As filed with the Securities and Exchange Commission on June 13, 2008
File No. 333-141398
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C. 20549
POST-EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
BOISE INC.
(Exact name of registrant as specified in its charter)
Delaware | 2600 | 20-8356960 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
1111 West Jefferson Street, Suite 200
Boise, ID 83702-5388
(208) 384-7000
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
Alexander Toeldte, Chief Executive Officer
1111 West Jefferson Street, Suite 200
Boise, ID 83702-5388
(208) 384-7000
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Karen Gowland, Esq.
Boise Inc.
1111 West Jefferson Street, Suite 200
Boise, ID 83702-5388
(208) 384-7000
Philip Weingold, Esq. Thomas D. Balliett, Esq. Kramer Levin Naftalis & Frankel LLP 1177 Avenue of the Americas New York, New York 10036 (212) 715-9100 |
Raymond B. Check, Esq. Cleary Gottlieb Steen & Hamilton LLP One Liberty Plaza New York, New York 10006 (212) 225-2000 (212) 255-3999Facsimile |
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. ý
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. o
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. o
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. o
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.
This Post-Effective Amendment No. 1 on Form S-1 contains an updated prospectus relating to shares of common stock issuable upon exercise of warrants included as part of the units sold to investors in the registrant's initial public offering. This Post-Effective Amendment No. 1 on Form S-1 is being filed in compliance with Regulation S-K of the Securities Act of 1933, as amended, which we refer to as the "Securities Act", pursuant to Item 512 thereof. The prospectus included in this Post-Effective Amendment No. 1 supersedes and replaces in its entirety the prospectus dated June 17, 2007 that was filed pursuant to Rule 424(b)(3) with the SEC on June 17, 2007. All filing fees payable in connection with the registration of all of the foregoing securities were previously paid in connection with the filing of the original registration statement.
The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is a post-effective amendment to our initial public offering pursuant to a prospectus dated June 17, 2007, and is not an offer to sell securities and is not soliciting an offer to buy these securities.
Subject to Completion, Dated June 13, 2008
PRELIMINARY PROSPECTUS
41,400,000 Shares of Common Stock
This prospectus relates to 41,400,000 shares of common stock issuable upon exercise of our warrants included as part of the units issued in our initial public offering pursuant to a prospectus dated June 17, 2007.
Our warrants and common stock are listed on the New York Stock Exchange "NYSE" under the symbol "BZ-WT" and "BZ". On June 12, 2008 on the NYSE, the closing price of the warrants was $0.27 per warrant and common stock was $3.75 per share.
Investing in our securities involves a high degree of risk. See "Risk Factors" beginning on page 8 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is , 2008.
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PROSPECTUS SUMMARY | 1 | |
THE OFFERING |
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FORWARD-LOOKING STATEMENTS |
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RISK FACTORS |
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USE OF PROCEEDS |
18 |
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DETERMINATION OF OFFERING PRICE |
18 |
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PLAN OF DISTRIBUTION |
18 |
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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BUSINESS |
65 |
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MANAGEMENT |
77 |
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COMPENSATION OF EXECUTIVE OFFICERS |
85 |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
104 |
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CERTAIN TRANSACTIONS |
106 |
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DESCRIPTIONS OF SECURITIES |
110 |
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LEGAL MATTERS |
114 |
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EXPERTS |
114 |
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WHERE YOU CAN FIND ADDITIONAL INFORMATION |
114 |
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS |
F-1 |
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This summary highlights certain information appearing elsewhere in this prospectus. For a more complete understanding of the offering, you should read the entire prospectus carefully, including the risk factors and the financial statements. Unless otherwise stated in this prospectus:
You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. Our securities are listed on the New York Stock Exchange. However, notwithstanding the foregoing, we are not making an offer of these securities in any jurisdiction where the offer is not permitted.
Company Overview
We were originally a blank check company organized under the laws of the State of Delaware on February 1, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. From inception through February 21, 2008, we did not have any business or operations. Our activities were limited to raising capital in our initial public offering, which we refer to as our "IPO". We focused on identifying and acquiring an operating business.
On February 22, 2008, we completed the acquisition (the "Acquisition") of Boise White Paper, L.L.C, ("Boise White Paper"), Boise Packaging & Newsprint, L.L.C ("BP&N"), Boise Cascade Transportation Holdings Corp. ("Boise Transportation") (collectively, the "Paper Group") and other assets and liabilities related to the operation of the paper, packaging and newsprint, and transportation businesses of the Paper Group and most of the headquarters operations of Boise Cascade, L.L.C ("Boise Cascade" or the"Seller"). The business so acquired from the Seller is referred to in this prospectus as "Boise Paper Products" or"BPP". The Acquisition was accomplished through our acquisition of Boise Paper Holdings, L.L.C. The Acquisition was approved by our shareholders on February 5, 2008. In conjunction with the completion of the Acquisition, we changed our name from Aldabra 2 Acquisition Corp. to Boise Inc.
The Business
Headquartered in Boise, Idaho, we manufacture packaging products and papers, including corrugated containers, containerboard, label and release and flexible packaging papers, imaging papers for the office and home, printing and converting papers, newsprint, and market pulp. We have approximately 4,600 employees.
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We are the third largest North American manufacturer of uncoated free sheet paper. We own pulp and paper mill operations in the following locations: Jackson, Alabama; International Falls, Minnesota; St. Helens, Oregon; and Wallula, Washington, all of which manufacture uncoated free sheet paper. We also own a mill in DeRidder, Louisiana, which produces containerboard (linerboard) as well as newsprint and is one of the largest paper mills in North America. We also have a network of six corrugated converting plants, located in the Pacific Northwest and Texas, which manufacture corrugated containers and sheets.
Additional Information
Our principal executive offices are located at 1111 West Jefferson Street, Suite 200, Boise, ID 83702-5388.
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Securities offered |
41,400,000 shares of common stock, underlying warrants sold to the public with an exercise price of $7.50 per share |
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Our common stock and warrants began trading on the NYSE on February 25, 2008. |
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Common stock: |
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Number of shares outstanding before the offering: |
79,740,647 shares |
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Number of shares outstanding after the offering: |
121,140,647 shares, assuming exercise of all warrants sold to the public. |
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New York Stock Exchange symbol for our common stock |
BZ |
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Warrants: |
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Number sold to insiders: |
3,000,000 warrants |
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Number outstanding before and after the offering and sale to insiders: |
44,400,000 warrants |
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Exercisability: |
Each warrant is exercisable for one share of common stock. |
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Exercise period: |
The warrants will become exercisable on June 19, 2008. However, the warrants held by public stockholders will only be exercisable if a registration statement relating to the common stock issuable upon exercise of the warrants is effective and current. The warrants will expire at 5:00 p.m., New York City time, on June 18, 2011 or earlier upon redemption. |
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Redemption: |
We may redeem the outstanding warrants (excluding any insider warrants held by the initial purchasers or their affiliates) without the prior consent of the underwriters: |
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in whole and not in part, |
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at a price of $.01 per warrant at any time while the warrants are exercisable, |
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upon a minimum of 30 days' prior written notice of redemption, and |
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if, and only, if, the last sales price of our common stock equals or exceeds $14.25 per share for any 20 trading days within a 30 trading day period ending three business days before we send the notice of redemption. |
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If the foregoing conditions are satisfied and we issue a notice of redemption, each warrant holder can exercise his, her or its warrant. |
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The following table sets forth historical financial data for the dates indicated below. The financial information is provided to assist you in your analysis of the financial aspects of the Acquisition. OfficeMax refers to the paper assets of OfficeMax other than its related timberland operations that Boise Cascade Holdings acquired on October 29, 2004 (inception) (such acquisition, the "2004 Transaction"). The term "Predecessor" refers to the operations of BPP, which we acquired on February 22, 2008. OfficeMax, BPP and Boise Inc.'s selected historical information is derived from the following audited and unaudited consolidated financial statements:
OfficeMax Unaudited Consolidated Financial Statements
Boise Paper Products Audited Consolidated Financial Statements
Boise Paper Products Unaudited Consolidated Financial Statements
Boise Inc. Unaudited Consolidated Financial Statements
The information is only a summary and should be read in conjunction with BPP's historical consolidated financial statements and related notes and "Boise Inc.'s Management's Discussion and Analysis of Financial Condition and Results of Operations" contained elsewhere in this prospectus.
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The historical results included below and elsewhere in this prospectus may not be indicative of the future performance of Boise Inc.
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OfficeMax |
Boise Paper Products (as operated by the Seller) |
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October 29 (inception) through December 31, 2004 |
Year ended December 31, |
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January 1 through October 28, 2004 |
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Boise Inc. Three months ended March 31, 2008 |
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Year ended December 31, 2003 |
Three months ended March 31, 2007 |
January 1 through February 21, 2008 |
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2005 |
2006 |
2007 |
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(dollars in millions) |
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Statement of income (loss) data | ||||||||||||||||||||||||||||
Sales | $ | 1,873.4 | $ | 1,688.5 | $ | 360.2 | $ | 2,129.0 | $ | 2,222.0 | $ | 2,332.6 | $ | 578.7 | $ | 359.9 | $ | 228.0 | ||||||||||
Costs and expenses(1) | 1,931.8 | 1,754.4 | 338.4 | 2,055.4 | 2,128.2 | 2,172.1 | 555.9 | 336.8 | 237.3 | |||||||||||||||||||
Income (loss) from operations | (58.4 | ) | (65.9 | ) | 21.8 | 73.6 | 93.8 | 160.5 | 22.8 | 23.1 | (9.3 | ) | ||||||||||||||||
Foreign exchange gain (loss) | 0.4 | 0.7 | 0.2 | | (0.1 | ) | 1.2 | | | (0.9 | ) | |||||||||||||||||
Interest expense | | | | | | | | | (11.4 | ) | ||||||||||||||||||
Interest income | 0.5 | 0.3 | 0.1 | 0.2 | 0.6 | 0.7 | 0.1 | 0.2 | 1.8 | |||||||||||||||||||
Income (loss) before income taxes and cumulative effect of accounting change | (57.5 | ) | (64.9 | ) | 22.1 | 73.8 | 94.3 | 162.4 | 23.0 | 23.3 | (19.7 | ) | ||||||||||||||||
Income tax (provision) benefit | 21.0 | 25.0 | (0.3 | ) | (2.2 | ) | (1.4 | ) | (2.8 | ) | (1.0 | ) | (0.5 | ) | 3.4 | |||||||||||||
Income (loss) before cumulative effect of accounting change | (36.5 | ) | (39.9 | ) | 21.8 | 71.6 | 92.9 | 159.6 | 22.0 | 22.8 | (16.4 | ) | ||||||||||||||||
Cumulative effect of accounting change(2) | (3.9 | ) | | | | | | | | | ||||||||||||||||||
Net income (loss) | $ | (40.4 | ) | $ | (39.9 | ) | $ | 21.8 | $ | 71.6 | $ | 92.9 | $ | 159.6 | $ | 22.0 | $ | 22.8 | $ | (16.4 | ) | |||||||
Balance sheet data (at end of period) |
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Property and equipment and fiber farms and deposits, net | $ | 1,906.8 | $ | 1,842.4 | $ | 1,136.7 | $ | 1,141.8 | $ | 1,144.5 | $ | 1,210.2 | $ | 1,147.0 | N/A | $ | 1,304.6 | |||||||||||
Total assets | 2,406.3 | 2,370.2 | 1,629.9 | 1,678.3 | 1,758.8 | 1,845.7 | 1,777.0 | N/A | 2,022.6 | |||||||||||||||||||
Total capital | 1,631.6 | 1,576.9 | 1,414.6 | 1,424.5 | 1,481.2 | 1,559.8 | 1,514.3 | N/A | 561.2 | |||||||||||||||||||
Other financial data |
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Depreciation, amortization, and depletion | $ | 182.0 | $ | 157.7 | $ | 15.0 | $ | 95.4 | $ | 116.4 | $ | 84.6 | $ | 30.8 | $ | 0.5 | $ | 12.7 | ||||||||||
Capital expenditures(3) | 123.0 | 90.8 | 17.6 | 100.9 | 109.1 | 141.8 | 33.0 | 10.2 | 10.2 | |||||||||||||||||||
EBITDA(4) | 120.3 | 92.5 | 37.0 | 169.0 | 210.1 | 246.3 | 53.6 | 23.7 | 2.6 |
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Predecessor |
Boise Paper Products (as operated by the Seller) |
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October 29 (inception) through December 31, 2004 |
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January 1 Through October 28, 2004 |
Year ended December 31, |
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Boise Inc. Three months ended March 31, 2008 |
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Year ended December 31, 2003 |
Three months ended March 31, 2007 |
January 1 through February 21, 2008 |
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2005 |
2006 |
2007 |
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(dollars in millions) |
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Net income (loss) | $ | (40.4 | ) | $ | (39.9 | ) | $ | 21.8 | $ | 71.6 | $ | 92.9 | $ | 159.6 | $ | 22.0 | $ | 22.8 | $ | (16.4 | ) | |||||||
Interest expense (income) | (0.5 | ) | (0.3 | ) | (0.1 | ) | (0.2 | ) | (0.6 | ) | (0.7 | ) | (0.1 | ) | (0.2 | ) | 9.6 | |||||||||||
Income tax provision (benefit) | (21.0 | ) | (25.0 | ) | 0.3 | 2.2 | 1.4 | 2.8 | 1.0 | 0.6 | (3.4 | ) | ||||||||||||||||
Depreciation, amortization, and depletion | 182.2 | 157.7 | 15.0 | 95.4 | 116.4 | 84.6 | 30.8 | 0.5 | 12.7 | |||||||||||||||||||
EBITDA | $ | 120.3 | $ | 92.5 | $ | 37.0 | $ | 169.0 | $ | 210.1 | $ | 246.3 | $ | 53.6 | $ | 23.7 | $ | 2.6 | ||||||||||
Gain on changes in retiree healthcare programs | $ | | $ | | $ | | $ | (5.2 | ) | $ | (3.7 | ) | $ | (4.4 | ) | $ | | $ | | $ | | ||||||
Impact of energy hedges | | | | | 18.1 | 8.7 | 8.7 | | | ||||||||||||||||||
Wallula start-up | | | | | | 4.0 | | | | ||||||||||||||||||
Write-downs associated with sale of Vancouver mill | | | | | 2.4 | | | | | ||||||||||||||||||
Jackson sawmill closure expense | | | | | 1.7 | | | | | ||||||||||||||||||
Special project costs | | | | | 2.8 | | | | | ||||||||||||||||||
Inventory purchase price adjustment | | | 11.7 | | | | | | 6.5 | ||||||||||||||||||
Expense for a one-time retention bonus OfficeMax granted to its employees | | 7.3 | | | | | | | | ||||||||||||||||||
Loss on lease termination | 3.6 | | | | | | | | | ||||||||||||||||||
Impact of DeRidder outage | | | | | | | | | 20.5 | ||||||||||||||||||
$ | 3.6 | $ | 7.3 | $ | 11.7 | $ | (5.2 | ) | $ | 21.3 | $ | 8.3 | $ | 8.7 | $ | | $ | 27.0 | |||||||||
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We believe that some of the information in this prospectus constitutes forward-looking statements within the definition of the Private Securities Litigation Reform Act of 1995. You can identify these statements by forward-looking words such as "may," "expect," "anticipate," "contemplate," "believe," "estimate," "intends," and "continue" or similar words. You should read statements that contain these words carefully because they:
We believe it is important to communicate our expectations to our stockholders. However, there may be events in the future that we are not able to accurately predict or over which we have little or no control. The following factors, among others may cause actual results to differ materially from the expectations described by us in our forward-looking statements:
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this prospectus.
All forward-looking statements included herein attributable to us, BPP or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events.
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You should carefully consider the following risk factors, together with all of the other information included in this prospectus. If any of these factors actually occur, the business, financial condition or results of operations of Boise Inc. could be materially and adversely affected, the value of our common stock could decline and stockholders could lose all or part of their investment.
Risks Associated with the Acquisition
If the Acquisition's benefits do not meet the expectations of the marketplace, investors, financial analysts or industry analysts, the market price of our common stock may decline.
The market price of our common stock may decline as a result of the Acquisition if we do not perform as expected or if we do not otherwise achieve the perceived benefits of the Acquisition as rapidly as, or to the extent anticipated by, the marketplace, investors, financial analysts or industry analysts. Accordingly, investors may experience a loss as a result of a decreasing stock price, and we may not be able to raise future capital, if necessary, in the equity markets.
Following the Acquisition, our stock ownership has become highly concentrated, and as a result, Boise Cascade may influence our affairs significantly.
Boise Cascade owns approximately 49% of our common stock. As a result, Boise Cascade has significant representation on our board of directors and will have the voting power to significantly influence our policies, business and affairs, and will also have the ability to influence the outcome of any corporate transaction or other matter, including mergers, consolidations and the sale of all or substantially all of our assets. This concentration in control may have the effect of delaying, deterring or preventing a change of control that otherwise could result in a premium in the price of our common stock.
In addition, as long as the holders of Seller Registrable Securities (as such term is defined in the Investor Rights Agreement dated February 22, 2008, entered into by and among us, Boise Cascade and certain of our other stockholders named therein (the "Investor Rights Agreement") in connection with the Acquisition) control 33% or more of our common stock issued to Boise Cascade at the closing, we will be subject to restrictions on our business activities pursuant to the terms of the Investor Rights Agreement. More specifically, for so long as the 33% ownership threshold is met or exceeded, the Investor Rights Agreement will restrict us from conducting specified activities or taking specified actions without the affirmative written consent of the holders of a majority of the Seller Registrable Securities then outstanding. The restricted activities include, without limitation, making distributions on our equity securities, redemptions, purchases or acquisitions of our equity securities, issuances or sales of equity securities or securities exchangeable or convertible for equity securities, issuing debt or convertible/exchangeable debt securities, making loans, advances or guarantees, mergers and/or acquisitions, asset sales, liquidations, recapitalizations, non-ordinary business activities, making changes to our organizational documents, making changes to arrangements with our officers, directors, employees and other related persons, incurrence of indebtedness for borrowed money or capital leases above specified thresholds and consummating the sale of the Company. Additionally, pursuant to affirmative covenants under the Investor Rights Agreement (and subject to the same 33% ownership threshold), unless the holders of a majority of the Seller Registrable Securities then outstanding have otherwise consented in writing, we are required to perform specified activities, including, without limitation, preservation of our corporate existence and material licenses, authorizations and permits necessary to the conduct of our business, maintenance of our material properties, discharge of certain statutory liens, performance under material contracts, compliance with applicable laws and regulations, preservation of adequate insurance coverage and maintenance of proper books of record and account.
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If we lose our key management and technical personnel, our business may suffer.
Following the Acquisition, we rely upon a relatively small group of key managers who have extensive experience in the paper and packaging and newsprint businesses. We do not expect to maintain any key man insurance. The loss of management or an inability to attract or retain other key individuals could materially and adversely affect our business. We will seek to compensate management, as well as other employees, through competitive salaries, bonuses and other incentive plans, but there can be no assurance that these programs will allow us to retain key management executives or hire new key employees.
Our indebtedness could adversely affect our financial condition and impair our ability to operate the Business.
At May 31, 2008, we have approximately $1,112 million of outstanding indebtedness (consisting of approximately $1,051 million under new credit facilities and approximately $61 million under a subordinated promissory note to Boise Cascade). This level of indebtedness could have important consequences on our business, financial condition and operating results, including the following:
Our operations may not be able to generate sufficient cash flows to meet our debt service obligations.
Our ability to make payments on and to refinance our indebtedness and to fund planned capital expenditures depends on our ability to generate cash from our future operations. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As a result, it is possible that we may not generate sufficient cash flow from its operations to enable us to repay our indebtedness, make interest payments and to fund other liquidity needs. To the extent we do not generate sufficient cash flow to meet these requirements, it would impact our ability to operate as a going concern.
The indebtedness incurred by us under our new credit facilities bears interest at variable rates, in which case increases in interest rates would cause our debt service requirements to increase. In such a case, we might need to refinance or restructure all or a portion of our indebtedness on or before maturity. However, we may not be able to refinance any of our indebtedness, including the new credit
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facilities, on commercially reasonable terms, or at all. Our debt service obligation, assuming our debt outstanding and interest rates stay at May 31, 2008 levels, is approximately $84 million in cash interest payments and fees per annum, which amount will be reduced each year in accordance with scheduled debt amortization payments, if made. In addition, debt service requirements also include scheduled principal payments totaling $8.3 million for 2008 and will rise to a maximum of $447.7 million in 2014.
If we cannot service or refinance our indebtedness, we may have to take actions such as selling assets, seeking additional equity or reducing or delaying capital expenditures, any of which could have a material adverse effect on our operations and financial condition.
A default under our indebtedness may have a material adverse effect on our business and financial condition.
In the event of a default under our new credit facilities, the lenders generally would be able to declare all of such indebtedness, together with interest, to be due and payable. In addition, borrowings under the new credit facilities are secured by first- and second-priority liens, as applicable, on all of our assets and our subsidiaries' assets, and in the event of a default under those facilities, the lenders generally would be entitled to seize the collateral. Moreover, upon the occurrence of an event of default, the commitment of the lenders to make any further loans would be terminated. Accordingly, a default under any debt instrument, unless cured or waived, would likely have a material adverse effect on our overall business, the results of our operations and our financial condition.
Servicing debt could limit funds available for other purposes.
We will use cash from operations to pay the principal and interest on our debt. These payments will limit funds available for other purposes, including expansion of our operations through acquisitions, funding future capital expenditures and the payment of dividends.
Our new credit facilities contain restrictive covenants that limit our overall liquidity and corporate activities.
The new credit facilities impose operating and financial restrictions that limit our ability to:
We need to seek permission from our lenders in order to engage in certain corporate actions. Our lenders' interests may be different from ours, and no assurance can be given that we will be able to obtain the lenders' permission when needed. This may prevent us from taking actions that are in our stockholders' best interest.
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Our new credit facilities also require us to achieve specified financial and operating results and maintain compliance with specified financial ratios. Our ability to comply with these ratios may be affected by events beyond our control, and these types of restrictions could:
Registration rights held by Boise Cascade and certain of our stockholders may have an adverse effect on the market price of our common stock.
The Investor Rights Agreement provides for registration rights with respect to: (1) Aldabra Registrable Securities (as such term is defined in the Investor Rights Agreement); (2) the Seller Registrable Securities; and (3) shares held by other of our stockholders party to the Investor Rights Agreement (the "Other Registrable Securities"). Holders of approximately 48,460,874 shares (or approximately 61% of our outstanding common stock as of June 12, 2008) have registration rights.
Holders of the Seller Registrable Securities or the Aldabra Registrable Securities have the right to demand registration under the Securities Act of all or a portion of their registrable securities subject to amount and time limitations. Holders of the Seller Registrable Securities may demand five long-form registrations and an unlimited number of short-form registrations, while holders of Aldabra Registrable Securities may demand two long-form registrations and an unlimited number of short-form registrations. The minimum aggregate offering value of the securities required to be registered must equal at least $25,000,000 for long-form registrations and $5,000,000 for short-form registrations.
Additionally, whenever (i) we propose to register any of our securities under the Securities Act and (ii) the method we select would permit the registration of registrable securities, holders of Aldabra Registrable Securities, the Seller Registrable Securities or Other Registrable Securities have the right to request the inclusion of their registrable securities in such registration. The resale of these shares in the public market upon exercise of the registration rights described above could adversely affect the market price of our common stock or impact our ability to raise additional equity capital.
Delaware law and our amended and restated charter documents may impede or discourage a takeover that our stockholders may consider favorable.
Our amended and restated charter has provisions that may deter, delay or prevent a third party from acquiring us. These provisions include:
These provisions could have the effect of delaying, deferring or preventing a change in control, discourage others from making tender offers for our shares, lower the market price of our stock or
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impede the ability of our stockholders to change our management, even if such changes would be beneficial to our stockholders.
Our stockholders may not receive dividends because of restrictions in the new credit facilities, Delaware law and state regulatory requirements.
Our ability to pay dividends is restricted by our new credit facilities, as well as Delaware law and state regulatory authorities. Under Delaware law, our board of directors may not authorize payment of a dividend unless it is either paid out of our capital surplus, as calculated in accordance with the DGCL, or, if we do not have a surplus, it is paid out of our net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. To the extent we do not have adequate surplus or net profits, we will be prohibited from paying dividends.
Our business may incur increased costs as a result of having publicly-traded equity securities.
We continue to have publicly-traded equity securities following the Acquisition, and as a result, we have significant legal, accounting and other expenses that the paper business did not incur as part of a private company with public debt. In addition, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley Act"), as well as rules subsequently implemented by the SEC and the NYSE, have required changes in corporate governance practices of public companies. These rules and regulations have increased legal and financial compliance costs and made activities more time-consuming and costly. For example, as a result of having publicly-traded equity securities, we are required to have a majority of independent directors and to have additional board committees, such as audit, compensation, and nominating and corporate governance committees.
If we fail to maintain effective systems for disclosure and internal controls over financial reporting as a result of the Acquisition, we may be unable to comply with the requirements of Section 404 of the Sarbanes Oxley Act in a timely manner.
Section 404 of the Sarbanes-Oxley Act requires us to document and test the effectiveness of our internal controls over financial reporting in accordance with an established internal control framework and to report on our conclusion as to the effectiveness of the internal controls. It also requires an independent registered public accounting firm to test our internal controls over financial reporting and report on the effectiveness of such controls for our fiscal year ending December 31, 2008 and subsequent years. It may cost us more than we expect to comply with these controls and procedure-related requirements. If we discover areas of internal controls that need improvement, we cannot be certain that any remedial measures taken will ensure that we implement and maintain adequate internal controls over financial processes and reporting in the future. Any failure to implement requirements for new or improved controls, or difficulties encountered in their implementation could harm our operating results or cause us to fail to meet our reporting obligations.
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The paper industry is cyclical. Fluctuations in the prices of and the demand for our products could result in smaller profit margins and lower sales volumes.
Historically, economic and market shifts, fluctuations in capacity, and changes in foreign currency exchange rates have created cyclical changes in prices, sales volumes, and margins for our products. The length and magnitude of industry cycles have varied over time and by product but generally reflect changes in macroeconomic conditions and levels of industry capacity. Most of our paper products, including our cut-size office paper, containerboard, and newsprint, are commodities that are widely available from other producers. Even our noncommodity products, such as premium papers, are impacted by commodity prices since the prices of these grades are often tied to commodity prices. Commodity products have few distinguishing qualities from producer to producer, and as a result, competition for these products is based primarily on price, which is determined by supply relative to demand.
The overall levels of demand for the commodity products we make and distribute, and consequently our sales and profitability, reflect fluctuations in levels of end-user demand, which depend in large part on general macroeconomic conditions in North America and regional economic conditions in our markets, as well as foreign currency exchange rates. For example, demand for our paper products fluctuates with levels of employment, the state of durable and nondurable goods industries, and prevailing levels of advertising and print circulation. In recent years, particularly since 2000, demand for some grades of paper has decreased as electronic transmission and document storage alternatives have become more prevalent. Newsprint demand in North America has been in decline for decades as electronic media has increasingly displaced paper as a medium for information and communication.
Industry supply of commodity paper products is also subject to fluctuation, as changing industry conditions can influence producers to idle or permanently close individual machines or entire mills. In addition, to avoid substantial cash costs in connection with idling or closing a mill, some producers will choose to continue to operate at a loss, sometimes even a cash loss, which could prolong weak pricing environments due to oversupply. Oversupply in these markets can also result from producers introducing new capacity in response to favorable short-term pricing trends.
Industry supply of commodity paper products is also influenced by overseas production capacity, which has grown in recent years and is expected to continue to grow. While the weakness of the U.S. dollar has mitigated the levels of imports in recent years, a strengthening of the U.S. dollar is likely to increase imports of commodity paper products from overseas, putting downward pressure on prices.
Prices for all of our products are driven by many factors outside our control, and we have little influence over the timing and extent of price changes, which are often volatile. Market conditions beyond our control determine the prices for our commodity products, and as a result, the price for any one or more of these products may fall below our cash production costs, requiring us to either incur short-term losses on product sales or cease production at one or more of our manufacturing facilities. Therefore, our profitability with respect to these products depends on managing our cost structure, particularly raw materials and energy prices, which represent the largest components of our operating costs and can fluctuate based upon factors beyond our control, as described below. If the prices of our products decline, or if our raw materials or energy costs increase, or both, then our sales and profitability could be materially and adversely affected.
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We face strong competition in our markets.
The paper and packaging and newsprint industry is highly competitive, and we face competition from numerous competitors, domestic as well as foreign. Some of our competitors are large, vertically integrated companies that have greater financial and other resources, greater manufacturing economies of scale, greater energy self-sufficiency, and/or lower operating costs, compared with our company. Because of ongoing consolidation in our industry, many of our competitors have become larger, and this trend may continue in the future. Some of our competitors have less indebtedness than we do, and therefore, more of their cash will be available for business purposes other than debt service. As a result, we may be unable to compete with other companies in the market during the various stages of the business cycle and particularly during any downturns.
Our manufacturing businesses may have difficulty obtaining logs and fiber at favorable prices or at all.
Wood fiber is our principal raw material, accounting for approximately 29% and 17% of the aggregate amount of materials, labor, and other operating expenses, including fiber costs, for our paper and packaging segments, respectively, in 2007. Wood fiber is a commodity, and prices have historically been cyclical. In addition, availability of wood fiber is often negatively affected if demand for building products declines, since wood fiber, including wood chips, sawdust, and shavings, is a byproduct in the manufacture of building products. Wood fiber for our paper mills in the Northwest comes predominantly from building products manufacturing plants. Because of the decline in the housing markets and new construction, a number of building products manufacturing plants have been curtailed and closed in the Northwest. These curtailments affect the availability and price of wood fiber in the region and, in turn, affect the operating and financial performance of our Northwest paper mills. In many cases, we may be unable to increase product prices in response to increased wood fiber costs, depending on other factors affecting the demand or supply of paper. Further, severe or sustained shortages of fiber could cause us to curtail our own operations, resulting in material and adverse affects on our sales and profitability.
Future domestic or foreign legislation and litigation concerning the use of timberlands, the protection of endangered species, the promotion of forest health, and the response to, and prevention of, catastrophic wildfires can also affect log and fiber supply. Availability of harvested logs and fiber may be further limited by fire, insect infestation, disease, ice storms, windstorms, hurricanes, flooding, and other natural and man-made causes, thereby reducing supply and increasing prices. In addition, since a number of our manufacturing facilities use wood-based biomass as an alternative energy source, an increase in wood fiber costs or a reduction in availability can increase the price of, or reduce the total usage of biomass, which could result in higher energy costs.
Further increases in the cost of our purchased energy or chemicals would lead to higher manufacturing costs, thereby reducing our margins.
Energy is one of our most significant costs, and it accounted for approximately 15% and 14% of the aggregate amount of materials, labor, and other operating expenses, including fiber costs, for our paper and packaging segments, respectively, in 2007. Energy prices, particularly for electricity, natural gas, and fuel oil, have been volatile in recent years and currently exceed historical averages. These fluctuations impact our manufacturing costs and contribute to earnings volatility. We have some flexibility to switch between fuel sources; however, we have significant exposure to natural gas, fuel oil, and biomass (hog fuel) price increases. Increased demand for these fuels (which could be driven by cold weather) or further supply constraints could drive prices higher. The electricity rates charged to us are impacted by the increase in natural gas prices, although the degree of impact depends on each utility's mix of energy resources and the relevant regulatory situation.
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Other raw materials we use include various chemical compounds, such as precipitated calcium carbonate, sodium chlorate, sodium hydroxide, and dyes. Purchases of chemicals accounted for approximately 14% and 5% of the aggregate amount of materials, labor, and other operating expenses, including fiber costs, for our paper and packaging segments, respectively, in 2007. The costs of these chemicals have been volatile historically and are influenced by capacity utilization, energy prices, and other factors beyond our control.
For our products, the relationship between industry supply and demand, rather than changes in the cost of raw materials, determines our ability to increase prices. Consequently, we may be unable to pass increases in our operating costs to our customers in the short term. Any sustained increase in chemical or energy prices would reduce our operating margins and potentially require us to limit or cease operations of one or more of our machines or facilities.
Some of our paper products are vulnerable to long-term declines in demand due to competing technologies or materials.
Our uncoated free sheet paper and newsprint compete with electronic transmission, document storage alternatives, and paper grades we do not produce. As the use of these alternatives grow, demand for paper products may shift from one grade of paper to another or be eliminated altogether. For example, demand for newsprint has declined and may continue to decline as newspapers are replaced with electronic media, and demand for our uncoated free sheet paper for use in pre-printed forms has declined and may continue to decline as the use of desktop publishing and on-demand printing continues to displace traditional forms. Demand for our containerboard may decline as corrugated paper packaging may be replaced with other packaging materials, such as plastic. Any substantial shift in demand from our products to competing technologies or materials could result in a material decrease in sales of our products. The increase in imports also has negatively influenced demand for domestic containerboard, as more products are manufactured and packaged offshore.
A material disruption at one of our manufacturing facilities could prevent us from meeting customer demand, reduce our sales, and/or negatively impact our net income.
Any of our manufacturing facilities, or any of our machines within an otherwise operational facility, could cease operations unexpectedly due to a number of events, including:
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Future events may cause shutdowns, which may result in downtime and/or cause damage to our facilities. Any such downtime or facility damage could prevent us from meeting customer demand for our products and/or require us to make unplanned capital expenditures. If our machines or facilities were to incur significant downtime, our ability to meet our production capacity targets and satisfy customer requirements would be impaired, resulting in lower sales and net income.
Our operations require substantial capital, and we may not have adequate capital resources to provide for all of our capital requirements.
Our manufacturing businesses are capital-intensive, and we regularly incur capital expenditures to expand our operations, maintain our equipment, increase our operating efficiency, and comply with environmental laws. During 2007, BPP's total capital expenditures, excluding acquisitions, were approximately $141.8 million, including approximately $59 million for maintenance capital (replacements) and approximately $4 million for environmental expenditures. Of the total 2007 capital spending, approximately $45 million is related to upgrades to the Wallula #3 paper machine (the "Wallula #3 machine") to convert it to be able to produce specialty paper grades in addition to commodity grades. Also included is $10 million of spending related to the installation of a shoe press in the DeRidder mill to reduce the use of energy in producing linerboard. We expect capital investments in 2008 to total approximately $110 million to $120 million. Our capital expenditures are expected to be between $110 million and $130 million annually over the next five years, excluding acquisitions or major capital projects.
If we require funds for operating needs and capital expenditures beyond those generated from operations, we ay not be able to obtain them on favorable terms, or at all. In addition, debt service obligations will reduce our available cash flows. If we cannot maintain or upgrade our equipment as it requires or ensure environmental compliance, we could be required to cease or curtail some of our manufacturing operations or we may become unable to manufacture products that can compete effectively in one or more of our markets.
Our operations are affected by our relationship with OfficeMax.
Pursuant to a 2004 paper supply contract, OfficeMax is required to purchase its North American requirements for certain grades of paper from us. We anticipate that OfficeMax will continue to be our largest customer and that we will continue to depend on OfficeMax's distribution network for a substantial portion of our uncoated free sheet sales in the future. Any significant deterioration in OfficeMax's financial condition or our relationship with OfficeMax, or a significant change in OfficeMax's business strategy, could result in OfficeMax ceasing to be our customer, or failing to satisfy its contractual obligations to us, or simply result in lower uncoated free sheet (cut size) paper sales through OfficeMax, which in turn could reduce our sales.
We are subject to significant environmental regulation and environmental compliance expenditures, as well as other potential environmental liabilities.
We are subject to a wide range of general and industry-specific environmental laws and regulations, particularly with respect to air emissions, wastewater discharges, solid and hazardous waste management, and site remediation. BPP's capital expenditures for environmental compliance were approximately $4 million, $7 million, and $16 million in 2007, 2006, and 2005, respectively, and BPP expects to incur approximately $1 million in 2008. We expect to continue to incur significant capital and operating expenditures in order to maintain compliance with applicable environmental laws and regulations. If we fail to comply with applicable environmental laws and regulations, we may face civil
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or criminal fines, penalties, or enforcement actions, including orders limiting our operations or requiring corrective measures, installation of pollution control equipment, or other remedial actions.
As an owner and operator of real estate, we may be liable under environmental laws for cleanup and other damages (including tort liability) resulting from releases of hazardous substances on or from our properties. We may have liability under these laws whether or not we knew of, or were responsible for, the presence of these substances on our property, and in some cases, our liability may not be limited to the value of the property.
The purchase and sale agreement governing the 2004 Transaction contained customary representations, warranties, covenants, and indemnification rights in favor of Boise Cascade's parent entity (as the purchaser thereunder) and Boise White Paper, BP&N and Boise Transportation (as "permitted affiliate purchasers" thereunder); therefore, following the Acquisition the Paper Group will continue to have unlimited indemnification rights against OfficeMax for certain pre-closing liabilities, including for hazardous substance releases and other environmental violations that occurred prior to the 2004 Transaction or that arose out of pre-2004 operations at the businesses, facilities, and other assets purchased by Boise Cascade. However, OfficeMax may not have sufficient funds to fully satisfy its indemnification obligations when required. Furthermore, we are not entitled to indemnification for liabilities incurred due to releases and violations of environmental laws occurring after the 2004 Transaction.
Enactment of new environmental laws or regulations or changes in existing laws or regulations might require significant expenditures. We may be unable to generate funds or other sources of liquidity and capital to fund unforeseen environmental liabilities or expenditures. In addition, we may be impacted if carbon emission laws are enacted that require us to install additional equipment or pay for existing emissions.
Labor disruptions or increased labor costs could adversely affect our business.
While we believe we have good labor relations and have established staggered labor contracts for each of our five paper mills to minimize potential disruptions in the event of a labor dispute, we could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, either in the course of negotiations of a labor agreement or otherwise. Either of these situations could prevent us from meeting customer demand or increased costs, thereby reducing our sales and profitability. As of March 31, 2008, we had approximately 4,600 employees. Approximately 2,750, or 60%, of these employees work pursuant to collective bargaining agreements. We are currently in negotiations at our Wallula, Washington, packaging facility (126 employees represented by the United Steelworkers). This year, labor contracts will expire at our Jackson, Alabama converting facility (106 employees represented by the United Steelworkers) in June and at our Salem, Oregon, packaging facilities (92 employees represented by the Association of Western Pulp & Paper Workers) in December. We do not expect material work interruptions or increases in our costs during the course of the negotiations with our collective bargaining units. Nevertheless, if our expectations are not accurate, we could experience a material labor disruption or significantly increased labor costs at one or more of our facilities, any of which could prevent us from meeting customer demand or reduce our sales and profitability.
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Assuming the exercise of all the warrants, we will receive gross proceeds of $310,500,000. We intend to use the proceeds from the exercise of the warrants for working capital, operating expenses and other general corporate purposes, including possible acquisitions. There is no assurance that the holders of the warrants will elect to exercise any or all of the warrants.
DETERMINATION OF OFFERING PRICE
The offering price of the shares of common stock offered hereby is determined by reference to the exercise price of the warrants. The exercise price of the warrants is $7.50 per share and was determined at the time of the initial public offering.
Pursuant to the terms of the warrants, the shares of common stock will be distributed to those warrant holders who surrender the certificates representing the warrants and provide payment of the exercise price through their brokers to our warrant agent, Continental Stock Transfer & Trust Company. We do not know if or when the warrants will be exercised. We also do not know whether any of the shares acquired upon exercise will be sold.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion of the financial condition and results of operations of our business in conjunction with the consolidated financial statements and related notes contained elsewhere in this registration statement. Among other things, those consolidated financial statements include more detailed information regarding the basis of the presentation.
This Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A") includes statements regarding the Company's expectations with respect to performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in "Risk Factors." Actual results may differ materially from those contained in or implied by any of these forward-looking statements.
Overview
Boise Inc. (formerly Aldabra 2 Acquisition Corp.) or "the Company," "we," "us," or "our" was a blank check company, created on February 1, 2007 (inception) and organized for the purpose of effecting a merger, capital stock exchange, asset acquisition, or other similar business combination with an operating business. On February 22, 2008, Boise Inc. completed the acquisition (the Acquisition) of Boise White Paper, L.L.C., Boise Packaging & Newsprint, L.L.C., Boise Cascade Transportation Holdings Corp. (collectively, the Paper Group), and other assets and liabilities related to the operation of the paper, packaging and newsprint, and transportation businesses of the Paper Group and part of the headquarters operations of Boise Cascade, L.L.C. The business we acquired is referred to in this report as the "Predecessor." The Acquisition was accomplished through the Company's acquisition of Boise Paper Holdings, L.L.C.
The accompanying consolidated statements of income (loss) and cash flows for the three months ended March 31, 2008, include the activities of Aldabra 2 Acquisition Corp. prior to the Acquisition and the operations of the acquired businesses from February 22, 2008, through March 31, 2008. For the period of January 1 through February 21, 2008, and for the three months ended March 31, 2007, the consolidated statements of income and cash flows of the Predecessor are presented for comparative purposes. The period of February 1 (inception) through March 31, 2007, represents the activities of Aldabra 2 Acquisition Corp.
Our Management's Discussion and Analysis of Financial Condition and Results of Operations begins with a general overview of the effects of the Acquisition, including the impact of purchase accounting, costs associated with running as a stand-alone company, changes in tax expense as a result of operating as a stand-alone company and the anticipated impact of increased leverage of the business.
Next, the analysis discusses our three operating segmentspaper, packaging, and corporate and other. The discussion of "Recent Trends and Operational Outlook" and "Factors That Affect Operating Results" is intended to give the reader an overview of the goals and challenges of our business and the direction in which our business and products are moving.
The analysis then reviews BPP's "Results of Operations" for 2007, compared with 2006 and 2006 compared with 2005. Following a review of our annual operating results, we discuss the combined operating results of our Company for the three months ended March 31, 2008 compared with the same period in the prior year. The combined operating results include the operations of Boise Inc. for the three months ended March 31, 2008 and the operations of BPP from January 1 through February 21, 2008. We believe this combined presentation is the most useful comparison between periods. The Acquisition was accounted for in accordance with SFAS No. 141, Business Combinations, resulting in a new basis of accounting from those previously reported by BPP. However, sales and most operating
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costs are substantially consistent with those reflected by BPP. Finished goods inventories were revalued to estimated selling prices less costs of disposal and a reasonable profit on the disposal. Depreciation changed as a result of adjustments to the fair values of property and equipment due to our preliminary purchase price allocation. These items, along with changes in interest expense and income taxes, are explained independently where appropriate. Following the analysis of our results, relevant merger activity in the industry is discussed in "Industry Mergers and Acquisitions," as well as in "Acquisitions" and "Divestitures," including the February 1, 2006 acquisition of CTC for $43.8 million, is addressed.
The analysis then provides discussion of changes in our balance sheet and cash flows and discusses our financial commitments in the sections entitled "Liquidity and Capital Resources." This is presented on both a historical basis under "Historical Annual Cash Flows" and pro forma for the Acquisition under "Following the Acquisition." The analysis then addresses our "Contractual Obligations" and "Disclosures of Financial Market Risks", giving effect to the Acquisition. On a historical basis, BPP's financials statements did not include an allocation of Boise Cascade's debt or interest. The analysis then addresses our "Contractual Obligations" and "Disclosures of Financial Market Risks." These sections are followed by a discussion of the "Critical Accounting Estimates" BPP's management believes are important to understanding the assumptions and judgments incorporated in its reported financial results.
Effects of the Acquisition
Purchase Accounting
The Company has accounted for the Acquisition using the purchase method of accounting. As a result, the total purchase price of approximately $1.664 billion (after working capital and certain other adjustments as set forth in the Company's pro forma financials included in this prospectus under the section heading "Unaudited Pro Forma Condensed Combined Financial Statements") has been preliminarily allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values as of the date of the Acquisition. Such allocation of the purchase price of the assets acquired has resulted in an increase in the pro forma book depreciation and amortization expense as a result of allocating a higher value to the acquired assets than their historical carrying value based on BPP's assessment of fair value, pending completion of a third-party valuation.
Stand-Alone Company
During all periods presented, BPP used the services and administrative staff of Boise Cascade. These services included, but were not limited to, finance, accounting, legal, information technology, and human resource functions. The costs not specifically identifiable to BPP were allocated based primarily on average sales, assets, and labor costs. Management believes all of the allocations reasonably reflect BPP's use of the services; however, had BPP operated on a stand-alone basis, and excluding gains related to changes in retiree healthcare programs, management estimates BPP's corporate and other segment would have reported segment losses of approximately $18 million before interest, taxes, depreciation, and amortization (EBITDA) in all annual periods presented. For 2007 and 2006, the corporate and other segment reported losses before interest, taxes, depreciation, and amortization of $10.0 million and $11.6 million, respectively.
Taxes
For all periods presented, the majority of BPP's assets were held and operated by limited liability companies, which are not subject to entity-level federal or state income taxation. The income taxes in respect to these operations were payable by Boise Cascade's equity holders in accordance with their respective ownership percentages. BPP is now subject to entity-level federal income taxation.
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Increased Leverage
As of May 31, 2008, we had approximately $1,051 million of outstanding indebtedness under the new credit facilities and approximately $61 million under the Seller Note payable to Boise Cascade, L.L.C. (the "Seller Note"). As a result, we are a leveraged company and interest expense will increase significantly in the periods following the consummation of the Acquisition. The indebtedness may limit our flexibility in planning for, or reacting to, changes in the business and future business opportunities since a substantial portion of cash flow from operations will be dedicated to the repayment of indebtedness. This may place us at a competitive disadvantage as some of our competitors are less leveraged. The Company's leverage may make it more vulnerable to a downturn in the business, the industry or the economy in general.
Segments
The Company operates its business through three reportable segments: paper, packaging, and corporate and other. These segments represent distinct businesses that are managed separately because of differing products and services. Each of these businesses requires distinct operating and marketing strategies. Management reviews the performance of the Company based on these segments.
Paper
Our paper segment manufactures and sells uncoated free sheet paper (including commodity and premium cut-size office papers); a range of packaging papers (including corrugating medium, label and release papers, and flexible packaging papers); commodity and premium printing and converting papers (including commercial printing papers, envelope papers, and form-related products); and market pulp. Many of these paper products are commodity products, while others have specialized features that make these products premium and specialty grades. Our premium grades include 100% recycled and colored cut-size office papers and our specialty grades include custom-developed papers for such uses as label and release and flexible food packaging. In 2007, the $80 million conversion of the #3 machine in Wallula, Washington, to significantly grow label and release capacity, was completed. We ship to customers both directly from our mills and through distribution centers. In the combined first quarter of 2008, approximately 40% of uncoated free sheet paper sales volume, including 72% of the office papers sale volume, was sold to OfficeMax. In 2007, approximately 44% of BPP's uncoated free sheet paper sales volume, including about 78% of its office papers sales volume, was sold to OfficeMax.
Packaging
Our packaging segment manufactures and sells containerboard (linerboard) and newsprint at our mill in DeRidder, Louisiana. In March 2008, the $23 million linerboard expansion project, which added 50,000 ton of linerboard capacity that will reduce fuel use and increase product capabilities, was completed.
We also operate five corrugated container plants in the Northwest and a sheet feeder plant in Waco, Texas, which we acquired in February 2006 for $43.8 million. Our corrugated containers are used primarily in the packaging of fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. Our Waco plant, known as CTC, produces corrugated sheets that are sold to sheet plants in the Southwest region, where they are converted into corrugated containers for a variety of customers. Our containerboard and corrugated products are sold by our own sales personnel and by brokers.
We market our newsprint through a subsidiary of Abitibi Consolidated Inc. (Abitibi) pursuant to an arrangement whereby Abitibi purchases all of the newsprint we produce at a price equal to the price at which Abitibi sells newsprint produced at its mills located in the southern United States, less associated expenses and a sales and marketing discount. The newsprint price is verified through a third-
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party review. Either party may terminate the agreement by giving eight months' prior written notice of termination.
Corporate and Other
Our corporate and other segment primarily includes corporate support services, related assets and liabilities, and foreign exchange gains and losses. During the Predecessor periods presented, the Corporate and Other segment primarily included an allocation of Boise Cascade corporate support services and related assets and liabilities. These support services included, but were not limited to, finance, accounting, legal, information technology, and human resource functions. This segment also includes transportation assets, such as rail cars and trucks, that we use to transport our products from our manufacturing sites. Rail cars and trucks are generally leased. We provide transportation services not only to our own facilities but also, on a limited basis, to third parties when geographic proximity and logistics are favorable. During the years ended December 31, 2007, 2006, and 2005, segment sales related primarily to our rail and truck transportation business were $58.9 million, $61.4 million and $66.5 million, respectively.
In connection with the Acquisition, we entered into an outsourcing services agreement under which we provide a number of corporate staff services to Boise Cascade at our cost. These services include information technology, accounting, and human resource services. The initial term of the agreement is for three years. It will automatically renew for one-year terms unless either party provides notice of termination to the other party at least 12 months in advance of the applicable term.
Recent Trends and Operational Outlook
North American demand for packaging and communications paper products is heavily influenced by the level of general economic activity. Over time, packaging paper demand has been growing, while growth in most communications paper grades has been negatively affected by electronic substitution.
Containerboard pricing continued to be stable in the first five months of 2008. In late May, after a major supply disruption at a competitor's mill, many producers announced price increases on linerboard Although we announced a $55 per ton price increase to become effective in July 2008, there is no assurance that the announced price increase will be fully realized. Demand in agriculture, food, and beverage markets, which constitute over half of our packaging product end use markets has remained relatively strong, while industrial markets have shown signs of easing as slower economic growth has reduced demand for packaging papers in the U.S. The impact of weaker domestic demand has been somewhat offset by a relatively weak U.S. dollar, which continues to help make export markets attractive for U.S. containerboard producers and U.S. markets less attractive for overseas producers.
The uncoated freesheet pricing environment was strong through the first five months of 2008. We announced a $60-per-ton price increase for cut-size copy paper and most printing and converting grades in the first quarter, which has largely been implemented. In late May, we announced a $60-per-ton increase across all of our communication papers for June. There is no assurance that the announced price increase will be fully realized. Since most of our cut-size office paper is sold to OfficeMax under a contract whereby the price OfficeMax pays is determined by a published index, changes in price for this product sold to OfficeMax tend to lag behind the general market by approximately 60 days.
Demand for our targeted label and release, flexible packaging, and premium office papers (such as colored and 100% recycled-content cut-size papers) has been growing, although demand in 2008 has been flat to slowly growing for these grades in conjunction with a slower overall economy. Demand for commodity communications papers in North America has continued to decline as electronic media substitutes for traditional paper media. According to Resource Information Systems, Inc. (RISI), during the first four months of 2008, uncoated freesheet demand declined 4.2% compared with the same period in 2007. Demand for uncoated free sheet printing and converting papers also continues to be heavily affected by the shift to electronic media for communications.
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Two factors have allowed producers to raise prices in the face of decreasing demand: first, producers have closed or converted capacity to offset demand reductions, and second, the decreased value of the U.S. dollar, relative to other currencies, has allowed U.S. producers to export profitably while making U.S. markets less attractive to offshore producers. As a result, industry inventories are low relative to historical standards, and most producers have announced price increases.
North American newsprint demand has continued to trend downward. In December 2007, AbitibiBowater Inc. (AbitibiBowater), the largest producer of newsprint in North America, announced the permanent closure of manufacturing facilities with approximately 1 million tons of annual capacity of groundwood printing and newsprint papers. At the same time, AbitibiBowater announced price increases of $60-per-ton, which were phased in during the first quarter of 2008, and followed with $60-per-ton increases for the second quarter, which are currently being implemented. In May, AbitibiBowater announced another $60-per-ton price increase which is expected to be phased in during the third quarter. There is no assurance that the announced price increases will be realized.
Our financial results continue to be negatively affected by significant cost increases. Fiber costs in the Pacific Northwest continue to be high by historical standards and have not declined seasonally as they did in 2007. These higher wood fiber costs are having a significant negative impact on the financial results of our St. Helens, Oregon, and Wallula, Washington, pulp and paper mills. As a result, we may choose to change our operating configuration at those facilities, including potentially closing some or all of the St. Helens mill if we cannot operate it profitably. We will continue to evaluate its ongoing financial performance. Our St. Helens pulp and paper mill and Wallula pulp and paper mill combined consume approximately 1 million bone-dry units (bdu) of fiber in the Pacific Northwest annually under normal operations. We have expanded our whole-log chipping capacity and we are currently pursuing alternative sources of fiber.
Energy costs, particularly natural gas, are also high relative to historical standards and have continued to increase since the first quarter of 2008. Boise Inc.'s pulp and paper operations consume approximately 14 million British thermal units (mmBtu) of natural gas annually under normal operations.
Through the first five months of 2008, chemical prices have increased and many of Boise Inc.'s chemical suppliers have increased their prices to us as contracts have allowed.
In May and June of 2008, downtime was taken at our International Falls, Minnesota and Wallula, Washington pulp and paper mills to perform annual maintenance work. The work at International Falls included additional planned long-term maintenance work on the recovery boiler. The total impact of both shutdowns to second quarter operating income, including lost contribution from lower production, is expected to be between $17 and $19 million dollars.
Under purchase accounting rules, in connection with the Acquisition we revalued our finished goods inventory to estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort, and we eliminated previously established profit in inventory reserves. As a result of these purchase accounting adjustments, our materials, labor, and other operating expenses will increase approximately $11.5 million, of which $6.5 million was recognized during the three months ended March 31, 2008, with the balance to be recognized during the second quarter of 2008.
Factors That Affect Operating Results
Our results of operations and financial performance are influenced by a variety of factors, including the following:
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Commodity and Premium and Specialty Products
Many of the products we manufacture and distribute are commodities widely available and can be readily produced by our competitors. Because commodity products have few distinguishing qualities from producer to producer, competition for these products is primarily based on price, which is determined by supply relative to demand. Generally, market conditions beyond our control determine the price for our commodity products, and the price for any one or more of these products may fall below our cash production costs. Therefore, our profitability with respect to these products depends on managing our manufacturing efficiency and cost structure, particularly raw material and energy costs, which also exhibit commodity characteristics.
Premium and specialty grades include our imaging papers and packaging papers, including label and release and flexible packaging products, and our printing and converting papers, including commercial printing papers, envelope papers, and form-related products. Our premium and specialty papers are differentiated from competing products based on quality and product design, as well as related customer service. We are generally able to influence price based on the strength of differentiation and levels of customer service and are generally able to sell these products at higher margins than our commodity products. Demand for specialty and premium products is affected by overall levels of economic activity and, in the case of our packaging papers, is not significantly impacted by electronic media substitution. In order to reduce our sensitivity to price cyclicality and electronic media substitution and improve our margins, a fundamental component of our strategy is to increase production of premium and specialty papers as a percent of our total Paper segment sales. We believe these products are less susceptible to commodity pricing dynamics.
In our paper segment, sales volumes of our target grades of label and release, flexible packaging, and premium office grades grew by 6%, compared with first quarter 2007. Sales volume of premium and specialty papers was approximately 32% of uncoated free sheet tons sold during the three months ended March 31, 2008, compared with 34% for the same period in 2007. The project to convert our
24
W-3 paper machine in Wallula, Washington to enable it to produce label and release grades was a key step in providing us with the capacity to increase production of premium and specialty paper grades. This project came online during second quarter 2007. During the second half of 2007, we identified performance issues relating to equipment installed during the machine rebuild. These issues were resolved in the fourth quarter, enabling us to resume our production ramp-up.
Demand
The overall level of demand for the products we make and distribute is affected by, among other things, manufacturing activity, employment, consumer spending, and currency exchange rates. Accordingly, we believe that our financial results depend in large part on general macroeconomic conditions in North America, as well as on regional economic conditions in the geographic markets in which we operate. While no single product line drives our overall financial performance, individual product lines are influenced by conditions in their respective industries. For example:
Supply
Industry supply of paper is affected by the number of operational or idled facilities, the building of new capacity, and the shutting down of existing capacity. Capacity also tends to increase gradually over time without significant capital expenditures, as manufacturers improve production efficiencies. Generally, more capacity is added or employed when supply is tight and margins are relatively high, and capacity is idled or eliminated when capacity significantly exceeds demand and margins are poor.
No new uncoated free sheet or linerboard machines have been built in North America since 1995. In addition, from 2003 to 2007, North American uncoated free sheet, containerboard, and newsprint capacities declined 10%, 2%, and 19%, respectively, according to RISI. New capacity additions are constrained by the high capital investment and long lead times required to plan, obtain regulatory approvals for, and build a new mill. A favorable pricing environment may prompt manufacturers to initiate expansion projects.
Industry supply of paper is also influenced by the level of imports and overseas production capacity, which has grown in recent years. The weakening of the U.S. dollar has mitigated the level of imports in recent years.
25
Operating Costs
The major costs of production are wood fiber, energy, chemicals and labor. The relative size of these costs varies by segment. Given the significance of raw material and energy costs to total operating expenses and its limited ability to control these costs, compared with other operating costs, volatility in these costs can materially affect operating margins. In addition, the timing and degree of price cycles of raw materials and energy differ with respect to each type of raw material and energy used.
Wood fiber. The primary raw material is wood fiber, accounting for the following percentages of materials, labor, and other operating expenses, including fiber costs, for each of the respective periods listed below:
|
Predecessor Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
||||
Paper | 27 | % | 28 | % | 29 | % | |
Packaging | 14 | % | 14 | % | 17 | % |
|
Predecessor |
Boise Inc. |
Predecessor |
Combined |
|||||
---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2008 |
January 1 Through February 21, 2008 |
Three Months Ended March 31, 2008 |
|||||
Paper | 28 | % | 30 | % | 26 | % | 27 | % | |
Packaging | 18 | % | 11 | % | 17 | % | 15 | % |
The primary sources of logs and wood fiber are timber and byproducts of timber, such as wood chips, wood shavings, and sawdust. Substantially all fiber is acquired from outside sources. We convert logs and wood chips into pulp, which we use at our paper mills to produce paper. On an aggregate basis, operating at capacity, we are able to produce volume equal to all of our pulp needs, purchasing and selling similar amounts on the open market. Recent developments in the Pacific Northwest, if extended, may limit our ability to produce and profitably sell market pulp. Extended lower pulp sales could change our aggregate structural pulp balance from pulp neutral to one in which we are a net consumer of pulp.
Logs and wood fiber are commodities, and prices for logs and wood fiber have historically been cyclical due to changing levels of demand. Log and fiber supply may be limited by public policy or government regulation as well as fire, insect infestation, disease, ice storms, windstorms, hurricanes, flooding, other weather conditions, and other natural and man-made causes. Residual fiber supply may be limited due to a reduction in primary manufacturing at sawmills and plywood plants. Declines in log and fiber supply, driven primarily by changes in public policy and government regulation, have been severe enough to cause the closure of numerous facilities in some of the regions in which we operate. Any sustained undersupply and resulting increase in wood fiber prices could decrease our production volumes and/or increase our operating costs. Prices for our products might not reflect increases or decreases in log and wood fiber prices, and as a result, our operating margins could fluctuate. In Minnesota, wood fiber prices declined in the first quarter of 2008, compared with the first quarter of 2007, as oriented stand board plants in the region curtailed operations, resulting in less demand pressure. In the Northwest, residual fiber costs increased sharply during the second half of the first quarter of 2008 and continue to be high by historical standards. Because residual fiber for our paper mills in the Northwest comes predominantly from sawmills and plywood plants, curtailments in these mills, as a result of decreased demand for these products related to the housing slowdown, will continue to impact the availability of residual fiber for our Northwest pulp and paper operations. After declining throughout 2007, residual fiber prices in the Pacific Northwest began to increase during the first quarter of 2008, as continued and additional curtailments of wood products facilities put pressure
26
on fiber markets. Relative to historical standards, fiber costs were high in Louisiana in 2007 due to unusually high and persistent rainfall, which limited access to many harvest areas and limited supply availability. Recently, standing timber prices in Louisiana have decreased, as weather patterns have allowed better access to timberlands. However, delivered cost of fiber is also impacted by diesel fuel costs. Recent increases in diesel prices have negatively affected delivered fiber costs.
Other raw materials and energy purchasing and pricing. We purchase other raw materials and energy used to manufacture our products in both the open market and through long-term contracts. These contracts are generally with regional suppliers who agree to supply all of our needs for a certain raw material or energy at one of our facilities. These contracts normally contain minimum purchase requirements and are for terms of various lengths. They also contain price adjustment mechanisms that take into account changes in market prices. Therefore, although the long-term contracts provide us with supplies of raw materials and energy that are more stable than open-market purchases, in many cases, they may not alleviate fluctuations in market prices.
Our costs for raw materials are influenced by increases in energy costs. Specifically, some of our key chemicals, including pulping and bleaching chemicals consumed in our paper and packaging mills, are heavily influenced by energy costs. A number of our major suppliers have increased prices. Relationship between industry supply and demand, rather than changes in the cost of raw materials, determines our ability to increase prices. Consequently, we may be unable to pass increases in our operating costs to our customers in the short term.
Energy. Energy prices, particularly for electricity, natural gas, and fuel oil, have been volatile in recent years and currently exceed historical averages. In addition, we have limited flexibility to switch between fuel sources in the short term; accordingly, we have significant exposure to natural gas price changes. In the first quarter of 2008, natural gas prices have increased sharply. In normal operations, our pulp and paper operations consume approximately 14 million mmBtu of natural gas annually. Energy costs represented the following percentages of materials, labor, and other operating expenses, including fiber costs, for each of the respective periods listed below:
|
Predecessor Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
||||
Paper | 16 | % | 16 | % | 15 | % | |
Packaging | 14 | % | 15 | % | 14 | % |
|
Predecessor |
Boise Inc. |
Predecessor |
Combined |
|||||
---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2008 |
January 1 Through February 21, 2008 |
Three Months Ended March 31, 2008 |
|||||
Paper | 17 | % | 17 | % | 15 | % | 16 | % | |
Packaging | 15 | % | 14 | % | 14 | % | 14 | % |
We may enter into natural gas swaps, options, or a combination of these instruments to hedge the variable cash flow risk of natural gas purchases. As of March 31, 2008, we had entered into derivative instruments related to approximately 3% of our forecasted natural gas purchases from July 2008 through October 2008, and approximately 2% of our forecasted natural gas purchases from November 2008 through March 2009. These derivatives form a "three-way collar," which is a combination of options: a written put, a purchased call, and a written call. The purchased call establishes a maximum price unless the market price exceeds the written call, at which point the maximum price would be New York Mercantile Exchange (NYMEX) price less the difference between the purchased call and the written call strike price. The written put establishes a minimum price (the floor) the Company will pay
27
for the volumes under contract. The following table summarizes our natural gas hedged positions as of March 31, 2008:
|
Three-Way Cashless Collar |
||||||
---|---|---|---|---|---|---|---|
|
July 2008 Through October 2008 |
November 2008 Through March 2009 |
|||||
Volume hedged | 1,000 mmBtu/day | 1,000 mmBtu/day | |||||
Strike price of call sold |
$ |
13.00 |
$ |
14.00 |
|||
Strike price of call bought | 10.00 | 11.00 | |||||
Strike price of put sold | 6.00 | 6.38 | |||||
Approximate percent hedged |
3 |
% |
2 |
% |
Subsequent to March 31, 2008, and as of April 30, 2008, we have entered into natural gas price caps related to approximately 21% of our forecasted natural gas purchases from May 2008 through August 2008. We have elected to account for these instruments as economic hedges and record the changes in fair value in "Materials, labor, and operating expenses" in our Consolidated Statements of Income (Loss). We may enter into additional derivative instruments to hedge variable cash flow risk of natural gas purchases.
Chemicals. Important chemicals we use in the production of our products include starch, sodium chlorate, precipitated calcium carbonate, sodium hydroxide, and dyestuffs and optical brighteners. Purchases of chemicals represented the following percentages of materials, labor, and other operating expenses, including fiber costs, for each of the respective periods listed below:
|
Predecessor Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
||||
Paper | 13 | % | 14 | % | 14 | % | |
Packaging | 4 | % | 5 | % | 5 | % |
|
Predecessor |
Boise Inc. |
Predecessor |
Combined |
|||||
---|---|---|---|---|---|---|---|---|---|
|
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2008 |
January 1 Through February 21, 2008 |
Three Months Ended March 31, 2008 |
|||||
Paper | 14 | % | 15 | % | 13 | % | 14 | % | |
Packaging | 4 | % | 5 | % | 6 | % | 6 | % |
We experienced higher chemical costs during first quarter 2008, compared with 2007, due primarily to chemical market supply and demand dynamics.
Labor. Labor costs tend to increase steadily due to inflation in healthcare and wage costs. Labor costs are not as volatile as energy and wood fiber costs. As of March 31, 2008, we had approximately 4,600 employees. Approximately 2,750, or 60%, of these employees work pursuant to collective bargaining agreements. We are currently in negotiations for our Wallula packaging facility (126 employees represented by the United Steelworkers). This year, labor contracts will expire at our converting facility in Jackson, Alabama (106 employees represented by the United Steelworkers) in June and at our packaging plant in Salem, Oregon (92 employees represented by the Association of Western Pulp & Paper Workers) in December. We do not expect material work interruptions or increases in our costs during the course of the negotiations with our collective bargaining units. Nevertheless, if our expectations are not accurate, we could experience a material labor disruption or
28
significantly increased labor costs at one or more of our facilities, any of which could prevent us from meeting customer demand or reduce our sales and profitability.
Inflationary and seasonal influences. Our major costs of production are labor, wood fiber, energy, and chemicals. Fiber costs in the Pacific Northwest are relatively high by historical standards. Energy costs, particularly for electricity, natural gas, and fuel oil, have been volatile in recent years and currently exceed historical standards. We have also seen higher chemical costs in the current year, compared with historical standards. In addition to these increases over historical levels, we experience some seasonality, based primarily on buying patterns associated with particular products. For example, the demand for our corrugated containers is influenced by agricultural demand in the Pacific Northwest. In addition, seasonally cold weather increases costs, especially energy consumption, at all of our manufacturing facilities.
Annual Results of Operations
The following tables set forth the results of operations for BPP in dollars and as a percentage of sales for the years ended December 31, 2005, 2006 and 2007:
|
Year Ended December 31 |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
|||||||
|
(dollars in millions) |
|||||||||
Sales | ||||||||||
Trade | $ | 1,479.5 | $ | 1,567.4 | $ | 1,636.6 | ||||
Related parties | 649.5 | 654.6 | 696.0 | |||||||
2,129.0 | 2,222.0 | 2,332.6 | ||||||||
Costs and expenses |
||||||||||
Materials, labor, and other operating expenses | 1,840.3 | 1,874.4 | 1,948.2 | |||||||
Fiber costs from related parties | 32.4 | 30.4 | 39.4 | |||||||
Depreciation, amortization, and depletion | 95.4 | 116.4 | 84.6 | |||||||
Selling and distribution expenses | 55.2 | 59.8 | 59.5 | |||||||
General and administrative expenses | 36.4 | 44.5 | 44.5 | |||||||
Other (income) expense, net | (4.3 | ) | 2.7 | (4.1 | ) | |||||
2,055.4 | 2,128.2 | 2,172.1 | ||||||||
Income from operations | $ | 73.6 | $ | 93.8 | $ | 160.5 | ||||
|
Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
||||
|
(percentage of sales) |
||||||
Sales |
|||||||
Trade | 69.5 | % | 70.5 | % | 70.2 | % | |
Related parties | 30.5 | 29.5 | 29.8 | ||||
100.0 | % | 100.0 | % | 100.0 | % | ||
Costs and expenses |
|||||||
Materials, labor, and other operating expenses | 86.4 | % | 84.4 | % | 83.5 | % | |
Fiber costs from related parties | 1.5 | 1.4 | 1.7 | ||||
Depreciation, amortization, and depletion | 4.5 | 5.2 | 3.6 | ||||
Selling and distribution expenses | 2.6 | 2.7 | 2.6 | ||||
General and administrative expenses | 1.7 | 2.0 | 1.9 | ||||
Other (income) expense, net | (0.2 | ) | 0.1 | (0.2 | ) | ||
96.5 | % | 95.8 | % | 93.1 | % | ||
Income from operations | 3.5 | % | 4.2 | % | 6.9 | % | |
29
Sales Volumes and Prices
Set forth below are BPP's segment sales volumes and average net selling prices for BPP's principal products for the years ended December 31, 2005, 2006, and 2007:
|
Year Ended December 31 |
||||||||
---|---|---|---|---|---|---|---|---|---|
|
2005 |
2006 |
2007 |
||||||
|
(thousands of short tons, except corrugated containers and sheets) |
||||||||
Paper | |||||||||
Uncoated free sheet | 1,516 | 1,497 | 1,475 | ||||||
Containerboard (medium) | 128 | 132 | 134 | ||||||
Market pulp | 142 | 112 | 145 | ||||||
1,786 | 1,741 | 1,754 | |||||||
Packaging & Newsprint |
|||||||||
Containerboard (linerboard)(1) | 452 | 266 | 239 | ||||||
Newsprint | 408 | 411 | 415 | ||||||
Corrugated containers and sheets | 4,770 | 6,599 | 6,609 | ||||||
(dollars per short ton, except corrugated containers and sheets) |
|||||||||
Paper | |||||||||
Uncoated free sheet | $ | 742 | $ | 802 | $ | 864 | |||
Containerboard (medium) | 330 | 392 | 435 | ||||||
Market pulp | 396 | 440 | 538 | ||||||
Packaging & Newsprint |
|||||||||
Containerboard (linerboard)(1) | $ | 349 | $ | 355 | $ | 389 | |||
Newsprint | 491 | 533 | 489 | ||||||
Corrugated containers and sheets ($/msf) | 50 | 50 | 53 |
Operating Results
2007 Compared With 2006
Sales
Total sales increased $110.6 million, or 5%, to $2,332.6 million in 2007 compared with $2,222.0 million in 2006. Relative to 2006, sales increased in BPP's paper and packaging and newsprint segments. The increase in both of the paper businesses was driven by improved pricing in 2007 relative to 2006. In addition, in both businesses, the weak U.S. dollar helped reduce the competitiveness of imports while increasing the competitiveness of U.S. exports.
Paper. Sales increased $101.5 million, or 7%, to $1,596.2 million in 2007 from $1,494.7 million in 2006. The increase in sales was the result of increased sales price, as producers closed, converted, or curtailed operations to keep production balanced with demand.
Packaging and Newsprint. Sales increased $16.6 million, or 2%, to $783.1 million in 2007 from $766.5 million in 2006. The increase in sales was driven by increased sales prices for corrugated products and linerboard, offset in part by lower sales prices for newsprint. The increase in sales prices for corrugated products was due to strong demand, while the decrease in newsprint sales prices was driven by continued lower demand trends, due in part to the growth of online media.
30
Costs and Expenses
Materials, labor, and other operating expenses, including fiber costs from related parties, expenses increased $82.8 million, or 4%, to $2.0 billion in 2007 from $1.9 billion in 2006. Compared with 2006, fiber costs increased approximately $19.0 million and $25.4 million in BPP's paper and packaging and newsprint segments, respectively. These increases in fiber costs resulted primarily from a 12% per ton increase and 25% per ton increase in wood costs in BPP's paper and packaging and newsprint segments. In BPP's paper segment, fiber costs increased in early 2007, compared with 2006, as a result of reduced residual availability in the Pacific Northwest and higher purchased pulp and purchased wastepaper costs. In BPP's packaging and newsprint segment, fiber costs increased, as unusually wet weather in Louisiana reduced access to lowland forests, forcing BPP to procure wood from further distances. Compared with 2006, chemical costs increased by $9.6 million and $3.8 million, in BPP's paper and packaging and newsprint segments, respectively, as a result of higher prices for many of the commodity chemical inputs to BPP's processes. BPP's paper segment's chemical cost increases were the result of higher prices for pulp, bleaching and additives. In addition, BPP experienced increased fixed costs. These increases were offset in part by $7.1 million in lower energy costs in these segments.
Depreciation, amortization, and depletion expenses decreased $31.8 million, or 27%, to $84.6 million in 2007 from $116.4 million in 2006. The year ended December 31, 2007, included $41.8 million of lower depreciation and amortization expense as a result of discontinuing depreciation and amortization on the assets recorded as held for sale in conjunction with the Acquisition. Of the $41.8 million of lower depreciation and amortization expense, $21.7 million related to BPP's paper segment and $19.1 million related to its packaging and newsprint segment, respectively. This reduction in depreciation and amortization expenses was partially offset by an increase in depreciation expense as the result of BPP's review of the estimated useful lives of some of its depreciable assets earlier in the year and determining that some of its assets would be used for a shorter period of time than the depreciable lives previously assigned to them. As a result, BPP revised its depreciation estimates to reflect the remaining expected use of the assets. This change in estimates increased depreciation, amortization, and depletion expenses by approximately $11.0 million in 2007 and $10.0 million in 2006.
Selling and distribution expenses decreased $0.3 million to $59.5 million in 2007 from $59.8 million in 2006. As a percentage of sales, selling and distribution expenses decreased to 2.6% in 2007 from 2.7% in 2006.
General and administrative expenses were flat at $44.5 million for 2007 and 2006.
Other (income) expense, net includes miscellaneous income and expense items. The components of "Other (income) expense, net" in the Consolidated Statements of Income are as follows:
|
Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2006 |
2007 |
|||||
|
(millions) |
||||||
Changes in retiree healthcare programs | $ | (3.7 | ) | $ | (4.4 | ) | |
Sales of assets, net | 3.0 | (0.1 | ) | ||||
Project costs | 2.7 | 0.3 | |||||
Other, net | 0.7 | 0.1 | |||||
$ | 2.7 | $ | (4.1 | ) | |||
Income (Loss) From Operations
Income from operations increased $66.7 million, or 71%, from $93.8 million in 2006 to $160.5 million in 2007. The increase was primarily the result of improved performance in the paper segment, offset in part by lower income in the packaging and newsprint segments.
31
Paper. Segment income increased $70.2 million, or 111%, to $133.5 million for 2007, compared with $63.3 million in 2006. The increase was driven by higher sales prices, offset in part by higher fiber and chemical costs. As a result of the proposed sale of BPP, Boise Cascade suspended depreciation and amortization of its long-lived assets in September 2007, which reduced depreciation and amortization during 2007 by approximately $21.7 million.
Packaging and Newsprint. Segment income decreased $5.2 million, or 11%, from $45.3 million in 2006 to $40.1 million for 2007. The decrease was driven primarily by lower newsprint prices, coupled with higher fiber costs, offset in part by higher prices for corrugated products and linerboard. Partially offsetting the unfavorable impacts on segment income was $19.1 million of lower depreciation and amortization expenses as a result of the pending sale of the paper and packaging, and newsprint businesses.
Other
Income tax provision. During the years ended December 31, 2007 and 2006, BPP's effective tax rates for its separate subsidiaries that are taxed as corporations were 44.1% and 37.4%, respectively. The primary reason for the difference in tax rates is the effect of state income taxes and the mix of domestic and foreign sources of income.
2006 Compared With 2005
Sales
Total sales increased $93.0 million, or 4%, to $2.2 billion in 2006 from $2.1 billion in 2005. Relative to the year ended December 31, 2005, sales increased in both paper and packaging and newsprint segments. The increase in sales in BPP's paper segment was driven primarily by higher prices. The increase in packaging and newsprint segment sales was driven primarily by the addition of CTC and higher prices, as relatively firm markets and little or no increase in capacity led to tighter supply/demand dynamics, which allowed producers to raise prices.
Paper. Sales increased $79.5 million, or 6%, to $1,494.7 million in 2006 from $1,415.2 million in 2005. The increase in sales was primarily due to the increase in the price of commodity uncoated free sheet paper, which was 10% higher than the same period a year ago. In addition, prices for premium and specialty papers, corrugating medium, and market pulp increased 2%, 19%, and 11%, respectively. In 2006, BPP took 4,000 tons of market-related downtime related to uncoated free sheet paper production, compared with 17,000 tons in 2005. In third quarter 2005, BPP lost approximately 3,500 tons of uncoated free sheet paper production due to Hurricanes Dennis and Katrina. Overall sales volumes of uncoated free sheet paper decreased 2%. Contributing to the drop in sales volume was a 21% decrease in the sales volume of market pulp, as BPP reduced production at its St. Helens pulp and paper mill due to difficulty sourcing an adequate volume of wood chips at acceptable prices. During 2006, as a result of the shortage of chips in the Northwest, BPP reduced pulp production at its St. Helens mill by approximately 20,000 tons. In addition, sales volumes in uncoated free sheet paper decreased 1%. During the fourth quarter 2006, BPP chose to build inventory to cover planned production downtime in early 2007 at its Wallula mill to implement the capital project to produce both pressure sensitive paper and commodity uncoated free sheet paper grades. The decrease in uncoated free sheet paper sales volumes occurred largely in the fourth quarter, as demand declined seasonally. Corrugating medium sales volumes were modestly higher in 2006, compared with 2005.
Packaging and Newsprint. Sales increased $34.9 million, or 5%, to $766.5 million in 2006 from $731.6 million in 2005. The increase was driven primarily by increased corrugated sheet sales from CTC, coupled with increased sales prices for both linerboard and newsprint, which were up 2% and 9%, respectively. These increases were partially offset by lower linerboard sales volumes due, in part, to
32
the adoption of EITF 04-13 and lower sales of linerboard, as BPP moved more of its linerboard through its own converting plants. Excluding the impact of EITF 04-13 (which nets out any trade sales), linerboard sales volumes decreased 1%, compared with 2005. Had EITF 04-13 been in effect in 2005, it would have reduced sales $69.6 million. In 2006, BPP took 9,000 tons of market-related downtime, compared with 13,000 tons in 2005. In both periods, the market-related downtime was primarily in newsprint. In third quarter 2005, BPP lost approximately 9,500 tons of linerboard production and 8,200 tons of newsprint production due to Hurricane Rita.
Costs and Expenses
Materials, labor, and other operating expenses, including fiber costs from related parties, increased $32.1 million, or 2%, to $1,904.8 million in 2006 from $1,872.7 million in 2005. The increase was due primarily to higher raw material costs in both of BPP's segments. Fiber, chemical, and energy costs were higher year over year in both segments. Compared with 2005, fiber costs increased approximately $32.8 million and $5.3 million in the Company's paper and packaging and newsprint segments, respectively. The increase in fiber costs in BPP's paper segment partially resulted from a 9% per ton increase in wood costs and a 16% per ton increase in purchased pulp costs, comparing 2006 with 2005. Chemical costs increased approximately $23.0 million and $8.1 million in BPP's paper and packaging and newsprint segments, respectively. Energy costs increased approximately $5.4 million and $6.9 million in BPP's paper and packaging and newsprint segments, respectively. During 2006, BPP's energy costs were approximately $18.1 million higher than they would have been had BPP not hedged its exposure to changing prices through derivative instruments. Chemical costs in BPP's paper and packaging and newsprint segments were higher, as suppliers increased prices to reflect increases in their energy costs. Chemical costs in BPP's uncoated free sheet business were also higher due to the move by the industry to higher brightness for commodity cut-size papers, which requires the use of more chemicals. In addition, BPP experienced higher compensation and benefit costs reflecting general inflation in wages and benefits. Compared with 2005, labor costs increased approximately $5.1 million and $8.7 million in the Company's paper and packaging and newsprint segments, respectively. These costs decreased approximately $1.0 million in BPP's corporate and other segment. As a percentage of sales, materials, labor, and other operating expenses decreased slightly to 85.8% in 2006 from 87.9% in 2005.
Depreciation, amortization, and depletion expenses increased $21.0 million, or 22%, to $116.4 million in 2006 from $95.4 million in 2005. The increase was primarily the result of BPP's review of the estimated useful lives of some of its depreciable assets and determining that some assets would be used for a shorter period of time than the depreciable lives previously assigned to them. As a result, BPP revised its depreciation estimates to reflect the remaining expected use of the assets. This change in estimate increased depreciation, amortization, and depletion expenses by approximately $10 million in 2006.
Selling and distribution expenses increased $4.6 million, or 8%, to $59.8 million in 2006 from $55.2 million in 2005. In 2006, BPP's paper segment recorded a $2.3 million write-off of bad debt related to the bankruptcy of a customer. In addition, distribution expenses increased in 2006, as compared to 2005, due to increased freight rates coupled with an increased percentage of truck shipments relative to rail shipments.
General and administrative expenses increased $8.1 million, or 22%, to $44.5 million in 2006 from $36.4 million in 2005. General and administrative expenses as a percentage of sales increased 0.3% in 2006, from 1.7% in 2005 to 2.0% in 2006. Relative to 2005, general and administrative expenses increased primarily due to higher outside professional fees, benefit costs, training expenditures, and lease costs.
33
Other (income) expense, net includes miscellaneous income and expense items. The components of "other (income) expense, net" in the Consolidated Statements of Income are as follows:
|
Year Ended December 31 |
||||||
---|---|---|---|---|---|---|---|
|
2005 |
2006 |
|||||
|
(dollars in millions) |
||||||
Changes in retiree healthcare programs | $ | (5.2 | ) | $ | (3.7 | ) | |
Sales of assets, net | 0.8 | 3.0 | |||||
Project costs | | 2.7 | |||||
Other, net | 0.1 | 0.7 | |||||
$ | (4.3 | ) | $ | 2.7 | |||
Income (Loss) From Operations
Income from operations increased $20.2 million, or 28%, from $73.6 million in 2005 to $93.8 million for 2006. The increase was primarily the result of improved performance in both the paper and packaging and newsprint segments.
Paper. Segment income increased $5.8 million, or 10%, to $63.3 million for 2006, compared with $57.5 million for 2005. This increase was due primarily to higher prices. Partially offsetting the higher prices were increases in raw material and manufacturing costs, including fiber, chemicals, compensation and benefits, and energy. Chemical cost increases were primarily the result of increases in prices from suppliers and, to a lesser extent, the conversion to higher brightness in uncoated free sheet paper grades. In addition, BPP experienced a reduction in market pulp sales, as it curtailed operations at its St. Helens, Oregon, pulp mill in response to high wood costs.
Packaging and Newsprint. Segment income increased $21.5 million, or 90%, to $45.3 million for 2006, compared with $23.8 million for 2005. The increase was primarily the result of higher linerboard and newsprint prices. The addition of CTC also contributed to improved segment income. These improvements were offset, in part, by increased depreciation, compensation and benefits, fiber, energy, and chemical costs. The year ended December 31, 2005, included downtime taken as a result of Hurricane Rita.
Other
Income Tax provision. During the years ended December 31, 2006 and 2005, BPP's effective tax rates for its separate subsidiaries that are taxed as corporations were 37.4% and 40.8%, respectively. The primary reason for the difference in tax rates is the effect of state income taxes.
34
Quarterly Results of Operations
The following table sets forth operating results in dollars and as a percentage of sales for the three months ended March 31, 2008, the period of February 1 (inception) through March 31, 2007, and the Predecessor periods of January 1 through February 21, 2008, and the three months ended March 31, 2007 (in millions, except for percent of sales data):
|
Boise Inc. |
Predecessor |
Boise Inc. |
Predecessor |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
February 1 (Inception) Through March 31, 2007 |
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2008 |
January 1 Through February 21, 2008 |
|||||||||
Sales | |||||||||||||
Trade | $ | | $ | 402.9 | $ | 226.1 | $ | 258.4 | |||||
Related parties | | 175.8 | 1.9 | 101.5 | |||||||||
| 578.7 | 228.0 | 359.9 | ||||||||||
Costs and expenses | |||||||||||||
Materials, labor, and other operating expenses | | 488.0 | 195.4 | 313.9 | |||||||||
Fiber costs from related parties | | 11.0 | 18.6 | 7.7 | |||||||||
Depreciation, amortization, and depletion | | 30.8 | 12.7 | 0.5 | |||||||||
Selling and distribution expenses | | 14.3 | 6.0 | 9.1 | |||||||||
General and administrative expenses | | 9.4 | 4.6 | 6.6 | |||||||||
Other (income) expense, net | | 2.4 | | (1.0) | |||||||||
| 555.9 | 237.3 | 336.8 | ||||||||||
Income (loss) from operations | $ | | $ | 22.8 | $ | (9.3) | $ | 23.1 | |||||
Sales | |||||||||||||
Trade | | % | 69.6 | % | 99.1 | % | 71.8 | % | |||||
Related parties | | 30.4 | 0.9 | 28.2 | |||||||||
| % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Costs and expenses | |||||||||||||
Materials, labor, and other operating expenses | | % | 84.3 | % | 85.7 | % | 87.2 | % | |||||
Fiber costs from related parties | | 1.9 | 8.2 | 2.2 | |||||||||
Depreciation, amortization, and depletion | | 5.3 | 5.6 | 0.1 | |||||||||
Selling and distribution expenses | | 2.5 | 2.6 | 2.5 | |||||||||
General and administrative expenses | | 1.7 | 2.0 | 1.9 | |||||||||
Other (income) expense, net | | 0.4 | | (0.3) | |||||||||
| % | 96.1 | % | 104.1 | % | 93.6 | % | ||||||
Income (loss) from operations | | % | 3.9 | % | (4.1 | )% | 6.4 | % | |||||
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Quarterly Sales Volumes and Prices
Set forth below are segment sales volumes and average net selling prices for our principal products for the three months ended March 31, 2008, the Predecessor period of January 1 through February 21, 2008, the combined three months ended March 31, 2008, the period of February 1 (inception) through March 31, 2007, the Predecessor three months ended March 31, 2007, and the combined three months ended March 31, 2007:
|
Boise Inc. |
Predecessor |
Combined |
Boise Inc. |
Predecessor |
Combined |
||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
February 1 (Inception) Through March 31, 2007 |
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2007 |
Three Months Ended March 31, 2008 |
January 1 Through February 21, 2008 |
Three Months Ended March 31, 2008 |
||||||||||||
|
(thousands of short tons, except corrugated containers and sheets) |
|||||||||||||||||
Paper | ||||||||||||||||||
Uncoated free sheet | | 380 | 380 | 154 | 236 | 390 | ||||||||||||
Containerboard (medium) | | 32 | 32 | 15 | 19 | 34 | ||||||||||||
Market pulp | | 23 | 23 | 13 | 20 | 33 | ||||||||||||
| 435 | 435 | 182 | 275 | 457 | |||||||||||||
Packaging | ||||||||||||||||||
Containerboard (linerboard) | | 65 | 65 | 12 | 36 | 48 | ||||||||||||
Newsprint | | 107 | 107 | 29 | 56 | 85 | ||||||||||||
Corrugated containers and sheets (mmsf) | | 1,634 | 1,634 | 640 | 914 | 1,554 | ||||||||||||
(dollars per short ton, except corrugated containers and sheets) |
||||||||||||||||||
Paper | ||||||||||||||||||
Uncoated free sheet | $ | | $ | 846 | $ | 846 | $ | 890 | $ | 868 | $ | 877 | ||||||
Containerboard (medium) | | 423 | 423 | 454 | 454 | 454 | ||||||||||||
Market pulp | | 516 | 516 | 568 | 535 | 548 | ||||||||||||
Packaging |
||||||||||||||||||
Containerboard (linerboard) | $ | | $ | 375 | $ | 375 | $ | 386 | $ | 399 | $ | 396 | ||||||
Newsprint | | 524 | 524 | 512 | 494 | 500 | ||||||||||||
Corrugated containers and sheets ($/mmsf) | | 51 | 51 | 56 | 55 | 55 |
Sales and Costs for the Combined Three Months Ended March 31, 2008 Compared With the Three Months Ended March 31, 2007
The following presents a discussion of sales and costs for the combined three months ended March 31, 2008, compared with the same period in 2007. The combined three months ended March 31, 2008, represent the results of Boise Inc. for the three months ended March 31, 2008, and the results of the Predecessor for the period from January 1 through February 21, 2008.
Management believes this combined presentation of the Boise Inc. and Predecessor statement of operations is the most useful comparison between periods. The Acquisition was accounted for in accordance with SFAS No. 141, Business Combinations, resulting in a new basis of accounting from those previously reported by the Predecessor. However, sales and most operating cost items are substantially consistent with those reflected by the Predecessor. Some inventories were revalued in accordance with purchase accounting rules. Depreciation changed as a result of adjustments to the fair values of property and equipment due to our preliminary purchase allocation. These items, along with changes in interest expense and income taxes, are explained independently where appropriate.
36
Sales
For the combined three months ended March 31, 2008, total sales increased $9.2 million, or 2%, to $587.9 million from $578.7 million during the three months ended March 31, 2007. The increase was primarily driven by an 8% increase in paper segment sales resulting from both higher prices and higher volumes, offset by an 11% decline in packaging segment sales driven mainly by reduced sales volumes as a result of completely shutting down the DeRidder mill for planned maintenance. The shutdown resulted in 19 days of lost linerboard production and 12 days of lost newsprint production.
Paper. Sales increased $30.7 million, or 8%, to $425.7 million for the combined three months ended March 31, 2008, from $395.0 million for the three months ended March 31, 2007. This increase was driven by continued strong demand and favorable market conditions in the first quarter of 2008. Commodity paper sales volumes increased 6%, compared with first quarter 2007. Total premium and specialty volumes declined 4% due to declining sales in mature printing and converting market segments such as lightweight opaque, card stock, and certain envelope grades. The sales volume of our target grades of label and release, flexible packaging, and premium office grades grew 6%, compared with first quarter 2007. Net sales prices increased across all major paper grades, including a 4% increase for our commodity products and a 3% increase on label and release, flexible packaging, and premium office grades.
Packaging. Sales decreased $20.6 million, or 11%, to $173.4 million for the combined three months ended March 31, 2008, from $194.0 million for the three months ended March 31, 2007. The decrease was largely driven by a 26% reduction in linerboard sales volume and a 20% reduction in newsprint sales volume due to the DeRidder outage and 5% lower newsprint pricing, compared with first quarter 2007. Containerboard demand was stable and pricing favorable as linerboard pricing improved 6% and corrugated container and sheet pricing improved 8%. Newsprint pricing, although lower than first quarter 2007 levels, has improved in the first quarter of 2008, compared with fourth quarter of 2007, in conjunction with accelerated capacity reductions across the industry.
Costs and Expenses
Materials, labor, and other operating expenses, including the cost of fiber from related parties, increased $36.6 million, or 7%, to $535.6 million for the combined three months ended March 31, 2008, from $499.0 million during the three months ended March 31, 2007. The increase was driven primarily by increased fixed costs, mainly maintenance, associated with the DeRidder outage and higher fiber, energy, and chemical prices, partially offset by lower usage due to the outage.
Fiber, energy, and chemical costs were $127.3 million, $82.8 million, and $62.0 million, respectively, for the combined three months ended March 31, 2008, and $127.1 million, $82.8 million, and $53.5 million, respectively, for the three months ended March 31, 2007. Fiber costs increased $4.3 million in our paper segment, primarily due to rapidly increasing chip prices in the Pacific Northwest during the second half of the first quarter as a result of a reduced supply of residual chips, increased waste paper costs, primarily at our Jackson, Alabama, recycling plant, and increased prices of wood in our Alabama operating region. In packaging, fiber costs decreased $4.1 million due to reduced consumption as a result of the outage and lower costs to access timber stands. Overall wood prices were higher, however, driven in part by increased diesel costs to harvest and transport logs.
Compared with the three months ended March 31, 2007, energy costs increased $1.1 million in our paper segment, driven by higher costs for fuel and electricity, and decreased $1.1 million in our packaging segment, driven by reduced usage during the outage, partially offset by higher natural gas pricing.
Chemical costs increased $5.3 million in our paper segment and $3.2 million in our packaging segment, driven mainly by substantial price increases for commodity chemical inputs.
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Under purchase accounting rules, in connection with the Acquisition we revalued our finished goods inventory to estimated selling prices less costs of disposal and a reasonable profit allowance for the selling effort, and we eliminated previously established profit in inventory reserves. As a result of these purchase accounting adjustments, our materials, labor, and other operating expenses will increase approximately $11.5 million, of which $6.5 million was recognized during the three months ended March 31, 2008, with the balance to be recognized during the second quarter of 2008.
Depreciation, amortization, and depletion for the three months ended March 31, 2008, was $12.7 million, which includes depreciation, amortization, and depletion for the period from February 22, 2008, through March 31, 2008. This amount is based on our preliminary purchase price allocation, which may change as we complete our final allocation. For the Predecessor period of January 1 through February 21, 2008, depreciation, amortization, and depletion was $0.5 million due to the suspension of depreciation for the assets being held for sale as a result of the Acquisition. For the Predecessor three months ended March 31, 2007, depreciation, amortization, and depletion was $30.8 million.
Selling and distribution expenses increased $0.8 million, or 5%, to $15.1 million for the combined three months ended March 31, 2008, from $14.3 million during the three months ended March 31, 2007. As a percentage of sales, selling and distribution expenses remained flat.
General and administrative expenses increased $1.8 million, or 18%, to $11.2 million for combined three months ended March 31, 2008, from $9.4 million during the three months ended March 31, 2007. Relative to the three months ended March 31, 2007, the increase related primarily to higher professional fees and information technology costs as we implemented a new information technology system in our Paper segment.
Other (income) expense, net. Other (income) expense net, includes miscellaneous income and expense items. During the three months ended March 31, 2008, we had $28,000 of other income, which represented primarily miscellaneous income items. The components of Other (income) expense, net include income from a net gain on sales of assets of $1.0 million for the Predecessor period January 1 through February 21, 2008, and $2.4 million of expense that consists of a net loss on sales of assets of $1.0 million, project costs of $0.2 million, and other nonoperating expenses of $1.2 million for the three months ended March 31, 2007.
Income (loss) from operations. Overall, we estimate that our operating results for the three months ended March 31, 2008, were negatively affected by approximately $20.5 million due to the DeRidder outage and by $6.5 million from inventory purchase price adjustments.
Other
Interest income. For the combined three months ended March 31, 2008, interest income was $2.0 million, compared with $0.1 million for the three months ended March 31, 2007. Interest income is primarily attributable to income from interest earned on trust assets held by Aldabra 2 Acquisition Corp. prior to the Acquisition.
Interest expense. For the three months ended March 31, 2008, interest expense was $11.4 million, of which $9.6 million was for unrelated third-party debt, $1.0 million was for related-party debt, and $0.8 million was for amortization of deferred financing fees. Interest expense is attributable to our new long-term debt and amortization of deferred financing costs incurred in connection with that debt. At March 31, 2008, our long-term debt, excluding related-party debt, was $1,019.7 million, and our net debt, defined as long-term and short-term debt owed to unrelated third parties plus current portion of long-term debt less cash and cash equivalents, was $1,005.7 million. Compared with February 22, 2008, net debt decreased $22.0 million from $1,027.7 million. The debt of Boise Cascade was not allocated to the Predecessor in the financial statements included in this registration statement.
38
Income taxes. For the three months ended March 31, 2008, we recorded $3.4 million of income tax benefits related to losses incurred during the quarter. We have not recognized $4.1 million of tax benefit from the losses resulting from its first-quarter operations, because the realization of these benefits is not considered more likely than not. Because of its pass-through tax structure, the Predecessor recorded tax expense related only to small subsidiaries that are taxed as corporations.
Industry Mergers and Acquisitions
In early 2007, two of our major competitors in the uncoated free sheet paper business, Domtar Inc. and Weyerhaeuser Company, combined their uncoated free sheet paper businesses. This combination has resulted in a larger and potentially much stronger competitor than the two companies operating their paper businesses independently.
In October 2007, Abitibi-Consolidated Inc., which sold the newsprint we produced at our DeRidder mill pursuant to a long-standing marketing agreement, completed a merger with Bowater Incorporated, another major newsprint producer. As a part of the merger, the merged company, AbitibiBowater, assumed rights and responsibilities of Abitibi-Consolidated Inc., under the newsprint marketing agreement currently with the Company.
In March 2008, two of our major competitors announced their intention to combine their packaging businesses when International Paper agreed to acquire Weyerhaeuser's containerboard operations. This combination, if it is realized, would create a larger and potentially much stronger competitor. The impact of this merger on our operations and results is uncertain at this time.
Acquisitions
On February 1, 2006, BPP purchased the assets of CTC in Waco, Texas, for an aggregate purchase price of $43.8 million, including fees and expenses, but before working capital adjustments. In 2006, BPP paid approximately $42.6 million of cash for the acquisition, which is net of a $2.0 million holdback that is payable in five years. At December 31, 2007 and 2006, "Other long-term liabilities" on BPP's Consolidated Balance Sheet included a $1.5 million and a $1.4 million discounted holdback (including accrued accretion expense). CTC manufactures corrugated sheets that it sells primarily to regional container plants in Texas, Louisiana, Arkansas, and Mexico. CTC is located close to BPP's mill in DeRidder, Louisiana, which produces linerboard used in CTC's manufacturing processes. BPP accounted for the acquisition using the purchase method of accounting. As a result, the purchase price was allocated to the tangible and intangible assets acquired and liabilities assumed based on its respective fair values as of the date of the acquisition.
Divestitures
The Company may engage in divestiture discussions with other companies and make divestitures from time to time. The Company reviews its operations and disposes of assets that fail to meet its criteria for return on investment or cease to warrant retention for other reasons.
Liquidity and Capital Resources
We believe that funds generated from operations and available borrowing capacity will be adequate to fund debt service requirements, capital expenditures, and working capital requirements for the next 12 months. Our ability to continue to fund these items may be affected by general economic, financial, competitive, legislative, and regulatory factors.
We cannot assure that our business will generate sufficient cash flow from operations or that future borrowings will be available for use under our revolving credit facility in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.
39
Historical Annual Cash Flows
Operating Activities
BPP operated in a cyclical industry, and its operating cash flows varied accordingly. BPP's principal operating cash expenditures were for compensation, fiber, energy and chemicals. For 2007 and 2006, BPP's operating activities provided $248.8 million and $172.9 million of cash, respectively.
Relative to 2006, the increase in cash provided by operations relates to changes in working capital and higher net income. Working capital and other items used $3.8 million in 2007, compared to $51.9 million in 2006. Working capital is subject to cyclical operating needs, the timing of the collection of receivables, the payment of payables and expenses, and to a lesser extent, seasonal fluctuations in BPP's operations. The $3.8 million unfavorable change in 2007 was comprised primarily of $13.3 million of payments for pension and other postretirement benefit programs, partially offset by a decrease in working capital which provided $9.7 million. The decrease in working capital was primarily attributable to higher accounts payable and accrued liabilities in the paper segment, due largely to the timing of payments. Items included in net income provided $252.6 million of cash in 2007, compared to $224.8 million in 2006. As discussed above, the 2007 increase in income was primarily the result of higher income in the paper segment due to higher product sales prices.
For 2006, BPP's operating activities provided $172.9 million of cash, compared with $143.4 million provided in 2005. Relative to 2005, the increase in cash provided by operations relates primarily to higher product prices in both paper and packaging and newsprint segments. Unfavorable changes in working capital used $37.2 million of cash from operations. Working capital is subject to cyclical operating needs, the timing of the collection of receivables, the payment of payables and expenses, and to a lesser extent, seasonal fluctuations in BPP's operations. In 2006, the increase in working capital was primarily attributable to increased inventories in the paper segment offset in part, by overall increased accounts payable and accrued liabilities. The higher levels of inventory in the paper segment reflect inventory built in anticipation of planned mill downtime in the spring of 2007.
In 2005, operating activities provided $143.4 million of cash. Items included in net income provided $176.8 million of cash. Working capital and other items used $33.4 million. Unfavorable changes in working capital used $22.8 million of cash from operations. In 2005, the increase in working capital and other items was primarily attributable to higher overall receivables and increased inventories, which were offset, in part, by overall increased accounts payable and accrued liabilities.
Investment Activities
Cash investing activities used $158.4 million in 2007, compared with $145.9 million in 2006, and $81.9 million in 2005. In all periods, capital expenditures for property and equipment consisted primarily of expansion, business improvement and quality/efficiency projects, replacement projects, and ongoing environmental compliance.
2007
In 2007, investing activities included $141.8 million of capital expenditures for the purchase of property, plant, and equipment. Approximately $45 million of BPP's expenditures for property, plant, and equipment related to the reconfiguration of the paper machine at the Company's pulp and paper mill in Wallula to produce both pressure sensitive paper and commodity uncoated free sheet. Also included in this amount is $10 million of spending related to the installation of a shoe press in the Company's DeRidder mill to reduce BPP's use of energy in producing linerboard. Investing activities also included $14.2 million of proceeds from the sale of assets. In 2007, BPP received approximately $5.2 million (net of cash costs paid to buyer) from the sale of its paper converting facility in Salem, Washington. Additionally, in 2007, BPP received approximately $3.7 million and $3.2 million of
40
proceeds from the sale of a portion of its Wallula, Washington, fiber farm and Jackson, Alabama sawmill.
Investing activities in 2007 also used $32.5 million of cash to pay amounts owed to OfficeMax under the Additional Consideration Agreement. As part of the Forest Products Acquisition, Boise Cascade entered into an Additional Consideration Agreement with OfficeMax, pursuant to which it agreed to adjust the purchase price based on changes in paper prices over the six-year period following the Forest Products Acquisition. Under the Additional Consideration Agreement, Boise Cascade could pay to OfficeMax, or OfficeMax could pay to Boise Cascade, a maximum aggregate amount of $125.0 million, in each case net of payments received. After each anniversary of the Forest Products Acquisition, Boise Cascade reviews paper prices with the provisions of the Additional Consideration Agreement to determine whether any amounts are owed or receivable under the agreement. For the first and second anniversary periods, which ended October 29, 2005 and 2006, neither Boise Cascade nor OfficeMax owed additional consideration for the purchase price. Based on paper prices during the third anniversary period ended October 29, 2007, Boise Cascade paid OfficeMax $32.5 million. This payment increased goodwill in BPP's paper segment. This agreement terminated as a result of the Acquisition, and consequently, Boise Cascade will neither receive payments from, nor make subsequent payments to, OfficeMax under this agreement.
Details of 2007 capital investment by segment are included in the table below:
|
Year Ended December 31, 2007 |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Acquisition/ Expansion |
Quality/ Efficiency (a) |
Replacement, Environmental, and Other |
Total |
||||||||
|
(millions) |
|||||||||||
Paper(b) | 50.5 | 12.5 | 40.4 | 103.4 | ||||||||
Packaging(c) | 9.8 | 5.8 | 22.6 | 38.2 | ||||||||
Corporate and Other | | | 0.2 | 0.2 | ||||||||
$ | 60.3 | $ | 18.3 | $ | 63.2 | $ | 141.8 | |||||
The Company expects capital investments in 2008 to total approximately $110 million to $120 million, excluding acquisitions. This level of capital expenditures could increase or decrease as a result of a number of factors, including the Company's financial results and future economic conditions. The Company's capital spending in 2008 will be for expansion, business improvement and quality/efficiency projects, replacement projects, and ongoing environmental compliance. During 2007, BPP spent $4 million on environmental compliance. The Company expects to spend approximately $1 million in 2008 for this purpose.
41
2006
Cash investing activities used $145.9 million during the year ended December 31, 2006, compared with $81.9 million during the same period in 2005. During the year ended December 31, 2006, investing activities included $109.1 million of capital expenditures for the purchase of property and equipment. Investing activities also included approximately $42.6 million of cash paid for the purchase of CTC's assets in Waco, Texas. These expenditures were partially offset by $3.8 million of proceeds from sales of assets.
2005
During the year ended December 31, 2005, investing activities included $100.9 million of capital expenditures for the purchase of property and equipment. The expenditures were partially offset by $14.5 million of proceeds related to the sales of assets.
Financing Activities
BPP has historically been operated as a business of Boise Cascade. BPP's financing activities have historically consisted of intercompany loans.
Historical Quarterly Cash Flows
Operating Activities
We operate in a cyclical industry, and our operating cash flows vary accordingly. Our principal operating cash expenditures are for compensation, fiber, energy, and interest. For the three months ended March 31, 2008 and 2007, operating activities provided $28.7 million and $27.8 million of cash, respectively.
Relative to 2007, cash provided by operations was negatively affected by lower combined net income for the three months ended March 31, 2008. Lower net income in first quarter 2008 reflects the impact of the DeRidder outage, as well as higher interest expense and inventory purchase price adjustments.
Offsetting the decrease in net income was a favorable change in working capital, compared with the first quarter of 2007. In the first quarter of 2008, favorable changes in working capital contributed $6.5 million of cash to operations, while unfavorable changes in working capital used $30.4 million of cash in the first quarter of 2007. Working capital is subject to cyclical operating needs, the timing of the collection of receivables, the payment of payables and expenses, and to a lesser extent, seasonal fluctuations in our operations.
In first quarter 2008, changes in working capital primarily reflect an increase in accounts payable and accrued expenses, the net effect of which was partially offset by an increase in prepaid corporate expenses. The higher levels of accounts payable and accrued expenses reflect higher trade accounts payable in the packaging segment, due in large part to increased costs associated with the DeRidder outage. In addition, the packaging segment had a significant increase in accounts payable to related parties for fiber purchases, which have historically been sourced internally. Accounts receivable for the packaging segment decreased, which reflects a lower level of sales for March 2008, compared with December 31, 2007, as March sales were impacted by lost production during the DeRidder outage. To a lesser extent, also contributing to the favorable change in working capital was an increase in trade payables for the paper segment, which reflected an increase in fiber costs.
In addition to the increase in prepaid corporate expenses, these favorable changes in working capital were also partially offset by lower levels of accrued compensation, which reflect bonus payouts by the Predecessor across all segments in first quarter 2008. Accounts receivable increased for the
42
paper segment and the Corporate and Other segment. Increased receivables in the Paper segment reflect a higher level of sales for March 2008, compared with December 31, 2007. The increase in accounts receivable for the Corporate segment reflects related-party receivables for the trucking business.
Investment Activities
Acquisition
On February 22, 2008, we acquired the Paper, Packaging, and most of the Corporate and Other segments of Boise Cascade for a total purchase price of $1.7 billion, which included $1.3 billion of net cash and fees. We obtained $1.1 billion of financing in conjunction with the Acquisition, which is discussed below in "Financing Activities."
Combined investing activities of Boise Inc. and Predecessor
Cash investing activities used $814.9 million for the three months ended March 31, 2008, compared with $29.4 million during the same period in 2007. For the three months ended March 31, 2008, investing activities included $1.2 billion in cash spent for the Acquisition, excluding deferred financing fees, as discussed above.
Combined cash capital expenditures for property, plant, and equipment for the three months ended March 31, 2008, was $20.4 million. This amount includes $10.2 million spent by the Predecessor for the period from January 1, 2008, through February 21, 2008, and $10.2 million spent by us from February 22, 2008, through March 31, 2008. Of these amounts, $7.1 million relates to the installation of a shoe press in our DeRidder, Louisiana mill to reduce the use of energy in producing linerboard. We estimate total capital spending of $23 million for the project. As of March 31, 2008, cumulative cash spending on this project totaled $19.1 million, with the balance to be paid in 2008.
For the three months ended March 31, 2007, cash investing activities included $33.0 million of capital expenditures for the purchase of property, plant, and equipment. Approximately $17 million of these expenditures relate to the reconfiguration of the paper machine at our pulp and paper mill in Wallula, Washington, to produce both pressure sensitive paper and commodity uncoated free sheet.
Financing Activities
Cash provided by financing activities was $811.0 million for the three months ended March 31, 2008, which reflects approximately $1.1 billion of debt financing obtained in conjunction with the Acquisition, partially offset by $120.2 million paid to stockholders who exercised their conversion rights, $94.3 million of deferred financing costs and underwriting fees, and $35.0 million of debt repayments. Prior to the Acquisition, financing activities have historically consisted primarily of intercompany loans obtained by the Predecessor.
For the three months ended March 31, 2008, cash payments for interest, net of interest capitalized, was $8.5 million.
Following the Acquisition
We expect the primary sources of our liquidity to be cash flows from operations. We also have availability under our $250 million revolving credit facility, under which we had $163 million of availability at May 31, 2008 after taking into account letters of credit totaling approximately $22 million. We expect that our primary liquidity requirements will be debt service, working capital and capital expenditures. As described in the contractual obligations table that follows this discussion (under "Contractual Obligations"), we estimate debt repayment to be approximately $8.3 million for 2008 based on the amortization schedule set forth in the First Lien Facilities, and our expected debt
43
service obligation, assuming our debt outstanding and interest rates stay at May 31, 2008 levels, is estimated to be approximately $84 million in cash interest payments and fees per annum. A 1% increase in interest rates would increase interest expense by approximately $6 million per annum (based on rates at May 31, 2008). For 2008, we estimate our capital expenditures will be approximately $110 million to $120 million. Capital expenditures for the foreseeable future thereafter are expected to be between $110 million to $130 million per year, excluding acquisitions and extraordinary capital projects. Notwithstanding our substantial debt service and capital requirements, based on our current estimates, we anticipate that cash flows from operations will be sufficient to operate our business, service our debt and make capital expenditures. This belief is based on our assumptions regarding our anticipated operating performance in 2008, which in turn is based on our assumptions regarding a variety of factors, including increased sales based on RISI estimates of 2008 paper and packaging prices and increased sales volumes primarily due to the installation of a shoe press in our DeRidder plant that we expect to increase capacity and reduce costs. In addition, these assumptions are based on many other factors beyond our control, including but not limited to, general economic activity, financial market conditions, competitors' actions, and the regulatory environment.
At March 31, 2008, our short- and long-term debt was as follows:
|
Boise Inc. |
|||
---|---|---|---|---|
|
March 31, 2008 |
|||
|
(millions) |
|||
Revolving credit facility, due 2013 | $ | 45.0 | ||
Tranche A Term Loan, due 2013 | 250.0 | |||
Tranche B Term Loan, due 2014 | 475.0 | |||
Second Lien Term Loan, due 2015 | 260.7 | |||
Current portion of long-term debt | (11.0 | ) | ||
Long-term debt, less current portion | 1,019.7 | |||
Current portion of long-term debt | 11.0 | |||
1,030.7 | ||||
15.75% Related-party note, due 2015 | 58.8 | |||
$ | 1,089.5 | |||
Senior Secured Credit Facilities
Our new senior secured credit facilities consist of:
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All borrowings under the Credit Facilities bear interest at a rate per annum equal to an applicable margin plus a customary base rate or Eurodollar rate. The base rate means, for any day, a rate per annum equal to the greater of (i) the Prime Rate in effect on such day and (ii) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. In addition to paying interest, we pay a commitment fee to the lenders under the Revolving Credit Facility at a rate of 0.50% (which shall be reduced to 0.375% when the leverage ratio is less than 2.25:1.00) per annum times the daily average undrawn portion of the Revolving Credit Facility (reduced by the amount of letters of credit issued and outstanding), which fee accrues from the Acquisition closing date and shall be payable quarterly in arrears.
Our obligations under our Credit Facilities are guaranteed by each of Boise Paper Holdings, L.L.C.'s (the "Borrower") existing and subsequently acquired domestic (and, to the extent no material adverse tax consequences to BZ Intermediate Holdings LLC, formerly Aldabra Holding Sub LLC ("Holdings") or Borrower would result there from and as reasonably requested by the administrative agent under each Credit Facility), foreign subsidiaries and Holdings (collectively, the "Guarantors"). The First Lien Facilities are secured by a first priority security interest in substantially all of the real, personal and mixed property of Borrower and the Guarantors, including a first priority security interest in 100% of the equity interests of Borrower and each domestic subsidiary of Holdings, 65% of the equity interests of each of Holdings' foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does not account for more than $2,500,000 of consolidated EBITDA during any fiscal year of Borrower) and all intercompany debt. The Second Lien Facility is secured by a second priority security interest in substantially all of the real, personal and mixed property of Borrower and the Guarantors, including a second priority security interest in 100% of the equity interests of Borrower and each domestic subsidiary of Holdings, 65% of the equity interests of each of Holdings' foreign subsidiaries (other than Boise Hong Kong Limited so long as Boise Hong Kong Limited does not account for more than $2,500,000 of consolidated EBITDA during any fiscal year of Borrower) and all intercompany debt.
In the event all or any portion of the Tranche B Term Loan Facility is repaid pursuant to any voluntary prepayments or mandatory prepayments with respect to asset sale proceeds or proceeds received from the issuance of debt prior to February 22, 2010, such repayments will be made at (a) 102.0% of the amount repaid if such repayment occurs prior to February 22, 2009 and (b) 101.0% of the amount repaid if such repayment occurs on or after February 22, 2009 and prior to February 22, 2010.
Subject to the provisions of the intercreditor agreement between the First Lien Facility and the Second Lien Facility, in the event the Second Lien Facility is prepaid as a result of a voluntary or mandatory prepayment (other than as a result of a mandatory prepayment with respect to insurance/condemnation proceeds or excess cash flow) at any time prior to February 22, 2011, a prepayment premium equal to the "make-whole premium" as described below will be due.
At any time after February 22, 2011 and prior to February 22, 2014, subject to the provisions of the First Lien Facilities, the Second Lien Facility may be prepaid in whole or in part subject to the "call premium" as described below; provided that loans bearing interest with reference to the reserve adjusted Eurodollar rate will be prepayable only on the last day of the related interest period unless we pay any related breakage costs.
The "make-whole premium" means, with respect to a Second Lien Facility loan on any date of prepayment, the present value of (a) all required interest payments due on such Second Lien Facility loan from the date of prepayment through and including the make-whole termination date (excluding accrued interest) (assuming that the interest rate applicable to all such interest is the swap rate at the close of business on the third business day prior to the date of such prepayment with the termination date nearest to the make-whole termination date plus 7.00%) plus (b) the prepayment premium that would be due if such prepayment were made on the day after the make-whole termination date, in
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each case discounted to the date of prepayment on a quarterly basis (assuming a 360-day year and actual days elapsed) at a rate equal to the sum of such swap rate plus 0.50%.
The "call premium" means, in the event all or any portion of the Second Lien Facility is repaid as a result of a voluntary prepayment or mandatory prepayment with respect to asset sale proceeds or proceeds received from the issuance of debt after February 22, 2011 and prior to February 22, 2014, such repayments will be made at (i) 105.0% of the amount repaid if such repayment occurs on or after February 22, 2011 and prior to February 22, 2012, (ii) 103.0% of the amount repaid if such repayment occurs on or after February 22, 2012 and prior to February 22, 2013 and (iii) 101.0% of the amount repaid if such repayment occurs on or after February 22, 2013 and prior to February 22, 2014.
Subject to specified exceptions, the Credit Facilities require that the proceeds from certain asset sales, casualty insurance, certain debt issuances and 75% (subject to step downs based on certain leverage ratios) of the excess cash flow for each fiscal year must be used to pay down outstanding borrowings. Required debt principal repayments, excluding those from excess cash flows, total $8.3 million for 2008; $15.7 million in 2009; $26.6 million in 2010; $48.5 million in 2011; $134.4 million in 2012; and $797.2 million thereafter.
The loan documentation for the Credit Facilities contains, among other terms, representations and warranties, covenants, events of default and indemnification customary for loan agreements for similar leveraged acquisition financings and other representations and warranties, covenants and events of default deemed by the administrative agent of the First Lien Facilities or the Second Lien Facility, as applicable, to be appropriate for the specific transaction. The First Lien Facilities require Holdings and its subsidiaries to maintain a minimum interest coverage ratio and a maximum leverage ratio, the Second Lien Facility requires Holdings and its subsidiaries to maintain a maximum leverage ratio and the Credit Facilities limit the ability of Holdings and its subsidiaries to make capital expenditures.
In connection with the Acquisition, we entered into the Seller Note with Boise Cascade, as partial consideration. With the exception of the subsidiaries party to the Credit and Guaranty Agreement, dated as of February 22, 2008, by and among Boise Paper Holdings, L.L.C., BZ Intermediate Holding Sub LLC, our other subsidiaries party thereto, the lenders and agents party thereto, Goldman Sachs Credit Partners L.P., as joint lead arranger, administrative agent, and collateral agent, and Lehman Brothers Inc., as joint lead arranger, each of our current and future domestic subsidiaries are joint and several obligors under this Seller Note. On February 22, 2008, certain of our subsidiaries entered into a Subordinated Guaranty Agreement, guaranteeing our obligations to Boise Cascade under the Seller Note.
On May 22, 2008, we and our wholly owned subsidiary, Boise Paper Holdings, L.L.C., entered into a letter agreement with Boise Cascade and its wholly owned subsidiary, Boise Cascade, L.L.C., confirming the final settlement of the post closing working capital adjustments required by Sections 1E(iv) and 1F(i) of the Purchase and Sale Agreement between and among such entities and certain of their affiliates dated September 7, 2007, as amended. The letter agreement confirms that, as a result of such post closing working capital adjustments, the principal amount of the Promissory Note dated February 22, 2008, which was issued by Boise Inc. to Boise Cascade Holdings, L.L.C. pursuant to the requirements of the Purchase and Sale Agreement, was increased by $17,333,850.44, to a revised principal amount of $58,333,850.44. Under the terms of the Seller Note and the Purchase and Sale Agreement, such change was effective February 22, 2008. Boise Cascade may freely transfer the Seller Note to one or more parties. Such a transfer would neither affect the amount of nor the terms of the Seller Note.
The Seller Note bears interest at 15.75% per annum (computed on the basis of a 360-day year), payable quarterly (each such quarterly payment date, an Interest Payment Date). Interest will accrue on the Seller Note and be added to the principal amount of the Seller Note on each Interest Payment Date. The Seller Note matures on August 21, 2015, provided that if such date is more than 181 days
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after the scheduled maturity date of the indebtedness under the Credit Facilities, then the maturity date shall automatically be deemed to be 181 days after the latest maturity date of any such indebtedness. The amount of the Seller Note at maturity is expected to be approximately $180.2 million.
We may prepay the Seller Note at any time in whole or in part, without premium or penalty, subject to any restrictions contained in our senior credit facilities. We must prepay the Seller Note upon the occurrence of the following events: (i) a Change of Control (as defined in the Credit Facilities); (ii) a sale or transfer of 50% or more of our assets; and (iii) Events of Default (as provided in the Seller Note). We must use the proceeds from the sale of equity or debt securities or borrowings to repay the Seller Note, subject to any restrictions contained in our senior credit facilities. Any post-closing adjustments to the purchase price in connection with the Acquisition resulting in a payment owed to us will be effected by means of a reduction in the principal amount of the Seller Note.
At March 31, 2008, we had $81.1 million of costs recorded in "Deferred financing costs" on our Consolidated Balance Sheet related to the Acquisition. The amortization of these costs is recorded in interest expense using the effective interest method over the life of the loans. We recorded $0.8 million of amortization expense for the three months ended March 31, 2008.
Contractual Obligations
In the table below, we set forth our enforceable and legally binding obligations as of March 31, 2008. Some of the amounts included in the table are based on management's estimates and assumptions about these obligations, including their duration, the possibility of renewal, anticipated actions by third parties, and other factors. Because these estimates and assumptions are necessarily subjective, our actual payments may vary from those reflected in the table. Purchase orders made in the ordinary course of business are excluded from the table below. Any amounts for which we are liable under purchase orders are reflected on the Consolidated Balance Sheets as accounts payable and accrued liabilities.
|
Payments Due by Period |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Remainder of 2008 |
2009-2010 |
2011-2012 |
Thereafter |
Total |
|||||||||||
|
(millions) |
|||||||||||||||
Long-term debt, including current portion(a) | $ | 8.3 | $ | 42.3 | $ | 182.9 | $ | 797.2 | $ | 1,030.7 | ||||||
Interest(b) | 62.7 | 164.5 | 154.9 | 112.9 | 495.0 | |||||||||||
Note payable to related-party(c) | | | | 180.2 | 180.2 | |||||||||||
Operating leases(d) | 8.7 | 20.4 | 14.6 | 22.4 | 66.1 | |||||||||||
Purchase obligations | ||||||||||||||||
Raw materials and finished goods inventory(e) | 73.0 | 75.9 | 20.5 | 19.5 | 188.9 | |||||||||||
Utilities(f) | 18.0 | 11.5 | 0.6 | 0.4 | 30.5 | |||||||||||
Capital spending | 0.4 | | | | 0.4 | |||||||||||
Other | 8.9 | 6.7 | 0.1 | | 15.7 | |||||||||||
Other long-term liabilities reflected on our Balance Sheet | ||||||||||||||||
Compensation and benefits(g) | 0.6 | 31.0 | 27.7 | 0.3 | 59.6 | |||||||||||
Other | 3.0 | 6.2 | 6.4 | 17.8 | 33.4 | |||||||||||
$ | 183.6 | $ | 358.5 | $ | 407.7 | $ | 1,150.7 | $ | 2,100.5 | |||||||
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Operations. The table assumes our long-term debt is held to maturity and includes the current portion of long-term debt.
In addition to the contractual obligations quantified in the table above, we have other obligations for goods and services and raw materials entered into in the normal course of business.
Off-Balance-Sheet Activities
At March 31, 2008, and December 31, 2007 and 2006, we had no material off-balance-sheet arrangements with unconsolidated entities. The Predecessor had no material off-balance-sheet arrangements with unconsolidated entities at December 31, 2007.
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Guarantees
Note 16, Commitments and Guarantees, of the notes to BPP's consolidated financial statements describes the nature of BPP's guarantees, including the approximate terms of the guarantees, how the guarantees arose, the events or circumstances that would require us to perform under the guarantees, and the maximum potential undiscounted amounts of future payments we could be required to make.
Inflationary and Seasonal Influences
Other than the effects of higher energy costs, which is described elsewhere in this document, we believe inflation has not had a material effect on its financial condition or results of operations. However, there can be no assurance that we will not be affected by inflation in the future. Our paper businesses experience some seasonality, based primarily on buying patterns associated with particular products. For example, the demand for our corrugated container plants are influenced by changes in agricultural shipments in the Pacific Northwest. In addition, seasonally cold weather increases costs, especially energy consumption, at most of our manufacturing facilities.
Disclosures of Financial Market Risks
We are exposed to market risks such as changes in interest rates and energy prices.
Interest rates
The consolidated financial statements of BPP do not include an allocation of Boise Cascade's debt or interest because none of these items was identified as corporate advances to, or borrowings by, BPP. Boise Cascade used interest rate swaps to hedge variable interest rate risk; however, because debt and interest costs were not allocated to BPP, the effects of the interest rate swaps are not included in BPP's consolidated financial statements.
Following the Acquisition, our market risks relate primarily to changes in interest rates. The indebtedness under the new credit facilities bears interest at variable rates and indebtedness the Seller Note also bears interest at variable rates. Because this debt bears variable interest rates tied to market indices, our results of operations and cash flows are exposed to changes in interest rates. At May 31, 2008 we have approximately $1,051 million of variable debt under our new credit facilities and approximately $61 million under the subordinated promissory note to Boise Cascade. Following the Acquisition, our initial cash interest payments and fees per annum (assuming interest rates and debt outstanding at May 31, 2008 levels) are approximately $84 million These rates reflect assumptions with respect to the Debt Financing, which assumptions are subject to changes that could be material. If interest rates increased 100 basis points, the Company's annual interest expense would increase by approximately $6 million based on rates at May 31, 2008. See the section entitled "Unaudited Pro Forma Condensed Consolidated Financial Statements" to this prospectus.
In April 2008, we entered into interest rate derivative instruments to hedge a portion of our interest rate risk as required under the terms of the First Lien Facilities. We purchased interest rate caps with a term of 3 years and a cap rate of 5.50% on a notional amount of $260.0 million to hedge the interest rate on our Second Lien Facility. We also purchased interest rate caps to hedge part of the interest rate risk on our Tranche B Term Loan Facility with a cap rate of 5.00% on a notional amount of $425 million for the period April 21, 2008, through March 31, 2009; a notional amount of $350 million for the period March 31, 2009, through March 31, 2010; a notional amount of $300 million for the period March 31, 2010, through March 31, 2011.
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Energy Risk
We have had significant exposure to price changes for energy, particularly for natural gas. To reduce its exposure, Boise Cascade entered into a variety of contracts to limits its susceptibility to short-term changes in energy costs. Boise Cascade enters into natural gas swaps, options, or a combination of these instruments to hedge its exposure to natural gas price movements. As of December 31, 2007, Boise Cascade has also entered into derivative instruments related to approximately 23% of forecasted natural gas purchases through March 2008, 3% of forecasted natural gas purchases from July 2008 through October 2008, and 2% of forecasted natural gas purchases from November 2008 through March 2009. BPP has elected to account for these instruments as economic hedges and record the changes in fair value in "Materials, labor, and operating expenses" in the Consolidated Statements of Income (Loss). In April and May 2008, we entered into derivative instruments to hedge additional exposure related to natural gas prices.
Environmental
We are subject to a wide range of general and industry-specific environmental laws and regulations. In particular, we are affected by laws and regulations covering air emissions, wastewater discharges, solid and hazardous waste management, and site remediation. Compliance with these laws and regulations is a significant factor in our operations. We believe we have a corporate culture of strong compliance by taking a conservative approach to environmental issues in order to assure that we are operating well within the bounds of regulatory requirements. However, we cannot assure you that it will at all times be in full compliance with environmental requirements, and it cannot assure you that it will not incur fines and penalties in the future. In 2007, Boise Cascade paid $4,125 in environmental fines and penalties across all of its segments.
BPP has incurred, and we expect to incur, substantial capital and operating expenditures to comply with federal, state, and local environmental laws and regulations. Failure to comply with these laws and regulations could result in civil or criminal fines or penalties or in enforcement actions. Our failure to comply could also result in governmental or judicial orders that stop or interrupt our operations or require us to take corrective measures, install additional pollution control equipment, or take other remedial actions. During 2007, BPP spent approximately $4.0 million on capital expenditures to comply with environmental requirements. We anticipate capital expenditures of approximately $1.0 million in 2008 to comply with environmental requirements and expect to spend similar or greater amounts on environmental capital expenditures in the years ahead.
As an owner and operator of real estate, we may be liable under environmental laws for the cleanup of past and present spills and releases of hazardous or toxic substances on or from its properties and operations. We can be found liable under these laws if we knew of, or were responsible for, the presence of such substances. In some cases, this liability may exceed the value of the property itself.
OfficeMax retained responsibility for environmental liabilities that occurred with respect to businesses, facilities, and other assets not purchased by Madison Dearborn Partners, L.L.C. ("Madison Dearborn") from OfficeMax in the 2004 Transaction. In addition, OfficeMax generally indemnifies our operating subsidiaries, Boise White Paper and BP&N for hazardous substance releases and other environmental violations that occurred prior to the 2004 Transaction at the businesses, facilities, and other assets purchased by such subsidiaries. However, OfficeMax may not have sufficient funds to fully satisfy its indemnification obligations when required, and in some cases, we may not be contractually entitled to indemnification by OfficeMax.
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Critical Accounting Estimates
Critical accounting estimates are those that are most important to the portrayal of our financial condition and results. These estimates require management's most difficult, subjective, or complex judgments, often as a result of the need to estimate matters that are inherently uncertain. We review the development, selection, and disclosure of our critical accounting estimates with the Audit Committee of our board of directors. Our current critical accounting estimates are as follows:
AcquisitionsPurchase Price Allocation
We account for acquisitions in accordance with the provisions of SFAS No. 141, Business Combinations. We assign to all identifiable assets acquired (including intangible assets), and to all identifiable liabilities assumed, a portion of the cost of the acquired company equal to the estimated fair value of such assets and liabilities at the date of acquisition. We record the excess of the cost of the acquired company over the sum of the amounts assigned to identifiable assets acquired less liabilities assumed, if any, as goodwill.
We have made a preliminary purchase price allocation in connection with our Acquisition of the Paper, Packaging, and most of the Corporate and Other segments of Boise Cascade. This purchase price allocation is preliminary and will remain so until we complete a third-party valuation and have obtained all the necessary information to make fair value determinations. Once our purchase price allocation is completed, we may have changes to the amounts recorded in our preliminary allocation. If necessary, we have up to one year after the closing date of our Acquisition to finish these fair value determinations and finalize the purchase price allocation.
Long-Lived Asset Impairment
We account for the impairment of long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. An impairment of a long-lived asset exists when the carrying value of an asset exceeds its fair value and when the carrying value is not recoverable through future undiscounted cash flows from operations. We review the carrying value of long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of assets may not be recoverable.
Long-lived asset impairment is a critical accounting estimate, as it is susceptible to change from period to period. To estimate whether the carrying value of an asset or asset group is impaired, we estimate the undiscounted cash flows that could be generated under a range of possible outcomes. To measure future cash flows, we are required to make assumptions about future production volumes, future product pricing, and future expenses to be incurred. In addition, estimates of future cash flows may change based on the availability of logs and fiber, environmental requirements, capital spending, and other strategic management decisions. We estimate the fair value of an asset or asset group based on quoted market prices (the amount for which the asset(s) could be bought or sold in a current transaction with a third party) when available. When quoted market prices are not available, we use a discounted cash flow model to estimate fair value.
We currently believe that we have adequate support for the carrying value of all of our assets based on anticipated cash flows that will result from our estimates of future demand, pricing, and production costs, assuming certain levels of capital expenditures. However, should the markets for our products deteriorate significantly or should we decide to invest capital differently and should other cash flow assumptions change, it is possible that we will be required to record noncash impairment charges that could have a material impact on our results of operations. Due to the numerous variables associated with our judgments and assumptions relating to the valuation of assets and the effects of changes on these valuations, both the precision and reliability of our estimates are subject to uncertainty. As additional information becomes known, we may change our estimates.
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Goodwill and Intangible Asset Impairment
We account for acquisitions under the purchase method of accounting, typically resulting in goodwill. Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and intangible assets of businesses acquired. We account for goodwill in accordance with the provisions of SFAS No. 142, Goodwill and Other Intangible Assets, which requires assessing acquired goodwill and intangible assets with indefinite lives for impairment at least annually in the absence of an indicator of possible impairment and immediately upon an indicator of possible impairment. We assess goodwill and intangible assets with indefinite lives in the fourth quarter of each year using a fair-value-based approach. We also evaluate the remaining useful lives of their finite-lived purchased intangible assets to determine whether any adjustments to the useful lives are necessary. At December 31, 2007, intangible assets with indefinite lives consisted of some trade names and trademarks, while finite-lived intangible assets consisted of customer relationships, technology, and other trade names.
At December 31, 2007, BPP had $42.2 million of goodwill recorded on its Consolidated Balance Sheet, of which $33.9 million was in the paper segment and $8.3 million was in the packaging and newsprint segment. At December 31, 2007, intangible assets with indefinite lives was $13.9 million and the net carrying amount of finite-lived purchase intangible assets was $10.1 million.
Because the selling price for the paper and packaging and newsprint segments reached in the Purchase Agreement exceeds the carrying value of the assets held for sale, no impairment exists for the assets included in these segments. During fourth quarter 2007, BPP performed its annual impairment assessment of goodwill and indefinite-lived intangible assets for all of its segments in accordance with the provisions of SFAS No. 142. BPP concluded that no impairment existed in any of its segments. BPP also evaluated the remaining useful lives of its finite-lived purchased intangible assets and determined no adjustments to the useful lives were necessary.
In testing for potential impairment, BPP measured the estimated fair value of BPP's reporting units based upon discounted future operating cash flows using a discount rate reflecting its estimated average cost of funds. Differences in assumptions used in projecting future operating cash flows and cost of funds could have a significant impact on the determination of the fair value of BPP's reporting units.
In estimating future cash flows for BPP's segments, BPP used internal budgets. The budgets were based on recent sales data for existing products, planned timing of capital projects, and customer commitments related to new and existing products. These budgets also included assumptions of future production volumes and pricing of commodity products. Due to the inherent volatility of commodity product pricing, pricing assumptions were based on the average pricing over the commodity cycle. These prices were estimated from information gathered from industry research firms, research reports published by investment analysts, and other published forecasts. If Boise Cascade's estimates of projected future cash flows from income from operations were too high by 10%, there would be no impact on the reported value of goodwill on Boise Cascade's Consolidated Balance Sheet.
BPP assessed the finite-lived purchased intangible assets, noting that no impairment indicators were present to suggest that the amortization period needed to be adjusted.
Due to the numerous variables associated with BPP's judgments and assumptions relating to the valuation of the reporting units and the effects of changes in circumstances on these valuations, both the precision and reliability of the resulting estimates are subject to uncertainty. As additional information becomes known, the Company may change these estimates.
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Pensions
Prior to completion of the Acquisition, BPP participated in Boise Cascade's noncontributory defined benefit pension plans, and its employees are treated as participants in multiemployer plans. Accordingly, there are no assets or liabilities related to defined benefit pension plans recorded on the BPP's Consolidated Balance Sheets. BPP did, however, incur costs associated with BPP's employees who participated in Boise Cascade's plans in the Consolidated Statements of Income. During 2005, 2006, and 2007, BPP incurred $13.8 million, $14.4 million and $13.1 million of pension expenses, respectively. In connection with the Acquisition, Boise Cascade spun off the pension plan assets and liabilities that pertained to the employees of Boise Paper Holdings. As of the closing date, Boise Paper Holdings assumed the sponsorship of and responsibilities under the spun off pension plans. Boise Paper Holdings also assumed the sponsorship of two additional pension plans that related solely to Boise Paper Holdings employees.
BPP and the Company account for pension expense in accordance with SFAS No. 87, Employers' Accounting for Pensions. This statement requires the calculation of pension expense and liabilities using actuarial assumptions, including discount rates, expected return on plan assets, expected rate of compensation increases, retirement rates, mortality rates, expected contributions, and other factors. BPP based the assumptions used in this analysis to calculate pension expense on the following factors:
Discount Rate Assumption. The discount rate assumption was determined using a spot rate yield curve constructed to replicate Aa-graded corporate bonds. The plan's projected cash flows were duration-matched to this yield curve to develop an appropriate discount rate.
Asset Return Assumption. The expected rate of return on plan assets was based on the average rate of earnings expected on invested funds.
Rate of Compensation Increases. This assumption reflected long-term actual experience, the near-term outlook, and assumed inflation.
Retirement and Mortality Rates. These rates were developed to reflect actual and projected plan experience.
Expected Contributions. Plan obligations and expenses were based on existing retirement plan provisions. No assumption was made regarding future changes to benefit provisions beyond those to which the Company is presently committed. For example, changes the Company might commit to in future labor contracts are not included.
We believe that the accounting estimate related to pensions is a critical accounting estimate because it is highly susceptible to change from period to period. As discussed above, the future effects of pension plans on our financial position and results of operations will depend on economic conditions, employee demographics, mortality rates, retirement rates, investment performance, and funding decisions, among other factors. The following table presents selected assumptions used and expected to be used in the measurement of pension expense in the following periods:
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|
Year Ended December 31, |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Year Ending December 31, 2008 |
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|
2007 |
2006 |
||||||||
|
(millions, except for percentages) |
|||||||||
Pension expense | $ | 10.0 | $ | 13.1 | $ | 14.4 | ||||
Discount rate | 6.50 | % | 5.90 | % | 5.60 | % | ||||
Expected rate of return on plan assets | 7.25 | % | 7.25 | % | 7.25 | % | ||||
Rate of compensation increases | 4.25 | % | 4.25 | % | 4.25 | % |
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A change of 0.25% in either direction to the discount rate, the expected rate of return on plan assets, or the rate of compensation increases would have had the following effect on 2008 and 2007 pension expense. These sensitivities are specific to 2008 and 2007. The sensitivities may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by combining the individual sensitivities shown.
|
|
Increase (Decrease) in Pension Expense |
||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Base Expense |
0.25% Increase |
0.25% Decrease |
|||||||
|
(millions) |
|||||||||
2007 Expense | ||||||||||
Discount rate | $ | 13.1 | $ | (0.4 | ) | $ | 0.4 | |||
Expected rate of return on plan assets | 13.1 | (0.8 | ) | 0.8 | ||||||
Rate of compensation increases | 13.1 | 0.2 | (0.2 | ) | ||||||
2008 Expense |
||||||||||
Discount rate | $ | 10.0 | $ | (0.3 | ) | $ | 0.3 | |||
Expected rate of return on plan assets | 10.0 | (0.7 | ) | 0.7 | ||||||
Rate of compensation increases | 10.0 | 0.2 | (0.2 | ) |
New and Recently Adopted Accounting Standards
In March 2008, the Financial Accounting Standards Board (FASB) issued SFAS No. 161, Disclosures About Derivative Instruments and Hedging Activities. SFAS No. 161 requires enhanced disclosures about derivative instruments and hedging activities to enable investors to better understand their effects on financial position, financial performance, and cash flows. These requirements include the disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. SFAS No. 161 is effective for fiscal years beginning after November 15, 2008, which will require us to adopt these provisions in 2009. Early adoption of SFAS No. 161 is permitted. We are currently evaluating the impact SFAS No. 161 will have on our consolidated financial statement disclosures.
In December 2007, the FASB issued SFAS No. 141(R), Business Combinations, and SFAS No. 160, Accounting and Reporting of Noncontrolling Interest in Consolidated Financial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51. These new standards will significantly change the accounting for and reporting of business combination transactions and noncontrolling (minority) interests in consolidated financial statements. SFAS Nos. 141(R) and 160 are required to be adopted simultaneously and are effective for the first annual reporting period beginning on or after December 15, 2008. Thus, we are required to adopt these standards on January 1, 2009. Earlier adoption is prohibited. We are currently evaluating the impact of adopting SFAS Nos. 141(R) and 160 on our consolidated financial statements. However, its impact will be limited to business combinations occurring on or after January 1, 2009.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. We adopted this standard January 1, 2008, and the adoption did not have an impact on our financial position or results of operations. In February 2008, the FASB issued Staff Position No. 157-2, which provides a one-year delayed application of SFAS No. 157 for nonfinancial assets and liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We must adopt these new requirements no later than our first quarter of fiscal 2009.
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In December 2006, BPP adopted SFAS No. 158, Employers' Accounting for Defined Benefit Pension and Other Postretirement PlansAn Amendment of FASB Statements No. 87, 88, 106, and 132(R), which required companies to recognize the funded status of their pension and other postretirement benefit plans on their balance sheets. It also required companies to recognize the actuarial and experience gains and losses and the prior service costs and credits as a component of other comprehensive income, net of tax. Most of BPP's employees participated in Boise Cascade's defined benefit pension plans prior to the closing of the Acquisition. BPP has treated its participants in these plans as participants in multiemployer plans. Accordingly, BPP has not reflected any assets or liabilities related to the defined benefit pension plans on its Consolidated Balance Sheets. The adoption of SFAS No. 158 did not have a material impact on BPP's financial position or results of operations.
In January 2006, BPP adopted EITF 04-13, Accounting for Purchases and Sales of Inventory With the Same Counterparty. The consensus identifies circumstances under which two or more transactions involving inventory with the same counterparty should be viewed as a single nonmonetary transaction within the scope of Accounting Principles Board (APB) Opinion No. 29, Accounting for Nonmonetary Transactions. BPP adopted this standard effective January 2006, and it required BPP to report its inventory buy/sell transactions on a net basis in its Consolidated Statements of Income. Previously, in accordance with EITF 99-19, Reporting Revenue Gross as a Principal Versus Net as an Agent, and SAB No. 104, Revenue Recognition, BPP recorded sales and purchases related to its inventory buy/sell arrangements on a gross basis. This consensus had no impact on net income. Had this consensus previously been in effect, it would have reduced sales $76.1 million for the year ended December 31, 2005, and would have reduced "Materials, labor, and other operating expenses" by about the same amount. In accordance with the provisions of EITF 04-13, prior-period financial information has not been recast to conform with the current period's presentation.
Changes in and disagreements with accountants on accounting and financial disclosure
On January 25, 2008, we were notified that the partners of Goldstein Golub Kessler LLP ("GGK"), the Company's independent registered public accounting firm, became partners of McGladrey & Pullen, LLP ("M&P") in a limited asset purchase agreement and that, as a result thereof, GGK had resigned as our independent registered public accounting firm. M&P was engaged as our new independent registered public accounting firm on January 25, 2008. The decision to engage M&P was approved by the audit committee of our board of directors.
The audit reports of GGK on our financial statements at June 22, 2007 and from the period February 1, 2007 (inception) to June 22, 2007 did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the period from February 1, 2007 (inception) through January 25, 2008, there were: (i) no disagreements between us and GGK on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of GGK, would have caused GGK to make reference to the subject matter of the disagreement in their report on our financial statements for the financial year ended December 31, 2007 and (ii) any matter that was subject of any disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
During our recent fiscal year from February 1, 2007 (inception) through February 21, 2008, we did not consult with M&P on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on our financial statements, and M&P did not provide either a written report or oral advice to us that M&P concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in
55
Item 304(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
On February 22, 2008, we dismissed M&P as our independent registered public accounting firm. As of February 22, 2008, the audit committee of the Board appointed KPMG LLP as our independent registered public accounting firm to audit our financial statements and internal control over financial reporting for the fiscal year ending December 31, 2008. KPMG LLP had previously been Boise Cascade's independent auditors.
The audit reports of M&P on our financial statements at December 31, 2007, and the results of our operations and our cash flows for the period from February 1, 2007 (date of inception) to December 31, 2007, did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
From February 1, 2007 (date of inception) through February 21, 2008, we did not consult with KPMG LLP on (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that may be rendered on our financial statements, and KPMG LLP did not provide either a written report or oral advice to us that KPMG LLP concluded was an important factor considered by us in reaching a decision as to any accounting, auditing, or financial reporting issue; or (ii) any matter that was the subject of any disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, or a reportable event within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
From February 1, 2007 (date of inception) through February 21, 2008, we have not consulted with KPMG LLP regarding either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on our financial statements, as well as any matters or reportable events described in Items 304(a)(2)(i) or (ii) of Regulation S-K.
During the period from January 25, 2008 through February 22, 2008, there were: (i) no disagreements between us and M&P on any matters of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of M&P, would have caused M&P to make reference to the subject matter of the disagreement in their report on our financial statements for the financial year ended December 31, 2007 and (ii) any matter that was subject of any disagreement, as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions, no reportable events within the meaning set forth in Item 304(a)(1)(v) of Regulation S-K.
We have given permission to M&P to respond fully to the inquiries of the successor auditors, including concerning the subject matter of any reportable events.
56
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated statement of income for the year ended December 31, 2007, combines the audited historical statement of income of the Company from February 1, 2007 (date of inception) through December 31, 2007, and the audited historical statement of income of BPP for the year ended December 31, 2007. The unaudited pro forma condensed consolidated statement of income (loss) for the three months ended March 31, 2008, combines the unaudited statement of income of the Company for the three months ended March 31, 2008, including the effects of the Acquisition subsequent to February 21, 2008, and the unaudited statement of income of BPP for the period January 1, 2008 through February 21, 2008. The pro forma income statements give effect to the Acquisition and the Debt Financing as if they had occurred on January 1, 2007.
The historical financial information has been adjusted to give effect to pro forma events that are directly attributable to the transaction, are factually supportable and, in the case of the pro forma income statements, have a recurring impact.
The Acquisition has been accounted for under the purchase method of accounting. The purchase price allocation has not been finalized and is subject to change based upon recording actual transaction costs, finalization of working capital adjustments, and completion of appraisals of tangible and intangible assets of the acquired BPP business.
This information is provided to aid you in your analysis of the financial aspects of the Acquisition and the Debt Financing. The unaudited pro forma condensed consolidated financial statements described above should be read in conjunction with the historical financial statements of the Company and BPP and the related notes. The unaudited pro forma information is not necessarily indicative of the financial position or results of operations that may have actually occurred had the Acquisition and the Debt Financing taken place on the dates noted, or the future financial position or operating results of the combined company.
57
Unaudited Pro Forma Condensed Consolidated Statement of Income
for the Year Ended December 31, 2007
|
Aldabra |
Boise Paper Products |
Pro Forma Adjustments |
Pro Forma |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||||||
Sales | ||||||||||||||
Trade | $ | | $ | 1,636,605 | $ | 615,661 | (a) | $ | 2,252,266 | |||||
Related parties | | 695,998 | (615,661 | )(a) | 80,337 | |||||||||
| 2,332,603 | | 2,332,603 | |||||||||||
Costs and expenses | ||||||||||||||
Materials, labor and other operating expenses | | 1,948,230 | | 1,948,230 | ||||||||||
Fiber costs from related parties | | 39,352 | | 39,352 | ||||||||||
Depreciation, amortization, and depletion | | 84,649 | 53,003 | (b) | 135,310 | |||||||||
(1,038 | )(b) | |||||||||||||
(1,304 | )(c) | |||||||||||||
Selling and distribution expenses | | 59,488 | | 59,488 | ||||||||||
General and administrative expenses | 340 | 44,549 | | (d) | 44,889 | |||||||||
Other (income) expense, net | | (4,142 | ) | | (4,142 | ) | ||||||||
340 | 2,172,126 | 50,661 | 2,223,127 | |||||||||||
Income (loss) from operations | (340 | ) | 160,477 | (50,661 | ) | 109,476 | ||||||||
Foreign exchange gain | | 1,184 | | 1,184 | ||||||||||
Interest expense | | | (90,793 | )(e) | (113,310 | ) | ||||||||
(9,105 | )(e) | |||||||||||||
(13,412 | )(f) | |||||||||||||
Interest income | 10,422 | 697 | | 11,119 | ||||||||||
Income before income taxes | 10,082 | 162,358 | (163,971 | ) | 8,469 | |||||||||
Income tax provision | (4,590 | ) | (2,767 | ) | 3,775 | (g) | (3,582 | ) | ||||||
Net income | $ | 5,492 | $ | 159,591 | $ | (160,196 | ) | $ | 4,887 | |||||
Earnings per share: | ||||||||||||||
Basic | $ | 0.16 | | | $ | 0.06 | ||||||||
Diluted | $ | 0.16 | | | $ | 0.06 |
See the accompanying notes to the unaudited pro forma condensed consolidated financial
statements, which are an integral part of these statements.
58
Unaudited Pro Forma Condensed Consolidated Statements of Income (Loss)
for the Three Months Ended March 31, 2008
|
Boise Inc |
Boise Paper Products January 1 February 21, 2008 |
Pro Forma Adjustments |
Pro Forma |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
(dollars in thousands) |
|||||||||||||
Sales | ||||||||||||||
Trade | $ | 226,044 | $ | 258,430 | $ | 90,053 | (a) | $ | 574,527 | |||||
Related parties | 1,944 | 101,490 | (90,053 | )(a) | 13,381 | |||||||||
227,988 | 359,920 | | 587,908 | |||||||||||
Costs and expenses | ||||||||||||||
Materials, labor and other operating expenses | 195,429 | 313,931 | | 509,360 | ||||||||||
Fiber costs from related parties | 18,629 | 7,662 | | 26,291 | ||||||||||
Depreciation, amortization, and depletion | 12,747 | 477 | 18,053 (98 305 |
(b) )(b) (c) |
31,484 | |||||||||
Selling and distribution expenses | 5,943 | 9,097 | | 15,040 | ||||||||||
General and administrative expenses | 4,549 | 6,606 | | 11,155 | ||||||||||
Other (income) expense, net | (28 | ) | (989 | ) | | (1,017 | ) | |||||||
237,269 | 336,784 | 18,260 | 592,313 | |||||||||||
Income (loss) from operations | (9,281 | ) | 23,136 | (18,260 | ) | (4,405 | ) | |||||||
Foreign exchange gain | (853 | ) | 54 | | (799 | ) | ||||||||
Interest expense | (11,435 | ) | (2 | ) | (12,899 (1,294 (1,905 |
)(d) )(d) )(e) |
(27,535 | ) | ||||||
Interest income | 1,821 | 161 | | 1,982 | ||||||||||
(10,467 | ) | 213 | (16,098 | ) | (26,352 | ) | ||||||||
Income (loss) before income taxes | (19,748 | ) | 23,349 | (34,358 | ) | (30,757 | ) | |||||||
Income tax provision | 3,377 | (563 | ) | 563 | (f) | 3,377 | ||||||||
Net income (loss) | $ | (16,371 | ) | $ | 22,786 | $ | (33,795 | ) | $ | (27,380 | ) | |||
Earnings per share: | ||||||||||||||
Basic | $ | (0.21 | ) | | | $ | (0.35 | ) | ||||||
Diluted | $ | (0.21 | ) | | | $ | (0.35 | ) |
See the accompanying notes to the unaudited pro forma condensed consolidated financial
statements, which are an integral part of these statements.
59
1. Calculation of Purchase Price
At the closing of the Acquisition, we delivered cash and securities equal to a base purchase price of $1.571 billion plus an incremental amount equal to the sum of (i) the Paper Group's cash and cash equivalents, (ii) plus or minus the amount by which BPP's paper and packaging businesses' net working capital was greater or less than $329 million, and (iii) plus the amount by which our net working capital was less than $404.4 million.
The following table reflects the sources and uses related to the Acquisition (dollars in millions):
Cash in trust held for payment to Boise Inc. stockholders that exercised their conversion rights |
$ | 120 | (1) | |
Boise Inc. cash | 270 | (2) | ||
Cash proceeds from new debt, net of issuance fees | 1,008 | |||
Subordinated note payable to Boise Cascade | 41 | (3) | ||
Non-equity consideration | 1,319 | |||
Contributed cash by Boise Cascade | (38 | )(4) | ||
Net non-equity consideration | 1,281 | |||
Equity consideration, net of lack of marketability discount | 290 | (5) | ||
Purchase price before working capital adjustments and new debt issuance fees | 1,571 | |||
Our working capital adjustment paid with equity consideration | 15 | (3) | ||
Post-closing working capital adjustments paid with subordinated note payable to Boise Cascade |
17 | (3) | ||
Debt issuance fees payable from proceeds of new debt | 57 | |||
Other fees and expenses | 4 | |||
Total purchase price after Boise Inc. working capital adjustment and new debt issuance fees, net of contributed cash | $ | 1,664 | ||
60
Cash paid to Boise Inc. shareholders that exercised their conversion rights | $ | 120 | ||
Cash paid to Boise Cascade | 1,253 | |||
Subordinated note payable to Boise Cascade | 41 | |||
Cash paid to Boise Cascade for financing and other fees | 25 | |||
Total paid | 1,319 | |||
Contributed cash by Boise Cascade | (38 | ) | ||
Net amount paid | 1,281 | |||
Equity consideration, net of lack of marketability discount | 290 | |||
Purchase price before working capital adjustments and new debt issuance fees | 1,571 | |||
Boise Inc.'s working capital adjustment paid with equity consideration | 15 | |||
Post-closing working capital adjustment paid with subordinated note payable to Boise Cascade |
17 | |||
New debt issuance fees | 57 | |||
Other fees and expenses | 4 | |||
Total purchase price after Boise Inc. working capital adjustment and new debt issuance fees, net of contributed cash | $ | 1,664 | ||
61
The allocation of the purchase price is estimated to be as follows (dollars in millions):
Current assets | $ | 591 | |||
Property and equipment | 1,292 | ||||
Fiber farms and deposits | 11 | ||||
Intangible assets | 23 | ||||
Deferred financing costs | 82 | ||||
Other assets | 5 | ||||
Current liabilities | (252 | ) | |||
Long-term liabilities | (88 | ) | |||
Total purchase price | $ | 1,664 | |||
The purchase price allocation is preliminary. The final determination of the purchase price allocation will be based on the fair values of assets acquired and liabilities assumed. The purchase price allocation will remain preliminary until we complete a third-party valuation and determine these fair values, determine actual transaction costs, and finalize working capital adjustments. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the preliminary amounts presented in the unaudited pro forma condensed consolidated financial statements.
4. Adjustments to the Unaudited Pro Forma Condensed Consolidated Statement of Income for the year ended December 31, 2007
62
|
Principal Amount |
Interest Rate |
Interest Expense |
|||||||
---|---|---|---|---|---|---|---|---|---|---|
Revolving credit facility | $ | 80.0 | 6.38 | % | $ | 5.1 | ||||
Term loan A | 250.0 | 6.38 | % | 15.9 | ||||||
Term loan B | 475.0 | 7.50 | % | 35.6 | ||||||
Second lien facility | 260.7 | 12.50 | % | 32.6 | ||||||
Note payable to related party | 57.8 | 15.75 | % | 9.1 | ||||||
$ | 1,123.5 | |||||||||
Interest, excluding amortization of deferred financing costs (1) | 98.3 | |||||||||
Ongoing fees on credit facilities | 1.6 | |||||||||
Total interest expense | 99.9 | |||||||||
Interest on note payable to related party (2) | (9.1 | ) | ||||||||
Total cash interest expense | $ | 90.8 | ||||||||
Increase in interest expense | ||||||||||
if rates on variable rate debt increased by 25 basis points | $ | 2.7 | ||||||||
5. Adjustments to the Unaudited Pro Forma Condensed Consolidated Statement of Income (Loss) for the three months ended March 31, 2008
63
Pro forma income per share was calculated by dividing pro forma net income by the weighted average number of shares as follows, assuming our initial public offering occurred on January 1, 2007.
|
Year Ended December 31, 2007 |
Three Months Ended March 31, 2008 |
|||
---|---|---|---|---|---|
Boise Inc. | 39,402,573 | 39,402,573 | |||
Boise Cascade, L.L.C. | 37,857,374 | 37,857,374 | |||
Pro forma weighted average sharesbasic | 77,259,947 | 77,259,947 | |||
Incremental shares on exercise of warrants | 10,137,705 | | (1) | ||
Pro forma weighted average sharesdiluted | 87,397,652 | 77,259,947 | |||
For purposes of the pro forma per share calculation, we assumed the stockholders that exercised their conversion rights exercised the rights on January 1, 2007.
64
General
We were originally a blank check company organized under the laws of the State of Delaware on February 1, 2007. We were formed with the purpose of effecting a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. From inception through February 21, 2008, we did not have any business or operations. Our activities were limited to raising capital in our IPO and subsequently identifying and acquiring an operating business.
On February 22, 2008, we completed the acquisition of BPP through our acquisition of Boise Paper Holdings, L.L.C. The transaction was approved by our shareholders on February 5, 2008. In conjunction with the completion of the transaction, we changed our name from Aldabra 2 Acquisition, Corp. to Boise Inc.
The paper and packaging and newsprint business units of BPP have operated as three segments: the paper segment, the packaging and newsprint segment, and the corporate and other segment (which includes BPP's transportation business and corporate staff support).
Paper
Products
Our paper segment manufactures and sells uncoated free sheet paper (including cut-size office papers, commercial printing paper, envelope papers, and a wide range of premium and specialty papers), market pulp, and corrugating medium (a component of containerboard). For all years presented, the paper segment's annual paper production was approximately 1.8 million short tons (a short ton is equal to 2,000 pounds) and its annual paper production capacity was approximately 1.9 million short tons. Many of BPP's paper products are commodity products, while others have specialized features that make these products premium or specialty grades. Our premium grades include 100% recycled, high-bright and colored cut-size office papers, and our specialty grades include custom-developed papers for such uses as label and release and flexible food packaging. We ship to customers both directly from our mills and through distribution centers. In 2007, BPP was the third largest manufacturer of uncoated free sheet paper in North America, with annual uncoated free sheet paper production capacity of approximately 1.5 million short tons and market share of approximately 12% in 2007. During 2007, uncoated free sheet paper accounted for approximately 87% of segment sales.
65
The following table sets forth the capacity and production by product for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31 |
|||||||||
|
Year Ended December 31, 2003 |
|||||||||||
|
2005 |
2006 |
2007 |
|||||||||
Capacity(a) | ||||||||||||
Uncoated free sheet | 1,580,000 | 1,576,000 | 1,576,000 | 1,550,000 | 1,547,000 | 1,484,000 | ||||||
Containerboard (medium) | 130,000 | 134,000 | 134,000 | 130,000 | 134,000 | 138,000 | ||||||
Market pulp | 230,000 | 232,000 | 232,000 | 228,000 | 224,000 | 229,000 | ||||||
1,940,000 | 1,942,000 | 1,942,000 | 1,908,000 | 1,905,000 | 1,851,000 | |||||||
Production | ||||||||||||
Uncoated free sheet | 1,379,000 | 1,203,000 | 256,000 | 1,487,000 | 1,520,000 | 1,458,000 | ||||||
Containerboard (medium) | 127,000 | 109,000 | 23,000 | 128,000 | 132,000 | 134,000 | ||||||
Market pulp | 202,000 | 184,000 | 39,000 | 229,000 | 187,000 | 221,000 | ||||||
1,708,000 | 1,496,000 | 318,000 | 1,844,000 | 1,839,000 | 1,813,000 | |||||||
Our strategy is to increase our presence in the growing premium and specialty paper markets, while reducing our exposure to shrinking commodity markets, such as converting paper for business forms. BPP increased sales of premium and specialty papers from approximately 28% of uncoated free sheet tons sold during 2004 to approximately 33% of uncoated free sheet tons sold during 2007. Some traditional communications paper markets have been declining as electronic media has developed. These declines have varied by specific products; for example, roll stock for business forms has declined significantly, while cut-size copy paper consumption has been essentially flat over the past several years as increased printer placements in home and manufacturing environments has offset reductions in office consumption. Many premium paper markets, such as recycled and colored papers have been growing. Other paper markets, such as label and release papers and flexible packaging papers, are not impacted negatively by electronic substitution. While we produce some uncoated free sheet paper for forms converting use, our commodity uncoated free sheet paper production is heavily weighted to cut-size copy paper sold through OfficeMax, which also helps facilitate sales of premium office papers, such as recycled and colored copy paper.
66
The following table sets forth packaging and newsprint segment sales; segment income (loss) before interest and taxes; depreciation, amortization, and depletion; and EBITDA for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
||||||||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31, |
|||||||||||||||
|
Year Ended December 31, 2003 |
|||||||||||||||||
|
2005 |
2006 |
2007 |
|||||||||||||||
|
(dollars in millions) |
|||||||||||||||||
Sales | $ | 1,254.8 | $ | 1,141.5 | $ | 237.6 | $ | 1,415.2 | $ | 1,494.7 | $ | 1,596.2 | ||||||
Segment income (loss) before interest and taxes | (22.9 | ) | (35.2 | ) | 17.7 | 57.5 | 63.3 | 133.5 | ||||||||||
Depreciation, amortization and depletion(a) | 136.3 | 118.5 | 8.4 | 55.2 | 62.3 | 45.0 | ||||||||||||
EBITDA(b) | $ | 113.4 | $ | 83.3 | $ | 26.2 | $ | 112.6 | $ | 125.6 | $ | 178.5 | ||||||
Our commodity-grade paper products are produced primarily on our larger paper machines in long, high-volume production runs that achieve economies of scale. On our smaller paper machines, we cost-competitively manufacture premium and specialty grades, which are increasingly displacing the production of commodity grades. Premium and specialty grades tend to require shorter production runs, generate higher and more stable prices, and have higher margins over time. Sales volumes of premium and specialty grades are more than 10% above the 436,000-ton level achieved in 2005. This increased focus on premium and specialty grades is an important component of our strategy. In support of this strategy, as of December 31, 2007, BPP had spent approximately $80 million to modify its uncoated free sheet paper machine at its Wallula, Washington mill to enable it to produce pressure sensitive papers in addition to the commodity grades it has historically produced. Pressure sensitive papers include those used in the manufacture of labels and other adhesive papers.
We also manufacture and sells market pulp. The quantity of market pulp we sell is approximately equal to the market pulp we purchase across our operating segments; therefore, any changes in the price and cost of pulp generally tend to offset one another.
Facilities
We manufacture uncoated free sheet paper at four mills in the United States. These mills had an annual capacity of 1.5 million short tons of uncoated free sheet paper as of December 31, 2007. Our uncoated free sheet paper mills are supported by converting machines that, on a net basis, can produce approximately 1 million short tons of cut- and folio-size sheets annually.
67
The following table sets forth the annual capacities of manufacturing locations in BPP's paper segment as of December 31, 2007, and production for the year then ended:
|
Number of Machines |
Capacity(1) |
Production |
||||
---|---|---|---|---|---|---|---|
|
(short tons) |
||||||
PULP AND PAPER MILLS | |||||||
Jackson, Alabama | |||||||
Uncoated free sheet | 2 | 492,000 | 488,000 | ||||
International Falls, Minnesota | |||||||
Uncoated free sheet | 4 | 533,000 | 526,000 | ||||
St. Helens, Oregon | |||||||
Uncoated free sheet | 3 | 263,000 | 260,000 | ||||
Market pulp | | 81,000 | 94,000 | ||||
Wallula, Washington | |||||||
Uncoated free sheet | 1 | 196,000 | 184,000 | ||||
Market pulp | 1 | 148,000 | 127,000 | ||||
Containerboard (medium) | 1 | 138,000 | 134,000 | ||||
12 | 1,851,000 | 1,813,000 | |||||
ANNUAL CAPACITY BY PRODUCT | |||||||
Uncoated free sheet | 1,484,000 | ||||||
Containerboard (medium) | 138,000 | ||||||
Market pulp | 229,000 | ||||||
1,851,000 | |||||||
Raw Materials and Input Costs
Wood fiber is the principal raw material in this segment. The primary sources of wood fiber are timber and its byproducts, such as wood chips, wood shavings, and sawdust. Most of our manufacturing facilities are located in close proximity to active wood markets. We have long-term market-based contracts for a portion of our fiber needs. We obtain some of our wood residuals from Boise Cascade's sawmills and wood products facilities in the Pacific Northwest and, to a lesser extent, in the South, and the remainder are purchased from outside sources. As a part of the transaction, we entered into contracts (based on market price) with Boise Cascade to continue to source this fiber based on terms and conditions traditionally used between the businesses when they operated as fully-owned segments of Boise Cascade. We also obtain fiber for our pulp mills in the Pacific Northwest from our cottonwood fiber farm near Wallula, Washington. In addition, the Company will continue to enter into fiber supply contracts with other third parties, which enable the Company to source wood at market prices.
All of our paper mills have on-site pulp production facilities. Some of our paper mills also purchase pulp from third parties pursuant to contractual arrangements. At the time these arrangements were negotiated, pulp markets were relatively soft and, as a result, we were able to negotiate attractive terms. Because the current pulp market is relatively tight, we may not be able to achieve new purchase arrangements with similarly attractive terms.
We generally purchase raw materials through contracts or open-market purchases. These contracts are generally with suppliers located in closest proximity to the specific facility they supply, and they generally contain price adjustment mechanisms to account for market price and expense volatility.
68
Our paper segment consumes substantial amounts of energy, such as electricity, natural gas, and a modest amount of fuel oil. During 2007, energy costs accounted for approximately 15% of the aggregate amount of materials, labor, and other operating expenses, including fiber costs, in this segment. We purchase substantial portions of our natural gas and electricity under supply contracts, most of which are between a specific plant and a specific local provider. Under most of these contracts, the providers are bound to provide us with all of our needs for a particular type of energy at a specific facility. Most of these contracts have pricing mechanisms that adjust or set prices based on current market prices. In addition, we also uses derivative instruments such as natural gas swaps, options, or a combination of these instruments to partially mitigate price risk for our energy requirements. In addition, we have been increasing our use of renewable biomass fuels to displace fossil fuels. Historically, these fuels have cost less than fossil fuels per unit of energy output. Some of this shift has required capital investment to convert power boilers to be able to handle biomass fuels. For example, in 2007 BPP completed a $9 million project in Wallula, Washington, which allows one of its boilers to burn wood waste (hog fuel) instead of natural gas.
Sales, Marketing, and Distribution
Our uncoated free sheet paper is sold primarily by our own sales personnel. We ship to customers both directly from our mills and through distribution centers. This allows us to respond quickly to customer requirements.
The following table sets forth sales volumes of paper and paper products for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31, |
|||||||||
|
Year Ended December 31, 2003 |
|||||||||||
|
2005 |
2006 |
2007 |
|||||||||
|
(thousands of short tons) |
|||||||||||
Commodity | 1,022 | 891 | 178 | 1,080 | 999 | 995 | ||||||
Premium and specialty | 374 | 358 | 68 | 436 | 498 | 480 | ||||||
Uncoated free sheet | 1,396 | 1,249 | 246 | 1,516 | 1,497 | 1,475 | ||||||
Containerboard (medium) | 126 | 110 | 23 | 128 | 132 | 134 | ||||||
Market pulp | 146 | 138 | 27 | 142 | 112 | 145 | ||||||
1,668 | 1,497 | 296 | 1,786 | 1,741 | 1,754 | |||||||
Customers
Our largest customer in this segment is OfficeMax. In 2007, sales to OfficeMax accounted for $615.7 million of paper segment sales. Sales to OfficeMax constituted 44% of BPP's total uncoated free sheet sales volume and 78% of its office papers sales volume. In October 2004, OfficeMax agreed to purchase from BPP its full North American requirements for cut-size office paper, to the extent BPP chooses to supply such paper to them, through December 2012. OfficeMax's purchase obligations under the Paper Supply Agreement will phase out over a four-year period (25% per year) beginning one year after the delivery of notice of termination, but in no event will the purchase obligation be reduced prior to December 31, 2012. The price for paper sold under the Paper Supply Agreement approximates market prices. However, due to the structure of the contract, price changes to OfficeMax lag the market approximately 60 days. The Paper Supply Agreement was transferred to the Company on closing of the Acquisition. The Paper Supply Agreement provides the Company with access to one of North America's largest office products sales and distribution networks, giving it a competitive advantage from the perspective of market access and customer supply-chain management.
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Prior to the Acquisition, BPP also had an agreement in place whereby it received or made additional payments to OfficeMax each year based on the average price of uncoated free sheet paper. For the first and second anniversary periods, which ended October 29, 2005 and 2006, neither BPP nor OfficeMax owed additional consideration for the purchase price. For the third anniversary period ended October 29, 2007, BPP paid OfficeMax $32.5 million. This agreement terminated as a result of the Acquisition, and consequently, the Company and BPP will neither receive payments from, nor make payments to, OfficeMax under this agreement.
In addition to OfficeMax, we have approximately 800 uncoated free sheet paper customers, none of which individually represents a material portion of our sales. Our customers include paper merchants, commercial and financial printers, paper converters such as envelope and form manufacturers, and customers who use its paper for specialty applications such as label and release products. The majority of these customers purchase products through individual purchase orders. In addition to its paper supply agreement with OfficeMax, we have long-term relationships with other customers, although no single relationship, other than the one with OfficeMax, is material to our business.
Business Plan
Our strategy in our paper segment is to maximize profitability by operating our two largest paper manufacturing machines at full capacity in the production of cut-size commodity office paper while dedicating as much production as possible on smaller machines to premium and specialty papers for a variety of markets and end uses.
We work closely with our customers to develop and manufacture innovative premium and specialty papers and to provide related service programs that respond to our customers' changing needs and technical requirements. On our smaller machines, we will continue to displace the production of commodity grades with higher-margin premium and specialty grades. By leveraging our existing customer relationships, design capabilities, competitive cost position, and efficient logistics network, we seek to expand our position as a leading North American supplier of premium and specialty papers. In support of this strategy, at December 31, 2007, BPP had spent approximately $80 million to modify its uncoated free sheet paper machine at its Wallula, Washington mill (the Wallula #3 machine), which historically produced a variety of commodity paper grades, to enable it to produce pressure sensitive papers, as well as commodity grades. Significant to the execution of our strategy is the ability to produce and sell pressure sensitive papers from the Wallula #3 machine and the ability to develop, produce and sell other premium and specialty grades on its smaller machines. Pressure sensitive paper grades, as well as other specialty grade products, are important because these categories are generally growing, while North American demand for commodity uncoated free sheet paper in total has declined over the last five years.
The long-term supply agreement with OfficeMax allows us to focus our largest paper machines on producing commodity products in long, high-volume production runs. This relationship allows us to continue to improve the capacity utilization of our largest paper machines, achieve supply-chain efficiencies, and develop and test product and packaging innovations. We plan to leverage the expertise developed in this relationship to better serve our other customers and develop new customers and products while pursuing productivity improvements and cost reductions.
Packaging
Products
Our packaging segment manufactures and sells containerboard (linerboard) and corrugated containers and sheets, as well as newsprint. For all years presented, the packaging segment's annual linerboard and newsprint production and production capacity was approximately 1.0 million short tons. BPP consumed approximately 71% of its own linerboard and medium production (including industry trades) to make corrugated containers and sheets in this segment.
70
The following table sets forth the capacity and production by product for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31 |
|||||||||
|
Year Ended December 31, 2003 |
|||||||||||
|
2005 |
2006 |
2007 |
|||||||||
|
(short tons) |
|||||||||||
Capacity(1) | ||||||||||||
Containerboard (linerboard) | 560,000 | 555,000 | 555,000 | 554,000 | 559,000 | 575,000 | ||||||
Newsprint | 440,000 | 448,000 | 448,000 | 434,000 | 426,000 | 425,000 | ||||||
1,000,000 | 1,003,000 | 1,003,000 | 988,000 | 985,000 | 1,000,000 | |||||||
Production | ||||||||||||
Containerboard (linerboard) | 525,000 | 427,000 | 94,000 | 533,000 | 554,000 | 573,000 | ||||||
Newsprint | 413,000 | 352,000 | 75,000 | 411,000 | 415,000 | 409,000 | ||||||
938,000 | 779,000 | 169,000 | 944,000 | 969,000 | 982,000 | |||||||
The following table sets forth packaging and newsprint segment sales; segment income (loss) before interest and taxes; depreciation, amortization, and depletion; and EBITDA for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
||||||||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31, |
|||||||||||||||
|
Year Ended December 31, 2003 |
|||||||||||||||||
|
2005 |
2006 |
2007 |
|||||||||||||||
|
(dollars in millions) |
|||||||||||||||||
Sales | $ | 642.7 | $ | 565.6 | $ | 128.9 | $ | 731.6 | $ | 766.5 | $ | 783.1 | ||||||
Segment income (loss) before interest and taxes | (14.4 | ) | (2.1 | ) | 7.0 | 23.8 | 45.3 | 40.1 | ||||||||||
Depreciation, amortization and depletion(a) | 40.4 | 34.7 | 6.0 | 37.2 | 50.8 | 37.7 | ||||||||||||
EBITDA(b) | $ | 26.0 | $ | 32.5 | $ | 13.0 | $ | 61.0 | $ | 96.1 | $ | 77.8 |
Containerboard is used in the production of corrugated containers and sheets. Our corrugated containers are used in the packaging of fresh fruit and vegetables, processed food, beverages, and other industrial and consumer products. Growth of corrugated containers is driven by durable and
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non-durable goods production as more packaging gets used in the sale of these products. Corrugated sheets are primarily sold to converters who finish the sheets into corrugated container products. In 2007, BPP's packaging and newsprint segment produced approximately 573,000 short tons of linerboard and its paper segment produced approximately 134,000 tons of corrugating medium, both of which are used in the production of corrugated containers. In 2007, BPP's two segments produced 707,000 short tons of linerboard and medium, while BPP's corrugated container and sheet plants consumed approximately 502,000 tons of containerboard (including both linerboard and corrugating medium) or the equivalent of 71% of its containerboard production.
BPP manufactured approximately 410,000 tons of newsprint during 2007, primarily for use in printing daily newspapers and other publications in North America. Of the machines at its mills in DeRidder, Louisiana, two machines are currently used in the production of newsprint. It is possible that these machines can be switched to other paper grades (such as linerboard, corrugating medium, unbleached kraft pulp, or packaging papers) provided that the Company makes additional capital expenditures and can economically source sufficient fiber.
Facilities
We manufacture containerboard (linerboard) and newsprint at our mill in DeRidder, Louisiana. This mill is one of the largest paper mills in North America, with an approximate annual production capacity of 1 million short tons as of December 31, 2007. We also manufacture corrugated containers and sheets at five plants in the Pacific Northwest and one sheet feeder plant in Texas, with an aggregate annual capacity of approximately 9.3 billion square feet, (which assumes operating the plants five days a week, 24 hours a day).
The following table sets forth annual capacities of the containerboard (linerboard) and newsprint mill in DeRidder, Louisiana, as of December 31, 2007, and production for the year then ended:
|
Number of Machines |
Capacity(1) |
Production |
||||
---|---|---|---|---|---|---|---|
|
(short tons) |
||||||
PULP AND PAPER MILL | |||||||
DeRidder, Louisiana | |||||||
Containerboard (linerboard) | 1 | 575,000 | 573,000 | ||||
Newsprint | 2 | 425,000 | 409,000 | ||||
3 | 1,000,000 | 982,000 | |||||
Raw Materials and Input Costs
Wood fiber is the principal raw material in this segment. The primary sources of wood fiber are timber and its byproducts, such as wood chips. Our DeRidder manufacturing facility is located in close proximity to active wood markets. It relies on market-based contracts for a significant portion of its fiber needs. It obtains some of its wood residuals from Boise Cascade's wood products plants in the South, and the remainder are purchased from outside sources. After the Acquisition and pursuant to written arrangements, the Company and Boise Cascade will continue to jointly source wood requirements to maximize cost efficiencies.
We generally purchase raw materials through contracts or open-market purchases. Our contracts are generally with suppliers located in close proximity to the specific facility they supply, and they generally contain price adjustment mechanisms to account for market price and expense volatility.
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Our packaging segment consumes substantial amounts of energy, such as electricity and natural gas. During 2007, energy costs accounted for approximately 14% of the sum of materials, labor, and other operating expenses, including fiber costs, in this segment. We purchase substantial portions of our natural gas and electricity under supply contracts. Under most of these contracts, the providers are bound to supply us with all of our needs for a particular type of energy at a specific facility. Our gas contracts have pricing mechanisms based primarily on current market prices, and our electricity contracts have pricing mechanisms based primarily on published tariffs. We also use derivative instruments such as natural gas swaps, options, or a combination of these instruments to partially mitigate price risk. For more information about the use of derivative instruments, see the section entitled "Management's Discussion and Analysis of Financial Condition and Results of OperationsDisclosures of Financial Market Risks" in this prospectus. At the end of first quarter 2008 we completed a major capital project to reduce fiber and energy costs and increase production of linerboard through the addition of a shoe press in our DeRidder manufacturing facility.
Sales, Marketing, and Distribution
Our containerboard (linerboard) and corrugated containers and sheets are sold by our own sales personnel or brokers. We market our newsprint through a subsidiary of AbitibiBowater Inc. (AbitibiBowater) pursuant to an arrangement whereby AbitibiBowater purchases all of the newsprint BPP produces at a price equal to the price AbitibiBowater's mills in the southern United States receive from customers, less associated expenses and a sales and marketing discount. The newsprint price is verified through a third-party review. AbitibiBowater is one of the world's largest producers and marketers of newsprint. AbitibiBowater sells our newsprint primarily in regional markets near the Company's DeRidder, Louisiana, manufacturing facility. The Company's contract with AbitibiBowater expires on December 31, 2008, and will renew automatically for one additional five-year term. Either party may terminate the contract on eight months' prior written notice.
The following table sets forth sales volumes of containerboard (linerboard), newsprint, and corrugated containers and sheets for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
Year Ended December 31, |
||||||||
|
|
January 1 through October 28, 2004 |
||||||||||
|
Year Ended December 31, 2003 |
|||||||||||
|
2005 |
2006 |
2007 |
|||||||||
|
(thousands of short tons) |
|||||||||||
Containerboard (linerboard)(1) | 451 | 382 | 81 | 452 | 266 | 239 | ||||||
Newsprint | 416 | 349 | 81 | 408 | 411 | 415 | ||||||
(millions of square feet) |
||||||||||||
Corrugated containers and sheets | 4,591 | 3,876 | 787 | 4,770 | 6,599 | 6,609 |
Customers
During 2007, BPP sold approximately 42% of its linerboard in the open market, both domestically and in the export market. However, once trades (linerboard sales to other producers who, in turn, sell
73
linerboard to BPP to achieve freight benefits) are included, approximately 71% of its total containerboard production (including both linerboard and corrugating medium) was effectively consumed by its own corrugated container and sheet plants. We sell our finished corrugated containers to over 1,000 active customers, including large agricultural producers and food and beverage processors. We sell corrugated sheets to over 200 converters who use the sheets to manufacture corrugated containers for a variety of customers.
We sell all of our newsprint to AbitibiBowater, one of the largest manufacturers of newsprint in the world, which sells to a number of newspaper publishers located near our mill. In October 2007, Abitibi-Consolidated Inc., which sold the newsprint BPP produces at its DeRidder mill pursuant to a long-standing marketing agreement, completed a merger with Bowater Incorporated, another major newsprint producer. As a part of the merger, the merged company, AbitibiBowater, assumed rights and responsibilities of Abitibi-Consolidated Inc. It is uncertain what the effects of this merger will be, if any, on the newsprint industry in general.
Business Plan
We operate our packaging segment to optimize cash flow through integration between our containerboard and converting operations and operational improvements in our facilities to lower costs and improve efficiency. The acquisition of Central Texas Corrugated ("CTC") in February 2006 was a significant step in increasing our integration. We are a low-volume producer of newsprint, all of which is sold through AbitibiBowater. Our strategy for newsprint is to reduce exposure to that market by identifying an opportunity to convert current newsprint production capacity to serve packaging markets or, if no attractive conversion alternative is identified, to run our newsprint production capacity only if it generates positive cash flow. Should our newsprint production fail to continue to generate positive cash flow, we will consider a shutdown of one or both of the newsprint machines and associated pulp and utility operations.
Corporate and Other
Historically our corporate and other segment primarily included an allocation of BPP's and OfficeMax's corporate support staff services and related assets and liabilities. These support services included, but were not limited to, finance, accounting, legal, information technology, and human resource functions. This segment also includes certain rail and truck transportation businesses and related assets that support our manufacturing facilities. Rail cars and trucks are generally leased. We provide transportation service not only to our own facilities but also, on a limited basis, to third parties when geographic proximity and logistics are favorable. During the years ended December 31, 2007, 2006, and 2005, segment sales related primarily to the BPP's rail and truck transportation business and were $58.9 million, $61.4 million, and $66.5 million, respectively. Segment sales were $11.2 million and $54.2 million for the period of October 29 (inception) through December 31, 2004 and the period of January 1 through October 28, 2004, respectively.
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The following table sets forth segment sales; segment income (loss) before interest and taxes; depreciation, amortization, and depletion; and EBITDA for the periods indicated:
|
OfficeMax |
Boise Paper Products (as operated by Boise Cascade) |
|||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
|
|
October 29 (inception) through December 31, 2004 |
|
|
|
|||||||||||||
|
|
January 1 through October 28, 2004 |
Year Ended December 31 |
||||||||||||||||
|
Year Ended December 31, 2003 |
||||||||||||||||||
|
2005 |
2006 |
2007 |
||||||||||||||||
|
(millions) |
||||||||||||||||||
Sales | $ | 56.8 | $ | 54.2 | $ | 11.2 | $ | 66.5 | $ | 61.4 | $ | 58.9 | |||||||
Segment loss before interest and taxes | (20.7 | ) | (27.9 | ) | (2.7 | ) | (7.7 | ) | (14.9 | ) | (11.9 | ) | |||||||
Depreciation, amortization, and depletion(a) | 5.5 | 4.5 | 0.6 | 3.0 | 3.3 | 1.9 | |||||||||||||
EBITDA(b) | $ | (15.2 | ) | $ | (23.3 | ) | $ | (2.2 | ) | $ | (4.6 | ) | $ | (11.6 | ) | $ | (10.0 | ) | |
Competition
The markets in each of our operating segments are large and highly competitive. Our products and services compete with similar products manufactured and distributed by others. Many factors influence our competitive position in each of its operating segments. Those factors include price, service, quality, product selection, and convenience of location.
Paper
The markets in which our paper segment competes are large and highly competitive. Commodity grades of uncoated free sheet paper are globally traded, with numerous worldwide manufacturers, and as a result, these products compete primarily on the basis of price. All of our paper manufacturing facilities are located in the United States, and although they compete largely in the domestic market, they face competition from foreign producers, some of which have lower operating costs. The level of this competition varies, depending on domestic and foreign demand and foreign currency exchange rates. In general, paper production does not rely on proprietary processes or formulas, except in highly specialized or custom grades.
Four major manufacturers in the North American uncoated free sheet paper market account for approximately 72% of capacity. As of December 2007, BPP was the third-largest producer of uncoated free sheet paper in North America. Our competitors include Domtar (the largest producer), International Paper, and Georgia-Pacific. Although price is the primary basis for competition in most of BPP's paper grades, quality and service are important competitive determinants, especially in premium and specialty grades. Some of BPP's paper products also compete with other paper grades, and other technologies such as electronic transmission and document storage alternatives. As the use of these alternatives continues to grow, BPP may see variances in overall demand for paper products or shifts from one type of paper to another.
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In early 2007, two of BPP's major competitors in the uncoated free sheet paper business, Domtar Inc. and Weyerhaeuser Company, combined their uncoated free sheet paper businesses. This combination has resulted in a larger and potentially much stronger competitor than the two companies operating their paper businesses independently. It is uncertain what the long-term effects of this merger will be on the paper industry in general.
The execution of our strategy is partially dependent upon the ability to produce and sell pressure sensitive papers from the Wallula #3 machine and the ability to develop, produce and sell other premium and specialty grades on our smaller machines.
Packaging
Containerboard (corrugating medium and linerboard) and newsprint are globally traded commodities with numerous worldwide manufacturers, and as a result, these products compete primarily on the basis of price. The intensity of competition in these industries fluctuates based on demand and supply levels, as well as prevailing foreign currency exchange rates. Our corrugated container operations in the Pacific Northwest have a leading regional market position and compete with several national and regional manufacturers. Our plant in Waco, Texas, known as CTC, produces corrugated sheets that are sold to sheet plants in the Southwest, where they are converted into corrugated containers for a variety of customers. Some of our competitors have lower operating costs and/or enjoy greater integration between their containerboard production and corrugated container production.
In October 2007, Abitibi-Consolidated Inc., which sells the newsprint we produce at our DeRidder mill pursuant to a long-standing marketing agreement, completed a merger, with Bowater Incorporated another major newsprint producer. It is uncertain what the long-term effects of the merger will be, if any, on the newsprint industry in general.
Seasonality
Our paper businesses experience some seasonality, based primarily on buying patterns associated with particular products. For example, the demand for corrugated container products is influenced by changes in agricultural shipments in the Pacific Northwest. In addition, seasonally cold weather increases costs, especially energy consumption, at all of our manufacturing plants.
Working Capital
We have no unusual working capital practices. We believe our management practices with respect to working capital conform to common business practices in the United States.
Employees
The number of persons employed by the Company is approximately 4,600 employees.
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Directors and Executive Officers
The following information is provided regarding our directors and executive officers as of May 1, 2008:
Name |
Age |
Position |
||
---|---|---|---|---|
Alexander Toeldte | 48 | President and Chief Executive Officer, Director | ||
Jeffrey P. Lane | 52 | Senior Vice President, Packaging | ||
Robert M. McNutt | 48 | Senior Vice President and Chief Financial Officer | ||
Robert E. Strenge | 54 | Senior Vice President, Paper Manufacturing | ||
Robert A. Warren | 55 | Senior Vice President, Paper and Supply Chain Management | ||
Samuel K. Cotterell | 57 | Vice President and Controller | ||
Judith M. Lassa | 49 | Vice President, Packaging | ||
Carl A. Albert | 66 | Board Chair and Non-Executive Director | ||
Zaid F. Alsikafi | 32 | Non-Executive Director | ||
Jonathan W. Berger | 49 | Non-Executive Director | ||
Jack Goldman | 67 | Non-Executive Director | ||
Nathan D. Leight | 48 | Non-Executive Director | ||
Thomas S. Souleles | 39 | Non-Executive Director | ||
W. Thomas Stephens | 65 | Non-Executive Director | ||
Jason G. Weiss | 38 | Non-Executive Director |
Alexander Toeldte, President and Chief Executive Officer, Director
Mr. Toeldte serves as the Company's president and chief executive officer and a director. Prior to the Acquisition, Mr. Toeldte was Boise Cascade's executive vice president, paper and packaging and newsprint segments, since October 28, 2005. Since October 1, 2005, he had served as president of Boise Cascade's packaging and newsprint segment. From 2004 to 2006, Mr. Toeldte served as chair of Algonac Limited, a private management and consulting firm based in Auckland, New Zealand. From 2001 to 2003, Mr. Toeldte served as executive vice president of Fonterra Co-operative Group, Ltd., and chief executive officer of Fonterra Enterprises. Fonterra, based in New Zealand, is a global dairy company. From 1999 to 2001, Mr. Toeldte served in various capacities with Fletcher Challenge Limited, which was formerly one of the largest companies in New Zealand with holdings in paper, forestry, building materials and energy. From 2000 to 2001, he was chief executive officer of Fletcher Challenge Building and from 1999 to 2000, he was chief executive officer of Fletcher Challenge Paper. Prior to 1999, Mr. Toeldte was a partner at McKinsey & Company, where he had served since 1986 in Toronto, Brussels, Montreal and Stockholm. Mr. Toeldte completed his undergraduate studies in economics at the Albert-Ludwigs-Universität in Freiburg, Germany, and received a Master of Business Administration from McGill University in Montreal.
Jeffrey P. Lane, Senior Vice President and General Manager, Packaging
Mr. Lane joined the Company and was elected senior vice president and general manager of the Company's packaging operations on April 30, 2008. Prior to joining the Company, Mr. Lane was a partner at McKinsey & Company from 1989 to 1995 and from 1998 until 2008. From 2000 until 2008, Mr. Lane led McKinsey's global packaging industry practice. Mr. Lane served as the president of
77
MicroCoating Technologies, an advanced materials technology startup during 1997 and served as the vice president of marketing and business development for Westinghouse Security Systems, a division of Westinghouse Electric Corporation during 1996. From 1983 to 1989, Mr. Lane served as brand manager at The Procter & Gamble Company, a global consumer products company. Mr. Lane received a B.S. (Biology) from Georgia Institute of Technology and an M.B.A. from Kellogg Graduate School of Management, Northwestern University.
Robert M. McNutt, Senior Vice President and Chief Financial Officer
Mr. McNutt serves as the Company's senior vice president and chief financial officer. Prior to the Acquisition, Mr. McNutt was Boise Cascade's vice president, Investor Relations and Public Policy, since June 1, 2005. From October 2004 to May 2005, Mr. McNutt served as Boise Cascade's financial manager, Building Products where he was the senior financial manager overseeing Boise Cascade's Wood Products and Building Materials Distribution segments with responsibility for strategy, information systems, accounting and credit functions. Between 1999 and October 2004, Mr. McNutt had the same responsibilities for OfficeMax. Prior to 1999, Mr. McNutt held a variety of positions with Boise Cascade including treasury, audit and business development roles. Mr. McNutt has experience in acquisitions and divestitures, project finance, international business development and internal control including development of Sarbanes-Oxley compliant processes.
Robert E. Strenge, Senior Vice President, Paper Manufacturing
Mr. Strenge was elected senior vice president of the Company's paper manufacturing operations on April 30, 2008. Since the Acquisition, Mr. Strenge had served as vice president of the Company's newsprint segment, a position that he also held with Boise Cascade from October 29, 2004 to the date of the Acquisition. Mr. Strenge was Boise Cascade Corporation's vice president, DeRidder Operations, from 2003 to 2004. From 1997 to 2003, Mr. Strenge served as mill manager of Boise Cascade Corporation's St. Helens, Oregon, paper mill. Mr. Strenge received a B.S. (Pulp and Paper Technology) from Syracuse University.
Robert A. Warren, Senior Vice President and General Manager, Paper and Supply Chain Management
Mr. Warren was elected senior vice president and general manager of the Company's paper operations and supply chain management function on April 30, 2008. Since the Acquisition, Mr. Warren had served as general manager of the Company's supply chain function, a position that he also held with Boise Cascade since 2006. From 2004 to 2005, Mr. Warren was the business leader for Boise Cascade's printing papers business and from 2003 to 2004 was a project leader for Boise Cascade Corporation. Prior to joining Boise Cascade Corporation, Mr. Warren was the president and chief executive officer for Strategy in Action Group, a private business consulting firm. Mr. Warren received a B.S. (General Engineering) from Oregon State University and an M.B.A. from Kellogg Graduate School of Management, Northwestern University.
Samuel K. Cotterell, Vice President and Controller
Mr. Cotterell serves as the Company's vice president and controller. Prior to the Acquisition, Mr. Cotterell was Boise Cascade's vice president and controller since October 29, 2004. From 1999 to October 2004, Mr. Cotterell served as director of financial reporting of Boise Cascade Corporation. Mr. Cotterell received a B.A. (Spanish) from the University of Idaho, a B.S. (Accounting) from Boise State University and a Masters of International Business from the American Graduate School of International Management. Mr. Cotterell is a certified public accountant.
78
Judith M. Lassa, Vice President, Packaging
Ms. Lassa serves as vice president of the Company's packaging segment, or "Packaging." Prior to the Acquisition, Ms. Lassa was Boise Cascade's vice president, Packaging, since October 29, 2004. From 2000 to October 2004, Ms. Lassa served as vice president, Packaging, of Boise Cascade Corporation. From 1997 to 2000, Ms. Lassa served as Packaging business leader of Boise Cascade Corporation. Ms. Lassa received a B.S. (Paper Science and Engineering) from the University of Wisconsin-Stevens Point.
Carl A. Albert, Board Chair
Mr. Albert serves as the Company's board chair. He has been a member of the Company's board of directors since its inception. Since April 2000, Mr. Albert has served as the chairman of the board and chief executive officer of Fairchild Venture Capital Corporation, a private investment firm. From September 1990 to April 2000, he was the majority owner, chairman of the board and chief executive officer of Fairchild Aerospace Corporation and Fairchild Dornier Corporation, and chairman of the supervisory board of Dornier Luftfahrt, GmbH, all aircraft manufacturing companies. From 1989 to 1990, Mr. Albert was a private investor. After providing start up venture capital, he served from 1981 to 1988 as chairman of the board and chief executive officer of Wings West Airlines, a California-based regional airline that completed an IPO in 1983 and was acquired by AMR Corporation, parent of American Airlines, in 1988. Following the acquisition, Mr. Albert served as president until 1989. Prior to this, he was an attorney specializing in business, real estate and corporate law. Mr. Albert is also a member of the board of directors of Tulip Corporation, a privately-held manufacturing company, and the National Asthma Campaign. Mr. Albert received a B.A. from the University of California at Los Angeles and an L.L.B. from the University of California at Los Angeles School of Law.
Zaid F. Alsikafi, Director
Mr. Alsikafi serves as a director of the Company. He has been employed by Madison Dearborn since 2003 and currently serves as a director. From 2001 to 2003, Mr. Alsikafi attended Harvard Business School. From 1999 to 2001, he was employed by MDP as an associate. Mr. Alsikafi received a B.S. from The Wharton School of the University of Pennsylvania and an M.B.A. from the Harvard Graduate School of Business Administration. Mr. Alsikafi is also a member of the boards of directors of Forest Products Holdings, L.L.C. (d.b.a. Boise Cascade); Univision Communications Inc.; UPC Wind Management, L.L.C.; and US Power Generating Company.
Jonathan W. Berger, Director
Mr. Berger serves as a director of the Company. He has been a member of the Company's board of directors since its inception. Mr. Berger has been associated with Navigant Consulting, Inc., a NYSE-listed consulting firm, since December 2001, and is the managing director and co-practice area leader for that firm's corporate finance practice. He has also been president of Navigant Capital Advisors, L.L.C., Navigant Consulting, Inc.'s registered broker-dealer, since October 2003. From January 2000 to March 2001, Mr. Berger was president of DotPlanet.com, an Internet services provider. From August 1983 to December 1999, Mr. Berger was employed by KPMG, LLP, an independent public accounting firm, and served as a partner from August 1991 to December 1999 where he was in charge of the corporate finance practice for three of those years. Mr. Berger received a B.S. from Cornell University and an M.B.A. from Emory University. Mr. Berger is a certified public accountant. Mr. Berger is also a member of the board of directors of Great Lakes Dredge & Dock Corporation and is chairman of its audit committee. Mr. Berger is the cousin of Nathan D. Leight.
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Jack Goldman, Director
Mr. Goldman serves as a director of the Company. Since January 2006 he has been a partner in the law firm of Theodora, Oringher, Miller & Richman PC in Los Angeles. From May 2002 until January 2006, he was of counsel to the law firm of Miller & Holguin, at which time it merged with Mr. Goldman's current firm. Mr. Goldman was a partner in the law firm of Arter & Hadden from May 1994 through May 2000 and thereafter was of counsel to that firm until May 2002. Prior to this, Mr. Goldman was a partner in the law firm of Keck, Mahin & Cate from June 1989 until May 1994. Mr. Goldman was General Counsel of Superscope, Inc., an NYSE-listed multinational manufacturer and distributor of brand name consumer audio products from June 1975 through November 1980. While at Superscope, Mr. Goldman also served as Treasurer and then Vice President of Administration. Mr. Goldman was admitted to practice law in California in January 1966 and engaged in private practice from 1966 until June 1975. He returned to private practice through his own law firm beginning in November 1980 and through May 1989. Mr. Goldman specializes in corporate and business law. From April 2001 until December 31, 2007 and from May 2008 to present, Mr. Goldman served as chairman and chief executive officer of Business Protection Systems International, Inc., a provider of proprietary software solutions for business continuity and risk management programs for business and public sector clients. He received a B.A. in Chemistry from Lafayette College and a J.D. from the University of California at Los Angeles School of Law.
Nathan D. Leight, Director
Mr. Leight serves as a director of the Company. Until the Acquisition, he was the Company's chairman of the board. Mr. Leight is the co-founder, chief investment officer and a senior managing member of Terrapin Partners, LLC, Terrapin Asset Management, LLC and TWF Management Company, all private investment entities. From 2004 to 2006, Mr. Leight was Chairman of the Board of Aldabra Acquisition Corporation, a previously publicly traded blank check company. In December 2006, the Company merged with Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD), and since that time, Mr. Leight has served as a director. From September 1998 to March 1999, Mr. Leight served as the interim chief executive officer of e-STEEL L.L.C., and from January 2000 to May 2002, he served as interim chief executive officer of VastVideo, Inc. From February 1995 to August 1998, Mr. Leight was employed by Gabriel Capital LP, a hedge fund with assets exceeding $1 billion, and from February 1995 to August 1997, he served as its chief investment officer. From December 1991 to February 1995, Mr. Leight served as a managing director of Dillon Read & Co., where he oversaw the firm's proprietary trading department. Mr. Leight received a B.A. from Harvard College (cum laude). Mr. Leight is the cousin of Jonathan W. Berger.
Thomas S. Souleles, Director
Mr. Souleles serves as a director of the Company. Mr. Souleles has been employed by Madison Dearborn since 1995 and currently serves as a managing director, concentrating on investments in the basic industries sector. Mr. Souleles received an A.B. from Princeton University, a J.D. from Harvard Law School and an M.B.A. from the Harvard Graduate School of Business Administration. Mr. Souleles is also a member of the Boards of Directors of Forest Products Holdings, L.L.C. (d.b.a. Boise Cascade LLC); Great Lakes Dredge & Dock Corporation; Magellan GP, LLC; Magellan Midstream Holdings GP, LLC; The Children's Memorial Medical Center; and US Power Generating Company; and the Board of Trustees of the National Multiple Sclerosis Society, Greater Illinois Chapter.
W. Thomas Stephens, Director
Mr. Stephens serves as a director of the Company. Prior to the Acquisition, Mr. Stephens was Boise Cascade's chief executive officer and chairman and one of its directors in October 2004 following a period of retirement. Mr. Stephens served as president and chief executive officer of MacMillan
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Bloedel, a Canadian forest products company, from 1997 until his retirement in 1999. From 1986 to 1996, Mr. Stephens served as the president and chief executive officer of Manville Corporation. From 1982 to 1985, Mr. Stephens served as the chief executive officer of Riverwood Corporation. Mr. Stephens received a B.S. (Engineering) from the University of Arkansas and a Master of Engineering from the University of Arkansas. Mr. Stephens is also a member of the board of directors of TransCanada Pipelines Limited.
Jason G. Weiss, Director
Mr. Weiss serves as a director of the Company. Until the Acquisition, he was the Company's chief executive officer, secretary, and a member of the Company's board of directors. Mr. Weiss is the co-founder and a managing member of Terrapin Partners, LLC, Terrapin Asset Management, LLC and TWF Management Company. From 2004 to 2006, Mr. Weiss was CEO of Aldabra Acquisition Corporation, a previously publicly traded blank check company. In December 2006, Aldabra merged with Great Lakes Dredge & Dock Corporation (NASDAQ:GLDD), and since that time, Mr. Weiss has served as a director. From March 1999 to December 1999, he served as the chief executive officer of PaperExchange.com, Inc, and from December 1999 to March 2000, he served as executive vice president of strategy. Mr. Weiss served as a managing member of e-STEEL L.L.C. from September 1998 to March 1999 and from August 1998 to December 2000 and from January 2004 to March 2004 he served as a managing member of American Classic Sanitation LLC. Mr. Weiss received a B.A. from the University of Michigan (with Highest Distinction) and a J.D. (cum laude) from Harvard Law School.
Composition of the Company's Board of Directors
The Company's board of directors consists of three staggered classes of directors, designated as Class I, Class II, and Class III. The term of the initial Class I directors will terminate on the date of the 2009 annual meeting; the term of the initial Class II directors will terminate on the date of the 2010 annual meeting; and the term of the initial Class III directors will terminate on the date of the 2011 annual meeting. At each succeeding annual meeting of the stockholders, successors to the class of directors whose term expires at that annual meeting will be elected for a three-year term. If the number of directors is changed, any increase or decrease will be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class will hold office for a term that will coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.
The members of each class are:
Director Independence
The NYSE requires that a majority of the Company's board of directors must be composed of "independent directors," which is defined generally as a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company's board of directors, would interfere with the director's exercise of independent judgment in carrying out the responsibilities of a director.
The Company has determined that Messrs. Albert, Alsikafi, Berger, Goldman and Souleles are independent directors as defined under the listing standards of the NYSE, which directors constitute a majority of the Company's board of directors.
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Committees of the Board of Directors
The Company's board of directors has established an audit committee, compensation committee, executive committee, governance committee, and nominating committee. The composition, duties and responsibilities of these committees are set forth in written charters that the Company's board of directors has adopted for each committee.
Audit Committee
The Company's audit committee consists of Messrs. Albert, Berger (as chair) and Goldman. The Company's board of directors has determined that Mr. Berger is an "audit committee financial expert" as that term is defined in Item 407(d)(5) of Regulation S-K.
The Company's audit committee is responsible for:
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Compensation Committee
The Company's compensation committee consists of Messrs. Albert, Alsikafi and Souleles (as chair).
The Company's compensation committee is responsible for:
Executive Committee
The Company's executive committee consists of Messrs. Albert (as chair), Berger, Goldman, Souleles and Toeldte.
The Company's executive committee is responsible for exercising all the powers and authority of the board of directors in the management of the Company's business and affairs, subject to the direction of the board of directors and subject to the limitations under Section 141(c) of the Delaware General Corporation Law.
Governance Committee
The Company's governance committee consists of Messrs. Albert, Alsikafi and Goldman (as chair).
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The Company's governance committee is responsible for:
Nominating Committee
The Company's nominating committee consists of Messrs. Albert (as chair), Alsikafi and Berger.
The Company's nominating committee is responsible for identifying and recommending for election individuals who meet the criteria the board of directors has established for board membership.
The nominating committee's guidelines for selecting director nominees will generally provide that persons to be nominated:
The nominating committee will consider a number of qualifications relating to management and leadership experience, background and integrity and professionalism in evaluating a person's candidacy for membership on the board of directors. The nominating committee may require skills or attributes, such as financial or accounting experience, to meet specific board needs that arise.
Other Committees
The Company's board of directors may establish other committees as it deems necessary or appropriate from time to time.
Code of Ethics and Committee Charters
The Company's board of directors has adopted a code of ethics that applies to its directors and all of its employees, including its chief executive officer, chief financial officer, and principal accounting officer. Copies of the Company's Code of Ethics and committee charters are available, free of charge, on the Company's website at www.BoiseInc.com by clicking on Investors and then Corporate Governance. You may also obtain copies of the Company's Code of Ethics by contacting the Company's Investor Relations Department, 1111 West Jefferson Street, Suite 200, Boise, Idaho 83702-5388, or by calling 208/384-7803. If the Company amends or grants a waiver of one or more of the provisions of the Company's Code of Ethics, the Company intends to disclose such amendments or waivers by posting the required information on the Company's website at the above address. The Company's Code of Ethics is included as Exhibit 14.1 to the Company's Current Report on Form 8-K filed with the SEC on February 28, 2008 and is incorporated herein by reference.
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COMPENSATION OF EXECUTIVE OFFICERS
We have agreed to maintain for at least one year following the closing of the Acquisition for each of our executive officers, executive compensation and benefits at levels that are substantially comparable, in the aggregate, to the levels of executive compensation and benefits that Boise Cascade had maintained for these individuals. The following discussion is based upon Boise Cascade's compensation decisions in 2007 and compensation decisions we have made to date in 2008.
Executive Compensation Program Objectives
The compensation committee's overall compensation objectives applicable to our executive officers were to provide a compensation package intended to:
To ensure that compensation levels remained competitive, the committee surveyed and analyzed information on executive compensation practices and data from a wide variety of sources, including compensation practices and data for executives holding comparable positions throughout general industry and in the forest products industry.
The committee and management used information, surveys and data compiled by outside human resource consulting firms to assist them in structuring our compensation programs. In 2007 and 2008, we used services provided by Hewitt Associates and the Forest Products Industry Compensation Association (FPICA) to obtain market rates of compensation for base salary and annual incentives for all officer positions.
We targeted total compensation for executive officers (the sum of base salary, annual variable incentive compensation and long-term incentive compensation) at the 50th percentile of our surveyed companies. We believe our annual variable incentive compensation component linked executive compensation directly to our financial performance, and the long-term incentive compensation component linked executive compensation to changes in our equity value.
Executive Compensation Program Elements
The elements of our executive compensation program were:
Our compensation plans reflected the committee's intent and general practice to pay compensation that we could deduct for purposes of federal income tax.
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Base Salary
The committee reviewed base salaries for executive officers annually and at the time of promotions or other changes in responsibilities. Almost all salaried positions, including each executive officer position, had an established salary guideline. The midpoint of each salary guideline approximated the median salary, adjusted for company size (in sales), of equivalent positions at our surveyed companies. While the salary target range for our executive officers was the midpoint of the salary guideline, an individual's salary may have fallen above or below the midpoint based on a subjective evaluation of factors such as the individual's level of responsibility, performance and years of experience.
Annual Variable Incentive Compensation (Incentive and Performance Plan)
For 2007, each of the Named Executive Officers (as defined below) earned an incentive award pursuant to Boise Cascade's Incentive and Performance Plan. These awards were based on the attainment of annual financial goals at corporate and business unit levels and for achieving individual annual performance objectives. Awards were calculated as a percentage of base salary, based on the extent to which the financial goals and performance objectives were met during the year. The 2007 target incentive award for Mr. Toeldte was 65% of his base salary. The 2007 target incentive award for Miles A. Hewitt, our former Senior Vice President, Paper who stepped down from his position on May 2, 2008, was 55% of his base salary. The 2007 target incentive awards for Ms. Lassa and Messrs. McNutt and Strenge were 45% of their base salaries. Depending on the achievement of their predetermined financial goals and performance objectives, the annual incentive awards for the Named Executive Officers may have been less than or greater than the target incentive amounts. In 2007, all incentive award payouts were also subject to an incentive compensation cap based on Boise Cascade's financial performance.
For 2008, each of the Named Executive Officers other than Mr. Hewitt will earn an incentive award pursuant to the Boise Inc. Incentive and Performance Plan. The 2008 incentive awards will be based on the attainment of financial goals at corporate and business unit levels and for achieving individual performance objectives. The awards will be calculated as a percentage of base salary, based on the extent to which the financial goals and performance objectives were met during the year. The 2008 target incentive award for Mr. Toeldte is 100% of his base salary. The 2008 target incentive award for Messrs. McNutt and Strenge are 65% of their base salaries. The 2008 target incentive award for Ms. Lassa is 50% of her base salary. Depending on the achievement of their predetermined financial goals and performance objectives, the 2008 annual incentive awards for the Named Executive Officers may be less than or greater than the target incentive amounts.
Long-Term Incentive Compensation (Boise Cascade Management Equity Plan)
Pursuant to an equity incentive program established shortly after Madison Dearborn acquired the forest products assets from OfficeMax, Boise Cascade's management-level employees were given the opportunity to purchase, at fair market value, Series B equity units in Forest Products Holdings, L.L.C. ("FPH"). Purchasers of Series B equity units in this program also received, at no additional cost, Series C equity units (2004 Series C equity units) representing the right to participate in Boise Cascade's profits after the holders of the Series B equity units had received a return of all of their invested capital. The 2004 Series C equity units had no value to the holder until equity value appreciated above a specified level.
On April 3, 2006, shortly after joining Boise Cascade, Mr. Toeldte purchased, at fair market value, Series B equity units for $560,000 and also received, at no additional cost, a new series of Series C equity units (2006 Series C equity units). Also on April 3, 2006, Mr. McNutt received, at no cost, 2006 Series C equity units. The 2006 Series C equity units had a higher threshold for participation in Boise Cascade's profits than did the 2004 Series C equity units. Like the 2004 Series C equity units,
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Messrs. Toeldte's and McNutt's 2006 Series C equity units had no value until equity value appreciated above a specified level.
All Series B equity units, 2004 Series C equity units and 2006 Series C equity units vested on a pro rata basis from December 31, 2004, to the closing date of the Acquisition. Boise Cascade's Management Equity Plan allowed unitholders whose employment was transferred to us to require FPH to repurchase (1) all vested and unvested Series B equity units and (2) all vested 2004 Series C equity units and 2006 Series C equity units. All of our executive officers exercised this repurchase requirement and in March 2008, FPH repurchased all vested Series B equity units, 2004 Series C equity units and 2006 Series C equity units at fair market value. FPH repurchased all unvested Series B equity units at the original cost. Any unvested 2004 Series C equity units and 2006 Series C equity units were forfeited for no consideration.
Set forth below are the numbers of shares of Series B equity units, 2004 Series C equity units and 2006 Series C equity units held by the Named Executive Officers as of December 31, 2007:
Name |
Series B Equity Units |
2004 Series C Equity Units |
2006 Series C Equity Units |
|||
---|---|---|---|---|---|---|
Alexander Toeldte | 280,000 | | 4,500,000 | |||
Robert M. McNutt | 125,000 | 205,010 | 600,000 | |||
Miles A. Hewitt | 660,000 | 1,598,000 | | |||
Judith M. Lassa | 225,000 | 431,000 | | |||
Robert E. Strenge | 250,000 | 431,000 | |
Long-Term Incentive Compensation (Boise Inc. Restricted Stock Shares and Restricted Stock Units)
As approved by the compensation committee of our board of directors, on May 2, 2008, certain of our managerial employees, including the following Named Executive Officers, received grants of restricted stock shares or restricted stock units:
Name |
Restricted Stock Shares |
Restricted Stock Units |
||
---|---|---|---|---|
Alexander Toeldte | 975,100 | | ||
Robert M. McNutt | 213,400 | | ||
Judith M. Lassa | 77,000 | | ||
Robert E. Strenge | | 107,000 |
Approximately seventy percent of the restricted stock shares vest only if the Company achieves specific performance hurdles (performance-vesting restricted stock shares). A portion of the performance-vesting restricted stock shares will vest on February 28, 2011, if, at some point before this date, the stock price of our stock has closed at or above $10.00 on 20 of any consecutive 30 trading days. The other portion of the performance-vesting restricted stock shares will vest on February 28, 2011, if, at some point before this date, the stock price of our stock has closed at or above $12.50 on 20 of any consecutive 30 trading days.
Approximately thirty percent of the restricted stock shares vest with the passage of time (time-vesting restricted stock shares). One-third of the time-vesting restricted stock shares will vest on each of February 28, 2009; February 28, 2010; and February 28, 2011, subject to certain EBITDA goals.
All employees, including Mr. Strenge, who are eligible for retirement on or before February 28, 2011, received restricted stock units in lieu of restricted stock shares. The restricted stock units vest in the same manner as do the restricted stock shares. Once vested, the restricted stock units are payable to the employee in stock. Any shares or units not vested on or before February 28, 2011, are forfeited by the employee.
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The restricted stock shares and restricted stock units were granted, at no cost to the employee, under the Boise Inc. Incentive and Performance Plan, pursuant to a Restricted Stock (Restricted Stock Unit) Award Agreement, the forms of which were filed as Exhibits 99.1 and 99.2 to the Company's Current Report on Form 8-K filed with the SEC on May 6, 2008, and which are incorporated herein by reference.
Other Compensation and Benefit Plans
Our executive officers received additional compensation in the form of payments, allocations or accruals under various other compensation and benefit plans. Among these plans and benefits were:
These plans are further described below and were an important part of our executive compensation program. We believe that providing attractive retirement and savings benefits to our executive officers and key managers helped us to remain competitive in the market for top talent.
Summary Compensation Table
The following table presents compensation information for the fiscal years ended December 31, 2007 and 2006, for Mr. Toeldte, the Company's president and chief executive officer, Mr. McNutt, the Company's senior vice president and chief financial officer, and Ms. Lassa and Messrs. Hewitt and Strenge, the Company's three most highly compensated executive officers other than Messrs. Toeldte and McNutt (collectively, the "Named Executive Officers").
Name and Principal Position |
Year |
Salary ($)(1) |
Bonus ($)(2) |
Stock Awards ($)(3) |
Non-Equity Incentive Plan Compensation ($)(4) |
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($)(5) |
All Other Compensation ($)(6) |
Total ($) |
|||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Alexander Toeldte President and Chief Executive Officer |
2007 2006 |
$ |
500,000 500,000 |
$ |
|
$ |
85,500 171,000 |
$ |
314,876 410,000 |
$ |
4,375 725 |
$ |
49,321 151,945 |
$ |
954,072 1,233,670 |
||||||||
Robert M. McNutt Senior Vice President and Chief Financial Officer |
2007 2006 |
215,000 200,000 |
17,989 |
23,906 35,306 |
92,011 80,000 |
57,127 68,252 |
12,687 12,870 |
418,720 396,428 |
|||||||||||||||
Miles A. Hewitt(7) Senior Vice President, Paper |
2007 2006 |
337,500 330,000 |
|
97,478 97,478 |
151,599 176,055 |
163,250 131,651 |
17,552 14,845 |
767,379 750,029 |
|||||||||||||||
Judith M. Lassa Vice President, Packaging |
2007 2006 |
283,750 251,667 |
|
26,291 26,291 |
157,780 220,000 |
176,558 74,977 |
28,510 21,008 |
672,889 593,943 |
|||||||||||||||
Robert E. Strenge(8) Vice President, Newsprint |
2007 2006 |
301,928 266,667 |
478 |
26,291 26,291 |
186,878 224,000 |
220,196 115,218 |
18,496 17,992 |
754,267 650,168 |
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Name |
2007 Financial Goals and Performance Objectives |
2006 Financial Goals and Performance Objectives |
||
---|---|---|---|---|
Alexander Toeldte |
25% corporate incentive cash flow 50% paper incentive cash flow 25% packaging and newsprint incentive cash flow Less 10% safety adjustment if corporate recordable incident rate (RIR) not met |
25% corporate incentive cash flow 32.5% paper incentive cash flow 19.5% packaging and newsprint incentive cash flow 13% CTC EBITDA and volume 10% safety based on corporate RIR |
||
Robert M. McNutt |
100% corporate incentive cash flow Less 10% safety adjustment if corporate RIR not met |
100% corporate incentive cash flow Less 10% safety adjustment if corporate RIR not met |
||
Miles A. Hewitt |
10% corporate incentive cash flow 90% paper incentive cash flow Less 10% safety adjustment if corporate RIR not met |
10% corporate incentive cash flow 80% paper incentive cash flow 10% safety based on corporate RIR |
||
Judith M. Lassa |
10% corporate incentive cash flow 50% packaging and newsprint incentive cash flow 40% packaging incentive cash flow Less 10% safety adjustment if corporate RIR not met |
10% corporate incentive cash flow 25% packaging and newsprint incentive cash flow 35% packaging incentive cash flow 20% CTC EBITDA and volume 10% safety based on corporate RIR |
||
Robert E. Strenge |
10% corporate incentive cash flow 50% packaging and newsprint incentive cash flow 40% DeRidder incentive cash flow Less 10% safety adjustment if corporate RIR not met |
10% corporate incentive cash flow 35% packaging and newsprint incentive cash flow 25% DeRidder incentive cash flow 20% CTC EBITDA and volume 10% safety based on corporate RIR |
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financial goals and performance objectives were met during the year. The specific 2008 financial goals and performance objectives that will be used to calculate the awards are set forth below.
Name |
2008 Financial Goals and Performance Objectives |
2008 Target Incentive Percentage Payout |
||
---|---|---|---|---|
Alexander Toeldte | 90% corporate incentive cash flow 10% safety based on corporate recorded incident rate (RIR) |
100% | ||
Robert M. McNutt |
90% corporate incentive cash flow 10% safety based on corporate RIR |
65% |
||
Judith M. Lassa |
20% corporate incentive cash flow 70% packaging incentive cash flow 10% safety based on corporate RIR |
50% |
||
Robert E. Strenge |
90% corporate incentive cash flow 10% safety based on corporate RIR |
65%(a) |
Name |
Year |
Change in Pension Value(a) |
Nonqualified Deferred Compensation Earnings(b) |
|||||
---|---|---|---|---|---|---|---|---|
Alexander Toeldte | 2007 2006 |
$ |
|
$ |
4,374 725 |
|||
Robert M. McNutt |
2007 2006 |
51,160 65,844 |
5,967 2,408 |
|||||
Miles A. Hewitt |
2007 2006 |
162,800 131,651 |
450 |
|||||
Judith M. Lassa |
2007 2006 |
172,630 73,601 |
3,928 1,376 |
|||||
Robert E. Strenge |
2007 2006 |
220,196 115,218 |
|
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Name |
Year |
Company-Matching Contributions to Savings and Deferred Compensation Plans(a) |
Company-Paid Portion of Executive Officer Life Insurance |
Reportable Perquisites(b) |
|||||||
---|---|---|---|---|---|---|---|---|---|---|---|
Alexander Toeldte | 2007 2006 |
$ |
48,961 22,535 |
$ |
360 360 |
$ |
129,050 |
||||
Robert M. McNutt |
2007 2006 |
12,390 12,600 |
297 270 |
|
|||||||
Miles A. Hewitt |
2007 2006 |
9,118 6,090 |
8,434 8,755 |
|
|||||||
Judith M. Lassa |
2007 2006 |
21,158 13,930 |
7,352 7,078 |
|
|||||||
Robert E. Strenge |
2007 2006 |
9,450 9,240 |
9,046 8,752 |
|
Name |
Year |
Nonbusiness Memberships |
Supplemental Healthcare |
Legal Fees |
Relocation Expenses |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Alexander Toeldte | 2006 | $ | 20,160 | $ | * | $ | 14,621 | $ | 94,269 |
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Grants of Plan-Based Equity Awards
The following table reflects the 2007 target incentive awards for the Named Executive Officers under Boise Cascade's annual variable Incentive and Performance Plan. For further information on the terms of these incentive awards, please refer to the Compensation Discussion and AnalysisAnnual Variable Incentive Compensation (Incentive and Performance Plan) section above. The Named Executive Officers' actual 2007 incentive awards were paid by Boise Cascade in February 2008 and are shown in the Non-Equity Incentive Plan Compensation column of the Summary Compensation Table. Boise Cascade did not grant any equity incentive plan awards to the Named Executive Officers in 2007.
|
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards |
|||
---|---|---|---|---|---|
Name |
|
||||
Grant Date |
Target ($) |
||||
Alexander Toeldte | 3/13/07 | $ | 325,000 | ||
Robert M. McNutt | 3/13/07 | 99,000 | |||
Miles A. Hewitt | 3/13/07 | 187,000 | |||
Judith M. Lassa | 3/13/07 | 130,500 | |||
Robert E. Strenge | 3/13/07 | 135,000 |
On May 2, 2008, the Named Executive Officers received the following grants of restricted stock shares and restricted stock units pursuant to the Boise Inc. Incentive and Performance Plan. For further information on the terms of these 2008 equity incentive awards, please refer to the Compensation Discussion and AnalysisLong-Term Incentive Compensation (Boise Inc. Restricted Stock Shares and Restricted Stock Units) section above.
Name |
Restricted Stock Shares |
Restricted Stock Units |
||
---|---|---|---|---|
Alexander Toeldte | 975,100 | | ||
Robert M. McNutt | 213,400 | | ||
Judith M. Lassa | 77,000 | | ||
Robert E. Strenge | | 107,000 |
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Outstanding Equity Awards at Fiscal Year-End
The following table reflects the number of the Named Executive Officers' 2004 Series C equity units and 2006 Series C equity units that had not vested as of December 31, 2007:
|
Stock Awards |
||||
---|---|---|---|---|---|
Name |
Number of Shares or Units of Stock That Have Not Vested (#) |
Value of Shares or Units of Stock That Have Not Vested ($)(1) |
|||
Alexander Toeldte | 3,150,000 | $ | 279,000 | ||
Robert M. McNutt | 563,507 | 71,437 | |||
Miles A. Hewitt | 1,118,600 | 266,866 | |||
Judith M. Lassa | 301,700 | 71,977 | |||
Robert E. Strenge | 301,700 | 71,977 |
In connection with the closing of the Acquisition, the Named Executive Officers were no longer participants in Boise Cascade's Management Equity Plan. On March 31, 2008, FPH paid the Named Executive Officers the following amounts for their vested Series B equity units and Series C equity units and their unvested Series B equity units.
Name |
Amount |
||
---|---|---|---|
Alexander Toeldte | $ | 740,397.20 | |
Robert M. McNutt | 367,674.87 | ||
Miles A. Hewitt | 2,165,498.92 | ||
Judith M. Lassa | 662,381.44 | ||
Robert E. Strenge | 704,049.94 |
Option Exercises and Stock Vested
The following table reflects the number of the Named Executive Officers' 2004 Series C equity units and 2006 Series C equity units that vested during 2007:
|
Stock Awards |
||||
---|---|---|---|---|---|
Name |
Number of Shares Acquired on Vesting (#) |
Value Realized on Vesting ($)(1) |
|||
Alexander Toeldte | 450,000 | $ | 49,500 | ||
Robert M. McNutt | 80,501 | 16,030 | |||
Miles A. Hewitt | 159,800 | 73,508 | |||
Judith M. Lassa | 43,100 | 19,826 | |||
Robert E. Strenge | 43,100 | 19,826 |
In connection with the closing of the Acquisition, the Named Executive Officers were no longer participants in Boise Cascade's Management Equity Plan. On March 31, 2008, FPH paid the Named
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Executive Officers the following amounts for their vested Series B equity units and Series C equity units and their unvested Series B equity units:
Name |
Amount |
||
---|---|---|---|
Alexander Toeldte | $ | 740,397.20 | |
Robert M. McNutt | 367,674.87 | ||
Miles A. Hewitt | 2,165,498.92 | ||
Judith M. Lassa | 662,381.44 | ||