KAPSTONE PAPER & PACKAGING CORP (Form: 10-Q, Received: 10/28/2015 16:24:50)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

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

For the transition period from to

Commission File Number: 001-33494

KapStone Paper and Packaging Corporation

(Exact Name of Registrant as Specified in its Charter)

Delaware		20-2699372
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

KapStone Paper and Packaging Corporation

1101 Skokie Blvd., Suite 300

Northbrook, IL 60062

(Address of Principal Executive Offices including zip code)

Registrant’s Telephone Number, including area code (847) 239-8800

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

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

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

Large accelerated filer x		Accelerated filer o

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

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

There were 96,314,983 shares of the Registrant’s Common Stock, $0.0001 par value, outstanding at October 22, 2015.

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KAPSTONE PAPER AND PACKAGING CORPORATION

Index to Form 10-Q

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PART I. — FINANCIAL INFORMATION

Item 1. — Consolidated Financial Statements (Unaudited) and Notes to Consolidated Financial Statements	1

Item 2. — Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3. — Quantitative and Qualitative Disclosures about Market Risk	22

Item 4. — Controls and Procedures	22

PART II. — OTHER INFORMATION

Item 1. — Legal Proceedings	23

Item 1A. — Risk Factors	23

Item 2. — Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3. — Defaults Upon Senior Securities	23

Item 4. — Mine Safety Disclosures	24

Item 5. — Other Information	24

Item 6. — Exhibits	24

SIGNATURE	25

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PART 1. FINANCIAL INFORMATION

ITEM 1. - FINANCIAL STATEMENTS

KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Balance Sheets

(In thousands, except share and per share amounts)

	September 30,			December 31,
	2015			2014
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	7,767		$	28,467
Trade accounts receivable (Includes $379,683 at September 30, 2015, and $225,577 at December 31, 2014, associated with the securitization facility)	395,549			228,740
Other receivables	18,694			12,833
Inventories	334,256			238,329
Prepaid expenses and other current assets	18,152			7,172
Total current assets	774,418			515,541
Plant, property and equipment, net	1,406,446			1,386,670
Other assets	13,209			10,135
Intangible assets, net	351,270			110,077
Goodwill	704,592			533,851
Total assets	$	3,249,935		$	2,556,274
Liabilities and Stockholders’ Equity
Current liabilities:
Short-term borrowings	$	2,000		$	—
Other current borrowings	2,214			—
Dividend payable	9,828			9,911
Accounts payable	191,213			149,600
Accrued expenses	64,432			48,340
Accrued compensation costs	72,181			62,491
Accrued income taxes	—			6,477
Deferred income taxes	1,396			1,990
Total current liabilities	343,264			278,809
Other liabilities:
Long-term debt (Includes $261,512 at September 30, 2015, and $167,000 at December 31, 2014, associated with the securitization facility)	1,589,670			1,046,063
Pension and postretirement benefits	23,444			32,800
Deferred income taxes	420,446			412,293
Other liabilities	20,025			8,182
Total other liabilities	2,053,585			1,499,338
Commitments and contingencies
Stockholders’ equity:
Preferred stock $0.0001 par value; 1,000,000 shares authorized; no shares issued and outstanding	—			—
Common stock — $0.0001 par value; 175,000,000 shares authorized; 96,314,983 shares issued and outstanding (excluding 40,000 treasury shares) at September 30, 2015 and 96,046,554 shares issued and outstanding (excluding 40,000 treasury shares) at December 31, 2014	10			10
Additional paid-in-capital	264,306			255,505
Retained earnings	640,149			574,601
Accumulated other comprehensive loss	(51,379		)	(51,989		)
Total stockholders’ equity	853,086			778,127
Total liabilities and stockholders’ equity	$	3,249,935		$	2,556,274

See notes to consolidated financial statements.

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KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Comprehensive Income

(In thousands, except share and per share amounts)

(unaudited)

	Three Months Ended September 30,					Nine Months Ended September 30,
	2015		2014			2015		2014

Net sales	$	807,563	$	598,106		$	2,025,107	$	1,737,507
Cost of sales, excluding depreciation and amortization	569,267		388,641			1,421,943		1,164,134
Depreciation and amortization	42,500		34,997			114,617		101,580
Freight and distribution expenses	70,623		46,173			167,941		131,829
Selling, general, and administrative expenses	63,577		34,133			150,252		102,371
Operating income	61,596		94,162			170,354		237,593

Foreign exchange loss	766		960			1,704		859
Loss on debt extinguishment	628		2,963			628		2,963
Interest expense, net	9,528		8,099			24,456		25,299
Income before provision for income taxes	50,674		82,140			143,566		208,472
Provision for income taxes	16,468		27,886			49,004		70,660
Net income	$	34,206	$	54,254		$	94,562	$	137,812
Other comprehensive income, net of tax
Pension and postretirement plan reclassification adjustments:
Amortization of prior service costs	12		31			36		93
Amortization of net (gain) / loss	192		(2		)	574		(5		)
Other comprehensive income, net of tax	204		29			610		88
Total comprehensive income	$	34,410	$	54,283		$	95,172	$	137,900

Weighted average number of shares outstanding:
Basic	96,310,998		95,958,877			96,235,404		95,857,079
Diluted	97,629,641		97,515,901			97,631,247		97,416,869
Net income per share:
Basic	$	0.36	$	0.57		$	0.98	$	1.44
Diluted	$	0.35	$	0.56		$	0.97	$	1.41
Dividends declared per common share	$	0.10	$	—		$	0.30	$	—

See notes to consolidated financial statements.

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KAPSTONE PAPER AND PACKAGING CORPORATION

Consolidated Statements of Cash Flows

(In thousands)

(unaudited)

	Nine Months Ended September 30,
	2015			2014
Operating activities
Net income	$	94,562		$	137,812
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	114,617			101,580
Stock-based compensation expense	8,122			5,630
Pension and postretirement	(8,379		)	(9,939		)
Excess tax benefit from stock-based compensation	(1,518		)	(2,960		)
Amortization of debt issuance costs	4,364			4,415
Loss on debt extinguishment	628			2,963
Loss on disposal of fixed assets	5			1,203
Deferred income taxes	6,441			(1,059		)
Changes in assets and liabilities:
Trade accounts receivable, net	(27,022		)	(24,269		)
Other receivables	2,744			999
Inventories	(5,639		)	(17,222		)
Prepaid expenses and other current assets	(2,595		)	(2,462		)
Other assets	(153		)	(716		)
Accounts payable	(11,005		)	(3,510		)
Accrued expenses and other liabilities	8,398			9,227
Accrued compensation costs	912			4,057
Accrued income taxes	(7,834		)	300
Net cash provided by operating activities	176,648			206,049

Investing activities
Victory acquisition, net of cash acquired	(617,046		)	—
Capital expenditures	(94,895		)	(112,367		)
Net cash used in investing activities	(711,941		)	(112,367		)

Financing activities
Proceeds from revolving credit facility	268,200			97,900
Repayments on revolving credit facility	(266,200		)	(97,900		)
Proceeds from receivables credit facility	112,961			175,000
Repayments on receivables credit facility	(18,449		)	—
Proceeds from long-term debt	519,763			—
Repayments on long-term debt	(64,688		)	(178,525		)
Payment of loan amendment and debt issuance costs	(10,790		)	(1,081		)
Proceeds from other current borrowings	6,615			6,300
Repayments on other current borrowings	(4,401		)	(5,138		)
Cash dividends paid	(29,098		)	—
Payment of withholding taxes on stock awards	(2,460		)	(1,755		)
Proceeds from exercises of stock options	778			639
Proceeds from shares issued to ESPP	844			600
Excess tax benefit from stock-based compensation	1,518			2,960
Net cash provided by (used in) financing activities	514,593			(1,000		)

Net increase (decrease) in cash and cash equivalents	(20,700		)	92,682
Cash and cash equivalents-beginning of period	28,467			12,967
Cash and cash equivalents-end of period	$	7,767		$	105,649

See notes to consolidated financial statements.

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KAPSTONE PAPER AND PACKAGING CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except share and per share amounts)

(unaudited)

1. Financial Statements

The accompanying unaudited consolidated financial statements of KapStone Paper and Packaging Corporation (the “Company,” “we,” “us,” “our” or “KapStone”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of a normal recurring nature) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. For further information, refer to the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the year ended December 31, 2014.

We report our operating results in two reportable segments: Paper and Packaging and Distribution. Our Paper and Packaging segment manufactures and sells a wide variety container board, corrugated products and specialty paper for industrial and consumer markets. The Distribution segment was established June 1, 2015 through the acquisition of Victory Packaging, L.P. and its subsidiaries (“Victory”), a North American distributor of packaging materials. See Note 3, Victory Packaging Acquisition, for further detail. For more information about our segments, see Note 12, Segment Information.

In these consolidated financial statements, certain amounts in prior periods’ consolidated financial statements have been reclassified to conform with the current period presentation. In accordance with Accounting Standards Codification (“ASC”) 280, “Segment Reporting,” we recast 2015 and 2014 segment information to conform with the current year presentation. For more information see Note 12, Segment Information. None of the reclassifications affected our results of operations, financial position, or cash flows.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB’) issued Accounting Standards Update (“ASU”) No. 2014-09 “Revenue from Contracts with Customers”. The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The guidance in this update supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition”, and most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this update supersedes some cost guidance included in Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts”. For a public entity, the amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB approved a one-year deferral of the effective date for its new revenue standard for public and nonpublic entities reporting under GAAP. The standard will be effective for public entities for annual reporting periods beginning after December 15, 2017 and interim periods therein. Additionally the FASB approved the option to early adopt up to the original effective date (fiscal years beginning after December 15, 2016). We are currently evaluating the impact that the adoption of ASU 2014-09 will have on our financial condition, results of operations and disclosures.

In April 2015, the FASB issued ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs”, which changes the presentation of debt issuance costs in financial statements. ASU 2015-03 requires an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. It is effective for annual reporting periods beginning after December 15, 2016. Early adoption is permitted. The new guidance will be applied retrospectively to each prior period presented. The Company does not expect the adoption of this standard to have a material impact on its consolidated balance sheets.

In August 2015, the FASB issued an ASU 2015-15, “Interest — Imputation of Interest” which relates to the presentation of debt issuance costs. This standard clarifies the guidance set forth in FASB ASU 2015-03, which required that debt issuance costs related to a recognized debt liability be presented on the balance sheet as

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a direct deduction from the debt liability rather than as an asset. The new pronouncement clarifies that debt issuance costs related to line-of-credit arrangements could continue to be presented as an asset and be subsequently amortized over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the arrangement. The Company does not expect the adoption of this standard to have a material impact on its consolidated balance sheets.

In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments”, which eliminates the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Instead, acquirers must recognize measurement-period adjustments during the period in which they determine the amounts, including the effect on earnings of any amounts they would have recorded in previous periods if the accounting had been completed at the acquisition date. The ASU is effective for public business entities for fiscal years beginning after 15 December 2015, and interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its financial condition, results of operations or cash flows.

3. Victory Packaging Acquisition

On June 1, 2015, the Company purchased all of the partnership interests in Victory Packaging, L.P. and its subsidiaries (“Victory”) for $615 million in cash and $2.0 million for working capital adjustments. $40.0 million of the purchase price was placed into escrow to fund certain limited indemnity obligations of Victory. Victory, headquartered in Houston, TX, is a North American distributor of packaging materials.

The Company will also be obligated to pay up to an additional $25.0 million of contingent consideration in cash to the former owners of Victory if certain financial performance criteria are satisfied during the thirty month period following the closing. The Company used a present value analysis to determine the fair value of the contingent consideration of $11.7 million as of September 30, 2015, which included an increase of $1.2 million during the third quarter due to revised Company estimates. The contingent consideration is included in other non-current liabilities on the Company’s Consolidated Balance Sheets and its fair value is a categorized as Level 3 within the fair value hierarchy. This analysis considers, among other items, the financial forecasts of future operating results of Victory, the probability of reaching the forecast, and the associated discount rate.

In the quarter ended September 30, 2015, the Company paid an additional $0.5 million related to post-closing working capital adjustments. The total acquisition consideration is $617.0 million, net of cash acquired (excluding any future contingent consideration that may be payable). The purchase price allocation is preliminary and subject to final review.

Purchase price	$	615,000
Working capital adjustments	2,046
Cash paid	$	617,046
Fair value of contingent consideration	9,600
Total acquisition consideration	$	626,646

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The following table summarizes the preliminary allocation of the Victory acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition, as well as adjustments made during quarter ended September 30, 2015 (referred to as “measurement period adjustments”):

	Amounts						Amounts
	Recognized at			Mesurement			Recognized as of
	Acquisition			Period			Acquisition Date
	Date (1)			Adjustments (2)			(as Adjusted)
Trade accounts receivable	$	144,497		$	(408	)	$	144,089
Other receivables	4,302						4,302
Inventories	90,542			(254		)	90,288
Prepaid expenses and other current assets	1,746			2,897			4,643
Plant, property and equipment	18,865			(794		)	18,071
Other assets	3,104						3,104
Intangible assets	257,700			100			257,800
Accounts payable	(47,795		)				(47,795		)
Accrued expenses	(6,905		)	(2,897		)	(9,802		)
Accrued compensation costs	(8,778		)				(8,778		)
Other noncurrent liabilities	(17		)				(17		)
Goodwill	167,703			3,038			170,741
Total acquisition consideration	$	624,964		$	1,682		$	626,646

(1) Preliminary allocation of Victory acquisition consideration to the fair value of the assets acquired and liabilities assumed at the date of acquisition.

(2) The measurement period adjustments include the following:

· Property, plant and equipment were adjusted downward by $0.8 million as accounting policies were aligned accross the Company.

· Trade accounts receivable and inventory were adjusted by $0.4 million and $0.3 million, respectively, resulting from minor adjustment to management estimates.

· Certain liability amounts have been reclassified to conform to current presentation.

Transaction fees and expenses for the Victory acquisition related to due diligence, advisory and legal services have been expensed as incurred. These expenses were $1.9 million and $4.5 million, respectively, for the three and nine month periods ended September 30, 2015 and were recorded as selling, general and administrative expenses in the Consolidated Statements of Comprehensive Income.

Since the June 1, 2015 acquisition date, the Company’s consolidated statement of comprehensive income for the nine months ended September 30, 2015 includes $341.5 million of net sales and $12.9 million of operating income from the Victory operations.

The following unaudited pro forma consolidated results of operations assume that the acquisition of Victory occurred as of January 1, 2014. The unaudited pro forma consolidated results include the accounting effects of the business combination, including the application of the Company’s accounting policies, amortization of intangible assets and depreciation of equipment related to preliminary fair value adjustments, interest expense on acquisition related debt, elimination of intercompany sales and income tax effects of the adjustments. The pro forma adjustments are directly attributable to the Victory acquisition, factually supportable and are expected to have a continuing impact on the Company’s combined results. Unaudited pro forma data is based on historical information and does not necessarily reflect the actual results that would have occurred, nor is it indicative of future results of operations.

	Nine Months Ended September 30,
	(unaudited)
	2015		2014
Net sales	$	2,402,487	$	2,446,555
Net income	$	93,642	$	147,560
Net income per share - diluted	$	0.96	$	1.51

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4. Planned Maintenance Outages

Planned maintenance outage costs for the three months ended September 30, 2015 and 2014 totaled $4.4 million and $5.2 million, respectively, and are included in cost of sales. As a result of the 2015 outage, production tons were reduced by 2,400 tons.

Planned maintenance outage costs for the nine months ended September 30, 2015 and 2014 totaled $24.1 million and $25.1 million, respectively. As a result of these outages, production tons were reduced by 14,800 tons and 19,700 tons, respectively. Outage costs for the nine months ended September 30, 2015 included an annual planned maintenance outage at the Company’s paper mill in Roanoke Rapids, North Carolina in April 2015. The outage lasted approximately 8 days with a cost of approximately $8.0 million and a 10,400 reduction in tons produced. In 2014, the Roanoke Rapids, North Carolina paper mill planned outage occurred in October over a similar number of days and at a similar cost.

5. Inventories

Inventories consist of the following at September 30, 2015 and December 31, 2014, respectively:

	(unaudited)
	September 30,			December 31,
	2015			2014
Raw materials	$	104,886		$	99,390
Work in process	4,645			3,634
Finished goods	147,800			63,639
Replacement parts and supplies	77,035			70,026
Inventory at FIFO costs	334,366			236,689
LIFO inventory reserves	(110		)	1,640
Inventories	$	334,256		$	238,329

As of September 30, 2015, finished goods inventory included $81.2 million related to Victory.

6. Short-term Borrowings and Long-term Debt

Long-term debt consists of the following at September 30, 2015 and December 31, 2014, respectively:

	(unaudited)
	September 30,			December 31,
	2015			2014
Term loan A-1 under Second Amended and Restated Credit Agreement with interest payable monthly at LIBOR plus 1.75% at September 30, 2015	$	881,250		$	664,125
Term loan A-2 under Second Amended and Restated Credit Agreement with interest payable monthly at LIBOR plus 1.875% at September 30, 2015	469,063			231,113
Receivable Credit Facility with interest payable monthly at LIBOR plus 0.75% at September 30, 2015	261,512			167,000
Total long-term debt	1,611,825			1,062,238
Less unamortized debt issuance costs	(22,155		)	(16,175		)
Long-term debt, net of current portion and debt issuance costs	$	1,589,670		$	1,046,063

KapStone and certain of our subsidiaries are parties to a Second Amended and Restated Credit Agreement dated June 1, 2015 (the “Credit Agreement”), which provided for a senior secured credit facility (the “Credit Facility”) of $1.95 billion, consisting of a Term Loan A-1 in the aggregate amount of $940 million and a Term Loan A-2 in the aggregate amount of $475 million and a $500 million revolving credit facility (the “Revolver”), which includes an accordion feature that provides for, subject to certain significant conditions, up to $600 million of additional commitments.

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Annual principal repayments under the Credit Facility, paid in quarterly installments, are as follows:

Fiscal year ending:
2015	$	—
2016	12,937
2017	51,750
2018	51,750
2019	51,750
2020	994,762
2021	4,750
2022	444,126
Total	$	1,611,825

In 2015, the Company incurred approximately $10.6 million of debt issuance costs associated with the Credit Agreement, which are being amortized using the effective interest method.

In September 2015, the Company made a voluntary prepayment on its term loans under the Credit Facility of $51.8 million and as a result, $0.6 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.

Short-term Borrowings

As of September 30, 2015, the Company had $2.0 million of short-term borrowings with a base interest rate of 4.0 percent under the Revolver and $479.8 million available for additional borrowings.

Receivables Credit Facility

Under our Securitization Program, we sell, on an ongoing basis without recourse, certain trade receivables to KapStone Receivables, LLC (“KAR”), which is considered a wholly-owned, bankruptcy-remote variable interest entity (“VIE”). The Company has the authority to direct the activities of the VIE and, as a result, we have concluded that we maintain control of the VIE, are the primary beneficiary (as defined by accounting guidance) and, therefore, consolidate the account balances of KAR. As of September 30, 2015, $379.7 million of our receivables were sold to KAR. KAR in turn assigns a collateral interest in these receivables to a financial institution under a one-year facility (the “Receivables Credit Facility”) for proceeds of $261.5 million under a $275 million facility. The assets of KAR are not available to us until all obligations of KAR are satisfied in the event of bankruptcy or insolvency proceedings.

In connection with the Victory acquisition, in June 2015 the Company amended its Securitization Program. The Company incurred approximately $0.2 million of debt issuance costs associated with the amendment, which is being amortized using the effective interest method.

In 2014, we used proceeds from the Receivables Credit Facility to prepay $175.0 million of the term loans under our Credit Facility and, as a result, $3.0 million of unamortized debt issuance costs were written-off as a loss on debt extinguishment.

Debt Covenants

Our Credit Agreement governing our Credit Facility contains, among other provisions, covenants with which we must comply. The covenants limit our ability to, among other things, incur indebtedness, create additional liens on our assets, make investments, engage in mergers and acquisitions and sell any assets outside the normal course of business.

As of September 30, 2015, the Company was in compliance with all applicable covenants in the Credit Agreement.

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Fair Value of Debt

As of September 30, 2015, the fair value of the Company’s debt approximates the carrying value of $1.6 billion as the variable interest rates re-price frequently at current market rates. The debt was valued using Level 2 inputs in the fair value hierarchy, which are significant observable inputs including quoted prices for debt of similar terms and maturities. Our weighted-average cost of borrowings was 1.82 percent and 2.00 percent for the nine months ended September 30, 2015 and September 30, 2014, respectively.

Other Borrowing

In 2015 and 2014, the Company entered into short-term financing agreements of $6.6 million and $6.3 million, respectively, at an annual interest rate of 1.70 percent and 1.69 percent, respectively, for its annual property insurance premiums. The 2015 agreement requires the Company to pay three quarterly payments through the term of the financing agreement ending on December 31, 2015. As of September 30, 2015 and 2014, there was $2.2 million and $1.2 million, respectively, outstanding under these agreements which is included in “Other current borrowings” on the Consolidated Balance Sheets.

7. Income Taxes

The Company’s effective income tax rate for the three and nine months ended September 30, 2015 was 32.5 percent and 34.1 percent, respectively, compared to 33.9 percent for both the three and nine months ended September 30, 2014. Our tax rate is affected by recurring items such as state income taxes, as well as discrete items that may occur in any given period, but are not consistent from period to period. In addition to state income taxes, the domestic manufacturing deduction had the most significant impact on the difference between our statutory U.S. federal income tax rate of 35 percent and our effective income tax rate for both periods.

The 2015 third quarter provision for income taxes includes a net $1.1 million favorable discrete adjustment, mainly due to tax legislation enacted during the quarter. The nine months ended September 30, 2015 includes $0.7 million in net favorable discrete adjustments, mainly relating to tax legislation and the Victory Packaging acquisition. The 2014 third quarter provision for income taxes includes a $0.5 million favorable discrete adjustment and the nine months ended September 30, 2014 includes $1.3 million of net favorable discrete adjustments from the resolution of tax audits, the effects from tax legislation and a favorable tax return filing adjustment.

In the normal course of business, the Company is subject to examination by taxing authorities. The Company’s open federal tax years are 2013 and 2014. The Company has open tax years for state income tax filings generally starting in 2011.

8. Net Income per Share

The Company’s basic and diluted net income per share is calculated as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Net income	$	34,206	$	54,254	$	94,562	$	137,812
Weighted-average number of common shares for basic net income per share	96,310,998		95,958,877		96,235,404		95,857,079
Incremental effect of dilutive common stock equivalents:
Unexercised stock options	1,030,234		1,196,617		1,112,767		1,198,418
Unvested restricted stock awards	288,409		360,407		283,076		361,372

Weighted-average number of shares for diluted net income per share	97,629,641		97,515,901		97,631,247		97,416,869

Net income per share - basic	$	0.36	$	0.57	$	0.98	$	1.44
Net income per share - diluted	$	0.35	$	0.56	$	0.97	$	1.41

Approximately 900,000 and 42,000 of unexercised stock options were outstanding at September 30, 2015 and 2014, respectively, but were not included in the computation of diluted earnings per share because the options were anti-dilutive.

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9. Pension Plan and Post-Retirement Benefits

Defined Benefit Plan

Net pension benefit recognized for the three and nine months ended September 30, 2015 and 2014 for the Company’s defined benefit plan (the “Pension Plan”) are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2014			2015			2014
Service cost for benefits earned	$	1,215		$	2,448		$	3,645		$	7,346
Interest cost on projected benefit obligations	6,900			7,180			20,701			21,540
Expected return on plan assets	(10,236		)	(11,030		)	(30,708		)	(33,091		)
Amortization of net loss	533			—			1,601			—
Amortization of prior service cost	69			101			207			302
Net pension benefit - Company plan	(1,519		)	(1,301		)	(4,554		)	(3,903		)
Net pension cost - multi -employer plan	77			82			252			247
Total net pension benefit	$	(1,442	)	$	(1,219	)	$	(4,302	)	$	(3,656	)

KapStone funds the Pension Plan according to IRS funding requirements. Based on those requirements, KapStone funded $1.1 million for the nine months ended September 30, 2015. No additional funding is required for the balance of 2015.

Defined Contribution Plan

We offer a 401(k) Defined Contribution Plan (“Contribution Plan”) to eligible employees. The Company’s monthly contributions are based on the matching of certain employee contributions or based on a union negotiated formula. For the three months ended September 30, 2015 and 2014, the Company recognized expense of $5.5 million and $3.6 million, respectively, for the Company contributions to the Contribution Plan. For the nine months ended September 30, 2015 and 2014, the Company recognized expense of $15.5 million and $11.8 million, respectively, for the Company contributions to the Contribution Plan. The amounts for the three and nine month periods ended September 30, 2015 include $0.5 million and $0.8 million attributable to Victory, respectively. Effective in 2015, Longview Fibre Paper and Packaging, Inc. (“Longview”) salaried personnel received a 401(k) contribution, under the Contribution Plan, rather than a cash balance plan contribution which was included in net pension benefit for the three and nine months ended September 30, 2014.

10. Stock-Based Compensation

In March, 2015, the Company’s compensation committee of the board of directors approved stock-based awards to executive officers, certain employees and directors. In total, 555,451 stock options and 181,590 restricted stock units were awarded.

In May, 2015, the Company’s compensation committee of the board of directors approved new stock awards for certain employees. In total, 7,494 stock options and 2,346 restricted stock units were awarded.

The Company accounts for stock-based awards in accordance with ASC 718, “ Compensation — Stock Compensation ”, which requires that the cost resulting from all share-based payment transactions be recognized as compensation cost over the vesting period based on the fair value of the instrument on the date of grant.

Total stock-based compensation expense related to the stock option and restricted stock unit grants for the three and nine months ended September 30, 2015 and 2014 is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2014		2015		2014
Stock option compensation expense	$	826	$	740	$	4,048	$	2,938
Restricted stock unit compensation expense	759		661		4,074		2,692
Total stock-based compensation expense	$	1,585	$	1,401	$	8,122	$	5,630

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Total unrecognized stock-based compensation cost related to the stock options and restricted stock units as of September 30, 2015 and December 31, 2014 is as follows:

	September 30,		December 31,
	2015		2014
Unrecognized stock option compensation expense	$	4,531	$	3,243
Unrecognized restricted stock unit compensation expense	5,347		3,923
Total unrecognized stock-based compensation expense	$	9,878	$	7,166

As of September 30, 2015, total unrecognized compensation cost related to non-vested stock options and restricted stock units is expected to be recognized over a weighted average period of 2.1 years.

Stock Options

Stock option awards vest as follows: 50% after two years and the remaining 50% upon the earlier of after three years or upon a grantee of such stock options attaining the age 65. The stock options awarded in 2015 have a contractual term of ten years and are subject to forfeiture should the recipient terminate his or her employment with the Company for certain reasons prior to vesting in his or her awards, or the occurrence of certain other events, such as termination with cause. The exercise price of these stock options is based on the closing market price of our common stock on the date of grant ($31.89 for March 2015 awards and $27.44 for May 2015 awards) and compensation expense is recorded on an accelerated basis over the awards’ vesting periods.

The weighted average fair value of the stock options granted in May 2015, March 2015 and March 2014 was $8.59, $10.08 and $10.36, respectively. The fair value was calculated using the Black-Scholes option-pricing model based on the market price at the grant date and the weighted average assumptions specific to the underlying options. The expected term used by the Company is based on the historical average life of stock option awards. The expected volatility assumption is based on the volatility of our common stock from the same time period as the expected term of the stock options. The risk-free interest rate was selected based upon yields of U.S. Treasury issues with a term similar to the expected life of the stock options.

The assumptions utilized for calculating the fair value of stock options during the period are as follows:

	Nine Months Ended September 30,
	2015		2014
Stock Options Black-Scholes assumptions (weighted average):
Expected volatility	39.08	%	39.93	%
Expected life (years)	4.90		4.30
Risk-free interest rate	1.35	%	1.34	%
Expected dividend yield	1.25	%	—	%

The following table summarizes stock options amounts and activity:

			Weighted		Weighted	Intrinsic
			Average		Average	Value
			Exercise		Remaining	(dollars in
	Options		Price		Life (Years)	thousands)
Outstanding at January 1, 2015	2,759,306		$	11.81	6.8	$	48,799
Granted	562,945		31.83
Exercised	(85,802	)	10.11
Forfeited	(41,532	)	24.38
Outstanding at September 30, 2015	3,194,917		$	15.24	6.6	$	18,834
Exercisable at September 30 2015	1,964,951		$	7.46	5.3	$	18,200

There were no options exercised in the three months ended September 30, 2015. For the nine months ended September 30, 2015, cash proceeds from the exercise of stock options totaled $0.8 million. For the three

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and nine months ended September 30, 2014, cash proceeds from the exercise of stock options totaled $0.2 million and $0.6 million, respectively.

Restricted Stock

Restricted stock units are restricted as to transferability until the earlier of their vesting three years from the grant date or a grantee of such restricted stock units attaining the age 65. These restricted stock units are subject to forfeiture should applicable employees terminate their employment with the Company for certain reasons prior to vesting in their awards, or the occurrence of certain other events. The value of these restricted stock units is based on the closing market price of our common stock on the date of grant and compensation expense is recorded on a straight-line basis over the awards’ vesting periods.

The following table summarizes unvested restricted stock units amounts and activity:

			Weighted
			Average
			Grant Date
	Units		Fair Value
Outstanding at January 1, 2015	588,067		$	16.98
Granted	183,936		31.83
Vested	(228,825	)	10.94
Forfeited	(19,491	)	21.61
Outstanding at September 30, 2015	523,687		$	24.75

11. Commitments and Contingencies

Legal Claims

We are from time to time subject to various administrative and legal investigations, claims and proceedings incidental to our business, including environmental and safety matters, labor and employments matters, personal injury claims, contractual disputes and taxes. We establish reserves for claims and proceedings when it is probable that liabilities exist and where reasonable estimates can be made. We also maintain insurance that may limit our financial exposure for defense costs, as well as liability, if any, for claims covered by the insurance (subject also to deductibles and self-insurance amounts). While any investigation, claim or proceeding has an element of uncertainty, and we cannot predict or assure the outcome of any claim or proceeding involving the Company, we believe the outcome of any pending or threatened claim or proceeding (other than those that cannot be assessed due to their preliminary nature), or all of them combined, will not have a material adverse effect on our results of operations, cash flows or financial condition.

There have been no material changes in any of our legal proceedings since December 31, 2014.

Environment Claim

The Company’s subsidiary, Longview, is a potentially responsible party under the Comprehensive Environmental Response, Compensation and Liability Act with respect to the Lower Duwamish Waterway Superfund Site in the State of Washington (the “Site”). The U.S. Environmental Protection Agency (“EPA”) asserts that the Site is contaminated as a result of discharges from various businesses and government entities located along the Lower Duwamish Waterway, including a corrugated converting plant owned and operated by Longview. In November 2014, the EPA issued a Record of Decision (“ROD”) for the Site. The ROD includes a selected remedy for the Site. In the ROD, EPA states that the total estimated net present value costs (discounted at 2.3 percent) for the selected remedy are $342 million. At least 40 potentially responsible parties, including Longview, have entered into an Allocation Agreement. Pursuant to the Allocation Agreement, the parties will attempt to determine each party’s portion of the cost to remediate the site. The allocation process in not expected to be completed until 2017. Based on available information provided to the Company to date, the Company cannot reasonably estimate its potential liability with respect to the site.

Longview Union Contract Status and Work Stoppage

The union contract covering approximately 760 employees at the Longview paper mill expired in June 2014. From July 2014 through early June 2015 the Company negotiated a new contract with the union, but

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could not agree on terms. On June 12, 2015, the union provided a “10 Day Notice,” which made it possible for union employees to go out on legal strike at any time after June 22, 2015.

On August 27, 2015, KapStone received a notice of a work stoppage at the Longview mill from the union. The work stoppage lasted 12 days with a production loss of approximately 29,000 tons. During the 12 day work stoppage, the Company performed certain maintenance work and thereafter commenced operating certain paper machines prior to the union workers return to work. There has been no additional work stoppage since September 7, 2015.

The Longview mill continues to operate without an agreement with the union.

12. Segment Information

Prior to the acquisition of Victory on June 1, 2015, we manufactured and sold packaging products and reported the Company’s consolidated results as one reportable segment. In connection with the acquisition, we began reporting in two reportable segments: Paper and Packaging and Distribution. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies.

Paper and Packaging: This segment manufactures and sells a wide variety of container board, corrugated products and specialty paper for industrial and consumer markets.

Distribution: Through Victory, a North American distributor of packaging materials, and its approximately 70 distribution centers located in the United States, Mexico and Canada, the Company provides packaging materials and related products to a wide variety of customers.

Each segment’s profits and losses are measured on operating profits before foreign exchange gains / (losses), net interest expense and income taxes.

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	Net Sales											Depreciation				Total assets
Three Months Ended September 30, 2015	Trade		Inter- segment			Total			Operating Income (Loss)			and Amortization		Capital Expenditures		at September 30, 2015
Paper and Packaging (a)	$	559,435	$	7,628		$	567,063		$	60,185		$	36,059	$	25,448	$	2,524,562
Distribution	248,128		—			248,128			11,139			5,522		1,283		683,555
Corporate	—		—			—			(9,728		)	919		4,453		41,818
Intersegment eliminations	—		(7,628		)	(7,628		)	—			—		—		—
	$	807,563	$	—		$	807,563		$	61,596		$	42,500	$	31,184	$	3,249,935

	Net Sales									Depreciation				Total assets
Three Months Ended September 30, 2014	Trade		Inter- segment		Total		Operating Income (Loss)			and Amortization		Capital Expenditures		at September 30, 2014
Paper and Packaging	$	598,106	$	—	$	598,106	$	102,291		$	34,244	$	38,179	$	2,669,499
Distribution (a)	—		—		—		—			—		—		—
Corporate	—		—		—		(8,129		)	753		512		126,748
Intersegment eliminations	—		—		—		—			—		—
	$	598,106	$	—	$	598,106	$	94,162		$	34,997	$	38,691	$	2,796,247

	Net Sales											Depreciation
Nine Months Ended September 30, 2015	Trade		Inter- segment			Total			Operating Income (Loss)			and Amortization		Capital Expenditures
Paper and Packaging	$	1,683,581	$	8,416		$	1,691,997		$	190,321		$	104,723	$	81,954
Distribution (a)	341,526		—			341,526			12,859			7,467		1,526
Corporate	—		—			—			(32,826		)	2,427		11,415
Intersegment eliminations	—		(8,416		)	(8,416		)	—			—		—
	$	2,025,107	$	—		$	2,025,107		$	170,354		$	114,617	$	94,895

	Net Sales									Depreciation
Nine Months Ended September 30, 2014	Trade		Inter- segment		Total		Operating Income (Loss)			and Amortization		Capital Expenditures
Paper and Packaging	$	1,737,507	$	—	$	1,737,507	$	264,133		$	99,103	$	107,059
Distribution (a)	—		—		—		—			—		—
Corporate	—		—		—		(26,540		)	2,477		5,308
Intersegment eliminations	—		—		—		—
	$	1,737,507	$	—	$	1,737,507	$	237,593		$	101,580	$	112,367

(a) Results for the nine months September 30, 2015, include Victory for the period of June 1 through September 30, 2015 and is included in the Distribution segment.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to known and unknown risks, uncertainties and assumptions about us that may cause our actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “could,” “would,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “continue,” or the negative of such terms or other similar expressions. Factors that might cause or contribute to such a discrepancy include, but are not limited to, those described in Part I Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 and in our other Securities and Exchange Commission filings. The information contained in this Form 10-Q represents our best judgment at the date of this report based on information currently available. In providing forward-looking statements, KapStone does not intend, and does not undertake any duty or obligation, to update its statements as a result of new information, future events or otherwise.

The following discussion should be read in conjunction with our Consolidated Financial Statements and related Notes thereto included elsewhere in this report.

Comparison of Results of Operations for the Three Months Ended September 30, 2015 and 2014

(In thousands)

	Three Months Ended September 30,						Increase/
	2015			2014			(Decrease)

Paper and packaging	$	567,063		$	598,106		$	(31,043	)
Distribution	248,128			—			248,128
Intersegment Eliminations	(7,628		)	—			(7,628		)
Net sales	$	807,563		$	598,106		$	209,457
Paper and packaging	60,185			102,291			(42,106		)
Distribution	11,139			—			11,139
Corporate	(9,728		)	(8,129		)	(1,599		)
Operating income	$	61,596		$	94,162		$	(32,566	)
Foreign exchange loss	766			960			(194		)
Loss on debt extinguishment	628			2,963			(2,335		)
Interest expense, net	9,528			8,099			1,429
Income before taxes	50,674			82,140			(31,854		)
Provision for income taxes	16,468			27,886			(11,418		)
Net income	$	34,206		$	54,254		$	(20,436	)

Consolidated net sales for the quarter ended September 30, 2015 were $807.6 million compared to $598.1 million for the third quarter of 2014, an increase of $209.5 million, or 35.0 percent. The increase in net sales was driven primarily by the Victory acquisition on June 1, 2015, which accounted for $248.1 million.

Paper and Packaging segment net sales decreased by $31.0 million to $567.1 for the quarter ended September 30, 2015, due to $16.5 million of lower volume primarily due to the Longview mill work stoppage, $9.4 million of lower prices and a less favorable product mix, $2.8 million due to a stronger U.S. dollar compared to the Euro and $2.3 million due to lower other sales. Average mill selling price per ton for the quarter ended September 30, 2015 was $671 compared to $689 for the prior year’s quarter reflecting a stronger U.S. dollar compared to the Euro, lower export containerboard prices and a less favorable product mix partially offset by higher domestic kraft paper prices.

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Paper and Packaging segment sales to external customers by product line were as follows:

	Three Months Ended September 30,
	Net Sales (in thousands)				Increase/					Tons Sold			Increase/
Product Line Revenue:	2015		2014		(Decrease)			%		2015		2014	(Decrease)		%
Containerboard / Corrugated products	$	365,844	$	392,886	$	(27,042	)	(6.9	)%	434,193		470,099	(35,906	)	(7.6	)%
Specialty paper	179,451		180,725		(1,274		)	(0.7	)%	253,051		244,986	8,065		3.3	%
Other	21,768		24,495		(2,727		)	(11.1	)%	(8,823	)	—	(8,823	)	100.0	%
Product sold	$	567,063	$	598,106	$	(31,043	)	(5.2	)%	678,421		715,085	(36,664	)	(5.1	)%

Tons of product sold for the quarter ended September 30, 2015 was 678,421 tons compared to 715,085 tons for the quarter ended September 30, 2014, a decrease of 36,664 tons, or 5.1 percent, as follows:

· Containerboard sales decreased by 36,894 tons to 200,694 tons, primarily due to the Longview mill work stoppage and 34,000 ton increase in demand from the Company’s corrugated products manufacturing plants. Corrugated products sales volume increased 988 tons, or 0.4 percent (or approximately 1.8 percent on a MSF basis).

· Specialty paper sales volume increased by 8,065 tons to 253,051 tons, primarily due to higher kraft paper shipments of 6,611 tons, or 4.7 percent, and higher Durasorb ® shipments of 3,466 tons, or 5.6 percent, partially offset by lower roll pulp.

Distribution segment net sales of $248.1 million reflect sales for Victory, which the Company acquired on June 1, 2015.

Cost of sales, excluding depreciation and amortization expense, for the quarter ended September 30, 2015 was $569.3 million compared to $388.6 million for the third quarter of 2014, an increase of $180.7 million, or 46.5 percent. The increase in cost of sales was mainly due to the $178.7 million impact of the Victory acquisition. Excluding the acquisition, cost of sales increased by $2.0 million, or 0.5 percent, due to $14.1 million caused by the Longview mill work stoppage, $6.1 million of inflation and $3.2 million of higher other input costs. These cost increases were partially offset by $17.4 million of lower sales volume and $4.0 million of productivity gains. Planned maintenance outage costs of approximately $4.4 million and $5.2 million are in cost of sales for the quarters ended September 30, 2015 and 2014, respectively.

Depreciation and amortization expense for the quarter ended September 30, 2015 totaled $42.5 million compared to $35.0 million for the quarter ended September 30, 2014. The increase of $7.5 million was primarily due to $5.5 million from the Victory acquisition, including $4.7 million of amortization expense for acquired intangible assets, $1.0 million as the result of higher capital spending and $1.0 million of accelerated depreciation for two boilers at the Longview mill.

Freight and distribution expenses for the quarter ended September 30, 2015 totaled $70.6 million compared to $46.2 million for the quarter ended September 30, 2014. The increase of $24.4 million was primarily due to $24.0 million from the Victory acquisition and $0.5 million for premium freight charges related to the Longview mill work stoppage. Lower fuel costs of $0.7 million offset the cost of customer mix.

Selling, general and administrative expenses for the quarter ended September 30, 2015 totaled $63.6 million compared to $34.1 million for the quarter ended September 30, 2014. The increase of $29.5 million, or 86.5 percent, was primarily due to $28.2 million for Victory direct selling and administrative expenses. Excluding the Victory acquisition, selling, general and administrative expenses increased by $1.3 million, or 3.7 percent. The increase in selling, general and administrative expenses was mainly due to $1.9 million of Victory acquisition related expenses and $0.9 million of inflation on compensation and benefits, partially offset by $1.2 million of lower management incentives and $0.4 million of lower Longview integration costs. For the quarter ended September 30, 2015, selling, general and administrative expenses as a percentage of net sales increased to 7.6 percent from 5.7 percent in the quarter ended September 30, 2014.

Loss on debt extinguishment for the quarters ended September 30, 2015 and 2014 totaled $0.6 million and $3.0 million, respectively, due to a $51.8 million prepayment on the term loans under the Credit Facility in the quarter ended September 30, 2015 and a $175.0 million prepayment for the quarter ended September 30, 2014.

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Net interest expense for the quarters ended September 30, 2015 and 2014 was $9.5 million and $8.1 million, respectively. Interest expense reflects interest on the outstanding borrowings under the Credit Facility and the Receivables Credit Facility and amortization of debt issuance costs. Interest expense was $1.4 million higher in the quarter ended September 30, 2015, primarily due to higher term loan balances associated with the Victory acquisition.

Provision for income taxes for the quarters ended September 30, 2015 and 2014 was $16.5 million and $27.9 million, respectively, reflecting an effective income tax rate of 32.5 percent for the quarter ended September 30, 2015, compared to 33.9 percent for the similar period in 2014. The lower provision for income taxes in 2015 primarily reflects lower pre-tax income of $31.5 million and a net favorable discrete tax adjustment of $1.1 million due to state tax legislation enacted during the quarter.

Comparison of Results of Operations for the Nine Months Ended September 30, 2015 and 2014

(In thousands)

	Nine Months Ended September 30,						Increase/
	2015			2014			(Decrease)

Paper and packaging	$	1,691,997		$	1,737,507		$	(45,510	)
Distribution	341,526			—			341,526
Intersegment Eliminations	(8,416		)	—			(8,416		)
Net sales	$	2,025,107		$	1,737,507		$	287,600
Paper and packaging	190,321			264,133			(73,812		)
Distribution	12,859			—			12,859
Corporate	(32,826		)	(26,540		)	(6,286		)
Operating income	$	170,354		$	237,593		$	(67,239	)
Foreign exchange loss	1,704			859			845
Loss on debt extinguishment	628			2,963			(2,335		)
Interest expense, net	24,456			25,299			(843		)
Income before taxes	143,566			208,472			(63,216		)
Provision for income taxes	49,004			70,660			(21,656		)
Net income	$	94,562		$	137,812		$	(41,560	)

Consolidated net sales for the nine months ended September 30, 2015 were $2,025.1 million compared to $1,737.5 million for the nine months of 2014, an increase of $287.6 million, or 16.6 percent. The increase in net sales was driven primarily by the Victory acquisition, which accounted for $341.5 million of net sales.

Paper and Packaging segment net sales of $1,692.0 million decreased by $45.5 million from the prior year due to $19.2 million of lower volume primarily due to the Longview mill work stoppage and higher demand from the Company’s c orrugated products manufacturing plants, $14.9 million of lower prices and a less favorable product mix, $9.1 million due to a stronger U.S. dollar compared to the Euro and $2.3 million due to lower other sales. Average mill selling price per ton for the nine months ended September 30, 2015 was $673 compared to $686 for the prior period, reflecting a stronger U.S. dollar compared to the Euro, lower containerboard prices and a less favorable product mix, partially offset by higher domestic kraft paper prices.

Paper and Packaging segment sales to external customers by product line were as follows:

	Nine Months Ended September 30,
	Net Sales (in thousands)				Increase/					Tons Sold			Increase/
Product Line Revenue:	2015		2014		(Decrease)			%		2015		2014	(Decrease)		%
Containerboard / Corrugated products	$	1,076,731	$	1,102,046	$	(25,315	)	(2.3	)%	1,290,921		1,326,539	(35,618	)	(2.7	)%
Specialty paper	548,157		562,811		(14,654		)	(2.6	)%	767,688		781,660	(13,972	)	(1.8	)%
Other	67,109		72,650		(5,541		)	(7.6	)%	(9,478	)	—	(9,478	)	100.0	%
Product sold	$	1,691,997	$	1,737,507	$	(45,510	)	(2.6	)%	2,049,131		2,108,199	(59,068	)	(2.8	)%

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Tons of product sold for the nine months ended September 30, 2015 was 2,049,131 tons compared to 2,108,199 tons for the nine months ended September 30, 2014, a decrease of 59,068 tons, or 2.8 percent, as follows:

· Containerboard tons sold decreased by 50,192 tons, primarily due the Longview mill work stoppage in the third quarter and higher demand from the Company’s corrugated products manufacturing plants. Corrugated products sales volumes increased by 14,574 tons, or 2.3 percent (or approximately 3.7 percent on a MSF basis), compared to 2014.

· Specialty paper sales volume decreased by 13,972 tons to 767,688 tons, primarily due to lower kraft paper export shipments of 25,370 tons, or 24.4 percent. 2014 volumes were higher as customers ordered ahead of an announced $50 per ton kraft paper price increase.

Distribution segment net sales of $341.5 million reflect sales for Victory, which the Company acquired on June 1, 2015.

Cost of sales, excluding depreciation and amortization expense, for the nine months ended September 30, 2015 was $1,421.9 million compared to $1,164.1 million for the nine months of 2014, an increase of $257.8 million, or 22.1 percent. The increase in cost of sales was mainly due to the $251.4 million impact of the Victory acquisition, including $5.8 million of inventory step-up expense. Excluding the acquisition, cost of sales increased by $6.4 million, or 0.5 percent, due to $14.1 million caused by the Longview mill work stoppage, $13.1 million of inflation and $3.1 million of higher other input costs. These costs were partially offset by $21.5 million of lower sales volume and $2.4 million of lower severance charges. Planned maintenance outage costs of approximately $24.1 million and $25.1 million were included in cost of sales for the nine months ended September 30, 2015 and 2014, respectively.

Depreciation and amortization expense for the nine months ended September 30, 2015 totaled $114.6 million compared to $101.6 million for the nine months ended September 30, 2014. The increase of $13.0 million was primarily due to $7.4 million from the Victory acquisition, including $6.3 million of amortization expense for acquired intangible assets, $3.4 million as the result of higher capital spending and $2.2 million of accelerated depreciation for two boilers at the Longview mill.

Freight and distribution expenses for the nine months ended September 30, 2015 totaled $167.9 million compared to $131.8 million for the nine months ended September 30, 2014. The increase of $36.1 million was primarily due to $32.5 million from the Victory acquisition and $6.7 million due to product and customer mix, which was partially offset by $3.1 million of lower fuel costs.

Selling, general and administrative expenses for the nine months ended September 30, 2015 totaled $150.3 million compared to $102.4 million for the nine months ended September 30, 2014. The increase of $47.9 million, or 46.8 percent, includes $37.4 million for Victory direct selling and administrative expenses. Excluding Victory, selling, general and administrative expenses increased by $10.5 million due to $4.5 million of Victory acquisition expenses, $3.5 million of higher compensation and benefit related expenses, $2.5 million of higher stock based compensation expense, $0.9 million of higher legal expenses and $0.6 million bad debt expense, partially offset by $1.4 million of lower Longview integration expenses. For the nine months ended September 30, 2015, selling, general and administrative expenses as a percentage of net sales increased to 7.4 percent from 5.9 percent in the nine months ended September 30, 2014.

Loss on debt extinguishment for the nine months ended September 30, 2015 and 2014 totaled $0.6 million and $3.0 million, respectively, due to a $51.8 million prepayment on the term loans under the Credit Facility in the quarter ended September 30, 2015 and a $175.0 million prepayment for the quarter ended September 30, 2014.

Net interest expense for the nine months ended September 30, 2015 and 2014 was $24.5 million and $25.3 million, respectively. Interest expense reflects interest on the outstanding borrowings under the Credit Facility and the Receivables Credit Facility and amortization of debt issuance costs. Interest expense was $0.8 million lower in the nine months ended September 30, 2015, primarily due to lower borrowings under the term loans for the first five months of 2015 and lower interest rates on the term loans and the Receivables Credit Facility.

Provision for income taxes for the nine months ended September 30, 2015 and 2014 was $49.0 million and $70.7 million, respectively, reflecting an effective income tax rate of 34.1 percent for the nine months ended September 30, 2015, compared to 33.9 percent for the similar period in 2014. The lower provision for income taxes in 2015 primarily reflects lower pre-tax income of $64.9 million.

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Liquidity and Capital Resources

Acquisition

On June 1, 2015, the Company purchased all of the partnership interests in Victory for $615 million in cash and $2.0 million for working capital adjustments. In the quarter ended September 30, 2015 the Company paid an additional $0.5 million related to post-closing working capital adjustments. The Company will also be obligated to pay up to an additional $25.0 million of contingent consideration in cash to the former owners of Victory if certain performance criteria are satisfied during the thirty months following the closing. As of September 30, 2015, the contingent consideration is included in other non-current liabilities on the Company’s Consolidated Balance Sheets at a fair value of $11.7 million.

Credit Facility

In conjunction with the Victory acquisition, the Company entered into the Credit Agreement, which provided for a senior secured credit facility in an initial aggregate principal amount of $1.915 billion, consisting of a Term Loan A-1 in the aggregate amount of $940.0 million, a Term Loan A-2 in the aggregate amount of $475.0 million and the Revolver consisting of $500.0 million (including a $75.0 million letter of credit sub-facility and a $45.0 million swing line loan sub-facility). The Credit Facility also includes an “accordion” feature that allows the Company, subject to certain significant terms and conditions, to increase the commitments under the Credit Facility to the extent that is shall maintain a pro forma total leverage ratio equal to or less than 2.5 to 1.00 and otherwise by up to $600.0 million. The incremental borrowings from the Credit Agreement, consisting of proceeds from Term Loan A-1, Term Loan A-2, and $115.0 million of borrowings under the Revolver were used to finance the Company’s acquisition of Victory and pay certain transaction fees and expenses.

Depending on the type of borrowing, the applicable interest rate under the Credit Facility is calculated at a per annum rate equal to (a) LIBOR plus an applicable margin or (b) the base rate that is calculated as (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.50% or (z) a daily rate equal to one month LIBOR plus 1% plus (ii) an applicable margin. The unused portion of the Revolver is subject to an unused fee that is calculated at a per annum rate (the “Unused Fee Rate”), which initially is 0.30%.

Commencing with the delivery of the financial statements for the quarter ending September 30, 2015, the applicable margin for borrowings under the Credit Facility and the Unused Fee Rate will be determined by reference to the pricing grid based on the Company’s total leverage ratio. Under such pricing grid, the applicable margins for Term Loan A-1 and Revolver will range from 1.00% to 1.75% for Eurodollar loans and from 0.00% to 0.75% for base rate loans and the Unused Fee Rate will range from 0.20% to 0.30%. The applicable margins for Term Loan A-2 will range from 1.125% to 1.875% for Eurodollar loans and from 0.125% to 0.875% for base rate loans.

Annual principal repayments under the Credit Facility, paid in quarterly installments, are as follows:

Fiscal year ending:
2015	$	—
2016	12,937
2017	51,750
2018	51,750
2019	51,750
2020	994,762
2021	4,750
2022	444,126
Total	$	1,611,825

As of September 30, 2015, the Company had $479.8 million available for borrowings under the Revolver.

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Receivables Credit Facility

As of September 30, 2015, the Company had $261.5 million of outstanding borrowings under its $275 million Receivables Credit Facility at an interest rate of 0.9 percent.

Other Borrowing

In January 2015, the Company entered into a short-term financing agreement of $6.6 million at an annual interest rate of 1.70 percent for its annual property insurance premiums. The agreement requires the Company to pay three quarterly payments through the term of the financing agreement ending on December 1, 2015. As of September 30, 2015, there was $2.2 million outstanding under the current agreement.

Debt Covenants

The Company must comply on a quarterly basis with the financial covenants of its Credit Agreement, including a maximum permitted leverage ratio. The leverage ratio is calculated by dividing the Company’s debt net of available cash by its rolling twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments. The maximum permitted leverage ratio declines over the life of the Credit Agreement. On September 30, 2015, the maximum permitted leverage ratio was 4.50 to 1.00. On September 30, 2015, the Company was in compliance with a leverage ratio of 3.5 to 1.00.

The Credit Agreement also includes a financial covenant requiring a minimum interest coverage ratio. This ratio is calculated by dividing the Company’s trailing twelve month total earnings before interest expense, taxes, depreciation and amortization and allowable adjustments by the sum of our net cash interest payments during the twelve month period. For the quarter ended September 30, 2015, the interest coverage ratio was required to be at least 3.00 to 1.00. On September 30, 2015, the Company was in compliance with the Credit Agreement with an interest coverage ratio of 14.0 to 1.00.

As of September 30, 2015, KapStone was also in compliance with all other covenants in the Credit Agreement.

Income taxes

The Company’s effective income tax rate, excluding discrete items for 2015, is projected to be 34.6 percent. The cash tax rate for 2015 is projected to be 35.0 percent.

Sources and Uses of Cash

Nine months ended September 30 (in thousands)	2015			2014			Incr / (Dcr)
Operating activities	$	176,648		$	206,049		$	(29,401	)
Investing activities	(711,941		)	(112,367		)	(599,574		)
Financing activities	514,593			(1,000		)	515,593
Total change in cash and cash equivalents	$	(20,700	)	$	92,682		$	(113,382	)

Cash and cash equivalents decreased by $20.7 million from December 31, 2014, reflecting $176.6 million of net cash provided by operating activities, $711.9 million of net cash used in investing activities and $514.6 million of net cash provided by financing activities in the first nine months of 2015.

Net cash provided by operating activities was $176.6 million, comprised of net income for the first nine months of $94.6 million and non-cash charges of $124.2 million. Changes in operating assets and liabilities used $42.2 million of cash. Net cash provided by operating activities decreased by $29.4 million in the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, mainly due to a $43.3 million decrease in net income and an $8.6 million increase in cash used for working capital, partially offset by higher non-cash charges of $22.5 million. The increase in cash used for working capital in the nine months ended September 30, 2015 is primarily due to higher trade accounts receivables and lower accounts payable.

Net cash used in investing activities includes $617.0 million for the Victory acquisition and $94.9 million for capital expenditures. Net cash used in investing activities increased by $599.6 million in the nine

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months ended September 30, 2015 compared to the first nine months of 2014, primarily due to the Victory acquisition, partially offset by $17.5 million of lower capital spending.

Net cash provided by financing activities was $514.6 million, reflecting $519.8 million of additional borrowings under the Credit Agreement, $94.5 million of net borrowings under the Receivables Credit Facility, $2.0 million of net short-term borrowings under the Revolver and $2.2 million of net proceeds from other current borrowings for our annual property insurance premiums. These borrowings were partially offset by $51.8 million prepayment on the term loans under the Credit Facility, $29.1 million of dividend payments, $12.9 million principal payments on the term loans and $10.8 million of debt issuance costs for the Credit Agreement. Net cash provided by financing activities increased by $515.6 million in the nine months ended September 30, 2015, compared to the nine months ended September 30, 2014, primarily due to net borrowings to finance the Victory acquisition, partially offset by the cash dividend payments.

Future Cash Needs

The Company expects that cash generated from operating activities will be sufficient to meet its remaining 2015 cash needs. The cash needs consist of $9.6 million for a cash dividend payment on October 13, 2015 and any additional working capital needs. In addition, capital expenditures for the full year are estimated at $130.0 to $135.0 million.

Should the need arise, we have the ability to draw from our $500.0 million Revolver. In addition, if available and subject to specified significant conditions, we may have the ability to put in place and borrow under our $600.0 million accordion provision of our Revolver. As of September 30, 2015, we have $479.8 million available for borrowings under our Revolver.

Contractual Obligations

In September, 2015 the Company signed two non-cancellable contracts to outsource the construction of a facility to produce wood chips for use at the Company’s Charleston mill at an estimated cost of $38.5 million and processing of wood chips for twenty years with an annual purchase obligation of approximately $6.0 million.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet financing arrangements. The Company established a special purpose entity in connection with the Receivables Credit Facility, which is consolidated as part of our financial statements. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

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ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk is the sensitivity of income to changes in interest rates, commodity prices, equity prices and other market-driven rates or prices.

Under our Credit Agreement, at September 30, 2015 we have an outstanding Credit Facility consisting of two term loans totaling approximately $1.4 billion outstanding and the Revolver that provides for borrowing of up to $500 million. Depending on the type of borrowing, the applicable interest rate under the Credit Facility is calculated at a per annum rate equal to (a) LIBOR plus an applicable margin or (b) the base rate that is calculated as (i) the greatest of (x) the prime rate, (y) the federal funds effective rate plus 0.50% or (z) a daily rate equal to one month LIBOR plus 1% plus (ii) an applicable margin. The unused portion of the Revolver is also subject to the Unused Fee Rate.

The applicable margin for borrowings under the Credit Facility and the Unused Fee Rate is determined by reference to the pricing grid based on the Company’s total leverage ratio. Under such pricing grid, the applicable margins for Term Loan A-1 and Revolver ranges from 1.0% to 1.75% for Eurodollar loans and from 0.0% to 0.75% for base rate loans and the Unused Fee Rate ranges from 0.20% to 0.30%. The applicable margins for Term Loan A-2 ranges from 1.125% to 1.875% for Eurodollar loans and from 0.125% to 0.875% for base rate loans. At September 30, 2015 the weighted average interest rate of the term loans was 1.99 percent.

Under our Receivables Credit Facility, at September 30, 2015 we have $261.5 million of outstanding borrowings. The outstanding capital of each investment in the receivable interests shall accrue yield for each day at a rate per annum equal to the sum of (a) for any day, the one-month Eurodollar rate for U.S. dollar deposits plus (b) the applicable margin. At September 30, 2015 the interest rate on outstanding amounts under the Receivables Credit Facility was 0.9 percent.

Changes in market rates may impact the base or LIBOR rate under all borrowings. For instance, if the LIBOR rate was to increase or decrease by one percentage point (1.0%), our annual interest expense would change by approximately $16.4 million based upon our expected future monthly term loan balances per our existing repayment schedule and the Receivables Credit Facility.

We are exposed to price fluctuations of certain commodities used in production. Key raw materials and energy used in the production process include roundwood and woodchips, old corrugated containers, fuel oil, electricity and caustic soda. We purchase these raw materials and energy at market prices, and do not use forward contracts or other financial instruments to hedge our exposure to price risk related to these commodities.

We are exposed to price fluctuations in the price of our finished goods. The prices we charge for our products are primarily based on market conditions.

We are exposed to currency fluctuations as we invoice certain European customers in Euros and Mexican customers in Pesos. The Company did not use forward contracts to reduce the impact of currency fluctuations during the quarter ended September 30, 2015. No such contracts were outstanding at September 30, 2015.

ITEM 4.

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, our Chief Executive Officer and our Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.

There were no changes in our internal control over financial reporting during the three months ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. — OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

There have been no material changes in the legal proceedings described in our Form 10-K for the year ended December 31, 2014.

ITEM 1A.

RISK FACTORS

With the exception of the following updates to the risk factors relating to the Victory acquisition and collective bargaining agreements, there have been no material changes from the Risk Factors described in our Form 10-K for the year ended December 31, 2014 (“Form 10-K”). Each of the Risk Factors below should be read in conjunction with the Risk Factors and information disclosed in our Form 10-K.

The anticipated benefits of the Victory Packaging L.P. and its subsidiaries (“Victory”)acquisition may not be realized.

We expect that the Victory acquisition would result in various benefits including, among others, enhanced revenues and cash flows, an additional distribution channel for the Company’s converting facilities and corrugated box products and increased mill vertical integration. In addition, we expect the acquisition of Victory to allow the Company to allocate more linerboard production to converting operations and reduce exposure to the relatively lower price export sales of linerboard, expand and optimize our linerboard and medium production capabilities, strengthen the Company’s design and packaging capabilities, enhance our logistics and vendor managed inventory experience and expand our converting and corrugated box presence nationally. The acquisition presents challenges to management, including the integration of operations, information systems, properties and personnel of Victory and our existing operations. Achieving the anticipated benefits of the acquisition is subject to a number of uncertainties, including, but not limited to, whether we can retain the Victory management team and integrate our business and the Victory business in an efficient and effective manner. Failure to achieve these anticipated benefits could result in increased costs, decreases in the amount of expected revenues and diversion of management’s time and energy and could materially and adversely impact our business, financial condition and operating results.

If we fail to extend or renegotiate the collective bargaining agreements as they expire from time to time, or if our unionized employees were to engage in a strike or other work stoppage, our business, operating results and financial condition could be materially harmed.

Most of our hourly paid employees are represented by trade unions. We are a party to collective bargaining contracts which apply to approximately 875 employees at various corrugating manufacturing plants, 760 employees at the Longview mill, 560 employees at the North Charleston mill, and 365 employees at the Roanoke Rapids mill. No assurance can be given that we will be able to successfully extend or renegotiate the collective bargaining agreements as they expire from time to time. Currently, there is a collective bargaining agreement in effect with respect to Roanoke Rapids through August 2016. The Longview union contract expired in June 2014 and the North Charleston contract expired in June 2015. We experienced a 12-day work stoppage at Longview from August 27, 2015 until September 8, 2015 when the union employees returned to work without a contract.

If we are unable to extend or negotiate new agreements without work stoppages, it could negatively impact our ability to manufacture our products and adversely affect our business results of operations and financial condition. In addition, we can give no assurances that the recent Longview work stoppage is any indication of the duration and impact on our business or results of operations of any future work stoppage.

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

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ITEM 4.

MINE SAFETY DISCLOSURES

None.

ITEM 5.

OTHER INFORMATION

None.

ITEM 6.

EXHIBITS

The following Exhibits are filed as part of this report.

Exhibit No.		Description
10.1		KapStone Paper and Packaging Corporation Deferred Compensation Plan for Non-Employee Directors, together with adoption agreement effective as of January 1, 2016.*

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101.INS		XBRL Instance Document.

101.SCH		XBRL Taxonomy Extension Schema.

101.CAL		XBRL Taxonomy Extension Calculation Linkbase.

101.DEF		XBRL Taxonomy Extension Definition Linkbase.

101.LAB		XBRL Taxonomy Extension Label Linkbase.

101.PRE		XBRL Extension Presentation Linkbase.

* Management compensatory plan or arrangement.

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SIGNATURE

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	KAPSTONE PAPER AND PACKAGING CORPORATION


October 28, 2015	By:	/s/ Andrea K. Tarbox
		Andrea K. Tarbox
		Vice President and Chief Financial Officer (duly authorized officer and principal financial officer)

Exhibit 10.1

KapStone Paper and Packaging Corporation Deferred Compensation Plan for Non-Employee Directors

January 1, 2016

IMPORTANT NOTE

This document has not been approved by the Department of Labor, Internal Revenue Service or any other governmental entity. An adopting Employer must determine whether the Plan is subject to the Federal securities laws and the securities laws of the various states. An adopting Employer may not rely on this document to ensure any particular tax consequences or to ensure that the Plan is “unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees” under Title I of the Employee Retirement Income Security Act of 1974, as amended, with respect to the Employer’s particular situation. Fidelity Employer Services Company, its affiliates and employees cannot provide you with legal advice in connection with the execution of this document. This document should be reviewed by the Employer’s attorney prior to execution.

March 2012

TABLE OF CONTENTS

PREAMBLE

ARTICLE 1 — GENERAL

1.1 Plan

1.2 Effective Dates

1.3 Amounts Not Subject to Code Section 409A

ARTICLE 2 — DEFINITIONS

2.1 Account

2.2 Administrator

2.3 Adoption Agreement

2.4 Beneficiary

2.5 Board or Board of Directors

2.6 Bonus

2.7 Change in Control

2.8 Code

2.9 Compensation

2.10 Director

2.11 Disability

2.12 Eligible Employee

2.13 Employer

2.14 ERISA

2.15 Identification Date

2.16 Key Employee

2.17 Participant

2.18 Plan

2.19 Plan Sponsor

2.20 Plan Year

2.21 Related Employer

2.22 Retirement

2.23 Separation from Service

2.24 Unforeseeable Emergency

2.25 Valuation Date

2.26 Years of Service

ARTICLE 3 — PARTICIPATION

3.1 Participation

3.2 Termination of Participation

ARTICLE 4 — PARTICIPANT ELECTIONS

4.1 Deferral Agreement

4.2 Amount of Deferral

4.3 Timing of Election to Defer

4.4 Election of Payment Schedule and Form of Payment

ARTICLE 5 — EMPLOYER CONTRIBUTIONS

5.1 Matching Contributions

5.2 Other Contributions

ARTICLE 6 — ACCOUNTS AND CREDITS

6.1 Establishment of Account

6.2 Credits to Account

ARTICLE 7 — INVESTMENT OF CONTRIBUTIONS

7.1 Investment Options

7.2 Adjustment of Accounts

ARTICLE 8 — RIGHT TO BENEFITS

8.1 Vesting

8.2 Death

8.3 Disability

ARTICLE 9 — DISTRIBUTION OF BENEFITS

9.1 Amount of Benefits

9.2 Method and Timing of Distributions

9.3 Unforeseeable Emergency

9.4 Payment Election Overrides

9.5 Cashouts of Amounts Not Exceeding Stated Limit

9.6 Required Delay in Payment to Key Employees

9.7 Change in Control

9.8 Permissible Delays in Payment

9.9 Permitted Acceleration of Payment

ARTICLE 10 — AMENDMENT AND TERMINATION

10.1 Amendment by Plan Sponsor

10.2 Plan Termination Following Change in Control or Corporate Dissolution

10.3 Other Plan Terminations

ARTICLE 11 — THE TRUST

11.1 Establishment of Trust

11.2 Rabbi Trust

11.3 Investment of Trust Funds

ARTICLE 12 — PLAN ADMINISTRATION

12.1 Powers and Responsibilities of the Administrator

12.2 Claims and Review Procedures

12.3 Plan Administrative Costs

ARTICLE 13 — MISCELLANEOUS

13.1 Unsecured General Creditor of the Employer

13.2 Employer’s Liability

13.3 Limitation of Rights

13.4 Anti-Assignment

13.5 Facility of Payment

13.6 Notices

13.7 Tax Withholding

13.8 Indemnification

13.9 Successors

13.10 Disclaimer

13.11 Governing Law

iii

PREAMBLE

The Plan is intended to be a “plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, or an “excess benefit plan” within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended, or a combination of both. The Plan is further intended to conform with the requirements of Internal Revenue Code Section 409A and the final regulations issued thereunder and shall be interpreted, implemented and administered in a manner consistent therewith.

ARTICLE 1 — GENERAL

1.1 Plan. The Plan will be referred to by the name specified in the Adoption Agreement.

1.2 Effective Dates.

(a) Original Effective Date. The Original Effective Date is January 1, 2016.

(b) Amendment Effective Date. The Amendment Effective Date is the date specified in the Adoption Agreement as of which the Plan is amended and restated. Except to the extent otherwise provided herein or in the Adoption Agreement, the Plan shall apply to amounts deferred and benefit payments made on or after the Amendment Effective Date.

(c) Special Effective Date. A Special Effective Date may apply to any given provision if so specified in Appendix A of the Adoption Agreement. A Special Effective Date will control over the Original Effective Date or Amendment Effective Date, whichever is applicable, with respect to such provision of the Plan.

1.3 Amounts Not Subject to Code Section 409A

Except as otherwise indicated by the Plan Sponsor in Section 1.01 of the Adoption Agreement, amounts deferred before January 1, 2005 that are earned and vested on December 31, 2004 will be separately accounted for and administered in accordance with the terms of the Plan as in effect on December 31, 2004.

1- 1

ARTICLE 2 — DEFINITIONS

Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

2.1 “Account” means an account established for the purpose of recording amounts credited on behalf of a Participant and any income, expenses, gains, losses or distributions included thereon. The Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant or to the Participant’s Beneficiary pursuant to the Plan.

2.2 “Administrator” means the person or persons designated by the Plan Sponsor in Section 1.05 of the Adoption Agreement to be responsible for the administration of the Plan. If no Administrator is designated in the Adoption Agreement, the Administrator is the Plan Sponsor.

2.3 “Adoption Agreement” means the agreement adopted by the Plan Sponsor that establishes the Plan.

2.4 “Beneficiary” means the persons, trusts, estates or other entities entitled under Section 8.2 to receive benefits under the Plan upon the death of a Participant.

2.5 “Board” or “Board of Directors” means the Board of Directors of the Plan Sponsor.

2.6 “Bonus” means an amount of incentive remuneration payable by the Employer to a Participant.

2.7 “Change in Control” means the occurrence of an event involving the Plan Sponsor that is described in Section 9.7.

2.8 “Code” means the Internal Revenue Code of 1986, as amended.

2.9 “Compensation” has the meaning specified in Section 3.01 of the Adoption Agreement.

2.10 “Director” means a non-employee member of the Board who has been designated by the Employer as eligible to participate in the Plan.

2- 1

2.11 “Disability” means a determination by the Administrator that the Participant is either (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer. A Participant will be considered to have incurred a Disability if he is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.

2.12 “Eligible Employee” means an employee of the Employer who satisfies the requirements in Section 2.01 of the Adoption Agreement.

2.13 “Employer” means the Plan Sponsor and any other entity which is authorized by the Plan Sponsor to participate in and, in fact, does adopt the Plan.

2.14 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.15 “Identification Date” means the date as of which Key Employees are determined which is specified in Section 1.06 of the Adoption Agreement.

2.16 “Key Employee” means an employee who satisfies the conditions set forth in Section 9.6.

2.17 “Participant” means an Eligible Employee or Director who commences participation in the Plan in accordance with Article 3.

2.18 “Plan” means the unfunded plan of deferred compensation set forth herein, including the Adoption Agreement and any trust agreement, as adopted by the Plan Sponsor and as amended from time to time.

2.19 “Plan Sponsor” means the entity identified in Section 1.03 of the Adoption Agreement or any successor by merger, consolidation or otherwise.

2.20 “Plan Year” means the period identified in Section 1.02 of the Adoption Agreement.

2.21 “Related Employer” means the Employer and (a) any corporation that is a member of a controlled group of corporations as defined in Code Section 414(b) that includes the Employer and (b) any trade or business that is under common control as defined in Code Section 414(c) that includes the Employer.

2- 2

2.22 “Retirement” has the meaning specified in 6.01(f) of the Adoption Agreement.

2.23 “Separation from Service” means the date that the Participant dies, retires or otherwise has a termination of employment with respect to all entities comprising the Related Employer. A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed six months or such longer period during which the Participant’s right to re-employment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to re-employment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six-month period. If the period of leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where the impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29 month period of absence may be substituted for the six month period.

Whether a termination of employment has occurred is based on whether the facts and circumstances indicate that the Related Employer and the Participant reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Participant would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period (or the full period of services to the Related Employer if the employee has been providing services to the Related Employer for less than 36 months).

An independent contractor is considered to have experienced a Separation from Service with the Related Employer upon the expiration of the contract (or, in the case of more than one contract, all contracts) under which services are performed for the Related Employer if the expiration constitutes a good-faith and complete termination of the contractual relationship.

If a Participant provides services as both an employee and an independent contractor of the Related Employer, the Participant must separate from service both as an employee and as an independent contractor to be treated as having incurred a Separation from Service. If a Participant ceases providing services as an independent contractor and begins providing services as an employee, or ceases providing services as an employee and begins providing services as an independent

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contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services in both capacities.

If a Participant provides services both as an employee and as a member of the board of directors of a corporate Related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as a director are not taken into account in determining whether the Participant has incurred a Separation from Service as an employee for purposes of a nonqualified deferred compensation plan in which the Participant participates as an employee that is not aggregated under Code Section 409A with any plan in which the Participant participates as a director.

If a Participant provides services both as an employee and as a member of the board of directors of a corporate related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as an employee are not taken into account in determining whether the Participant has experienced a Separation from Service as a director for purposes of a nonqualified deferred compensation plan in which the Participant participates as a director that is not aggregated under Code Section 409A with any plan in which the Participant participates as an employee.

All determinations of whether a Separation from Service has occurred will be made in a manner consistent with Code Section 409A and the final regulations thereunder.

2.24 “Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Code Section 152, without regard to Code section 152(b)(1), (b)(2) and (d)(1)(B); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

2.25 “Valuation Date” means each business day of the Plan Year that the New York Stock Exchange is open.

2.26 “Years of Service” means each one year period for which the Participant receives service credit in accordance with the provisions of Section 7.01(d) of the Adoption Agreement.

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ARTICLE 3 — PARTICIPATION

3.1 Participation. The Participants in the Plan shall be those Directors and employees of the Employer who satisfy the requirements of Section 2.01 of the Adoption Agreement.

3.2 Termination of Participation. The Administrator may terminate a Participant’s participation in the Plan in a manner consistent with Code Section 409A. If the Employer terminates a Participant’s participation before the Participant experiences a Separation from Service the Participant’s vested Accounts shall be paid in accordance with the provisions of Article 9.

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ARTICLE 4 — PARTICIPANT ELECTIONS

4.1 Deferral Agreement. If permitted by the Plan Sponsor in accordance with Section 4.01 of the Adoption Agreement, each Eligible Employee and Director may elect to defer his Compensation within the meaning of Section 3.01 of the Adoption Agreement by executing in writing or electronically, a deferral agreement in accordance with rules and procedures established by the Administrator and the provisions of this Article 4.

A new deferral agreement must be timely executed for each Plan Year during which the Eligible Employee or Director desires to defer Compensation. An Eligible Employee or Director who does not timely execute a deferral agreement shall be deemed to have elected zero deferrals of Compensation for such Plan Year.

A deferral agreement may be changed or revoked during the period specified by the Administrator. Except as provided in Section 9.3 or in Section 4.01(c) of the Adoption Agreement, a deferral agreement becomes irrevocable at the close of the specified period.

4.2 Amount of Deferral. An Eligible Employee or Director may elect to defer Compensation in any amount permitted by Section 4.01(a) of the Adoption Agreement.

4.3 Timing of Election to Defer. Each Eligible Employee or Director who desires to defer Compensation otherwise payable during a Plan Year must execute a deferral agreement within the period preceding the Plan Year specified by the Administrator. Each Eligible Employee who desires to defer Compensation that is a Bonus must execute a deferral agreement within the period preceding the Plan Year during which the Bonus is earned that is specified by the Administrator, except that if the Bonus can be treated as performance based compensation as described in Code Section 409A(a)(4)(B)(iii), the deferral agreement may be executed within the period specified by the Administrator, which period, in no event, shall end after the date which is six months prior to the end of the period during which the Bonus is earned, provided the Participant has performed services continuously from the later of the beginning of the performance period or the date the performance criteria are established through the date the Participant executed the deferral agreement and provided further that the compensation has not yet become ‘readily ascertainable’ within the meaning of Reg. Sec 1.409A-2(a)(8). In addition, if the Compensation qualifies as ‘fiscal year compensation’ within the meaning of Reg. Sec. 1.409A-2(a)(6), the deferral agreement may be made not later than the

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end of the Employer’s taxable year immediately preceding the first taxable year of the Employer in which any services are performed for which such Compensation is payable.

Except as otherwise provided below, an employee who is classified or designated as an Eligible Employee during a Plan Year or a Director who is designated as eligible to participate during a Plan Year may elect to defer Compensation otherwise payable during the remainder of such Plan Year in accordance with the rules of this Section 4.3 by executing a deferral agreement within the thirty (30) day period beginning on the date the employee is classified or designated as an Eligible Employee or the date the Director is designated as eligible, whichever is applicable, if permitted by Section 4.01(b)(ii) of the Adoption Agreement. If Compensation is based on a specified performance period that begins before the Eligible Employee or Director executes his deferral agreement, the election will be deemed to apply to the portion of such Compensation equal to the total amount of Compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election becomes irrevocable and effective over the total number of days in the performance period. The rules of this paragraph shall not apply unless the Eligible Employee or Director can be treated as initially eligible in accordance with Reg. Sec. 1.409A-2(a)(7).

4.4 Election of Payment Schedule and Form of Payment.

All elections of a payment schedule and a form of payment will be made in accordance with rules and procedures established by the Administrator and the provisions of this Section 4.4.

(a) If the Plan Sponsor has elected to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director completes a deferral agreement, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for the Compensation subject to the deferral agreement from among the options the Plan Sponsor has made available for this purpose and which are specified in 6.01(b) of the Adoption Agreement. Prior to the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director shall elect a distribution event (which includes a specified time) and a form of payment for any Employer contributions that may be credited to the Participant’s Account during the Plan Year. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service as the distribution event. If he fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

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(b) If the Plan Sponsor has elected not to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director first completes a deferral agreement but in no event later than the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for amounts credited to his Account from among the options the Plan Sponsor has made available for this purpose and which are specified in Section 6.01(b) of the Adoption Agreement. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service in the distribution event. If the fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

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ARTICLE 5 — EMPLOYER CONTRIBUTIONS

5.1 Matching Contributions. If elected by the Plan Sponsor in Section 5.01(a) of the Adoption Agreement, the Employer will credit the Participant’s Account with a matching contribution determined in accordance with the formula specified in Section 5.01(a) of the Adoption Agreement. The matching contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(a)(iii) of the Adoption Agreement.

5.2 Other Contributions. If elected by the Plan Sponsor in Section 5.01(b) of the Adoption Agreement, the Employer will credit the Participant’s Account with a contribution determined in accordance with the formula or method specified in Section 5.01(b) of the Adoption Agreement. The contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(b)(iii) of the Adoption Agreement.

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ARTICLE 6 — ACCOUNTS AND CREDITS

6.1 Establishment of Account. For accounting and computational purposes only, the Administrator will establish and maintain an Account on behalf of each Participant which will reflect the credits made pursuant to Section 6.2, distributions or withdrawals, along with the earnings, expenses, gains and losses allocated thereto, attributable to the hypothetical investments made with the amounts in the Account as provided in Article 7. The Administrator will establish and maintain such other records and accounts, as it decides in its discretion to be reasonably required or appropriate to discharge its duties under the Plan.

6.2 Credits to Account. A Participant’s Account will be credited for each Plan Year with the amount of his elective deferrals under Section 4.1 at the time the amount subject to the deferral election would otherwise have been payable to the Participant and the amount of Employer contributions treated as allocated on his behalf under Article 5.

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ARTICLE 7 — INVESTMENT OF CONTRIBUTIONS

7.1 Investment Options. The amount credited to each Account shall be treated as invested in the investment options designated for this purpose by the Administrator.

7.2 Adjustment of Accounts. The amount credited to each Account shall be adjusted for hypothetical investment earnings, expenses, gains or losses in an amount equal to the earnings, expenses, gains or losses attributable to the investment options selected by the party designated in Section 9.01 of the Adoption Agreement from among the investment options provided in Section 7.1. If permitted by Section 9.01 of the Adoption Agreement, a Participant (or the Participant’s Beneficiary after the death of the Participant) may, in accordance with rules and procedures established by the Administrator, select the investments from among the options provided in Section 7.1 to be used for the purpose of calculating future hypothetical investment adjustments to the Account or to future credits to the Account under Section 6.2 effective as of the Valuation Date coincident with or next following notice to the Administrator. Each Account shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical earnings, expenses, gains and losses described above; (b) amounts credited pursuant to Section 6.2; and (c) distributions or withdrawals. In addition, each Account may be adjusted for its allocable share of the hypothetical costs and expenses associated with the maintenance of the hypothetical investments provided in Section 7.1.

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ARTICLE 8 — RIGHT TO BENEFITS

8.1 Vesting. A Participant, at all times, has a 100% nonforfeitable interest in the amounts credited to his Account attributable to his elective deferrals made in accordance with Section 4.1.

A Participant’s right to the amounts credited to his Account attributable to Employer contributions made in accordance with Article 5 shall be determined in accordance with the relevant schedule and provisions in Section 7.01 of the Adoption Agreement. Upon a Separation from Service and after application of the provisions of Section 7.01 of the Adoption Agreement, the Participant shall forfeit the nonvested portion of his Account.

8.2 Death. The Plan Sponsor may elect to accelerate vesting upon the death of the Participant in accordance with Section 7.01(c) of the Adoption Agreement and/or to accelerate distributions upon Death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement. If the Plan Sponsor does not elect to accelerate distributions upon death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the vested amount credited to the Participant’s Account will be paid in accordance with the provisions of Article 9.

A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries in accordance with rules and procedures established by the Administrator.

A copy of the death notice or other sufficient documentation must be filed with and approved by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant’s vested Account, such amount will be paid to his estate (such estate shall be deemed to be the Beneficiary for purposes of the Plan) in accordance with the provisions of Article 9.

8.3 Disability. If the Plan Sponsor has elected to accelerate vesting upon the occurrence of a Disability in accordance with Section 7.01(c) of the Adoption Agreement and/or to permit distributions upon Disability in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the determination of whether a Participant has incurred a Disability shall be made by the Administrator in its sole discretion in a manner consistent with the requirements of Code Section 409A.

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ARTICLE 9 — DISTRIBUTION OF BENEFITS

9.1 Amount of Benefits. The vested amount credited to a Participant’s Account as determined under Articles 6, 7 and 8 shall determine and constitute the basis for the value of benefits payable to the Participant under the Plan.

9.2 Method and Timing of Distributions. Except as otherwise provided in this Article 9, distributions under the Plan shall be made in accordance with the elections made or deemed made by the Participant under Article 4. Subject to the provisions of Section 9.6 requiring a six month delay for certain distributions to Key Employees, distributions following a payment event shall commence at the time specified in Section 6.01(a) of the Adoption Agreement. If permitted by Section 6.01(g) of the Adoption Agreement, a Participant may elect, at least twelve months before a scheduled distribution event, to delay the payment date for a minimum period of sixty months from the originally scheduled date of payment, provided the election does not take effect for at least twelve months from the date on which the election is made. The distribution election change must be made in accordance with procedures and rules established by the Administrator. The Participant may, at the same time the date of payment is deferred, change the form of payment but such change in the form of payment may not effect an acceleration of payment in violation of Code Section 409A or the provisions of Reg. Sec. 1.409A-2(b). For purposes of this Section 9.2, a series of installment payments is always treated as a single payment and not as a series of separate payments.

9.3 Unforeseeable Emergency. A Participant may request a distribution due to an Unforeseeable Emergency if the Plan Sponsor has elected to permit Unforeseeable Emergency withdrawals under Section 8.01(a) of the Adoption Agreement. The request must be in writing and must be submitted to the Administrator along with evidence that the circumstances constitute an Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence it deems necessary to determine whether a distribution is warranted, and may require the Participant to certify that the need cannot be met from other sources reasonably available to the Participant. Whether a Participant has incurred an Unforeseeable Emergency will be determined by the Administrator on the basis of the relevant facts and circumstances in its sole discretion, but, in no event, will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets to the extent such liquidation would not itself cause severe financial hardship, or (c) by cessation of deferrals under the Plan. A distribution due to an

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Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need and may include any amounts necessary to pay any federal, state, foreign or local income taxes and penalties reasonably anticipated to result from the distribution. The distribution will be made in the form of a single lump sum cash payment. If permitted by Section 8.01(b) of the Adoption Agreement, a Participant’s deferral elections for the remainder of the Plan Year will be cancelled upon a withdrawal due to an Unforeseeable Emergency. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with Section 9.6 at the time he experiences an Unforeseeable Emergency, the amount being delayed shall not be subject to the provisions of this Section 9.3 until the expiration of the six month period of delay required by section 9.6.

9.4 Payment Election Overrides . If the Plan Sponsor has elected one or more payment election overrides in accordance with Section 6.01(d) of the Adoption Agreement, the following provisions apply. Upon the occurrence of the first event selected by the Plan Sponsor, the remaining vested amount credited to the Participant’s Account shall be paid in the form designated to the Participant or his Beneficiary regardless of whether the Participant had made different elections of time and /or form of payment or whether the Participant was receiving installment payments at the time of the event.

9.5 Cashouts Of Amounts Not Exceeding Stated Limit. If the vested amount credited to the Participant’s Account does not exceed the limit established for this purpose by the Plan Sponsor in Section 6.01(e) of the Adoption Agreement at the time he incurs a Separation from Service for any reason, the Employer shall distribute such amount to the Participant at the time specified in Section 6.01(a) of the Adoption Agreement in a single lump sum cash payment following such Separation from Service regardless of whether the Participant had made different elections of time or form of payment as to the vested amount credited to his Account or whether the Participant was receiving installments at the time of such termination. A Participant’s Account, for purposes of this Section 9.5, shall include any amounts described in Section 1.3.

9.6 Required Delay in Payment to Key Employees . Except as otherwise provided in this Section 9.6, a distribution made on account of Separation from Service (or Retirement, if applicable) to a Participant who is a Key Employee as of the date of his Separation from Service (or Retirement, if applicable) shall not be made before the date which is six months after the Separation from Service (or Retirement, if applicable). If payments to a Key Employee are delayed in accordance with this Section 9.6, the payments to which the Key Employee would otherwise have been entitled

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during the six month period shall be accumulated and paid in a single lump sum at the time specified in Section 6.01(a) of the Adoption Agreement after the six month period elapses.

(a) A Participant is treated as a Key Employee if (i) he is employed by a Related Employer any of whose stock is publicly traded on an established securities market, and (ii) he satisfies the requirements of Code Section 416(i)(1)(A)(i), (ii) or (iii), determined without regard to Code Section 416(i)(5), at any time during the twelve month period ending on the Identification Date.

(b) A Participant who is a Key Employee on an Identification Date shall be treated as a Key Employee for purposes of the six month delay in distributions for the twelve month period beginning on the first day of a month no later than the fourth month following the Identification Date. The Identification Date and the effective date of the delay in distributions shall be determined in accordance with Section 1.06 of the Adoption Agreement.

(c) The Plan Sponsor may elect to apply an alternative method to identify Participants who will be treated as Key Employees for purposes of the six month delay in distributions if the method satisfies each of the following requirements. The alternative method is reasonably designed to include all Key Employees, is an objectively determinable standard providing no direct or indirect election to any Participant regarding its application, and results in either all Key Employees or no more than 200 Key Employees being identified in the class as of any date. Use of an alternative method that satisfies the requirements of this Section 9.6(c ) will not be treated as a change in the time and form of payment for purposes of Reg. Sec. 1.409A-2(b).

( d) The six month delay does not apply to payments described in Section 9.9(a),(b) or (d) or to payments that occur after the death of the Participant. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with this Section 9.6 at the time he incurs a Disability which would otherwise require a distribution under the terms of the Plan, no amount shall be paid until the expiration of the six month period of delay required by this Section 9.6.

9.7 Change in Control. If the Plan Sponsor has elected to permit distributions upon a Change in Control, the following provisions shall apply. A distribution made upon a Change in Control will be made at the time specified in Section 6.01(a) of the Adoption Agreement in the form

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elected by the Participant in accordance with the procedures described in Article 4. Alternatively, if the Plan Sponsor has elected in accordance with Section 11.02 of the Adoption Agreement to require distributions upon a Change in Control, the Participant’s remaining vested Account shall be paid to the Participant or the Participant’s Beneficiary at the time specified in Section 6.01(a) of the Adoption Agreement as a single lump sum payment. A Change in Control, for purposes of the Plan, will occur upon a change in the ownership of the Plan Sponsor, a change in the effective control of the Plan Sponsor or a change in the ownership of a substantial portion of the assets of the Plan Sponsor, but only if elected by the Plan Sponsor in Section 11.03 of the Adoption Agreement. The Plan Sponsor, for this purpose, includes any corporation identified in this Section 9.7. All distributions made in accordance with this Section 9.7 are subject to the provisions of Section 9.6.

If a Participant continues to make deferrals in accordance with Article 4 after he has received a distribution due to a Change in Control, the residual amount payable to the Participant shall be paid at the time and in the form specified in the elections he makes in accordance with Article 4 or upon his death or Disability as provided in Article 8.

Whether a Change in Control has occurred will be determined by the Administrator in accordance with the rules and definitions set forth in this Section 9.7. A distribution to the Participant will be treated as occurring upon a Change in Control if the Plan Sponsor terminates the Plan in accordance with Section 10.2 and distributes the Participant’s benefits within twelve months of a Change in Control as provided in Section 10.3.

(a) Relevant Corporations. To constitute a Change in Control for purposes of the Plan, the event must relate to (i) the corporation for whom the Participant is performing services at the time of the Change in Control, (ii) the corporation that is liable for the payment of the Participant’s benefits under the Plan (or all corporations liable if more than one corporation is liable) but only if either the deferred compensation is attributable to the performance of services by the Participant for such corporation (or corporations) or there is a bona fide business purpose for such corporation (or corporations) to be liable for such payment and, in either case, no significant purpose of making such corporation (or corporations) liable for such payment is the avoidance of federal income tax, or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a shareholder owning more than fifty percent (50%) of the total

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fair market value and voting power of such corporation.

(b) Stock Ownership. Code Section 318(a) applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation Section 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option.

(c) Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. If any one person or more than one person acting as a group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as discussed below in Section 9.7(d)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 9.7(c) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of this Section 9.7(c), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

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(d) Change in the effective control of a corporation. A change in the effective control of a corporation occurs on the date that either (i) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing fifty percent (50%) or more of the total voting power of the stock of such corporation, or (ii) a majority of members of the corporation’s board of directors is replaced during any twelve month period by directors whose appointment or election is not endorsed by a at least two-thirds of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this paragraph (ii), the term corporation refers solely to the relevant corporation identified in Section 9.7(a) for which no other corporation is a majority shareholder for purposes of Section 9.7(a). In the absence of an event described in Section 9.7(d)(i) or (ii), a change in the effective control of a corporation will not have occurred. A change in effective control may also occur in any transaction in which either of the two corporations involved in the transaction has a change in the ownership of such corporation as described in Section 9.7(c) or a change in the ownership of a substantial portion of the assets of such corporation as described in Section 9.7(e). If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of this Section 9.7(d), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation or to cause a change in the ownership of the corporation within the meaning of Section 9.7(c). For purposes of this Section 9.7(d), persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in Section 9.7(c) with the following exception. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(e) Change in the ownership of a substantial portion of a corporation’s assets. A change in the ownership of a substantial portion of a corporation’s assets occurs on the date that any one person, or more than one person acting as a group (as determined in accordance with rules similar to those set forth in Section 9.7(d)), acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value

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equal to or more than forty percent (50%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation or the value of the assets being disposed of determined without regard to any liabilities associated with such assets. There is no Change in Control event under this Section 9.7(e) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 9.7(e)(iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets.

9.8 Permissible Delays in Payment. Distributions may be delayed beyond the date payment would otherwise occur in accordance with the provisions of Articles 8 and 9 in any of the following circumstances as long as the Employer treats all payments to similarly situated Participants on a reasonably consistent basis.

(a) The Employer may delay payment if it reasonably anticipates that its deduction with respect to such payment would be limited or eliminated by the application of Code Section 162(m). Payment must be made during the Participant’s first taxable year in which the Employer reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year the deduction of such payment will not be barred by the application of Code Section 162(m) or during the period beginning with the Participant’s Separation from Service and ending on the later of the last day of the Employer’s taxable year in which the Participant separates from service or the 15th day of the third month following the Participant’s Separation from Service. If a scheduled payment to a Participant is delayed in accordance with this Section 9.8(a), all scheduled payments to the Participant that could be delayed in accordance with this Section 9.8(a) will also be delayed.

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(b) The Employer may also delay payment if it reasonably anticipates that the making of the payment will violate federal securities laws or other applicable laws provided payment is made at the earliest date on which the Employer reasonably anticipates that the making of the payment will not cause such violation.

(c) The Employer reserves the right to amend the Plan to provide for a delay in payment upon such other events and conditions as the Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.

9.9 Permitted Acceleration of Payment . The Employer may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan provided such acceleration would be permitted by the provisions of Reg. Sec. 1.409A-3(j)(4), including the following events:

(a) Domestic Relations Order. A payment may be accelerated if such payment is made to an alternate payee pursuant to and following the receipt and qualification of a domestic relations order as defined in Code Section 414(p).

(b) Compliance with Ethics Agreements and Legal Requirements. A payment may be accelerated as may be necessary to comply with ethics agreements with the Federal government or as may be reasonably necessary to avoid the violation of Federal, state, local or foreign ethics law or conflicts of laws, in accordance with the requirements of Code Section 409A.

(c) De Minimis Amounts. A payment will be accelerated if (i) the amount of the payment is not greater than the applicable dollar amount under Code Section 402(g)(1)(B), (ii) at the time the payment is made the amount constitutes the Participant’s entire interest under the Plan and all other plans that are aggregated with the Plan under Reg. Sec. 1.409A-1(c)(2).

(d) FICA Tax. A payment may be accelerated to the extent required to pay the Federal Insurance Contributions Act tax imposed under Code Sections 3101, 3121(a) and 3121(v)(2) of the Code with respect to compensation deferred under the Plan (the “FICA Amount”). Additionally, a payment may be accelerated to pay the income tax on wages imposed under Code Section 3401 of the Code on the FICA Amount and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes. The total payment under this subsection (d) may not exceed the aggregate of the FICA Amount and the income tax withholding related to the FICA Amount.

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(e) Section 409A Additional Tax. A payment may be accelerated if the Plan fails to meet the requirements of Code Section 409A; provided that such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.

(f) Offset. A payment may be accelerated in the Employer’s discretion as satisfaction of a debt of the Participant to the Employer, where such debt is incurred in the ordinary course of the service relationship between the Participant and the Employer, the entire amount of the reduction in any of the Employer’s taxable years does not exceed $5,000, and the reduction is made at the same time and in the same amount as the debt otherwise would have been due and collected from the Participant.

(g) Other Events. A payment may be accelerated in the Administrator’s discretion in connection with such other events and conditions as permitted by Code Section 409A.

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ARTICLE 10 — AMENDMENT AND TERMINATION

10.1 Amendment by Plan Sponsor. The Plan Sponsor reserves the right to amend the Plan (for itself and each Employer) through action of its Board of Directors. No amendment can directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of his Account which had accrued and vested prior to the amendment.

10.2 Plan Termination Following Change in Control or Corporate Dissolution. If so elected by the Plan Sponsor in 11.01 of the Adoption Agreement, the Plan Sponsor reserves the right to terminate the Plan and distribute all amounts credited to all Participant Accounts within the 30 days preceding or the twelve months following a Change in Control as determined in accordance with the rules set forth in Section 9.7. For this purpose, the Plan will be treated as terminated only if all agreements, methods, programs and other arrangements sponsored by the Related Employer immediately after the Change in Control which are treated as a single plan under Reg. Sec. 1.409A-1(c)(2) are also terminated so that all participants under the Plan and all similar arrangements are required to receive all amounts deferred under the terminated arrangements within twelve months of the date the Plan Sponsor irrevocably takes all necessary action to terminate the arrangements. In addition, the Plan Sponsor reserves the right to terminate the Plan within twelve months of a corporate dissolution taxed under Code Section 331 or with the approval of a bankruptcy court pursuant to 11 U. S. C. Section 503(b)(1)(A) provided that amounts deferred under the Plan are included in the gross incomes of Participants in the latest of (a) the calendar year in which the termination and liquidation occurs, (b) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture, or (c) the first calendar year in which payment is administratively practicable.

10.3 Other Plan Terminations. The Plan Sponsor retains the discretion to terminate the Plan if (a) all arrangements sponsored by the Plan Sponsor that would be aggregated with any terminated arrangement under Code Section 409A and Reg. Sec. 1.409A-1(c)(2) are terminated, (b) no payments other than payments that would be payable under the terms of the arrangements if the termination had not occurred are made within twelve months of the termination of the arrangements, (c) all payments are made within twenty-four months of the date the Plan Sponsor takes all necessary action to irrevocably terminate and liquidate the arrangements, (d) the Plan Sponsor does not adopt a new arrangement that would be aggregated with any terminated arrangement under Code Section 409A and the regulations thereunder at any time within the three year period following the date of termination of the arrangement, and (e) the termination does not occur proximate to a downturn in the financial health

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of the Plan sponsor. The Plan Sponsor also reserves the right to amend the Plan to provide that termination of the Plan will occur under such conditions and events as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin.

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ARTICLE 11 — THE TRUST

11.1 Establishment of Trust. The Plan Sponsor may but is not required to establish a trust to hold amounts which the Plan Sponsor may contribute from time to time to correspond to some or all amounts credited to Participants under Section 6.2. In the event that the Plan Sponsor wishes to establish a trust to provide a source of funds for the payment of Plan benefits, any such trust shall be constructed to constitute an unfunded arrangement that does not affect the status of the Plan as an unfunded plan for purposes of Title I of ERISA and the Code. If the Plan Sponsor elects to establish a trust in accordance with Section 10.01 of the Adoption Agreement, the provisions of Sections 11.2 and 11.3 shall become operative.

11.2 Rabbi Trust. Any trust established by the Plan Sponsor shall be between the Plan Sponsor and a trustee pursuant to a separate written agreement under which assets are held, administered and managed, subject to the claims of the Plan Sponsor’s creditors in the event of the Plan Sponsor’s insolvency. The trust is intended to be treated as a rabbi trust in accordance with existing guidance of the Internal Revenue Service, and the establishment of the trust shall not cause the Participant to realize current income on amounts contributed thereto. The Plan Sponsor must notify the trustee in the event of a bankruptcy or insolvency.

11.3 Investment of Trust Funds. Any amounts contributed to the trust by the Plan Sponsor shall be invested by the trustee in accordance with the provisions of the trust and the instructions of the Administrator. Trust investments need not reflect the hypothetical investments selected by Participants under Section 7.1 for the purpose of adjusting Accounts and the earnings or investment results of the trust need not affect the hypothetical investment adjustments to Participant Accounts under the Plan.

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ARTICLE 12 — PLAN ADMINISTRATION

12.1 Powers and Responsibilities of the Administrator. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a) To make and enforce such rules and procedures as it deems necessary or proper for the efficient administration of the Plan;

(b) To interpret the Plan, its interpretation thereof to be final, except as provided in Section 12.2, on all persons claiming benefits under the Plan;

(d) To administer the claims and review procedures specified in Section 12.2;

(e) To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;

(f) To determine the person or persons to whom such benefits will be paid;

(g) To authorize the payment of benefits;

(h) To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA;

(i) To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;

(j) By written instrument, to allocate and delegate its responsibilities, including the formation of an Administrative Committee to administer the Plan.

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12.2 Claims and Review Procedures.

(a) Claims Procedure.

If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial, (ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the person’s right to bring a civil action following an adverse decision on review. Such notification will be given within 90 days (45 days in the case of a claim regarding Disability) after the claim is received by the Administrator. The Administrator may extend the period for providing the notification by 90 days (30 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the claim and if written notice of such extension and circumstance is given to such person within the initial 90 day period (45 day period in the case of a claim regarding Disability). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim.

(b) Review Procedure.

Within 60 days (180 days in the case of a claim regarding Disability) after the date on which a person receives a written notification of denial of claim (or, if written notification is not provided, within 60 days (180 days in the case of a claim regarding Disability) of the date denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The notification will explain that the person is entitled to receive, upon request and free of charge,

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reasonable access to and copies of all pertinent documents and has the right to bring a civil action following an adverse decision on review. The decision on review will be made within 60 days (45 days in the case of a claim regarding Disability). The Administrator may extend the period for making the decision on review by 60 days (45 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the request such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period (45 days in the case of a claim regarding Disability). If the decision on review is not made within such period, the claim will be considered denied.

No action at law or equity shall be brought more than one (1) year after the Administrator’s affirmation of a denial of a claim, or, if earlier, more than four (4) years after the facts or events giving rising to the claimant’s allegation(s) or claim(s) first occurred.

12.3 Plan Administrative Costs. All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator in administering the Plan shall be paid by the Plan to the extent not paid by the Employer.

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ARTICLE 13 — MISCELLANEOUS

13.1 Unsecured General Creditor of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Employer. For purposes of the payment of benefits under the Plan, any and all of the Employer’s assets shall be, and shall remain, the general, unpledged, unrestricted assets of the Employer. Each Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

13.2 Employer’s Liability . Each Employer’s liability for the payment of benefits under the Plan shall be defined only by the Plan and by the deferral agreements entered into between a Participant and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as provided by the Plan and a deferral agreement or agreements. An Employer shall have no liability to Participants employed by other Employers.

13.3 Limitation of Rights . Neither the establishment of the Plan, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to the Participant or any other person any legal or equitable right against the Employer, the Plan or the Administrator, except as provided herein; and in no event will the terms of employment or service of the Participant be modified or in any way affected hereby.

13.4 Anti-Assignment . Except as may be necessary to fulfill a domestic relations order within the meaning of Code Section 414(p), none of the benefits or rights of a Participant or any Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the fullest extent permitted by law, all such benefits and rights shall be free from attachment, garnishment, or any other legal or equitable process available to any creditor of the Participant and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she may expect to receive, contingently or otherwise, under the Plan, except the right to designate a Beneficiary to receive death benefits provided hereunder. Notwithstanding the preceding, the benefit payable from a Participant’s Account may be reduced, at the discretion of the administrator, to satisfy any debt or liability to the Employer.

13.5 Facility of Payment . If the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may

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direct the Employer to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Employer , the Plan and the Administrator for the payment of benefits hereunder to such recipient.

13.6 Notices . Any notice or other communication to the Employer or Administrator in connection with the Plan shall be deemed delivered in writing if addressed to the Plan Sponsor at the address specified in Section 1.03 of the Adoption Agreement and if either actually delivered at said address or, in the case or a letter, 5 business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified.

13.7 Tax Withholding . If the Employer concludes that tax is owing with respect to any deferral or payment hereunder, the Employer shall withhold such amounts from any payments due the Participant or from amounts deferred, as permitted by law, or otherwise make appropriate arrangements with the Participant or his Beneficiary for satisfaction of such obligation. Tax, for purposes of this Section 13.7 means any federal, state, local or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any earnings thereon, and any payments made to Participants under the Plan.

13.8 Indemnification . (a) Each Indemnitee (as defined in Section 13.8(e)) shall be indemnified and held harmless by the Employer for all actions taken by him and for all failures to take action (regardless of the date of any such action or failure to take action), to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated, against all expense, liability, and loss (including, without limitation, attorneys’ fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Indemnitee in connection with any Proceeding (as defined in Subsection (e)). No indemnification pursuant to this Section shall be made, however, in any case where (1) the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness or (2) there is a settlement to which the Employer does not consent.

(b) The right to indemnification provided in this Section shall include the right to have the expenses incurred by the Indemnitee in defending any Proceeding paid by the Employer in advance of the final disposition of the Proceeding, to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated; provided that, if such law requires, the payment of such expenses incurred by the Indemnitee in advance of the final disposition of a Proceeding shall be made only on delivery to the Employer of

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an undertaking, by or on behalf of the Indemnitee, to repay all amounts so advanced without interest if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified under this Section or otherwise.

(c) Indemnification pursuant to this Section shall continue as to an Indemnitee who has ceased to be such and shall inure to the benefit of his heirs, executors, and administrators. The Employer agrees that the undertakings made in this Section shall be binding on its successors or assigns and shall survive the termination, amendment or restatement of the Plan.

(d) The foregoing right to indemnification shall be in addition to such other rights as the Indemnitee may enjoy as a matter of law or by reason of insurance coverage of any kind and is in addition to and not in lieu of any rights to indemnification to which the Indemnitee may be entitled pursuant to the by-laws of the Employer.

(e) For the purposes of this Section, the following definitions shall apply:

(1) “Indemnitee” shall mean each person serving as an Administrator (or any other person who is an employee, director, or officer of the Employer) who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any Proceeding, by reason of the fact that he is or was performing administrative functions under the Plan.

(2) “Proceeding” shall mean any threatened, pending, or completed action, suit, or proceeding (including, without limitation, an action, suit, or proceeding by or in the right of the Employer), whether civil, criminal, administrative, investigative, or through arbitration.

13.9 Successors . The provisions of the Plan shall bind and inure to the benefit of the Plan Sponsor, the Employer and their successors and assigns and the Participant and the Participant’s designated Beneficiaries.

13. 10 Disclaimer. It is the Plan Sponsor’s intention that the Plan comply with the requirements of Code Section 409A. Neither the Plan Sponsor nor the Employer shall have any liability to any Participant should any provision of the Plan fail to satisfy the requirements of Code Section 409A.

13. 11 Governing Law . The Plan will be construed, administered and enforced according to the laws of the State specified by the Plan Sponsor in Section 12.01 of the Adoption Agreement.

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1.01 PREAMBLE

By the execution of this Adoption Agreement the Plan Sponsor hereby [complete (a) or (b)]

(a) x adopts a new plan as of January 1, 2016

(b) o amends and restates its existing plan as of [month, day, year] which is the Amendment Restatement Date. Except as otherwise provided in Appendix A, all amounts deferred under the Plan prior to the Amendment Restatement Date shall be governed by the terms of the Plan as in effect on the day before the Amendment Restatement Date.

Original Effective Date: [month, day, year]

Pre-409A Grandfathering: o Yes x No

1.02 PLAN

Plan Name: KapStone Paper and Packaging Corporation Deferred Compensation Plan for Non-Employee Directors

Plan Year: December 31

1.03 PLAN SPONSOR

Name:		KapStone Paper and Packaging Corporation
Address:		1101 Skokie Blvd., Suite 300, Northbrook, IL 60062-4124
Phone # :		847-239-8800
EIN:		20-2699372
Fiscal Yr:		December 31

Is stock of the Plan Sponsor, any Employer or any Related Employer publicly traded on an established securities market?

x Yes o No

1.04 EMPLOYER

The following entities have been authorized by the Plan Sponsor to participate in and have adopted the Plan (insert “Not Applicable” if none have been authorized):

	Publicly Traded on Est. Securities Market
Entity	Yes	No
	o	o
	o	o
	o	o
	o	o
	o	o
	o	o

1.05 ADMINISTRATOR

The Plan Sponsor has designated the following party or parties to be responsible for the administration of the Plan:

Name:		KapStone Paper and Packaging Corporation Pension and Investment Committee
Address:		1101 Skokie Blvd., Suite 300, Northbrook, IL 60062-4124

Note : The Administrator is the person or persons designated by the Plan Sponsor to be responsible for the administration of the Plan. Neither Fidelity Employer Services Company nor any other Fidelity affiliate can be the Administrator.

1.06 KEY EMPLOYEE DETERMINATION (1)

The Employer has designated as the Identification Date for purposes of determining Key Employees.

In the absence of a designation, the Identification Date is December 31.

The Employer has designated as the effective date for purposes of applying the six month delay in distributions to Key Employees.*

In the absence of a designation, the effective date is the first day of the fourth month following the Identification Date.

(1) Not Applicable — no employees participate in this Plan.

2.01 PARTICIPATION

(a) o Employees [complete (i), (ii) or (iii)]

(i) o Eligible Employees are selected by the Employer.

(ii) o Eligible Employees are those employees of the Employer who satisfy the following criteria:

(iii) x Employees are not eligible to participate.

(b) x Directors [complete (i), (ii) or (iii)]

(i) ¨ All Directors are eligible to participate.

(ii) x Only Directors selected by the Employer are eligible to participate.

(iii) ¨ Directors are not eligible to participate.

3.01 COMPENSATION

For purposes of determining Participant contributions under Article 4 and Employer contributions under Article 5, Compensation shall be defined in the following manner [complete (a) or (b) and select (c) and/or (d), if applicable]:

(a) o Compensation is defined as:

(b) ¨ Compensation as defined in [insert name of qualified plan] without regard to the limitation in Section 401(a)(17) of the Code for such Plan Year.

Annual retainer

Restricted Stock Units

(d) ¨ Compensation shall, for all Plan purposes, be limited to $ .

(e) ¨ Not Applicable.

3.02 BONUSES AND EQUITY COMPENSATION

Compensation, as defined in Section 3.01 of the Adoption Agreement, includes the following type of bonuses that will be the subject of a separate deferral election:

	Will be treated as Performance Based Compensation
Type	Yes	No
Restricted Stock Units	o	x
	o	o
	o	o
	o	o
	o	o

o Not Applicable.

4.01 PARTICIPANT CONTRIBUTIONS

If Participant contributions are permitted, complete (a), (b), and (c). Otherwise complete (d). Participant contributions under this Section 4.01 will be permitted beginning January 1, 2016.

(a) Amount of Deferrals

A Participant may elect within the period specified in Section 4.01(b) of the Adoption Agreement to defer the following amounts of remuneration. For each type of remuneration listed, complete “dollar amount” and / or “percentage amount”.

(i) Compensation Other than Bonuses [do not complete if you complete (iii)]

	Dollar Amount		% Amount
Type of Remuneration	Min	Max	Min	Max	Increment
(a)
(b)
(c)

Note: The increment is required to determine the permissible deferral amounts. For example, a minimum of 0% and maximum of 20% with a 5% increment would allow an individual to defer 0%, 5%, 10%, 15% or 20%.

(ii) Bonuses and Equity Awards[do not complete if you complete (iii)]

	Dollar Amount		% Amount
Type of Bonus	Min	Max	Min	Max	Increment

(iii) Compensation [do not complete if you completed (i) and (ii)]

Dollar Amount		% Amount
Min	Max	Min	Max	Increment

(iv) Director Compensation

	Dollar Amount		% Amount
Type of Compensation	Min	Max	Min		Max		Increment
Annual Retainer			0	%	100	%	1	%
Restricted Stock Units			0	%	100	%	100	%

Other:

(b) Election Period

(i) Performance Based Compensation

A special election period

o Does o Does Not

apply to each eligible type of performance based compensation referenced in Section 3.02 of the Adoption Agreement.

The special election period, if applicable, will be determined by the Employer.

(ii) Newly Eligible Participants

A Director who is classified or designated as eligible to participate during a Plan Year

o May x May Not

elect to defer Compensation earned during the remainder of the Plan Year by completing a deferral agreement within the 30 day period beginning on the date he is eligible to participate in the Plan.

(c) Revocation of Deferral Agreement

A Participant’s deferral agreement

o Will

o Will Not

be cancelled for the remainder of any Plan Year during which he receives a hardship distribution of elective deferrals from a qualified cash or deferred arrangement maintained by the Employer to the extent necessary to satisfy the requirements of Reg. Sec. 1.401(k)-1(d)(3). If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.

(d) No Participant Contributions

o Participant contributions are not permitted under the Plan.

5.01 EMPLOYER CONTRIBUTIONS

If Employer contributions are permitted, complete (a) and/or (b). Otherwise complete (c).

(a) Matching Contributions

(i) Amount

For each Plan Year, the Employer shall make a Matching Contribution on behalf of each Participant who defers Compensation for the Plan Year and satisfies the requirements of Section 5.01(a)(ii) of the Adoption Agreement equal to [complete the ones that are applicable]:

(A) o [insert percentage] of the Compensation the Participant has elected to defer for the Plan Year

(B) o An amount determined by the Employer in its sole discretion

(D) o Other:

(E) o Not Applicable [Proceed to Section 5.01(b)]

(ii) Eligibility for Matching Contribution

A Participant who defers Compensation for the Plan Year shall receive an allocation of Matching Contributions determined in accordance with Section 5.01(a)(i) provided he satisfies the following requirements [complete the ones that are applicable]:

(A) ¨ Describe requirements:

(B) o Is selected by the Employer in its sole discretion to receive an allocation of Matching Contributions

(iii) Time of Allocation

Matching Contributions, if made, shall be treated as allocated [select one]:

(A) ¨ As of the last day of the Plan Year

(B) ¨ At such times as the Employer shall determine in it sole discretion

(C) ¨ At the time the Compensation on account of which the Matching Contribution is being made would otherwise have been paid to the Participant

(D) ¨ Other:

(b) Other Contributions

(i) Amount

The Employer shall make a contribution on behalf of each Participant who satisfies the requirements of Section 5.01(b)(ii) equal to [complete the ones that are applicable]:

(A) ¨ An amount equal to [insert number] % of the Participant’s Compensation

(B) ¨ An amount determined by the Employer in its sole discretion

(D) ¨ Other:

(E) ¨ Not Applicable [Proceed to Section 6.01]

(ii) Eligibility for Other Contributions

A Participant shall receive an allocation of other Employer contributions determined in accordance with Section 5.01(b)(i) for the Plan Year if he satisfies the following requirements [complete the one that is applicable]:

(A) o Describe requirements:

(B) o Is selected by the Employer in its sole discretion to receive an allocation of other Employer contributions

(iii) Time of Allocation

Employer contributions, if made, shall be treated as allocated [select one]:

(A) ¨ As of the last day of the Plan Year

(B) ¨ At such time or times as the Employer shall determine in its sole discretion

(c) No Employer Contributions

x Employer contributions are not permitted under the Plan.

6.01 DISTRIBUTIONS

The timing and form of payment of distributions made from the Participant’s vested Account shall be made in accordance with the elections made in this Section 6.01 of the Adoption Agreement except when Section 9.6 of the Plan requires a six month delay for certain distributions to Key Employees of publicly traded companies.

(a) Timing of Distributions

(i) All distributions shall commence in accordance with the following [choose one]:

(A) o Within 60 days following the distribution event but in no event later than the time prescribed by Treas. Reg. Sec. 1.409A-3(d).

(B) x Monthly on specified day 10 th of each month [insert day]

(D) o Calendar quarter on specified month and day [ month of quarter (insert 1,2 or 3); day (insert day)]

(ii) The timing of distributions as determined in Section 6.01(a)(i) shall be modified by the adoption of:

(A) o Event Delay — Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for months [insert number of months].

(B) o Hold Until Next Year — Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for twelve months from the date of the event if payment pursuant to Section 6.01(a)(i) will thereby occur in the next calendar year or on the first payment date in the next calendar year in all other cases.

(C) o Immediate Processing — The timing method selected by the Plan Sponsor under Section 6.01(a)(i) shall be overridden for the following distribution events [insert events]:

(D) x Not applicable.

(b) Distribution Events

Participants may elect the following payment events and the associated form or forms of payment. For installments, insert the range of available periods (e.g., 5-15) or insert the periods available (e.g., 5,7,9).

			Lump Sum	Installments
(i)	x	Specified Date	X	2-10 years

(ii)	o	Specified Age		years

(iii)	o	Separation from Service		years

(iv)	x	Separation from Service plus 6 months	X	2-10 years

(v)	o	Separation from Service plus months [not to exceed months]		years

(vi)	o	Retirement		years

(vii)	o	Retirement plus 6 months		years

(viii)	o	Retirement plus months [not to exceed months]		years

(ix)	o	Disability		years

(x)	o	Death		years

(xi)	o	Change in Control		years

The minimum deferral period for Specified Date or Specified Age event shall be 2.

Installments may be paid [select each that applies]

x Monthly

x Quarterly

x Annually

(c) Specified Date and Specified Age elections may not extend beyond age 100 [insert age or “Not Applicable” if no maximum age applies].

(d) Payment Election Override

Payment of the remaining vested balance of the Participant’s Account will automatically occur at the time specified in Section 6.01(a) of the Adoption Agreement in the form indicated upon the earliest to occur of the following events [check each event that applies and for each event include only a single form of payment]:

	EVENTS	FORM OF PAYMENT
o	Separation from Service		Lump sum	Installments
o	Separation from Service before Retirement plus 6 months		Lump sum	Installments
x	Death	X	Lump sum	Installments
x	Disability	X	Lump sum	Installments
o	Not Applicable

(e) Involuntary Cashouts

o If the Participant’s vested Account at the time of his Separation from Service does not exceed distribution of the vested Account shall automatically be made in the form of a single lump sum in accordance with Section 9.5 of the Plan.

x There are no involuntary cashouts.

(f) Retirement

o Retirement shall be defined as a Separation from Service that occurs on or after the Participant [insert description of requirements]:

x No special definition of Retirement applies.

(g) Distribution Election Change

A Participant

x Shall

o Shall Not

be permitted to modify a scheduled distribution date and/or payment option in accordance with Section 9.2 of the Plan.

A Participant shall generally be permitted to elect such modification 1 time.

Administratively, allowable distribution events will be modified to reflect all options necessary to fulfill the distribution change election provision.

(h) Frequency of Elections

The Plan Sponsor

x Has

o Has Not

Elected to permit annual elections of a time and form of payment for amounts deferred under the Plan. If a single election of a time and/or form of payment is required, the Participant will make such election at the time he first completes a deferral agreement which, in all cases, will be no later than the time required by Reg. Sec. 1.409A-2.

7.01 VESTING

(a) Matching Contributions

The Participant’s vested interest in the amount credited to his Account attributable to Matching Contributions shall be based on the following schedule:

o	Years of Service	Vesting %
	0	100	(insert ‘100’ if there is immediate vesting)
	1
	2
	3
	4
	5
	6
	7
	8
	9

o		Other:


o		Class year vesting applies.

x		Not applicable.

(b) Other Employer Contributions

The Participant’s vested interest in the amount credited to his Account attributable to Employer contributions other than Matching Contributions shall be based on the following schedule:

o	Years of Service	Vesting %
	0	100	(insert ‘100’ if there is immediate vesting)
	1
	2
	3
	4
	5
	6
	7
	8
	9

o		Other:


o		Class year vesting applies.

Not applicable.

(c) Acceleration of Vesting

A Participant’s vested interest in his Account will automatically be 100% upon the occurrence of the following events: [select the ones that are applicable]:

(i)	o	Death

(ii)	o	Disability

(iii)	o	Change in Control

(iv)	o	Eligibility for Retirement

(v)	o	Other:


(vi)	x	Not applicable.

(d) Years of Service

(i) A Participant’s Years of Service shall include all service performed for the Employer and

o Shall

o Shall Not

include service performed for the Related Employer.

(ii) Years of Service shall also include service performed for the following entities:

(iii) Years of Service shall be determined in accordance with (select one)

(A) ¨		The elapsed time method in Treas. Reg. Sec. 1.410(a)-7

(B) ¨		The general method in DOL Reg. Sec. 2530.200b-1 through b-4

(C) ¨		The Participant’s Years of Service credited under [insert name of plan]

(D) ¨		Other:

(iv) x Not applicable.

8.01 UNFORESEEABLE EMERGENCY

(a) A withdrawal due to an Unforeseeable Emergency as defined in Section 2.24:

o Will

x Will Not [if Unforeseeable Emergency withdrawals are not permitted, proceed to Section 9.01]

be allowed.

(b) Upon a withdrawal due to an Unforeseeable Emergency, a Participant’s deferral election for the remainder of the Plan Year:

o Will

o Will Not

be cancelled. If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.

9.01 INVESTMENT DECISIONS

Investment decisions regarding the hypothetical amounts credited to a Participant’s Account shall be made by [select one]:

(a) x The Participant or his Beneficiary with respect to the Annual Retainer.

(b) x The Employer with respect to RSUs.

10.01 TRUST

The Employer [select one]:

x Does

o Does Not

intend to establish a rabbi trust as provided in Article 11 of the Plan.

11.01 TERMINATION UPON CHANGE IN CONTROL

Notwithstanding 11.02, the Plan Sponsor

x Reserves

o Does Not Reserve

the right to terminate the Plan and distribute all vested amounts credited to Participant Accounts upon a Change in Control as described in Section 9.7.

11.02 AUTOMATIC DISTRIBUTION UPON CHANGE IN CONTROL

Distribution of the remaining vested balance of each Participant’s Account

o Shall

x Shall Not

automatically be paid as a lump sum payment upon the occurrence of a Change in Control as provided in Section 9.7.

11.03 CHANGE IN CONTROL

A Change in Control for Plan purposes includes the following [select each definition that applies]:

(a) x A change in the ownership of the Employer as described in Section 9.7(c) of the Plan.

(b) x A change in the effective control of the Employer as described in Section 9.7(d) of the Plan.

(c) x A change in the ownership of a substantial portion of the assets of the Employer as described in Section 9.7(e) of the Plan.

(d) o Not Applicable.

12.01 GOVERNING STATE LAW

The laws of Illinois shall apply in the administration of the Plan to the extent not preempted by ERISA.

The Plan Sponsor has caused this Adoption Agreement to be executed this 14th day of August, 2015.

PLAN SPONSOR:		KapStone Paper and Packaging Corporation
By:		/s/ Therese Lowry
Title:		Sr. Dir, Benefits and Compensation

Exhibit 31.1

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

I, Roger W. Stone, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2015

	/s/ Roger W. Stone
	Name: Roger W. Stone
	Title: Chairman and Chief Executive Officer

Exhibit 31.2

CERTIFICATION OF CHIEF FINANCIAL OFFICER

I, Andrea K. Tarbox, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation;

b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: October 28, 2015

	/s/ Andrea K. Tarbox
	Name: Andrea K. Tarbox
	Title: Vice President and Chief Financial Officer

Exhibit 32.1

Certification of CEO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Roger W. Stone, Chairman and Chief Executive Officer of KapStone Paper and Packaging Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of KapStone Paper and Packaging Corporation.

Dated: October 28, 2015

	By:	/s/ Roger W. Stone
		Roger W. Stone
		Chairman and Chief Executive Officer

Exhibit 32.2

Certification of CFO Pursuant to

18 U.S.C. Section 1350,

as Adopted Pursuant to

Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Quarterly Report on Form 10-Q of KapStone Paper and Packaging Corporation for the quarter ended September 30, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Andrea K. Tarbox, Vice President and Chief Financial Officer of KapStone Paper and Packaging Corporation, hereby certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of KapStone Paper and Packaging Corporation.

Dated: October 28, 2015

	By:	/s/ Andrea K. Tarbox
		Andrea K. Tarbox
		Vice President and Chief Financial Officer