KSOP Guide Introduction

Transcription

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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