PAPERWEIGHT DEVELOPMENT CORP Just Filed Its Annual Report: 20.      EMPLOYEE...

20.      EMPLOYEE STOCK OWNERSHIP PLAN



The KSOP includes a separate ES OP component. The KSOP is a tax-qualified retirement plan that also contains a 401(k) feature, which provides participants with the ability to make pre-tax contributions to the KSOP by electing to defer a percentage of their compensation. The ESOP is a tax-qualified employee stock ownership plan that is designed to invest primarily in the common stock of PDC.



Eligible participants, as “named fiduciaries” under ERISA, were offered a one-time irrevocable election in 2001 to acquire a beneficial interest in the common stock of PDC by electing to direct the transfer of all or a portion of their existing account balances in the KSOP and the 401(a) plan (Appleton Papers Inc. Retirement Medical Savings Plan) to the Company Stock Fund. The total proceeds transferred by eligible participants to the Company Stock Fund were approximately $107 million. All proceeds of the offering were used by the ESOP trustee to purchase 10,684,373 shares of PDC common stock. As a result of this purchase, the ESOP owns 100% of the common stock of PDC. The ESOP trustee is expected to purchase common stock from PDC with future pre-tax payroll deferrals made by employees. The Company also intends to fund a significant part of its matching contribution commitment with common stock of PDC. Matching contributions charged to expense were $1.6 million in 2016, $1.9 million in 2015, and $2.3 million in 2014. 

The value of each participant’s account balance will be paid to that participant, or that participant’s beneficiary, in the case of the participant’s death, upon the participant’s retirement, death, disability, resignation, dismissal or permanent layoff. Requests for lump sum distributions from the Company Stock Fund will be granted in accordance with a uniform, nondiscriminatory policy established by the ESOP committee. Covenants in the Credit Agreement, as amended, providing for the first lien term loan and revolving credit facility, as well as the indenture governing the second lien senior secured notes restrict Appvion’s ability to pay dividends to PDC, which could limit PDC’s ability to repurchase shares distributed to ESOP participants who have terminated employment or who are entitled to diversification rights. PDC has obligations to make distributions to former participants in the ESOP under ERISA and these obligations may conflict with the terms of these debt agreements. During 2016, 2015, and 2014, the Company exercised its right to satisfy requests for distributions to former participants using five equal annual installments.



In 2016, the ESOP trustee purchased 145,102 shares of PDC redeemable common stock for an aggregate price of $1.6 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 138,018 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 780,600 shares of PDC redeemable common stock were repurchased during 2016 at an aggregate price of $10.2 million.



In 2015, the ESOP trustee purchased 167,177 shares of PDC redeemable common stock for an aggregate price of $1.9 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 160,097 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 775,075 shares of PDC redeemable common stock were repurchased during 2015 at an aggregate price of $9.4 million.

 

In 2014, the ESOP trustee purchased 178,179 shares of PDC redeemable common stock for an aggregate price of $2.4 million from pre-tax payroll deferrals, rollovers and loan payments made by employees, as well as interest received by the trust. Matching contributions over this same period resulted in an additional 172,167 shares of redeemable common stock being issued. As a result of hardship withdrawals, required diversifications, employee terminations and employee loan requests, 1,273,759 shares of PDC redeemable common stock were repurchased during 2014 at an aggregate price of $18.2 million.



In accordance with ASC 480, “Distinguishing Liabilities from Equity,” the appropriate accounting for redeemable equity first depends upon a determination of whether the equity is currently redeemable or not currently redeemable.  Shares that are currently redeemable should be recorded at redemption value.  For shares that are not currently redeemable, the accounting guidance allows for changes in redemption value to be accreted from the initial issuance date to the earliest redemption date. This guidance also specifies that if the redemption value is less than the original issuance cost, the carrying amount of the redeemable common stock should not be less than the original issuance cost.



The fair value of the redeemable common stock is determined by an independent, third-party appraiser selected by the ESOP Trustee, as required by law and the ESOP. Such valuations are made as of June 30 and December 31. The year-end 2016 share price was $10.35. Based upon the estimated fair value of the redeemable common stock at December 31, 2016, an ultimate redemption liability of approximately $64.8 million was determined. The redeemable common stock recorded book value as of December 31, 2016, was $100.6 million. The net decrease in fair value and accretion of redeemable common stock was $3.4 million for the year ended December 31, 2016.



As of December 31, 2016, the Company is obligated to purchase 1,956,365 shares of redeemable common stock eligible for redemption as a result of participants terminating employment due to retirement, resignation, dismissal, permanent layoff, disability or death. Using the year-end 2016 share price, the Company has estimated a future share repurchase obligation of approximately $20.2 million. Per plan provisions, neither the dates of nor prices at distribution are fixed or determinable, and therefore, repurchase obligations to be settled over the next five years will vary from the estimated repurchase obligation above.

The above information was disclosed in a filing to the SEC. To see the filing, click here.

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