S-1/A 1 ds1a.htm AMENDMENT NO. 4 TO FORM S-1 Amendment No. 4 to Form S-1
Table of Contents
Index to Financial Statements

As filed with the Securities and Exchange Commission on January 7, 2010

Registration No. 333-162543

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

AMENDMENT NO. 4

TO

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

CELLU TISSUE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Delaware   2621   06-1346495

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification No.)

 

 

1855 Lockeway Drive, Suite 501

Alpharetta, Georgia 30004

(678) 393-2651

(Address, including zip code, and telephone number, including area code, of Registrant’s principal executive offices)

 

 

W. Edwin Litton

General Counsel, Senior Vice President, Human Resources and Secretary

1855 Lockeway Drive, Suite 501

Alpharetta, Georgia 30004

(678) 393-2651

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

with copies to:

 

Alan J. Prince

Tracy Kimmel

King & Spalding LLP

1180 Peachtree Street, N.E.

Atlanta, Georgia 30309

(404) 572-4600

 

John C. Ericson

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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

 

  Larger accelerated filer  ¨     Accelerated filer   ¨
  Non-accelerated filer  x   (Do not check if a smaller reporting company)   Smaller reporting company  ¨

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of each class of

securities to be registered

  Amount to be
registered(1)
  Proposed
maximum
aggregate offering
price per share
  Proposed
maximum
aggregate offering
price(1)(2)
 

Amount of

registration fee

Common Stock, $0.01 par value per share

  8,970,000 shares   $16.00   $143,520,000   $8,296(3)
 
 

 

(1) Includes shares to be sold upon exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act.
(3) $6,975 of which was previously paid.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


Table of Contents
Index to Financial Statements

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion. Dated January 7, 2010

7,800,000 Shares

LOGO

Common Stock

 

 

This is an initial public offering of the common stock of Cellu Tissue Holdings, Inc.

Cellu Tissue Holdings, Inc. is offering 2,175,000 of the shares to be sold in the offering. The selling stockholders identified in this prospectus are offering an additional 5,625,000 shares. Cellu Tissue will not receive any proceeds from the sale of the shares being sold by the selling stockholders.

Prior to this offering, there has been no public market for the common stock. It is currently estimated that the initial public offering price per share will be between $15.00 and $17.00. Cellu Tissue intends to list the common stock on the New York Stock Exchange under the symbol “CLU”.

 

 

See “Risk Factors” beginning on page 16 to read about factors you should consider before buying shares of the common stock.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share    Total

Initial public offering price

     

Underwriting discount

     

Proceeds, before expenses, to Cellu Tissue

     

Proceeds, before expenses, to the selling stockholders

     

To the extent the underwriters sell more than 7,800,000 shares of common stock, the underwriters have the option to purchase up to an additional 1,170,000 shares from the selling stockholders at the initial public offering price less the underwriting discount.

 

 

The underwriters expect to deliver the shares against payment in New York, New York on                      , 2010.

 

Goldman, Sachs & Co.

J.P. Morgan

BofA Merrill Lynch

 

Baird   William Blair & Company   D.A. Davidson & Co.

 

 

 

Prospectus dated                     , 2010.


Table of Contents
Index to Financial Statements

LOGO


Table of Contents
Index to Financial Statements

TABLE OF CONTENTS

 

     Page

Prospectus Summary

   1

Risk Factors

   16

Special Note Regarding Forward-Looking Statements

   29

Use of Proceeds

   30

Dividend Policy

   31

Capitalization

   32

Unaudited Pro Forma Condensed Combined Financial Information

   34

Selected Consolidated Financial Data

   38

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   41

Business

   66

Management

   80

Compensation Discussion and Analysis

   85

Principal and Selling Stockholders

   108

Certain Relationships and Related Party Transactions

   111

Description of Indebtedness

   116

Description of Capital Stock

   121

Shares Eligible for Future Sale

   124

Material U.S. Federal Income Tax Considerations to Non-U.S. Holders

   126

Underwriting

   129

Legal Matters

   134

Experts

   134

Where You Can Find More Information

   134

Index to Financial Statements

   F-1

 

 

No dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus. You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

 

 

INDUSTRY AND MARKET DATA

The data included in this prospectus regarding our industry, including market size, industry product mix and growth rates, are based on a variety of sources, including publicly available data, information obtained from customers, other industry sources, management estimates and management’s assessments of industry sources. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable but do not guarantee the accuracy and completeness of such information. Although we believe that the publications and reports are reliable, neither we nor the underwriters have independently verified the data. Our internal data and estimates are based upon information obtained from our investors, partners, trade and business organizations and contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had such information verified by any independent sources.

 

i


Table of Contents
Index to Financial Statements

PROSPECTUS SUMMARY

This summary highlights significant aspects of our business and this offering, but it is not complete and does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire prospectus, including the information presented under the section entitled “Risk Factors” and the historical and pro forma financial data and related notes, before making an investment decision. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from the results discussed in the forward-looking statements as a result of certain factors, including those set forth in this prospectus under the headings “Risk Factors” and “Special Note Regarding Forward-Looking Statements.” In this prospectus, unless indicated otherwise or the context otherwise requires, “we,” “us,” “our” and “Cellu Tissue” refer to Cellu Tissue Holdings, Inc., the issuer of the common stock, and its subsidiaries. Unless otherwise noted, the term “tons” refers to short tons.

Our Company

We are a North American producer of tissue products, with a strategic focus on consumer-oriented private label tissue products and a growing presence in the value retail tissue market. We manufacture large rolls of tissue, which we refer to as hardrolls, from purchased pulp and our own recycled fiber. We are a vertically integrated manufacturer, which means that we convert some of the hardrolls we produce into finished and packaged tissue products, and we sell the remainder of our hardrolls to third-party converters of tissue products. Our vertically integrated manufacturing operations and extensive geographic footprint enable us to deliver a broad range of cost-competitive products with brand-like quality manufactured to our customers’ specifications. For the twelve months ended November 26, 2009, we sold 331,425 tons of tissue along with our other products, generating aggregate net sales of $515.3 million, Adjusted EBITDA of $81.3 million and net income of $11.0 million. For an explanation of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA, see pages 12, 13, 14 and 15.

We own and operate nine strategically-located manufacturing and converting facilities in Connecticut, Georgia, Michigan, Mississippi, New York, Ontario and Wisconsin. Six of these facilities manufacture hardrolls for internal conversion and external hardroll sales, two of these facilities produce converted tissue products and one facility is an integrated hardroll manufacturing and converting site. We have grown our annual hardroll production capacity from approximately 264,171 tons, as of February 28, 2006, to approximately 327,000 tons as of November 26, 2009. In response to significant market demand for our converted tissue products, we have grown our annual converting capacity from approximately 85,000 tons as of February 28, 2006, to approximately 194,000 tons as of November 26, 2009.

Our Products

Our tissue products consist of two primary product lines sold predominantly to (1) the consumer private label and away-from-home markets and (2) third-party converters.

 

  Ÿ  

Converted tissue.    Our converted tissue products include a full product line of consumer private label and away-from-home bathroom tissue, facial tissue, napkins, folded towels and kitchen roll towels. We manufacture our converted tissue products according to our customers’ specifications with a quality range from super premium to value quality. Our flexible manufacturing assets enable us to produce converted tissue products according to a variety of specifications, including fiber type, weight, softness, size, color, prints, embossing patterns, fold and package configuration. For the nine months ended November 26, 2009, sales of converted tissue products comprised 46.4% of our total net sales compared to 22.5% of our total net sales for fiscal year 2008.

 

 

1


Table of Contents
Index to Financial Statements
  Ÿ  

Hardroll tissue.    We manufacture a variety of hardroll tissue and absorbent cover stock to our customers’ specifications, which our customers print, cut and process into an assortment of finished converted tissue products and disposable absorbent products in the personal and health care markets. These absorbent products include a complete line of away-from-home and consumer bath and towel products, liners for diapers, adult incontinence and feminine care products, surgical waddings and other medical and sanitary disposable products. For the nine months ended November 26, 2009, sales of hardroll tissue products comprised 31.1% of our total net sales compared to 52.8% of our total net sales for fiscal year 2008. We also produce machine-glazed tissue hardrolls, which are sold to third-party converters of products such as fast food and commercial food wrappers. Machine-glazed tissue is glazed with a coating and, in some cases, other moisture and grease-resistant coatings. We convert a limited amount of our machine-glazed tissue hardrolls into rolls for retail food wrappers. For the nine months ended November 26, 2009, sales of machine-glazed tissue products comprised 21.0% of our total net sales compared to 24.8% of our total net sales for fiscal year 2008.

Our Industry

According to RISI, a leading information provider for the global forest products industry, the North American tissue market exceeded 9 million tons in 2008. From 1995 to 2008, North American tissue demand grew in the aggregate by 32%, according to RISI. RISI estimates that the annual operating rate for North American tissue manufacturers will remain above 92% through 2012. According to RISI, tissue demand has grown at a higher rate than any other major paper sector in North America since 1995.

Tissue paper is sold into two primary market sectors: (1) the consumer retail sector and (2) the commercial and industrial, or away-from-home, sector. The consumer retail sector comprises approximately 6.3 million tons, or 70%, of the North American tissue paper market, with the away-from-home sector comprising approximately 2.7 million tons. The consumer retail sector is further divided between private label, estimated at 1.6 million tons, and branded, estimated at 4.7 million tons. Within the consumer private label sector, mass retailers, value retail chains and dollar stores, such as Dollar General, Dollar Tree and Family Dollar, represent the fastest growing portion of the private label market. The balance of private label tissue products are sold through grocery and drug retail chains, and warehouse clubs such as Costco and Sam’s Club. We believe that competition in the dollar stores market is relatively fragmented among many small regional converters with a limited private label presence from large branded tissue producers.

We also compete in the away-from-home sector, where products are generally sold to paper, food service and janitorial supply distributors, which resell these products for use in hotels, restaurants, factories, schools, office buildings and other commercial, government and industrial institutions.

Machine-glazed tissue represents a much smaller market than the consumer and away-from-home tissue markets. End markets for machine-glazed tissue include fast food and commercial food wrap as well as niche market products such as gum wrappers, coffee filters, cigarette pack liner paper, wax paper and butter wraps.

Our Strengths

We believe our core strengths include the following:

Strategic focus on consumer private label tissue products.    As a North American tissue manufacturer with a strategic focus on consumer private label products, we benefit from: (1) strong consumer demand for brand-like tissue products, (2) our ability to produce private label products that are equivalent in quality to branded products, (3) growing consumer acceptance of private label

 

 

2


Table of Contents
Index to Financial Statements

products, (4) consumer demand for products sold through the value retail channel and (5) our ability to generate higher margins from our converted tissue products than from our sales of hardrolls to third parties or our machine-glazed tissue products.

Low-cost manufacturing operations.    Our flexible production capability, low overhead costs and branded-quality products contribute to our competitive position in the marketplace. We have a proven track record of ongoing cost-savings and productivity improvement initiatives. We have contracted for approximately 50% to 65% of our anticipated fiber requirements through fiscal year 2012 while achieving highly competitive market discounts and ensuring consistency of supply. Also, because of our significant scale, we are able to optimize our machine schedules to take full advantage of our production capabilities and minimize freight costs for our customers. To ensure supply and reduce market dependency, we have invested in green energy projects such as a third-party biomass gasification steam project in Wiggins, Mississippi and our cogeneration installation in East Hartford, Connecticut, which produces steam and electricity.

Significant scale and footprint in the Northeast, Southeast, South and Central United States.    Our strategic manufacturing facilities produce a full line of private label products and support geographic coverage of the U.S. market east of the Rocky Mountains. The geographic location of our facilities enables us to be a provider in the consumer private label and away-from-home converted tissue markets in the Northeast, Southeast, South and Central United States, which collectively account for approximately 76% of the U.S. population. Our Neenah, Wisconsin; Thomaston, Georgia; and Long Island, New York converting lines have approximately 194,000 tons of annual converting capacity. The APF Acquisition described below under “—Our History” has allowed us to reach new distribution channels and expand our geographic footprint in the South, Southeast, Midwest and Northeast United States. In addition, our proximity to customers and our diverse reach give us an economic advantage over smaller, and often one- or two-plant, regional tissue converters.

Strong financial position and operating results.    We believe our significant growth in Adjusted EBITDA and net cash provided by operating activities, coupled with our balance sheet liquidity will allow us to execute our converting strategy, whether through organic growth or strategic acquisitions. Our net sales and Adjusted EBITDA have increased 49.7% and 175%, respectively, from fiscal year 2007 to the twelve months ended November 26, 2009. Our net income has grown from a net loss of $13.1 million in fiscal year 2007 to net income of $11.0 million for the twelve months ended November 26, 2009. For the twelve months ended November 26, 2009, our Adjusted EBITDA margin equaled 15.8% and our gross margin equaled 15.3%, compared to 11.4% and 10.6%, respectively, for fiscal year 2009. In July 2009, we successfully refinanced most of our debt with $255 million of 11 1/2% senior secured notes due 2014. Our net cash provided by operating activities equaled $24.1 million and $68.1 million for fiscal year 2009 and for the twelve months ended November 26, 2009, respectively. As of November 26, 2009, we also had $52.2 million available under our revolving line of credit.

Proven acquisition integration capabilities.    Since 2007, we have made two strategically important acquisitions: (1) in March 2007, we acquired CityForest Corporation, which greatly expanded our recycled fiber capabilities, and (2) in July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities in the APF Acquisition described below, which provided us with two geographically diverse, stand-alone converting facilities. Due to the successful integration of these businesses, these acquisitions were accretive to our earnings and generated synergies in excess of original estimates. These acquisitions were strategically important because they have enabled us to reach new distribution channels and expand our geographical footprint in the South, Southeast and Northeast. Given the fragmented nature of our industry, we believe there are additional opportunities for profitable expansion and consolidation in our markets.

 

 

3


Table of Contents
Index to Financial Statements

Significant capital investment.    Since 2001, we have made significant capital investment in our hardroll manufacturing capacity, which has increased our hardroll capacity by more than 120,000 tons. These tons are available to support our vertically integrated, converting growth strategy and further solidify our ability to provide brand-equivalent quality and consistent supply. Furthermore, this additional capacity was added at a capital cost well below that of new tissue manufacturing assets. We have also grown our converting capacity capabilities over the last three years, increasing our converting capacity by 109,000 tons.

Diversified and high-quality customer base.    We sell to a highly diversified customer base of over 200 companies, without dependence on any single customer. In fiscal year 2009, no customer accounted for more than 10% of our sales and, for the nine months ended November 26, 2009, Dollar General was our largest single customer, representing 10.5% of our sales. Our customers include leading consumer retailers and away-from-home distributors including Dollar General, Wal-Mart and Guest Supply, other vertically integrated tissue manufacturers and third-party converters.

Experienced and incentivized management team.     Our executive management team has an average of over 25 years of experience in the paper products industry. Russell C. Taylor (53) has been our President and Chief Executive Officer since 2001 and has over 25 years of industry experience. Prior to coming to our company, he was a senior executive at Kimberly-Clark Corporation, a leading personal care consumer products company. Steven D. Ziessler (49), our Chief Operating Officer since 2005, has over 25 years of industry experience and prior to joining our company was President of Kimberly-Clark Europe Ltd.’s away-from-home business. David J. Morris (53), our Chief Financial Officer, has spent 27 years in the paper and wood products business, including 15 years at Georgia-Pacific Corporation and seven years at Kimberly-Clark Corporation. After this offering, we expect that our executive officers will own approximately 8.4% of our outstanding common stock.

Environmentally friendly manufacturing capabilities.    We have the ability to manufacture hardrolls that contain up to 100% recycled fiber. We also convert recycled fiber hardrolls into products that are sold in the consumer retail and away-from-home markets. Our recycled fiber content exceeds current applicable Environmental Protection Agency guidelines and contains up to 100% recycled, post-consumer wastepaper (including magazines, phonebooks and manufacturing and office waste) that is processed without the use of chlorine compounds. Our acquisition of CityForest Corporation expanded our ability to manufacture recycled hardrolls and enabled us to produce our own recycled fiber. We also focus on other ways to avoid waste, including recycling water used in our manufacturing processes and reconstituting the fiber from our paper waste. In addition, 100% of our contractually purchased pulp is certified by the Sustainable Forestry Initiative or the Forest Stewardship Council.

Our Strategy

Our principal strategy is to be the private label tissue manufacturer of choice in North America by continuing to grow sales of our converted tissue products. We believe that our intense focus on “customer delight” through high levels of service, efficient and reliable supply-chain management, brand-like quality and consistency, and low cost manufacturing will provide us with continued growth opportunities. Our key initiatives include:

Continue to grow converted tissue sales to both consumer product retailers and value retailers.    We have substantially increased our sales of private label converted tissue products as a percentage of our total sales to both the consumer retail and value retail chains from 3.0% of our net sales in fiscal year 2008 to 30.2% of our net sales for the nine months ended November 26, 2009. As

 

 

4


Table of Contents
Index to Financial Statements

these retailers invest heavily in their private label brands, we will continue to focus on growing our business to support this profitable and growing segment of the U.S. tissue market. We also believe that through organic growth and acquisitions we have attractive opportunities to increase our market share in this growing customer segment. In addition, we currently have the ability to shift a majority of our lower margin, externally sold hardrolls to converted products sales, which have historically generated higher margins. For the nine months ended November 26, 2009, sales of tissue hardrolls and machine-glazed tissue hardrolls comprised 48.7% of our total net sales compared to 73.2% in fiscal year 2008. The decline in hardroll sales resulted from a mix shift to higher margin converted products.

Invest in converting capacity to service these growing private label market segments.    To satisfy increased customer demand and to further expand our geographic reach, we have accelerated our growth strategy and expect to invest approximately $30 million over the next 18 to 24 months to increase our retail converting capacity by 50,000 tons. We anticipate that a portion of this investment will be used to add converting capacity to our new 323,000 square foot facility in Oklahoma City, Oklahoma. We expect that the balance of this investment will be used to add converting capacity to our three established facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York. In December 2009, we completed installation of a new tissue converting line at our Long Island, New York facility. In addition, we also believe the fragmentation of the U.S. tissue market provides potential acquisition opportunities that would strengthen our market position, continue to expand our geographic reach and offer potential for industry consolidation.

Enhance our fiber and energy cost management initiatives.    We have developed and implemented a fiber procurement strategy that has been effective in reducing our fiber costs while helping to ensure consistent supply. Our agreements with various pulp suppliers enable us to purchase a majority of our fiber requirements at discounts below published list prices. In addition, these agreements do not preclude us from shifting a portion of our fiber purchases to the spot market to react to favorable market conditions. We believe these supply agreements offer substantial savings from purchasing pulp on the spot market during periods of tight supply. Furthermore, approximately 50% of our hardroll sales are contracted to customers and include escalators that allow for the pass-through of increased pulp costs. These contracts track a published pulp benchmark price index that is well accepted in the industry. We also have a targeted strategy that has successfully generated greater energy cost control. This strategy includes the use of gas strips or hedges to minimize price volatility, and capital projects that reduce consumption through alternative green-energy sources, further reducing our dependence on the energy market.

Further reduce manufacturing costs.    We continually pursue opportunities to contain and reduce our costs. As part of our cost management strategy, we benchmark our machines and manufacturing operations against those of other leading paper manufacturers. Our benchmarking is applied by business sector and machine type on a monthly, year-to-date and year-on-year basis. We review metrics such as total machine efficiency, fiber loss, waste percentage, tons produced per machine per person per year, fixed and variable costs per ton produced and total energy cost per ton produced. In addition, our cost management strategy focuses on reducing variable costs through increased operating efficiencies and reduced energy consumption, allowing us to better manage our costs and lessen the impact of fiber price cyclicality.

 

 

5


Table of Contents
Index to Financial Statements

Our History

We were incorporated in Delaware in 1984. At the time of our incorporation, we acquired the assets of our East Hartford, Connecticut facility and, in 1995, we purchased our Wiggins, Mississippi facility. Throughout 1998, we acquired the assets of each of our Menominee, Michigan; Gouverneur, New York; and St. Catharines, Ontario facilities and, in 2002, we purchased our Neenah, Wisconsin facility.

Weston Presidio V, L.P.

We have been controlled by Weston Presidio V, L.P. since June 2006. Weston Presidio V, L.P. is a partnership managed by Weston Presidio. Weston Presidio, founded in 1991, has managed five investment funds aggregating over $3.3 billion. The firm focuses its investment activities on growth companies. With offices in Boston, San Francisco and Menlo Park, Weston Presidio has completed transactions across a broad range of industries, including consumer, business services and manufacturing and industrial.

Strategic Acquisitions

In March 2007, we acquired our Ladysmith, Wisconsin facility in connection with our purchase of CityForest Corporation, doubling our recycled fiber capabilities. In July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities from Atlantic Paper & Foil, which we refer to in this prospectus as the APF Acquisition, providing us with two geographically diverse, stand-alone converting facilities and nearly doubling our converting capacity.

Concurrent Reorganization Transactions

Prior to the completion of this offering, we intend to complete an internal restructuring designed to eliminate our direct and indirect parent entities. In this prospectus, we refer to this restructuring and the 167.27 for 1 stock split to be effected prior to the closing of this offering as our reorganization transactions. Pursuant to the reorganization transactions, Cellu Paper Holdings, Inc., our direct parent, will merge with and into Cellu Tissue, with Cellu Tissue surviving the merger. Immediately following this merger, Cellu Parent Corporation, which will then be our direct parent, will merge with and into Cellu Tissue, with Cellu Tissue surviving this second merger. In connection with these reorganization transactions, the holders of Cellu Parent Corporation’s outstanding Series A preferred stock will ultimately receive an aggregate of 12,729,233 shares of our common stock, the holders of Cellu Parent Corporation’s outstanding Series B preferred stock will ultimately receive an aggregate of 2,620,410 shares of our common stock, and the holders of Cellu Parent Corporation’s common stock will receive an aggregate of 1,082,913 shares of our common stock. Except as otherwise indicated, the information in this prospectus gives effect to the reorganization transactions. As described in this prospectus under the heading “—The Offering—Pricing Sensitivity Analysis,” to the extent that the actual initial public offering price per share for this offering is greater or less than $16.00, the actual number of shares of our common stock that the holders of Cellu Parent Corporation’s outstanding Series A preferred stock and Series B preferred stock will ultimately receive will be lower or higher, respectively. See “Capitalization” and “Certain Relationships and Related Party Transactions” for more information on the reorganization transactions.

Risk Factors

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks, including those that are generally associated with our industry. Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock.

 

 

6


Table of Contents
Index to Financial Statements

 

Our principal executive offices are located at 1855 Lockeway Drive, Suite 501, Alpharetta, Georgia 30004, and our telephone number at that address is (678) 393-2651. Our website is located at www.cellutissue.com. The information on our website is not part of this prospectus.

 

 

Our fiscal year ends on the last day of February. In this prospectus, we refer to our fiscal year ended February 28, 2009 as fiscal year 2009, to our fiscal year ended February 29, 2008 as fiscal year 2008 and to our fiscal year ended February 28, 2007 as fiscal year 2007.

 

 

7


Table of Contents
Index to Financial Statements

The Offering

 

Shares of common stock offered by us

2,175,000 shares

 

Shares of common stock offered by the selling stockholders

5,625,000 shares

 

Shares of our common stock to be outstanding after this offering

18,607,556 shares

 

Option to purchase additional shares of common stock

The selling stockholders have granted the underwriters a 30-day option to purchase up to 1,170,000 additional shares of our common stock at the initial public offering price.

 

Use of proceeds

We estimate that the net proceeds we will receive from this offering, after deducting underwriting discounts and other estimated offering expenses payable by us, will be approximately $29.4 million, assuming the shares are offered at $16.00 per share, which is the mid-point of the estimated offering price range set forth on the cover page of this prospectus.

 

  We intend to use the net proceeds we will receive from this offering to repay, repurchase, redeem or otherwise retire (including paying any redemption or repurchase premiums or related pre-payment penalties) existing indebtedness, including potentially, but not limited to, redeeming or repurchasing a portion of our outstanding 11 1/2% senior secured notes due 2014, which we refer to in this prospectus either as our senior secured notes or our 2014 Notes, or repaying our $6.3 million promissory note issued in the APF Acquisition. See “Use of Proceeds.”

We will not receive any proceeds from the sale of shares of our common stock by the selling stockholders.

 

Dividend policy

We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business and debt repayment; therefore, we do not anticipate paying cash dividends in the foreseeable future. See “Dividend Policy” below.

 

Proposed New York Stock Exchange ticker symbol

“CLU”

 

Risk factors

You should carefully read and consider the information set forth under “Risk Factors” beginning on page 16 of this prospectus and all other information set forth in this prospectus before investing in our common stock.

 

 

8


Table of Contents
Index to Financial Statements

The common stock to be outstanding after this offering excludes the following:

 

  Ÿ  

as of November 26, 2009, 797,499 shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $5.12 per share; and

 

  Ÿ  

2,795,000 shares reserved for future issuance under our 2010 Equity Compensation Plan, which will become effective prior to the completion of this offering, as more fully described in “Compensation Discussion and Analysis—2010 Equity Compensation Plan”.

Except as otherwise indicated, the information in this prospectus:

 

  Ÿ  

gives effect to the reorganization transactions, which include a 167.27 for 1 stock split of shares of all our common stock to be effected prior to the closing of this offering;

 

  Ÿ  

assumes the adoption of our amended and restated certificate of incorporation and our amended and restated bylaws upon completion of this offering;

 

  Ÿ  

assumes the underwriters do not exercise their option to purchase up to 1,170,000 additional shares from the selling stockholders; and

 

  Ÿ  

assumes that our shares of common stock will be sold at $16.00 per share, which is the mid-point of the price range set forth on the cover page of this prospectus.

Pricing Sensitivity Analysis

In connection with the reorganization and this offering, holders of Cellu Parent Corporation Series A preferred stock will receive one share of our common stock plus a liquidation preference of $5.98 for each share of Series A preferred stock payable in shares of our common stock. In addition, holders of Cellu Parent Corporation Series B preferred stock will receive one share of our common stock plus a liquidation preference of $8.91 for each share of Series B preferred stock payable in shares of our common stock. The exact number of shares they will receive as a result of the liquidation preference will be based on the initial public offering price set forth on the cover page of this prospectus. The information in this prospectus is based on our estimate that 15,349,643 shares of our common stock will be issued to the holders of Cellu Parent Corporation preferred stock based on an initial public offering price per share of $16.00, which is the mid-point of the price range set forth on the cover page of this prospectus. To the extent that the actual initial public offering price per share for this offering is greater or less than $16.00, the actual number of shares of common stock to be issued to them will be lower or higher, respectively. For example, if the actual initial public offering price per share for this offering were to equal $17.00, the number of shares of common stock to be issued to the holders of Cellu Parent Corporation preferred stock would equal 15,090,806 and, consequently, the aggregate number of shares of common stock to be outstanding after this offering would equal 18,348,719. Similarly, if the actual initial public offering price per share for this offering were to equal $15.00, the number of shares of common stock to be to be issued to the holders of Cellu Parent Corporation preferred stock would equal 15,642,979 and, consequently, the aggregate number of shares of common stock to be outstanding after this offering would equal 18,900,892.

 

 

9


Table of Contents
Index to Financial Statements

Summary Consolidated Data for Cellu Tissue Holdings, Inc.

The following table contains our summary consolidated financial data for fiscal year 2009, for fiscal year 2008, for the period from March 1, 2006 to June 12, 2006 (pre-merger), for the period from June 13, 2006 to February 28, 2007 (post-merger), for the nine months ended November 26, 2009 and November 27, 2008 and for the twelve months ended November 26, 2009, as well as our summary pro forma statement of operations and other financial data for fiscal year 2009. Our summary consolidated results of operations and other data for fiscal year 2009, for fiscal year 2008, for the period from March 1, 2006 to June 12, 2006 (pre-merger) and for the period from June 13, 2006 to February 28, 2007 (post-merger), and our summary consolidated balance sheet data at February 28, 2009 and February 29, 2008 have been derived from audited consolidated financial statements included elsewhere in this prospectus. Our summary consolidated results of operations and other data for the nine months ended November 26, 2009 and November 27, 2008 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus, and, in our opinion, such financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data for those periods. Our summary consolidated results of operations and other data for the twelve months ended November 26, 2009 have been derived from our unaudited consolidated financial statements for the nine months ended November 27, 2008 and November 26, 2009 and from our audited consolidated financial statements for fiscal year 2009. The fiscal year 2007 information is presented separately for the periods prior to and after the 2006 merger transaction in which Weston Presidio V, L.P. gained control of Cellu Tissue. We refer to the 2006 merger transaction in this prospectus as the 2006 Merger. For more information about the 2006 Merger, see “Business—Our History—Weston Presidio V, L.P.”

The summary unaudited pro forma combined statement of operations and other financial data give effect to the APF Acquisition as if it had occurred on March 1, 2008 and include historical financial results of Cellu Tissue and Atlantic Paper & Foil Corp. of N.Y., Atlantic Lakeside Properties, LLC, Atlantic Paper & Foil, LLC, Atlantic Paper & Foil of Georgia, LLC and Consumer Licensing Corporation, collectively referred to in this prospectus as APF, adjusted to exclude the income and expense items related to the non-operating assets and liabilities that were not acquired by Cellu Tissue in the APF Acquisition. The excluded income and expense items primarily relate to depreciation, aircraft-related expenses, and interest expense.

The summary unaudited pro forma combined statement of operations data for fiscal year 2009 has been derived from the historical statement of operations data of Cellu Tissue for fiscal year 2009 appearing elsewhere in this prospectus and historical statement of operations data derived from the accounting records of APF for the period from March 1, 2008 through July 1, 2008. This historical statement of operations data of APF for the period from March 1, 2008 through July 1, 2008 was computed as the sum of (1) statement of operations data for March 2008, and (2) statement of operations data for the period from April 1, 2008 through June 30, 2008, which was derived by subtracting the data for the three months ended March 31, 2008 from statement of operations data for the six months ended June 30, 2008 included elsewhere in this prospectus.

The summary unaudited pro forma combined statement of operations data includes the adjustments that have a continuing impact on the combined company to reflect the application of purchase accounting. The pro forma adjustments are described in the notes to the unaudited pro forma combined statement of operations and other financial data contained elsewhere in this prospectus.

Any savings or additional costs that may be realized through the integration of the operations of APF with Cellu Tissue have not been estimated or included in the summary unaudited pro forma statement of operations.

 

 

10


Table of Contents
Index to Financial Statements

The summary pro forma data are presented for illustrative purposes only and do not purport to be indicative of, and should not be relied upon as indicative of, the operating results that may occur in the future or that would have occurred if the acquisition had been consummated on March 1, 2008.

The unaudited consolidated other financial data set forth below include calculations of EBITDA and Adjusted EBITDA. These measures should not be construed as an alternative to our operating results or cash flows as determined in accordance with U.S. generally accepted accounting principles. Please see footnote (2) below for further discussion of EBITDA and Adjusted EBITDA.

You should read the information set forth below in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Combined Financial Information” and our and APF’s consolidated financial statements and related notes included elsewhere in this prospectus.

 

 

11


Table of Contents
Index to Financial Statements

(Amounts in thousands
except share amounts
and tons sold)

  March 1,
2006-

June 12,
2006
         June 13,
2006-
February

28, 2007
    Fiscal year ended     Fiscal year
ended
February

28, 2009
pro forma
  Nine months ended     Twelve
months
ended
November

26, 2009
 
        February
29, 2008
    February
28, 2009(1)
      November
27, 2008(1)
    November
26, 2009(1)
   
    (Pre-merger)                (Post-merger)           (unaudited)   (unaudited)     (unaudited)     (unaudited)  

Statement of operations data:

                   

Net sales:

                   

Tissue segment

  $ 68,715          $ 174,074      $ 333,342      $ 400,640        N/A   $ 300,355      $ 299,880      $ 400,164   

Machine-glazed tissue segment

    28,029            73,338        109,739        114,376        N/A     87,904        81,195        107,667   

Foam segment

                             4,006        N/A     2,323        5,797        7,481   
                                                             

Total net sales

    96,744            247,412        443,081        519,022      $ 551,109     390,582        386,872        515,312   

Cost of goods sold

    88,556            234,897        401,352        464,118        489,019     351,693        324,143        436,567   
                                                                 

Gross profit

    8,188            12,515        41,729        54,904        62,090     38,889        62,729        78,745   

Income (loss) from operations

    (3,330         611        19,630        30,163        33,772     21,649        43,642        52,156   

Net income (loss)

  $ (6,439       $ (6,660   $ 3,702      $ 6,560      $ 7,344   $ 2,584      $ 7,028      $ 11,004   

Basic and diluted income (loss) per share

  $ (64,392.31       $ (66,596.06   $ 37,017.56      $ 65,601.88      $ 73,440.00   $ 25,841.33      $ 70,283.50      $ 110,043.50   

Basic and diluted shares outstanding

    100            100        100        100        100     100        100        100   

Unaudited pro forma basic and diluted income (loss) per share(2)

  $ (0.39       $ (0.41   $ 0.23      $ 0.40      $ 0.45   $ 0.16      $ 0.43      $ 0.67   

Unaudited pro forma basic and diluted shares outstanding(2)

    16,432,556            16,432,556        16,432,556        16,432,556        16,432,556     16,432,556        16,432,556        16,432,556   
 

Balance sheet data (at end of period):

                   

Cash and cash equivalents

    N/A          $ 16,261      $ 883      $ 361      $ 361   $ 513      $ 7,149      $ 7,149   

Total assets

    N/A            345,343        423,217        484,047        484,047     494,040        502,101        502,101   

Total debt

    N/A            160,356        208,647        261,653        261,653     270,998        269,083        269,083   

Stockholders’ equity

    N/A            38,752        46,085        67,737        67,737     64,792        84,362        84,362   
 

Other financial data:

                   

Net cash provided by (used in) operating activities

  $ (6,384       $ 9,785      $ 19,796      $ 24,060        N/A   $ 9,601      $ 53,684      $ 68,142   

Net cash (used in) investing activities

    (1,938         (7,677     (64,141     (80,557     N/A     (73,882     (19,773     (26,447

Net cash provided by (used in) financing activities

    (290                29,193        55,244        N/A     63,277        (27,131     (35,163

Depreciation and amortization

    4,227            16,759        24,146        26,529        28,126     19,676        21,447        28,300   

Capital expenditures

    1,938            7,677        20,477        16,402        N/A     9,734        19,773        26,441   

EBITDA(3)

    895            17,605        43,996        57,187        62,390     41,480        64,435        80,142   

Adjusted EBITDA(3)

    6,828            22,713        46,764        59,274        64,477     42,535        64,512        81,251   

Gross margin%

    8.5            5.1        9.4        10.6        11.3     10.0        16.2        15.3   

Adjusted EBITDA margin %(4)

    7.1            9.2        10.6        11.4        11.7     10.9        16.7        15.8   
 

Other operational data:

                   

Tons sold:

                   

Tissue segment

    50,406            122,471        235,395        250,073        N/A     188,004        183,850        245,919   

Machine-glazed tissue segment

    23,108            57,231        81,685        82,482        N/A     62,474        65,498        85,506   

 

(1) We completed the APF Acquisition in July 2008. As a result, the fiscal year ended February 28, 2009 includes APF’s results for eight months. Our results for the nine months ended November 27, 2008 and November 26, 2009 include APF’s results for five and nine months, respectively. For additional information relating to these periods, see “Unaudited Pro Forma Condensed Combined Financial Information” and the consolidated financial statements included elsewhere in this prospectus.

 

(2) The unaudited pro forma computation of basic and diluted earnings per share includes the effect of the reorganization transactions, including the conversion of preferred stock into shares of common stock and the stock split of such stock as well as the existing shares of common stock into 16,432,556 shares of common stock; however, it excludes the shares expected to be issued in connection with this offering. Unaudited pro forma basic and diluted shares outstanding are equal for all periods presented as there were no potentially dilutive shares in these periods. The 16,432,556 shares of common stock is based on an assumed initial public offering price of $16.00 per share, the mid-point of the range set forth on the cover of this prospectus. See “Prospectus Summary—The Offering—Pricing Sensitivity Analysis.”

 

 

12


Table of Contents
Index to Financial Statements
(3) EBITDA represents earnings before interest expense, income taxes and depreciation and amortization. Adjusted EBITDA represents EBITDA adjusted to reflect the additions and eliminations described in the table below. EBITDA and Adjusted EBITDA are supplemental measures of operating performance that do not represent and should not be considered as alternatives to net income or cash flow from operations, as determined by U.S. generally accepted accounting principles, or U.S. GAAP, and our calculation thereof may not be comparable to that reported by other companies. EBITDA and Adjusted EBITDA have limitations as analytical tools, and you should not consider them in isolation, or as substitutes for analysis of our results as reported under U.S. GAAP. Some of the limitations are:

 

  Ÿ  

EBITDA and Adjusted EBITDA do not reflect our cash expenditures, or future requirements for capital expenditures or contractual commitments;

 

  Ÿ  

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

  Ÿ  

EBITDA and Adjusted EBITDA do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;

 

  Ÿ  

although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

 

  Ÿ  

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our U.S. GAAP results and using EBITDA and Adjusted EBITDA only supplementally. We further believe that our presentation of these U.S. GAAP and non-GAAP financial measurements provide information that is useful to analysts and investors because they are important indicators of the strength of our operations and the performance of our core business.

Management uses EBITDA and Adjusted EBITDA:

 

  Ÿ  

as measurements of operating performance because they assist us in comparing our operating performance on a consistent basis, as both remove the impact of items not directly resulting from our core operations;

 

  Ÿ  

for planning purposes, including the preparation of our internal annual operating budget;

 

  Ÿ  

to allocate resources to enhance the financial performance of our business;

 

  Ÿ  

to evaluate the performance and effectiveness of our operational strategies;

 

  Ÿ  

to evaluate our capacity to fund capital expenditures and expand our business; and

 

  Ÿ  

to calculate incentive compensation for our employees.

In addition, these measurements are used by investors as supplemental measures to evaluate the overall operating performance of companies in our industry. Management believes that investors’ understanding of our performance is enhanced by including these non-GAAP financial measures as a reasonable basis for comparing our ongoing results of operations. Many investors are interested in understanding the performance of our business by comparing our results from ongoing operations from one period to the next and would ordinarily add back events that are not part of normal day-to-day operations of our business. By providing these non-GAAP financial measures, together with reconciliations, we believe we are enhancing investors’ understanding of our business and our results of operations, as well as assisting investors in evaluating how well we are executing strategic initiatives.

 

 

13


Table of Contents
Index to Financial Statements

The following is a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:

 

(Dollars in thousands)

  March 1,
2006-
June 12,
2006
         June 13,
2006-
February

28, 2007
    Fiscal year ended     Fiscal year
ended
February 28,
2009

pro forma
    Nine months ended     Twelve
months
ended
November

26, 2009
 
        February
29, 2008
    February
28, 2009
      November
27, 2008
  November
26, 2009
   
    (Pre-merger)                (Post-merger)           (unaudited)     (unaudited)   (unaudited)     (unaudited)  

Net income (loss)

  $ (6,439       $ (6,660   $ 3,702      $ 6,560      $ 7,344      $ 2,584   $ 7,028      $ 11,004   

Add (subtract):

                   

Interest expense

    5,001            11,685        20,057        24,709        27,105        17,951     27,351        34,109   

Provision for (benefit from) income taxes

    (1,894         (4,179     (3,909     (611     (185     1,269     8,610        6,729   

Depreciation and amortization

    4,227            16,759        24,146        26,529        28,126        19,676     21,446        28,300   
                                                                 

EBITDA(a)

  $ 895          $ 17,605      $ 43,996      $ 57,187      $ 62,390      $ 41,480   $ 64,435      $ 80,142   

Add (subtract):

                   

APF transition and related costs(b):

                   

Elimination and alignment of certain overhead functions

                             373        373        373              

Facility consolidation

                             282        282            373        655   

Fair value accounting for acquired inventory

                             284        284        284              

Mill restructuring(c)

                      247                                   

Whistleblower investigation(d)

                      443                                   

Mississippi sales tax audit(e)

                             258        258        258              

Corporate restructuring(f)

               240                                          

Impairment of fixed assets(g)

               488                                          

Terminated acquisition costs(h)

                      2,078        140        140        140              

Merger transaction costs(i)

    5,933            4,380                                          

Restatement—legal/accounting fees(j)

                             750        750                   750   

Natural Dam fire(k)

                                               250        250   

Insurance claim for wrapper damage(l)

                                               (546     (546
                                                                 

Adjusted EBITDA(a)

  $ 6,828          $ 22,713      $ 46,764      $ 59,274      $ 64,477      $ 42,535   $ 64,512      $ 81,251   
                                                                 

 

  (a) EBITDA and Adjusted EBITDA include stock-based compensation expense related to equity awards and cash payment of taxes associated with such equity awards. In addition, EBITDA and Adjusted EBITDA also include management fees and expenses paid to Weston Presidio Service Company, LLC, an affiliate of Weston Presidio V, L.P. and, from March 1, 2006 to June 12, 2006, to Charterhouse Group International, Inc., our former majority stockholder. We incurred stock-based compensation expense of $497 thousand from June 13, 2006 to February 28, 2007 (post-merger), $1,359 thousand and $1,140 thousand for the fiscal years ended February 29, 2008 (post-merger) and February 28, 2009 (including pro forma year ended February 28, 2009), respectively, and $690 thousand and $637 thousand for the nine months ended November 27, 2008 and November 26, 2009, respectively, and $1,087 thousand for the twelve months ended November 26, 2009. Management fees and expenses paid to Charterhouse Group International, Inc. equaled $153 thousand from March 1, 2006 to June 12, 2006. Management fees and expenses paid to Weston Presidio Service Company, LLC equaled $303 thousand from June 13, 2006 to February 28, 2007 (post-merger), $450 thousand for fiscal years ended February 29, 2008 (post-merger) and February 28, 2009 (including pro forma year ended February 28, 2009), respectively, and $338 thousand and $338 thousand for the nine months ended November 27, 2008 and November 26, 2009, respectively, and $450 thousand for the twelve months ended November 26, 2009.
  (b)

In fiscal year 2009, we acquired APF, which was a significant acquisition because of its size and complexity of operations. In connection with the APF Acquisition, we determined that several initiatives, to be completed over a

 

 

14


Table of Contents
Index to Financial Statements
 

twelve-month period, would help achieve the identified synergies. These initiatives included eliminating certain overhead functions and aligning those activities with our existing infrastructure as well as consolidating production and inventory storage facilities. Our consolidation of facilities included centralizing the acquired APF production facility and two APF inventory storage facilities located in Hauppauge, New York into one consolidated facility in Long Island, New York and moving machinery for a napkin line from our Neenah, Wisconsin location to the acquired APF Thomaston, Georgia facility. In addition, as a result of applying purchase accounting to record inventory at fair market value, we increased the book value of acquired inventory, which we amortized to cost of goods sold as the inventory was sold to customers during the second quarter of fiscal year 2009.

  (c) Mill restructuring relates to severance costs at one of our mills related to the termination of six employees.
  (d) We incurred legal and accounting costs associated with a whistleblower investigation that was ultimately determined to be without merit.
  (e) State tax catch-up costs for fiscal year 2009 relate to a Mississippi sales and use tax assessment based on an audit of prior periods. The Mississippi taxing authority assessed sales and use tax for natural gas consumption purchased in prior periods for which our service provider had not charged the appropriate sales and use tax amounts.
  (f) Corporate restructuring for fiscal year 2007 related to severance costs associated with the elimination of a corporate position.
  (g) Expenses incurred in connection with our decision in the fourth quarter of fiscal year 2007 to permanently shut down one of our paper machines at our St. Catharines, Ontario facility.
  (h) Acquisition-related costs incurred in connection with an acquisition that did not transpire.
  (i) In 2006, Weston Presidio V, L.P. acquired its ownership interest in us from our former majority stockholder, Charterhouse Group International, Inc. In connection with this acquisition, we incurred significant expenses within a finite period of time that were a direct result of the acquisition and did not reflect the ongoing nature of the business. Merger transaction costs for the period from March 1, 2006 to June 12, 2006 include bond consent solicitation fees and expenses of $3.0 million, investment banking fees of $2.0 million and legal fees and other of $0.9 million. Merger transaction costs for the period from June 13, 2006 to February 28, 2007 include $3.3 million of merger incentive compensation and legal and other acquisition-related transactions costs of $0.2 million. In addition, as a result of applying purchase accounting to record inventory at fair value, we increased the book value of acquired inventory by $0.9 million, which we amortized to cost of goods sold as the inventory was sold to customers during the period from June 13, 2006 to February 28, 2007.
  (j) Legal and accounting fees incurred in connection with the restatement of our consolidated financial statements for the fiscal year ended February 29, 2008 and for the first and second quarters of fiscal year 2009.
  (k) Insurance deductible costs related to a fire at our Natural Dam mill at our Gouverneur, New York facility.
  (l) Reflects insurance proceeds exceeding the book value for damaged packaging equipment (damaged in transit).

 

(4) Adjusted EBITDA margin is defined as the ratio of Adjusted EBITDA to net sales. We present Adjusted EBITDA margin because it is used by management as a performance measurement of Adjusted EBITDA generated from net sales. See note 3 above for a discussion of Adjusted EBITDA as a non-GAAP measurement and a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA.

 

 

15


Table of Contents
Index to Financial Statements

RISK FACTORS

This offering involves a high degree of risk. In addition to the other information contained in this prospectus, prospective investors should carefully consider the following risks before investing in our common stock. If any of the following risks actually occur, our business, financial condition and operating results could be materially adversely affected. As a result, the trading price of our common stock could decline, and you may lose all or part of you investment in our common stock. The risks discussed below also include forward-looking statements, and our actual results may differ substantially from those discussed in these forward-looking statements. See “Special Note Regarding Forward-Looking Statements” in this prospectus.

Risks Related to Our Business

Fluctuating demand in the tissue and specialty paper industry could have a material adverse effect on our business, financial condition and operating results.

The market for tissue and specialty paper products is sensitive to changes in general business conditions, industry capacity, consumer preferences and other factors. Our business exhibits some of this sensitivity, particularly in the away-from-home tissue market. Demand is influenced by fluctuations in inventory levels held by customers and consumer preferences. Supply depends primarily on industry capacity and capacity utilization rates. In periods of economic weakness, reduced spending by consumers and businesses results in decreased demand, potentially causing downward price pressure. In particular, the away-from-home market has experienced a recent decline because of the slowdown in the travel and restaurant industries and an increase in lay-offs as a result of the current economic downturn. This decline has had an effect on our net sales throughout fiscal year 2010 and may continue to have an effect in the future. Industry participants may also, at times, add new capacity or increase capacity utilization rates, potentially causing supply to exceed demand and exerting downward price pressure. We have no control over these factors, and they can heavily influence our financial performance.

Our operating results depend upon our wood pulp costs. An increase in wood pulp costs could have a material adverse effect on our business, financial condition and operating results.

Pulp is the principal raw material used in the manufacture of our specialty paper and tissue products. It is purchased in highly competitive, price sensitive markets. We buy a significant amount of pulp and other raw materials either through supply agreements or on the spot market. For fiscal year 2009, we purchased approximately 331,000 metric tons of pulp and recycled fiber at a cost of $185.7 million compared to 322,000 metric tons in fiscal year 2008 at a cost of $178.5 million. For the nine months ended November 26, 2009, we purchased approximately 239,126 metric tons of pulp and recycled fiber at a cost of $100.5 million compared to 244,544 metric tons in the nine months ended November 27, 2008 at a cost of $144.5 million. Pulp prices continued to increase in the third quarter of fiscal 2010 from their low point in April 2009 and are expected to increase in the fourth quarter of fiscal 2010. When pulp prices increase, we can generally pass most increases in the cost of pulp through to our customers, but price increases may not be passed to customers for three months or more after such increases in pulp prices occur. In some cases, the lag may be longer or we may not be able to pass through such cost increases at all. When pulp prices decline, we generally pass most decreases in the cost of pulp through to our tissue and machine-glazed tissue hardroll customers. For example, net sales in our machine-glazed tissue segment decreased 8.0% in the fourth quarter of fiscal year 2009 in part because of a decrease in net selling price per ton following a decrease in pulp prices. In addition, many of our arrangements with away-from-home hardroll customers do not have price escalators relating to wood pulp prices, and consequently, in some instances, we are unable to pass along an increase in pulp costs to these customers.

 

16


Table of Contents
Index to Financial Statements

We have agreements with various pulp vendors to purchase various amounts of pulp over the next two years. These commitments require purchases of pulp up to approximately 153,000 metric tons per year at pulp prices below published list prices and allow us to shift a portion of our pulp purchases to the spot market to take advantage of spot market prices when such prices fall. We believe that our current commitment under these arrangements or their equivalent approximates 50% to 65% of our current budgeted pulp needs through fiscal year 2012. If upon expiration of these agreements, or upon failure of our suppliers to fulfill their obligations under these agreements, we are unable to obtain wood pulp on terms as favorable as those contained therein, our cost of goods sold may increase and results of operations will be impaired. As a result, our ability to satisfy customer demands and to manufacture products in a cost-effective manner may be materially adversely affected.

In addition, the costs and availability of wood pulp have at times fluctuated greatly because of weather, economic global buying behaviors or general industry conditions. From time to time, timber harvesting may be limited by natural events, such as fire, insect infestation, disease, ice storms, excessive rainfall and wind storms or by harvesting restrictions. Production levels within the forest products industry are also affected by such factors as currency fluctuations, duties and finished lumber prices. These factors may increase the price we have to pay to our existing or any new suppliers. In the presence of oversupply in the markets we serve, selling prices of our finished products may not increase in response to raw material price increases. If we are unable to pass any raw material price increases through to our customers, our business financial condition and operating results may be materially adversely affected.

Our significant debt obligations, or our incurrence of additional debt, could limit our flexibility in managing our business and could materially and adversely effect our financial performance.

We are highly leveraged. As of November 26, 2009, we had approximately $268.3 million of long-term indebtedness outstanding. In addition, we are permitted under our revolving line of credit, which we refer to in this prospectus as our working capital facility, and the indenture governing our senior secured notes to incur additional debt, subject to certain limitations. Our high degree of leverage may have important consequences to you, including the following:

 

  Ÿ  

we may have difficulty satisfying our obligations under our indebtedness and, if we fail to comply with these requirements, an event of default could result;

 

  Ÿ  

we may be required to dedicate a substantial portion of our cash flow from operations to required payments on indebtedness, thereby reducing the availability of cash flow for working capital, capital expenditures and other general corporate activities (please refer to the table below under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations,” which sets forth our payment obligations with respect to our existing long-term debt);

 

  Ÿ  

covenants relating to our debt may limit our ability to obtain additional financing for working capital, capital expenditures and other general corporate activities;

 

  Ÿ  

covenants relating to our debt may limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;

 

  Ÿ  

we may be more vulnerable than our competitors to the impact of economic downturns and adverse developments in our business; and

 

  Ÿ  

we may be placed at a competitive disadvantage against any less leveraged competitors.

The occurrence of any one of these events could have a material adverse effect on our business, financial condition, operating results, and ability to satisfy our obligations under our indebtedness.

 

17


Table of Contents
Index to Financial Statements

In addition, subject to restrictions in the indenture governing our senior secured notes and restrictions in our working capital facility, we may incur additional indebtedness. As of November 26, 2009, we had approximately $52.2 million of availability under our working capital facility, after giving effect to outstanding letters of credit having a face amount of approximately $4.6 million. The terms of the indenture governing our senior secured notes permit us to incur additional debt, including a limited amount of additional secured debt. Any additional indebtedness we incur could increase the risks associated with our already substantial indebtedness and could have a material adverse effect on our business, financial condition and operating results.

Our energy costs may be higher than we anticipate, which could have a material adverse effect on our business, financial condition and operating results.

We use energy—mainly natural gas and electricity—to operate machinery and to generate steam, which we use in our production process. In the past, energy prices, particularly for natural gas and fuel oil, have increased, with a corresponding effect on our production costs. Although energy prices have been decreasing recently, such costs may increase again in the future. During fiscal year 2009 and 2008, and the nine months ended November 26, 2009 and November 27, 2008, we spent approximately $56.3 million, $50.9 million, $33.7 million and $42.6 million, respectively, on electricity, natural gas, oil and coal. If our energy costs are greater than anticipated, our business, financial condition and operating results may be materially adversely affected.

Unforeseen or recurring operational problems and maintenance outages at any of our facilities may cause significant lost production, which could have a material adverse effect on our business, financial condition and operating results.

Our manufacturing process could be affected by operational problems that could impair our production capability. Each of our facilities contains complex and sophisticated machines that are used in our manufacturing process. Disruptions or shutdowns at any of our facilities could be caused by:

 

  Ÿ  

maintenance outages to conduct maintenance operations that cannot be performed safely during operations;

 

  Ÿ  

prolonged power failures or reductions, including the effect of lightning strikes on our electrical supply;

 

  Ÿ  

breakdowns, failures or substandard performance of any of our pulping machines, paper machines, recovery boilers, converting machines, de-inking facility or other equipment;

 

  Ÿ  

the effect of noncompliance with material environmental requirements or permits;

 

  Ÿ  

shortages of raw materials, a drought or lower than expected rainfall on our water supply;

 

  Ÿ  

disruptions in the transportation infrastructure, including railroad tracks, bridges, tunnels or roads;

 

  Ÿ  

fires, floods, tornados, hurricanes, earthquakes or other catastrophic disasters;

 

  Ÿ  

labor difficulties; or

 

  Ÿ  

other operational problems.

If our facilities are shut down, they may experience prolonged startup periods, regardless of the reason for the shutdown. Those startup periods could range from several days to several weeks, depending on the reason for the shutdown and other factors. Any prolonged disruption in operations of any of our facilities could cause significant lost production, which would have a material adverse effect on our business, financial condition and operating results.

 

18


Table of Contents
Index to Financial Statements

Labor disputes or increased labor costs could disrupt our business and have a material adverse effect on our financial condition and operating results.

As of February 28, 2009, approximately 54% of our active full-time employees were represented by either the United Steelworkers of America or the Independent Paper Workers of Canada through various collective bargaining agreements. The collective bargaining agreements for our facilities expire between October 2009 and June 2013. We commenced collective bargaining negotiations at our Menominee, Michigan facility in late November 2009 and we are currently preparing for collective bargaining negotiations at our Gouverneur, New York facility, which we expect to begin in January 2010. It is likely that our workers will seek an increase in wages and benefits at the expiration of each of those contracts. Any significant work stoppage in the future or any significant increase in labor costs could have a material adverse effect on our business, financial condition and operating results.

We are dependent upon continued demand from our large customers. If we lose order volumes from any of our largest customers, our business, financial condition and operating results could be materially and adversely affected.

Our largest customers account for a significant portion of our sales. Our ten largest customers represented 54.9% of our sales for fiscal year 2007, 51.3% of our sales for fiscal year 2008 and 46.3% of our sales for the fiscal year 2009. Our largest single customer represented 13.4% of our sales in fiscal year 2008 and less than 10% of our sales in fiscal year 2009. Our ten largest customers represented 46.5% and 46.7% of our sales for the nine months ended November 26, 2009 and November 27, 2008, respectively. Our single largest customer represented 10.5% and 8.1% of our sales in the nine months ended November 26, 2009 and November 27, 2008, respectively. Some of our large customers (including four of our ten largest customers) have the capability of producing the products that they currently buy from us. The loss or significant reduction of orders from any of our largest customers could have a material adverse effect on our business, financial condition and operating results.

Restrictive covenants in our working capital facility and the indenture governing our senior secured notes may restrict our ability to pursue our business strategies.

Our working capital facility and the indenture governing our senior secured notes limit our ability, among other things, to:

 

  Ÿ  

incur additional debt and guarantees;

 

  Ÿ  

pay dividends and repurchase our stock;

 

  Ÿ  

make other restricted payments, including without limitation, investments;

 

  Ÿ  

create liens;

 

  Ÿ  

sell or otherwise dispose of assets, including capital stock of restricted subsidiaries;

 

  Ÿ  

enter into sale and leaseback transactions;

 

  Ÿ  

enter into agreements that restrict dividends from subsidiaries;

 

  Ÿ  

enter into transactions with our affiliates;

 

  Ÿ  

consolidate, merge, sell or otherwise dispose of all or substantially all of our assets; and

 

  Ÿ  

enter into new lines of business.

The agreement governing our working capital facility also requires us to maintain compliance with a 1:1 fixed charge coverage ratio if the average monthly availability under the facility is less than 15% of the facility commitment. Although the average monthly availability as of November 26, 2009 was

 

19


Table of Contents
Index to Financial Statements

$52.2 million, which was significantly higher than the covenant trigger level of $9 million, our ability to comply with this ratio may be affected by events beyond our control.

The restrictions contained in the indenture governing our senior secured notes and the agreement governing our working capital facility could:

 

  Ÿ  

limit our ability to plan for or react to market conditions or meet capital needs or otherwise restrict our activities or business plans; and

 

  Ÿ  

adversely affect our ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business activities that would be in our interest.

Any failure on our part to comply with these restrictive covenants may result in an event of default. Such event of default may trigger an acceleration right for our lenders under our working capital facility or the holders of our senior secured notes. If our obligations to repay the indebtedness under our working capital facility or our senior secured notes were accelerated, we cannot assure you that we would have sufficient assets to repay in full such indebtedness.

We may not be able to generate sufficient cash flows to meet our debt service obligations.

Our ability to make scheduled payments on, or to refinance, our obligations with respect to our indebtedness will depend on our financial and operating performance, which in turn will be affected by general economic conditions and by financial, competitive, regulatory and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future sources of capital will be available to us in an amount sufficient to enable us to service our indebtedness or to fund our other liquidity needs. If we are unable to generate sufficient cash flow to satisfy our debt obligations, we may have to undertake alternative financing plans, such as refinancing or restructuring our debt, selling assets, reducing or delaying capital investments or seeking to raise additional capital. We cannot assure you that any refinancing would be possible, that any assets could be sold, or, if sold, of the timing of the sales and the amount of proceeds that may be realized from those sales, or that additional financing could be obtained on acceptable terms, if at all. Our working capital facility and the indenture governing our senior secured notes restrict our ability to dispose of assets and use the proceeds from the disposition. Our inability to generate sufficient cash flows to satisfy our debt obligations, or to refinance our indebtedness on commercially reasonable terms, would materially and adversely affect our financial condition and operating results.

We are subject to significant environmental, health and safety laws and regulations and compliance expenditures. The cost of compliance with, and liabilities under, such laws and regulations could materially and adversely affect our business, financial condition and operating results.

Our business is subject to a wide range of federal, state, local and foreign general and industry specific environmental, health and safety laws and regulations, including those relating to air emissions, wastewater discharges, solid and hazardous waste management and disposal and site remediation. We are also subject to frequent inspections and monitoring by government enforcement authorities. Compliance with these laws and regulations is a significant factor in our business. From time to time, we incur significant capital and operating expenditures to achieve and maintain compliance with applicable environmental laws and regulations. Our failure to comply with applicable environmental laws and regulations or permit requirements could result in substantial civil or criminal fines or penalties or enforcement actions, including regulatory or judicial orders enjoining or curtailing operations or requiring remedial or corrective measures, installation of pollution control equipment or other actions, which could have a material adverse effect on our business, financial condition and operating results.

 

20


Table of Contents
Index to Financial Statements

Certain of our operations also require environmental permits or other approvals from governmental authorities, and certain of these permits and approvals are subject to expiration, denial, revocation or modification under various circumstances. Failure to obtain or comply with these permits and approvals, or with other environmental requirements, may subject us to civil or criminal enforcement proceedings that could lead to substantial fines and penalties being imposed against us, orders requiring us to take certain actions or temporary or permanent shutdown of our affected operations. Such enforcement proceedings could also have a material adverse effect on our business, financial condition and operating results.

In addition, as an owner and operator of real estate, we may be responsible under environmental laws and regulations for the investigation, remediation and monitoring, as well as associated costs, expenses and third-party damages, including tort liability and natural resource damages, relating to past or present releases of hazardous substances on or from our properties. Liability under these laws may be imposed without regard to whether we knew of, or were responsible for, the presence of those substances on our property, may be joint and several, meaning that the entire liability may be imposed on each party without regard to contribution, and retroactive and may not be limited to the value of the property. In addition, we or others may discover new material environmental liabilities, including liabilities related to third-party owned properties that we or our predecessors formerly owned or operated, or at which we or our predecessors have disposed of, or arranged for the disposal of, certain materials. We may be involved in administrative or judicial proceedings and inquiries in the future relating to such environmental matters which could have a material adverse effect on our business, financial condition and operating results.

New environmental laws or regulations (or changes in existing laws or regulations or their enforcement) may be enacted that require significant expenditures by us. If the resulting expenses significantly exceed our expectations, our business, financial condition and operating results could be materially and adversely affected. For example, there has been a recent legislative focus on greenhouse gas emissions, which could lead to laws or regulations requiring expenditures at our coal-based Menominee, Michigan facility or at other of our facilities.

We are also subject to various federal, state, local and foreign requirements concerning safety and health conditions at our manufacturing facilities. We may also be subject to material financial penalties or liabilities for noncompliance with those safety and health requirements, as well as potential business disruption, if any of our facilities or a portion of any facility is required to be temporarily closed as a result of any noncompliance with those requirements. Such financial penalties, liabilities or business disruptions could have a material adverse effect on our business, financial condition and operating results.

We may expand through acquisitions of other companies, which may divert our management’s attention and result in unexpected operating difficulties, increased costs and dilution to our stockholders.

We may make strategic acquisitions of other businesses. An acquisition may result in unforeseen operating difficulties and expenditures in assimilating or integrating the businesses, technologies, products, personnel or operations of the acquired companies. Furthermore, future acquisitions may:

 

  Ÿ  

involve our entry into geographic or business markets in which we have little or no prior experience;

 

  Ÿ  

create difficulties in retaining the customers of any acquired business;

 

  Ÿ  

result in a delay or reduction of sales for both us and the company we acquire; and

 

  Ÿ  

disrupt our ongoing business, divert our resources and require significant management attention that would otherwise be available for ongoing development of our current business.

 

21


Table of Contents
Index to Financial Statements

To complete an acquisition, we may be required to use a substantial amount of our cash or engage in equity or debt financing. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our common stock. Any debt financing obtained by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters that make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all, which could limit our ability to engage in acquisitions. Moreover, we can make no assurances that the anticipated benefits of any acquisition, such as operating improvements or anticipated cost savings, would be realized or that we would not be exposed to unexpected liabilities.

Further, an acquisition may negatively impact our results of operations because it may require us to incur charges and substantial debt or liabilities, may cause adverse tax consequences, substantial depreciation and amortization or deferred compensation charges, or may require the amortization, write-down or impairment of amounts related to deferred compensation, goodwill and other intangible assets, or may not generate sufficient financial return to offset acquisition costs.

We face many competitors, several of which have greater financial and other resources, and our customers may choose their products instead of ours.

We face competition in each of our markets from companies that produce the same type of products that we produce or that produce alternative products that customers may use instead of our products. We currently compete in the tissue, converted paper and specialty paper markets. Some of our competitors may be able to produce certain of our products at lower cost than us. Additionally, several of our competitors are large, vertically integrated companies that are more strongly capitalized than us or have more financial resources than us. Any of the foregoing factors may enable our competitors to better withstand periods of declining demand and adverse operating conditions. In addition, changes within the paper industry, including the consolidation of our competitors and consolidation of companies in the distribution channels for our products, have occurred and may continue to occur and may have a material adverse effect on our business, financial condition and operating results.

We compete on the basis of product quality and performance, price, service, sales and distribution. Competing in our markets involves the following key risks:

 

  Ÿ  

our failure to anticipate and respond to changing customer preferences and demographics;

 

  Ÿ  

our failure to develop new and improved products;

 

  Ÿ  

aggressive pricing by competitors, which may force us to decrease prices in an attempt to maintain market share;

 

  Ÿ  

consolidation of our customer base that diminishes our negotiating leverage;

 

  Ÿ  

the decision by our large customers to discontinue outsourcing the production of their products to us and to produce their products themselves;

 

  Ÿ  

acquisition of a customer by one of our competitors, who thereafter replaces us as a supplier for that customer; and

 

  Ÿ  

our failure to control costs.

These competitive factors could cause our customers to shift to other products or attempt to produce products themselves. Additional competition could result in lost market share or reduced prices for our products.

 

22


Table of Contents
Index to Financial Statements

Excess supply in the markets we serve may reduce the prices we are able to charge for our products.

Our competitors may build new machines or may activate idle machines, which would add more capacity to the tissue, specialty paper and converted paper and tissue product markets. Increased production capacity in any of these markets could cause an oversupply, resulting in lower market prices for our products and increased competition, either of which could have a material adverse effect on our business, financial condition and operating results.

We may lose business to competitors who underbid us, and we may be otherwise unable to compete favorably under declining market conditions.

Demand for tissue, converted paper and tissue products and specialty paper products tends to be more price-sensitive during declining market conditions than during normal market conditions. When market conditions decline, our competitors are more likely to try to underbid our prices in markets where we enjoy a leading position to target some of our market share in those markets. This competitive behavior could drive market prices down and hinder our ability to pass on increases in raw material costs to our customers. Because of the fixed-cost nature of our business, our overall profitability is sensitive to minor shifts in the balance between supply and demand. Competitors having lower operating costs than we do will have a competitive advantage over us with respect to products that are particularly price-sensitive.

The loss of our key managers could materially and adversely affect our business, financial condition and operating results.

Our future success depends, in significant part, upon the continued services of our management personnel. Our Chief Executive Officer, Russell C. Taylor, has over 25 years experience in the paper and paper products industry. Our senior executives have an average of over 25 years experience in the paper and paper products industry. The market for qualified individuals is highly competitive and we may not be able to attract and retain qualified personnel to replace or succeed members of our senior management or other key employees, should the need arise. Therefore, the loss of services of one or more of our key senior managers could materially and adversely affect our business, financial condition and operating results.

Exposure to interest rate changes and other types of capital market volatility could increase our financing costs.

We require both short-term and long-term financing to fund our operations, including capital expenditures. We are exposed to changes in interest rates with respect to our working capital facility and any new debt offerings. Changes in the capital markets, our credit rating or prevailing interest rates can increase or decrease the cost or availability of financing which may have an adverse effect on our financial condition and operating results. In addition, because some of our operations and sales are in international markets, we could be adversely affected by unfavorable fluctuations in foreign currency exchange rates.

Changes in the political or economic conditions in the United States, Canada and, to a lesser extent, other countries in which our products are sold could materially and adversely affect our business, financial condition and operating results.

We sell our products in the United States, Canada, Mexico and South America. The economic and political climate of each of these regions has a significant impact on costs, prices and demand for our products in these areas. Changes in regional economies or political stability (including acts of war or terrorism) and changes in trade restrictions or laws (including tax laws and regulations, increased

 

23


Table of Contents
Index to Financial Statements

tariffs or other trade barriers) can affect the cost of manufacturing and distributing our products and the price and sales volume of our products, which could materially and adversely affect our business, financial condition and operating results.

We may develop unexpected legal contingencies, which may have a material adverse effect on our business, financial condition and operating results.

We are, from time to time, party to various routine legal proceedings arising out of our business. These proceedings primarily involve commercial claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. In the event of unexpected future developments, it is possible that the ultimate resolutions of such matters, if unfavorable, could have a material adverse effect on our business, financial condition and operating results. In addition, there may also be adverse publicity associated with legal proceedings that could negatively affect the perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, legal proceedings may have a material adverse effect on our business, financial condition and operating results.

If we fail to establish and maintain effective internal control over financial reporting, we may have material misstatements in our financial statements, and we may not be able to report our financial results in a timely and reliable manner.

Pursuant to the Sarbanes-Oxley Act of 2002, we are required to provide a report by management in our Form 10-K on internal control over financial reporting, including management’s assessment of the effectiveness of such control. Internal control over financial reporting may not prevent or detect misstatements because of its inherent limitations, including the possibility of human error, the circumvention or overriding of controls or fraud. Therefore, even effective internal controls can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements. If we fail to maintain the adequacy of our internal controls, we may be unable to provide financial information in a timely and reliable manner. Any such difficulties or failure may have a material adverse effect on our business, financial condition and operating results.

During fiscal year 2009, we identified a material weakness in our internal control related to the application of GAAP as it relates to complex purchase accounting issues and accounting for derivatives, specifically:

 

  Ÿ  

deferred income taxes associated with purchase accounting;

 

  Ÿ  

shipping and handling fees and costs;

 

  Ÿ  

foreign exchange gains and losses; and

 

  Ÿ  

derivatives.

These deficiencies resulted in our restatement in February 2009 of our consolidated financial statements as of and for the fiscal years ended February 29, 2008 and February 28, 2007 and for the first two quarters of fiscal year 2009. In connection with the restatement, we also corrected errors in our treatment of classification of borrowings and repayments on the working capital facility in the statement of cash flows and classification of the equity investment by Weston Presidio V, L.P. and other stockholders.

In order to remediate the material weakness, we have:

 

  Ÿ  

implemented formal policies and procedures to identify, review, research and document accounting and disclosure of any unusual, nonrecurring and/or complex accounting transactions on a quarterly basis, including consultation with third-party consultants, when appropriate;

 

24


Table of Contents
Index to Financial Statements
  Ÿ  

corrected shipping and handling fees and costs presentation by restating prior periods and applied consistent presentation prospectively;

 

  Ÿ  

implemented monthly reconciliation processes with respect to the translation of our foreign subsidiary’s accounts from the functional currency to the U.S. dollar;

 

  Ÿ  

enhanced documentation with respect to our hedging transactions; and

 

  Ÿ  

reviewed the responsibilities within our accounting and finance department.

Management believes that the additional control procedures that have been implemented have fully remediated the material weakness; however, we cannot guarantee that we will not have additional material weaknesses in the future.

Risks Related to This Offering and Ownership of Our Common Stock

Our stock price will likely be volatile and your investment could decline in value.

The trading price of our common stock following this offering may fluctuate substantially, and the price of our common stock that will prevail in the market after this offering may be higher or lower than the price you pay, depending on many factors. These fluctuations could cause you to lose all or part of your investment in our common stock. Factors that could cause fluctuations in the trading price of our common stock include the following:

 

  Ÿ  

quarterly variations in our results of operations;

 

  Ÿ  

results of operations that vary from the expectations of securities analysts and investors;

 

  Ÿ  

results of operations that vary from those of our competitors;

 

  Ÿ  

changes in expectations as to our future financial performance, including financial estimates by securities analysts and investors;

 

  Ÿ  

announcements by us, our competitors or our vendors of significant contracts, acquisitions, or capital commitments;

 

  Ÿ  

announcements by third parties of significant claims or proceedings against us;

 

  Ÿ  

increases in prices of raw materials for our products or energy costs;

 

  Ÿ  

future sales of our common stock; and

 

  Ÿ  

general domestic and international economic conditions.

In addition, the stock market in general has experienced significant price and volume fluctuations that have often been unrelated or disproportionate to operating performance. These broad market factors may seriously harm the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. A securities class action suit against us could result in potential liabilities, substantial costs and the diversion of our management’s attention and resources, regardless of the outcome.

Our common stock has no prior market and our stock price may decline after the offering.

Prior to this offering, there has been no public market for shares of our common stock. Although we have applied to have our common stock listed on the New York Stock Exchange, an active trading market for our common stock may not develop or, if it develops, may not be maintained after this offering. Our company and the representatives of the underwriters will negotiate to determine the initial

 

25


Table of Contents
Index to Financial Statements

public offering price. The initial public offering price may be higher than the trading price of our common stock following the offering and you may not be able to sell your shares of our common stock at or above the price you paid in the offering, or at all.

Our principal stockholders will have significant influence over our business affairs. If the ownership of our common stock continues to be highly concentrated, it will prevent you and other stockholders from influencing significant corporate decisions, which may adversely affect the value of your investment.

After this offering, it is anticipated that our major stockholder, Weston Presidio V, L.P., will beneficially own shares of our common stock, which in the aggregate will represent approximately 48.46% of the outstanding shares of our common stock, or 43.15% if the underwriters’ option to purchase additional shares is exercised in full, based on an assumed initial public offering price per share of $16.00, the mid-point of the range set forth on the cover of this prospectus. For example, if the offering price were to equal $15.00, Weston Presidio V, L.P. would beneficially own shares of our common stock, which in the aggregate would represent approximately 49.1% of the outstanding shares of our common stock, or 43.88% if the underwriters’ option to purchase additional shares is exercised in full. If the offering price were to equal $17.00, Weston Presidio V, L.P. would beneficially own shares of our common stock, which in the aggregate would represent approximately 47.88% of the outstanding shares of our common stock, or 42.49% if the underwriters’ option to purchase additional shares is exercised in full. As a result, Weston Presidio V, L.P. will have the ability to exercise significant influence over matters submitted to our stockholders for approval, including the election and removal of directors, amendments to our certificate of incorporation and bylaws and the approval of any business combination. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving a premium for their shares.

In addition, pursuant to a replacement shareholders’ agreement that we expect to enter into with Weston Presidio V, L.P. effective immediately prior to the closing of the offering, Weston Presidio V, L.P. will have a consent right over the hiring or firing of our chief executive officer, a change of control of our company, certain acquisitions or divestitures of assets or entities and the issuance of equity securities in certain transactions. In addition, Weston Presidio V, L.P. will have the right under the replacement shareholders’ agreement to nominate one director for election to our board at our annual meeting of stockholders to be held in 2010. See “Certain Relationships and Related Party Transactions—Replacement Shareholders’ Agreement.”

Weston Presidio V, L.P. may have interests different from yours. For example, because Weston Presidio V, L.P. acquired its investment in our company at a cost of $63.3 million in the aggregate, Weston Presidio V, L.P. may be more interested in selling our company to an acquiror than other investors or may want us to pursue strategies that deviate from the interests of other stockholders.

Additionally, Weston Presidio V, L.P. is in the business of making investments in companies and it, or its affiliates, may from time to time acquire and hold interests in businesses that compete directly or indirectly with us. Weston Presidio V, L.P. or its affiliates may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. So long as Weston Presidio V, L.P. continues to own, or hold proxies with respect to, a significant amount of our common stock, Weston Presidio V, L.P. will continue to be able to significantly influence or effectively control our decisions.

 

26


Table of Contents
Index to Financial Statements

Investors purchasing common stock in this offering will experience immediate and substantial dilution.

The initial public offering price of shares of our common stock will be substantially higher than the net tangible book value per outstanding share of our common stock. Our net tangible book value per share as of November 26, 2009, on a pro forma basis to give effect to the reorganization transactions, this offering and the application of the net proceeds thereof, is $2.25 per share. You will incur immediate and substantial dilution of $13.75 per share in the pro forma net tangible book value per share of our common stock, based on an assumed initial public offering price of $16.00, the mid-point of the range set forth on the cover of this prospectus. If the offering price were to equal $15.00, you would incur dilution of $12.88 per share in the pro forma net tangible book value per share, and if the offering price were to equal $17.00, you would incur dilution of $14.62 per share in the pro forma net tangible book value per share. In addition, we have outstanding options with exercise prices significantly below the initial public offering price. To the extent outstanding options are ultimately exercised, there will be further dilution to investors in this offering.

Future sales, or the perception of future sales, of a substantial amount of our common shares could depress the trading price of our common stock.

If we or our stockholders sell shares of common stock in the public market following this offering or if the market perceives that these sales could occur, the market price of shares of our common stock could decline. These sales may make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we deem appropriate, or to use equity as consideration for future acquisitions.

Upon completion of this offering, we will have 200 million shares of common stock authorized and 18,607,556 shares of common stock outstanding, based on an assumed initial public offering price per share of $16.00, the mid-point of the range set forth on the cover of this prospectus. See “Prospectus Summary—The Offering—Pricing Sensitivity Analysis.” Of these shares, the 7,800,000 shares to be sold in this offering will be freely tradable. We, our executive officers, our directors and the selling stockholders have entered into agreements with the underwriters not to sell or otherwise dispose of shares of our common stock for a period of at least 180 days following completion of this offering, with certain exceptions. Immediately upon the expiration of this lock-up period, 101,533 shares will be freely tradable pursuant to Rule 144 under the Securities Act of 1933 by non-affiliates, and another 10,582,450 shares will be eligible for resale pursuant to Rule 144 under the Securities Act of 1933, subject to the volume, manner of sale, holding period and other limitations of Rule 144.

Anti-takeover provisions in our charter documents could discourage, delay or prevent a change in control of our company and may affect the trading price of our common stock.

Our corporate documents, to be effective upon the completion of this offering, and the Delaware General Corporation Law contain provisions that may enable our board of directors to resist a change in control of our company even if a change in control were to be considered favorable by you and other stockholders. These provisions:

 

  Ÿ  

stagger the terms of our board of directors (which provision will expire beginning with our annual meeting of stockholders in 2013) and require supermajority stockholder voting to remove directors;

 

  Ÿ  

authorize our board of directors to issue preferred stock and to determine the rights and preferences of those shares, which will be senior to our common stock, without prior stockholder approval;

 

  Ÿ  

establish advance notice requirements for nominating directors and proposing matters to be voted on by stockholders at stockholder meetings;

 

27


Table of Contents
Index to Financial Statements
  Ÿ  

prohibit our stockholders from calling a special meeting of stockholders and prohibit stockholders from acting by written consent; and

 

  Ÿ  

require supermajority stockholder voting to effect certain amendments to our certificate of incorporation and bylaws.

In addition, our certificate of incorporation will prohibit large stockholders, in particular those owning 15% or more of our outstanding voting stock (other than Weston Presidio V, L.P., its affiliates and associates and subsequent purchasers of 5% or more of our outstanding voting stock from Weston Presidio V, L.P. and its affiliates and associates, subject to certain exceptions), from merging or consolidating with us except under certain circumstances. These provisions could discourage, delay or prevent a transaction involving a change in control of our company. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire.

We do not expect to pay any dividends on our common stock for the foreseeable future.

We currently expect to retain all future earnings, if any, for future operation, expansion and debt repayment and have no current plans to pay any cash dividends for the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our operating results, financial condition, cash requirements, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends may be limited by covenants of any existing and future outstanding indebtedness we or our subsidiaries incur. As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than that which you paid for it.

 

28


Table of Contents
Index to Financial Statements

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that express our opinions, expectations, beliefs, plans, objectives, assumptions or projections regarding future events or future results, in contrast with statements that reflect historical facts. Many of these statements are contained under the headings “Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business.” In some cases, we have identified such forward-looking statements with typical conditional words such as “anticipate,” “intend,” “believe,” “estimate,” “plan,” “seek,” “project” or “expect,” “may,” “will,” “would, “could” or “should,” the negative of these terms or other comparable terminology.

While we always intend to express our best judgment when we make statements about what we believe will occur in the future, and although we base these statements on assumptions that we believe to be reasonable when made, these forward-looking statements are not a guarantee of performance, and you should not place undue reliance on such statements. Forward-looking statements are subject to many uncertainties and other variable circumstances, including those discussed in this prospectus under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” many of which are outside of our control, that could cause our actual results and experience to differ materially from those we thought would occur.

The following listing represents some, but not necessarily all, of the factors that may cause actual results to differ from those anticipated or predicted:

 

  Ÿ  

the fluctuating demand of the paper industry;

 

  Ÿ  

changes in the cost and availability of raw materials, including future demand for pulp in domestic and export markets;

 

  Ÿ  

the effects on us from competition;

 

  Ÿ  

our ability to service our debt obligations and fund our working capital requirements;

 

  Ÿ  

increases in our energy costs;

 

  Ÿ  

operational problems at our facilities causing significant lost production;

 

  Ÿ  

the maintenance of relationships with customers;

 

  Ÿ  

our ability to realize operating improvements and anticipated cost savings;

 

  Ÿ  

changes in our regulatory environment, including environmental regulations;

 

  Ÿ  

increases in interest rates;

 

  Ÿ  

loss of key management;

 

  Ÿ  

assessment of market and industry conditions;

 

  Ÿ  

general economic conditions and their effects on our business;

 

  Ÿ  

our ability to establish and maintain effective control over financial reporting; and

 

  Ÿ  

those factors listed in the “Risk Factors” section of this prospectus.

Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. The forward-looking statements included in this prospectus are made only as of the date hereof. We do not undertake, and specifically decline, any obligation to update any such statements or to publicly announce the results of any revisions to any of such statements to reflect future events or developments.

 

29


Table of Contents
Index to Financial Statements

USE OF PROCEEDS

We estimate that the net proceeds we will receive from the sale of 2,175,000 shares of our common stock in this offering, after deducting underwriting discounts and other offering expenses payable by us, will be approximately $29.4 million. This estimate assumes an initial public offering price of $16.00 per share, the mid-point of the range set forth on the cover page of this prospectus. A $1.00 increase (decrease) in the assumed initial public offering price of $16.00 per share would increase (decrease) the net proceeds to us from this offering by $2.0 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and other offering expenses payable by us. We will not receive any proceeds from the sale of shares of our common stock by Weston Presidio V, L.P. or any of the other selling stockholders (including any shares sold by the selling stockholders pursuant to the underwriters’ option to purchase additional shares).

We intend to use the net proceeds we will receive from this offering to repay, repurchase, redeem or otherwise retire approximately $29.4 million of existing indebtedness (including paying any redemption or repurchase premiums or related pre-payment penalties), including potentially, but not limited to, redeeming or repurchasing a portion of our outstanding senior secured notes or repaying our $6.3 million promissory note issued in the APF Acquisition.

In June 2009, we issued $255 million in aggregate principal amount of our senior secured notes and used the proceeds of this issuance to redeem all of our 9 3/4% senior secured notes due 2010, which we refer to in this prospectus as the 2010 Notes, and to fund an earnout payment made on August 28, 2009 in conjunction with the 2006 Merger. This redemption was completed in July 2009. The senior secured notes mature on June 1, 2014, pay interest in arrears on June 1 and December 1 of each year (commencing on December 1, 2009) at the rate of 11 1/2% and have an effective interest rate of 12.48%.

In connection with the APF Acquisition in July 2008, we issued a promissory note in the principal amount of $6.3 million, which bears interest at 12% per year and is payable in quarterly installments with the principal due on July 2, 2011.

 

30


Table of Contents
Index to Financial Statements

DIVIDEND POLICY

We have not declared or paid recurring dividends on our common stock. We currently expect to retain all future earnings, if any, for use in the operation and expansion of our business and debt repayment; therefore, we do not anticipate paying cash dividends in the foreseeable future. Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, our operating results, cash requirements, financial condition, contractual restrictions and other factors that our board of directors may deem relevant. In addition, our ability to pay dividends is limited by covenants in our working capital facility and in the indenture governing our senior secured notes. See “Description of Indebtedness” for restrictions on our ability to pay dividends.

 

31


Table of Contents
Index to Financial Statements

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization as of November 26, 2009:

 

  Ÿ  

on an actual basis;

 

  Ÿ  

on a pro forma basis to give effect to the reorganization transactions; and

 

  Ÿ  

on a pro forma as adjusted basis to give effect to (1) the reorganization transactions, (2) the adoption of our amended and restated certificate of incorporation in connection with this offering, (3) our sale of 2,175,000 shares of common stock in this offering at an assumed initial public price of $16.00 per share, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and other offering expenses payable by us, (4) the repayment of indebtedness with the proceeds from this offering and (5) the payment of an estimated $2.4 million in redemption or repurchase premiums or penalties.

You should read the information set forth below in conjunction with “Use of Proceeds,” “Unaudited Pro Forma Condensed Combined Financial Information,” “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

     As of November 26, 2009
     Actual    Pro Forma    Pro Forma
As Adjusted(1)
          (unaudited)    (unaudited)
     (dollars in thousands, except per share
data)

Cash and cash equivalents(2)

   $ 7,149    $ 7,149    $ 7,149
                    

Total debt(3):

        

11 1/2% senior secured notes due in 2014(4)

     246,428      246,428      226,438

CityForest industrial revenue bonds

     16,355      16,355      16,355

APF Acquisition seller promissory note(4)

     6,300      6,300     

Borrowing under variable rate working capital facility

              
                    

Total debt(4)

     269,083      269,083      242,793

Stockholders’ equity:

        

Common stock, par value $0.01 per share: 1,000 shares authorized, 100 shares issued and outstanding, actual; 200,000,000 shares authorized, 16,432,556 shares issued and outstanding, pro forma; and 200,000,000 shares authorized, 18,607,556 shares issued and outstanding pro forma as adjusted

     1      164      186

Capital in excess of par value

     73,284      73,121      102,463

Accumulated earnings

     10,726      10,726      8,291

Accumulated other comprehensive (loss) income

     351      351      351
                    

Total stockholders’ equity

     84,362      84,362      111,291

Total capitalization

   $ 353,445    $ 353,445    $ 354,084
                    

 

32


Table of Contents
Index to Financial Statements

 

 

(1) A $1.00 increase (decrease) in the assumed initial public offering price of $16.00, which is the mid-point of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of the amount of cash and cash equivalents, additional paid-in capital, total stockholders’ equity and total capitalization by approximately $2.0 million, assuming the number of shares offered, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and other offering expenses payable by us. The pro forma information discussed above is illustrative only and following the closing of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing.

The table above excludes:

 

  Ÿ  

as of November 26, 2009, 797,499 shares issuable upon the exercise of outstanding stock options at a weighted-average exercise price of $5.12 per share; and

 

  Ÿ  

2,795,000 shares reserved for future issuance under our 2010 Equity Compensation Plan, which will become effective prior to the completion of this offering, as more fully described in “Compensation Discussion and Analysis—2010 Equity Compensation Plan”.

In addition, the number of shares to be outstanding after this offering as set forth in the table is based on an initial public offering price per share of $16.00, which is the mid-point of the price range set forth on the cover page of this prospectus. The actual number of shares of common stock to be issued to holders of Cellu Parent Corporation preferred stock in connection with the reorganization and this offering, as well as the actual number of shares of common stock to be outstanding following this offering, will be based on the initial public offering price set forth on the cover page of this prospectus. As described above in this prospectus under the heading “Prospectus Summary—The Offering—Pricing Sensitivity Analysis,” to the extent that the actual initial public offering price per share for this offering is greater or less than $16.00, the actual number of shares of common stock to be issued to the holders of preferred stock and to be outstanding after this offering will be lower or higher, respectively.

 

(2) Does not reflect a potential reduction to cash and cash equivalents of up to $0.9 million in connection with the put right granted to certain option holders as described below under the heading “Compensation Discussion and Analysis—Existing Equity Compensation Plans—2006 Stock Option and Restricted Stock Plan.”

 

(3) Includes the current portion of long-term debt of $760,000 related to the City Forest industrial revenue bonds at November 26, 2009.

 

(4) The amount of our indebtedness that we redeem or repurchase with the net proceeds of this offering set forth in the table is based on an assumed initial public offering price per share of $16.00, the mid-point of the range set forth on the cover of this prospectus. To the extent that the actual initial public offering price is greater or less than $16.00, the actual amount of indebtedness that we redeem or repurchase will be greater or less, respectively, than the amount shown. For example, if the actual initial public offering price per share for this offering were to equal $17.00, our total debt outstanding on a pro forma as adjusted basis would be $241.0 million. Similarly, if the actual initial public offering price per share for this offering were to equal $15.00, our total debt outstanding on a pro forma as adjusted basis would be $244.6 million.

 

33


Table of Contents
Index to Financial Statements

UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION

The following table contains our pro forma statement of operations data for the fiscal year ended February 28, 2009. The unaudited pro forma combined statement of operations data for the fiscal year ended February 28, 2009 gives effect to the APF Acquisition as if it had occurred on March 1, 2008 and includes historical financial results of Cellu Tissue, including APF from the date of acquisition (July 2, 2008 through February 28, 2009), and APF (adjusted to exclude the income and expense items related to the non-operating assets and liabilities that were not acquired by Cellu Tissue in the APF Acquisition) for the period from March 1, 2008 through July 1, 2008. The excluded income and expense items primarily relate to depreciation, aircraft-related expenses and interest expense.

Our unaudited pro forma combined statement of operations data for fiscal year 2009 has been derived from the historical statement of operations data of Cellu Tissue for fiscal year 2009 appearing elsewhere in this prospectus and historical statement of operations data derived from the accounting records of APF for the period from March 1, 2008 through July 1, 2008. This historical statement of operations data of APF for the period from March 1, 2008 through July 1, 2008 was computed as the sum of (1) statement of operations data for March 2008, and (2) statement of operations data for the period from April 1, 2008 through June 30, 2008, which was derived by subtracting the data for the three months ended March 31, 2008 from statement of operations data for the six months ended June 30, 2008 included elsewhere in this prospectus.

The unaudited pro forma combined statement of operations data includes the adjustments that have a continuing impact on the combined company and reflect the application of purchase accounting. The pro forma adjustments are described in the notes to the unaudited pro forma combined statement of operations data. The adjustments are based upon available information and certain management judgments and estimates. The purchase accounting adjustments are subject to revisions, which may be reflected in future periods. Revisions, if any, are not expected to have a material effect on the statement of operations or financial position of the combined company.

Any savings or additional costs that may be realized through the integration of the operations of APF with Cellu Tissue have not been estimated or included in the unaudited pro forma combined statement of operations.

The unaudited pro forma financial information and accompanying notes are presented for illustrative purposes only and do not purport to be indicative of, and should not be relied upon as indicative of, the operating results that may occur in the future or that would have occurred if the acquisition had been consummated on March 1, 2008. A number of factors may affect our actual results. See “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Special Note Regarding Forward-Looking Statements.” The unaudited pro forma financial information set forth below should be read in conjunction with “Selected Consolidated Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Cellu Tissue’s audited consolidated financial statements and notes thereto for the fiscal year ended February 28, 2009 included elsewhere in this prospectus and APF’s audited combined financial statements and notes thereto as of and for the year ended December 31, 2007, APF’s audited combined financial statements and notes thereto as of December 31, 2006 and for the years ended December 31, 2006 and 2005 and APF’s unaudited combined financial statements and notes thereto as of June 30, 2008 and for the three and six months ended June 30, 2007 and 2008, all included elsewhere in this prospectus.

 

34


Table of Contents
Index to Financial Statements

Unaudited Pro Forma Condensed Combined Statement of Operations for the Fiscal Year Ended February 28, 2009

 

    Cellu Tissue
Holdings, Inc.
    APF     Excluded
results
    Acquired
results
    Pro forma
adjustments
    Pro forma
combined
 

(Amounts in thousands
except share amounts)

  Fiscal year
ended
February 28,
2009
    Period from
March 1, 2008-
July 1, 2008
    Period from
March 1, 2008-
July 1, 2008
    Period from
March 1, 2008-
July 1, 2008
    February 28,
2009
    February 28,
2009
 
       

Net sales

  $ 519,022      $ 32,087      $      $ 32,087      $      $ 551,109   

Cost of goods sold

    464,118        24,211        (824 )(1A)      23,387        1,514 (1)(4)      489,019   
                                               

Gross profit

    54,904        7,876        824        8,700        (1,514     62,090   

Selling, general and administrative expenses

    21,869        4,548        (1,054 )(1A)      3,494        (1,377 )(4)      23,986   

Amortization expense

    2,872                             1,460 (1)      4,332   
                                               

Income from operations

    30,163        3,328        1,878        5,206        (1,597     33,772   

Interest expense, net

    (24,709     (650     650 (1A)             (2,396 )(2)      (27,105

Foreign currency gain

    562                                    562   

Other expense

    (67     (3            (3            (70

Income before income tax (benefit) expense

    5,949        2,675        2,528        5,203        (3,993     7,159   

Income tax (benefit) expense

    (611                     426 (3)      (185
                                               

Net income

  $ 6,560        2,675      $ 2,528      $ 5,203      $ (4,419   $ 7,344   
                                               

Basic and diluted income per share

  $ 65,602              $ 73,440   

Basic and diluted shares outstanding

    100                100   

Pro forma basic and diluted income per share(5)

  $ 0.40              $ 0.45   

Pro forma basic and diluted shares outstanding(5)

    16,432,556                16,432,556   

 

35


Table of Contents
Index to Financial Statements

Notes to Unaudited Pro Forma Condensed Combined Statement of Operations

(in thousands)

In July 2008, we acquired certain assets and assumed certain liabilities from APF. We paid total cash for the acquisition of $70,455, representing a purchase price of $68,000 less a working capital adjustment of $63 and acquisition costs of $2,518. We financed the acquisition in part through the issuance of additional 9 3/4% Senior Secured Notes due 2010 in an aggregate principal amount of $40,000 at a discount of $3,100 (for net proceeds of $36,900), borrowings under our working capital facility of $11,368, contribution by our ultimate parent company from the proceeds of an issuance of its preferred stock in the amount of $15,001, the issuance of a promissory note by Cellu Tissue to the sellers in an aggregate principal amount equal to $6,300 and available cash on hand. In addition, we incurred $886 of costs for the working capital facility and bond financing.

 

(1) We considered outside third-party appraisals of the acquired business’ tangible and intangible assets to determine the applicable fair market values, which are as follows:

 

Tangible fixed assets

   $ 5,306

Trademarks

     56

Customer lists

     12,319

Noncompete agreements

     12,770

Goodwill

     29,685

Depreciation of the fair market value assigned to tangible fixed assets based on the remaining useful lives is $137 for the period from March 1, 2008 through July 1, 2008 and has been recorded within cost of goods sold. Intangible assets identified are being amortized over the following periods:

 

Trademarks

   3 years

Noncompete agreements

   5 years

Customer lists

   7 years

Goodwill is not being amortized, and amortization expense related to intangible assets is $1,460 for the period from March 1, 2008 through July 1, 2008.

 

(1A) Depreciation expense and airplane expenses recorded in the historical results of APF for the period from March 1, 2008 through July 1, 2008 have been excluded and consisted of the following:

 

Depreciation expense (cost of goods sold)

   $ 824
      

Depreciation expense (selling, general and administrative expenses)

     429

Aircraft expenses (selling, general and administrative expenses)

     625
      

Total selling, general and administrative expenses

   $ 1,054

Historically, depreciation expense was computed using both straight-line and accelerated methods over the estimated useful lives of the assets as follows:

 

Land improvements

   15 years

Buildings and improvements

   7-39 years

Machinery and equipment

   3-7 years

Office furniture and fixtures

   3-7 years

Automobiles

   5 years

Aircraft

   20 years

 

36


Table of Contents
Index to Financial Statements

Furthermore, depreciation expense related to the aircraft, office furniture and fixtures and a storage facility historically was recorded to selling, general and administrative expenses. All other deprecation expense was recorded to cost of goods sold. As not all fixed assets were acquired and those that were acquired are valued at fair value, all historical deprecation has been excluded for purposes of the pro forma combined statement of operations and depreciation has been recorded based on the fair value of the acquired assets over the remaining estimated useful lives (ranging from 4-28 years, depending on the equipment) on a straight-line basis.

Interest expense, net of $650 for the period from March 1, 2008 to July 1, 2008, has been excluded as the existing debt was not assumed.

 

(2) Interest recorded historically by APF has been excluded. Interest on new debt, financing and capitalized costs has been included for the period March 1, 2008 through July 1, 2008 and consists of the following:

 

Debt and bond issuance costs

   $ 132

Discount on notes

     512

9 3/4% Senior Secured Notes due 2010

     1,314

Seller note

     255

Working capital facility

     183
      

Total interest

   $ 2,396
      

The interest rate on the senior secured notes was 9 3/4%, and the weighted average interest rate on the revolving line of credit is 4.6%. If the interest rate on the revolving line of credit were to change by 0.25%, interest expense would have changed by $10.

We incurred debt and bond issuance costs of $886 in connection with financing the transaction. These costs are being amortized over the remaining term of the working capital facility (June 12, 2011), and bond issuance costs were being amortized over the term of the 9 3/4% Senior Secured Notes (March 15, 2010) before the redemption of the 9 3/4% Senior Secured Notes with the net proceeds of the offering of our 11 1/2 % Senior Secured Notes due 2014, which were issued on June 3, 2009. Giving effect to the refinancing of the 9 3/4% Senior Secured Notes with a portion of the net proceeds from the issuance of the 11 1/2% Senior Secured Notes on June 3, 2009, the interest expense of $1,314 recorded above would have been $1,550.

 

(3) Prior to the acquisition, APF operated as an S Corporation. The pro forma tax rate assumes that APF was taxed as a C Corporation and was part of the consolidated tax return of Cellu Tissue. The statutory tax rate of 35% was applied to tax effect the pro forma adjustments.

 

(4) Shipping and handling costs of $1,377 have been reclassified from selling, general and administrative expenses to cost of goods sold as APF historically classified such costs as operating expenses and Cellu Tissue classifies such costs as cost of goods sold.

 

(5) The unaudited pro forma computation of basic and diluted earnings per share includes the effect of the reorganization transactions, including the conversion of preferred stock into shares of common stock and the stock split of such stock as well as the existing shares of common stock into 16,432,556 shares of common stock; however, it excludes the shares expected to be issued in connection with this offering. Unaudited pro forma basic and diluted shares outstanding are equal for all periods presented as there were no potentially dilutive shares in these periods. The 16,432,556 shares of common stock is based on an assumed initial public offering price of $16.00 per share, the mid-point of the range set forth on the cover of this prospectus. See “Prospectus Summary—The Offering—Pricing Sensitivity Analysis.”

 

37


Table of Contents
Index to Financial Statements

SELECTED CONSOLIDATED FINANCIAL DATA

The following table contains our selected consolidated financial data for fiscal year 2009, for fiscal year 2008, for the period from March 1, 2006 to June 12, 2006 (pre-merger), for the period from June 13, 2006 to February 28, 2007 (post-merger), for fiscal year 2006 and for fiscal year 2005 and for the nine months ended November 26, 2009 and November 27, 2008. Our selected consolidated results of operations and other data for fiscal year 2009, for fiscal year 2008, for the period from March 1, 2006 to June 12, 2006 (pre-merger) and for the period from June 13, 2006 to February 28, 2007 (post-merger), and our summary consolidated balance sheet data at February 28, 2009 and February 29, 2008 have been derived from audited consolidated financial statements included elsewhere in this prospectus. Our selected consolidated results of operations and other data for fiscal years 2006 and 2005 and our selected consolidated balance sheet data at February 28, 2007, February 28, 2006 and February 28, 2005 have been derived from audited consolidated financial statements not included elsewhere in this prospectus. Our selected consolidated results of operations and other data for the nine months ended November 27, 2008 and November 26, 2009 have been derived from our unaudited consolidated financial statements included elsewhere in this prospectus and, in our opinion, such financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the data for those periods. The fiscal year 2007 information is presented separately for the periods prior to the 2006 Merger and after the 2006 Merger. For more information about the 2006 Merger, in which Weston Presidio V, L.P. gained control of Cellu Tissue, see “Business.”

You should read the information set forth below in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes included elsewhere in this prospectus.

 

38


Table of Contents
Index to Financial Statements

(Amounts in
thousands
except share
amounts)

  Fiscal year     March 1,
2006-

June 12,
2006
             June 13,
2006-
February 28,
2007
    Fiscal year     Nine months ended  
  2005     2006             2008     2009(1)     November 27,
2008(1)
    November 26,
2009(1)
 
    (Pre-merger)                          (Post-merger)              

Statement of operations data:

                     

Net sales:

                     

Tissue segment

  $ 233,710      $ 237,998      $ 68,715            $ 174,074      $ 333,342      $ 400,640      $ 300,355      $ 299,880   

Machine-glazed tissue segment

    106,023        99,365        28,029              73,338        109,739        114,376        87,904        81,195   

Foam segment

                                             4,006        2,323        5,797   
                                                                     

Total net sales

    339,733        337,363        96,744              247,412        443,081        519,022        390,582        386,872   

Cost of goods sold

    298,891        309,641        88,556              234,897        401,352        464,118        351,693        324,143   
                                                                     

Gross profit

    40,842        27,722        8,188              12,515        41,729        54,904        38,889        62,729   

Income (loss) from operations

    21,955        11,433        (3,330           611        19,630        30,163        21,649        43,642   

Net income (loss)

  $ 3,096      $ (2,569   $ (6,439         $ (6,660   $ 3,702      $ 6,560      $ 2,584      $ 7,028   

Basic and diluted income (loss) per share

  $ 30,960      $ (25,694   $ (64,392         $ (66,596   $ 37,017      $ 65,601      $ 25,841      $ 70,283   

Basic and diluted shares outstanding

    100        100        100              100        100        100        100        100   

Unaudited pro forma basic and diluted income (loss) per share (2)

  $ 0.19      $ (0.16   $ (0.39         $ (0.41   $ 0.23      $ 0.40      $ 0.16      $ 0.43   

Unaudited pro forma basic and diluted shares outstanding (2)

    16,432,556        16,432,556        16,432,556              16,432,556        16,432,556        16,432,556        16,432,556        16,432,556   

Balance sheet data (at end of period):

                     

Cash and cash equivalents

  $ 26,959      $ 22,824        N/A            $ 16,261      $ 883      $ 361      $ 513      $ 7,149   

Total assets

    210,843        210,232        N/A              345,343        423,217        484,047        494,040        502,101   

Total debt

    161,060        161,080        N/A              160,356        208,647        261,653        270,998        269,083   

Stockholders’ equity

    (7,586     (6,906     N/A              38,752        46,085        67,737        64,792        84,362   

Other financial data:

                     

Net cash provided by (used in) operating activities

  $ 32,235      $ 8,600      $ (6,384         $ 9,785      $ 19,796      $ 24,060      $ 9,601      $ 53,684   

Net cash (used in) investing activities

    (7,416     (13,050     (1,938           (7,677     (64,141     (80,557     (73,882     (19,773

Net cash (used in) provided by financing activities

    1,437        (282     (290                  29,193        55,244        63,277        (27,131

Depreciation and amortization

    16,264        16,277        4,227              16,759        24,146        26,529        19,676        21,447   

Capital expenditures

    11,419        13,050        1,938              7,677        20,477        16,402        9,734        19,773   

 

39


Table of Contents
Index to Financial Statements

 

(1) We completed the APF Acquisition in July 2008. As a result, the fiscal year ended February 28, 2009 includes APF’s results for eight months. Our results for the nine months ended November 27, 2008 and November 26, 2009 include APF’s results for five and nine months, respectively. For additional information relating to these periods, see “Unaudited Pro Forma Condensed Combined Financial Information” and the consolidated financial statements included elsewhere in this prospectus.
(2) The unaudited pro forma computation of basic and diluted earnings per share includes the effect of the reorganization transactions, including the conversion of preferred stock into shares of common stock and the stock split of such stock as well as the existing shares of common stock into 16,432,556 shares of common stock; however, it excludes the shares expected to be issued in connection with this offering. Unaudited pro forma basic and diluted shares outstanding are equal for all periods presented as there were no potentially dilutive shares in these periods. The 16,432,556 shares of common stock is based on an assumed initial public offering price of $16.00 per share, the mid-point of the range set forth on the cover of this prospectus. See “Prospectus Summary—The Offering—Pricing Sensitivity Analysis.”

 

40


Table of Contents
Index to Financial Statements

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and accompanying notes appearing elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to these differences include, but are not limited to, those identified below and those discussed in “Risk Factors” appearing elsewhere in this prospectus.

Overview

We produce converted tissue products, tissue hardrolls and machine-glazed tissue, and we believe we are one of the leaders in the value retail converted tissue market. Our customers include leading consumer retailers and away-from-home distributors of tissue products, vertically integrated manufacturers and third-party converters serving the tissue and machine-glazed tissue segments. Most of the tissue products we convert are internally sourced from the tissue hardrolls that we manufacture to the specifications requested by our customers. The tissue hardrolls that we manufacture, but do not convert, are marketed to customers for use in various end products, including diapers, bath and facial tissue, assorted paper towels and napkins. In addition to converted tissue products and tissue hardrolls, we also manufacture machine-glazed tissue and polystyrene foam used in various end products, including food wraps and foam plates. However, foam products are not a significant portion of our business.

We own and operate six facilities in the United States, located in East Hartford, Connecticut; Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; Neenah, Wisconsin; and Ladysmith, Wisconsin and one facility located in St. Catharines, Ontario, Canada. We also lease and operate facilities in Long Island, New York and Thomaston, Georgia. In addition, we recently added a new 323,000 square foot facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational by June 2010.

Our fiscal year ends on the last day of February. We refer to our fiscal year ending February 28, 2010 as our fiscal year 2010, to our fiscal year ended February 28, 2009 as fiscal year 2009, to our fiscal year ended February 29, 2008 as fiscal year 2008 and to our fiscal year ended February 28, 2007 as fiscal year 2007.

Our Segments

We operate in three segments, tissue, machine-glazed tissue and foam, although we generally operate our business as an integrated tissue paper company. In our tissue segment, we derive our revenues from the sale of:

 

  Ÿ  

converted tissue products, including a variety of consumer private label and away-from-home bath and facial tissue, napkins and folded and rolled towels; and

 

  Ÿ  

tissue hardrolls sold as facial and bath tissue, special medical tissue, industrial wipers, napkin and paper towel stock, as well as absorbent cover stock.

We derive our revenues in our machine-glazed tissue segment from the sale of:

 

  Ÿ  

machine-glazed tissue hardrolls to third-party converters that manufacture fast food and commercial food wrap, as well as niche market products such as gum wrappers, coffee filters, paper used to line packs of cigarettes, wax paper and butter wraps; and

 

  Ÿ  

converted wax paper products, including wet and dry wax paper, sandwich bags and wax paper.

 

41


Table of Contents
Index to Financial Statements

We derive our revenues in our foam segment, which was added in fiscal year 2009 in connection with the APF Acquisition, primarily from the sale of foam plates as a private branded product to a single customer.

For fiscal year 2009, our tissue segment generated net sales of $400.6 million, or approximately 77.2% of our net sales, our machine-glazed tissue segment generated net sales of $114.4 million, or approximately 22.0% of our net sales, and our foam segment generated net sales of $4.0 million, or approximately 0.8% of our net sales. For fiscal year 2008, our tissue segment generated net sales of $333.4 million or approximately 75.2% of our net sales, and our machine-glazed tissue segment generated net sales of $109.7 million or approximately 24.8% of our net sales. For fiscal year 2007, our tissue segment generated $242.8 million, or approximately 70.5% of our net sales and our machine-glazed tissue segment generated $101.4 million, or approximately 29.5% of our net sales.

We entered the consumer and away-from-home converted tissue products market following our August 2002 acquisition of our Neenah, Wisconsin manufacturing and converting facility. Over the last seven years, our Neenah, Wisconsin facility has added approximately 85,000 tons of annual hardroll tissue production capacity and 14 converting lines with approximately 90,000 tons of annual converting production capacity. Sales of our converted tissue products in the consumer and away-from-home converted tissue products market generate significantly greater revenue per ton than sales of hardroll tissue. Our Neenah, Wisconsin facility produces our full line of consumer and away-from-home converted tissue products.

In July 2008, we completed the APF Acquisition, which is described below, adding the strategic geographic converting operations and increasing our capacity to convert tissue hardrolls into finished cases for sale to consumer private label retailers.

During the second quarter of fiscal 2010, we filled our converting capacity for a number of converted tissue product grades, as strong customer demand reduced inventory below targeted levels. Therefore, to maintain effective customer service levels, improve product mix and support the growth of converted tissue products, we rebuilt inventory levels during the third quarter of fiscal 2010 and completed the installation of a new tissue converting line at our Long Island, New York facility that became fully operational in December 2009.

Acquisition by Weston Presidio V, L.P.

On May 8, 2006, Cellu Paper Holdings, Inc., our parent, entered into a merger agreement with Cellu Parent Corporation, a corporation organized and controlled by Weston Presidio V, L.P., and Cellu Acquisition Corporation, a newly formed wholly-owned subsidiary of Cellu Parent Corporation. Pursuant to the agreement, Cellu Acquisition Corporation was merged with and into Cellu Paper Holdings, Inc., with our Cellu Paper Holdings, Inc. surviving and becoming a wholly-owned subsidiary of Cellu Parent Corporation. As a result, we have been controlled by Weston Presidio V, L.P. since June 12, 2006.

The following discussion of our fiscal year 2007 combines our operating results for the period March 1, 2006 to June 12, 2006 (pre-merger) and June 13, 2006 to February 28, 2007 (post-merger).

CityForest Acquisition

On March 21, 2007, we acquired CityForest Corporation, or CityForest, which is now our wholly-owned subsidiary. We refer to this transaction as the CityForest Acquisition. The results of CityForest’s operations from the date of acquisition, March 21, 2007, are included in our tissue segment.

 

42


Table of Contents
Index to Financial Statements

APF Acquisition

On July 2, 2008, we consummated the APF Acquisition. The aggregate purchase price paid was $68.0 million, including a cash payment at closing of $61.7 million and the issuance of a promissory note by Cellu Tissue to Atlantic Paper & Foil Corp. of N.Y. in the principal amount of $6.3 million (the “Seller Note”), plus the assumption of certain liabilities. We also incurred $2.5 million of transaction-related costs. The purchase price, which was subject to post-closing working capital adjustments, was adjusted downward by approximately $63,000 by the working capital adjustment settlement that was finalized in the third quarter of fiscal year 2009.

The results of operations of the APF entities from the July 2, 2008 date of acquisition are primarily included in our tissue segment. Part of the acquisition related to the foam business, which we report as a separate segment. Unaudited pro forma results of operations for the fiscal year ended February 28, 2009, as if we and APF had been combined at the beginning of the period presented, are presented in “Unaudited Pro Forma Condensed Combined Financial Information” elsewhere in this prospectus.

Business Drivers and Measures

Our business is driven by several factors affecting our revenues, costs and results of operations. In managing our business, we closely monitor these factors as well as the industry trends described in “Business—Our Industry.”

Revenue Factors

 

  Ÿ  

Price and volume dynamics.    Our business is highly dependent on the timing and magnitude of price increases in our industry, the sensitivity of those prices to subsequent changes in our costs and the volumes we are able to sell to our customers. Because we manufacture consumer products or products that are converted into consumer products and sold in a competitive market, a small increase in price can have a significant effect on our revenues, and any inability to increase prices can require a disproportionate increase in volumes to achieve the same revenues. We manage these dynamics differently depending on the type of product.

 

   

Value retail and retail converted tissue products.    Our value retail and retail customers generally award contracts for delivery of products to specified distribution centers annually with committed volumes and prices. These contracts can generally be terminated by our customers but typically provide that they will continue to take deliveries for a specified period following termination. Although prices are fixed in the contracts, if major increases in cost occur in the industry, we generally have the ability to negotiate increases in price with these customers so long as we remain market competitive.

 

   

Away-from-home converted tissue products.    Approximately three-fourths of our away-from-home business is subject to contracts with a duration of six months to one year. We sell the remainder of our away-from-home products on the spot market, which we believe increases our flexibility in reacting to cost increases.

 

   

Tissue hardrolls.    We generally sell our tissue hardrolls either under contracts with six-month to three-year terms and price escalators and de-escalators designed to pass through the majority of increases and decreases in pulp and energy costs to our customers or pursuant to sales at current market prices. We experienced downward price pressures in this sector in the first half of fiscal 2010 due to decreases in pulp prices and general market conditions, although we have begun to see some increases in tissue hardroll prices as pulp prices have increased in the latter half of fiscal 2010.

Given our product mix, approximately one-half of our hardroll business is protected by pulp price escalators or specific customer agreements that allow us to pass through cost increases to our customers. Under these provisions, a price escalation generally becomes effective within a period of one month to three months.

 

43


Table of Contents
Index to Financial Statements
  Ÿ  

Product mix.    Our product mix is also an essential driver of our revenues and margins. Converted products generate our highest gross margins, followed by tissue hardrolls and machine-glazed tissue, respectively. While we expect to continue to be active in all three of these sectors, the higher margins in the converted tissue business have influenced our strategic decision to expand our production of private label products for value retail and retail customers. In recent periods, we have chosen to increase the number of tissue hardrolls that we in-source into our converting operations, which has reduced the number of tissue hardrolls that we sold to third parties but has had a positive effect on our gross margins.

Cost Factors

 

  Ÿ  

Pulp.    The primary component of cost of goods sold for each of our segments is pulp, which represented approximately 46%, 45% and 43% of our cost of goods sold in fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively. We have supply agreements with various pulp suppliers over the next two years. We believe under these agreements or their equivalents, we will purchase approximately 50% to 65% of our anticipated pulp requirements through fiscal year 2012. The balance of our pulp requirements are purchased on the open market. These supply agreements permit us to purchase pulp at prices that are discounted from published list prices and allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. In addition, our Ladysmith, Wisconsin facility processes over 98% of the fiber used in its product, which provides us with a lower cost alternative to purchasing fiber from a third-party supplier.

 

  Ÿ  

Energy.    Energy costs are also a significant cost of our business, representing approximately 12% for fiscal year 2009, and 13% for each of fiscal year 2008 and fiscal year 2007. Other than as described below, we satisfy our energy requirements through purchases of natural gas and electricity from local utility companies. At our Menominee, Michigan facility, our power boilers generate most of our energy requirements through the use of coal, with the balance being supplied through the purchase of natural gas by contract. In recent years, we have increasingly managed our energy costs by entering into forward swap contracts for natural gas. We have also developed other initiatives to reduce our energy costs, including (1) a third-party gasification steam project at our Wiggins, Mississippi plant to replace a portion of our natural gas consumption with steam, (2) a cogeneration project at our East Hartford, Connecticut facility to reduce electrical consumption, which generates an annual benefit of $2.0 million and (3) a third-party gasification steam project at our Neenah, Wisconsin facility to replace a portion of our natural gas consumption with steam.

 

  Ÿ  

Manufacturing overhead.    Manufacturing overhead represented approximately 18%, 17% and 19% for fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively. These are comprised of mill salary overhead, maintenance labor and materials and other facility costs.

 

  Ÿ  

Labor.    Wages and benefits made up approximately 9% for fiscal year 2009 and 10% for each of fiscal year 2008 and fiscal year 2007. We have collective bargaining agreements with the United Steelworkers of America in each of our Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; and Neenah, Wisconsin facilities covering 551 of our hourly employees. In addition, we have a collective bargaining agreement with Independent Paper Workers of Canada covering 81 hourly employees in our St. Catharines, Ontario facility. Our agreements expire between October 2009 and June 2013. We commenced collective bargaining negotiations at our Menominee, Michigan facility in late November 2009 and we are currently preparing for collective bargaining negotiations at our Gouverneur, New York facility, which we expect to begin in January 2010. Historically, we have not experienced any significant labor disputes or work stoppages.

 

44


Table of Contents
Index to Financial Statements
  Ÿ  

Other materials.    Our costs for other materials, including chemicals, wax, dye and packaging, represented approximately 10%, 9% and 10%, for fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively.

 

  Ÿ  

Depreciation and amortization.    Depreciation and amortization expense represented approximately 5%, 6% and 6%, for fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively.

Other Factors

 

  Ÿ  

Effect of APF Acquisition on our production processes.    The APF Acquisition has significantly increased the capacity of our converted tissue business and expanded our footprint, particularly in the Northeast, South and Southeast. The equipment of the APF entities is comparable to that at the facilities we already owned and is currently operating below full capacity, representing an opportunity for growth and production flexibility. We expect that an important aspect of managing our business in the near future will be the flexible and efficient allocation of production among all our facilities and the optimization of production at the APF facilities.

 

  Ÿ  

Further investments in converting capacity.    We expect to invest approximately $30 million over the next 18 to 24 months to increase our retail converting capacity by 50,000 tons. We anticipate that a portion of this investment will be used to add converting capacity to our new facility in Oklahoma City, Oklahoma. We expect to begin operations at our Oklahoma City facility in the second half of fiscal 2011 and to continue to increase production throughout fiscal 2011 and fiscal 2012. We also recently completed installation of a new tissue converting line at our Long Island, New York facility.

Results of Operations

We compare fiscal year 2009 to fiscal year 2008 (post-merger) and the combined periods from March 1, 2006 to June 12, 2006 (pre- merger) and from June 13, 2006 to February 28, 2007 (post- merger) for purposes of management’s discussion and analysis of the results of operations. Any references below to fiscal year 2007 refer to the combined periods. Material fluctuations in operations resulting from the effect of purchase accounting have been highlighted.

U.S. GAAP does not allow for such combination of pre-merger and post-merger financial results. We believe the combined results provide the most meaningful way to comment on our results of operations for fiscal year 2007 compared to fiscal year 2008 because discussion of any partial period comparisons would not be meaningful. The combined information is the result of merely adding the pre-merger and post-merger columns and does not include any pro forma assumptions or adjustments.

 

45


Table of Contents
Index to Financial Statements

The following table sets forth certain sales and operating data for our business segments for the periods indicated:

 

(Dollars in millions)

  March 1,
2006-
June 12,
2006
    June 13,
2006-
February 28,
2007
    Combined
fiscal
year ended
February 28,
2007
    Fiscal year ended     Nine months ended  
        February 29,
2008
    February 28,
2009
    November 27,
2008
    November 26,
2009
 
    (Pre-merger)                 (Post-merger)              

Statement of operations data:

             

Net Sales:

             

Tissue segment

  $ 68.7      $ 174.1      $ 242.8      $ 333.4      $ 400.6      $ 300.4      $ 299.9   

Machine-glazed tissue segment

    28.0        73.3        101.4        109.7        114.4        87.9        81.2   

Foam segment

                                4.0        2.3        5.8   
                                                       

Total

  $ 96.7      $ 247.4      $ 344.2      $ 443.1      $ 519.0      $ 390.6      $ 386.9   

Gross Profit:

             

Tissue segment

  $ 6.4      $ 9.8      $ 16.2      $ 35.0      $ 46.0      $ 32.3      $ 52.7   

Machine-glazed tissue segment

    1.8        2.7        4.5        6.7        8.4        6.3        8.0   

Foam segment

                                0.5        0.3        2.0   
                                                       

Total

  $ 8.2      $ 12.5      $ 20.7      $ 41.7      $ 54.9      $ 38.9      $ 62.7   

Percentage of Net Sales:

             

Tissue segment

    71.0     70.4     70.5     75.2     77.2     76.9     77.5

Machine-glazed tissue segment

    29.0     29.6     29.5     24.8     22.0     22.5     21.0

Foam segment

                                0.8     0.6     1.5
                                                       

Total

    100.0     100.0     100.0     100.0     100.0     100.0     100.0

Gross margin:

             

Tissue segment

    9.3     5.6     6.7     10.5     11.5     10.8     17.6

Machine-glazed tissue segment

    6.4     3.7     4.5     6.1     7.4     7.2     10.0

Foam segment

                                13.0     11.2     34.5

Total

    8.5     5.1     6.0     9.4     10.5     10.0     16.2

Tons sold:

             

Tissue segment

    50,406        122,471        172,877        235,395        250,073        188,004        183,850   

Machine-glazed tissue segment

    23,108        57,231        80,339        81,685        82,482        62,474        65,498   
                                                       

Total

    73,514        179,702        253,216        317,080        332,555        250,478        249,348   
                                                       

Three Months Ended November 26, 2009 (the fiscal 2010 three-month period) compared to the Three Months Ended November 27, 2008 (the fiscal 2009 three-month period)

Consolidated net sales for the fiscal 2010 three-month period decreased $12.9 million, or 9.0%, to $130.1 million from $143.0 million for the comparable prior year period. On an overall basis, volume contributed $10.0 million to the decrease and lower pricing contributed $2.9 million. During the fiscal 2010 three-month period, we sold 82,012 tons of tissue hardrolls, machine-glazed tissue hardrolls and converted tissue products, a decrease of 6,010 tons, or a decrease of 6.8% over the comparable prior year period. During the fiscal 2010 three-month period, we in-sourced an additional 5,484 tons of hardrolls for our converting operations that were previously purchased on the hardroll market in the prior year period. This served to reduce external hardroll shipments by a similar amount and improved our overall sales mix due to higher selling prices for converted tissue products. This is consistent with our strategy to increase the vertical integration of our acquired operations, supporting improved quality control and profitability. Net selling price per ton decreased to $1,564 during the current period from $1,609 during the comparable prior year period. This decrease in price primarily reflects the downward pricing pressure brought on by lower pulp prices, which was partially offset by the impact of mix improvements.

Net sales for our tissue segment were $98.6 million during the fiscal 2010 three-month period, a decrease of $12.5 million, or 11.3%, from $111.1 million in the comparable prior year period. The decrease was due primarily to in-sourcing an additional 5,484 tons of hardrolls into our converting operations, partially offset by our October 2009 hardroll price increase and an improved mix with

 

46


Table of Contents
Index to Financial Statements

respect to converted tissue products sold. Net selling price per ton increased to $1,675 for the fiscal 2010 three-month period from $1,661 for the fiscal 2009 three-month period. This increase in net selling price per ton was primarily the result of improvements in product mix and an increase in converted product selling prices, partially offset by downward pricing pressure brought on by lower pulp prices. For the fiscal 2010 three-month period, we sold 58,884 tons of tissue, of which 30,920 tons were sold as hardrolls and 27,964 tons were sold as converted tissue products, compared to the fiscal 2009 three-month period when we sold 66,903 tons of tissue, of which 39,188 tons were sold as hardrolls and 27,715 tons were sold as converted tissue products.

Net sales for our machine-glazed tissue segment for the fiscal 2010 three-month period were $29.7 million, a decrease of $0.8 million, or 2.6%, compared to $30.4 million in the comparable prior year period. Tons sold during the fiscal 2010 three-month period increased 9.5%, but this increase was offset by a decline in selling prices associated with lower pulp prices. Net selling price per ton was $1,283 for the fiscal 2010 three-month period compared to $1,442 per ton for the fiscal 2009 three-month period. For the fiscal 2010 three-month period, we sold 23,128 tons of machine-glazed tissue, of which 21,057 tons were sold as hardrolls and 2,071 tons were sold as converted machine-glazed tissue products, compared to the fiscal 2009 three-month period when we sold 21,119 tons of machine-glazed tissue, of which 19,452 tons were sold as hardrolls and 1,667 tons were sold as converted machine-glazed tissue products.

Net sales for our foam segment for the fiscal 2010 three-month period were $1.8 million compared to $1.4 million in the comparable prior year period, due to higher prices and volumes.

Consolidated gross profit was $20.3 million for the fiscal 2010 three-month period or an increase of $4.2 million from $16.1 million in the comparable prior year period. As a percentage of net sales, gross profit increased to 15.6% in the fiscal 2010 three-month period from 11.3% in the fiscal 2009 three-month period. The improvement was primarily driven by an increase in converted product selling prices, sales mix, as well as lower pulp and energy costs.

Gross profit by segment is as follows (in thousands):

 

     For the three months ended    Increase
(Decrease)
 
     November 26, 2009    November 27, 2008   

Tissue

   $ 16,645    $ 12,736    $ 3,909   

Machine-glazed tissue

     2,833      3,287      (454

Foam

     795      78      717   
                      

Total

   $ 20,273    $ 16,101    $ 4,172   
                      

Tissue gross margins increased to 16.9% for the three months ended November 26, 2009 compared to 11.5% in the comparable prior year period. In addition to the factors noted above for net sales, these favorable results were also due to reduced fiber and energy prices and increased sales of our converted tissue products, which leveraged our ability to incrementally use more internally manufactured hardrolls.

Machine-glazed tissue gross margins decreased to 9.5% for the three months ended November 26, 2009 compared to 10.8% in the comparable prior year period. The decrease in gross margin was primarily attributable to lower selling prices, partially offset by lower fiber costs.

Foam gross margins were 43.2% for the three months ended November 26, 2009 compared to 5.4% in the comparable prior year period as a result of lower resin prices, the primary raw material used to manufacture our foam products, and an improvement in selling prices.

 

47


Table of Contents
Index to Financial Statements

Selling, general and administrative expenses were $5.0 million for the three months ended November 26, 2009 compared to $5.5 million for the comparable three-month period in fiscal 2009. As a percentage of net sales, expenses were 3.9% for the current period, compared to 3.8% for the prior period. Additionally, stock-based compensation was $0.2 million in both the 2010 and 2009 three-month period.

Amortization expense in the fiscal 2010 three-month period of $1.1 million relates to the amortization of the intangible assets recorded in connection with the APF Acquisition.

Interest expense, net in the fiscal 2010 three-month period was $8.5 million compared to $6.9 million in the fiscal 2009 three-month period. The increase in the fiscal 2010 three-month period is primarily attributable to the higher interest rate and debt issuance costs related to the 2014 Notes that were issued in the three-month period ended August 27, 2009.

Foreign currency gain (loss) in the fiscal 2010 three-month period was a loss of $0.4 million compared to a gain of $0.2 million in the fiscal 2009 three-month period. The fluctuation relates to the change in the Canadian currency exchange rate period over period.

Income tax expense for the fiscal 2010 third quarter was $3.4 million compared to income tax expense of $0.9 million for the fiscal 2009 third quarter. During the fiscal 2010 third quarter, we reduced our estimate of foreign tax credits that will be generated in the current year, which increased our underlying estimated annual effective tax rate from 34.7% to 36.3%. In addition, included in income tax expense for the fiscal 2010 third quarter are $1.2 million of discrete tax adjustments that increased income tax expense. These discrete adjustments primarily arose from changes in management estimates relating to the calculation of foreign subsidiary deemed dividends and the generation and utilization of alternative minimum tax credits, which were recorded as tax expense in the current quarter.

Nine Months Ended November 26, 2009 (the fiscal 2010 nine-month period) compared to the Nine Months Ended November 27, 2008 (the fiscal 2009 nine-month period)

Consolidated net sales for the fiscal 2010 nine-month period decreased $3.7 million, or 0.9%, to $386.9 million from $390.6 million for the comparable prior year period. On an overall basis, pricing contributed $4.8 million of the decrease and was partially offset by higher volume of $1.1 million. During the fiscal 2010 nine-month period, we sold 249,348 tons of tissue hardrolls, machine-glazed tissue hardrolls and converted paper products. This decrease of 1,130 tons, or 0.5%, over the comparable prior year period, which was due to fewer tons of tissue hardrolls sold, partially offset by an increase in tons sold of converted tissue products, a portion of which was due to the July 2008 acquisition of APF, and machine-glazed tissue. During the fiscal 2010 nine-month period, we in-sourced an additional 9,025 tons of hardrolls for our converting operations that were previously purchased on the hardroll market. This served to reduce external hardroll shipments by a similar amount. Net selling price per ton decreased to $1,528 during the current period from $1,550 during the prior year period. This decrease in price primarily reflects the downward pricing pressure associated with declines in pulp prices, partially offset by improvements in product mix.

Net sales for our tissue segment were $299.9 million during the fiscal 2010 nine-month period, a decrease of $0.5 million over the comparable prior year period. Decreased hardroll sales volumes were partially offset by an improvement in mix with respect to increased converting tons sold and moderate overall price improvements in revenue per ton of approximately 2.1%. Price and mix improvements were driven by the APF Acquisition in fiscal 2009 and the achievement of related synergies. Net selling price per ton increased to $1,631 for the fiscal 2010 nine-month period from $1,598 for the fiscal 2009 nine-month period. This increase in net selling price per ton was primarily the result of improvements in product mix derived both from the APF Acquisition and organic growth in converted sales and, to a

 

48


Table of Contents
Index to Financial Statements

lesser extent, increase in prices. During the fiscal 2010 nine-month period, we in-sourced an additional 9,025 tons of hardrolls for our converting operations that were previously purchased on the hardroll market. This served to reduce external hardroll shipments by a similar amount. For the fiscal 2010 nine-month period, we sold 183,850 tons of tissue, of which 102,010 tons were sold as hardrolls and 81,840 tons were sold as converted tissue products, compared to the fiscal 2009 nine-month period when we sold 188,004 tons of tissue, of which 121,953 tons were sold as hardrolls and 66,051 tons were sold as converted tissue products. Compared to the fiscal 2009 nine-month period, the increase in converted tons sold primarily reflects the APF Acquisition and organic growth in our converted tissue shipments. The reduction in hardroll shipments reflects a mix shift from hardrolls to converted tons within the tissue segment.

Net sales for our machine-glazed tissue segment for the fiscal 2010 nine-month period were $81.2 million, a decrease of $6.7 million, or 7.6%, compared to $87.9 million in the comparable prior year period. Tons sold during the fiscal 2010 nine-month period increased 4.8%, but were more than offset by an 11.9% decline in selling prices that resulted from lower pulp prices. Net selling price per ton was $1,240 for the fiscal 2010 nine-month period compared to $1,407 per ton for the fiscal 2009 nine-month period. For the fiscal 2010 nine-month period, we sold 65,498 tons of machine-glazed tissue, of which 61,003 tons were sold as hardrolls and 4,495 tons were sold as converted machine-glazed tissue products, compared to the fiscal 2009 nine-month period when we sold 62,474 tons of machine-glazed tissue, of which 57,960 tons were sold as hardrolls and 4,514 tons were sold as converted machine-glazed tissue products.

Net sales for our foam segment for the fiscal 2010 nine-month period were $5.8 million compared to $2.3 million in the prior year period. The comparable prior year nine-month period consisted of approximately five months of results from APF, which was acquired in July 2008.

Consolidated gross profit was $62.7 million for the fiscal 2010 nine-month period or an increase of $23.8 million from $38.9 million in the comparable prior year period. As a percentage of net sales, gross profit increased to 16.2% in the fiscal 2010 nine-month period from 10.0% in the fiscal 2009 nine-month period. The improvement was driven by the overall volume, mix and selling price changes as discussed above, as well as favorable improvements in pulp pricing and lower energy costs, which were partially offset by a $2.1 million increase in expense to record inventory at the lower of cost or market value.

Gross profit by segment is as follows, (in thousands):

 

     For the nine months ended    Increase
     November 26, 2009    November 27, 2008   

Tissue

   $ 52,700    $ 32,328    $ 20,372

Machine-glazed tissue

     7,994      6,300      1,694

Foam

     2,035      261      1,774
                    

Total

   $ 62,729    $ 38,889    $ 23,840
                    

Tissue gross margins increased to 17.6% for the nine months ended November 26, 2009 compared to 10.8% in the comparable prior year period. In addition to the factors noted above for net sales, these favorable results were also due to lower fiber and energy costs and increased sales of our converted tissue products, which leveraged our ability to incrementally use more internally manufactured hardrolls, which were partially offset by a $2.1 million increase in expense to record inventory at the lower of cost or market value.

Machine-glazed tissue gross margins increased to 9.8% for the nine months ended November 26, 2009 compared to 7.2% in the comparable prior year period. In addition to the factors noted above for net sales, the increase in gross margin was primarily attributable to lower pulp, energy and other raw material prices, along with favorable machine productivity.

 

49


Table of Contents
Index to Financial Statements

Foam gross margins were 35.1% for the nine months ended November 26, 2009 compared to 11.2% in the comparable prior year period as a result of reduced resin prices, which is the primary raw material used to manufacture our foam products, and improvement in selling prices.

Selling, general and administrative expenses were $15.9 million for the nine months ended November 26, 2009 compared to $15.0 million for the comparable nine-month period. As a percentage of net sales, expenses were 4.1% for the current period, compared to 3.9% for the prior period. The increase is primarily attributable to cash-based incentive compensation expense as a result of the achievement of previously established performance goals. Additionally, stock-based compensation was $0.6 million and $0.7 million in the 2010 and 2009 nine-month periods, respectively.

Amortization expense in the fiscal 2010 nine-month period of $3.2 million relates to the amortization of the intangible assets recorded in connection with the APF Acquisition.

Interest expense, net in the fiscal 2010 nine-month period was $27.4 million compared to $18.0 million in the fiscal 2009 nine-month period. The fiscal 2010 nine-month period includes the effects of extinguishing our 2010 Notes and the issuance of our 2014 Notes. Non-recurring costs of extinguishing our 2010 Notes include both the write-off of deferred financing fees of $2.2 million and incremental interest expense of $1.7 million due to the period of time that elapsed between the issuance of the 2014 Notes and the extinguishment of the 2010 Notes. The remaining increase is primarily attributable to the higher interest rates and debt issuance costs related to the 2014 Notes.

Foreign currency (gain) loss in the fiscal 2010 nine-month period was a loss of $1.1 million compared to a gain of $0.2 million in the fiscal 2009 nine-month period. The fluctuation relates to the change in the Canadian currency exchange rate period over period.

Income tax expense for the fiscal 2010 nine-month period was $8.6 million compared to income tax expense of $1.3 million for the fiscal 2009 comparable period. During the fiscal 2010 nine-month period, we reduced our estimate of foreign tax credits that will be generated in the current year, which increased our underlying estimated annual effective tax rate from 34.7% to 36.3%. In addition, included in income tax expense for the fiscal 2010 nine-month period are $1.2 million of discrete tax adjustments that increased income tax expense. These discrete adjustments primarily arose from changes in management estimates relating to the calculation of foreign subsidiary deemed dividends and the generation and utilization of alternative minimum tax credits, which were recorded as tax expense in the current quarter. Additionally, the fiscal 2010 nine-month period also includes discrete tax expense of $1.8 million associated with an increase in our federal tax rate from 34% to 35% for fiscal 2010 based on projected taxable income and the benefit of a change in state tax laws.

Fiscal year ended February 28, 2009 (fiscal year 2009) compared to fiscal year ended February 29, 2008 (fiscal year 2008)

Net sales for fiscal year 2009 increased $75.9 million, or 17.1%, to $519.0 million from $443.1 million for fiscal year 2008. On a consolidated basis, tons sold increased for fiscal year 2009 compared to fiscal year 2008. For fiscal year 2009, we sold 332,555 tons of tissue hardrolls, machine-glazed tissue hardrolls and converted paper products, an increase of 15,475, or 4.9%, compared to fiscal year 2008. The net selling price per ton increased from $1,397 for fiscal year 2008 to $1,549 for fiscal year 2009.

 

  Ÿ  

Tissue.    Net sales for our tissue segment for fiscal year 2009 increased $67.2 million, or 20.2%, to $400.6 million from $333.4 million for fiscal year 2008. The majority of this increase was the result of the APF Acquisition; sales were also favorably impacted by improvements in price and mix. Net selling price per ton increased from $1,416 for fiscal year 2008 to $1,602 for

 

50


Table of Contents
Index to Financial Statements
 

fiscal year 2009. This increase was primarily the result of improvements in product mix derived both from the APF Acquisition and organic growth in converted sales and, to a lesser extent, increases in prices. For fiscal year 2009, we sold 250,073 tons of tissue, of which 157,917 tons were sold as hardrolls and 92,156 tons were sold as converted tissue products, compared to 235,395 tons sold in fiscal year 2008, of which 180,539 tons were sold as hardrolls and 54,856 tons were sold as converted tissue products. Compared to fiscal year 2008, the increase in tons sold as converted tissue products primarily reflects of the APF Acquisition and organic growth in our converted tissue shipments. The reduction in hardroll shipments reflects a mix shift from hardrolls to converted tons within the tissue segment.

 

  Ÿ  

Machine-glazed tissue.    Net sales for our machine-glazed tissue segment for fiscal year 2009 increased $4.7 million, or 4.2%, to $114.4 million from $109.7 million for fiscal year 2008. This increase is primarily as a result of increases in prices. Net selling price per ton increased from $1,343 for fiscal year 2008 to $1,387 for fiscal year 2009. For the fiscal year 2009, we sold 82,482 tons of machine-glazed tissue, of which 76,688 tons were sold as hardrolls and 5,794 tons were sold as converted machine-glazed products, compared to the fiscal year 2008 when we sold 81,685 tons of machine-glazed tissue, of which 74,599 tons were sold as hardrolls and 7,086 tons were sold as converted machine-glazed tissue products.

 

  Ÿ  

Foam.    Net sales for our foam segment for fiscal year 2009 from the date of acquisition, July 2, 2008, were $4.0 million. We started reporting with respect to the foam segment following the APF Acquisition.

Gross profit for fiscal year 2009 increased to $54.9 million from $41.7 million for fiscal year 2008, an increase of $13.3 million, or 31.9%, from fiscal year 2008. The increase reflects both the 17.1% increase in sales noted above and an increase in gross profit as a percentage of sales from 9.4% in fiscal year 2008 to 10.5% in fiscal year 2009. The increase in gross profit as a percentage of sales reflects improvements in product mix and prices, partially offset by increases in pulp and energy costs.

Gross profit for our tissue segment for fiscal year 2009 was $46.0 million, an increase of $11.0 million, or 31.7%, from fiscal year 2008. Gross profit for our machine-glazed tissue segment for fiscal year 2009 was $8.4 million, an increase of $1.7 million, or 25.7%, from fiscal year 2008. As a percentage of net sales, gross profit for the tissue segment increased to 11.5% for fiscal year 2009 from 10.5% in fiscal year 2008. As a percentage of net sales, gross profit for the machine-glazed tissue segment increased to 7.4% for fiscal year 2009 from 6.1% in fiscal year 2008. Gross profit for our foam segment for fiscal year 2009 from the date of acquisition, July 2, 2008, was $0.5 million.

Selling, general and administrative expenses for fiscal year 2009 increased $2.1 million, or 11.1%, to $20.7 million from $18.6 million for fiscal year 2008. As a percentage of net sales, selling, general and administrative expenses decreased to 4.0% in fiscal year 2009 from 4.2% for fiscal year 2008. Included in fiscal year 2009 are $0.3 million of ongoing APF administrative expenses and $0.4 million of transition expenses related thereto. Also, included in fiscal year 2009 are increases in workers compensation expense, bad debt expense due to two customer bankruptcies and an increase in incentive compensation expense associated with strong business performance.

Terminated acquisition related transaction costs for fiscal year 2008 were $2.1 million and consisted of costs incurred related to an acquisition that did not transpire.

Stock and related compensation expense for fiscal year 2009 was $0.2 million compared to $0.6 million for fiscal year 2008. These amounts relate to compensation expense associated with the payment of taxes associated with restricted stock award grants in each year.

 

51


Table of Contents
Index to Financial Statements

Vesting of stock option/restricted stock grants for fiscal year 2009 was $0.9 million compared to $0.8 million for fiscal year 2008. The increase is associated with a restricted stock award grant in the third quarter of fiscal year 2009.

Amortization expense for fiscal year 2009 of $2.9 million relates to the amortization of the intangible assets recorded in connection with the APF Acquisition.

Interest expense, net for fiscal year 2009 was $24.7 million compared to $19.9 million for fiscal year 2008. This increase is due to the additional debt incurred in connection with the APF Acquisition.

Foreign currency gain (loss) for fiscal year 2009 was a gain of $0.6 million and for fiscal year 2008 was a loss of $0.1 million. This fluctuation relates to the change in the Canadian currency year over year.

Income tax benefit for fiscal year 2009 was $0.6 million compared to a benefit for fiscal year 2008 of $3.9 million. Included in the income tax benefit for fiscal year 2009 is a $1.1 million benefit related to foreign tax credits generated in the current year and a $2.9 million benefit associated with changes in our effective state tax rates, which are expected to be realized in the future. Included in the income tax benefit for fiscal year 2008, is $1.5 million and $1.4 million, respectively, of benefit associated with future changes in Canadian tax rates due to legislative changes and changes in our effective state tax rates, which are expected to be realized in the future.

Net income for fiscal year 2009 was $6.6 million compared to $3.7 million for fiscal year 2008. Included in fiscal year 2008 net income is $2.1 million of terminated acquisition-related costs and $1.4 million of cash and non-cash stock compensation charges. Also, included in fiscal year 2008 net income is a tax benefit of $3.9 million.

Fiscal year ended February 29, 2008 (fiscal year 2008) compared to fiscal year ended February 28, 2007 (fiscal year 2007)

Net sales for fiscal year 2008 increased $98.9 million, or 28.7%, to $443.1 million from $344.1 million for fiscal year 2007. On a company-wide basis, tons sold increased for fiscal year 2008 compared to fiscal year 2007. For fiscal year 2008, we sold 317,080 tons of tissue hardrolls, machine-glazed tissue hardrolls and converted paper products, an increase of 62,323 tons, or 24.5%, compared to fiscal year 2007.

Furthermore, net selling price per ton increased from $1,351 for fiscal year 2007 to $1,397 for fiscal year 2008.

 

  Ÿ  

Tissue.    Net sales for our tissue segment for fiscal year 2008 increased $90.6 million, or 37.3%, to $333.4 million from $242.8 million for fiscal year 2007. This increase is attributable to the CityForest Acquisition, an increase in net selling price per ton and an increase in tonnage sold. Net selling price per ton increased from $1,392 for fiscal year 2007 to $1,416 for fiscal year 2008. For fiscal year 2008, we sold 235,395 tons of tissue, of which 180,539 tons were sold as hardrolls and 54,856 tons were sold as converted tissue products, compared to 172,877 tons sold in fiscal year 2007, of which 131,282 tons were sold as hardrolls and 41,595 tons were sold as converted tissue products. Compared to fiscal year 2008, sales of converted tons increased as a result of organic growth in converted shipments and sales of hardroll tons increased as a result of the CityForest Acquisition.

 

  Ÿ  

Machine-glazed tissue.    Net sales for our machine-glazed tissue segment for fiscal year 2008 increased $8.4 million, or 8.3%, to $109.7 million from $101.4 million for fiscal year 2007. This increase is also attributable to an increase in net selling price per ton and an increase in

 

52


Table of Contents
Index to Financial Statements
 

tonnage sold. Net selling price per ton increased from $1,262 for fiscal year 2007 to $1,343 for fiscal year 2008. For the fiscal year 2008, we sold 81,685 tons of machine-glazed tissue, of which 74,599 tons were sold as hardrolls and 7,086 tons were sold as converted machine-glazed products, compared to the fiscal year 2007 when we sold 80,339 tons of machine-glazed tissue, of which 73,140 tons were sold as hardrolls and 7,199 tons were sold as converted machine-glazed tissue products.

Gross profit for fiscal year 2008 increased to $41.7 million from $20.7 million for fiscal year 2007, an increase of $21.0 million, or 101.6%, from fiscal year 2007. As a percentage of net sales, gross profit increased to 9.4% for fiscal year 2008, compared to 6.0% for fiscal year 2007. The increases in gross profit are attributable to the CityForest Acquisition, continued improvement in product mix and the strong market for tissue hardrolls, compared to the comparable period in the prior year.

Gross profit for our tissue segment for fiscal year 2008 was $35.0 million, an increase of $18.8 million, or 117.0%, from fiscal year 2007. Gross profit for our machine-glazed tissue segment for fiscal year 2008 was $6.7 million, an increase of $2.0 million, or 46.7%, from fiscal year 2007. As a percentage of net sales, gross profit for the tissue segment increased to 10.5% for fiscal year 2008 from 6.7% in fiscal year 2007. As a percentage of net sales, gross profit for the machine-glazed tissue segment increased to 6.1% for fiscal year 2008 from 4.5% in fiscal year 2007.

Selling, general and administrative expenses for fiscal year 2008 increased $6.8 million, or 57.2%, to $18.7 million from $11.9 million for fiscal year 2007. As a percentage of net sales, selling, general and administrative expenses increased to 4.2% in fiscal year 2008 from 3.4% for fiscal year 2007. Included in fiscal year 2008 are $1.6 million of ongoing CityForest administrative expenses. Also, included in fiscal year 2008 are additional costs incurred in connection with Sarbanes-Oxley compliance and increases in incentive compensation expense associated with strong business performance.

Restructuring costs for fiscal year 2007 were $0.2 million related to severance costs associated with the elimination of a corporate position.

Merger-related transaction costs for fiscal year 2007 were $6.1 million.

Terminated acquisition related transaction costs for fiscal year 2008 were $2.1 million related to costs incurred related to an acquisition that did not transpire.

Stock and related compensation expense for fiscal year 2008 were $0.6 million compared to $3.3 million for fiscal year 2007. The $0.6 million for fiscal year 2008 was primarily related to compensation expense related to the payment of taxes associated with a restricted stock award grant. The $3.3 million for fiscal year 2007 was related to non-cash compensation expense related to the vesting of restricted stock awards, payment of taxes associated with such awards and other compensation expense related to the 2006 Merger.

Vesting of stock option/restricted stock grants for fiscal year 2008 was $0.8 million compared to $1.4 million for fiscal year 2007.

Impairment of property, plant and equipment for fiscal year 2007 resulted in a charge of $0.5 million related to our decision in the fourth quarter of fiscal year 2007 to shut down permanently the paper machine at our St. Catharines, Ontario facility, which we had idled in the third quarter of fiscal year 2006.

 

53


Table of Contents
Index to Financial Statements

Foreign currency gain (loss) for fiscal year 2008 and 2007 were both a loss of $0.1 million.

Income tax benefit for fiscal year 2008 was $3.9 million compared to $6.1 million for fiscal year 2007. Included in the income tax benefit for fiscal year 2008 is $1.5 million and $1.4 million, respectively, of benefit associated with future changes in Canadian tax rates due to legislative changes and changes in our effective state tax rates which are expected to be realized in the future. The effective income tax rate for fiscal year 2007 was 31.7%, which differs from the federal statutory rate primarily due to non-deductible transaction costs expensed for book purposes.

Net income for fiscal year 2008 was $3.7 million compared to a net loss of $13.1 million for fiscal year 2007. Included in fiscal year 2008 net income is $2.1 million of terminated acquisition-related costs and $1.4 million of cash and non-cash stock compensation charges. Also, included in fiscal year 2008 net income is a tax benefit of $3.9 million. Included in fiscal year 2007 net loss is $0.2 million of restructuring costs, $6.1 million of merger-related transaction costs, $3.8 million of merger- related and other compensation charges and $0.5 million related to an impairment charge for our paper machine at our St. Catharines, Ontario facility.

Results of Operations of APF

As described above under “—Overview—APF Acquisition,” we acquired certain assets and assumed certain liabilities of APF on July 2, 2008. The assets and liabilities of APF are reflected in our consolidated balance sheet as of February 28, 2009. The results of operations of APF from the date of acquisition (July 2, 2008) through February 28, 2009 are included in our consolidated statement of operations for the fiscal year ended February 28, 2009.

We have included the audited combined financial statements of Atlantic Paper & Foil Corp. of NY, Consumer Licensing Corporation, Atlantic Paper & Foil LLC, Atlantic Paper & Foil of Georgia, LLC, Atlantic Lakeside Properties, LLC, Blue Skies EL 600, LLC and 260G Ventures LLC, which we refer to as the APF entities, as of and for the years ended December 31, 2007, 2006 and 2005 in this prospectus. Blue Skies EL 600, LLC and 260G Ventures LLC became part of the combined group during fiscal year 2007. In reviewing these financial statements, you should bear in mind the following:

 

  Ÿ  

We did not acquire the assets or assume the liabilities of Consumer Licensing Corporation, Atlantic Lakeside Properties, LLC, Blue Skies EL 600, LLC or 260G Ventures LLC, four entities included in the audited combined financial statements for the APF entities as of and for the year ended December 31, 2007. Consumer Licensing Corporation was formed for the purpose of obtaining design licenses for tissue boxes and reselling them and had no activity since 2001. Atlantic Lakeside Properties, LLC owned certain of the real property. Blue Skies EL 600 was engaged in the charter of an airplane for the benefit of certain of the other entities and outside charters. 260G Ventures LLC was an investment company that had invested funds in a brokerage account with an investment bank.

 

  Ÿ  

We did not assume the existing indebtedness of the APF entities.

 

  Ÿ  

The year end of the APF entities previously was December 31, whereas our fiscal year ends on the last day of February.

See “Unaudited Pro Forma Condensed Combined Financial Information.”

Net Sales

The APF assets we purchased consisted of equipment used to produce converted tissue products and other current assets, primarily accounts receivable and inventory. We include the operating results of APF primarily in our tissue segment. Part of the acquisition related to the foam business, which we now show as a separate segment.

 

54


Table of Contents
Index to Financial Statements

The price and volume dynamics that influence net sales of APF are generally similar to those that affect our company as a whole.

For the year ended December 31, 2007, sales to the three major customers of APF accounted for approximately 51% of net sales. One of those customers was an existing customer of ours and has now become our largest customer. APF’s other major customers were generally not significant customers of ours, which has enabled us to expand our customer base in the retail sector.

Gross Profit

Gross profit of the APF entities was historically higher than that of our company due to higher margin product mix in the retail converting sector, customer mix and other factors. Furthermore, APF historically classified shipping and handling costs as selling and delivery expenses, as described below, as opposed to classifying shipping and handling costs as a component of cost of goods sold, which is our company policy. Our accounting policies and procedures have been applied to APF’s operations since the date of acquisition.

Operating Income

Operating income includes APF’s gross margin less selling and delivery expenses, general and administrative expenses and, in 2007, a gain on the sale of an aircraft. The largest single component of selling and delivery expenses was shipping and handling costs, which as noted above, were classified as operating expenses, historically. We have substantially completed the integration of the APF business into our operations, and we expect that prospectively, operating expenses of APF will generally be in line with our overall company’s operating expenses.

Tax Expense

Prior to the acquisition, APF operated as an S Corporation. Accordingly, those entities’ shareholders included their share of taxable income in their individual income tax returns and paid the majority of the income taxes related to the APF business, other than certain New York State corporate-level income taxes that were paid by the APF entities.

Liquidity and Capital Resources

Our principal liquidity requirements are to service debt and meet working capital, tax and capital expenditure needs. Our total debt at November 26, 2009 was $269.1 million. We fund our working capital requirements, capital expenditure needs and tax liabilities from net cash provided by operating activities and borrowings under our working capital facility. Additionally, in the past, we have issued debt securities to fund acquisitions.

Based on current forecasts and anticipated market conditions, we believe that funding generated from operating cash flows and available sources of liquidity will be sufficient to meet all of our operating needs, to make planned capital expenditures and to make all required interest and principal payments on indebtedness for the next twelve to eighteen months. However, our operating cash flows and liquidity are significantly influenced by numerous factors, including prices of pulp fiber, interest rates and the general economy.

As a result of the debt financing completed during June 2009, our principal debt payments are expected to be $0.8 million in fiscal 2010, $0.8 million in fiscal 2011, $7.1 million in fiscal 2012, $0.8 million in fiscal 2013, $0.8 million in fiscal 2014 and $268.3 million in fiscal 2015 and thereafter.

 

55


Table of Contents
Index to Financial Statements

Additionally, cash interest payments are expected to be $22.4 million fiscal 2010, $30.6 million in fiscal 2011, $30.2 million in fiscal 2012, $29.8 million in fiscal 2013, $29.7 million in fiscal 2014 and $18.0 million in fiscal 2015 and thereafter.

The following is a summary of our indebtedness. For additional information regarding our indebtedness, see the notes to the consolidated financial statements.

Working Capital Facility

We have a $60.0 million working capital facility that matures on June 12, 2011. Borrowings under the working capital facility are secured by liens on substantially all of our assets and guaranteed by our subsidiaries. As of November 26, 2009, there were no borrowings outstanding under the working capital facility and excess availability, less letters of credit of $4.6 million in the aggregate principal amount, was $52.2 million.

2014 Notes

In June 2009, we issued $255 million principal face amount of 11 1/2% senior secured notes maturing on June 1, 2014, with an effective interest rate of 12.48%. The 2014 Notes pay interest in arrears on June 1 and December 1 of each year, commencing on December 1, 2009. The 2014 Notes are secured by liens on substantially all of our assets and guaranteed by our subsidiaries. The net proceeds of $245.7 million from the issuance of the 2014 Notes were primarily used to redeem the 2010 Notes and fund the contingent earnout payment made on August 28, 2009 in conjunction with the 2006 Merger.

APF Note

As part of the financing of the APF Acquisition, we entered into a subordinated, unsecured promissory note in the amount of $6.3 million that bears interest at 12% per year payable in quarterly installments with the principal due July 2, 2011.

CityForest Industrial Revenue Bonds

Our subsidiary, CityForest, had approximately $16.4 million in aggregate principal amount of industrial revenue bonds outstanding as of November 26, 2009. We have guaranteed all of the obligations of CityForest. We are required to annually pay $760,000 of principal of the bonds in two semi-annual payments of $380,000.

Contingent Payment

In connection with the acquisition of Cellu Tissue by the current owners, we were required to pay up to $35.0 million of contingent consideration, in cash and shares of Cellu Parent Corporation’s Series A preferred stock, to the former owners and advisors of Cellu Parent Corporation in the event certain financial targets were met. All financial targets were met and $15.0 million, consisting of cash and shares of Series A preferred stock, was paid in fiscal 2009. The second payment of $15.0 million, consisting of $13.7 million in cash and 1,274 shares of Cellu Parent Corporation’s Series A preferred stock (which was valued at approximately $1.3 million) was paid on August 28, 2009. The final payment of $5.0 million, consisting of $4.6 million in cash and 425 shares of Cellu Parent Corporation’s Series A preferred stock (which was valued at approximately $0.4 million) was paid on November 24, 2009.

 

56


Table of Contents
Index to Financial Statements

Cash Flows

The table that follows presents cash flows information for the nine months ended November 26, 2009 and November 27, 2008, fiscal year 2009, fiscal year 2008, and combined fiscal year 2007.

 

    Pre-merger     Post-merger     Combined     Post-merger  
    March 1,
2006-
June 12,

2006
    June 13,
2006-
February 28,
2007
    Fiscal year
ended
February 28,
2007
    Fiscal year
ended
February 29,
2008
    Fiscal year
ended
February 28,
2009
    Nine months
ended
November 27,
2008
    Nine months
ended
November 26,
2009
 

Net cash provided by (used in) operating activities

               

Net (loss) income

  $ (6,439,231   $ (6,659,606   $ (13,098,837   $ 3,701,756      $ 6,560,188      $ 2,584,133      $ 7,028,350   

Non-cash items

    5,245,238        12,064,306        17,309,544        18,435,763        27,619,677        22,896,836        30,372,139   

Changes in working capital

    (5,190,415     4,380,317        (810,098     (2,341,640     (10,120,022     (15,879,959     16,283,176   
                                                       

Net cash provided by (used in) operating activities

  $ (6,384,408   $ 9,785,017      $ 3,400,609      $ 19,795,879      $ 24,059,843        9,601,010      $ 53,683,665   

Net cash (used in) provided by investing activities

  $ (1,937,610   $ (7,677,141   $ (9,614,751   $ (64,140,696   $ (80,556,754   $ (73,882,196   $ (19,772,877

Net cash (used in) provided by financing activities

  $ (290,000   $      $ (290,000   $ 29,193,000      $ 55,244,403      $ 63,277,034      $ (27,130,667

Effect of foreign currency

  $ 206,800      $ (266,119   $ (59,319   $ (225,396   $ 730,155      $ 634,126      $ 8,083   
                                                       

Net increase (decrease) in cash and cash equivalents

  $ (8,405,218   $ 1,841,757      $ (6,563,461   $ (15,377,213   $ (522,353   $ (370,026   $ 6,788,204   
                                                       

Cash flows for the Nine Months Ended November 26, 2009 (the fiscal 2010 nine-month period) compared to the Nine Months Ended November 27, 2008 (the fiscal 2009 nine-month period)

Net cash provided by operations was $53.7 million for the fiscal 2010 nine-month period compared to $9.6 million for the fiscal 2009 nine-month period. Net income for the fiscal 2010 nine-month period was $7.0 million, an increase of $4.4 million over the fiscal 2009 nine-month period. Net cash flow provided from working capital was $16.3 million for the fiscal 2010 nine-month period compared to net cash used by working capital of $15.9 million in the fiscal 2009 period. This favorable increase is primarily reflective of the timing of long-term debt interest payments, the timing of payments related to purchases of pulp fiber, an improvement in customer cash collections and a focus on managing inventory production to more closely match the timing of our customers’ orders. We also incurred $2.2 million of non-cash expenditures as a result of extinguishing a portion of our debt during the fiscal 2010 period. Additionally, net deferred income tax assets increased $3.4 million during the fiscal 2010 period as a result of an increase in Cellu Tissue’s federal tax rate, and amortization expense increased by $1.2 million in the fiscal 2010 period as a result of the APF Acquisition.

Net cash used in investing activities for the fiscal 2010 nine-month period was $19.8 million compared to $73.9 million in the fiscal 2009 nine-month period. The fiscal 2009 nine-month period includes $64.2 million of cash paid for the APF Acquisition. The remaining change relates to the level of capital spending period over period. The increased level of spending is primarily due to expanding our converting capacity and the completion of our East Hartford, Connecticut energy cogeneration facility.

 

57


Table of Contents
Index to Financial Statements

Net cash used by financing activities for the fiscal 2010 nine-month period was $27.1 million compared to cash provided by financing activities of $63.3 million in fiscal 2009 nine-month period. The activity in the fiscal 2010 period is primarily driven by the refinancing of our debt that was to mature during fiscal 2010 and the excess cash generated by operations. Both were used to reduce borrowings on our revolving line of credit to zero. The financing activity for the fiscal 2009 period was primarily related to financing obtained in connection with the APF Acquisition.

Balance Sheet

Receivables, net as of November 26, 2009 decreased to $50.6 million from $54.1 million as of the end of fiscal year 2009. Receivables decreased as a result of increased cash collections that resulted primarily from a focus on accelerating certain customer payments.

Property, plant and equipment, net as of November 26, 2009 increased $5.4 million to $307.4 million from $302.0 million as of the end of fiscal year 2009. Routine capital expenditures, including deposits made in conjunction with our efforts to expand our converting capacity, were partially offset by depreciation expense.

Other intangibles, net as of November 26, 2009 decreased to $28.5 million from $31.7 million as of the end of fiscal year 2009 as a result of amortization expense during the current period.

Other assets as of November 26, 2009 increased to $10.4 million from $1.9 million as of the end of fiscal year 2009 due to payment of deferred financing fees that were capitalized in conjunction with the issuance of the 2014 Notes.

Bank overdrafts were $0 as of November 26, 2009 compared to $3.3 million at February 28, 2009 due to increased cash balances as of November 26, 2009.

Revolving line of credit was $0 as of November 26, 2009 compared to a balance of $18.5 million as a result of cash generated from operations and the issuance of the 2014 Notes during fiscal 2010. Available cash generated during the current period was applied to the revolving line of credit.

Accounts payable as of November 26, 2009 increased to $21.3 million from $16.7 million as of the end of fiscal year 2009 primarily as a result of the timing of various payments, including for spot pulp purchases.

Accrued interest as of November 26, 2009 increased to $14.4 million from $10.2 million at the end of fiscal year 2009 as a result of the issuance of the 2014 Notes which have interest payments due in June and December. The 2010 Notes, which were retired during the quarter ended August 27, 2009, had interest payments due in March and September.

Other current liabilities as of November 26, 2009, decreased to $1.0 million from $17.4 million as of the end of fiscal year 2009 as a result of the $15.0 million earnout payment paid on August 28, 2009.

Deferred income tax assets and liabilities increased as a result of Cellu Tissue’s increase in the statutory federal income rate from 34% to 35% and the current year income tax provision.

Long-term debt as of November 26, 2009 increased to $268.3 million from $242.4 million as of the end of fiscal year 2009 as a result of the issuance of the 2014 Notes and the redemption of the 2010 Notes during the quarter ended August 27, 2009.

Other liabilities as of November 26, 2009 decreased to $1.0 million from $5.4 million as of the end of fiscal year 2009 as a result of the $5.0 million earnout payment paid on November 24, 2009.

 

58


Table of Contents
Index to Financial Statements

Cash flows for fiscal year 2009, fiscal year 2008, and combined fiscal year 2007

Net cash provided by (used in) operations was $24.1 million for fiscal year 2009, $19.8 million for fiscal year 2008 and $3.4 million for fiscal year 2007. Non-cash items for fiscal year 2009, fiscal year 2008 and fiscal year 2007 totaled $27.6 million, $18.4 million and $17.3 million, respectively, and consisted primarily of amortization, derivative gain (loss), depreciation, stock compensation and deferred income taxes. Cash flows used by changes in working capital totaled $10.1 million, $2.4 million and $0.8 million for fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively. With respect to changes in accounts receivable and inventory, cash used by these items was $9.7 million for fiscal year 2009, cash used by these items was $8.5 million for fiscal year 2008 and cash provided by these items was $0.1 million for fiscal year 2007. Cash provided by changes in prepaid expenses, income tax receivable and other assets was $1.6 million for fiscal year 2009, $1.9 million for fiscal year 2008 and $0.9 million for fiscal year 2007. Cash used by changes in accounts payable, accrued expenses, accrued interest and other liabilities was $2.0 million for fiscal year 2009, cash provided by changes in accounts payable, accrued expenses, accrued interest and other liabilities was $4.3 million for fiscal year 2008 and cash used by changes in accounts payable, accrued expenses, accrued interest and other liabilities was $1.8 million for fiscal year 2007.

Net cash provided by (used in) investing activities was cash used in investing activities of $80.6 million for fiscal year 2009, cash used in investing activities of $64.2 million for fiscal year 2008 and cash used in investing activities of $9.6 million in fiscal year 2007. Included in fiscal year 2009 is the cash paid for the APF Acquisition, net of cash received of $64.2 million. Included in fiscal year 2008 is the cash paid for the CityForest Acquisition, net of cash received, of $43.7 million. Investing activities in 2007 related to the level of capital spending year over year.

Net cash (used in) provided by financing was cash provided by financing activities of $55.2 million for fiscal year 2009, which includes proceeds from the issuance of the additional 2010 Notes of $36.9 million on July 2, 2008, $8.7 million of net borrowings on the working capital facility, $15.0 million equity investment and $7.0 million cash portion of earnout payment. Cash provided by financing activities of $29.2 million for fiscal year 2008 includes proceeds from the issuance of the additional 2010 Notes of $20.0 million on March 21, 2007, $9.8 million of net borrowings on the working capital facility and $0.6 million payment on the industrial revenue bonds assumed in the CityForest Acquisition. The remaining $0.3 million for fiscal year 2007 relates to payments on our industrial revenue bond. Our final payment was made in the first quarter of fiscal year 2007.

Balance Sheet

Assets

Cash as of February 28, 2009 decreased to $0.4 million from $0.9 million as of the end of the prior fiscal year as a result of the items described above.

Receivables, net as of February 28, 2009 increased to $54.1 million from $44.5 million as of the end of the prior fiscal year. Included in the $54.1 million is $9.4 million of receivables related to APF. Without the effect of the acquisition, receivables increased $0.2 million.

Inventories as of February 28, 2009 increased to $47.2 million from $34.0 million as of the end of the prior fiscal year. Included in the $47.2 million is $8.9 million of inventories related to APF. Without the effect of the acquisition, inventories increased $4.3 million in support of increased net sales.

Deferred income taxes as of February 28, 2009 decreased to $3.5 million from $7.2 million as of the end of the prior fiscal year. This decrease is primarily attributable to the utilization of net operating loss carryforwards, or NOLs, for federal and state tax purposes.

 

59


Table of Contents
Index to Financial Statements

Property, plant and equipment, net as of February 28, 2009 decreased to $302.0 million from $310.5 million as of the prior fiscal year. Included in the $302.0 million of property, plant and equipment, net is $10.7 million related to APF. Without the effect of the acquisition, property plant and equipment decreased $19.2 million from the end of the prior fiscal year due to depreciation expense partially offset by capital expenditures.

Goodwill as of February 28, 2009 increased to $41.0 million from $11.3 million as of prior fiscal year due to the APF Acquisition.

Other intangibles, net as of February 28, 2009 increased to $31.7 million from $9.4 million as of the end of the prior fiscal year. The additions to other intangibles relate to the APF Acquisition, reduced by amortization expense from the date of acquisition (July 2, 2008) through year-end.

Other assets as of February 28, 2009 increased to $0.9 million from $0.2 million as of the end of the prior fiscal year due to debt and bond issuance costs capitalized and included in other assets resulting from the financing in connection with the APF Acquisition.

Liabilities

Bank overdrafts as of February 28, 2009 were $3.3 million compared to $0 as of the end of the prior fiscal year. As of the end of the current fiscal year checks outstanding exceeded cash balances in our lockbox account by this amount due to timing of payments.

Revolving line of credit as of February 28, 2009 increased to $18.5 million from $9.8 million as of the end of the prior fiscal year primarily due to additional borrowings in connection with the financing of the APF Acquisition, the semi-annual interest payments on the 2010 Notes and the earnout payment made in connection with the 2006 Merger, offset by net payments of $10.0 million in the fourth quarter of the current fiscal year.

Accounts payable as of February 28, 2009 decreased to $16.7 million from $24.1 million as of the end of the prior fiscal year. Included in the $16.7 million of accounts payable is $0.9 million related to APF. Without the effect of the acquisition, accounts payable decreased $8.3 million primarily due to timing of payments.

Accrued expenses as of February 28, 2009 increased to $26.5 million from $19.1 million as of the end of the prior fiscal year. Included in the $26.5 million of accrued expenses is $1.5 million related to APF. Without the effect of the acquisition, accrued expenses increased $5.9 million primarily due to the timing lag between receipt of goods and receipt of invoices at year-end.

Accrued interest as of February 28, 2009 increased to $10.2 million from $8.3 million as of the end of the prior fiscal year. The increase is due to the additional borrowings to finance the APF Acquisition and the debt assumed in the transaction.

Other current liabilities as of February 28, 2009 increased to $17.4 million from $15.0 million as of the end of the prior fiscal year. Included in the $17.4 million is a liability of $2.4 million related to the fair value of our cash flow hedging instruments. The remaining $15.0 million, consistent with the prior fiscal year end relates to the earnout payment of $15.0 million earned for fiscal year 2009 to be paid in fiscal year 2010.

Long-term debt as of February 28, 2009 increased to $243.1 million from $198.8 million as of the end of the prior fiscal year due to the debt incurred to finance the APF Acquisition.

 

60


Table of Contents
Index to Financial Statements

Other liabilities as of February 29, 2008 decreased to $5.4 million from $20.1 million as of the end of the prior fiscal year primarily due to the earnout payment in August 2008.

Capital in excess of par value as of February 28, 2009 increased to $70.9 million from $47.0 million as of the end of the prior fiscal year due to an equity investment by our Parent to fund a portion of the APF Acquisition and the stock portion of the earnout payment in August 2008 and the equity investment by Weston Presidio V, L.P. used to fund a part of the cash portion of the earnout payment in August 2008.

Accumulated earnings (deficit) as of February 28, 2009 was accumulated earnings of $3.7 million compared to accumulated deficit of $2.9 million as of the end of the prior fiscal year due to the earnings generated in fiscal year 2009.

Accumulated other comprehensive (loss) income as of February 28, 2009 was a loss of $6.9 million compared to income of $1.9 million as of the end of the prior fiscal year due to the negative impact of natural gas derivatives and foreign currency rates over the prior year.

Capital Spending Summary

Capital expenditures were $16.4 million, $20.5 million and $9.6 million for fiscal year 2009, fiscal year 2008 and fiscal year 2007, respectively. We have increased capital expenditures since fiscal year 2002 to support ongoing cost savings programs (cost improvements) and growth in our manufacturing capacity. Cost improvement refers to our initiatives to continue to reduce our manufacturing costs in accordance with our business strategy. We have concentrated the growth in our manufacturing capacity since fiscal year 2003 on our converting operations at our Neenah, Wisconsin facility for the production of value-added converted tissue products. Our capital expenditures over the two-year period ended February 28, 2009 have been divided generally among three categories: 44% for maintenance capital, 30% to expand converting capacity and 26% related to cost improvement programs.

Additionally, included in the fiscal year 2008 spending described above is $5.5 million that we spent to buy out an operating lease. The assets and the associated lease were put into place in 1999.

We expect that the percentage of our capital expenditures dedicated to additional converting capacity may increase in the future as we execute our strategy of increasing our sales of converted tissue products. In order to satisfy increased customer demand for converted tissue products and to further expand our geographic reach, we completed the installation of a new tissue converting line in our Long Island, New York facility (which became operational in December 2009) and we expect to invest approximately $30 million (over the next 18-24 months) to further increase our retail converting capacity by 50,000 tons. It is anticipated that a portion of this investment will be used to add converting capacity to our new 323,000 square foot facility in Oklahoma City, Oklahoma. We expect that the balance of this investment will be used to add converting capacity to our three established facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York.

 

61


Table of Contents
Index to Financial Statements

Contractual Obligations

At February 28, 2009, our material obligations under firm contractual arrangements, including commitments for future payments under long-term debt arrangements, operating lease arrangements and other long-term obligations, are summarized below.

 

     Cash payments due by period

(Dollars in thousands)

   Total    Less than
1 year
   1-3 years    3-5 years    More than
5 years

Long-term debt obligations(1)

   $ 245,671    $ 760    $ 230,076    $ 1,520    $ 13,315

Interest obligations(1)

     28,687      22,939      1,638      468      3,642

Operating lease obligations

     13,006      3,136      8,392      1,478     

Purchase obligations

     141,076      62,288      78,788          
                                  

Total(2)

   $ 428,440    $ 89,123    $ 318,894    $ 3,466    $ 16,957
                                  

 

(1)

Interest incurred at 9 3/4%, payable semi-annually for the 9 3/4% senior secured notes due 2010 through March 15, 2010, 12% for the Seller Note through July 2, 2011 and an assumed rate of 3% on the outstanding balance for the industrial revenue bonds through March 1, 2028. In July 2009, we refinanced the 9 3/4% senior secured notes due 2010 with a portion of the net proceeds of our 11 1/2% senior secured notes due 2014, which will mature on June 1, 2014. As a result of this refinancing:

 

   

our principal debt payments are expected to be $0.8 million in fiscal 2010, $0.8 million in fiscal 2011, $7.1 million in fiscal 2012, $0.8 million in fiscal 2013, $0.8 million in fiscal 2014 and $268.3 million in fiscal 2015 and thereafter; and

 

   

our cash interest payments are expected to be $22.4 million fiscal 2010, $30.6 million in fiscal 2011, $30.2 million in fiscal 2012, $29.8 million in fiscal 2013, $29.7 million in fiscal 2014 and $18.0 million in fiscal 2015 and thereafter.

 

(2) Due to uncertainty regarding potential tax audits and their possible outcomes, the estimate of obligations related to unrecognized tax benefits cannot be made. See Note 8 to the Consolidated Financial Statements for additional detail.

Off-Balance Sheet Transactions

We do not currently have any off-balance sheet transactions.

Net Operating Loss Carryforwards

At February 28, 2009, we had state NOLs of approximately $9.9 million, which begin to expire in 2019 and foreign tax credit carryforwards of approximately $3.6 million. We currently anticipate fully utilizing recorded state NOLs and foreign tax credits prior to their expiration.

In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. We consider the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, we believe it is more likely than not that we will realize the benefits of these deductible differences.

 

62


Table of Contents
Index to Financial Statements

New Accounting Standards

Refer to Note 2 (Summary of Significant Accounting Policies) of the notes to our consolidated financial statements included elsewhere in this prospectus for a discussion of new accounting pronouncements and the potential impact to our consolidated results of operations and financial position.

On July 31, 2009, the Financial Accounting Standards Board Accounting Standards Codification became the authoritative source of accounting principles to be applied to the financial statements of nongovernmental entities prepared in accordance with U.S. GAAP. The following is a list of recent pronouncements issued by the Financial Accounting Standards Board and which we adopted during the second quarter of fiscal 2010:

 

   

Fair Value Measurements and Disclosures: The pronouncements define fair value, establish guidelines for measuring fair value and expand disclosures regarding fair value measurements. The adoption of fair value measurements and disclosures did not have a material impact on our results of operations and financial position.

 

   

Subsequent Events: The pronouncement codifies existing standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. We adopted the pronouncement in the second quarter of fiscal 2010. The adoption did not have any impact on our consolidated financial statements.

Critical Accounting Policies and Estimates

Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Significant accounting policies used in the preparation of our consolidated financial statements are described in Note 2 (Summary of Significant Accounting Policies) of the notes to our consolidated financial statements included elsewhere in this prospectus. Management believes the most complex and sensitive judgments, because of their critical nature, result primarily from the need to make estimates about the effects of matters with inherent uncertainty. The most critical areas involving management estimates are described below. Actual results in these areas could differ from management’s estimates.

Allowance for Doubtful Accounts

We estimate our allowance for doubtful accounts using two methods. First, we determine a specific reserve for individual accounts where information is available that the customer may have an inability to meet its financial obligation. Second, we estimate additional reserves for all customers based on historical write-offs. Accounts are charged-off against the allowance for doubtful accounts when we have exhausted all collection efforts and have deemed the accounts uncollectible.

Goodwill and Trademarks

Goodwill is not amortized but tested for impairment annually at year-end, and at any time when events suggest impairment may have occurred. Our goodwill impairment test is performed by comparing the fair value of each reporting unit to the carrying value of each reporting unit. We incorporate assumptions involving future growth rates, discount rates and tax rates in projecting the future cash flows. In the event the carrying value of a reporting unit exceeds its fair value, an impairment loss would be recognized to the extent the carrying amount of the reporting unit’s goodwill exceeds its implied fair value. Goodwill as of February 28, 2007 was $4.4 million. Goodwill as of

 

63


Table of Contents
Index to Financial Statements

February 29, 2008 was $11.4 million, of which $7.0 million was recorded in connection with an acquisition in that year. Goodwill as of February 28, 2009 was $41.0 million, of which $29.6 million was recorded in connection with an acquisition in the current year. No goodwill impairment has been noted through February 28, 2009.

Trademarks are not generally amortized but tested for impairment annually at the end of our second quarter, and at any time when events suggest impairment may have occurred. Our impairment test is performed by comparing the carrying amount to its fair market value at the time of assessment. We incorporate assumptions involving future growth rates, discount rates and tax rates in projecting the future cash flows. In the event the carrying value of the trademark exceeds its fair value, an impairment loss would be recognized. No trademark impairments were recorded during fiscal year 2009, fiscal year 2008 or the period from June 13, 2006 to February 28, 2007 (post-merger).

Income Taxes

We recognize deferred tax assets and liabilities for expected future tax consequences of events that have been included in the financial statements or income tax returns. Under this methodology, deferred tax assets and liabilities are determined based on the difference between the financial statements and the tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.

Derivatives and Hedging

We use derivative financial instruments to offset a substantial portion of our exposure to market risk arising from changes in the price of natural gas. Hedging of this risk is accomplished by entering into forward swap contracts, which are designated as hedges of specific quantities of natural gas expected to be purchased in future months. These contracts are held for purposes other than trading and are designated as cash flow hedges. We measure fair value of our derivative financial instruments as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows: level 1-inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access; level 2-inputs utilize data points that are observable such as quoted prices, interest rate and yield curves; level 3-inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Our derivative contracts, natural gas forward contracts, are valued using industry-standard models that use observable market inputs (forward market prices for natural gas) as their basis. We classify these instruments within level 2 of the valuation hierarchy. For level 2 and 3 of the fair value hierarchy, where appropriate, valuations are adjusted for various factors such as liquidity, bid/offer spreads and credit considerations (non performance risk).

Quantitative and Qualitative Disclosures About Market Risk

We use natural gas swap contracts with a cumulative total notional amount of approximately $3.7 million for 525,767 MMbtu at November 26, 2009 to hedge against cash flow variability arising from changes in natural gas prices in conjunction with our anticipated purchases of natural gas through August 2010. These swap contracts fix the rates on portions of our natural gas purchases to rates ranging from $4.62 per MMbtu to $7.52 per MMbtu for various periods through August 2010. These

 

64


Table of Contents
Index to Financial Statements

swap contracts were accounted for as effective hedges during fiscal year 2010. These natural gas swap contracts had a liability fair value of $1.0 million at November 26, 2009, which was included in other current liabilities. Approximately 52% of our natural gas requirements are hedged through August 2010.

We have minimal foreign currency translation risk. All international sales, other than sales originating from our Canadian subsidiary, are denominated in U.S. dollars. Due to our Canadian operations, however, we could be adversely affected by unfavorable fluctuations in foreign currency exchange rates.

Although, as of November 26, 2009, we did not have any outstanding borrowings under our working capital facility, to the extent that we borrow under the working capital facility in the future, our interest expense for such borrowings would be affected by changes in interest rates. In addition, amounts borrowed by CityForest Corporation under the Associated Bank Revolving Credit Facility, as described below under the heading “Description of Indebtedness,” bear interest at a rate per annum equal to the LIBOR Rate (as defined in the Reimbursement Agreement described below under the heading “Description of Indebtedness”), plus an applicable margin. Accordingly, the interest expense for borrowings under the Associated Bank Revolving Credit Facility would also be affected by changes in interest rates.

We are also subject to commodity price risk associated with pulp costs and take advantage of spot prices on pulps to minimize market risk arising from changes in pulp costs.

 

65


Table of Contents
Index to Financial Statements

BUSINESS

Our Company

We are a North American producer of tissue products, with a strategic focus on consumer-oriented private label tissue products and a growing presence in the value retail tissue market. We manufacture large rolls of tissue from purchased pulp and our own recycled fiber. We are a vertically integrated manufacturer, which means that we convert some of the hardrolls we produce into finished and packaged tissue products, and we sell the remainder of our hardrolls to third-party converters of tissue products. Our vertically integrated manufacturing operations and extensive geographic footprint enable us to deliver a broad range of cost-competitive products with brand-like quality manufactured to our customers’ specifications. For the twelve months ended November 26, 2009, we sold 331,425 tons of tissue along with our other products, generating aggregate net sales of $515.3 million, Adjusted EBITDA of $81.3 million and net income of $11.0 million. For an explanation of Adjusted EBITDA and a reconciliation of net income to Adjusted EBITDA, see pages 12, 13, 14 and 15.

We own and operate nine strategically-located manufacturing and converting facilities in Connecticut, Georgia, Michigan, Mississippi, New York, Ontario and Wisconsin. Six of these facilities manufacture hardrolls for internal conversion and external hardroll sales, two of these facilities produce converted tissue products and one facility is an integrated hardroll manufacturing and converting site. We have grown our annual hardroll production capacity from approximately 264,171 tons, as of February 28, 2006, to approximately 327,000 tons as of November 26, 2009. In response to significant market demand for our converted tissue products, we have grown our annual converting capacity from approximately 85,000 tons, as of February 28, 2006, to approximately 194,000 tons as of November 26, 2009.

Our Products

Our tissue products consist of two primary product lines sold predominantly to (1) the consumer private label and away-from-home markets and (2) third-party converters.

 

  Ÿ  

Converted tissue.    Our converted tissue products include a full product line of consumer private label and away-from-home bathroom tissue, facial tissue, napkins, folded towels and kitchen roll towels. We manufacture our converted tissue products according to our customers’ specifications with a quality range from super premium to value quality. Our flexible manufacturing assets enable us to produce converted tissue products according to a variety of specifications, including fiber type, weight, softness, size, color, prints, embossing patterns, fold and package configuration. We sell our converted tissue products through various retailers and away-from-home distributors that serve the consumer and away-from-home markets. We entered the consumer and away-from-home converted tissue products market following our August 2002 acquisition of the manufacturing and converting facility in Neenah, Wisconsin. We began manufacturing at this facility in August 2002 and began producing our full line of converted tissue products in March 2003. We have significantly increased sales of products out of our Neenah, Wisconsin facility since its acquisition to $154.0 million in fiscal year 2009. In July 2008, we completed the APF Acquisition, which provided us with two geographically diverse, stand-alone converting facilities and nearly doubling our converting capacity. For the nine months ended November 26, 2009, sales of converted tissue products comprised 46.4% of our total net sales compared to 22.5% of our total net sales for fiscal year 2008.

 

  Ÿ  

Hardroll tissue.    We manufacture a variety of hardroll tissue and absorbent cover stock to our customers’ specifications, which our customers print, cut and process into an assortment of finished converted tissue products and disposable absorbent products in the personal and health care markets. These absorbent products include a complete line of away-from-home

 

66


Table of Contents
Index to Financial Statements
 

and consumer bath and towel products, liners for diapers, adult incontinence and feminine care products, surgical waddings and other medical and sanitary disposable products. For the nine months ended November 26, 2009, sales of hardroll tissue products comprised 31.1% of our total net sales compared to 52.8% of total net sales for fiscal year 2008. We produce hardroll tissue at all of our facilities, except our Menominee, Michigan; Long Island, New York; and Thomaston, Georgia facilities. In March 2007, we acquired CityForest Corporation which increased our capacity to sell hardrolls to third-party converters and to utilize for internal conversion. We manufacture our hardroll tissue with a variety of pulps and recycled fibers and produce hardroll tissue to our customers’ specifications by controlling brightness, absorbency, bulk, strength, porosity and color. We also produce absorbent cover stock in a variety of weights and widths for sale to consumer products companies or third-party converters.

For the fiscal year 2009, we sold 250,073 tons of converted tissue and tissue hardrolls, generating net sales of $400.6 million, or approximately 77.2% of our net sales, and 83.8% of our gross margin. For the nine months ended November 26, 2009, we sold 183,850 tons of converted tissue and tissue hardrolls, generating net sales of $299.9 million, or approximately 77.5% of our net sales, and 84.1% of our gross margin.

We also produce machine-glazed tissue hardrolls at our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities in a variety of weights, widths and surface characteristics. Machine-glazed tissue is glazed with a coating and, in some cases, other moisture and grease-resistant coatings. We sell our machine-glazed tissue hardrolls to third-party converters of products such as fast food and commercial food wrappers, gum wrappers, coffee filters, cigarette pack liner paper, wax paper and butter wraps. We also convert a limited amount of our machine-glazed tissue hardrolls into rolls for retail food wrappers. The majority of our converted wax paper products manufactured at our Menominee, Michigan facility is sold as branded products to a single customer. For the fiscal year 2009, we sold 82,482 tons of machine-glazed tissue hardrolls and converted wax paper products, generating net sales of $114.4 million, or approximately 22.0% of our net sales, and 15.3% of our gross margin. For the nine months ended November 26, 2009, we sold 65,498 tons of machine-glazed tissue hardrolls and converted wax paper products, generating net sales of $81.2 million, or approximately 21.0% of our net sales, and 12.8% of our gross margin.

We sell a small amount of foam as a result of our acquisition of the assets of the Thomaston, Georgia facility from APF. We manufacture polystyrene foam for conversion into foam plates using polystyrene pellets that are heated with natural gas to form a sheet of polystyrene foam. We then convert the sheets into foam plates of various sizes by stamping the sheet with a plate mold. We have the capability of using different molds to manufacture different products, including foam trays and bowls. We sell our products primarily to a single value retail customer, which also purchases a variety of converted tissue products from us. From the date of acquisition through fiscal year-end 2009, we sold 344,208 cases of polystyrene foam rolls generating net sales of $4.0 million, or approximately 0.8% of our net sales, and 1.0% of our gross margin. For the nine months ended November 26, 2009, we sold 494,526 cases of polystyrene foam products generating net sales of $5.8 million, or approximately 1.5% of our net sales, and 3.2% of our gross margin.

Our Industry

According to RISI, a leading information provider for the global forest products industry, the North American tissue market exceeded 9 million tons in 2008. From 1995 to 2008, North American tissue demand grew in the aggregate by 32%, according to RISI. RISI estimates that the annual operating rate for North American tissue manufacturers will remain above 92% through 2012. According to RISI, tissue demand has grown at a higher rate than any other major paper sector in North America since 1995.

 

67


Table of Contents
Index to Financial Statements

Tissue paper is sold into two primary market sectors: (1) the consumer retail sector and (2) the commercial and industrial, or away-from-home, sector. The consumer retail sector comprises approximately 6.3 million tons, or 70%, of the North American tissue paper market, with the away-from- home sector comprising approximately 2.7 million tons. The consumer retail sector is further divided between private label, estimated at 1.6 million tons, and branded, estimated at 4.7 million tons. Within the consumer private label sector, mass retailers, value retail chains and dollar stores, such as Dollar General, Dollar Tree and Family Dollar, represent the fastest growing portion of the private label market. The balance of private label tissue products are sold through grocery and drug retail chains, and warehouse clubs such as Costco and Sam’s Club. We believe that competition in the dollar stores market is relatively fragmented among many small regional converters with a limited private label presence from large branded tissue producers. Concentration in the North American branded products sector is high, with approximately 65% of capacity concentrated among the top three producers, Kimberly-Clark Corporation, Georgia-Pacific Corporation and Proctor & Gamble.

Unlike other paper products that are more easily shipped, tissue is a national or even regional business, with limited import/export trade flow. Tissue does not ship well because it is voluminous and easily damaged in transit. High quality tissue is made from virgin pulp, while lower quality tissue may be made from either virgin pulp or recycled fiber. Across the spectrum of personal care products, the manufacturing of tissue is among the most capital intensive, which provides an inherent constraint among industry participants to allocate additional capital towards tissue production and acts as a barrier to entry for potential new entrants.

We also compete in the away-from-home sector, where products are generally sold to paper, food service and janitorial supply distributors, which resell these products for use in hotels, restaurants, factories, schools, office buildings and other commercial, government and industrial institutions. The top three North American branded producers in this sector are Kimberly-Clark Corporation, Georgia-Pacific Corporation and SCA.

Machine-glazed tissue represents a much smaller market than the consumer and away-from-home tissue markets. End markets for machine-glazed tissue include fast food and commercial food wrap as well as niche market products such as gum wrappers, coffee filters, cigarette pack liner paper, wax paper and butter wraps. Because of the (1) breadth of product offerings, (2) high level of service required to effectively meet customer needs and (3) significant required investments in facilities, equipment and local inventories, there have been no substantial new domestic or international entrants in the North American machine-glazed tissue market in recent years. We believe that pricing and demand for our products will remain relatively stable due to the elimination of several major producers of machine-glazed tissue.

Our Strengths

We believe our core strengths include the following:

Strategic focus on consumer private label tissue products.    As a North American tissue manufacturer with a strategic focus on consumer private label products, we benefit from: (1) strong consumer demand for brand-like tissue products, (2) our ability to produce private label products that are equivalent in quality to branded products, (3) growing consumer acceptance of private label products, (4) consumer demand for products sold through the value retail channel and (5) our ability to generate higher margins from our converted tissue products than from our sales of hardrolls to third parties or our machine-glazed tissue products.

Low-cost manufacturing operations.    Our flexible production capability, low overhead costs and branded-quality products contribute to our competitive position in the marketplace. We have a proven track record of ongoing cost-savings and productivity improvement initiatives. We have contracted for

 

68


Table of Contents
Index to Financial Statements

approximately 50% to 65% of our anticipated fiber requirements through fiscal year 2012 while achieving highly competitive market discounts and ensuring consistency of supply. Also, because of our significant scale, we are able to optimize our machine schedules to take full advantage of our production capabilities and minimize freight costs for our customers. To ensure supply and reduce market dependency, we have invested in green energy projects such as a third-party biomass gasification steam project in Wiggins, Mississippi and our cogeneration installation in East Hartford, Connecticut, which produces steam and electricity.

Significant scale and footprint in the Northeast, Southeast, South and Central United States.    Our strategic manufacturing facilities produce a full line of private label products and support geographic coverage of the U.S. market east of the Rocky Mountains. The geographic location of our facilities enables us to be a provider in the consumer private label and away-from-home converted tissue markets in the Northeast, Southeast, South and Central United States, which collectively account for approximately 76% of the U.S. population. Our Neenah, Wisconsin; Thomaston, Georgia; and Long Island, New York converting lines have approximately 194,000 tons of annual converting capacity. The APF Acquisition described below under “—Our History” has allowed us to reach new distribution channels and expand our geographic footprint in the South, Southeast, Midwest and Northeast United States. In addition, our proximity to customers and our diverse reach give us an economic advantage over smaller, and often one- or two-plant, regional tissue converters.

Strong financial position and operating results.    We believe our significant growth in Adjusted EBITDA and net cash provided by operating activities, coupled with our balance sheet liquidity will allow us to execute our converting strategy, whether through organic growth or strategic acquisitions. Our net sales and Adjusted EBITDA have increased 49.7% and 175%, respectively, from fiscal year 2007 to the twelve months ended November 26, 2009. Our net income has grown from a net loss of $13.1 million in fiscal year 2007 to net income of $11.0 million for the twelve months ended November 26, 2009. For the twelve months ended November 26, 2009, our Adjusted EBITDA margin equaled 15.8% and our gross margin equaled 15.3%, compared to 11.4% and 10.6%, respectively, for fiscal year 2009. In July 2009, we successfully refinanced most of our debt with $255 million of 11 1/2% senior secured notes due 2014. Our net cash provided by operating activities equaled $24.1 million and $68.1 million for fiscal year 2009 and for the twelve months ended November 26, 2009, respectively. As of November 26, 2009, we also had $52.2 million available under our revolving line of credit.

Proven acquisition integration capabilities.    Since 2007, we have made two strategically important acquisitions: (1) in March 2007, we acquired CityForest Corporation, which greatly expanded our recycled fiber capabilities, and (2) in July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities in the APF Acquisition described below, which provided us with two geographically diverse, stand-alone converting facilities. Due to the successful integration of these businesses, these acquisitions were accretive to our earnings and generated synergies in excess of original estimates. These acquisitions were strategically important because they have enabled us to reach new distribution channels and expand our geographical footprint in the South, Southeast and Northeast. Given the fragmented nature of our industry, we believe there are additional opportunities for profitable expansion and consolidation in our markets.

Significant capital investment.    Since 2001, we have made significant capital investment in our hardroll manufacturing capacity, which has increased our hardroll capacity by more than 120,000 tons. These tons are available to support our vertically integrated, converting growth strategy and further solidify our ability to provide brand-equivalent quality and consistent supply. Furthermore, this additional capacity was added at a capital cost well below that of new tissue manufacturing assets. We have also grown our converting capacity capabilities over the last three years, increasing our converting capacity by 109,000 tons.

 

69


Table of Contents
Index to Financial Statements

Diversified and high-quality customer base.    We sell to a highly diversified customer base of over 200 companies, without dependence on any single customer. In fiscal year 2009, no customer accounted for more than 10% of our sales and, for the nine months ended November 26, 2009, Dollar General was our largest single customer, representing 10.5% of our sales. Our customers include leading consumer retailers and away-from-home distributors including Dollar General, Wal-Mart and Guest Supply, other vertically integrated tissue manufacturers and third-party converters.

Experienced and incentivized management team.    Our executive management team has an average of over 25 years of experience in the paper products industry. Russell C. Taylor (53) has been our President and Chief Executive Officer since 2001 and has over 25 years of industry experience. Prior to coming to our company, he was a senior executive at Kimberly-Clark Corporation, a leading personal care consumer products company. Steven D. Ziessler (49), our Chief Operating Officer since 2005, has over 25 years of industry experience and prior to joining our company was President of Kimberly-Clark Europe Ltd.’s away-from-home business. David J. Morris (53), our Chief Financial Officer, has spent 27 years in the paper and wood products business, including 15 years at Georgia-Pacific Corporation and seven years at Kimberly-Clark Corporation. After this offering, we expect that our executive officers will own approximately 8.4% of our outstanding common stock.

Environmentally friendly manufacturing capabilities.    We have the ability to manufacture hardrolls that contain up to 100% recycled fiber. We also convert recycled fiber hardrolls into products that are sold in the consumer retail and away-from-home markets. Our recycled fiber content exceeds current applicable Environmental Protection Agency guidelines and contains up to 100% recycled, post-consumer wastepaper (including magazines, phonebooks and manufacturing and office waste) that is processed without the use of chlorine compounds. Our acquisition of CityForest Corporation expanded our ability to manufacture recycled hardrolls and enabled us to produce our own recycled fiber. We also focus on other ways to avoid waste, including recycling water used in our manufacturing processes and reconstituting the fiber from our paper waste. In addition, 100% of our contractually purchased pulp is certified by the Sustainable Forestry Initiative or the Forest Stewardship Council.

Our Strategy

Our principal strategy is to be the private label tissue manufacturer of choice in North America by continuing to grow sales of our converted tissue products. We believe that our intense focus on “customer delight” through high levels of service, efficient and reliable supply-chain management, brand-like quality and consistency, and low cost manufacturing will provide us with continued growth opportunities. Our key initiatives include:

Continue to grow converted tissue sales to both consumer product retailers and value retailers.    We have substantially increased our sales of private label converted tissue products as a percentage of our total sales to both the consumer retail and value retail chains from 3.0% of our net sales in fiscal year 2008 to 30.2% of our net sales for the nine months ended November 26, 2009. As these retailers invest heavily in their private label brands, we will continue to focus on growing our business to support this profitable and growing segment of the U.S. tissue market. We also believe that through organic growth and acquisitions we have attractive opportunities to increase our market share in this growing customer segment. In addition, we currently have the ability to shift a majority of our lower margin, externally sold hardrolls to converted products sales, which have historically generated higher margins. For the nine months ended November 26, 2009, sales of tissue hardrolls and machine-glazed tissue hardrolls comprised 48.7% of our total net sales compared to 73.2% in fiscal year 2008. The decline in hardroll sales resulted from a mix shift to higher margin converted products.

 

70


Table of Contents
Index to Financial Statements

Invest in converting capacity to service these growing private label market segments.    To satisfy increased customer demand and to further expand our geographic reach, we have accelerated our growth strategy and expect to invest approximately $30 million over the next 18 to 24 months to increase our retail converting capacity by 50,000 tons. We anticipate that a portion of this investment will be used to add converting capacity to our new 323,000 square foot facility in Oklahoma City, Oklahoma. We expect that the balance of this investment will be used to add converting capacity to our three established facilities in Neenah, Wisconsin, Thomaston, Georgia and Long Island, New York. In December 2009, we completed installation of a new tissue converting line at our Long Island, New York facility. In addition, we also believe the fragmentation of the U.S. tissue market provides potential acquisition opportunities that would strengthen our market position, continue to expand our geographic reach and offer potential for industry consolidation.

Enhance our fiber and energy cost management initiatives.    We have developed and implemented a fiber procurement strategy that has been effective in reducing our fiber costs while helping to ensure consistent supply. Our agreements with various pulp suppliers enable us to purchase a majority of our fiber requirements at discounts below published list prices. In addition, these agreements do not preclude us from shifting a portion of our fiber purchases to the spot market to react to favorable market conditions. We believe these supply agreements offer substantial savings from purchasing pulp on the spot market during periods of tight supply. Furthermore, approximately 50% of our hardroll sales are contracted to customers and include escalators that allow for the pass-through of increased pulp costs. These contracts track a published pulp benchmark price index that is well accepted in the industry. We also have a targeted strategy that has successfully generated greater energy cost control. This strategy includes the use of gas strips or hedges to minimize price volatility, and capital projects that reduce consumption through alternative green-energy sources, further reducing our dependence on the energy market.

Further reduce manufacturing costs.    We continually pursue opportunities to contain and reduce our costs. As part of our cost management strategy, we benchmark our machines and manufacturing operations against those of other leading paper manufacturers. Our benchmarking is applied by business sector and machine type on a monthly, year-to-date and year-on-year basis. We review metrics such as total machine efficiency, fiber loss, waste percentage, tons produced per machine per person per year, fixed and variable costs per ton produced and total energy cost per ton produced. In addition, our cost management strategy focuses on reducing variable costs through increased operating efficiencies and reduced energy consumption, allowing us to better manage our costs and lessen the impact of fiber price cyclicality.

Our History

We were incorporated in Delaware in 1984. At the time of our incorporation, we acquired the assets of our East Hartford, Connecticut facility and, in 1995, we purchased our Wiggins, Mississippi facility. Throughout 1998, we acquired the assets of each of our Menominee, Michigan; Gouverneur, New York; and St. Catharines, Ontario facilities and, in 2002, we purchased our Neenah, Wisconsin facility.

Weston Presidio V, L.P.

On May 8, 2006, Cellu Paper Holdings, Inc., our parent, entered into an Agreement and Plan of Merger with Cellu Parent Corporation, a corporation organized and controlled by Weston Presidio V, L.P., and Cellu Acquisition Corporation, a newly formed wholly-owned subsidiary of Cellu Parent Corporation. Pursuant to the agreement, on June 12, 2006, Cellu Acquisition Corporation was merged with and into Cellu Paper Holdings, Inc., with Cellu Paper Holdings, Inc. surviving and becoming a wholly-owned subsidiary of Cellu Parent Corporation. We refer to this transaction in this prospectus as the 2006 Merger. As of a result of the 2006 Merger, we are controlled by Weston Presidio V, L.P.

 

71


Table of Contents
Index to Financial Statements

Weston Presidio V, L.P. is a partnership managed by Weston Presidio. Weston Presidio, founded in 1991, has managed five investment funds aggregating over $3.3 billion. The firm focuses its investment activities on growth companies. With offices in Boston, San Francisco and Menlo Park, Weston Presidio has completed transactions across a broad range of industries, including consumer, business services and manufacturing and industrial.

Strategic Acquisitions

In March 2007, we acquired our Ladysmith, Wisconsin facility in connection with our purchase of CityForest Corporation, doubling our recycled fiber capabilities. In July 2008, we acquired our Long Island, New York and Thomaston, Georgia facilities in connection with the APF Acquisition providing us with two geographically diverse, stand-alone converting facilities and nearly doubling our converting capacity.

Concurrent Reorganization Transactions

Prior to the completion of this offering, we intend to complete an internal restructuring designed to eliminate our direct and indirect parent entities. In this prospectus, we refer to this restructuring and the 167.27 for 1 stock split to be effected prior to the closing of this offering as our reorganization transactions. Pursuant to the reorganization transactions, Cellu Paper Holdings, Inc., our direct parent, will merge with and into Cellu Tissue, with Cellu Tissue surviving the merger. Immediately following this merger, Cellu Parent Corporation, which will then be our direct parent, will merge with and into Cellu Tissue, with Cellu Tissue surviving this second merger. In connection with these reorganization transactions, the holders of Cellu Parent Corporation’s outstanding Series A preferred stock will ultimately receive an aggregate of 12,729,233 shares of our common stock, the holders of Cellu Parent Corporation’s outstanding Series B preferred stock will ultimately receive an aggregate of 2,620,410 shares of our common stock, and the holders of Cellu Parent Corporation’s common stock will receive an aggregate of 1,082,913 shares of our common stock. Except as otherwise indicated, the information in this prospectus gives effect to the reorganization transactions. As described in this prospectus under the heading “Prospectus Summary—The Offering—Pricing Sensitivity Analysis,” to the extent that the actual initial public offering price per share for this offering is greater or less than $16.00, the actual number of shares of our common stock that the holders of Cellu Parent Corporation’s outstanding Series A preferred stock and Series B preferred stock will ultimately receive will be lower or higher, respectively. See “Capitalization” and “Certain Relationships and Related Party Transactions” for more information on the reorganization transactions.

Manufacturing

We currently operate three converting facilities at our Long Island, New York; Neenah, Wisconsin; and Thomaston, Georgia facilities. In addition, we recently added a new 323,000 square foot facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational by June 2010. The tissue converting process involves loading hardroll tissue onto converting machines which unwind, perforate, emboss and print on the tissue. The converting machines then roll or fold the processed tissue into converted tissue products, such as bath or facial tissue, napkins or paper towels to the specification ordered by our customers. Similarly, our converting operations at our Menominee, Michigan facility are designed to convert our machine-glazed tissue hardrolls into converted wax paper products.

We currently own and operate six manufacturing facilities located in the United States and one manufacturing facility located in St. Catharines, Ontario, Canada. We lease and operate two additional manufacturing facilities in the United States. We produce hardroll tissue at our East Hartford, Connecticut; Wiggins, Mississippi; Gouverneur, New York; St. Catharines, Ontario; Neenah, Wisconsin; and Ladysmith, Wisconsin facilities for sale to consumer products companies and third-party converters and for use in the production of converted tissue products at our Neenah, Wisconsin facility. We produce machine-glazed tissue at our Menominee, Michigan; Wiggins, Mississippi; and

 

72


Table of Contents
Index to Financial Statements

St. Catharines, Ontario facilities in a variety of specialty hardrolls. We also produce converted wax paper products at our Menominee, Michigan facility.

Our hardroll tissue manufacturing process begins with wood pulp or recycled fiber. These raw materials typically are pulped in large blenders or pulpers and moved through networks of pipes and pumps to a tissue machine where sheets of tissue paper are formed according to customer or grade specifications. The tissue paper is then drawn through the machine and formed on wires as it travels through various press rolls. Once the sheets are formed, they are transferred to a dryer section of the machine that dries the tissue. Following the drying process, the tissue paper is removed from the drying cylinders and wound into hardroll tissue. Hardroll tissue is either used internally for our converting operations at our Neenah, Wisconsin, Long Island, New York or Thomaston, Georgia facilities or sold to consumer products companies and third-party converters. We undergo a similar process at each of our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities in our machine-glazed tissue operations, which are designed to produce machine-glazed tissue hardrolls. Also, at our Ladysmith, Wisconsin facility, we process the majority of fiber used in our products received in the form of bales of recycled paper (mostly office paper). The de-inking process removes contaminants such as ink, staples, paper clips, plastic and paper coatings. Non-chlorine whiteners are used to brighten the fiber and strip colors. The end product is clean, bright fiber pulp.

Our foam business was acquired as part of the APF Acquisition. We manufacture polystyrene foam for conversion into foam plates using polystyrene pellets that are heated with natural gas to form a sheet of polystyrene foam. We then convert the sheets into foam plates of various sizes by stamping the sheet with a plate mold. We have the capability of using different molds to manufacture different products, including foam trays and bowls. Our production is primarily sold to a single retail customer, who also purchases a variety of converted tissue products from us.

The following table illustrates the annual hardroll production capacity at each of our manufacturing facilities based on current utilization and the type of products produced at each such facility:

Location

   Total
hardroll
capacity
(tons
per year)
   Hardroll
tissue
   Hardroll
machine-
glazed
paper
   Tissue
converting
   Machine-
glazed
paper
converting
   Foam

East Hartford, Connecticut

   29,000    X            

Thomaston, Georgia

            X       X

Menominee, Michigan

   32,000       X       X   

Wiggins, Mississippi

   54,000    X    X         

Gouverneur, New York

   32,000    X            

Long Island, New York

            X      

St. Catharines, Ontario

   45,000    X    X         

Ladysmith, Wisconsin

   55,000    X            

Neenah, Wisconsin

   85,000    X       X      

In addition, we recently added a new 323,000 square foot facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational by June 2010.

East Hartford, Connecticut Facility

Our East Hartford, Connecticut facility is a 59,000 square foot facility consisting of two paper machines, each of which produces dry creped tissue that is used by consumer products companies and third-party converters in the manufacture of liner for disposable baby diapers, adult incontinence products, surgical waddings and disposable bibs. The tissue paper is produced with 100% virgin pulp to insure absolute cleanliness. For fiscal year 2009, both machines in the aggregate produced approximately 28,000 tons of hardroll tissue with an annual production capacity of 29,000 tons. In addition, our East Hartford, Connecticut facility has the capacity to produce base sheets for facial and bath tissue, napkins and paper towel products.

 

73


Table of Contents
Index to Financial Statements

Thomaston, Georgia Facility

Our Thomaston, Georgia facility is a 426,000 square foot facility, with the capacity to expand further. Its production capacity includes the manufacture of bath tissue, towels, facial tissue, napkins and foam plates. We produce all of our foam at this facility. We acquired this facility as part of the APF Acquisition.

Menominee, Michigan Facility

Our Menominee, Michigan facility is a 397,000 square foot complex located along Lake Michigan’s Bay of Green Bay in the City of Menominee. The facility consists of a paper machine for the manufacture of machine-glazed tissue hardrolls and 20 converting line operations for both wet and dry wax papers. This facility is a producer of machine-glazed tissue hardrolls which are used by third-party converters to make food packaging, wrapping, laminating and moisture-resistant paper products. A portion of the machine-glazed tissue hardrolls produced at the Menominee, Michigan facility is converted through our converting equipment into converted wax paper products, including wet and dry wax paper, sandwich bags and microwavable wax paper. The majority of our converted wax paper products manufactured at the Menominee, Michigan facility is sold as branded products to the facility’s largest customer. For fiscal year 2009, the facility produced approximately 32,000 tons of machine-glazed tissue hardrolls and converted paper products, with an annual production capacity of 32,000 tons.

Wiggins, Mississippi Facility

Our Wiggins, Mississippi facility complex consists of a 163,200 square foot manufacturing and warehousing facility in addition to a 6,800 square foot office. The facility is close to major interstate highways and a railroad, with a rail spur that runs directly to the facility. In addition, the facility is strategically located near the Wiggins, Mississippi gulf coast and three major seaports, including the Port of Gulfport, through which we ship our exports. Our Wiggins, Mississippi facility is centrally located between Atlanta and Dallas, allowing for optimal service to many of our key customers.

Our manufacturing facility at the Wiggins, Mississippi location consists of two paper machines. One machine produces machine-glazed tissue hardrolls for food packaging, wrapping, laminating and moisture-resistant and grease-resistant paper products. The second machine produces dry creped paper that is used in the diaper and hygiene products market. In addition, it produces tissue, napkin and towel roll stock. For fiscal year 2009, the machines in the aggregate produced approximately 52,500 tons of hardroll tissue with an annual production capacity of 54,000 tons.

Gouverneur, New York Facility

Our Gouverneur, New York facility consists of a 242,000 square foot manufacturing complex and an 86,000 square foot warehouse. The manufacturing facility consists of two light dry creped paper machines, each of which produces a variety of specialty tissue products, such as personal hygiene grades, medical and surgical drapes, face mask wadding, filtration grades and tissues used in the personal care markets. In addition, the facility produces flexographic printed (a lower-cost, lower resolution graphic) colored napkins for the party goods industry and premium facial tissue. The facility is in close proximity to major interstate highways and a railroad, with a rail spur that runs directly to the facility. For fiscal year 2009, the facility produced in the aggregate approximately 32,000 tons of hardroll tissue with an annual production capacity of 32,000 tons.

Long Island, New York Facility

Our Long Island, New York facility is a 180,000 square foot complex. Its production capacity includes the conversion of bath tissue, towels, facial tissue and napkins. We acquired this facility as part of the APF Acquisition.

 

74


Table of Contents
Index to Financial Statements

St. Catharines, Ontario Facility

Our St. Catharines, Ontario facility is a 256,000 square foot complex currently consisting of two types of actively used machines: through-air dried and machine-finished. Both of these types of machines have color capability.

Our through-air dried machine produces highly absorbent bulky sheets in basis weights from nine to 25 pounds used in the manufacture of folded and rolled towels, facial and bath tissue, napkins and absorbent tissues. Our machine-finished machine produces wax paper base stock and wet creped tissue used in the manufacture of coffee filters and washroom towel base papers. All of the products manufactured at our St. Catharines, Ontario facility are produced in jumbo rolls and either converted into finished product at one of our three converting sites or sold to North American converters for further processing. For fiscal year 2009, the facility produced in the aggregate approximately 44,500 tons of hardroll tissue and machine-glazed tissue hardrolls with an annual production capacity of 45,000 tons.

Neenah, Wisconsin Facility

Our Neenah, Wisconsin facility is a 1.2 million square foot facility. We acquired this facility in August 2002 and added converting capacity to the facility subsequent to its acquisition. The facility currently consists of five light dry creped paper machines with up to 85,000 tons of annual hardroll tissue production capacity and 14 converting lines with approximately 90,000 tons of annual converting capacity. A complete distribution center with fully automated unitizing and wrapping capabilities is located adjacent to the facility. This facility produces converted tissue products such as facial and bath tissue, napkins and paper towels, as well as unconverted hardroll tissue, and enables us to offer our customers flexibility in the price, grade, softness, package configuration and size of our products. For example, our products can be manufactured completely with virgin pulp (for premium products) or recycled fiber (for value products) or any combination thereof. Our machines have color and multi-ply capacity. For fiscal year 2009, the facility produced approximately 83,000 tons of hardroll tissue and converted tissue products in the aggregate.

Ladysmith, Wisconsin Facility

Our Ladysmith, Wisconsin facility is a 259,000 square foot facility. We acquired this facility in March 2007 in the CityForest Acquisition. At this facility, we manufacture tissue hardrolls for third-party converters that resize and convert the rolls into napkins, towels, bath tissue, specialty medical tissue, industrial wipers and facial tissue. The majority of our sales from this facility are either converted into finished product at one of our three converting sites or sold to third-party converters serving the away-from-home market, the consumer market, as well as state and federal government agencies and the medical industry. We do not currently convert rolls into finished products at this facility. Our manufacturing process includes a de-inking facility, two light dry creped paper machines with a combined annual capacity of 55,000 tons used to manufacture tissue hardrolls and water and wastewater treatment capabilities. The facility processes over 98% of the fiber used in its product. This pulp can be used to make 100% recycled tissue or can be combined with other fiber, such as virgin pulp, at the paper machine. The ability to combine fibers of different types allows the facility to precisely match the specific requirements for a customer’s existing or new products. For fiscal year 2009, the facility produced in the aggregate approximately 53,000 tons of hardroll tissue.

Raw Material and Energy Sources and Supply

The primary raw material used in our various facilities is wood pulp (both virgin pulp and recycled fiber). Other costs include natural gas, electricity, fuel oil and, in our Menominee, Michigan facility, coal. We have developed and implemented a pulp cost management strategy that has been highly effective

 

75


Table of Contents
Index to Financial Statements

in controlling our pulp costs. Our supply agreements with various pulp suppliers enable us to purchase a majority of our anticipated total pulp requirements for a given year at competitive market discounts. These agreements further allow us to shift a portion of our pulp purchases to the spot market to take advantage of more favorable spot market prices when such prices fall. We believe these supply agreements provide us with significant protection against the risk of fluctuating pulp costs and offer a substantial savings from purchasing pulp on the spot market during periods of tight supply. In addition, our Ladysmith, Wisconsin facility processes over 98% of the fiber used in its product. We satisfy all of our energy requirements through purchases of natural gas (other than for our Menominee, Michigan facility) and electricity from local utility companies. At our Menominee, Michigan facility, our power boilers generate most of our energy requirements through the use of coal, with the balance being supplied through the purchase of natural gas by contract.

Sales and Customer Support

Hardroll tissue.    Our hardroll sales group markets and sells our tissue hardrolls and specialty products to consumer and away-from-home products companies and third-party converters.

Consumer and away-from-home converted tissue.    Our converted products sales group markets and sells our converted tissue products to a variety of retail and away-from-home customers, directly to retailers or to distributors, which in turn sell to end-users. The same members of our consumer and away-from-home tissue sales group are also responsible for polystyrene foam sales.

Our machine-glazed tissue sales group markets and sells our machine-glazed tissue in a variety of specialty hardrolls from each of our Menominee, Michigan; Wiggins, Mississippi; and St. Catharines, Ontario facilities. In addition, at our Menominee, Michigan facility, our machine-glazed tissue sales group markets and sells converted wax paper products. We sell our machine-glazed tissue products to third-party converters, consumer products companies and, in certain instances, directly to distributors.

Seasonality

Our business is not subject to material seasonal variations.

Distribution

We sell and distribute our machine-glazed tissue and tissue hardrolls to our customers’ manufacturing sites primarily in North America. Our away-from-home converted cases are sold through major North American distributors. Our retail converted products are sold directly to North American retailers or through other large manufacturers. All of our products are either shipped from our nine strategically located manufacturing sites east of the Mississippi via third-party common carriers according to contracted freight agreements or are picked up by the customer at the producing mill.

Competition

The hardroll tissue market and consumer and away-from-home converted tissue products market are highly competitive and are led by a number of large, international companies, such as Kimberly-Clark, Georgia-Pacific, SCA and Proctor & Gamble, as well as smaller, regional companies, such as Cascades, Irving, Stefco, Orchids, Royal and Clearwater Paper Corporation. Among the value retailers there is a growing trend towards branded-quality private label converted products. Our primary focus since 2005 has been on delivering branded-quality private label converted products to this fast growing value retail market. We believe these retailers, which are primarily based east of the Mississippi, see us as consistently delivering branded-quality converted products due to our vertical integration and the geographic locations of our converting facilities.

 

76


Table of Contents
Index to Financial Statements

We also compete in the machine-glazed tissue market. Our primary competitors in the machine-glazed tissue market are medium-sized North American-based independent organizations, such as Burrows Paper Corporation, Thilmany Papers and Domtar Inc.

We manufacture a limited line of polystyrene foam products primarily for a single customer that purchases the foam products as well as converted tissue products. Our primary competitors in this business are small to medium-sized North American-based independent organizations that have the ability to convert both tissue and foam, such as Genpak, Dalco and Pactiv.

In all areas, we believe that we compete on the basis of product quality, price and service. See “Risk Factors—We face many competitors, several of which have greater financial and other resources and our customers may choose their products instead of ours.”

Major Customers

Our customer base is comprised of leading tissue consumer products companies, tissue and machine-glazed tissue converters, manufacturers of private label products and distributors of tissue products. Our ten largest customers represented 54.9% of sales for fiscal year 2007, 51.3% of sales for fiscal year 2008 and 46.3% of sales for fiscal year 2009. Our ten largest customers represented 46.5% and 46.7% of our sales for the nine months ended November 26, 2009 and November 27, 2008, respectively. For the nine months ended November 26, 2009, Dollar General was our largest single customer, representing 10.5% of our sales. Our largest single customer represented 8.1% and 13.4% of our sales in the nine months ended November 27, 2008 and in fiscal year 2008, respectively. No customer accounted for more than 10% of our sales in fiscal year 2009 or fiscal year 2007. A summary of our net sales and long-lived assets by geographic area for fiscal years 2007, 2008 and 2009 is presented in Note 13 to our consolidated financial statements for fiscal year 2009 included elsewhere in this prospectus.

We have specific agreements with some, but not all, of our customers that allow us to pass through cost increases to them. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Business Drivers and Measures.”

Employees and Labor Relations

As of February 28, 2009, we employed 1,160 active full-time employees, consisting of 972 hourly employees and 188 salaried employees. We have collective bargaining agreements with the United Steelworkers of America covering approximately 551 of our hourly employees in our Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; and Neenah, Wisconsin facilities, collectively. In addition, we have a collective bargaining agreement with Independent Paperworkers of Canada covering approximately 81 employees in our St. Catharines, Ontario facility. Our collective bargaining agreements expire between October 2009 and June 2013. We commenced collective bargaining negotiations at our Menominee, Michigan facility in late November 2009 and we are currently preparing for collective bargaining negotiations at our Gouverneur, New York facility, which we expect to begin in January 2010.

Our facilities have active health and safety programs in place. We have not experienced any work stoppages or significant labor disputes and we consider relations with our employees to be satisfactory. All of our facilities are situated in areas where adequate labor pools exist.

Properties

We own and operate seven facilities located in East Hartford, Connecticut; Menominee, Michigan; Wiggins, Mississippi; Gouverneur, New York; St. Catharines, Ontario, Canada; Ladysmith, Wisconsin; and Neenah, Wisconsin. In addition, we lease facilities in Thomaston, Georgia, Long Island, New York, and Oklahoma City, Oklahoma as well as our corporate headquarters in Alpharetta, Georgia.

 

77


Table of Contents
Index to Financial Statements

The following table lists each of our facilities and its location, use, approximate square footage and status:

 

Facility

  

Use

   Approximate
square

footage
   Owned
or leased

East Hartford, Connecticut facility

   Tissue manufacturing    59,000    Owned

Alpharetta, Georgia administrative offices

   Corporate headquarters and administrative offices    9,000    Leased

Thomaston, Georgia facility

   Tissue converting and foam manufacturing and converting    426,000    Leased

Menominee, Michigan facility

   Machine-glazed tissue manufacturing and converting    397,000    Owned

Wiggins, Mississippi facility

   Tissue and machine-glazed tissue manufacturing    170,000    Owned

Gouverneur, New York facility

   Tissue manufacturing, warehousing    328,000    Owned

Long Island, New York facility

   Tissue converting    180,000    Leased

Oklahoma City, Oklahoma(1)

   Tissue Converting    323,000    Leased

St. Catharines, Ontario facility

   Tissue and machine-glazed tissue manufacturing    256,000    Owned

Neenah, Wisconsin facility

   Tissue manufacturing, tissue converting and distribution center    1,200,000    Owned

Ladysmith, Wisconsin facility

   Tissue manufacturing, de-inking facility    259,000    Owned

 

(1) We recently added this new facility in Oklahoma City, Oklahoma, which we expect will add to our converting capacity and become operational by June 2010.

Intellectual Property

We are the owner of certain trademarks relating to our products. We are not aware of any existing infringing uses that could materially affect our business. We believe that our trademarks are valuable to our operations in our tissue and machine-glazed tissue segments and are important to our overall business strategy.

We own the trademark Waxtex™ which is used in connection with our machine-glazed tissue products brand produced at our Menominee, Michigan facility. We also own the trademark Magic Soft™ used in association with the converted facial and bath tissue, paper towel and napkin products manufactured at our Neenah, Wisconsin facility and the trademarks acquired as part of the APF Acquisition and used in association with the converted facial and bath tissue, paper towel and napkin products manufactured at our Long Island, New York and Thomaston, Georgia facilities, as well as the trademarks Interlake™ and Interlake Paper™.

Environmental Laws

We are subject to comprehensive and frequently changing federal, state, local and foreign environmental, health and safety laws and regulations, including laws and regulations governing emissions of air pollutants, discharges of wastewater and storm water, storage, treatment and disposal

 

78


Table of Contents
Index to Financial Statements

of materials and waste, site remediation and liability for damage to natural resources. We are also subject to frequent inspections and monitoring by government enforcement authorities. Compliance with these laws and regulations is an important factor in our business. From time to time, we incur significant capital and operating expenditures to comply with applicable federal, state and local environmental laws and regulations and to meet new statutory and regulatory requirements. We have implemented practices and procedures at our operating facilities that are intended to promote compliance with environmental laws, regulations and permit requirements. We believe that our facilities and manufacturing operations are currently in material compliance with such laws, regulations and requirements; however, we may not always be in compliance with all such laws, regulations or requirements.

We may be subject to strict liability for the investigation and remediation of environmental contamination (including contamination that may have been caused by other parties) at properties that we own or operate and at other third-party owned properties where we or our predecessors have disposed of or arranged for the disposal of regulated materials. As a result, we may be involved in administrative and judicial proceedings and inquiries in the future relating to environmental matters. The total of such environmental compliance costs and liabilities cannot be determined at this time and may be material.

Other Governmental Regulation

We are regulated by the U.S. Food and Drug Administration because we manufacture paper products used in the food service industry. We are also regulated by the U.S. Occupational Safety and Health Administration. We believe that our manufacturing facilities are in compliance, in all material respects, with these laws and regulations.

We are committed to ensuring that safe operating practices are established, implemented and maintained throughout our organization. In addition, we have instituted active health and safety programs throughout our company.

Legal Matters

Gabayzadeh Litigation

We were a defendant in a suit filed August 11, 2008 in the United States District Court for the Eastern District of New York by Mahin Gabayzadeh, as trustee for and on behalf of The Diane Gabayzadeh Trust, The Deborah Gabayzadeh Trust and The John Gabayzadeh U.T.M.A. Trust (the “Gabayzadeh Litigation”). The other defendants in the lawsuit were Russell C. Taylor, our chief executive officer; Steven C. Catalfamo; Kimberly-Clark Corporation; and Charterhouse Group, Inc. The complaint alleged that we fraudulently acquired American Tissue Co.’s Neenah, Wisconsin plant for $5.85 million, which the plaintiffs alleged was approximately $125 million below the then-current appraised liquidation value. The other defendants were alleged to have participated in the fraud. Plaintiffs sought $250 million in damages and alleged joint and several liability. On September 15, 2009, the United States District Court for the Eastern District of New York entered a judgment dismissing the complaint without prejudice.

Other Litigation

We are, from time to time, party to various routine legal proceedings arising out of our business. These proceedings primarily involve commercial claims, personal injury claims and workers’ compensation claims. We cannot predict the outcome of these lawsuits, legal proceedings and claims with certainty. Nevertheless, we believe that the outcome of any currently existing proceedings, even if determined adversely, would not have a material adverse effect on our business, financial condition and operating results.

 

79


Table of Contents
Index to Financial Statements

MANAGEMENT

The following table sets forth certain information regarding the members of our board of directors and our executive officers upon the closing of this offering, with their respective ages as of October 1, 2009. Our officers serve at the discretion of our board of directors. There are no family relationships between any of our directors or executive officers.

 

Name

   Age   

Position(s)

Executive Officers:

     

Russell C. Taylor

   53    President, Chief Executive Officer and Director

David J. Morris

   53    Senior Vice President, Finance and Chief Financial Officer

W. Edwin Litton

   45    General Counsel, Senior Vice President, Human Resources and Secretary

Steven D. Ziessler*

   49    President, Tissue & Machine-Glazed, Chief Operating Officer and Proposed Director

Other Directors:

     

R. Sean Honey

   38    Chairman of the Board of Directors

David L. Ferguson

   54    Director

Proposed Directors:*

     

Cynthia T. Jamison

   50    Proposed Director

Joseph J. Troy

   46    Proposed Director

Gordon A. Ulsh

   63    Proposed Director

 

* We expect to add Mr. Ziessler and three independent directors, Cynthia T. Jamison, Joseph J. Troy and Gordon A. Ulsh, to our board of directors immediately following the closing of this offering.

Russell C. Taylor has been our President and Chief Executive Officer since October 2001. Mr. Taylor became a member of our board of directors upon assuming his role as Chief Executive Officer in October 2001. Prior to that, he was employed by Kimberly-Clark Corporation, a manufacturer of personal care paper products, from May 1997 to January 1999 as President, Kimberly-Clark, Professional/Pulp, North America/Europe, and from January 1999 to October 2001 as group president, Kimberly-Clark, Professional Pulp/Tissue Paper/Environmental, North America/Europe.

David J. Morris has been our Chief Financial Officer and Senior Vice President-Finance since August 2007. Previously, Mr. Morris was employed by BlueLinx Holdings, Inc., a building products distribution business, as Chief Financial Officer and Treasurer from May 2004 to December 2006. Prior to that time, Mr. Morris spent 15 years with Georgia-Pacific Corporation, a pulp and paper company, most recently as Vice President of Finance for the distribution division from 1999 to May 2004.

W. Edwin Litton has been our General Counsel and Senior Vice President of Human Resources since July 2006 and Secretary since December 2006. From August 2003 to July 2006, Mr. Litton was retained by us as outside counsel. Mr. Litton served as in-house legal counsel for Lacerte Technologies, Inc., a provider of management consulting and advisory services, from May 2002 until May 2003 and was employed in the private practice of law from September 1990 until April 2002.

Steven D. Ziessler has been our President, Tissue & Machine-Glazed and Chief Operating Officer since August 2005. We also expect that Mr. Ziessler will be elected to our board of directors effective immediately following the closing of this offering. Previously, Mr. Ziessler was employed by Kimberly-Clark Corporation as Vice President, Global Health Care from January 2005 to April 2005; President, Kimberly-Clark Professional Europe from 2003 to 2004; and Vice President of Kimberly-Clark Professional North America from 1999 to 2003.

 

80


Table of Contents
Index to Financial Statements

R. Sean Honey was appointed to our board of directors in June 2006 and has served as Chairman since that date. Mr. Honey is a partner with Weston Presidio, which he joined in 1999. Mr. Honey performs investment activities and portfolio company management for Weston Presidio. Prior to Weston Presidio, Mr. Honey was an associate with JP Morgan Capital (the predecessor to JP Morgan Partners), where he focused on growth investments and buyouts of consumer, healthcare and industrial companies. Mr. Honey also worked in the mergers and acquisitions group at JPMorgan. In addition to Cellu Tissue, Mr. Honey currently serves on the boards of directors of Apple American Group, Nebraska Book Company and Purcell Systems.

David L. Ferguson was appointed to our board of directors in June 2006. Mr. Ferguson is a partner with Weston Presidio, which he joined in 2003. Mr. Ferguson performs investment activities and portfolio company management for Weston Presidio. Prior to Weston Presidio, Mr. Ferguson was a general partner of JP Morgan Partners. His prior work experience includes Bankers Trust New York Corporation and Prudential Securities, as well as the audit departments of KPMG Peat Marwick and Deloitte & Touche. In addition to Cellu Tissue, Mr. Ferguson is currently a member of the boards of directors of MacDermid, Evenflo and Robbins Bros. Jewelry.

Proposed Directors

Cynthia T. Jamison has been the National Director of CFO Services at Tatum, LLC, a provider of executive services, executive consulting and executive search, since August 2005. Prior to that, Ms. Jamison served as an engagement partner at Tatum. As a Tatum partner, Ms. Jamison has held several chief financial officer positions for its clients, including (currently) AquaSpy, Inc., Cosi, Inc., Savista Corporation, Near North Insurance, Inc., CultureWorx, Inc. and Illinois Superconductor Corporation. Prior to joining Tatum, Ms. Jamison served as the chief financial officer of Chart House Enterprises and previously held various financial positions at Allied Domecq Retailing USA, Kraft General Foods and Arthur Andersen. Ms. Jamison currently serves on the boards of directors of B&G Foods, Inc. and Tractor Supply Company, Inc.

Joseph J. Troy has been the Chairman and Chief Financial Officer of GuardianLion Wireless, LLC, a developer of unique personal locator devices, since January 2009. From March 2000 until December 2008, Mr. Troy held various senior leadership positions with Walter Industries, Inc., a multi-industry conglomerate and producer and exporter of premium hard coking coal for the global steel industry. From February 2008 until December 2008, Mr. Troy served as the Executive Vice President of Structured Finance for JWH Holding Company, LLC, Walter Industries’ financing and homebuilding business. Mr. Troy also previously served as Executive Vice President, Chief Financial Officer of Walter Industries, Inc., from August 2006 until February 2008, and as Senior Vice President—Financial Services, President of Walter Mortgage Company and Senior Vice President and Treasurer of Walter Industries, Inc. from November 2000 until August 2006. Prior to Walter Industries, Mr. Troy held various banking positions with NationsBank and its predecessor institutions.

Gordon A. Ulsh has been the President, Chief Executive Officer and member of the board of directors of Exide Technologies, a provider of stored electrical energy products and services for industrial and transportation applications, since April 2005. From 2001 until March 2005, Mr. Ulsh was Chairman, President and Chief Executive Officer of FleetPride Inc., an independent aftermarket distributor of heavy-duty truck parts. Prior to joining FleetPride in 2001, Mr. Ulsh worked with Ripplewood Equity Partners, providing analysis of automotive industry segments for investment opportunities. Mr. Ulsh served as President and Chief Operating Officer of Federal-Mogul Corporation in 1999 and as head of its Worldwide Aftermarket Division in 1998. Prior to Federal-Mogul, he held a number of leadership positions with Cooper Industries, including Executive Vice President of its automotive products segment. Mr. Ulsh joined Cooper’s Wagner Lighting business unit in 1984 as Vice President of Operations, following 16 years in manufacturing and engineering management at Ford Motor Company. Mr. Ulsh also serves on the board of directors of OM Group, Inc.

 

81


Table of Contents
Index to Financial Statements

Compensation Committee Interlocks and Insider Participation

There are no compensation committee interlocks (none of our executive officers serves as a member of the board of directors or the compensation committee of another entity that has an executive officer serving on our board of directors).

Board of Directors and Committees

Our board of directors currently consists of R. Sean Honey, David Ferguson and Russell C. Taylor. Messrs. Honey and Ferguson currently serve on our audit committee and compensation committee. Effective immediately following the completion of this offering, we intend to appoint Ms. Jamison and Messrs. Troy, Ulsh and Ziessler as directors to our board.

Our board of directors has determined that Messrs. Taylor and Ziessler are not independent under the listing standards of the New York Stock Exchange because they serve as our chief executive officer and chief operating officer, respectively. Our board of directors has also affirmatively determined that Messrs. Honey and Ferguson satisfy the independence requirements of the New York Stock Exchange listing standards for service on the board of directors and the compensation, nominating and corporate governance committee. In addition, the board of directors has determined that Ms. Jamison and Messrs. Troy and Ulsh will satisfy the independence requirements of the New York Stock Exchange listing standards for service on the board of directors and each of its committees, effective upon their appointment to the board of directors.

Initial Terms

As of the completion of this offering, our board of directors will be divided into three classes and will serve the following initial terms:

 

  Ÿ  

Class I, whose initial term will expire at the annual meeting of stockholders to be held in 2010;

 

  Ÿ  

Class II, whose initial term will expire at the annual meeting of stockholders to be held in 2011; and

 

  Ÿ  

Class III, whose initial term will expire at the annual meeting of stockholders to be held in 2012.

The Class I directors will be Messrs. Ferguson and Taylor, the Class II directors will be Messrs. Ulsh and Ziessler and the Class III directors will be Messrs. Honey and Troy and Ms. Jamison. Any additional directorships resulting from an increase in the number of directors will be distributed among the three classes so as to ensure that no one class has more than one director more than any other class. This classification of the board of directors may have the effect of delaying or preventing changes in control of our company.

Subsequent Terms

At the 2010 annual meeting of stockholders, the Class I directors will be elected for a term expiring at the 2013 annual meeting of stockholders. At the 2011 annual meeting of stockholders, the Class II directors will be elected for a term expiring at the 2013 annual meeting of stockholders. At the 2012 annual meeting of stockholders, the Class III directors will be elected for a term expiring at the 2013 annual meeting of stockholders. Beginning with the 2013 annual meeting of stockholders, directors will be elected for a term expiring at the next annual meeting of stockholders and until his or her successor shall be elected and qualified, subject, however to prior death, resignation, retirement, disqualification or removal from office.

 

82


Table of Contents
Index to Financial Statements

Audit Committee

Our audit committee currently consists of Messrs. Honey and Ferguson. Upon completion of this offering, the current audit committee members will resign, and we intend to appoint Ms. Jamison and Messrs. Troy and Ulsh to our audit committee. Our board has affirmatively determined that each of such nominees meets the definition of “independent director” for purposes of the New York Stock Exchange rules and the independence requirements of Rule 10A-3 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Our board of directors has also determined that Ms. Jamison and Mr. Troy qualify as “audit committee financial experts” under Securities and Exchange Commission rules and regulations. Previously, our board of directors had determined that none of the current audit committee members qualify as an audit committee financial expert; however, the board of directors believes that these members had sufficient expertise to have previously acted as members of the audit committee.

Our audit committee will be responsible for, among other matters:

 

  Ÿ  

appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm;

 

  Ÿ  

discussing with our independent registered public accounting firm their independence from management;

 

  Ÿ  

reviewing with our independent registered public accounting firm the scope and results of their audit;

 

  Ÿ  

approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm;

 

  Ÿ  

overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the Securities and Exchange Commission;

 

  Ÿ  

reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements;

 

  Ÿ  

establish procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters; and

 

  Ÿ  

reviewing and approving related person transactions.

Our board of directors will update its written charter for the audit committee which will be available on our website prior to the closing of this offering.

Compensation, Nominating and Corporate Governance Committee

We currently have a compensation committee which consists of Messrs. Honey and Ferguson. Upon completion of this offering, our board of directors will establish a new compensation, nominating and corporate governance committee and we intend to appoint Messrs. Ferguson, Troy and Ulsh as the members of this committee. Our board of directors has affirmatively determined that each such newly-appointed nominee meets the definition of “independent director” under the New York Stock Exchange listing standards for serving on the compensation, nominating and corporate governance committee. In addition, we intend to establish a sub-committee of our compensation, nominating and corporate governance committee consisting of Messrs. Troy and Ulsh for purposes of approving any compensation that may otherwise be subject to Section 16 of the Exchange Act.

 

83


Table of Contents
Index to Financial Statements

The compensation, nominating and corporate governance committee will be responsible for, among other matters:

 

  Ÿ  

annually reviewing and approving our goals and objectives for executive compensation;

 

  Ÿ  

annually reviewing and approving for the chief executive officer and other executive officers (1) the annual base salary level, (2) the annual cash incentive opportunity level, (3) the long-term incentive opportunity level, and (4) any special or supplemental benefits or perquisites;

 

  Ÿ  

reviewing and approving employment agreements, severance arrangements and change of control agreements for the chief executive officer and other executive officers, as appropriate;

 

  Ÿ  

making recommendations and reports to the board of directors concerning matters of executive compensation;

 

  Ÿ  

administering our executive incentive plans;

 

  Ÿ  

reviewing compensation plans, programs and policies;

 

  Ÿ  

developing and recommending criteria for selecting new directors;

 

  Ÿ  

screening and recommending to the board of directors individuals qualified to become executive officers; and

 

  Ÿ  

handling such other matters that are specifically delegated to the compensation, nominating and corporate governance committee by the board of directors from time to time.

Our board of directors will adopt a written charter for the compensation, nominating and corporate governance committee which will be available on our website prior to the closing of this offering.

See “Compensation Discussion and Analysis” for a description of the processes and procedures of the current compensation committee and for additional information regarding the committee’s role and management’s role in determining compensation for executive officers and directors prior to this offering.

 

84


Table of Contents
Index to Financial Statements

COMPENSATION DISCUSSION AND ANALYSIS

This section provides an overview and analysis of Cellu Tissue’s compensation programs and policies, the material compensation decisions our compensation committee made under those programs and policies, and the material factors that the committee considered in making those decisions. Following this section, you will find tables containing specific information about the compensation earned by the following executive officers, all of whom received compensation in excess of $100,000 in fiscal year 2009, whom we refer to as our “named executive officers”:

 

  Ÿ  

Russell C. Taylor, president, chief executive officer and director

 

  Ÿ  

David J. Morris, senior vice president, finance and chief financial officer since August 2007

 

  Ÿ  

W. Edwin Litton, general counsel, senior vice president, human resources and secretary

 

  Ÿ  

Steven D. Ziessler, president and chief operating officer

The discussion below is intended to help you understand the detailed information provided in those tables and put that information into context within Cellu Tissue’s overall compensation program.

Compensation Philosophy

Our compensation programs are designed to attract, motivate and retain key employees, rewarding them for the achievement of significant goals that continuously improve our business performance and increase our value. Performance and compensation are evaluated annually to ensure that we maintain our ability to attract and retain outstanding employees in key positions and that compensation provided to our key employees is competitive relative to the compensation paid to similarly situated employees of comparable companies.

Our compensation committee’s decisions with respect to executive officer salaries and annual incentives, as well as long-term incentives such as restricted stock awards and stock option grants, are influenced by (a) the executive’s level of responsibility and function, (b) Cellu Tissue’s overall performance and profitability and (c) our compensation committee’s assessment of the competitive marketplace, including other peer companies. As discussed below in more detail, Cellu Tissue’s philosophy is to focus on total direct compensation opportunities through a mix of base salary and annual cash bonus, as applicable, and long-term incentives, including stock-based awards.

Overview of Compensation Committee

Cellu Tissue’s executive compensation philosophy, policies, plans and programs are under the supervision of the compensation committee of the board of directors. The compensation committee’s responsibilities include (1) compensation of executives; (2) administration and overview of equity-based compensation plans, including, without limitation, the 2006 Stock Option and Restricted Stock Plan, in which officers and employees may participate and (3) arrangements with executive officers related to their employment relationships, including, without limitation, employment agreements and restrictive covenants. The compensation committee has overall responsibility for approving and evaluating executive officer compensation plans, policies and programs, as well as all equity-based compensation plans and policies.

Following this offering, we intend to appoint Messrs. Ferguson, Troy and Ulsh as members of the newly formed compensation, nominating and corporate governance committee. Our board of directors has affirmatively determined that each such newly-appointed committee member meets the definition of “independent director” under the New York Stock Exchange listing standards for serving on the compensation, nominating and corporate governance committee.

 

85


Table of Contents
Index to Financial Statements

Our current compensation committee has already set base salary amounts and granted equity-based incentive compensation for the named executive officers for fiscal year 2010. The current compensation committee has also taken the following actions, which will be effective upon the consummation of this offering:

 

  Ÿ  

approved the Cellu Tissue Holdings, Inc. 2010 Equity Compensation Plan described below;

 

  Ÿ  

set base salaries for the named executive officers for fiscal year 2011, which will equal $525,000 for Mr. Taylor, $283,000 for Mr. Morris, $345,000 for Mr. Ziessler and $182,476 for Mr. Litton;

 

  Ÿ  

approved equity-based incentive compensation for the named executive officers for fiscal year 2011, which will consist of options to purchase shares of our common stock to be granted upon or shortly after the consummation of this offering; and

 

  Ÿ  

approved amendments to the employment agreements for Messrs. Taylor, Morris and Ziessler.

The amendments to the employment agreements with Messrs. Taylor and Ziessler extend the initial term of their employment agreements for one year so that each of their initial terms will expire on June 12, 2011. The amendments to the employment agreements with Messrs. Taylor and Ziessler as well as Mr. Morris also provide that their annual bonus will be determined by the compensation committee in accordance with the Cellu Tissue Holdings, Inc. Annual Executive Bonus Program. These employment agreements are described in this prospectus under the heading “—Employment Agreements; Restricted Stock Agreements.”

The current compensation committee approved granting options to the named executive officers upon or shortly after the consummation of the initial public offering. The value of these options will equal approximately 150%, 75%, 100% and 40% of the fiscal 2011 base salary amounts for Messrs. Taylor, Morris, Ziessler and Litton, respectively. The options will vest pro rata over a four-year period and will have an exercise price equal to the fair market value of our common stock on the date of grant. The current compensation committee intends to make equity-based incentive compensation grants for the non-executive officers and other employees for fiscal year 2011.

Following the consummation of this offering, we expect that the newly composed compensation, nominating and corporate governance committee will:

 

  Ÿ  

determine and approve the amount and payout of performance-based cash incentive compensation for the named executive officers relating to fiscal year 2010, which bonuses cannot be determined until after the completion of fiscal year 2010;

 

  Ÿ  

set the performance goals for, and determine and approve the amount and payout of performance-based cash incentive compensation, relating to all future periods beginning with fiscal year 2011 for the named executive officers; and

 

  Ÿ  

make all other future compensation determinations.

The newly composed committee will not be required to review or approve the actions taken by the committee prior to the consummation of this offering.

Overview of Compensation Program

The key compensation package provided to our named executive officers includes:

 

  Ÿ  

base salary, which provides fixed compensation based on competitive market practice and, except for W. Edwin Litton, in accordance with the terms of each individual’s employment agreement;

 

  Ÿ  

bonus/performance-based cash incentive compensation, which provides focus on meeting corporate annual goals that lead to our long-term success and motivates achievement of critical annual performance metrics;

 

86


Table of Contents
Index to Financial Statements
  Ÿ  

equity compensation, as applicable, in the form of restricted stock awards or stock option grants by Cellu Parent Corporation, our indirect parent, which is designed to reward and motivate employees by aligning their interests with those of the stockholders of Cellu Parent Corporation and provide an opportunity to acquire an indirect proprietary interest in us;

 

  Ÿ  

matching cash contributions to named executive officers who participate in our 401(k) Plan; and

 

  Ÿ  

other benefits.

Determination of Appropriate Pay Levels

Cellu Tissue competes with many other companies for experienced and talented executives. As such, the compensation committee has reviewed market information to assist in gaining an understanding of current compensation practices in the marketplace. However, the compensation committee does not target compensation levels at any particular level or percentile based on this information.

In addition, as described elsewhere in this prospectus, three of our executive officers entered into employment agreements with us that establish various terms and conditions of their employment. For a further description of these agreements, see “Employment Agreements; Restricted Stock Award Agreements.”

In February 2008, Cellu Tissue engaged Hewitt Consulting, at the recommendation of Cellu Tissue management, to perform a compensation review of Cellu Tissue’s executive officers and employees. The compensation committee considered this review to provide a general understanding of current market compensation and concluded Cellu Tissue’s compensation practices were generally competitive.

The study encompassed the following components of pay: base salary, target bonus and long-term incentives for executives and base salary and bonus for other employees. In addition, the study included an analysis comparing Cellu Tissue’s compensation practices with 17 companies selected by Hewitt Consulting with industry input from Cellu Tissue’s management. This comparative group of companies was drawn from the consumer products, forest and paper products and manufacturing industries and included both public and private companies. The companies comprising this comparative group are listed below:

 

Ÿ Valmont Industries, Inc.

Ÿ Rayonier Inc.

Ÿ Brady Corporation

Ÿ Alter Trading Corporation

  

Ÿ Mine Safety

Appliances Co.

Ÿ Elkay Manufacturing Company

Ÿ Fraser Papers Inc.

Ÿ Lance, Inc.

  

Ÿ OMNOVA Solutions Inc.

Ÿ Playtex Products, Inc.

Ÿ Lord Corporation

Ÿ Neenah Paper, Inc.

  

Ÿ  Ameron International
Corporation

Ÿ Uline, Inc.

Ÿ ESCO Technologies Inc.

Ÿ Johnson Outdoors Inc.

Ÿ Potlatch Corp.

Each element of compensation (including any base adjustments to the terms and conditions set forth in the employment agreements) is reviewed so that the overall compensation package will attract, motivate and retain our key employees, including our named executive officers, by rewarding superior performance and providing an incentive for the achievement of our strategic goals. The compensation committee considered the following factors to determine the amount of compensation paid to each executive officer:

 

  Ÿ  

overall job performance, including performance against corporate and individual objectives;

 

87


Table of Contents
Index to Financial Statements
  Ÿ  

job responsibilities, including unique skills necessary to support our long-term corporate performance;

 

  Ÿ  

teamwork, both contributions as a member of the executive management team and fostering an environment of personal and professional growth for the entire work force;

 

  Ÿ  

performance of general management responsibilities, execution of our objectives and contributions to our continuing success; and

 

  Ÿ  

our overall financial position and structure for providing for an equitable distribution of compensation.

Allocation of Compensation

There is no pre-established policy or target for the allocation of compensation, other than the employment agreements, as discussed below. The compensation committee reviews the factors described above, as well as Cellu Tissue’s overall compensation philosophy, to determine appropriate level and mix of compensation for our named executive officers.

Timing of Compensation

As discussed elsewhere, the compensation committee reviews the compensation for our named executive officers annually, including incentive plan goal specifications and incentive plan payments for our named executive officers.

Compensation Components for Fiscal Year 2009

For fiscal year 2009, the principal components of compensation for the named executive officers were:

 

  Ÿ  

base salary;

 

  Ÿ  

bonus;

 

  Ÿ  

equity awards under the 2006 Stock Option and Restricted Stock Plan of Cellu Parent Corporation; and

 

  Ÿ  

401(k) matching contributions and other benefits.

Base Salary

Our named executive officers receive a base salary to compensate them for services rendered during the fiscal year. In general, base salary amounts are determined for each executive based on his or her position and responsibility and any applicable employment agreement. Base salary levels are reviewed annually by our chief executive officer and compensation committee, as part of our performance review process. The compensation committee adjusts base salary amounts based on a subjective analysis of an executive’s performance and responsibilities and upon recommendations from the chief executive officer and management. Management’s recommendations are based on a general market review of publicly available compensation information and knowledge of industry practices. Our chief executive officer makes recommendations to the compensation committee with respect to any adjustments to the compensation package for each named executive officer except for his own, which is determined by the compensation committee based on the overall performance of Cellu Tissue. In addition, management and the compensation committee considered the 2008 Hewitt Consulting review and concluded that Cellu Tissue’s base salary practices were generally competitive.

 

88


Table of Contents
Index to Financial Statements

On June 12, 2006, in connection with the 2006 Merger, we entered into employment agreements with Russell C. Taylor and Steven D. Ziessler. On August 2, 2007, we entered into an employment agreement with David J. Morris. We discuss the terms and conditions of these agreements elsewhere in this prospectus under “Additional Information Regarding Executive Compensation—Employment Agreements; Restricted Stock Award Agreements.”

Annual Bonus Compensation

For fiscal year 2008, and for each fiscal year thereafter, named executive officers are eligible to receive an annual cash incentive award, subject to the achievement by us of adjusted EBITDA performance goals recommended by the chairman of our board of directors and approved by the compensation committee. Adjusted EBITDA differs from EBITDA presented elsewhere in this prospectus, because adjusted EBITDA is adjusted to remove the effects of any non-recurring or extraordinary charges for such period as approved by the compensation committee.

It is anticipated that, for each fiscal year, an adjusted EBITDA threshold performance goal and an adjusted EBITDA maximum performance goal will be set by our compensation committee, annually, in the first quarter of such fiscal year. If the threshold performance goal is met, each executive officer will be entitled to receive 50% of the officer’s maximum award amount, and if the maximum performance goal is achieved, each executive officer will be entitled to receive 100% of the officer’s maximum award amount. The maximum award amounts for each executive officer are described below. If adjusted EBITDA falls between the threshold performance goal and the maximum performance goal, the amount of the incentive award earned by each executive officer will be prorated between 50% and 100% of the officer’s maximum award amount. In addition, the compensation committee of the board of directors may, in its discretion, increase the award to 120% of an officer’s maximum award amount, if adjusted EBITDA exceeds the maximum performance goal, or reduce award amounts on a discretionary basis. Any such discretionary adjustments would be based solely on the chief executive officer’s and compensation committee’s subjective evaluation of the applicable officer’s individual performance for the fiscal year. The compensation committee does not rely on qualitative inputs in determining whether the performance goals have been met.

The compensation committee sets the maximum award for each executive officer as a percentage of base salary depending on the officer’s position and any applicable employment agreement. These percentages are recommended by the chairman of our board of directors and approved by the compensation committee. In addition, while the compensation committee considered the 2008 review from Hewitt Consulting, it did not target awards at any particular level or percentile based on this information. For fiscal year 2009, the maximum award amount for each named executive officer was as follows, expressed as a percentage of salary and in an equivalent dollar amount:

 

Named Executive Officer

   Percentage
of Salary
    Maximum Award
Amount

Russell C. Taylor

   100   $ 475,000

David J. Morris

   100   $ 250,000

Steven D. Ziessler

   100   $ 300,000

W. Edwin Litton

   50   $ 88,580

For fiscal year 2009, the annual incentive awards were subject to our achieving the threshold performance goal of at least $55.89 million of adjusted EBITDA. The maximum performance goal for fiscal year 2009 was adjusted EBITDA (which is consistent with the definition of Adjusted EBITDA described in “Prospectus Summary—Summary Consolidated Data for Cellu Tissue Holdings, Inc.,” except that it also excludes, or adds back, stock-based compensation expense) of $60.0 million. Based on our fiscal year 2009 adjusted EBITDA in excess of $60.0 million, each executive officer is entitled to receive in excess of 100% of the officer’s maximum award amount. The annual incentive awards will

 

89


Table of Contents
Index to Financial Statements

be paid in the first quarter of fiscal year 2010. Although we exceeded the maximum performance goal, the compensation committee did not exercise its discretion to increase the awards beyond the maximum amount. In addition, the compensation committee of the board of directors did not exercise its discretion to reduce awards to the named executive officers based on individual performance in fiscal year 2009.

Equity Awards

On June 12, 2006, the board of directors of Cellu Parent Corporation adopted the 2006 Stock Option and Restricted Stock Plan, or the Plan. Under the Plan, the board of directors of Cellu Parent Corporation or its delegate (referred to as the plan administrator) may grant to participants, including named executive officers, stock option awards to purchase shares of common stock of Cellu Parent Corporation and/or awards of restricted shares of common stock of Cellu Parent Corporation. For the named executive officers, all stock option and restricted stock grants are approved by the board of directors of Cellu Parent Corporation. A maximum of 12,095 shares of common stock of Cellu Parent Corporation may be delivered in satisfaction of awards under the Plan, determined net of shares of common stock withheld by Cellu Parent Corporation in payment of the exercise price of an award or in satisfaction of tax-withholding requirements. Key employees and directors of, and consultants and advisors to, Cellu Parent Corporation or its affiliates who, in the opinion of the plan administrator, are in a position to make a significant contribution to the success of Cellu Parent Corporation and its affiliates are eligible to participate in the Plan. Stock options are granted at the fair market value as determined by the plan administrator in accordance with the applicable regulations of the Internal Revenue Code on the date of grant and have a 10-year term. Generally, stock option grants vest ratably over four years from the date of grant. Periodically, senior executives will make recommendations with respect to a stock option grant, which is approved by the board of directors of Cellu Parent Corporation, to select individuals in recognition of their contribution to the success of Cellu Tissue. In addition, awards of restricted shares of common stock generally vest ratably over four years from the date of grant. We did not award shares of restricted common stock to our named executive officers during fiscal 2009. On August 6, 2007, Mr. Morris received a grant of 700 shares of restricted common stock, which vest 25% per year from August 6, 2008 until August 6, 2011. On June 12, 2006, Messrs. Taylor and Ziessler were granted 3,778 shares of restricted common stock and 1,349 shares of restricted common stock, respectively, which vest 25% per year from June 12, 2007 until June 12, 2010. We did not award options to our named executive officers during fiscal year 2009, except for options to purchase 25 shares granted to Mr. Litton on April 7, 2008. See “Employment Agreements; Restricted Stock Award Agreements” for a discussion of restricted stock awards to our named executive officers.

In April 2009, we granted options to purchase an aggregate of 2,253 shares, at an exercise price of $883.27 per share, to our named executive officers in the following individual amounts: Mr. Taylor was granted options to purchase 574 shares; Mr. Morris was granted options to purchase 723 shares; Mr. Ziessler was granted options to purchase 829 shares; and Mr. Litton was granted options to purchase 127 shares. These option grants were designed to reward and motivate employees by aligning their interests with those of the stockholders of Cellu Parent Corporation and provide an opportunity to acquire an indirect proprietary interest in us.

The April 2009 options granted to Messrs. Taylor, Morris and Ziessler vest if our current majority stockholder, Weston Presidio V, L.P., realizes certain stated returns (ranging from 2.5 times to 3.5 times) on its total cash investment in Cellu Tissue at the time of sale or other transfer for value and if the individual remains employed on the date of such sale or transfer. However, effective upon the consummation of this offering, any remaining portion of these options that do not vest in connection with this offering will be amended to vest in equal installments over a three-year period, subject to the executive’s continued employment.

 

90


Table of Contents
Index to Financial Statements

Similarly, Mr. Litton’s options to purchase 83 shares also vest if Weston Presidio V, L.P. realizes a return of 2.5 times its total cash investment in Cellu Tissue at the time of sale or other transfer for value and Mr. Litton remains employed at such time. Mr. Litton’s remaining options to purchase 44 shares vest 25% per year from April 13, 2010 until April 13, 2013 if Mr. Litton remains employed on such vesting dates. However, effective upon the consummation of this offering, Mr. Litton will be deemed to have fully vested in all of the 83 options (that vest in accordance with Weston Presidio’s investment return) and he will be permitted to exercise the put right described below under the heading “Existing Equity Compensation Plans—2006 Stock Option and Restricted Stock Plan.”

401(k) and Other Benefits

401(k) Plan

We have a Savings Incentive and Profit-Sharing Plan qualified under Section 401(k) of the Code, which is available to all our employees who are 21 years of age or older with one or more years of service. Employees may contribute up to 20% of their annual compensation (subject to certain statutory limitations) to the plan through voluntary salary deferred payments. We match 100% of each employee’s contribution up to 2% of the employee’s salary and 70% of the employee’s remaining contribution up to 6% of the employee’s salary. Eligible named executive officers participated in the 401(k) Plan received matching contributions from us under the 401(k) Plan as follows:

 

Named Executive

   2009 Matching
Contributions under
the 401(k) Plan
   2008 Matching
Contributions under
the 401(k) Plan
   2007 Matching
Contributions under
the 401(k) Plan

Russell C. Taylor

   $ 10,144    $ 10,812    $ 4,562

David J. Morris

   $ 9,231    $ 2,308    $ N/A

Steven D. Ziessler

   $ 7,245      N/A    $ N/A

W. Edwin Litton

   $ 8,430    $ 8,630    $ 1,328

Other Benefits

Each of the named executive officers receives medical and dental insurance coverage on the same terms as other employees.

In connection with the investment in Cellu Tissue by Weston Presidio, agreements were executed with Messrs. Taylor and Ziessler to provide compensation to such executive officers in the event of a termination of employment. These agreements generally called for increased payments if the termination of employment occurred in connection with a change of control. Upon execution of the employment agreement with Mr. Morris, similar provisions were included. Such provisions were made to enhance retention. For further description of the employment agreements and restrictive stock agreements governing these payments, see “Employment Agreements; Restricted Stock Award Agreements.”

Cellu Tissue does not provide any other perquisites, other than auto allowances, and no pension plans or deferred compensation plans.

Tax Deductibility Under Section&nbs