1: Purchase at the beginning semi-annual period price Assume your pre-tax deferrals directed to the Company Stock Fund from January 1 through June 30 equal $3,000. State Street invests your money in the GSTIF money market account, where it accrues interest until June 30. Imagine that the current fair market value of company stock as of June 30 is $35 per share, which is greater than the value as of the prior December 31 when it was $30 per share. Your deferral money would be used to purchase stock at the price at the beginning of the semi-annual period, since it is the lesser value. Deferrals during semi-annual period * = $3,000 12/31 share price = $30 6/30 share price = $35 (current fair market value) Your $3,000 in deferrals purchase 100 shares (at the $30 per share price at the beginning of the semi-annual period). The purchase would look like this. $3,000 Deferrals during semi-annual period $30 12/31 share price 100 Shares purchased If you had purchased shares at the 6/30 current fair market value at $35 per share instead of the beginning of semi-annual period value of $30, then you would have purchased a total of only 85.71shares. $3,000 Deferrals during semi-annual period $35 6/30 share price Shares purchased In this case, your deferrals purchased an additional shares (100 minus 85.71), which, at the current fair market value of $35 per share, is an additional value of $500 allocated to your account Additional shares x $35 6/30 share price (current fair market value) $500 Additional value * For purpose of this example, the deferral number has been rounded and does not include the interest accumulated during the semi-annual valuation period. Part II, page 10

31 eg Example 2: Purchase at current fair market value Now, let's look at what occurs in the event the end of the semi-annual period value is less than it was at the beginning of the semi-annual period. Assume that your deferrals during the January 1 through June 30 semi-annual period are equal to $3,000. State Street invests your money in the GSTIF money market account, where it accrues interest until June 30. The current fair market value of company stock is $25 per share, which is less than the value as of the prior December 31 when it was $30 per share. Your deferral money would be used to purchase stock at the price at the end of the semi-annual period, since it is the lesser value. Deferrals during semi-annual period = $3,000 12/31 Share Price = $30 6/30 Share Price = $25 The trustee cannot legally pay more than current fair market value. Therefore, your $3,000 in deferrals must purchase shares at the current value since it is less than what it was at the beginning of the semi-annual period. Your net purchase is for 120 shares. The purchase would look like this. $3,000 Deferrals during semi-annual period $25 6/30 share price 120 Shares purchased If you had purchased shares at the beginning of the semi-annual period price at $30 per share, then you would have only purchased a total of 100 shares. $3,000 Deferrals during semi-annual period $30 12/31 share price 100 Shares purchased Therefore, your deferrals purchased an additional 20 shares. * For purpose of this example, the deferral number has been rounded and does not include the interest accumulated during the semi-annual valuation period. Part II, page 11

32 S E C T I O N S E V E N Diversification Two features Diversification is the process of selling shares of company stock and moving the cash proceeds to other investment options. There are two provisions in the KSOP that describe how and when this may occur. The first is a legally required provision for those nearing, or in, retirement. The second provision applies to all participants and is part of the KSOP plan design. It is important to note that once you diversify to the 401(k) Fund, you may not transfer these amounts back to the Company Stock Fund. All diversification calculations are done in shares (not dollars). You can compute the value of your diversification election by multiplying the number of shares diversified by the fair market value of the company stock at the time you diversify. For those nearing retirement legal diversification By law, when you reach age 55 and have completed 10 years of participation in the KSOP, you may begin diversifying the balance of your Company Stock Fund to other investment options in the 401(k) Fund. Your years of participation in the former 401(k) plan prior to January 1, 2001 are counted in calculating the 10 years of participation. Years of participation in the former Appleton Papers Retirement Medical Savings Plan are counted only if you elected to transfer a portion of your account in that plan to the KSOP during the initial transaction in Your years of participation in a 401(k) plan operated by an acquired company are typically not included. During the first five years after you meet the criteria, you may diversify up to 25 percent of the shares in the Company Stock Fund, and in the sixth and final year, up to 50 percent. The calculation is not 25 percent of your share balance every year; your eligible balance is reduced by the number of shares you have previously diversified for the legal diversification feature, as it is a cumulative calculation. This opportunity is available to you as long as you have met the criteria, regardless if you are a current or former employee. There is no legal requirement to provide diversification opportunities to you after this six-year period. Participation, for purposes of determining eligibility for legal diversification, begins as of the date you are first eligible to participate in the plan. Part II, page 12

33 Timing of the legal diversification election During the 90 days immediately following the end of each of the six plan years after you have satisfied the age and participation requirements, you will be notified if you are eligible for this diversification election. Once your election is received and the December 31 value is known, any shares you elect to diversify will be sold and the cash proceeds will be invested in the 401(k) Fund according to your most recent investment direction on record with The Principal. Once you elect to diversify to the 401(k) Fund, you may not elect to transfer these amounts back to the Company Stock Fund. Additional diversification right Our plan contains a second special diversification feature that is extended to all plan participants invested in company stock. Each year, subject to non-discriminatory rules established by the ESOP Committee, you may elect to diversify up to 10 percent of your total shares in your Company Stock Fund to the 401(k) Fund. This diversification election is in addition to the legal diversification previously described. Prior amounts diversified are not included in the calculation. Once all elections are received, the diversification elections must be approved by the ESOP Committee in a nondiscriminatory manner. The total shares approved will then be sold and the cash proceeds will be invested in the 401(k) Fund as soon as administratively possible. Your portion of the proceeds will be invested according to your most recent investment direction on record with The Principal. Once you elect to diversify to the 401(k) Fund, you may not elect to transfer these amounts back to the Company Stock Fund.? Do I get to diversify 25 percent of my shares every year that I am eligible for the legal diversification? No. The calculation is not based on 25 percent of your share balance every year. It is a cumulative calculation. Your eligible shares are reduced by the number of shares you have previously diversified for the legal diversification feature. See the example on Part II, page 14.? If I take a distribution from the 401(k) Fund when I leave the company and then later decide to diversify some shares I have left in the Company Stock Fund, what happens to the funds diversified into the 401(k) Fund? The amount you elect to diversify will be invested in the 401(k) Fund according to the most recent investment direction on record with The Principal where it will remain until you request another distribution from the 401(k) Fund. How it Works: Jared elects to diversify 100 shares of his vested balance in the Company Stock Fund. If the current share price is $30, then $3,000 will transfer to the 401(k) Fund. Jared's most recent investment direction on record with The Principal directed his pre-tax deferrals 50 percent to the Fixed Income Option fund and 50 percent to the Large Cap Value Fund. Therefore, the $3,000 he elects to diversify will be split according to this direction - $1,500 will go to the Fixed Income Option fund and $1,500 to the Large Cap Value Fund. Part II, page 13

34 eg Example 1 of the legal diversification feature Sara will turn 55 in June 2011, at which time she will have participated in the KSOP for more than 10 years. After the December 31, 2011 valuation is known in early 2012, she will be notified that she has the right to elect up to 25 percent of the shares in her Company Stock Fund account to be sold and the cash transferred to her 401(k) Fund account. Let's assume Sara had 800 shares in her account as of the end of the 2011 plan year, and she elected to diversify 15 percent of her account, or 120 shares. The 120 shares of company stock in her account would be sold at the value as of December 31, The cash proceeds would be transferred to the 401(k) Fund and invested according to her most recent investment direction on record with The Principal. Following the transfer, Sara would have 680 shares remaining in her Company Stock Fund account. In early 2013 (the second year), she would again be notified that she has the right to diversify up to 25 percent of the shares of company stock in her account to the investment options offered in the 401(k) Fund. However, the 25 percent she is eligible to diversify will include the 120 shares she elected to diversify in the first year. Suppose Sara elected to diversify the maximum 25 percent in the second year. For the purpose of this example, assume her account balance in the Company Stock Fund had increased as a result of the additional deferrals and company match made to her account, and that as of December 31, 2012, there were 880 shares in her Company Stock Fund account. In this case, Sara's diversification would be computed as follows. Sara s Diversification in Year shares 12/31/12 account balance shares Previous diversification transfer (election made in early 2012) 1,000 shares x 25% shares Sara s 2013 diversification election 250 shares shares Previous diversification transfer (election made in early 2012) 130 shares Eligible for diversification in 2013 Upon completion of the diversification process, there would be 750 shares of company stock remaining in her Company Stock Fund account. In early 2014 (the third year), she would again be notified that she had the right to diversify up to 25 percent of the shares in her Company Stock Fund account, less prior amounts diversified. For the purpose of this example, assume her account balance increased as a result of additional deferrals and company match made to her account, and that as of December 31, 2013, there were 790 shares in her Company Stock Fund account. If Sara elected to diversify 25 percent, her diversification would be computed as follows. Sara s Diversification in Year shares 12/31/13 account balance shares Previous diversification transfer (election made in early 2012) shares Previous diversification transfer (election made in early 2013) 1,040 shares x 25% Sara s 2014 diversification election 260 shares shares Previous diversification transfer (election made in early 2012) shares Previous diversification transfer (election made in early 2013) 10 shares Eligible for diversification in 2014 This process is repeated in 2015 (the fourth year), 2016 (the fifth year), and 2017 (the sixth year). The only difference is that in 2017 (the sixth year), Sara would be eligible to elect to diversify up to 50 percent of the shares of company stock in her account instead of 25 percent. Part II, page 14

35 Example 2 of the legal diversification feature eg Assume Wayne, age 55, retires in June 2013 after working 30 years for Appleton, and at the time he retired, he had participated in the Appleton KSOP for 22 years. If Wayne still had a balance in the Company Stock Fund in early 2014, he would be notified that he is eligible to diversify up to 25 percent of the shares in his Company Stock Fund account, since he will have attained the age of 55 and had already satisfied the 10-year participation requirement. After Wayne receives notification that he is eligible to diversify his account, the process will occur just as it did in Sara's example. Although Wayne retired before he was eligible for his legal diversification election, he will be eligible for diversification after he retires if he has not yet received a full distribution of his balance in the Company Stock Fund. eg Example 3: legal diversification plus additional diversification In 2006, Robert has participated in the Appleton KSOP for ten years and turns age 55; therefore, he becomes eligible to diversify his account under the legal diversification feature in early Robert has also been eligible to diversify under the additional diversification feature. Assume Robert's account balance as of December 31, 2006 is 800 shares. In early 2007, he elects to diversify 25 percent of his account, 200 shares. His remaining balance is 600 shares. In the fall of 2007, Robert is also eligible to diversify an additional 10 percent of the remaining 600 shares, which would be 60 shares, leaving a balance of 540 shares. Prior amounts diversified under legal diversification are considered when calculating his next legal diversification; however, amounts diversified under the additional diversification feature do not count. Let's assume Robert's balance the following year increases to 620 shares as a result of additional deferrals and company match. If Robert elects to diversify 25 percent again, his calculation would look like this. Robert s Diversification in Year shares 12/31/07 account balance shares Previous legal diversification transfer (election made in early 2007) 820 shares x 25% shares Robert s 2008 legal diversification election 205 shares shares Previous legal diversification transfer (election made in early 2007) 5 shares Eligible for legal diversification in 2008 If he elects to diversify the 5 shares, his remaining balance is 615 shares. In the fall, he would also have the option to diversify an additional 10 percent of his remaining balance, which would be 61.5 shares. This process is repeated in 2009 (the third year), 2010 (the fourth year), 2011 (the fifth year), and 2012 (the sixth year). In 2012, he would be eligible to diversify up to 50 percent of his account balance under the legal diversification feature. Note: This example assumes that the additional diversification feature has been approved by the ESOP Committee each year. Part II, page 15

36 S E C T I O N E I G H T Distributions Overview The value of your account balances will be paid to you (or your beneficiary in the case of your death) upon your termination of employment. The options available to you in the event of retirement, death, or disability are different than those available for resignation, dismissal, or permanent layoff. There are also differences between distributions from the Company Stock Fund and the 401(k) Fund. Finally, the money transferred from the former Appleton retirement plans to the Company Stock Fund as part of the initial transaction in 2001 is subject to different rules. Distributions from the Company Stock Fund There are three elements integral to your distributions from the Company Stock Fund: 1. The timing of distribution 2. The method of distribution 3. The form of distribution The timing of distributions from the Company Stock Fund differs from the timing of distributions from the 401(k) Fund. The company's obligation to begin making distributions to you also varies based on the reason for your request for a distribution. Finally, any Company Stock Fund shares purchased during the initial transaction are subject to different rules than those applied to shares purchased with your pre-tax deferrals, any rollovers to the Company Stock Fund, and the match shares Appleton contributed to your account after the initial transaction. Timing Retirement, death, or disability: If you retire, die, or become disabled, and you or your beneficiary requests a distribution of your account in the Company Stock Fund, the company will begin to make distributions no later than the end of the plan year following the plan year in which you retire, die, or become disabled. Timing of distribution Company Stock Fund When we refer to the timing of your distribution, we refer to the date by which Appleton is required to begin making distributions to you of the value of your KSOP account.? Am I a retiree? If you terminate employment on or after the first day of any month coinciding with or following your 55 th birthday and you have at least 10 years of employment service, you are a retiree. Part II, page 16

37 Timing Resignation, dismissal, or permanent layoff: If you separate from service with us because you resign, are dismissed, or are permanently laid off, and you request a distribution of your account balance in the Company Stock Fund, we must begin to make your distributions no later than the end of the sixth plan year following the plan year in which you resigned, were dismissed, or were laid off. Timing Initial transfer account balances: If you have an initial transfer account balance in the Company Stock Fund, and you separate from service for any reason and request a distribution of your account, we must begin to make your distribution of the shares related to your initial transfer account as soon as possible during the next distribution period following your request. Any additional shares in your account that were purchased with pre-tax deferrals, rollovers, and those that are contributed by the company after the initial transaction (your current account) will be treated as described in charts in Part II, pages 21 and 22. If your vested account balance is greater than $5,000 at the time of your separation from service, you do not have to begin taking a distribution until the April 1 after becoming age 70 1 /2. Consistent with federal law, if your vested account balance does not exceed $5,000, the KSOP may provide for a lump sum distribution of your benefits in cash after your termination of employment. However, in the case of a mandatory distribution that is greater than $1,000, if you do not elect to have such distribution paid directly to a taxqualified plan specified by you, or to receive the distribution directly, then the distribution will be paid in a direct rollover to an IRA designated by the ESOP Committee. Method of distribution Company Stock Fund When we refer to the method of distribution, we refer to whether your distribution will be paid in a lump sum or in a series of annual installments. If you request a lump sum distribution, the ESOP Committee may, in its nondiscriminatory discretion, make your distribution in a series of annual installments over a period of not more than five years. The ESOP Committee may also, in its nondiscriminatory discretion, accelerate the distribution of your installments. If your distribution is made in a series of annual installments, the undistributed portion of your account will continue to be invested in our common stock, in the Company Stock Fund, and each installment distribution will be made at the then current fair market value of the common stock as of the date of distribution. Retirement, death, or disability; initial transfer balances: If you retire, die, or become disabled, you or your beneficiary may request that your distribution be made to you in a series of annual installments over a period of not more than 10 years.? May I leave my money in the plan when I retire? Yes. If the value of your account balance in both the Company Stock Fund and the 401(k) Fund totals more than $5,000, you may leave your balance in the KSOP until the April 1 after you become 70 1 /2, at which time you are required to begin taking distributions. Part II, page 17

38 Form of distribution Company Stock Fund The form of distribution refers to whether you will receive stock or cash. Distributions from the Company Stock Fund will be made in the form of shares of our common stock, although you will be required to sell the shares back to the company immediately after you have received them. The effect of this is that, upon distribution, you will receive the cash value of the shares of common stock allocated to your account. Because the distribution is in the form of stock, you may have the opportunity to be taxed at ordinary income rates only on the cost basis of the shares in your account (which will include allocations of company income) and receive capital gains treatment on the appreciation. It is important to note that you are only eligible to receive capital gains treatment on a lump sum distribution. Installment distributions are not eligible for this tax treatment. See the section titled Taxation of Distributions for more information on this subject. Distribution policy for the Company Stock Fund The ESOP Committee is responsible for formulating and implementing the distribution policy for the Company Stock Fund. Requests for distributions from the Company Stock Fund must be granted in a uniform, non-discriminatory manner.? When will I receive paperwork for requesting a distribution? You will receive your Company Stock Fund distribution paperwork after the next valuation following your termination of employment. For example, employees who terminate between January 1 and June 30 will receive distribution paperwork after the completion of the June 30 valuation. Those who terminate between July 1 and December 31 will receive distribution paperwork after the completion of the December 31 valuation. You are able to call The Principal directly and request paperwork to receive a distribution of your account in the 401(k) Fund at any time after you separate from service.? If I am receiving annual installments, can I specify the amount of each installment? No. The shares must be distributed in a uniform manner. If your distribution is taking place over five years, you will receive 1 /5 of your shares in year one, 1 /4 of your remaining shares in year two, 1 /3 of your remaining shares in year three, etc. If you had requested a 10-year payout, then you would receive 1 /10 in year one, 1 /9 in year two, etc. Part II, page 18

39 Distributions from the 401(k) Fund Rules regarding distributions from the 401(k) Fund are different than distributions from the Company Stock Fund. The method of making your distribution also varies based on the reason for your request for a distribution. Form of distribution 401(k) Fund Your distribution from the 401(k) Fund will always be made in the form of cash, unless you elect a direct rollover to another taxqualified plan or an eligible IRA. Timing of distribution 401(k) Fund If you retire, die, or become disabled, and you or your beneficiary requests a distribution of your account in the 401(k) Fund, The Principal will make your distribution as soon as administratively feasible following receipt of your request. Direct rollover of distributions At the time you make your distribution request, you may direct that the vested value of your account be made to you in cash or in the form of a direct rollover to another taxqualified plan or eligible IRA. See the section titled Taxation of Distributions for more information on this subject. Method of distribution 401(k) Fund Retirement, death, or disability: If you retire, die, or become disabled, you or your beneficiary may request a distribution of your account in the 401(k) Fund in either a single lump sum or in a series of not more than 10 annual installments. Resignation, dismissal, or permanent layoff: If you separate from service with us because you resign, are dismissed, or are permanently laid off, and you request a distribution of your account in the 401(k) Fund, your distribution will always be made in a single lump sum. You may not request installments. Part II, page 19

40 Example 1: Resignation; no delay with installments eg Debra, who is 33, initially transferred some of her account balance in the former 401(k) plan to the Company Stock Fund during the initial transaction in It is now March 2007, and Debra has accepted a position with another company. In 2007, Debra submits her distribution request, instructing the company to roll over her account to her IRA. The account balance in the 401(k) Fund will be valued and rolled over to her IRA shortly after the deferral from her final paycheck is invested with The Principal. After receipt of the June 30, 2007 valuation and collection of all distribution requests, the ESOP Committee determines that the total amount requested for distribution exceeded the funds available. Therefore, they approve the distribution of Debra's Company Stock Fund account in five annual installments. The shares in her account will be distributed to Debra in a series of five installments beginning after the June 30, 2007 valuation. These installments will be made to her according to the following schedule: one-fifth of the shares in her account following the June 30, 2007 valuation, one-fourth following the June 30, 2008 valuation, one-third at the same time in 2009, one-half in 2010, and the balance of the shares in her account in Her account balance that is not yet distributed stays invested in stock until each distribution is made and is subject to the stock price valuation each semi-annual period. At any time, if available funds are sufficient, the ESOP Committee may accelerate the distribution of her account. Bottom line, Debra would begin to receive a distribution of her account in 2007, although she may receive it in five annual installments. eg Example 2: Resignation; no delay What would have happened if there were sufficient funds available to make Debra's Company Stock Fund distribution in a lump sum at the time she requested? She requests a distribution of her account balance in the KSOP and instructs the company to roll over her account to her Individual Retirement Account. The balance of her account invested in the 401(k) Fund will be valued and rolled over to Debra's designated Individual Retirement Account shortly after the deferral from her final paycheck is invested with The Principal. After receipt of the June 30, 2007 valuation and collection of all distribution requests, the ESOP Committee approves her Company Stock Fund distribution request, as there is sufficient cash available to fund the distribution of her account balance that was invested in company stock. The current fair market value of her account balance will be rolled over to her IRA. Part II, page 20

41 Note the different options summarized in the summary chart below for distributions from the Company Stock Fund and the 401(k) Fund to those who retire, die, or become disabled. If you...retire, Die, or Become Disabled Event Account Timing Method Form Company Stock Fund Initial Transfer Account (shares purchased on 11/9/2001) Current Account (pre-tax deferrals, rollovers, and company contributions) You decide......to request a distribution or to leave your balance in the plan You decide......to request a distribution or to leave your balance in the plan The Company......must begin your distribution as soon as administratively feasible following receipt of your request The Company......may distribute as soon as administratively feasible, but must begin your distribution no later than the end of the first plan year following the event You decide......to request your distribution as a lump sum or in a series of annual installments over a period of not more than 10 years You decide......to request your distribution as a lump sum or in a series of annual installments over a period of not more than 10 years The Company......may comply with your request for lump sum or annual installments. However, if the amount of available funds is not sufficient*, your distribution may be made in a series of annual installments over a period of not more than 5 years The Company......may comply with your request for lump sum or annual installments. However, if the amount of available funds is not sufficient*, your distribution may be made in a series of annual installments over a period of not more than 5 years Stock, immediately sold back to the company for cash Stock, immediately sold back to the company for cash You decide... The Plan... You decide... The Plan... Cash 401(k) Fund All Accounts...to request a distribution or to leave your balance in the plan...will begin your distribution as soon as administratively feasible...to request your distribution as a lump sum or in a series of annual installments over a period of not more than 10 years...will comply with your request * As determined by the ESOP Committee Part II, page 21

42 Note the different options summarized in the summary chart below for distributions from the Company Stock Fund and the 401(k) Fund for those who resign, are dismissed, or permanently laid off. If you...resign, are Dismissed, or Permanently Laid Off Event Account Timing Method Form Company Stock Fund Initial Transfer Account (shares purchased on 11/9/2001) Current Account (pre-tax deferrals, rollovers, and company contributions) You decide......to request a distribution or to leave your balance in the plan You decide......to request a distribution or to leave your balance in the plan The Company......must begin your distribution as soon as administratively feasible following receipt of your request The Company......may distribute as soon as administratively feasible, but must begin your distribution no later than the end of the SIXTH plan year following the event You decide......to request your distribution as a lump sum You decide......to request your distribution as a lump sum The Company......may comply with your request for lump sum. However, if the amount of available funds is not sufficient*, your distribution may be made in a series of annual installments over a period of not more than five years The Company......may comply with your request for lump sum. However, if the amount of available funds is not sufficient*, your distribution may be made in a series of annual installments over a period of not more than five years Stock, immediately sold back to the company for cash Stock, immediately sold back to the company for cash You decide... The Plan... You decide... The Plan... Cash 401(k) Fund All Accounts...to request a distribution or to leave your balance in the plan...will begin your distribution as soon as administratively feasible...to request your distribution as a lump sum...will comply with your request * As determined by the ESOP Committee Part II, page 22

43 eg Jim retires in October 2011 when he is age 55. He has participated in the KSOP for more than 10 years and is eligible for legal diversification. What happens if Jim makes a legal diversification election at the same time he is receiving annual distribution installments? Example 3: Resignation; installments; legal diversification feature After receipt of the December 31, 2011 valuation and collection of all distribution and diversification requests, the ESOP Committee determines that the total amount requested exceeds the funds available. Therefore, they approve Jim's request for distribution of his Company Stock Fund account in five annual installments. The shares in his account will be distributed to Jim in a series of five annual installments beginning after the December 31, 2011 valuation. These installments will be made to him according to the following schedule: one-fifth of the shares in his account following the December 31, 2011 valuation, one-fourth following the December 31, 2012 valuation, onethird following the December 31, 2013 valuation, one-half following the December 31, 2014 valuation, and the balance of the shares in his account following the December 31, 2015 valuation. The installment distributions are calculated each year on the remaining balance after any legal diversification election for that period is calculated. Let's assume Jim had 1,500 shares in his account at the end of the 2011 plan year. He is also eligible to diversify up to 25% of his account balance under the legal diversification feature. However, he chooses not to diversify any shares at this first opportunity. His first installment would be computed as follows. Jim s Distribution in Year 1 1,500 shares 12/31/11 account balance x 1/5 One-fifth (first installment) 300 shares First installment distribution Upon completion of the distribution payment, there would be 1,200 shares (1, shares distributed in Year 1) remaining in Jim s account. After the December 31, 2012 valuation, Jim is eligible for his second installment and is again eligible to diversify up to 25% of his account balance under the legal diversification feature. Jim elects to diversify 25%. His number of shares has not increased during 2012 because he retired during 2011 and cannot make further deferrals into the plan. The diversification distribution is calculated first and the installment distribution is calculated on the remaining balance. Jim s Diversification in Year 2 1,200 shares 12/31/12 account balance shares Previous shares distributed (Year 1) 1,500 shares x 25% 2012 diversification election 375 shares Eligible for diversification for 2012 continued on next page Part II, page 23

44 Example 3: continued Jim s Distribution in Year 2 1,200 shares 12/31/12 account balance shares Shares diversified for shares x 1/4 One-fourth (second installment) 206 shares Second installment distribution Upon completion of the diversification transfer and distribution payments, there would be 619 shares (1, diversification distribution shares) remaining in Jim s account. After the December 31, 2013 valuation, Jim is eligible for his third installment and is again eligible to diversify up to 25% of his account balance, less previous amounts diversified or distributed, under the legal diversification feature. Because Jim chose to diversify the maximum 25% allowed and there are no additional shares being allocated to his account, there will be no further shares available under the legal diversification feature of the plan until the sixth year when he can choose 50%. By the sixth year, he will have already received his entire account balance due to the five annual installments. Jim s Distribution in Year shares 12/31/13 account balance - 0 shares Shares diversified for shares x 1/3 One-third (third installment) 206 shares Third installment distribution This process is repeated for the next two years until the balance of Jim's shares is distributed following the December 31, 2015 valuation. Part II, page 24

45 eg Example 4: Resignation; no delay with installments; additional diversification feature Tom resigns from employment in May What happens if Tom makes an additional diversification election at the same time he is receiving annual distribution installments? Upon receipt of the June 30, 2007 valuation and collection of all distribution and diversification requests, the ESOP Committee determines that the total amount requested exceeds the funds available. Therefore, they approve Tom's request for distribution of his Company Stock Fund account in five annual installments. The shares in his account will be distributed to Tom in a series of five annual installments beginning after the June 30, 2007 valuation. These installments will be made to him according to the following schedule: one-fifth of the shares in his account following the June 30, 2007 valuation, one-fourth following the June 30, 2008 valuation, one-third following the June 30, 2009 valuation, one-half following the June 30, 2010 valuation, and the balance of the shares in his account following the June 30, 2011 valuation. The installment distributions are calculated each year on the remaining balance before any additional diversification election for that period is calculated. Let's assume Tom had 1,500 shares in his account at June 30, He also makes an additional diversification election to transfer 5% of his shares to the 401(k) Fund. The ESOP Committee approves 1/2 of the additional diversification requested. His first annual installment and diversification would be computed as follows. Tom s Distribution in Year 1 1,500 shares 6/30/07 account balance x 1/5 One-fifth (first installment) 300 shares First installment distribution Tom s Additional Diversification in Year 1 1,500 shares 6/30/07 account balance shares Shares distributed (Year 1) 1,200 shares x 2.5% 1/2 of 5 percent additional diversification election 30 shares Diversified in 2007 Upon completion of the distribution payment and diversification transfer, Tom has 1,170 shares (1, distributed - 30 diversified) remaining in his account. continued on next page Part II, page 25

46 Example 4: continued After the June 30, 2008 valuation, Tom is eligible for his second installment and is again eligible to diversify up to 10% of his account balance under the additional diversification feature. Tom elects to diversify 10%, and the ESOP Committee approves this request. His number of shares has not increased during 2008 because he resigned in 2007 and can no longer make deferrals into the plan. The distribution annual installment is calculated first and the additional diversification election is calculated on the remaining balance. Tom s Distribution in Year 2 1,170 shares 6/30/08 account balance x 1/4 One-fourth (second installment) shares Second installment distribution Tom s Additional Diversification in Year 2 1,170 shares 6/30/08 account balance shares Shares distributed (Year 2) shares x 10% 10 percent additional diversification election shares Diversified in 2008 This process is repeated each year until the balance of Tom's shares is distributed following the June 30, 2011 valuation. Part II, page 26

47 S E C T I O N N I N E Taxation of distributions Overview Following is a general description of how your distribution from the KSOP will be taxed; however, you should consult your tax advisor about your specific situation when taking a distribution from the KSOP. Generally, when you receive a distribution from the KSOP, you will be taxed on the value of the distribution, unless you immediately roll the proceeds into another tax-qualified plan or an Individual Retirement Account (IRA). You may reduce the tax due on your distribution through use of one of the following methods. (a) Rolling over all or a portion of the distribution to an IRA or another tax-qualified employer plan, which will defer your tax liability due until you begin withdrawing funds from the IRA or other qualified plan. However, the rollover of the distribution must be made within specified time frames, which are normally within 60 days after you receive your distribution. This 20 percent mandatory withholding requirement does not apply to share distributions you receive from the Company Stock Fund. You will receive a 1099-R following the end of a calendar year in which a distribution was made from the KSOP. All Company Stock Fund rollovers are reported as indirect rollovers to the IRS. This occurs because, technically, the stock is distributed for a split second before it is sold back to the company.? If I am age 55 or older when my employment with Appleton ends, is the distribution from my KSOP subject to a 10 percent tax penalty? No. It is only subject to Federal and State (except PA) taxes as long as you take a cash distribution directly from Appleton s plan. However, if you do a rollover to an IRA and then take a cash distribution from that IRA prior to age 59 1 /2, the 10 percent penalty will apply. (b) Electing to subject the distribution to favorable income tax treatment if you had attained age 50 as of January 1, 1986, under the 10-year forward averaging method. If you do not elect to have your distribution rolled directly to another tax-qualified plan or an IRA, we are required to withhold 20 percent of the amount of the distribution for federal income taxes, to the extent that such amount is available from the 401(k) Fund portion of your distribution. Part II, page 27? If my employment with Appleton ends before age 55, but I wait until after age 55 to get a distribution from my KSOP, is my distribution still subject to the 10 percent penalty? If your employment ends before the year you turn age 55, any cash distribution you receive before age 59 1 /2 is subject to income taxes and the 10 percent penalty.

48 Net unrealized appreciation There is a special rule for distributions from a plan that includes employer stock. Under this rule, you have the option to pay favorable capital gains rates on the "net unrealized appreciation" of the stock when you sell your stock back to the company. Net unrealized appreciation is the increase in the value of the employer stock while it was held by the plan. The rule provides that you may elect capital gains treatment on the net unrealized appreciation, paying ordinary income tax on the cost basis of the stock. The cost basis may be increased by allocations of company income. Capital gains tax rates are generally less than ordinary income tax rates. In order to take advantage of capital gains tax treatment on company stock, two criteria must be satisfied; your distribution must qualify as a lump sum distribution and your distribution must be made from the Company Stock Fund and the 401(k) Fund in the same tax year. When the company elects to make your distribution in a series of annual installments, capital gains tax treatment is not available to you. Don't forget that tax implications can be complicated. You should consult a tax advisor to discuss your personal situation. For example, if employer stock were allocated to your account when the stock was worth $1,000, but the stock was worth $1,200 when you received your distribution, you would pay ordinary income tax on the $1,000 and could elect to treat the $200 increase in value as capital gains. Part II, page 28

49 S E C T I O N T E N Participant loans As a KSOP participant, you may be eligible to borrow against your vested account balance subject to the following terms and conditions. To request a participant loan from either the 401(k) Fund or the Company Stock Fund, contact The Principal directly via the website at or call the Client Contact Center at The Principal at (800) For Loan Amounts of: The Maximum Loan Value Available is: Loans are Permitted Solely for: $1,000 - $10,000 $10,001 - $25, percent of the vested balance in the 401(k) Fund or Company Stock Fund from which the loan is requested 50 percent of the vested balance in the 401(k) Fund or Company Stock Fund from which the loan is requested No restrictions Payment of unreimbursed medical expenses of the employee, spouse, or dependents Preventing foreclosure on the mortgage or eviction from the employee s principal residence Payment of tuition and related educational fees and room & board expenses for up to the next 12 months of postsecondary education for the employee, spouse, or dependents Costs directly related to the purchase of the employee s principal residence (but not regular mortgage payments) Payments for burial or funeral expenses for the employee s deceased parent, spouse, children or dependents. Expenses for repair of casualty damage to the employee s principal residence. Part II, page 29

50 Loan features You may only have two loans outstanding at any time. There must be a minimum of 12 months between loan requests from each fund. You may receive only one loan from the 401(k) Fund and one loan from the Company Stock Fund at any time. You must receive a loan first from the 401(k) Fund, if available, before receiving a loan from the Company Stock Fund. All requests for loans from the Company Stock Fund will be processed twice each year, after the ESOP Committee calculates the aggregate requests and determines the amount that is available for distributions, diversifications, and loans. In no event will a loan request take precedence over a request for a distribution. It is possible that no Company Stock Fund loans will be granted in a semi-annual valuation period. The minimum loan amount is $1,000, and the maximum amount of loans you can have outstanding is $50,000 ($25,000 from the 401(k) Fund and $25,000 from the Company Stock Fund). Your highest outstanding loan balance reduces the $50,000 maximum in the previous 12 months, even if amounts have been repaid. The term of the loans must not be less than one year or more than five years, except that a loan used to purchase a primary residence may extend up to 15 years. Interest payable on these loans will be established by the ESOP Committee based upon prevailing rates and will be fixed during the term of your loan. If you receive a loan from the KSOP, your repayments, including interest, will be deducted from your pay each pay period. You may pay off the entire outstanding loan balance at any time, without penalty, by contacting The Principal. Partial pre-payments are not permitted. If you pay off a loan early, you may not request a new loan for three months. If you have an outstanding loan balance at the time you separate from service, you have 30 days to repay the loan; otherwise, the loan amount will be treated as a distribution from the KSOP and you will owe taxes on the distribution that year. In addition, you may be responsible for any early withdrawal penalties. Loan repayments will be directed to the fund from which the loan was taken. Repayments on loans taken from the 401(k) Fund will be repaid to the 401(k) Fund, and loans taken from the Company Stock Fund will be repaid to the Company Stock Fund. The repayments will be invested in the same manner as your future deferrals are directed. If your loan came from the Company Stock Fund, the dollar amount repaid plus interest will buy shares at the price in effect on the valuation date preceding or following the date the repayment is received (whichever is lower). Loan applications from the 401(k) Fund or the Company Stock Fund are subject to a onetime set-up fee of $75 (deducted from your account). This fee is subject to change.? I can contact The Principal and request a loan from the 401(k) Fund at any time and receive the loan money within a couple of weeks. Will the process work as quickly with loans from the Company Stock Fund? No. Our company stock is valued only twice per year. You must wait until the next valuation before loan money will be distributed to you. In addition, there must be sufficient funds available to honor loan requests. Part II, page 30

51 S E C T I O N E L E V E N Hardship withdrawals Eligible amount In cases of financial hardship, you may be able to make a withdrawal from your KSOP account. The hardship withdrawal cannot exceed your financial need, and you must have taken all other available loans under the KSOP and any other plan maintained by the company. The amount available for an eligible hardship withdrawal is limited to your pretax deferrals, excluding investment earnings. Hardship withdrawals are taken first from the 401(k) Fund and then only to the extent necessary from the Company Stock Fund. If you take a hardship withdrawal, you may not make deferrals to the KSOP for six months after the withdrawal. In addition, the maximum amount of the deferrals that you may make to the KSOP in the calendar year following your hardship withdrawal will be reduced by the amount of the hardship distribution. Reasons In general, a hardship withdrawal may be made upon satisfactory proof to the ESOP Committee that the withdrawal is necessary for the following reasons: 1. Payment of unreimbursed medical expenses of the employee, spouse, or dependents. 2. Payment necessary to prevent foreclosure on the mortgage or eviction from the employee s principal residence. 3. Payment of tuition and related educational fees and room & board expenses for up to the next 12 months of postsecondary education for the employee, spouse, or dependents. 4. Costs directly related to the purchase of the employee s principal residence (but not regular mortgage payments). 5. Payments for burial or funeral expenses for the employee s deceased parent, spouse, children or dependents. 6. Expenses for repair of casualty damage to the employee s principal residence. Part II, page 31

52 Requesting a hardship withdrawal To request a hardship withdrawal, contact The Principal directly via the website at or call the Client Contact Center at The Principal at (800) You will be asked to provide documentation supporting your request.? Will I pay taxes on a hardship withdrawal? Yes. Hardship withdrawals are subject to ordinary income tax as well as a 10 percent federal penalty tax if you are under age 59 1 /2. Approved hardship withdrawals from the 401(k) Fund or the Company Stock Fund are subject to a one-time processing fee of $35, deducted from the check you recieve. This fee is subject to change. Part II, page 32

53 S E C T I O N T W E L V E Voting company stock Although the ESOP trustee holds company stock in your Company Stock Fund, you are considered a beneficial shareholder of PDC stock. The ESOP trustee is the legal shareholder, who votes the shares held in the ESOP trust. However, there are certain voting rights with respect to PDC stock that the trustee passes through to you as a participant in the KSOP. Specifically, you will be entitled to vote the shares in your account by proxy on certain major issues, which include the following: Merger with another firm Liquidation and dissolution Sale of the company whether it be an asset or stock sale Stock reclassification and recapitalization Part II, page 33

54 S E C T I O N T H I R T E E N Claims procedures Timing You must apply for withdrawals, distributions, or other plan transactions by filing the proper forms, either online or with hard copy forms. Contact your human resources department or the ESOP Committee for help in filing your claim. Disagreements about benefits are rare, but should you and the company disagree on your eligibility for or the amount of your benefit, you may follow a review process. If you have made a claim for benefits under the plan and any portion of the claim is denied, you will receive a written notice of such denial within 90 days after receipt of your claim, plus any extension of time for processing the claim, not to exceed 90 additional days, as special circumstances require. Prior to the expiration on the initial 90 days, you will be advised in writing if an extension is necessary, stating the special circumstances requiring the extension and the date by which you can expect a decision regarding your claim. Such denial notice will state the specific reasons for the denial, specific reference to pertinent KSOP provisions upon which the denial was based, a description of any additional information or material necessary to perfect the claim and an explanation of why such information or material is necessary, and appropriate information as to the steps to take if you wish to submit the claim for review. Review procedure Within 90 days after the date of written notice denying any benefits, you or your authorized representative may write to the ESOP Committee requesting a review of that decision. Your request for review may contain such issues and comments as you wish considered in the review and may also review pertinent documents. The ESOP Committee will make a final determination with respect to your claim and advise you of the determination in writing within 60 days after receipt of your request for review, plus any extension of time for completing the review, not to exceed 60 additional days, as specific circumstances require. Prior to the expiration of the initial 60 days, the ESOP Committee must advise you in writing of an extension and the date by which you can expect a decision regarding the review of your claim. Such determination notice will state the reasons for the determination and specific references to any pertinent KSOP provisions upon which the determination is based. If your appeal is denied, you may file a lawsuit in federal district court to pursue your claim further. Part II, page 34

55 S E C T I O N F O U R T E E N Important facts Rights and protections of participants As a participant in the Appleton Papers Retirement Savings and Employee Stock Ownership Plan, you are entitled to certain rights and protections under the Employee Retirement Income Security Act of 1974 (ERISA). ERISA provides that all KSOP participants shall be entitled to: Receive information about your KSOP and benefits. Examine, without charge, at the ESOP Committee s office and at other specified locations such as worksites and union halls, all KSOP documents, including collective bargaining agreements and copies of all documents filed by the KSOP with the U.S. Department of Labor, such as the latest annual reports (Form 5500 series). Obtain copies of all KSOP documents and other information upon written request to the ESOP Committee. The administrator may make a reasonable charge for the copies. Receive a summary of the KSOP s annual financial report. The ESOP Committee is required by law to furnish each participant with a copy of this summary annual report. In addition to creating rights for KSOP participants, ERISA imposes duties upon the people who are responsible for the operation of the plan. The people who operate your KSOP, called fiduciaries of the plan, must do so prudently and in the interest of you and other KSOP participants and beneficiaries. No one, including your employer, your union, or any other person, may fire you or otherwise discriminate against you in any way to prevent you from obtaining a pension benefit or exercising your rights under ERISA. If your claim for a pension benefit is denied in whole or in part, you have a right to know the reason for the denial, to obtain without charge copies of documents relating to the decision, and to appeal any denial, all within certain time schedules. Under ERISA, there are steps you can take to enforce the above rights. If you request materials from the ESOP Committee and do not receive them within 30 days, you may file suit in a federal court. In such case, the court may require the ESOP Committee to provide the materials and pay you up to $110 per day until you receive the materials, unless the materials were not sent because of reasons beyond the control of the administrator. If you have a claim for benefits that is denied or ignored, in whole or in part, you may file suit in a state or federal court. In addition, if you disagree with the plan's decision or lack thereof concerning the qualified status of a domestic relations order, you may file suit in a federal court. Part II, page 35

56 If KSOP fiduciaries misuse the plan's money, or if you are discriminated against for asserting your rights, you may seek assistance from the U.S. Department of Labor, or you may file suit in a federal court. The court will decide who should pay court costs and legal fees. If you are successful, the court may order the person you have sued to pay these costs and fees. If you lose, the court may order you to pay these costs and fees if, for example, it finds your claim to be frivolous. If you have any questions about your KSOP, you should contact the ESOP Committee. If you have any questions about this statement or about your rights under ERISA, you should contact the nearest area office of the Employee Benefits Security Administration, U.S. Department of Labor, listed in your telephone directory. Division of Technical Assistance and Inquiries Employee Benefits Security Administration U.S. Department of Labor 200 Constitution Avenue N.W. Washington, D.C You may also obtain certain publications about your rights and responsibilities under ERISA by calling the publications hotline of the Employee Benefits Security Administrator. Obtain KSOP and financial statements If you would like to obtain a copy of the KSOP plan document, it is available at In addition, you may contact Appleton Employee Services at to request a hard copy of the KSOP plan document. To obtain the most recent (and historical) financial statements and a description of the business of PDC and its subsidiaries, including Appleton, go to and click on Investor Information; SEC filings, where you will find our quarterly (Form 10-Q) and annual (Form 10-K) reports. You may also contact Appleton's communication manager at to obtain hard copies of these documents. Plan not responsible for investment decisions The 401(k) Fund is intended to qualify as an ERISA Section 404(c) plan. This means that the plan fiduciary has permitted you to exercise control over assets in your 401(k) Fund account. You are able to direct the investment of your retirement account balance by choosing among several fund options offered under the KSOP. You may invest your deferrals in any of the investment options offered by your plan. For detailed information about your investment options in the 401(k) Fund (including prospectuses), please visit The Principal at or contact a registered representative of the Client Contact Center at The Principal at If you choose to make deferrals to the 401(k) Fund but do not choose any investment options, contributions will be automatically directed to the plan's investment default, Principal Fixed Income Option Fund. Part II, page 36

57 Termination Although the company fully intends to continue the KSOP indefinitely, the company reserves the right to change or terminate the KSOP at any time. If the KSOP is terminated (i.e., ends), you will be deemed fully vested in your KSOP account. If the plan ends, all contributions would stop. The money in your KSOP account would be paid as soon as possible after the termination. Loss of benefits Under certain circumstances, your participation in the KSOP could be suspended, or you might receive lower benefits than expected. Your right to continue to make contributions to the KSOP may be discontinued for the following reasons. Your employer stops participating in the KSOP, as each participating company has the right to do. You transfer to an Appleton company that does not participate in the KSOP. You transfer to a job classification that does not meet the eligibility requirements for participation. You have voluntarily stopped making your deferrals. You receive a hardship withdrawal, which would require a six-month suspension. You reach the limit on benefits and contributions set by law. You will be notified if you are affected. Your benefit may be less than you expected in the following cases. Appleton amends or terminates the KSOP, as it has the right to do. The value of your investments declines. You or your beneficiary do not submit the necessary documents or the completed claim forms that are required for processing. Service of legal process Legal process may be served on the ESOP Committee or the plan trustees at the business addresses noted in the References section of this document. KSOP year All KSOP records are maintained on a calendar year basis. Cost The company makes KSOP contributions for its participating employees and pays all administrative fees other than those indicated below. The fees charged by the funds are disclosed in the prospectus. The fees for participant loans or hardship withdrawals are listed in the related sections of this KSOP Guide. Part II, page 37

58 Assignment of benefits The KSOP is intended to pay benefits only to you or your beneficiaries. Your account cannot be used as collateral for loans outside of loans from the KSOP or be assigned in any other way, except pursuant to: (1) a Qualified Domestic Relations Order (QDRO); (2) certain IRS levies; or (3) a court judgment or settlement agreement that, with respect to the plan, you have engaged in a crime or committed a breach of any fiduciary duties you have under the KSOP. You and your beneficiaries may obtain, without charge, a copy of the procedures governing QDRO determinations from the KSOP administrator. PBGC status The KSOP is an individual investment account, or defined contribution plan. This means each participant builds an account in his or her own name, and the benefits you receive depend on the value of your account after investment. The KSOP doesn t guarantee you a payment of a specific amount of benefit, and accordingly, benefits are not insured by the Pension Benefit Guaranty Corporation, the government agency that insures other kinds of employee pension plans. Part II, page 38

59 S E C T I O N F I F T E E N References Formal plan name The formal name of the KSOP is the Appleton Papers Retirement Savings and Employee Stock Ownership Plan. The KSOP is a profit sharing plan with a cash or deferred arrangement, a stock bonus, and an employee stock ownership plan. The KSOP is considered an individual account plan under the Employee Retirement Income Security Act of The KSOP also is intended to be an ERISA Section 404(c) plan. Employers whose employees are covered by the KSOP Appleton P.O. Box 359 Appleton, WI (920) American Plastics Company, Inc Red Arrow Drive Rhinelander, WI C&H Packaging Company, Inc W. Taylor Merrill, WI New England Extrusion, Inc. 18 Industrial Blvd. Turners Falls, MA Plan sponsor/administrator Appleton P.O. Box 359 Appleton, WI (920) Employer identification number Plan identification number 001 KSOP administrator The ESOP Committee is responsible for the control and management of the operation and administration of the KSOP. You may send inquiries to: Appleton P.O. Box 359 Appleton, WI (920) KSOP trustee Trustar Retirement Services is the trustee of the 401(k) Fund, and the company has selected State Street as trustee of the Company Stock Fund: Trustar Retirement Services 1013 Centre Rd Wilmington, DE (866) State Street One Lincoln Street Boston, MA (617) Part II, page 39

60 KSOP recordkeeper The recordkeeper for the KSOP is the Principal Financial Group (The Principal ). The Principal can be reached at: Principal Financial Group 711 High Street Des Moines, IA The TeleTouch system with The Principal can be reached by calling , 24 hours a day, seven days a week. Participant Services Representatives are available Monday through Friday from 7:00 a.m. to 9:00 p.m. Central time. Part II, page 40

61 PART III Risk Factors Unless stated to the contrary or the context requires otherwise, all references to PDC, we, us, or our, and company refer to PDC Corp. and its subsidiaries and predecessors, including Appleton Papers Inc. Appleton Papers Inc. is a wholly-owned subsidiary of PDC Corp., which we refer to as Appleton in these risk factors.

62 r i s k f a c t o r s SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS To obtain the most recent (and historical) financial statements and a description of the business of PDC and its subsidiaries, including Appleton, go to and click on Investor Information; SEC filings, where you will find our quarterly (Form 10-Q) and annual (Form 10-K) reports. You may also contact Appleton's communication manager at to obtain hard copies of these documents. This report and our quarterly and annual filings on forms 10-Q and 10-K contain forward-looking statements. The words "will," "may," "should," "believes," "anticipates," "intends," "estimates," "expects," "projects," "plans," "seek" or similar expressions are intended to identify forwardlooking statements. All statements in this report and our quarterly and annual filings on forms 10-Q and 10-K other than statements of historical fact, including statements which address our strategy, future operations, future financial position, estimated revenues, projected costs, prospects, plans and objectives of management and events or developments that we expect or anticipate 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 our 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 below. Many of these factors are beyond our ability to control or predict. Given these uncertainties, you should not place undue reliance on the forwardlooking statements. We disclaim any obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise. If you invest a significant portion of your contributions to the KSOP in the Company Stock Fund, then your retirement savings portfolio will be less diversified and therefore subject to greater risk. The 401(k) Fund offers a diversified portfolio of investment options. Many investors consider it prudent to diversify investments to spread the risk of a particular investment decreasing in value. If all or a significant part of your retirement assets are in the form of PDC common stock, then those assets will not be diversified and will be subject to changes in value based solely on our financial performance. Furthermore, under most circumstances, there will be limited opportunities to redirect those assets into other diversified investments once they are transferred to the Company Stock Fund, even if you later determine that those other investments are more desirable. Neither we nor the ESOP trustee can determine the suitability of this investment for you as an individual, and we urge you to consult your own financial advisor as to whether investing in the Company Stock Fund and thus in PDC is a prudent decision for you. Part III, page 1

63 r i s k f a c t o r s There are substantial restrictions on the ownership and transfer of the PDC common stock held in the Company Stock Fund. If you invest in the Company Stock Fund, you will acquire a beneficial interest in PDC common stock held in the Company Stock Fund. You will not directly own the common stock allocated to your account. The ESOP trustee is the legal title holder of the common stock and holds the common stock in the name of the ESOP. Because the common stock is held by the ESOP trustee and not by individual participants, individual participants may not sell, pledge or otherwise transfer the shares of common stock allocated to their accounts. As long as PDC is an S corporation for federal income tax purposes, any shares of PDC common stock distributed to participants must be immediately sold back to PDC at fair market value as determined by an independent, third party appraiser selected by the ESOP trustee in accordance with the terms of the plan. There is not currently a public market for the common stock, and it is unlikely that there will ever be a public market for the common stock. Furthermore, interests in common stock may not be transferred except upon death or pursuant to a qualified domestic relations order, which is a judicial order issued to divide property in the event of a divorce or separation. We cannot assure you that the PDC stock allocated to your account will be repurchased at or above the price paid by the Company Stock Fund participants. The value of the stock may decline as a result of the risks discussed or incorporated by reference in this KSOP Guide or other unanticipated risks. When your participation in the ESOP terminates, we have the right and obligation to repurchase the common stock allocated to your account in the Company Stock Fund at the fair market value of the common stock at the time you receive a distribution from the plan. We cannot assure you that the fair market value of the common stock at the time will be equal to or greater than the price at which PDC sold the common stock to the ESOP. Your investment in the ESOP will be a long-term investment and your ability to realize the value of that investment will be limited. Investment in the ESOP is participation in a retirement plan subject to various rules under the Employee Retirement Income Security Act of 1974, which we refer to as "ERISA" and the Internal Revenue Code of 1986, relating to distributions from tax-qualified retirement plans. The ESOP also has specific limitations on distributions and on transfers from the Company Stock Fund to the 401(k) Fund. These provisions and limitations which, in general, provide that you Part III, page 2

64 r i s k f a c t o r s will only be entitled to a distribution related to your investment in the ESOP upon termination of your employment, and that even that distribution may be made in up to five annual installments beginning as many as six years after your termination of employment. We generally repurchase shares and make distributions in a series of five annual installments, in accordance with the terms of the ESOP and the ESOP distribution policy. Because of these limitations, your ability to realize the value of your investment in the ESOP will be restricted and your investment will not be as liquid as an investment in a publicly-traded security. Finally, PDC does not intend to pay dividends to the ESOP and we do not expect that the ESOP will make distributions to the participants, except upon termination of employment. These restrictions may have a material adverse effect on the value of your investment in the ESOP. As a beneficial shareholder, you do not have the right to vote the PDC common stock allocated to your account, except in the event of extraordinary transactions. The ESOP trustee votes the shares of common stock held in the Company Stock Fund. Participants in the ESOP are entitled to direct the ESOP trustee's voting of the shares of common stock allocated to their accounts only with respect to certain extraordinary corporate transactions, such as a merger, consolidation, recapitalization, reclassification, liquidation, dissolution or sale of substantially all of the assets of PDC. Participants will not have the power to elect the board of directors or otherwise participate in the management of PDC or Appleton. We are subject to substantial costs and potential liabilities relating to environmental regulation and litigation. We are subject to comprehensive and frequently changing laws and regulations by various federal, state and local authorities concerned with the impact of the environment on human health, the limitation and control of emissions and discharges into the air, ground and waters, the quality of ambient air and bodies of water and the handling, use and disposal of specified substances. Financial responsibility for the cleanup or other remediation of contaminated property or for natural resource damages can extend to previously owned or used properties, waterways and properties owned by unrelated companies or individuals, as well as properties currently owned and used by us, regardless of whether the contamination is attributable entirely to prior owners. As described in the following risk factor, we have been identified as a potentially responsible party for remediation and alleged natural resource damages related to the Lower Fox River and Green Bay system, which we refer to as the Lower Fox River. In addition, we make capital expenditures and incur operating expenses for environmental obligations and matters arising from our daily operations. Part III, page 3

65 r i s k f a c t o r s Including the Lower Fox River, we have approximately $96.0 million of accrued liabilities as of December 31, 2005 for estimated or anticipated liabilities and legal and consulting costs relating to environmental matters arising from past operations. We also have approximately $71.0 million of indemnification receivables from our former parent company, Arjowiggins, as of December 31, See the company s most recently filed quarterly or annual reports for the most recent financial information. While the accrued liabilities reflect our current estimate of the cost of these environmental matters, the amount that we have accrued may be inadequate. In addition, we may be named as a potentially responsible party at other sites in the future and the costs associated with such future sites may be material. We expect environmental laws and regulations and the interpretation and enforcement of those laws and regulations to become increasingly stringent and to further limit emission and discharge levels and to increase the likelihood and cost of environmental cleanups and related activities. All of these factors are likely to increase our operating expenses, require continuing capital expenditures and adversely affect the operating flexibility of our manufacturing operations and may require indeterminable and significant additional expenditures in connection with such compliance. We have been named as a potentially responsible party related to the Lower Fox River. We have been named by the EPA as a "potentially responsible party," or PRP, under the Comprehensive Environmental Response, Compensation and Liability Act. We have been named a PRP because of discharges of polychlorinated biphenyls, or PCBs, into the Lower Fox River from our Appleton Plant in the 1950s, 1960s and 1970s and because of discharges from the Appleton Coated paper mill in Combined Locks, Wisconsin, which we owned from 1978 to We could be liable for a significant portion of the costs of remediating the PCBs that remain in the Lower Fox River. These costs could be material to our financial position. In 2003, the DNR and EPA issued two Record of Decisions (RODs) covering all five segments of the Lower Fox River, which includes Green Bay. The RODs provide for a combination of dredging and capping and monitored natural recovery and contain revised estimates of total costs for remediation of $400 million over a 7 to 18-year time period. In addition to remediation, various government agencies are also asserting that we and the other PRPs are liable for natural resource damages caused by the PCBs. In October 2000, the U.S. Fish & Wildlife Service estimated that total natural resource damages would be in a range between $176 million to $333 million for all PRPs in the aggregate. At this time, we cannot precisely estimate our total liability for the Lower Fox River because we do not know how much the remedial actions and natural resource damages may cost or how large our share of those costs will be. Our liability could be material Part III, page 4

66 r i s k f a c t o r s to our financial position. The issuance of the RODs and the beginning of remediation activities provides Appleton the ability to reasonably estimate its potential liability. Accordingly, Appleton has recorded a reserve for this environmental liability, before indemnification by our former parent. At January 1, 2005, this reserve was approximately $101.4 million. During fiscal 2005, the total reserve was accreted by $6.4 million while payments against the reserve totaled $11.8 million. This resulted in a remaining reserve of $96.0 million as of December 31, 2005, of which $13.7 million is recorded in other accrued liabilities and $82.3 million is recorded as a long-term environmental liability. Although we believe our recorded environmental liability reflects a reasonable estimate of our liabilities associated with the Lower Fox River based on the RODs, the actual amount of liabilities associated with the Lower Fox River could prove to be significantly larger than our recorded environmental liability. The liabilities associated with the Lower Fox River are discussed in greater detail under the heading "Item 1. Business- Environmental Matters-Lower Fox River" and Notes to Consolidated Financial Statements in the company s quarterly and annual reports (Forms 10-Q and 10-K). See the company s most recently filed quarterly or annual reports for most recent financial information. Our former parent, Arjowiggins, may fail to comply with its indemnification obligations related to the acquisition of our company. Pursuant to the purchase agreement relating to the acquisition of our company, as amended in, and as limited by the terms of, the purchase agreement, Arjowiggins and two of its affiliates have agreed to indemnify us for certain losses resulting from: inaccuracies in the environmental representations and warranties made by Arjowiggins and its affiliates; certain known environmental matters that existed at the closing of the acquisition; environmental matters related to the businesses of Newton Falls, Inc., Appleton Coated LLC and several other of our former affiliates and subsidiaries; and environmental matters relating to the real property on which our former Camp Hill, Pennsylvania, plant and our current distribution center are located that existed prior to our sale of the Camp Hill plant to a third party. Arjowiggins has also, subject to certain limitations, agreed to indemnify us for specified environmental liabilities relating to the contamination of the Lower Fox River. Arjowiggins' indemnification obligations with respect to the Lower Fox River are discussed in greater detail Part III, page 5

67 r i s k f a c t o r s under the heading "Item 1. Business-Environmental Matters-Lower Fox River-Arjowiggins Indemnification" and in Notes to Consolidated Financial Statements in Item 8 in the company s quarterly and annual reports (Forms 10-Q and 10-K). If the matters for which we are potentially entitled to receive indemnification from Arjowiggins and its affiliates result in significant liabilities for us and, for any reason, Arjowiggins and/or its affiliates are unable or unwilling to honor these indemnification obligations, we could be required to pay for these liabilities ourselves, which could have a material adverse effect on our cash flow, our ability to fund or expand our operations and our ability to repay our existing and future indebtedness. We have a substantial amount of indebtedness outstanding and, as a result, we are operating as a highly leveraged company. Our total debt at December 31, 2005, was approximately $574 million. For a description of the components of our debt see "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Notes to Consolidated Financial Statements in the company s quarterly and annual reports (Forms 10-Q and 10-K). This large amount of indebtedness could: make it more difficult for us to satisfy our obligations with respect to the new senior credit facility and the new senior notes and senior subordinated notes; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures, acquisitions, research and development efforts and other general corporate activities; expose us to fluctuations in interest rates, because the term debt and revolving portions of the new senior credit facility carry variable rates of interest; limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate activities; limit our flexibility in planning for, or reacting to, changes in our businesses and the industries in which we operate; make it more difficult for us to satisfy our obligations to our creditors and, if we fail to comply with the requirements of our indebtedness, could result in an event of default under the agreements related to our indebtedness; limit our ability to successfully withstand a downturn in our business or the economy generally; and place us at a competitive disadvantage against other less leveraged competitors. Part III, page 6

68 r i s k f a c t o r s Furthermore, although our ability, PDC's ability and the ability of substantially all of our subsidiaries to borrow money will be restricted by the terms of the new senior credit facility and the indentures governing the new senior notes and senior subordinated notes, it may be possible for us and our guarantors to incur even more debt and, if we and our guarantors were to do so, these risks could intensify. Our ability to service our debt is dependent on our future operating results and we cannot be sure that we will be able to meet our debt obligations as they come due. Our ability to meet our payment obligations and to comply with the financial covenants contained in the agreements relating to our indebtedness is subject to a variety of factors, including changes in: demand for and selling prices of our products; competition; costs of raw materials and operating costs; the decline rate in sales of carbonless paper products; interest rate levels; our ESOP repurchase liability; our status as a qualified subchapter S subsidiary; environmental regulations; and general economic conditions. We may not be able to generate sufficient cash flows to meet our payment obligations under the agreements relating to our indebtedness. If we are unable to generate sufficient cash flow or otherwise obtain funds necessary to make the required payments on our indebtedness, then we may be required to refinance our indebtedness. We may not be able to refinance our indebtedness on terms that are acceptable to us or at all. In the absence of a refinancing, our lenders would be able to accelerate the maturity of our indebtedness, which could cause us to default under our other indebtedness, dispose of assets or declare bankruptcy and to proceed against any collateral securing that indebtedness. Compliance with the covenants relating to our indebtedness may limit our operating flexibility. The agreements relating to our indebtedness, including our new senior credit facility, the new senior notes and senior subordinated notes, contain numerous covenants that include certain financial tests, Part III, page 7

69 r i s k f a c t o r s including various debt and cash flow ratios, certain of which became more restrictive in the second fiscal quarter of 2005 and will become even more restrictive as of the end of the first fiscal quarter in The covenants related to our indebtedness, among other things, prohibit or restrict our ability, as well as the ability of PDC and our subsidiaries to: pay dividends on or purchase or redeem capital stock; repay other indebtedness; make loans and investments; acquire assets, stock or debt securities of another person; incur or guarantee additional indebtedness; use assets as security in other transactions; sell assets or merge with or into other companies; make capital expenditures; enter into sale and leaseback transactions; enter into transactions with affiliates; create liens; sell equity interests in our subsidiaries; amend or terminate particular agreements relating to our transaction with Arjowiggins and the ESOP; engage in new lines of business; and take, or fail to take, any actions that would cause PDC to lose its S corporation status. A breach of any of these covenants or our inability to meet the required financial tests could result in a default in respect of the related indebtedness. If a default occurs, the relevant lenders could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. These limitations, together with our highly leveraged position, could limit our ability to finance our operations with debt or equity in the future. In addition, these restrictions and our leveraged position may restrict our ability to respond to competitive market conditions, to make capital expenditures beyond those permitted in the agreements relating to the indebtedness or to take advantage of other business opportunities, including making acquisitions. This loss of operating flexibility may have a material adverse affect on our ability to achieve our financial objectives or our ability to sustain our current or past levels of revenue, earnings and cash flow. Part III, page 8

70 r i s k f a c t o r s The market for the primary product in our coated solutions segment, carbonless paper, may decline more rapidly than we anticipate. Our technical papers business includes the coated solutions, thermal and security papers segments. Our coated solutions segment, of which the primary product is carbonless paper, currently represents our primary business segment and accounted for 72% of our net sales in fiscal 2003, 61% of our net sales in fiscal 2004 and 56% of our net sales in fiscal Our total sales volume of carbonless paper products declined 9.0% from fiscal 2002 to fiscal 2003, 1.9% from fiscal 2003 to fiscal 2004 and 4.6% from fiscal 2004 to fiscal We believe the worldwide carbonless market is declining as users switch to alternative modes of communication and technologies that do not use impact printing to create images. We expect that our total sales volume of carbonless paper products will continue to decline at the rates that are generally similar to those experienced most recently. If the decline in our sales of carbonless paper products accelerates, or if we are unable to maintain the prices of our carbonless paper products, then our operating efficiency, profitability and cash flow may be materially adversely affected. We may be unable to develop and introduce new and enhanced products. Our success in developing new products will depend in large part on our ability to use our existing technical and manufacturing capabilities and knowledge in the development and introduction of new, value-added products targeted at new markets and customers. If we are unable to utilize our capabilities or properly identify and address the evolving needs of targeted customers and markets, our ability to capture and develop new business opportunities will be limited. In addition, if the revenue and profits generated by new products are not sufficient to replace the anticipated decline in revenue and profits generated by carbonless products, then our business would suffer. The development of new products can be very difficult and requires high levels of innovation. The development process can also be lengthy and costly. To date, our new products have yet to generate significant revenues or profits. The success of our new product offerings will depend on several factors, including our ability to: accurately anticipate and properly identify our customers' needs and industry trends; price our products competitively; manufacture our products at a competitive cost and quality; innovate, develop and commercialize new products and applications in a timely manner; differentiate our products from our competitors' products; hire and retain personnel specializing in new product development; and use our research and development budget efficiently. Part III, page 9

71 r i s k f a c t o r s The risks associated with acquisitions could have a material adverse effect on us. Our strategy for growth includes strengthening and expanding our presence in certain market segments and broadening our product offerings through acquisitions. Acquisitions are subject to potential problems and inherent risks, including: difficulties in identifying, financing and completing viable acquisitions, especially in light of the restrictions on acquisitions imposed by our debt covenants and our inability to use our common stock as consideration; difficulties in integrating the acquired company, retaining the acquired company's customers and achieving the expected benefits of the acquisition, such as expected revenue increases, cost savings and increases in geographic or product presence, in the desired time frames, if at all; the diversion of management's attention away from current operations; the loss of key employees of the acquired company; the assumption of undisclosed liabilities or known liabilities not fixed as to their ultimate amount; and in the event of a foreign-based acquisition, exposure to new market dynamics, a different regulatory environment and various cultural differences. Financing acquisitions could require us to use substantial cash or other liquid assets or incur additional debt. In such cases, we could become more susceptible to default under our outstanding debt obligations, an economic downturn and competitive pressures. If we are unable to overcome the potential problems and inherent risks related to our acquisition strategy, then our business, operating results, financial condition and future growth prospects could suffer. We currently rely on a relatively small number of customers to generate a significant amount of our net sales from each of our various businesses. Within the technical papers business, our five largest customers in the coated solutions segment accounted for approximately 50% of coated solutions segment net sales in fiscal 2003, approximately 47% of coated solutions segment net sales in fiscal 2004 and approximately 45% of coated solutions segment net sales in fiscal Our five largest customers in the thermal segment accounted for approximately 51% of thermal segment net sales in fiscal 2003, approximately 46% of thermal segment net sales in fiscal 2004 and approximately 42% of thermal segment net sales in fiscal Part III, page 10

72 r i s k f a c t o r s Sales to our five largest customers within the secure and specialized print services segment represented approximately 33% of total segment net sales for 2005 and approximately 30% of total segment net sales in fiscal Sales to our five largest customers in the performance packaging segment accounted for approximately 28% of total segment net sales in fiscal 2005, approximately 29% of total segment net sales in fiscal 2004 and approximately 26% of total segment net sales in fiscal Many of our customers are under no obligation to purchase our products in the future. Furthermore, some of our customers have become insolvent or financially distressed in recent years. If we lose one or more of our significant customers (e.g., to a competitor or as a result of their being acquired by a customer of a competitor) or any of our significant customers experiences financial difficulty, then our operating efficiency, revenues, earnings and cash flow could be materially adversely affected. We currently rely on a small number of third parties to supply several of the key raw materials we use to produce our products. Our business depends upon the availability of key raw materials, including base stock, certain chemicals and resins. In fiscal 2005, we purchased from external suppliers approximately $135 million of base stock. We relied on three external suppliers for approximately 94% of the base stock we purchased in fiscal 2005 to produce our coated solutions products. We relied on a single external supplier for approximately 69% of the base stock we purchased in fiscal 2005 to produce our thermal papers. For some of the key chemicals we use in our products we rely on one or two suppliers. If there is a disruption in the supply of our raw materials, including the chemicals that we need to produce our coated solutions and thermal products or the resins we use in our performance packaging products, then we may be required to purchase these raw materials from alternative sources, which may result in a significant increase in our operating costs. Included in these increased costs would be development costs associated with qualifying new raw materials and suppliers. We may not be able to procure carbonless base stock, thermal base stock, key chemicals, resins or our other raw materials from alternative suppliers in the future in amounts sufficient to meet our needs or at prices consistent with historical prices. The unavailability of alternative suppliers could subject us to significant cost increases and manufacturing delays and could have a material adverse effect on our operations, earnings and cash flow. Part III, page 11

73 r i s k f a c t o r s We have competitors in our various markets and we may not be able to maintain prices and margins for our products. We face strong competition in all of our business segments. Our competitors vary in size and the breadth of their product offerings and some of our competitors have significantly greater financial, technical and marketing resources than we do. Regardless of the continuing quality of our primary products, we may be unable to maintain our prices or margins due to: declining overall carbonless market size; accelerating decline in the carbonless sheet market; variations in demand for, or pricing of, carbonless products; increasing manufacturing costs; increasing competition in international markets or from domestic or foreign producers; or declining general economic conditions. Our inability to compete effectively or to maintain our prices and margins could have a material adverse effect on our earnings and cash flow. We depend on our key personnel to manage our business effectively and they may be difficult to replace. Our success depends, to a significant degree, on the efforts and abilities of our current senior and middle management teams. Their skills, experience and industry contacts significantly benefit us. The loss of key employees could have a negative effect on our operating results and financial condition. We do not maintain key-man life insurance on any members of our senior management team and no members of our senior management team are subject to employment agreements except for the chief executive officer of our U.K.-based secure and specialized print services business. PDC, its eligible subsidiaries and the ESOP may not continue to be exempt from U.S. federal or certain state and local income taxes. PDC has made an election to be taxed as a subchapter S corporation for U.S. federal and, where recognized, state and local income tax purposes and an election to treat its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes. We believe that, currently, PDC qualifies as a subchapter S corporation for federal and, where recognized, state and local income tax purposes and that we and other eligible subsidiaries are qualified subchapter S subsidiaries for U.S. federal and, where recognized, state and local income tax purposes. Part III, page 12

74 r i s k f a c t o r s All of the BemroseBooth companies are registered in the United Kingdom and subject to U.K. Inland Revenue tax laws, are not eligible for treatment as qualified subchapter S subsidiaries and, as a result, will incur a foreign income tax liability. Similarly, Appleton's Canadian subsidiary is subject to Canadian tax law and is not eligible for this treatment. Section 1362 of the Internal Revenue Code of 1986, as amended, or the Code, provides that a corporation that meets certain requirements may elect to be taxed as a subchapter S corporation. These requirements include, but are not limited to: (1) the corporation having only certain types of shareholders, including ESOPs, (2) the corporation having 100 shareholders or less and (3) the corporation having only one class of stock. Section 1361 of the Code provides that a corporation that, among other requirements, has all of its stock owned by a subchapter S corporation or a qualified subchapter S subsidiary, and has only one class of stock, may be classified as a qualified subchapter S subsidiary upon proper election by the subchapter S corporation. A qualified subchapter S subsidiary is disregarded as a separate entity for federal and most state and local income tax purposes. The parent subchapter S corporation takes into account all of the activity of the qualified subchapter S subsidiary. With limited exceptions, a subchapter S corporation does not pay any income tax. Rather, the income of an S corporation is allocated to its shareholders. Under current law, since an ESOP is a tax-exempt defined contribution plan, the income tax on its allocable share of a subchapter S corporation's income is deferred until distributions are made out of the ESOP to the ESOP beneficiaries. A plan is, however, not treated as an ESOP, unless it meets the requirements of Section 4975 (e)(7) of the Code. The continuing status of PDC as a subchapter S corporation and its eligible subsidiaries as qualified subchapter S subsidiaries for U.S. federal and state income tax purposes will depend upon their ability to continue to meet the eligibility requirements and the plan as an ESOP. Neither we nor PDC have obtained a ruling from the Internal Revenue Service or any state or local tax agency confirming that PDC will be treated as a subchapter S corporation or that we will be treated as a qualified subchapter S subsidiary. In addition, neither we nor PDC have obtained an opinion upon which any investor may rely stating that PDC qualifies as a subchapter S corporation and its eligible subsidiaries qualify as qualified subchapter S subsidiaries for U.S. federal and state income tax purposes. It is possible that the Internal Revenue Service, or IRS, could take the position on audit that certain debt or obligations of PDC or its subsidiaries constitute a second class of stock and terminate PDC's subchapter S election. The applicable law and regulations may change in a way that results in the taxation of PDC as a corporation other than as a subchapter S corporation. Furthermore, the current law that exempts the ESOP trust from taxation on its allocable share of a subchapter S corporation's income may change. Part III, page 13

75 r i s k f a c t o r s PDC and its eligible subsidiaries realize significant tax savings during profitable years due to the subchapter S corporation status. PDC was audited by the IRS for the 2001 tax year and received a "no change" letter (meaning the subchapter S corporation election was held to be valid for that year). However, if, for any reason, PDC loses its subchapter S corporation status, or any of its qualified subchapter S subsidiaries loses its qualified subchapter S subsidiary status, PDC and its subsidiaries would be required to pay U.S. federal and certain state and local income taxes, thereby reducing the amount of cash available to repay debt or reinvest in our operations, which would have a material adverse effect on our earnings and cash flow. Similarly, if the plan does not qualify as an ESOP and becomes subject to tax on its share of the subchapter S corporation's income, PDC would have to distribute cash to the ESOP trust to allow it to pay the tax, again reducing the amount of cash available to repay debt or to be reinvested in our operations. The termination of PDC's subchapter S corporation status or the termination of PDC's subsidiaries' qualified subchapter S subsidiary status would violate covenants under the new senior credit facility and the indentures governing the new senior notes and senior subordinated notes and would lead to a default under the senior credit facility and/or the indentures governing the new senior notes and senior subordinated notes. As a subchapter S corporation, PDC is subject to a corporate-level tax under Section 1374 of the Code known as the built-in gain tax. The built-in gain tax is a tax imposed on the gain inherent in assets as of the effective date of the subchapter S election if the gain is recognized within ten years after the effective date of the subchapter S election. If we sell a material portion of our assets within that ten-year period, we could be subject to a significant tax liability. Future legislation or regulations intended to reform pension and other employee benefit plans could adversely affect our ability to repay our debt, reinvest in our operations, or grow our business through new product development or through acquisitions. From time to time in recent years, legislators and agencies of the executive branch have formulated or suggested various proposals to amend, restrict or eliminate various features of employee benefit plans. For example, legislation has been proposed in Congress to restrict the amount of company stock that may be held by a 401(k) plan and to allow plan participants to freely sell company stock held in their plan accounts. If legislation is adopted or new regulations are adopted that require us to lift restrictions on sales of stock held in participants' KSOP accounts, that expand the diversification rights of participants in the KSOP, or that limit the amount of PDC common stock that may be held by the KSOP, then we may be required to fund the repurchase of substantial amounts of PDC common stock or take some other action Part III, page 14

76 r i s k f a c t o r s restrictive to our finances. These repurchases or other restrictive actions could reduce the amount of cash available to repay debt, reinvest in our operations, or grow our business through new product development or through acquisitions. In addition, these repurchases could violate covenants under our new senior credit facility and the indentures governing the new senior and senior subordinated notes, which could lead to a default under those agreements. PDC's legal obligations to repurchase common stock from employees and former employees may lead to a default under the agreements governing our indebtedness. It may be necessary for Appleton to make significant distributions to PDC in order for PDC to satisfy its share repurchase obligations, under the Employee Retirement Income Savings Act of 1974, or ERISA, and the terms of the KSOP, to current and former employees who are participants in the ESOP. PDC incurs obligations to an ESOP participant to repurchase shares of PDC when he or she retires or otherwise terminates employment or when he or she elects to diversify a portion of the shares of PDC common stock held in their ESOP account. The ESOP allows PDC to satisfy its share repurchase obligations by installment payments. For repurchases from former employees in 2003 and 2004, PDC completed share repurchases by single payments. During 2005 and for the first half of 2006, we exercised our right to satisfy our share repurchase obligations to former participants by making five equal annual installment payments. Because the amount of our repurchase obligation to former employees is based on individual elections made semi-annually in mid-april and mid-october by former employees and the deadline for the second of these election periods for fiscal 2006 does not expire until mid-october 2006, it is difficult for us to accurately estimate the ultimate amount of the repurchase obligation for fiscal However, if the number of shares that former employees elect to redeem is consistent with or greater than prior years, we expect to pay for repurchases requested in the second half of 2006 by making five equal annual installment payments. The amount of our repurchase obligations may at any time exceed limitations imposed by agreements governing our indebtedness and Appleton may elect to or be forced to help us meet our obligations. Further, we, as a guarantor of Appleton's indebtedness, may also be limited to some extent from making payments to the ESOP or its beneficiaries by the terms of our and Appleton's indebtedness, including Appleton's indebtedness under the senior notes and senior subordinated notes. At the time of filing the quarterly report on Form 10-Q for the quarterly period ended April 2, 2006, it appeared that, as a result of our legally imposed repurchase obligation, we and/or Appleton might be forced to violate the distribution and/or payment Part III, page 15

77 limitations contained in the agreements relating to our and Appleton's indebtedness, including Appleton's indebtedness under the senior notes and senior subordinated notes, which could ultimately result in a default under the agreements and the notes. Defaults on any of our or Appleton's indebtedness could result in acceleration of that indebtedness and cause us or Appleton to dispose of certain assets or declare bankruptcy and, as a result, we, or Appleton, may not have sufficient funds to satisfy our obligations under the senior notes and senior subordinated notes. As previously disclosed, we had estimated that the total payments of approximately $16 million for semi-annual stock redemptions to be made in the second quarter of 2006 would exceed the covenant limitations established by the indentures governing the senior notes and the senior subordinated notes by approximately $5.5 million. The restrictive covenants in the indentures were amended as a result of a successful consent solicitation in June As a result, Appleton was able to make in the second quarter of 2006, and expects to continue to make, required ESOP stock distributions without violating the covenant limitations of the indentures governing the senior notes and the senior subordinated notes. A material disruption at one of our manufacturing facilities could adversely affect our ability to service our customers and therefore adversely affect our business, financial condition and results of operations. We manufacture a significant portion of our coated solutions, thermal papers and security papers segment products at our manufacturing facilities and we have limited ability to interchangeably produce certain of our products at more than one manufacturing facility or on more than one production line within a facility. Any of our paper and manufacturing facilities, or any of our machines within one of our facilities, could cease operations unexpectedly due to a variety of reasons, including, but not limited to, natural disasters (such as fires, floods, earthquakes, hurricanes, or other catastrophes), equipment or mechanical failures, labor difficulties, terrorism, or other operational problems. Any prolonged disruption in the operations of our manufacturing facilities, or certain machines within our facilities, particularly those that only manufacture a specific product line, could cause delays in the shipments of products to our customers, result in cancellation of orders or loss of customers and/or require us to make unplanned capital expenditures, which may have a material adverse affect on our business, financial condition and results of operations. Part III, page 16

78 CP 1211 JJ 10/ E. Wisconsin Avenue P.O. Box 359 Appleton, WI appletonideas.com