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**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C.  20549**

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**FORM10-K**

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**ANNUAL REPORT PURSUANT TO SECTION 13 OR15(d) OF**

**THE SECURITIES EXCHANGE ACT OF 1934**

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**Yearended December 31, 2005**

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**CommissionFile No. 333-125952**

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# ** **

# **NEWPAGE CORPORATION**

**CourthousePlaza Northeast**

**Dayton,Ohio 45463**

**877.855.7243**

 
| State of Incorporation:           |   | **Delaware**   |
|-----------------------------------|--------|----------------|
| IRS Employer Identification  No.: |   | **05-0616156** |

 
| Securities Registered  Pursuant to Section 12 (b) of the Act: |   | **None** |
|---------------------------------------------------------------|--------|----------|
| Securities Registered  Pursuant to Section 12 (g) of the Act: |   | **None** |

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.                                Yes o                    Noý

 

Indicate by check mark if the registrant isnot required to file reports pursuant to Section 13 or Section 15(d)of the Act.                                Yes o                    Noý

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days.

                                Yesý                    Noo

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, andwill not be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III of thisForm 10-K or any amendment to this Form 10-K. ý

 

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

                Largeaccelerated filer o    Acceleratedfiler o              Non-acceleratedfiler ý

 

Indicate by check mark whether the registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).

                                Yeso                    Noý

 

The aggregate market value of the Company’scommon stock held by non-affiliates was $0 as of June 30, 2005.

 

There were 100 Common Shares, $0.01 par value,outstanding as of March 1, 2006.

 

DOCUMENTS INCORPORATED BY REFERENCE—None

 

 

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References to the “Company” or “NewPage”include NewPage Corporation, a Delaware corporation that is the Registrant, andeach of its subsidiaries. As applicable by the context used, references to “we,”“us” and “our” refer to NewPage and its subsidiaries, including ourpredecessor. Our address is Courthouse Plaza Northeast, Dayton, Ohio 45463, andour telephone number is (877) 855-7243. Our periodic reports filed with theSecurities and Exchange Commission (“SEC”) are available on our website atwww.newpagecorp.com.

 

**SAFE HARBORSTATEMENT; INDUSTRY DATA**

 

This annual report contains “forward-lookingstatements.” All statements other than statements of historical fact are “forward-lookingstatements” for purposes of federal and state securities laws. Forward-lookingstatements may include the words “may,” “plans,” “estimates,” “anticipates,” “believes,”“expects,” “intends” and similar expressions. Although we believe that suchstatements are based on reasonable assumptions, these forward-lookingstatements are subject to numerous factors, risks and uncertainties that couldcause actual outcomes and results to be materially different from thoseprojected or assumed in our forward-looking statements. These factors, risksand uncertainties include, among others, the following: our substantial levelof indebtedness; changes in the supply and/or demand and/or prices for ourproducts; the activities of competitors; changes in significant operatingexpenses, including raw material and energy costs; changes in currency exchangerates; changes in the availability of capital; general economic and businessconditions in the United States and elsewhere in the world; changes in theregulatory environment, including requirements for enhanced environmentalcompliance; and our ability to operate as a stand-alone business. Given theserisks and uncertainties, we caution you not to place undue reliance onforward-looking statements. We undertake no obligation to update or revise anyforward-looking statements, either to reflect new developments or for any otherreason, except as required by law.

 

We refer to informationregarding market data obtained from internal sources and industry publications.Although we believe the third-party market data is reliable, we cannotguarantee the accuracy or completeness of the information and have notindependently verified it. Industry prices for coated paper provided in this annualreport are derived from Resource Information Systems, Inc. (“RISI”) data unlessotherwise noted. North American data included in this annual report that hasbeen derived from RISI only includes data from the United States and Canada.U.S. industry pricing data included in this annual report has been derived fromRISI data; and represents pricing from the eastern United States only (asdefined by RISI). Also, any reference in industry statistics to grade No. 3 andgrade No. 4 coated paper relates to 60 lb. weight and 50 lb. weight,respectively.

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**PARTI**

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**ITEM 1.**                             BUSINESS

 

We are the largest coated papermanufacturer in North America, based on production capacity. We operate fiveintegrated pulp and paper mills in Kentucky, Maine, Maryland, Michigan andOhio, which, together with our distribution centers, are strategically locatednear major end-use markets, such as New York, Chicago and Atlanta. Our millshave a total annual production capacity of approximately 2.6 million short tonsof paper and approximately 200,000 short tons of market pulp.

 

We are a wholly-ownedsubsidiary of NewPage Holding Corporation (“NewPage Holding”). We acquired theprinting and writing papers group of MeadWestvaco Corporation (“MeadWestvaco”)on May 2, 2005 (the “acquisition”), but the acquisition was deemed to have beencompleted on April 30, 2005. MeadWestvaco was formed in January 2002 from themerger of the Mead Corporation and Westvaco Corporation.

 

We currently operate in twosegments: the Coated Paper segment and the Carbonless Paper segment. See theNotes to the Consolidated Financial Statements for more information on ourbusiness segments.

 

Coated paper is used primarilyin media and marketing applications, including corporate annual reports,high-end advertising brochures, magazines, catalogs and direct mailadvertising. Our largest product category is coated freesheet paper, which isused primarily for higher-end applications such as annual reports, brochures,coated labels and magazine covers. The remainder of our coated paper is coatedgroundwood paper, which is used primarily for catalogs, magazines andtextbooks. We also produce carbonless copy paper for business forms, as well asuncoated paper, digital printing paper and market pulp, a component used in themanufacturing of paper. We have long-standing relationships with many leadingpublishers, commercial printers, specialty retail merchandisers and papermerchants.

 

In January 2006, Rumford Falls PowerCompany, our indirect wholly-owned subsidiary, entered into a definitiveagreement with Brascan Power Inc. to sell two hydroelectric generatingfacilities located on the Androscoggin River in Rumford, Maine, for $144million. In February 2006, we entered into a definitive agreement to sell ourcarbonless paper business to P.H. Glatfelter Company for $80 million. Thetransactions are expected to close in the first half of 2006.

 

***The Acquisition and Related Transactions***

 

On January 14, 2005, EscanabaTimber LLC (“Escanaba Timber”), which is our indirect parent, and MeadWestvacoentered into an equity and asset purchase agreement (the “purchase agreement”)pursuant to which NewPage Corporation and its subsidiaries acquired theprinting and writing papers group of MeadWestvaco. The purchase agreement andrelated documents contemplated the occurrence of the following events (collectively,the “Transactions”), which were completed on May 2, 2005 but were deemed tohave been completed on April 30, 2005:

 

**•** Escanaba Timbercontributed $415 million of cash equity, as an investment in common stock, toNewPage Holding, our direct parent.

**•** NewPage Holdingissued $100 million of NewPage Holding PIK notes to MeadWestvaco as part of theconsideration and an additional $25 million of NewPage Holding PIK notes forcash. NewPage Holding contributed the net cash proceeds from the NewPageHolding PIK notes and the $415 million of cash contributed by Escanaba Timberto NewPage, as an investment in the common stock of NewPage.

 

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**•** NewPage enteredinto two senior secured credit facilities, consisting of a $750 million seniorsecured term loan and a $350 million senior secured asset-based revolvingcredit facility.

**•** NewPage issued$225 million of floating-rate senior secured notes due 2012 and $350 million of10% senior secured notes due 2012.

**•** NewPage issued$200 million of 12% senior subordinated notes due 2013.

**•** NewPage and itssubsidiaries paid approximately $2.06 billion for MeadWestvaco’s Printing andWriting Papers Group, of which $1.96 billion was paid in cash and $100 millionwas paid in the form of NewPage Holding PIK notes.

 

On April 6, 2005, Cerberus CapitalManagement, L.P. and its affiliates (“Cerberus”), which is the majority equitysponsor of our indirect parent, Maple Timber Acquisition LLC, entered into acommodity basket option contract with J. Aron & Company, an affiliate ofGoldman, Sachs & Co. Concurrently with the completion of the Transactions,Cerberus assigned all of its rights under the commodity basket option contractto NewPage and NewPage assumed all of Cerberus’ obligations thereunder.

 

***Organization***

 

The following chart shows ourorganizational structure. Except as indicated below, each entity in the chartowns 100% of the equity interests of the entity appearing immediately below it.

 
|   | Cerberus Capital Management LP and affiliates    |   |
|--------|--------------------------------------------------|--------|
|   |                                             |
|   | NewPage Investments LLC                          |   |
|   |                                             |
|   | Maple Timber Acquisition LLC (1)                 |   |
|   |                                             |
|   | Escanaba Timber LLC                              |   |
|   |                                             |
|   | NewPage Holding Corporation                      |   |
|   |                                             |
|   | **NewPage Corporation**                          |   |
|   |                                             |
|   | ***NewPage Corporation Operating Subsidiaries*** |   |
|   | Chillicothe Paper Inc.                           |   |
|   | Escanaba Paper Company                           |   |
|   | Luke Paper Company                               |   |
|   | Rumford Paper Company                            |   |
|   | Wickliffe Paper Company                          |   |
|        |                                                  |        |  |

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(1) Maple Timber Acquisition LLC’s membershipinterests consist of two separate series: a paper series and a timber series.The paper series consists of class A common percentage interests, class Bcommon percentage interests and a paper preferred interest. NewPage InvestmentsLLC holds 88.6% of the class A common percentage interests of the paper seriesand 100% of the paper preferred interest. Members of our management and ourchairman collectively hold 11.4% of the class A common percentage interests and100% of the class B common percentage interests of the paper series. The timberseries consists of the timber percentage interest and the timber profitsinterest and is held by Escanaba Timber Investments LLC, an affiliate ofCerberus, and certain members of management and our chairman. Pursuant to theoperating agreement of Maple Timber Acquisition LLC, the timber series managedthe timber-related assets through Maple Timber Acquisition LLC’s ownership ofEscanaba Timber LLC. Similarly, the paper series manages the paper-relatedassets through Maple Timber Acquisition LLC’s indirect ownership of NewPage.

 

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***Products***

 

Our principal products arecoated paper and carbonless paper. We also sell uncoated paper and pulp.

 

*CoatedPaper*

 

We are the largest coated papermanufacturer in North America based on production capacity, according to RISI.Coated papers are used primarily in media and marketing applications, includingcorporate annual reports, high-end advertising brochures, magazines, catalogsand direct mail advertising. Coated paper has a higher level of smoothness thanuncoated paper, which is achieved by applying a coating that is typicallyclay-based on the surface of the paper. As a result, coated paper achieveshigher reprographic quality and printability.

 

Coated paper comes in coatedfreesheet and coated groundwood, which generally differ in price and quality.The chemically-treated pulp used in freesheet applications produces brighterand smoother paper than the mechanical pulp used in groundwood papers. Coatedfreesheet papers comprised 51% of the paper we produced in 2005. According toRISI, based on 2005 production capacity, we were one of the largest producersof coated freesheet papers in North America, accounting for approximately 22%of all North American production capacity in 2005. We produce coated freesheetpapers in No. 1, No. 2 and No. 3 grades for higher-end uses such as corporateannual reports and high-end advertising and coated label paper with our C1S(coated one-side) paper line, which is used primarily for label and specialtyapplications.

 

Coated groundwood papers, whichrepresented 34% of the paper we produced in 2005, are typically lighter andless expensive than our coated freesheet products. According to RISI, based on2005 production capacity, we were the third largest coated groundwood producerin North America, accounting for approximately 14% of all North Americanproduction capacity. We produce coated groundwood papers in No. 3 and No. 4grades for use in applications requiring lighter paper stock such as magazines,catalogs and inserts.

 

We also sell coated seconds,which are paper products that are damaged, defective or otherwise do not meetour quality specifications. Coated seconds are sold at a discount, typically tomerchants for use by printers that have needs for these products.

 

Each of our paper grades isproduced in a variety of weights, sizes and finishes that can be gloss, dull ormatte. The coating process changes the gloss, ink absorption qualities, textureand opacity of the paper to meet customers’ performance requirements. Most ofour coated paper is shipped in rolls, while a portion is cut into sheets.

 

*CarbonlessPaper*

 

Carbonless paper enables a copyto be made without using carbon paper or other copying materials. Carbonlesspaper is similar in composition to high-quality bond paper, with the majorcomponent in both being cellulose. Carbonless paper is differentiated from bondpaper by the coatings used to manufacture it. These coatings are composed ofmicroencapsulated dyes, coreactants, adhesives, inert fillers and othermaterials used to ensure a smooth, uniform printing surface. Carbonless papercomprised approximately 8% of the paper we produced in 2005. Our carbonlesspaper is available in different styles and in a variety of different weightsand colors to meet customer specifications. Most of our carbonless paper isshipped in roll form, while the remainder is cut into sheets. The majority ofour carbonless paper sales are made under contract, the average term of whichis between three and five years from their dates of inception.

 

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*OtherProducts*

 

In addition to coated andcarbonless paper, we also produce uncoated paper and pulp. Uncoated papertypically is used for business forms, business stationery, general printingpaper and photocopy paper. We primarily sell uncoated paper to formsmanufacturers that also purchase carbonless paper from us. We typically produceuncoated paper to fill unused capacity, such as when we have excess capacity ona paper machine, but not on a coater. Producing uncoated paper allows us toenhance our manufacturing efficiency.

 

Pulp is the primary rawmaterial used in the production of printing, writing and packaging paper andtissue. Pulp is the generic term that describes the cellulose fiber developedfrom wood. These cellulose fibers may be separated by mechanical,thermo-mechanical or chemical processes. The chemical processes we use at ourmills involve removing the glues, which bind the wood fibers, to leavecellulose fibers. The pulp we sell, which is produced using chemical processes,is hardwood pulp, which is used primarily as the main ingredient for printing,writing and packaging paper, tissue and cardboard. We sell our pulp tomanufacturers both domestically and internationally.

 

***Manufacturing***

 

We operate five integrated pulpand paper mills, meaning that we produce paper, pulp and energy at them. Muchof the energy we produce at our mills is for our own use. Our mills have acombined annual production capacity of approximately 2.2 million tons ofcoated paper, approximately 220,000 tons of carbonless paper and approximately160,000 tons of uncoated paper. The following table lists the productsproduced at each of our mills, as well as each mill’s approximate annual papercapacity:

 
| **Location**           | ** ** | **Products**                              | ** ** | **Paper Capacity (short tons)** | ** ** |
|------------------------|------------|-------------------------------------------|------------|------------------------------------------------|------------|
| Chillicothe,  Ohio (1) |       | Carbonless and uncoated paper             |       | 355,000 tons/year                              |       |
| Escanaba,  Michigan    |       | Coated and uncoated paper                 |       | 760,000 tons/year                              |       |
| Luke,  Maryland        |       | Coated paper                              |       | 585,000 tons/year                              |       |
| Rumford,  Maine        |       | Coated paper and market pulp              |       | 625,000 tons/year                              | (2)        |
| Wickliffe,  Kentucky   |       | Coated and uncoated paper and market pulp |       | 280,000 tons/year                              | (3)        |

 

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(1) Facility is included incarbonless paper business to be sold to P.H. Glatfelter Company.

(2) Excludes approximately85,000 tons of market pulp production capacity at this facility.

(3) Excludes approximately 120,000tons of market pulp production capacity at this facility.

 

Over the past ten years, we haveinvested approximately $1.4 billion to build, maintain and update ourfacilities, enhance product mix, lower costs and meet environmentalrequirements. For example, our capital expenditures included rebuilding papermachines at our Luke, Maryland mill in 1997 and 1998, a paper machine upgradeat our Wickliffe, Kentucky mill in 2004 and installation of a new paper coaterat our Chillicothe, Ohio mill in 2004. These upgrades also included an upgradeof our papermaking technology to support our high-end coated grade lines. Followingthe completion of the merger that resulted in MeadWestvaco in January 2002through December 31, 2005, we have significantly reduced our costs byconsolidating operations and focusing on operational efficiency. For example,during this period we reduced our salaried headcount by 21% and our hourlyheadcount by 15%. Since December 2004, our overall headcount remained flatthrough productivity-based restructuring despite the addition of the necessaryinfrastructure in creating our corporate staff. In addition, we shut down fiveof our paper machines, closed one paper mill and reduced our maintenance costsby improving our annual shut-down maintenance procedures. We also enhanced ourmanufacturing efficiency by producing a large portion of our energyrequirements. We intend to continue to reduce our costs per ton by furtherimplementing best practices on a company-wide basis, rebuilding machines,enhancing our inventory and supply chain management and our manufacturing processes.

 

According to RISI, during the fourthquarter of 2005, the mills at which we produced our coated paper were in thetop 20% of efficiency of all coated paper mills in North America, Europe andAsia based on 

 

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the cash cost of delivery toChicago, assuming an average exchange rate during that period of $1.22 per Euroand an assumed cost per ton for freight to ship the paper from each mill toChicago.

 

Paper production is energyintensive. During 2005, we produced approximately 60% of our energyrequirements from steam produced during our chemical pulp manufacturingprocess. We obtained the remainder of our energy needs from third-partysuppliers. The energy we purchase from third-party suppliers consists ofelectricity and fuel, primarily natural gas and coal, used by us to generate someof our own energy. We purchase substantial portions of our coal needs underlong-term supply contracts, most of which relate to a specific plant and arewith a single provider. Most of these contracts have pricing mechanisms thatadjust or set prices based on current market prices. We are required to postletters of credit or other financial assurance obligations with certain of ourenergy and other suppliers.

 

To produce our paper products,we begin by taking wood and removing the bark from it. The debarked timber isthen cut into wood chips, which are placed into digester “cooking” vessels,mixed with various chemicals to produce pulp and then washed and bleached. Toturn the pulp into paper, it is placed into a paper machine. Hardwood andsoftwood pulp is blended based on the desired paper characteristics. To producecoated paper, uncoated paper is put through a coating process. We have bothon-machine coaters, which are integrated with our paper machines, and separateoff-machine coaters. On-machine coaters generally are considered to be moreefficient, while off-machine coaters generally are considered to have moreflexibility. For our carbonless paper, when the paper exits the paper machine,we add the carbonless coating on off-machine coaters. After the coating processis complete, the coated paper and carbonless paper are wound into rolls. Papermachines are large, complex machines that operate more efficiently whenoperated continuously. Paper machine production and yield decline when amachine is stopped for any reason. Therefore, we organize our manufacturingprocesses so that our paper machines and most of our paper coaters run almostcontinuously throughout the year. Some of our paper machines also offer us theflexibility to change the type of paper produced on the machine, which allowseasier matching of production schedules and seasonal and geographic demandswings.

 

We are the general partner and havea 30% investment in Rumford Cogeneration Company, L.P., a joint venture createdto generate power for us and for public sale. Under the limited partnershipagreement relating to this investment, until 2014, we have an option to purchaseall of our co-investors’ interests in the partnership for a purchase priceequal to a formula specified in the limited partnership agreement based on netpre-debt cash flow of the partnership. As a result of the expiration of a fixedpower rate agreement between Rumford Cogeneration Company and Central MainePower at the end of 2005, sales of electricity generated from the Rumfordfacility will be sold at market rates beginning in 2006.

 

***Raw Materials and Suppliers***

 

Wood fiber is our primary rawmaterial. The primary sources of wood fiber are timber and its byproducts, suchas wood chips. During 2005, we obtained approximately 13% of our wood for ourpaper mills from timberlands that were owned by Escanaba Timber, or itspredecessor, with the remainder purchased from third parties.

 

Contemporaneously with theconsummation of the acquisition, we entered into three separate butsubstantially similar fiber supply agreements with Escanaba Timber, pursuant towhich Escanaba Timber would supply our Escanaba, Chillicothe and Wickliffe millswith hardwood, softwood and aspen pulpwood for an initial term expiringDecember 31, 2016, with a one-time option for us to extend the term of theagreement pertaining to each applicable mill for an additional three-yearperiod. The agreements required Escanaba Timber to sell to each of the threemills, and required us to purchase from each of the three mills, a designatedminimum number of tons of each type of pulpwood during the term. The annualminimum number of tons of pulpwood purchased is approximately 500,000, 240,000and 140,000 for 

 

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each of our Escanaba,Chillicothe and Wickliffe mills, respectively, although we maintain the rightto purchase a substantial portion of any additional pulpwood harvested byEscanaba Timber during each year. The price of the pulpwood purchased was basedon market prices in the relevant region, and is subject to semi-annualadjustment based on prices on comparable purchases by the applicable mill fromother pulpwood suppliers during the prior six-month period.

 

In the fourth quarter of 2005,Escanaba Timber sold substantially all of its timberland to third parties. Theacquirers have assumed the commitments under the fiber supply agreements and wehave negotiated certain revisions to the agreements with the acquirers. Wereceived $4 million for changes made to a fiber supply agreement in conjunctionwith one of Escanaba Timber’s dispositions. We have accounted for this paymentas an additional capital contribution from Escanaba Timber.

 

The amount of timber we receivedeach year from Escanaba Timber, or its predecessor, has varied, and is expectedto continue to vary, according to the price and supply of wood fiber for saleon the open market and the harvest levels we and the timberland owners deemappropriate in the management of the timberlands.

 

For our Rumford, Maine mill, wehave a long-term fiber supply agreement with Prime Timber LLC, an affiliate ofWagner Forest Management, Ltd., which expires on December 31, 2053. Under thatagreement, all pulpwood that Prime Timber harvests from 640,000 acres oftimberlands must be made available to us. Furthermore, until 2013, Prime Timberhas agreed to make available to us a minimum specified supply of pulpwood.

 

We seek to fulfillsubstantially all of our wood needs with timber that is harvested byprofessional loggers trained in certification programs that are designed topromote sustainable forestry. We do not accept wood from old growth forests,forests of exceptional conservation value or rainforests. We also do not acceptillegally harvested or stolen wood at our mills. We have formally notified ouroutside wood chip suppliers that we expect their wood supply will be producedby trained loggers in compliance with sustainable forestry principles. Our goalis to ensure that sustainable forestry-trained loggers are used to supplyessentially all wood to our mills. We oppose and, through our participation inthe American Forest and Paper Association and other industry organizations, areworking against illegal logging in the United States and worldwide.

 

We use chemicals in theproduction of paper. These include latex and starch, which we use to affixcoatings to our paper; calcium carbonate, which brightens our paper; titanium,which makes our paper opaque; and other chemicals used to bleach or color ourpaper. We purchase these chemicals from various suppliers and are not dependenton a single supplier for any of our chemicals, although some of our specialtychemicals are available only from a small number of suppliers. All of our papermills produce pulp. We use most of the pulp we produce and sell excess pulp tothird parties.

 

***Customers***

 

We have a diversified customerbase. We have long-standing relationships with leading publishers, commercialprinters, specialty retail merchandisers and paper merchants. Our relationshipswith our ten largest customers, which contributed approximately 51% of our netsales for the eight months ended December 31, 2005, average over 20 years. Our keycustomers for coated paper include: Hearst Publications, McGraw-Hill Companies,Pearson Education and Time, in publishing; Banta Corporation, QuadGraphics,QuebecorWorld and RR Donnelley & Sons, in commercial printing;Williams-Sonoma, in specialty retailing; and Unisource Worldwide and xpedx,which are paper merchants. Some of our key customers for carbonless paper areR.R. Donnelley & Sons and Standard Register, which manufacture 

 

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business forms, and Brown PaperCompany, a paper merchant, specializing in sales to manufacturers of businessforms.

 

During 2005, xpedx accountedfor approximately 18% of our total net sales. No other customer accounted formore than 10% of our 2005 net sales. We have long-term agreements with certainof our customers, including with xpedx for a small portion of its paper purchases.Some of our other purchase agreements are requirements contracts, while someare master agreements establishing terms and, in some cases, pricingmechanisms, by which sales to that customer will be made.

 

***Sales, Marketing and Distribution***

 

We sell our paper productsprimarily in the United States. Our products are sold directly by our own salespersonnel to end-use customers, including Banta Corporation, HearstPublications, R.R. Donnelley & Sons, McGraw Hill Companies, PearsonEducation, QuadGraphics, QuebecorWorld, Standard Register, Time,Williams-Sonoma, and to select paper merchants, including Brown Paper Company,Unisource Worldwide and xpedx. Our sales force sells primarily to largecustomers, such as publishers, printers and specialty retail merchandisers. Inaddition, sometimes our sales professionals refer end-user customers to ourmerchants and encourage them to place orders through these merchants. We haveapproximately 200 sales professionals, some of whom sell our products to paper merchants.As part of our customer service, we seek to provide value-added services to ourcustomers. Within the merchant channel, we work closely with our customers tomeet specifications, to ship a large portion of our products directly toend-users and to utilize joint marketing efforts, when appropriate.

 

The locations of our papermills, together with our distribution centers, also give us certain logisticaladvantages due to their close proximity to several major markets, including NewYork, Chicago and Atlanta. We have three major distribution facilities locatedin Bedford, Pennsylvania, Chicago, Illinois and Columbus, Ohio. In total, weown two warehouses and lease space in 22 warehouses owned by third parties. Weuse third parties to ship our products, by truck or rail. We utilize anintegrated tracking system that tracks all of our products through thedistribution process. Our customers can access order tracking information overthe Internet.

 

***Competition***

 

The North American paper marketis highly competitive. We compete based on a number of factors, includingprice, product availability, quality, breadth of product offerings, customerservice and distribution capabilities.

 

In North America, we competewith both local coated paper production and imports from non-North Americansources, principally from Europe and Asia. Foreign competition in North Americais determined primarily by worldwide supply and demand for coated paper,particularly in Europe and Asia, the exchange rate of the U.S. dollar relativeto other currencies, especially the Euro, market prices in North America andother markets and the cost of ocean-going freight. For 2005, imports into theUnited States were down May 2004, primarily as a result of strikes in Finlandand at the Miramichi mill in Canada and slightly lower demand. Imports in 2006 maybe higher as a result of new capacity brought online in China at the end of2005. Our primary competitors with North American coated paper manufacturingoperations are International Paper Company, Sappi Limited, Stora Enso Oyj andUPM-Kymmene Corporation.

 

Our principal competitor forcarbonless paper in North America is Appleton Papers Inc. Other competitors includeNekoosa Coated Papers LLC and Nashua, which announced on February 7, 2006 thatit had been acquired by Nekoosa, and non-North American manufacturers. Since1994, sales of 

 

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carbonless paper in NorthAmerica have been declining. The decline is the result of increasing relianceon competing products, such as thermal paper, and technologies that do not useimpact printing to create images, such as electronic data storage andelectronic communications, as well as increased use of thermal, laser andinkjet printers.

 

Some of our competitors havegreater financial and other resources than we do or may be better positionedthan we are to compete for certain opportunities.

 

***Information Technology Systems***

 

We utilize integratedinformation technology systems that help us manage our product pricing,customer order processing, customer billing, raw material purchasing, inventorymanagement, production controls and shipping management, as well as our humanresources management, financial management and budgeting. Our informationtechnology systems principally utilize third-party software. On August 31,2005, we entered into a Master Services Agreement with Accenture LLP. Under theagreement, Accenture will provide information technology services necessary tosupport our operations through January 31, 2012 and human resources servicesnecessary to support our operations through January 31, 2013, at specifiedmonthly base prices (with incremental charges for additional services provided)plus transition charges. The information technology services includedevelopment, maintenance and support of our software, mainframe, server,managed network and application management systems. Accenture is also obligatedto support and maintain third-party software and hardware currently used in ouroperations. The human resource services include maintenance and support ofemployee benefits, payroll and tax services. Accenture may immediatelyterminate the agreement in the event that we materially breach any of ourduties and/or obligations under the agreement and fail to cure such breachwithin 30 days. In addition, if Accenture fails to perform its services at orabove fixed service levels, we have the ability to terminate the informationtechnology services portion of the Master Services Agreement.

 

***Intellectual Property***

 

In general, paper productiondoes not rely on proprietary processes or formulas, except in highlyspecialized or custom grades, which do not comprise a large portion of ourbusiness. We hold foreign and domestic patents as a result of our research andproduct development efforts. We also own registered trademarks for some of ourproducts. Although, in the aggregate, our patents and trademarks are materialto our business, financial condition and results of operations, we believe thatthe loss of any one or any related group of intellectual property rights wouldnot have a material adverse effect on our business, financial condition orresults of operations.

 

***Employees***

 

As of December 31, 2005, we hadapproximately 6,000 employees. Approximately 75% of our employees arerepresented by labor unions, principally by United Steelworkers (“USW”) and theInternational Brotherhood of Electrical Workers (“IBEW”). Our six collectivebargaining agreements with USW expire at various times between August 2006 andJune 2010. Our three collective bargaining agreements with IBEW expire atvarious times between August 2006 and January 2009.

 

We have not experienced any significantwork stoppages or employee-related problems that had a material effect on ouroperations over the last five years. We consider our employee relations to begood.

 

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***Environmental and Other Governmental Regulations***

 

Our operations are subject tofederal, state and local environmental laws and regulations, including, but notlimited to, the Federal Water Pollution Control Act of 1972, the Federal CleanAir Act and the Federal Resource Conservation and Recovery Act and theComprehensive Environmental Response, Compensation and Liability Act of 1980,as amended (“CERCLA”). Among our activities subject to environmental regulationare the emissions of air pollutants, discharges of wastewater and stormwater,storage, treatment and disposal of materials and waste, remediation of soil,surface water and ground water contamination, and liability for damages tonatural resources. In addition, we are required to obtain and maintainenvironmental permits in connection with our operations. Many environmentallaws and regulations provide for substantial fines or penalties and criminalsanctions for violations.

 

Certain of these environmentallaws, such as CERCLA and analogous state laws, provide for strict, and undercertain circumstances, joint and several liability for investigation andremediation of releases of hazardous substances into the environment, includingsoil and groundwater. These laws may apply to properties presently or formerlyowned or operated by an entity or its predecessors, as well as to conditions atproperties at which wastes attributable to an entity or its predecessors weredisposed. Under these environmental laws, a current or previous owner oroperator of real property, and parties that generate or transport hazardoussubstances that are disposed of at real property, may be held liable for thecost to investigate or clean up such real property and for related damages tonatural resources. We handle and dispose of wastes arising from our milloperations, including by the operation of a number of landfills. We may besubject to liability, including liability for investigation and cleanup costs,if contamination is discovered at one of our paper mills or another locationwhere we have disposed of, or arranged for the disposal of, wastes. While webelieve, based upon current information, that we are in substantial compliancewith all applicable environmental laws, rules and regulations, we could besubject to potentially significant fines or penalties for any failure to complywith any environmental law, rule or regulation.

 

Compliance with environmentallaws and regulations is a significant factor in our business. We have made, andwill continue to make, significant expenditures to comply with theserequirements. In connection with compliance with environmental laws andregulations we incurred capital expenditures of approximately $11 million in2005, and we expect to incur capital expenditures of $18 million in 2006 and $27million in 2007 in order to maintain compliance with applicable federal, stateand local environmental laws and regulations and to meet new regulatoryrequirements. We anticipate that environmental compliance will continue torequire increased capital expenditures over time as environmental laws orregulations, or interpretations thereof, change or the nature of our operationsrequire us to make significant additional capital expenditures. A significantportion of anticipated environmental capital expenditures in 2006 will be spentin connection with new emission control technology meant to comply with theFederal Clean Air Act and our implementation of the Cluster Rule issued by theEPA in 1998. The Cluster Rule regulations established requirements regardingair emissions and wastewater discharges from pulp and paper mills to be met bythe year 2006. Compliance with the Cluster Rule requires integrated pulp andpaper mills to install control equipment to limit the release of certainpollutants into the air and water. In addition, our mills will incur increasedoperating expenses associated with compliance with the Cluster Rule regulationsand the operation of the control equipment.

 

Our operations also are subjectto a variety of worker safety laws. The Occupational Safety and Health Act, theU.S. Department of Labor Occupational Safety and Health AdministrationRegulations and analogous state laws and regulations mandate generalrequirements for safe workplaces for all employees. We believe that we areoperating in material compliance with applicable employee health and safetylaws.

 

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***Available Information***

 

Our annual report on Form 10-K,quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments tothose reports are available, without charge, on our website,www.newpagecorp.com, as soon as reasonably practicable after they are filedelectronically with the SEC. The company will also provide a free copy of anyof our filed documents upon written request to: General Counsel, NewPageCorporation, Courthouse Plaza Northeast, Dayton, Ohio 45463.

 

The public may read and copyany materials we file with the SEC at the SEC’s Public Reference Room at 100 FStreet, NE, Washington, DC 20549. The public may obtain information on theoperation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.The SEC maintains an Internet site that contains reports, proxy and informationstatements, and other information regarding issuers that file electronicallywith the SEC (http://www.sec.gov).

 

**ITEM 1A.**                    RISKFACTORS

 

The risks discussed below, anyof which could materially affect our business, financial condition or resultsof operations, are not the only risks facing us. Additional risks anduncertainties not currently known to us or that we currently deem to beimmaterial may also materially and adversely affect our business, financialcondition or results of operations.

 

***We have a limited operating history as a separate company. Accordingly,our historical combined financial information may not be representative of ourresults as a separate company.***

 

We operated as a division ofMeadWestvaco prior to the acquisition. Therefore, we have a limited operatinghistory as a separate company. Our business strategy as an independent entitymay not be successful on a long-term basis. We may not be able to grow ourbusiness as planned and may not remain a profitable business. In addition, thehistorical combined financial information for periods prior to the acquisitionmay not necessarily reflect what our results of operations, financial conditionand cash flows would have been had we been a separate independent entitypursuing our own strategies during the periods presented. Our limited operatinghistory as a separate entity makes evaluating our business and our futurefinancial prospects difficult. As a result, our business, financial conditionand results of operations may differ materially from our expectations based onhistorical financial information.

 

Our cost structure following theacquisition is not comparable to the cost structure that we experienced inprior periods. Our management has limited experience managing our business as aseparate company with a significant amount of indebtedness. We cannot assureyou that our cost structure in future periods will be consistent with ourcurrent expectations or will permit us to operate our business profitably.

 

***Our substantial level of indebtedness could adversely affect ourbusiness, financial condition or results of operations. Despite our currentindebtedness level, we may still be able to incur substantially more debt,which could exacerbate the risks associated with our substantial leverage.***

 

We have substantialindebtedness. As of December 31, 2005, we had $1,563 million of total indebtedness(excluding $24 million in outstanding letters of credit). Our revolving seniorsecured credit facility also permits additional borrowings of up to a maximumof $280 million. Our substantial indebtedness could have importantconsequences, including our ability to obtain additional financing for workingcapital, debt service requirements, general corporate or other purposes may beimpaired; we must use a substantial portion of our cash flow to pay interestand principal on our indebtedness, which will reduce the funds available to usfor other purposes; we are more vulnerable to economic downturns and adverseindustry conditions; our ability to capitalize on business opportunities and toreact to competitive 

 

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pressures and changes in ourindustry as compared to our competitors may be compromised due to our highlevel of indebtedness; and our ability to refinance our indebtedness may belimited.

 

In addition, we cannot assureyou that we will be able to refinance any of our debt on commerciallyreasonable terms or at all. If we are unable to make payments or refinance ourdebt or obtain new financing under these circumstances, we may have to considerother options, such as: sales of assets; sales of equity; and/or negotiationswith our lenders to restructure the applicable debt.

 

Our senior secured creditfacilities and the indentures governing our notes may restrict, or market orbusiness conditions may limit, our ability to use some of our options. Theterms of the indentures governing the notes permit us to incur substantialadditional indebtedness in the future. If we incur any additional indebtedness,the related risks that we now face could intensify.

 

***A substantial portion of our debt bears interest at variable rates. Ifmarket interest rates increase, it could adversely affect our cash flow orcompliance with our debt covenants.***

 

As of December 31, 2005, $1,019million of our debt consisted of borrowings under our senior secured creditfacilities and our floating-rate senior secured notes due 2012. All of thisdebt bears interest at variable rates. If market interest rates increase,variable-rate debt will create higher debt service requirements, which couldadversely affect our cash flow or compliance with our debt covenants. As ofDecember 31, 2005, weighted average interest rates on borrowings under oursenior secured credit facilities were 7.52% and 10.50% on the floating ratesenior secured notes due 2012. Each one-eighth percentage change in LIBOR wouldresult in a $1 million change in annual interest expense based on our debtoutstanding at December 31, 2005, without taking into account any interest ratehedging agreements. While we may enter into agreements limiting our exposure tohigher interest rates, any such agreements may not offer complete protectionfrom this risk.

 

***Servicing our indebtedness will require a significant amount of cash.***

 

Our ability to generatesufficient cash depends on numerous factors beyond our control, and we may beunable to generate sufficient cash flow to service our debt obligations. Ourability to make payments on and to refinance our indebtedness will depend onour ability to generate cash in the future. This, to a certain extent, issubject to general economic, political, financial, competitive, legislative,regulatory and other factors that are beyond our control. During the year endedDecember 31, 2005, we expended approximately $201 million to service ourindebtedness as compared to approximately $48 million during the year endedDecember 31, 2004. This represents an increase of approximately 300%. We cannotassure you that our business will generate sufficient cash flow fromoperations, or that future borrowings will be available to us under our seniorsecured credit facilities in an amount sufficient to enable us to pay ourindebtedness or to fund our other liquidity needs. If our cash flows andcapital resources are insufficient to allow us to make scheduled payments onour indebtedness, we may need to reduce or delay capital expenditures, sellassets, seek additional capital or restructure or refinance all or a portion ofour indebtedness on or before maturity. We cannot assure you that we will beable to refinance any of our indebtedness on commercially reasonable terms orat all, or that the terms of that indebtedness will allow any of the abovealternative measures or that such measures would satisfy our scheduled debtservice obligations. If we are unable to generate sufficient cash flow orrefinance our debt on favorable terms it could significantly adversely affectour financial condition, the value of the outstanding debt and our ability tomake any required cash payments under our indebtedness.

 

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***The senior secured credit facilities are secured by substantially allof our assets.***

 

NewPage Holding is a guarantor,along with our domestic subsidiaries, of our senior secured credit facilities.Our indebtedness is secured by collateral comprising substantially all of ourassets. Holders of secured debt have claims that are prior to those of otherdebtholders up to the value of the assets. On December 31, 2005, there was $794million of senior secured indebtedness outstanding under the senior secured creditfacilities (excluding $24 million in outstanding letters of credit). The seniorsecured credit facilities permit additional borrowings of up to a maximum of$280 million under the revolving portion of the facility. In the event that oursecured creditors, including lenders under our senior secured creditfacilities, exercise their rights with respect to their collateral, the securedcreditors would be entitled to be repaid in full from the proceeds of thoseassets before those proceeds would be available for distribution to othercreditors. In the event of any distribution or payment of our assets in anyforeclosure, dissolution, winding-up, liquidation, reorganization or otherbankruptcy proceeding, holders of secured debt will have prior claim to our assetsthat constitute their collateral. If any of the foregoing events occur, wecannot assure you that there will be sufficient assets to pay amounts due onmore junior borrowings.

 

***Our debt instruments, including the indentures governing the notes andour senior secured credit facilities, impose significant operating andfinancial restrictions on us.***

 

The indentures governing thenotes and our senior secured credit facilities impose significant operating andfinancial restrictions on us. These restrictions limit our ability to, amongother things: incur additional indebtedness or guarantee obligations; repayindebtedness prior to stated maturities; pay dividends or make certain otherrestricted payments; make investments or acquisitions; create liens or otherencumbrances; transfer or sell certain assets or merge or consolidate withanother entity; engage in transactions with affiliates; and engage in certainbusiness activities. In addition to the covenants listed above, our seniorsecured credit facilities require us to meet specified financial ratios andtests and restrict our ability to make capital expenditures. Any of theserestrictions could limit our ability to plan for or react to market conditionsor meet extraordinary capital needs and could otherwise restrict corporateactivities. Our ability to comply with these covenants may be affected byevents beyond our control, and an adverse development affecting our businesscould require us to seek waivers or amendments of covenants, alternative oradditional sources of financing or reductions in expenditures. We cannot assureyou that such waivers, amendments or alternative or additional financings couldbe obtained, or if obtained, would be on terms acceptable to us. A breach ofany of the covenants or restrictions contained in any of our existing or futurefinancing agreements, including our inability to comply with the requiredfinancial covenants in our senior secured credit facilities, could result in anevent of default under those agreements. Such a default could allow the lendersunder our financing agreements, if the agreements so provide, to discontinuelending, to accelerate the related debt as well as any other debt to which across-acceleration or cross-default provision applies, and to declare allborrowings outstanding thereunder to be due and payable. In addition, thelenders could terminate any commitments they had made to supply us with furtherfunds. If the lenders require immediate repayments, we may not be able to repaythem.

 

***We may not have the ability to raise the funds necessary to finance thechange of control offers required by the indentures governing our indebtedness.***

 

Upon the occurrence of a changeof control, we must offer to buy back certain indebtedness at a price greaterthan par, together with any accrued and unpaid interest, if any, to the date ofthe repurchase. Our failure to purchase, or give notice of purchase of, thisindebtedness would be a default under the indentures governing the applicableindebtedness, which would also be a default under our senior secured creditfacilities. If a change of control occurs, it is possible that we may not havesufficient assets at the time of the change of control to make the requiredrepurchase of indebtedness or to satisfy all obligations under our seniorsecured credit facilities and the indentures governing our indebtedness. Inorder to satisfy 

 

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our obligations, we could seekto refinance the indebtedness under our senior secured credit facilities andthe indentures governing the indebtedness or obtain a waiver from the lendersor holders of the indebtedness. We cannot assure you that we would be able toobtain a waiver or refinance our indebtedness on terms acceptable to us, if atall.

 

***Our controlling equity holder may take actions that conflict withinterests of the debtholders.***

 

Substantially all of the votingpower of our equity is held by an affiliate of Cerberus. Accordingly, Cerberusindirectly controls the power to elect our directors and officers, to appointnew management and to approve all actions requiring the approval of the holdersof our equity, including adopting amendments to our constituent documents andapproving mergers, acquisitions or sales of all or substantially all of ourassets. The directors have the authority, subject to the terms of our debt, toissue additional indebtedness or equity, implement equity repurchase programs,declare dividends and make other such decisions about our equity. In addition,the interests of our controlling equity holder could conflict with debtholders’interests. For example, if we encounter financial difficulties or are unable topay our debts as they mature, the interests of our controlling equity holdermight conflict with the debtholders. Our controlling equity holder also mayhave an interest in pursuing acquisitions, divestitures, financings or othertransactions that, in their judgment, could enhance their equity investment,even though such transactions might involve risks to the debtholders.

 

***We have limited ability to pass through increases in our costs; increasesin our costs or decreases in our product prices could adversely affect ourbusiness, financial condition or results of operations.***

 

Prices of paper products aredetermined by overall supply and demand. We therefore have limited ability tocontrol the pricing of our products. Market prices of grade No. 3 coated paper,60 lb. weight, which is an industry benchmark for coated paper pricing, havefluctuated since 2000 from a high of $950 per ton to a low of $705 per ton.Because market conditions determine the price for our paper products, the pricefor our products could fall below our cash production costs. Our earnings aresensitive to price changes for our products, with the effect of price changeson coated paper being the greatest. Additionally, even though our costs mayincrease, our customers may not accept price increases for our products, or theprices for our products may decline. Therefore, our ability to achieveacceptable margins is principally dependent on managing our cost structure andmanaging changes in raw materials prices, which represent a large component ofour operating costs and fluctuate based upon factors beyond our control. If theprices of our products decline, or if our raw material costs increase, it couldhave a material adverse effect on our business, financial condition and resultsof operations. For a further discussion of the variability of our coated paperprices and our costs and expenses, see “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations—Selected Factors that Affect ourOperations.”

 

***The paper industry is cyclical. Fluctuations in supply and demand forour products could materially adversely affect our business, financialcondition and results of operations.***

 

The paper industry is acommodity market to a significant extent and is subject to cyclical marketpressures. North American demand for coated paper products tends to declineduring a weak U.S. economy. Accordingly, general economic conditions may have amaterial adverse effect on the demand for our products, which could have amaterial adverse effect on our business, financial condition and results ofoperations. In addition, currency fluctuations can have a significant effect onthe supply of coated paper products in North America. If the U.S. dollarstrengthens, imports may increase, which, in turn, would cause the supply ofpaper products available in the North American market to increase. Foreignovercapacity also could result in an increase in the supply of paper productsavailable in the North American market. An increased supply of paper in NorthAmerica could put downward pressure on 

 

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prices and/or cause us to losesales to competitors, either of which could have a material adverse effect onour business, financial condition and results of operations.

 

***The markets in which we operate are highly competitive.***

 

Our business is highly competitive.Competition is based largely on price. We compete with numerous North Americanpaper manufacturers. We also face competition from foreign producers, some ofwhich are lower cost producers than we are or are subsidized by governments.Some of our competitors have advantages in one or more of the following: lowerraw material and labor costs and fewer environmental and governmentalregulations to comply with than we do. Furthermore, some of our competitorshave greater financial and other resources than we do or may be betterpositioned than we are to compete for certain opportunities. Our non-U.S.competitors may develop a competitive advantage over us and other U.S.producers if the U.S. dollar strengthens in comparison to the home currency ofthose competitors or ocean shipping rates decrease. If the U.S. dollarstrengthens, if shipping rates decrease or if overseas supply exceeds demand,imports may increase, which, in turn, would cause the supply of paper productsavailable in the North American market to increase. An increased supply ofpaper could cause us to lower our prices or lose sales to competitors, eitherof which could have a material adverse effect on our business, financialcondition and results of operations. In addition, the following factors willaffect our ability to compete: product availability; the quality of ourproducts; our breadth of product offerings; our ability to maintain plantefficiencies and high operating rates and thus lower our average manufacturingcosts per ton; customer service and our ability to distribute our products ontime; and the availability and/or cost of chemicals, wood, energy and other rawmaterials and labor. Recent trends in competing products and technologies,including electronic data transmission and storage of credit card receipts andthe Internet, have reduced the demand for carbonless paper. The carbonlesspaper market has decreased 18% from 2001 to 2005. We expect the demand forcarbonless paper to continue to decline due to competing products andtechnologies.

 

***If we are unable to obtain raw materials, including petroleum-basedchemicals, at favorable prices, or at all, it could adversely affect ourbusiness, financial condition and results of operations.***

 

We have no timber holdings andpurchase wood, chemicals and other raw materials from third parties. We mayexperience shortages of raw materials or be forced to seek alternative sourcesof supply. If we are forced to seek alternative sources of supply, we may notbe able to do so on terms as favorable as our current terms or at all. Theprices for many chemicals, especially petroleum-based chemicals, have increasedsubstantially over the last year, increasing our chemical costs from $167 perton of paper produced for the year ended December 31, 2004 to $183 per ton ofpaper produced for the year ended December 31, 2005, and prices are expected toremain volatile for the foreseeable future. Chemical suppliers that usepetroleum-based products in the manufacture of their chemicals may, due to asupply shortage, ration the amount of chemicals available to us and/or we maynot be able to obtain the chemicals we need at favorable prices, if at all.Certain specialty chemicals that we purchase are available only from a smallnumber of suppliers. If any of these suppliers were to cease operations orcease doing business with us, we may be unable to obtain such chemicals atfavorable prices, if at all. In addition, wood prices are dictated largely bydemand. Wood supply also sometimes is limited by fire, insect infestation,disease, ice and wind storms, floods or other weather conditions. Chemicalsuppliers may be adversely affected by, among other things, hurricanes andother natural disasters. Any disruption in the supply of chemicals, wood orother inputs could affect our ability to meet customer demand in a timelymanner and could harm our reputation. As we have limited ability to passthrough increases in our costs to our customers absent increases in marketprices for our products, material increases in the cost of our raw materialscould have a material adverse effect on our business, financial condition andresults of operations.

 

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***We are involved in continuous manufacturing processes with a high degreeof fixed costs. Any interruption in the operations of our manufacturingfacilities may affect our operating performance.***

 

We seek to run our pulp millsand paper machines on a nearly continuous basis for maximum efficiency. Anyunplanned plant downtime at any of our paper mills results in unabsorbed fixedcosts that negatively affect our results of operations for the period in whichwe experience the downtime. Due to the extreme operating conditions inherent insome of our manufacturing processes, we may incur unplanned businessinterruptions from time to time and, as a result, we may not generatesufficient cash flow to satisfy our operational needs. In addition, many of thegeographic areas where our production is located and where we conduct our businessmay be affected by natural disasters, including snow storms, forest fires andflooding. Such natural disasters could cause our mills to stop running, whichcould have a material adverse effect on our business, financial condition andresults of operations. Furthermore, during periods of weak demand for paperproducts, we may experience market-related downtime, which could have amaterial adverse effect on our financial condition and results of operations.

 

***Our operations require substantial ongoing capital expenditures, and wemay not have adequate capital resources to fund all of our required capitalexpenditures.***

 

Our business is capitalintensive, and we incur capital expenditures on an ongoing basis to maintainour equipment and comply with environmental laws, as well as to enhance theefficiency of our operations. Our total capital expenditures were $84 millionduring 2005, including $9 million for maintenance capital expenditures and $11million for environmental capital expenditures related to our facilities. Weexpect to spend approximately $90 million on capital expenditures during 2006,including approximately $3 million for maintenance capital expenditures andapproximately $18 million for environmental capital expenditures related to ourfacilities. We anticipate that our available cash resources and cash generatedfrom operations will be sufficient to fund our operating needs and capitalexpenditures for the foreseeable future. However, if we require additionalfunds to fund our capital expenditures, we may not be able to obtain them onfavorable terms, or at all. If we cannot maintain or upgrade our facilities andequipment as we require or to ensure environmental compliance, it could have amaterial adverse effect on our business, financial condition and results ofoperations.

 

***Rising energy or chemical prices and/or supply shortages couldadversely affect our business, financial condition and results of operations.***

 

Although a significant portionof our energy requirements is satisfied by steam produced as a byproduct of ourmanufacturing process, we purchase natural gas, coal and electricity to run ourmills. Energy costs have increased substantially over the last several monthsand are expected to remain volatile for the foreseeable future. In addition,energy suppliers and chemical suppliers that use petroleum-based products inthe manufacture of their chemicals may, due to supply shortages, ration theamount of energy or chemicals available to us and we may not be able to obtainthe energy or chemicals we need to operate our business at acceptable prices orat all. Any significant energy or chemical shortage or significant increase inour energy or chemical costs in circumstances where we cannot raise the priceof our products due to market conditions would have a material adverse effecton our business, financial condition and results of operations. Furthermore, wemay be required to post letters of credit or other financial assuranceobligations with certain of our energy and other suppliers because we are a newcompany, which could limit our financial flexibility. Additionally, due toincreased fuel costs, suppliers, distributors and freight carriers have chargedfuel surcharges, which have increased recently. If these fuel surcharges continueto increase significantly, they could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

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In addition, an outbreak orescalation of hostilities between the United States and any foreign power and,in particular, events in the Middle East, or weather events such as hurricanes,could result in a real or perceived shortage of oil and/or natural gas, whichcould result in an increase in energy and/or chemical prices.

 

***We depend on a small number of customers for a significant portion ofour business.***

 

Our largest customer, xpedx, adivision of International Paper Company, accounted for 18% of our 2005 netsales. Our ten largest customers (including xpedx) accounted for 51% of our2005 net sales. The loss of, or reduction in orders from, any of thesecustomers or other customers could have a material adverse effect on ourbusiness, financial condition and results of operations, as could significantcustomer disputes regarding shipments, price, quality or other matters.

 

Furthermore, we extend tradecredit to certain of our customers to facilitate the purchase of our products,and rely on their creditworthiness. Accordingly, a bankruptcy or a significantdeterioration in the financial condition of any of our significant customerscould have a material adverse effect on our business, financial condition andresults of operations, due to a reduction in purchases, a longer collectioncycle or an inability to collect accounts receivable.

 

***Our basket option contract may not protect us from decreases in ourcoated paper prices.***

 

Contemporaneously with the acquisition,we entered into a three-year commodity basket option contract that is intendedto help mitigate the effects we would experience if coated paper prices were tofall to the levels experienced from 2001 to the middle of 2003, which were thelowest prices for coated paper in the last twenty years. The value of the basketoption contract is not specific to changes in coated paper prices, but insteadis tied to market prices for a mix of commodities and currencies, whichtogether, exhibited a correlation with the monthly average U.S. industry pricesof coated paper grades No. 3 and No. 4 of 83% from December 1998 throughJanuary 2005 and 84% from January 2003 through January 2005. Although thebasket option contract is intended to help mitigate the adverse effect of adecline in North American coated paper prices, we cannot assure you that itwill do so adequately or that the historical level of correlation will continueduring the term of the basket option contract. Accordingly, the basket optioncontract may not protect us from risk of financial loss in certaincircumstances, including but not limited to instances in which: our sales, orproduction are less than expected; we are unable to increase our prices tooffset any unhedged cost increases; there is a weak actual degree ofcorrelation between the commodities and currencies that comprise the contractand future decreases in coated paper prices; there is a failure of anycounterparty to perform under any hedge agreements; or a sudden, unexpectedevent materially affects commodity prices, currency rates or otherwisematerially affects our business. Additionally, we may not be able to enter intoadditional hedging arrangements on a commercially reasonable basis, or at all,in the future.

 

***Litigation could be costly and harmful to our business.***

 

We are involved in variousclaims and lawsuits from time to time. For example, in 1998 and 1999, theEnvironmental Protection Agency (the “EPA”) issued Notices of Violation toeight paper industry facilities, including the Luke, Maryland mill, which we acquiredin connection with the acquisition, alleging violation of the prevention ofsignificant deterioration (“PSD”) regulations under the Clean Air Act. During2000, an enforcement action in Federal District Court in Maryland was broughtagainst the predecessor of MeadWestvaco, asserting violations in connectionwith capital projects at the Luke, Maryland mill carried out in the 1980s. Theaction alleges that MeadWestvaco did not obtain PSD permits or install requiredpollution controls, and sought penalties of $27,500 per day for each claimedviolation together with the installation of control equipment. In 2001, theCourt granted MeadWestvaco’s 

 

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Motion for Partial Dismissaland dismissed the EPA’s claims for civil penalties under the major counts ofthe complaint. In October 2005, the parties made their closing arguments onPhase I of this case, and each has filed for summary judgment in its favor. TheCourt has not ruled on these motions. MeadWestvaco has agreed to indemnify usfor substantially all of our liability under these claims to the extentreserves were not previously established or liability exceeds amounts budgetedby MeadWestvaco in connection with these matters. However, in the event that weincur liability for this lawsuit and we are unable to obtain indemnificationfrom MeadWestvaco, we may incur substantial costs, which may include costs inconnection with the installation of additional pollution control equipment. Inaddition, we may be involved in various other claims and legal actions thatarise in the ordinary course of business, including claims and legal actionsrelated to environmental laws, rules and regulations. Any of these claims orlegal actions could materially adversely affect our business, results ofoperations and financial condition.

 

***Rising postal costs could weaken demand for our paper products.***

 

A significant portion of paperis used in periodicals, catalogs and other promotional mailings. Many of thesematerials are distributed through the mail. The January 2006 increase in thecost of postage, or future increases, could reduce the frequency of mailings,reduce the number of pages in advertising materials and/or cause advertisers touse alternate methods to distribute their advertising materials. Any of theforegoing could decrease the demand for our products, which could materiallyadversely affect our business, financial condition and results of operations.

 

***The failure of Accenture to perform its obligations under, or thetermination or expiration of, our information technology and human resourcesservices agreements, could have a material adverse effect on our business,financial condition and results of operations.***

 

Our ability to monitor andcontrol our operations effectively depends to a large extent on the properfunctioning of our information technology and other business support systems.We have entered into an agreement with Accenture, under which Accenture willprovide a substantial portion of the information technology and human resourcesservices necessary to support our operations. If Accenture fails to providethese services or does not do so in a satisfactory manner, it could have amaterial adverse effect on our business, financial condition and results ofoperations. If we materially breach any of our duties and/or obligations underthe agreement and fail to cure such breach within 30 days, Accenture mayimmediately terminate the agreement. Upon any termination or expiration of ouragreement with Accenture, we will need to either perform these functionsinternally or obtain such services from third parties. We may not be able to doso on a cost-effective basis or at all, which could have a material adverseeffect on our business, financial condition and results of operations.

 

***Our business may suffer if we do not retain our senior management.***

 

We depend on our seniormanagement. The loss of services of members of our senior management team couldadversely affect our business until suitable replacements can be found. Theremay be a limited number of persons with the requisite skills to serve in thesepositions and we may be unable to locate or employ qualified personnel onacceptable terms. In addition, our future success requires us to continue toattract and retain competent personnel. As of March 1, 2006, Peter Vogel, ourformer chief executive officer, resigned. Our chairman, Mark Suwyn, is actingas interim chief executive officer until a replacement is named. Should,however, Mr. Suwyn be unable to serve as our interim chief executive officerand we are unable to find a suitable replacement, our business could beadversely affected.

 

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***A large percentage of our employees are unionized.***

 

Wage increases or workstoppages by our unionized employees may have a material adverse effect on ourbusiness, financial condition and results of operations. As of December 31,2005, approximately 4,300 of our employees were represented by labor unions. Asof December 31, 2005, we had 11 collective bargaining agreements, of which two,covering approximately 1,300 employees, are up for renewal in August 2006 andone, covering 27 employees, is up for renewal in September 2006. We may becomesubject to material cost increases or additional work rules imposed byagreements with labor unions. This could increase expenses in absolute termsand/or as a percentage of net sales. In addition, work stoppages or other labordisturbances may occur in the future. Any of these factors could negativelyaffect our business, financial condition and results of operations.

 

***We depend on third parties for certain transportation services.***

 

We rely primarily on thirdparties for transportation of our products to our customers and transportationof our raw materials to us, in particular, by truck and train. If any of ourthird-party transportation providers fail to deliver our products in a timelymanner, we may be unable to sell them at full value. Similarly, if any of ourtransportation providers fail to deliver raw materials to us in a timelymanner, we may be unable to manufacture our products on a timely basis.Shipments of products and raw materials may be delayed due to weatherconditions, strikes or other events. Any failure of a third-partytransportation provider to deliver raw materials or products in a timely mannercould harm our reputation, negatively affect our customer relationships andhave a material adverse effect on our business, financial condition and resultsof operations. In addition, our ability to deliver our products on a timelybasis could be adversely affected by the lack of adequate availability oftransportation services, especially rail capacity, whether because of workstoppages or otherwise. Furthermore, increases in the cost of ourtransportation services could cause a material adverse effect on our business,financial condition and results of operations.

 

***We are subject to various environmental regulations that could imposesubstantial costs upon us and may adversely affect our operating performance.***

 

Our business is subject to awide range of Federal, state and local general and industry-specificenvironmental, health and safety laws and regulations, including those relatingto air emissions, wastewater discharges, solid and hazardous waste managementand disposal and site remediation. Compliance with these laws and regulationsis a significant factor in our business. We have made, and will continue tomake, significant expenditures to comply with these requirements. In addition,we handle and dispose of wastes arising from our mill operations and operate anumber of landfills to handle that waste. While we believe, based upon currentinformation, that we are currently in substantial compliance with allapplicable environmental laws, rules and regulations, we could be subject topotentially significant fines, penalties or criminal sanctions for any failureto comply. Moreover, under certain environmental laws, a current or previousowner or operator of real property, and parties that generate or transporthazardous substances that are disposed of at real property, may be held liablefor the cost to investigate or clean up such real property and for relateddamages to natural resources. We may be subject to liability, includingliability for investigation and cleanup costs, if contamination is discoveredat one of our paper mills or other locations where we have disposed of, orarranged for the disposal of, wastes. MeadWestvaco has agreed to indemnify us,subject to certain limitations, for certain environmental liabilities. Therecan be no assurance that MeadWestvaco will perform under any of itsenvironmental indemnity obligations, which could have a material adverse effecton our financial condition and results of operations. Furthermore, we could besubject to claims brought pursuant to applicable laws, rules or regulations forproperty damage or personal injury resulting from the environmental impact ofour operations. Increasingly stringent environmental requirements, moreaggressive enforcement actions, the 

 

20

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discovery of unknown conditionsor the bringing of future claims may cause our expenditures for environmentalmatters to increase, and we may incur material costs associated with thesematters.

 

***If we fail to achieve and maintain effective internal controls, itcould have a material adverse effect on our business in the future.***

 

Although we currently are notsubject to the requirements of Section 404 of the Sarbanes-Oxley Act, we are inthe process of documenting and testing our internal control procedures in orderto enable us to satisfy these requirements on a stand-alone basis in thefuture. As part of MeadWestvaco, we operated using MeadWestvaco’s internalcontrol procedures. As a stand-alone business, certain adjustments to ourinternal control procedures are required. We cannot assure you that thisprocess will not be time consuming or costly. If we fail to achieve andmaintain an effective internal control environment, it could have a material adverseeffect on our business.

 

**ITEM 1B.**                    UNRESOLVEDSTAFF COMMENTS

 

Not applicable.

 

**ITEM 2.**                             PROPERTIES

 

We own five mills where weproduce our paper products. We believe that we have sufficient capacity at ourmanufacturing facilities to meet our production needs for the foreseeablefuture, and further believe that all our sales can be sourced through thesefacilities. In addition, we have third-party arrangements to utilize space or leasespace in 22 distribution facilities. All of our owned facilities are pledged ascollateral under our various debt agreements.

 

In February 2006, we enteredinto a definitive agreement to sell our carbonless paper business, includingour paper mill in Chillicothe, Ohio and our converting facility in Fremont,Ohio to P.H. Glatfelter Company.

 

The following are our significantfacilities as of December 31, 2005:

 
| **Location**        | ** ** | **Purpose/Segment**               | ** ** | **Owned or  Leased/Expiration** | ** ** |
|---------------------|------------|-----------------------------------|------------|--------------------------------------|------------|
| Dayton, Ohio        |       | Corporate Headquarters            |       | Leased/March 2007                    |       |
| Chillicothe, Ohio   |       | Warehouse & Converting/Coated |       | Owned                                |       |
| Escanaba, Michigan  |       | Paper Mill/Coated                 |       | Owned                                |       |
| Luke, Maryland      |       | Paper Mill/Coated                 |       | Owned                                |       |
| Luke, Maryland      |       | Warehouse & Converting/Coated |       | Leased/August 2008                   |       |
| Rumford, Maine      |       | Paper Mill/Coated                 |       | Owned                                |       |
| Wickliffe, Kentucky |       | Paper Mill/Coated                 |       | Owned                                |       |
| Chillicothe, Ohio   |       | Paper Mill/Carbonless             |       | Owned                                |       |
| Fremont, Ohio       |       | Converting/Carbonless             |       | Owned                                |       |

 

**ITEM 3.**                             LEGALPROCEEDINGS

 

In 1998 and 1999, the EPAissued Notices of Violation to eight paper industry facilities, including theLuke, Maryland mill, alleging violation of the prevention of significant deterioration(“PSD”) regulations under the Clean Air Act. During 2000, an enforcement actionin Federal District Court in Maryland was brought against the predecessor of MeadWestvaco,asserting violations in connection with capital projects at the Luke, Marylandmill carried out in the 1980s. The action alleges that MeadWestvaco did notobtain 

 

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PSD permits or install requiredpollution controls, and sought penalties of $27,500 per day for each claimed violationtogether with the installation of control equipment. During 2001, the Courtgranted MeadWestvaco’s Motion for Partial Dismissal and dismissed the EPA’sclaims for civil penalties under the major counts of the complaint. In October2005, the parties made their closing arguments on Phase I of this case, andeach has filed for summary judgment in its favor. The Court has not ruled onthese motions. MeadWestvaco has agreed to indemnify us for certain liabilities,if any, under these claims. MeadWestvaco will not indemnify us for litigationlosses arising from the design, installation or construction of ascrubber-compliant baghouse, to the extent such costs are considered capitalspending, as defined in the purchase agreement relating to the acquisition ofthe printing and writing papers group from MeadWestvaco, at our mill in Luke,Maryland. In the event that we incur liability for this lawsuit and we areunable to obtain indemnification from MeadWestvaco, we may incur substantialcosts, which may include costs in connection with the installation ofadditional pollution control equipment. In addition, MeadWestvaco will notindemnify us for litigation losses resulting from any increased operation costsat our mill in Luke, Maryland unless such costs exceed $2 million annuallywithin five years after resolution of the claims.

 

**ITEM 4.**                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

**PARTII**

** **

**ITEM 5.          MARKET FOR THEREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES**

 

As of March 1, 2006, NewPageHolding was the sole holder of record of the shares of our common stock. Thereis no established public trading market for the common stock. We have neverpaid or declared a cash dividend on the common stock. Our debt agreementsrestrict our ability and the ability of our subsidiaries to pay dividends.

 

The following is a list of allsecurities sold or issued by us within the past three years:

 

In May 2005, we issued 100shares of our common stock to NewPage Holding for an aggregate purchase priceof $439 million. The shares were issued in reliance on Section 4(2) of theSecurities Act as the sale of the securities did not involve a public offering.We were formed by affiliates of Cerberus to serve as the acquisition vehiclefor the purchase of assets of MeadWestvaco’s printing and writing papersbusiness. The issuance to NewPage Holding was used in part to fund the price ofour acquisition by Cerberus and its affiliates. Appropriate legends wereaffixed to the share certificate issued in that transaction.

 

In May 2005, we issued $225million of floating rate senior secured notes due 2012, $350 million of 10%senior secured notes due 2012 and $200 million of 12% senior subordinated notesdue 2013. We received proceeds of $751 million from the original issuance ofthe floating rate senior secured notes, the senior secured notes and the seniorsubordinated notes, net of fees. The initial purchasers of the notes wereGoldman, Sachs & Co., UBS Securities LLC, Credit Suisse First Boston LLC,J.P. Morgan Securities Inc. and Lehman Brothers Inc. The floating rate seniorsecured notes, the senior secured notes and the senior subordinated notes weresold to the initial purchasers pursuant to Section 4(2) of the Securities Act andmay be resold by the initial purchasers only to qualified institutional buyersunder Rule 144A and to persons outside the United States under Regulation S.

 

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**ITEM 6.**                             SELECTEDFINANCIAL DATA

 

The following table sets forthsummary financial data of the Company and its predecessor for each of the fivefiscal years in the period ended December 31, 2005.

 
| ** **                    | ** ** | **Successor**                                          | ** ** | **Predecessor**                              | ** ** |
|-------------------------------|------------|--------------------------------------------------------|------------|----------------------------------------------|------------|
| **(in millions)**        | ** ** | **Eight  Months  Ended  Dec. 31,  2005 (a)** | ** ** | **Four  Months  Ended  Apr. 30,  2005** | ** ** | **Year  Ended  Dec. 31,  2004** | ** ** | **Year  Ended  Dec. 31,  2003** | ** ** | **Year  Ended  Dec. 31,  2002 (b)** | ** ** | **Two  Months  Ended  Dec. 31,  2001 (c)** | ** ** | **Fiscal  Year  Ended  Oct. 31,  2001 (c)** | ** ** |
| Net sales                     |       | $                                                      | 1,564      |                                         | $          | 716 |   | $ | 2,176 |   | $ | 1,989 |   | $ | 1,961 |   | $ | 101 |   | $ | 719 |   |
| Goodwill and asset impairment |       | —                                                 |       | —                                       |       | 238 |   | — |   | 12 |   | — |   | — |   |
| Income (loss) before taxes    |       | (61                                                    | )          | (15                                          | )          | (339 | ) | (145 | ) | (174 | ) | (9 | ) | (21 | ) |
| Net income (loss)             |       | (57                                                    | )          | (8                                           | )          | (301 | ) | (94 | ) | (102 | ) | (5 | ) | (13 | ) |
| Working capital               |       | 366                                                    |       |                                         |       | 274 |   | 333 |   | 315 |   | 95 |   | 106 |   |
| Total assets                  |       | 2,302                                                  |       |                                         |       | 2,647 |   | 3,097 |   | 3,203 |   | 1,128 |   | 1,138 |   |
| Long-term debt                |       | 1,555                                                  |       |                                         |       | 145 |   | 145 |   | 172 |   | 18 |   | 35 |   |
| Total debt                    |       | 1,563                                                  |       |                                         |       | 145 |   | 184 |   | 181 |   | 35 |   | 35 |   |
|                               |            |                                                        |            |                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(a) Results reflect theacquisition of the printing and writing papers business of MeadWestvaco.

(b) Results reflect the mergerof the Mead Corporation and Westvaco Corporation. Mead’s results are includedfor eleven months.

(c) Results are for WestvacoCorporation.

 

**ITEM 7.          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

The following discussion andanalysis of our financial condition and results of operations covers certainperiods prior to the acquisition. Accordingly, the discussion and analysis ofhistorical operations of our predecessor during the periods prior to theacquisition do not reflect the significant effect that the accounting for theacquisition has had and will have on the reporting of our financial conditionand results of operations.

 

**Overview**

 

***Company Background***

 

On May 2, 2005, we acquired thePrinting and Writing Papers Business of MeadWestvaco, but the acquisition wasdeemed to have been completed on April 30, 2005. We are the largest coatedpaper manufacturer in North America based on production capacity according toindustry publications. Coated paper is used primarily in media and marketingapplications, including corporate annual reports, high-end advertisingbrochures, magazines and catalogs and direct mail advertising. Our largestproduct category is coated freesheet paper, which is used primarily forhigher-end applications such as annual reports, brochures, coated labels andmagazine covers. The remainder of our coated paper is coated groundwood paper,which is used primarily for catalogs, magazines and textbooks. We also producecarbonless copy paper for business forms, as well as uncoated paper, digitalprinting paper and market pulp, a component used in the manufacturing of paper.

 

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***The Acquisition and Related Transactions***

 

On January 14, 2005, EscanabaTimber and MeadWestvaco entered into the purchase agreement pursuant to whichNewPage and its subsidiaries acquired the printing and writing papers group ofMeadWestvaco. The purchase agreement and related documents contemplated theoccurrence of the following Transactions:

 

• EscanabaTimber contributed $415 million of cash equity, as an investment in commonstock, to NewPage Holding.

• NewPageHolding issued $100 million of NewPage Holding PIK notes to MeadWestvaco aspart of the consideration and an additional $25 million of NewPage Holding PIKnotes for cash. NewPage Holding contributed the net cash proceeds from the NewPageHolding PIK notes and the $415 million of cash contributed by Escanaba Timberto NewPage, as an investment in the common stock of NewPage.

• NewPageentered into two senior secured credit facilities, consisting of a $750 millionsenior secured term loan and a $350 million senior secured asset-basedrevolving credit facility.

• NewPageissued $225 million of floating-rate senior secured notes due 2012 and $350million of 10% senior secured notes due 2012.

• NewPageissued $200 million of 12% senior subordinated notes due 2013.

• NewPageand its subsidiaries paid approximately $2.06 billion for MeadWestvaco’sPrinting and Writing Papers Group, of which $1.96 billion was paid in cash and$100 million was paid in the form of NewPage Holding PIK notes.

 

On April 6, 2005, Cerberus,which is the majority equity sponsor of our indirect parent, Maple TimberAcquisition LLC, entered into a commodity basket option contract with J. Aron& Company, an affiliate of Goldman, Sachs & Co. Concurrently with thecompletion of the Transactions, Cerberus assigned all of its rights under thecommodity basket option contract to NewPage and NewPage assumed all of Cerberus’obligations thereunder.

 

***Subsequent Events***

 

On January 7, 2006, RumfordFalls Power Company, our indirect wholly-owned subsidiary, entered into adefinitive agreement with Brascan Power Inc. to sell two hydroelectricgenerating facilities located on the Androscoggin River in Rumford, Maine, fora cash sales price of $144 million. On February 21, 2006, we entered into adefinitive agreement to sell our carbonless paper business, including our papermill in Chillicothe, Ohio and a converting facility in Fremont, Ohio to P.H.Glatfelter Company for a cash sales price of $80 million, subject to a workingcapital adjustment. The transactions are expected to close in the first half of2006.

 

**SelectedFactors that Affect our Operating Results**

** **

***Net Sales***

 

Our net sales are a function ofthe number of tons of paper that we sell and the price at which we sell ourpaper. The coated paper industry is cyclical, which results in changes in bothvolume and price. Paper prices historically have been a function ofmacroeconomic factors, such as the strength of the United States economy, thatare largely out of our control. Price has historically been substantially morevariable than volume and can change significantly over relatively short time periods.Coated paper purchases typically are made by customers pursuant to purchaseorders on an as-needed basis, and generally are not made under contracts thatprovide for fixed prices or minimum volume commitments. We have not experiencedsignificant changes in our customer relationships subsequent to theacquisition. Uncoated paper and pulp prices 

 

24

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historically have notmaterially affected our operating results because uncoated paper and pulp havenot comprised a material portion of our net sales.

 

Carbonless paper prices havehistorically been less variable than coated paper prices, and in some casesprices are fixed by contract. Because of competition from competing productsand technologies, carbonless paper markets have been declining and we expect thistrend to continue in the future. We have supply agreements with several of ourcarbonless paper customers.

 

Our earnings are sensitive toprice changes for our principal products, with price changes in coated paperhaving the greatest effect. Fluctuations in pulp and paper prices historicallyhave had a direct effect on our results for several reasons:

 

•                                          Marketprices for pulp and paper products are a function of supply and demand, factorsover which we have limited control.

 

•                                          Marketprices for pulp and paper products typically are not directly affected by rawmaterial costs or other costs of sales, and consequently we have limitedability to pass through increases in our costs to our customers absentincreases in the market price.

 

•                                          Themanufacturing of paper is highly capital-intensive and a large portion of ourand our competitors’ operating costs are fixed. Additionally, paper machinesare large, complex machines that operate more efficiently when operatedcontinuously. Consequently, both we and our competitors typically continue torun our machines whenever marginal sales exceed the marginal costs.

 

***Cost of Sales***

 

The principal components of ourcost of sales are chemicals, wood, energy, labor, maintenance and depreciationand amortization. Costs for commodities, including chemicals, wood and energy,are the most variable component of our cost of sales because the prices of manyof the commodities that we use can fluctuate substantially, sometimes within arelatively short period of time. In addition, our aggregate commodity purchasesfluctuate based on the volume of paper that we produce. We do not track wood,energy or chemicals on a cost of sales basis, but instead track these costs ona cost of production basis. Cost of production is calculated using the cost forthe number of tons of paper we produce instead of the cost for the number oftons of paper we sell.

 

*Chemicals*.Certain chemicals used in the paper-making process are petroleum-based andfluctuate with the price of crude oil. The price for the largest component ofour chemical costs, latex, has historically been volatile. The price of latexincreased significantly during 2005 as compared to 2004, and we expect theprice of latex to remain volatile throughout the near term.

 

*Wood*.Our costs to purchase wood are affected directly by market costs of wood in ourregional markets and indirectly by the effect of higher fuel costs on loggingand transportation of timber to our facilities. While we have in place fibersupply agreements that ensure a portion of our wood requirements, purchasesunder these agreements are typically at market rates.

 

*Energy*.We produce a large portion of our energy requirements, historically purchasingapproximately 40% of our energy needs from third party suppliers. The energy wepurchase from third party suppliers consists of electricity and fuel used byus, primarily consisting of natural gas and coal, to generate some of our ownenergy. We expect energy costs to remain volatile for the foreseeable future. InJanuary 2006, we entered into a definitive agreement to sell twohydroelectric-generating facilities totaling 39 megawatts of 

 

25

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capacitylocated on the Androscoggin River in Rumford, Maine. Between thehydroelectric-generating facilities and the cogeneration facility operated byRumford Cogeneration Partners, we historically generated more electricity thanthe Rumford paper mill could utilize and sold excess electricity tothird-parties. After the sale of the hydroelectric-generating facilities, webelieve that our power generation and usage at that location will be moreclosely aligned. In addition, we expect that our energy costs will increaseafter the sale of the hydroelectric-generating facilities as a result of theloss of sales of excess electricity and the need to replace electricityutilized from the hydroelectric-generating facilities with electricity from ourcogeneration partnership at market rates.

 

*Labor costs*.Labor costs include wages, salary and benefit expenses attributable to our millpersonnel. Mill employees at a non-managerial level are compensated on anhourly basis in accordance with our union contracts. Management employees atour mills are compensated on a salaried basis. Wages, salary and benefitexpenses included in cost of sales do not vary significantly over the shortterm. The size of our hourly labor force is not expected to increase. Inaddition, we have not experienced significant labor shortages.

 

*Maintenance*.Maintenance expense includes day-to-day maintenance, equipment repairs andlarger maintenance projects, such as paper machine shutdowns for annualmaintenance. Day-to-day maintenance expenses have not varied significantly fromyear to year. Larger maintenance projects and equipment expenses can produceyear-to-year fluctuations in our maintenance expenses. In conjunction with ourannual maintenance shutdowns, we have incidental incremental costs that areprimarily comprised of unabsorbed fixed costs from lower production volumes andother incremental costs for purchased materials and energy that would otherwisebe produced as part of normal operations of our mills.

 

*Depreciationand amortization*. Depreciation and amortizationexpense for our assets associated with our mill operations is included in costof sales. Depreciation and amortization expense for our assets associated withour non-mill related assets is included in selling, general and administrativeexpense. Depreciation and amortization expense has been lower after theacquisition as a result of the lower asset bases assigned to property, plantand equipment. Under purchase accounting, the total acquisition considerationwas allocated to our assets and liabilities based upon management’s estimatesof fair value. Depreciation and amortization expense has been lower in thesuccessor period as a result of lower asset bases and longer average remaininguseful lives assigned to property, plant and equipment after the acquisition.The remaining useful lives of plant and equipment increased on aweighted-average basis from approximately 6.2 years to 9.6 years.

 

***Selling, General and Administrative (“SG&A”) Expenses***

 

The principalcomponents of our SG&A expenses are wages, salaries and benefits for ouroffice personnel at our headquarters and our sales force, travel andentertainment expenses, advertising expenses, expenses relating to ourinformation technology systems and research and development expenses. OurSG&A expenses have not historically fluctuated significantly from year toyear. We expect that our SG&A expenses will decrease as compared to priorto the acquisition as a result of the elimination of corporate allocations thatwere charged to our predecessor by MeadWestvaco that are not related to ourbusiness as a stand-alone company, partially offset by an increase in SG&Aexpenses that we expect to incur directly as a stand-alone company, such ascosts for information technology, legal and finance support and humanresources. In addition, we increased the use of incentive-based compensationfor our management, which more closely ties a portion of their compensation tothe achievement of performance targets. Certain senior management have enteredinto employment agreements that provide for a base salary and specifiedincentive compensation targets.

 

26

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***Interest***

 

MeadWestvacoonly allocated interest expense to our predecessor for borrowings specificallyrelated to certain mill operations. These borrowings were repaid prior to theacquisition or were retained by MeadWestvaco. Our interest expense issubstantially higher as a result of the financing arrangements related to theacquisition.

 

***Taxes***

 

For periodsprior to the acquisition, our predecessor was included in the consolidatedincome tax returns of MeadWestvaco. Income taxes have been presented based on acalculation of the income tax benefit we would have generated if we hadoperated as a separate taxpayer. However, pursuant to the acquisition purchaseagreement, any prior tax benefits were retained by MeadWestvaco. For federalincome tax purposes, the acquisition is being treated as an asset purchase andwe generally have a tax basis in the acquired assets equal to the purchaseprice. For the period subsequent to the acquisition, we have recorded avaluation allowance against our net deferred tax assets for federal and certainstate income taxes as it is more likely than not that we will not realize thesebenefits, as defined in SFAS No. 109, as a result of the negative evidencepresented by our current period loss and our predecessor’s history of lossesover the past three years.

 

**Resultsof Operations**

** **

The followingtable sets forth our historical results of operations for the periods indicatedbelow. For comparison purposes, we have presented the results of operations forthe year ended December 31, 2005 on a combined basis, consisting of thehistorical results of our predecessor for the four months ended April 30,2005, and the historical results of operations of the successor for the eightmonths ended December 31, 2005. We believe that this approach isbeneficial to the reader by providing an easier-to-read discussion of resultsof operations and provides the reader with information from which to analyzeour financial results that is consistent with the manner that managementreviews and analyzes results of operations. Furthermore, disclosures regardingsales volumes, spending and other operational measures are determined on acomparable basis for all periods presented. The discussion is provided forcomparative purposes only, but the value of such a comparison may belimited. Some of the factors that limit the usefulness of this approach includethe combination of results based on different accounting bases for predecessorand successor periods, differences in capitalization and the effects resultingfrom the change from a division of a larger entity to a stand-alone company.The following discussion of our financial condition and results of operationsshould be read in conjunction with our financial statements and notes theretoincluded elsewhere in this annual report.

 

27

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| ** **                                                               | ** ** | ** **                                                                      | ** ** | ** **                                                           | ** ** | **Non-GAAP**                                                                | ** ** | ** **                                        | ** ** | ** **                                        | ** ** |
|--------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                               | ** ** | **Successor -  NewPage  Corp.  Eight  Months  Ended  Dec. 31,  2005** | ** ** | **Combined  Predecessor  Four  Months  Ended  April 30,  2005** | ** ** | **Combined  Predecessor  and  Successor  Year  Ended  Dec. 31,  2005** | ** ** | **Predecessor  Year  Ended  Dec. 31,  2004** | ** ** | **Predecessor  Year  Ended  Dec. 31,  2003** | ** ** |
| **(in millions)**                                                        | ** ** | **$**                                                                           | ** ** | **%**                                                                | ** ** | **$**                                                                       | ** ** | **%**                                             | ** ** | **$**                                             | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                                                                |       | 1,564                                                                           |       | 100.0                                                                |       | 716                                                                         |       | 100.0                                             |       | 2,280                                             |       | 100.0 |   | 2,176 |   | 100.0 |   | 1,989 |   | 100.0 |   |
| Cost of sales                                                            |       | 1,418                                                                           |       | 90.7                                                                 |       | 673                                                                         |       | 94.0                                              |       | 2,091                                             |       | 91.7 |   | 2,145 |   | 98.6 |   | 1,995 |   | 100.3 |   |
| Selling, general and administrative expense                              |       | 79                                                                              |       | 5.1                                                                  |       | 39                                                                          |       | 5.5                                               |       | 118                                               |       | 5.2 |   | 129 |   | 5.9 |   | 136 |   | 6.8 |   |
| Goodwill impairment                                                      |       | —                                                                          |       | 0.0                                                                  |       | —                                                                      |       | 0.0                                               |       | —                                            |       | 0.0 |   | 238 |   | 11.0 |   | — |   | 0.0 |   |
| Interest expense                                                         |       | 111                                                                             |       | 7.0                                                                  |       | 21                                                                          |       | 2.9                                               |       | 132                                               |       | 5.7 |   | 9 |   | 0.4 |   | 10 |   | 0.5 |   |
| Other (income) expense                                                   |       | 17                                                                              |       | 1.1                                                                  |       | (2                                                                          | )          | (0.3                                              | )          | 15                                                |       | 0.7 |   | (6 | ) | (0.3 | ) | (7 | ) | (0.3 | ) |
| Income (loss) before income taxes                                        |       | (61                                                                             | )          | (3.9                                                                 | )          | (15                                                                         | )          | (2.1                                              | )          | (76                                               | )          | (3.3 | ) | (339 | ) | (15.6 | ) | (145 | ) | (7.3 | ) |
| Income tax (benefit)                                                     |       | (4                                                                              | )          | (0.2                                                                 | )          | (7                                                                          | )          | (1.0                                              | )          | (11                                               | )          | (0.5 | ) | (38 | ) | (1.8 | ) | (51 | ) | (2.6 | ) |
| Net income (loss)                                                        |       | (57                                                                             | )          | (3.7                                                                 | )          | (8                                                                          | )          | (1.1                                              | )          | (65                                               | )          | (2.8 | ) | (301 | ) | (13.8 | ) | (94 | ) | (4.7 | ) |
| ** **                                                               |       |                                                                            |       |                                                                 |       |                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| **Supplemental Information**                                             |       |                                                                            |       |                                                                 |       |                                                                        |       |                                              |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Earnings before interest, taxes, depreciation and  amortization (EBITDA) |       | 149                                                                             |       |                                                                 |       | 82                                                                          |       |                                              |       | 231                                               |       |   |   | (100 | ) |   |   | 101 |   |   |   |

 

***2005 Combined Successor and Predecessor Compared to 2004 Predecessor***

 

Net sales for 2005were $2,280 million compared to $2,176 million for 2004, an increase of 4.8%.The increase was largely the result of an increase in average coated paper pricesfrom $797 per ton in 2004 to $872 per ton in 2005. This increase in net sales waspartially offset by decreases in coated paper sales volume from 2,112,000 tonsin 2004 to 2,032,000 tons in 2005. The decrease in coated paper sales volumewas largely caused by a slowdown in industry demand in the second quarter of2005, which we believe was due to lower advertising spending and customerinventory reductions, and by a management decision to decrease export sales andto discontinue sales of certain low margin paper sold during the beginning of2004. During 2005 we took market-related downtime of 57,000 tons of coatedpaper and 11,000 tons of carbonless paper compared to market-related downtimein 2004 of 27,000 tons of coated paper and 10,000 tons of carbonless paper.

 

Cost of salesfor 2005 was $2,091 million compared to $2,145 million for 2004, a decrease of 2.5%.Our gross margin for 2005 improved to 8.3%, compared to 1.4% for 2004. Thehigher gross margin was due to higher sales prices, product mix improvements,productivity improvement initiatives and lower depreciation and amortization expense,offset by higher wood, energy, and chemical costs and more market-relateddowntime. We improved product mix by selling a more profitable mix of productsto existing customers and discontinuing sales of certain low margin paper soldduring the beginning of 2004. Depreciation and amortization expense decreasedto $175 million in 2005 from $230 million in 2004 as a result of lowerasset bases and longer average remaining useful lives assigned to property,plant and equipment after the acquisition. Wood costs increased due to higherlogistics costs for deliveries to the mills and logging expenses, causedprimarily from higher fuel costs. Energy costs in 2005 increased sharply over2004 as a result of temporarily lower industry supply of natural gas and 

 

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refinedpetroleum products. The increase in the cost of chemicals was primarily drivenby increases in latex prices, which historically have been volatile,fluctuating with the price of crude oil.

 

Maintenanceexpense at our mills totaled $230 million and $227 million in 2005 and 2004. Inconjunction with our annual maintenance shutdowns, we had incidentalincremental costs for 2005 and 2004 of $12 million and $18 million that areprimarily comprised of unabsorbed fixed costs from lower production volumes andother incremental costs for purchased materials and energy that would otherwisebe produced as part of normal operations of our mills.

 

Selling,general and administrative expenses were $118 million for 2005 compared to $129million for 2004, a decrease of 8.2%. The decrease was a result of theelimination of corporate charges of $43 million that were allocated to us by MeadWestvacothat are not related to our business, partially offset by an increase of $20million in selling, general and administrative expenses that we incurreddirectly as a stand-alone company, such as costs for information technology,legal and finance support and human resources. In addition, we incurredtransitional costs of $14 million relating to the setup of our business as astand-alone business, including professional services and consulting costsrelated to information technology, human resources and finance. We expect thatthe transitional costs will continue into 2006 as we complete our informationtechnology and human resources transitions. As a percentage of net sales,selling, general and administrative expenses decreased in 2005 to 5.2% from 5.9%in 2004.

 

A pretaximpairment charge was recorded in 2004 of $238 million for an impairment ofgoodwill. The goodwill resulted from the merger of Mead and Westvaco in January 2002.

 

Interestexpense for 2005 was $132 million compared to $9 million for 2004 primarily asa result of the interest expense of $111 million incurred on the debt issued tofinance the acquisition. For periods prior to the acquisition, interest expenserelates to long-term debt specifically related to certain mill facilities.

 

Other (income)expense for 2005 primarily consists of an unrealized loss of $25 milliondetermined based on the mark-to-market value of a purchased option contract towhich we do not apply hedge accounting treatment.

 

The income taxbenefit for 2005 was $11 million compared to $38 million for 2004. For theperiod subsequent to the acquisition, we have recorded a valuation allowanceagainst our net deferred tax assets for federal and certain state income taxes asit is more likely than not that we will not realize these benefits, as definedin SFAS No. 109, as a result of the negative evidence presented by our currentperiod loss and our predecessor’s history of losses over the past three years.

 

EBITDA was $231million and $(100) million for 2005 and 2004. The increase in EBITDA wasprimarily a result of higher sales prices and productivity improvements overthe last year and a 2004 charge of $238 million for goodwill impairment. Thechange in net loss to $65 million in 2005 from $301 million in 2004 was largelya result of higher sales prices and productivity improvements in 2005 and the2004 charge of $238 million for goodwill impairment offset by higher costs forchemicals, wood and energy and increased interest expense of $123 million. See “Reconciliationof Net Income (Loss) to EBITDA” below for further information on the use ofEBITDA as a measurement tool.

 

***2004 Compared to 2003***

 

Net sales for2004 were $2,176 million compared to $1,989 million for 2003, an increase of9.4%. The increase was largely the result of increased demand for coated paperthroughout most of 2004 and, to a lesser extent, coated paper price increasesbeginning late in the second quarter. Coated paper tons sold increased from 1,919,000tons to 2,112,000 tons. The average price per ton for coated paper increased 

 

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from $789 perton in 2003 to $797 per ton in 2004. During 2004, the prices for our coatedpaper fluctuated significantly, averaging $769 per ton on a weighted averagebasis during the first half of the year and rising to a weighted average of$825 per ton during the second half of the year. During 2003, the weightedaverage prices for our coated paper were $811 per ton during the first half ofthe year and fell to a weighted average price of $770 per ton during the secondhalf of the year.

 

Cost of salesfor 2004 was $2,145 million compared to $1,995 million for 2003, an increase of7.6%. The increase was primarily attributable to higher sales volume. Our grossmargin for 2004 improved to 1.4%, an increase of 1.7% over 2003, due to savingsfrom cost reductions programs, product mix improvements and less marketdowntime. Market-related downtime was lower due to order backlogs and strongcustomer demand. We believe that market-related downtime in 2004, most of whichoccurred in the first quarter, reduced our production by 37,000 tons. Webelieve that market-related downtime in 2003 reduced our production by 61,000tons.

 

Selling,general and administrative expenses were $129 million for 2004 compared to $136million for 2003, a decrease of 4.7%. Restructuring expenses relating to the2002 merger of Mead and Westvaco were higher in 2003. As a percentage of netsales, selling, general and administrative expenses decreased in 2004 to 5.9%from 6.8% in 2003. This decrease, as a percentage of net sales, was principallydue to the restructuring expenses in 2003 relating to the merger of Mead andWestvaco, offset in part by increased sales volume in 2004.

 

A pretaximpairment charge was recorded in 2004 of $238 million for an impairment ofgoodwill. The goodwill resulted from the merger of Mead and Westvaco in January 2002.

 

The effectivetax rate for 2004 decreased to approximately 11.3% from 35.2% for 2003. Theeffective tax rate decreased in 2004 primarily as a result of a nondeductiblegoodwill charge to earnings in 2004 of $238 million and the establishment ofvaluation allowances against state income tax carry-forward benefits in 2004.Without the goodwill and valuation allowance effects in 2004, the annualeffective tax rates for 2003 and 2004 were higher than the statutory rate dueto the composition and mix of our earnings and losses in certain domestic taxjurisdictions.

 

***Reconciliation of Net Income (Loss) to EBITDA***

 

EBITDA is not ameasure of our performance under accounting principles generally accepted inthe United States (“GAAP”), is not intended to represent net income (loss), andshould not be used as an alternative to net income (loss) as an indicator ofperformance. EBITDA is shown because it is a primary component of certaincovenants under our senior secured credit facilities and is a basis upon whichour management assesses performance. In addition, our management believesEBITDA is useful to investors because it and similar measures are frequentlyused by securities analysts, investors and other interested parties in theevaluation of companies with substantial financial leverage. The use of EBITDAinstead of net income (loss) has limitations as an analytical tool, and youshould not consider it in isolation, or as a substitute for analysis of ourresults as reported under GAAP.

 

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The followingtable presents a reconciliation of net income (loss) to EBITDA:

 
| ** **                     | ** ** | ** **                             | ** ** | ** **                              | ** ** | **Non-GAAP**                         | ** ** | ** **                           | ** ** | ** **                           | ** ** |
|--------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                     | ** ** | **Successor -**                   | ** ** | ** **                              | ** ** | **Combined**                         | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                     | ** ** | **NewPage**                            | ** ** | ** **                              | ** ** | **Predecessor**                      | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                     | ** ** | **Corp.**                              | ** ** | **Predecessor**                         | ** ** | **and**                              | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                     | ** ** | **Eight**                              | ** ** | **Four**                                | ** ** | **Successor**                        | ** ** | **Predecessor**                      | ** ** |
| **(in millions)**         | ** ** | **Months  Ended  Dec. 31,  2005** | ** ** | **Months  Ended  April 30,  2005** | ** ** | **Year  Ended  Dec. 31,  2005** | ** ** | **Year  Ended  Dec. 31,  2004** | ** ** | **Year  Ended  Dec. 31,  2003** | ** ** |
| Net income  (loss)             |       | $                                      | (57        | )                                       | $          | (8                                   | )          | $                                    | (65        | )                                    | $          | (301 | ) | $ | (94 | ) |
| Interest  expense              |       | 111                                    |       | 21                                      |       | 132                                  |       | 9                                    |       | 10                                   |       |
| Income taxes  (benefit)        |       | (4                                     | )          | (7                                      | )          | (11                                  | )          | (38                                  | )          | (51                                  | )          |
| Depreciation  and amortization |       | 99                                     |       | 76                                      |       | 175                                  |       | 230                                  |       | 236                                  |       |
| EBITDA                         |       | $                                      | 149        |                                    | $          | 82                                   |       | $                                    | 231        |                                 | $          | (100 | ) | $ | 101 |   |

 

***Segment Data***

 

The followingtable sets forth net sales and segment profit (loss) for our coated andcarbonless paper segments. The segments are measured on earnings beforeinterest, taxes and certain other (income) expenses that are corporate items.

 
| ** **                              | ** ** | ** **                             | ** ** | ** **                              | ** ** | **Non-GAAP**                         | ** ** | ** **                           | ** ** | ** **                           | ** ** |
|-----------------------------------------|------------|----------------------------------------|------------|-----------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|--------------------------------------|------------|
| ** **                              | ** ** | **Successor -**                   | ** ** | ** **                              | ** ** | **Combined**                         | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                              | ** ** | **NewPage**                            | ** ** | ** **                              | ** ** | **Predecessor**                      | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                              | ** ** | **Corp.**                              | ** ** | **Predecessor**                         | ** ** | **and**                              | ** ** | ** **                           | ** ** | ** **                           | ** ** |
| ** **                              | ** ** | **Eight**                              | ** ** | **Four**                                | ** ** | **Successor**                        | ** ** | **Predecessor**                      | ** ** |
| **(in millions)**                  | ** ** | **Months  Ended  Dec. 31,  2005** | ** ** | **Months  Ended  April 30,  2005** | ** ** | **Year  Ended  Dec. 31,  2005** | ** ** | **Year  Ended  Dec. 31,  2004** | ** ** | **Year  Ended  Dec. 31,  2003** | ** ** |
| Net sales:                              |       |                                   |       |                                    |       |                                 |       |                                 |       |                                 |       |
| Coated                                  |       | $                                      | 1,281      |                                    | $          | 581                                  |       | $                                    | 1,862      |                                 | $          | 1,779 |   | $ | 1,603 |   |
| Carbonless                              |       | 283                                    |       | 135                                     |       | 418                                  |       | 397                                  |       | 386                                  |       |
|                                    |       | $                                      | 1,564      |                                    | $          | 716                                  |       | $                                    | 2,280      |                                 | $          | 2,176 |   | $ | 1,989 |   |
|                                    |       |                                   |       |                                    |       |                                 |       |                                 |       |                                 |       |
| Segment  profit (loss):                 |       |                                   |       |                                    |       |                                 |       |                                 |       |                                 |       |
| Coated                                  |       | $                                      | 70         |                                    | $          | 13                                   |       | $                                    | 83         |                                 | $          | (300 | ) | $ | (112 | ) |
| Carbonless                              |       | 3                                      |       | (10                                     | )          | (7                                   | )          | (39                                  | )          | (33                                  | )          |
|                                    |       | $                                      | 73         |                                    | $          | 3                                    |       | $                                    | 76         |                                 | $          | (339 | ) | $ | (145 | ) |
|                                    |       |                                   |       |                                    |       |                                 |       |                                 |       |                                 |       |
| Segment  depreciation and amortization: |       |                                   |       |                                    |       |                                 |       |                                 |       |                                 |       |
| Coated                                  |       | $                                      | 99         |                                    | $          | 60                                   |       | $                                    | 159        |                                 | $          | 182 |   | $ | 190 |   |
| Carbonless                              |       | —                                 |       | 16                                      |       | 16                                   |       | 48                                   |       | 46                                   |       |
|                                    |       | $                                      | 99         |                                    | $          | 76                                   |       | $                                    | 175        |                                 | $          | 230 |   | $ | 236 |   |

 

***Coated Paper***

 

Net sales forthe coated paper segment were $1,862 million for 2005, compared to $1,779million for 2004, an increase of 4.7%. The increase was largely the result ofan increase in average coated paper prices from $797 per ton in 2004 to $872per ton in 2005. This increase in net sales was partially offset by 

 

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a decrease incoated paper sales volume from 2,112,000 tons in 2004 to 2,032,000 tons in2005. The decrease in coated paper sales volume was largely caused by aslowdown in industry demand in the second quarter of 2005, which we believe wasdue to lower advertising spending and customer inventory reductions, and by amanagement decision to decrease export sales and to discontinue sales ofcertain low margin paper sold during early 2004.

 

The coatedpaper segment profit was $83 million in 2005 compared to a loss of $300 millionin 2004. The increase in segment profitability was primarily due to improvedpricing and product mix, cost improvement programs and lower levels ofmarket-related downtime taken and a charge of $238 million for goodwill impairmentin 2004 offset in part by lower sales volumes and increased costs forchemicals, wood and energy. We took market-related downtime in 2005 of 57,000tons compared to 27,000 tons of market-related downtime in 2004.

 

Net sales forthe coated paper segment were $1,779 million for 2004, compared to $1,603million for 2003, an increase of 11.0%. The loss for the coated paper segmentin 2004 was $300 million, which included a charge of $238 million for goodwillimpairment, compared to a loss of $112 million for 2003. The goodwillimpairment charge was the primary reason for the segment loss increase in 2004.Other than the goodwill impairment charge, the segment loss decreased,primarily due to increased volume, paper price increases, reduced maintenance costsat our mills and the reduction in market-related downtime partially offset byhigher costs for wood, energy and chemicals, as well as increased freight andother costs of sales.

 

***Carbonless Paper***

 

Net sales forthe carbonless paper segment increased to $418 million in 2005 from $397million in 2004, an increase of 5.1%. The sales increase was driven by anincrease in sales prices per ton of carbonless and uncoated paper and anincrease in uncoated volume offset slightly by lower volumes of carbonless paper.The average price per ton of paper for this segment decreased from $1,265 perton in 2004 to $1,247 per ton in 2005, primarily caused by the mix to higheruncoated paper sales.

 

The carbonlesssegment incurred a loss of $7 million in 2005, compared to a loss of $39million in 2004. The decrease in the segment loss during 2005 was largely dueto lower depreciation and amortization expense for the eight months subsequentto the acquisition and productivity initiatives that were not in place during2004 offset by higher costs for chemicals, wood and energy. We took market-relateddowntime in 2005 of 11,000 tons compared to 10,000 tons of market-relateddowntime in 2004.

 

Net sales forthe carbonless paper segment increased to $397 million in 2004 from $386million in 2003, an increase of 2.8%. The carbonless segment incurred a loss of$39 million in 2004, compared to a loss of $33 million in 2003. The increase inthe segment loss during 2004 compared to 2003 was largely due to an increase inresearch and development costs of $5 million, which was offset in part bythe reduction in market-related downtime.

 

***Effects of Inflation***

 

Whileinflationary increases in certain costs, such as energy, wood and chemicalcosts, have had a significant effect on our operating results over the pastthree years, changes in general inflation have had a minimal effect on ouroperating results in each of the last three years. Sales prices and volumes aremore strongly influenced by supply and demand factors in specific markets thanby inflationary factors.

 

Certain of ourcosts, including the prices of energy, wood and chemicals that we purchase, canfluctuate substantially, sometimes within a relatively short period of time,and can have a significant effect on our 

 

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business,financial condition and results of operations. For example, we estimate thatfor each $1 increase in the cost of a barrel of crude oil, our direct energycosts and indirect costs, such as costs for transportation andpetroleum-derived chemicals, increase approximately $3 million.

 

***Seasonality***

 

We are exposedto fluctuations in quarterly sales volumes and expenses due to seasonalfactors. These seasonal factors are common in the coated paper industry. The firstquarter is typically a lighter sales volume quarter with some inventory buildin anticipation of maintenance outages to be taken in the second quarter andhigher sales volumes in the third quarter. Our second quarter typically beginsto build to a higher sales rate and has historically been our quarter with thehighest maintenance spending as a result of scheduled annual maintenanceshutdowns. Our third quarter is typically our strongest sales quarter,reflecting a substantial increase in sales volume as printers prepare foryear-end holiday catalogs and advertising. Our accounts receivable and payablegenerally peak in the third quarter, while inventory generally peaks in thesecond quarter in anticipation of the third quarter season. The fourth quarteris typically our second strongest sales quarter as printing for year-endholidays continues. We expect these trends to continue for the foreseeablefuture, except that we intend to manage our maintenance schedules so thatmaintenance costs are incurred more evenly throughout the year.

 

***Outlook***

 

Increases inthe price of crude oil have affected the cost of certain papermaking chemicals,purchased energy, and logistics and distribution. Overall, we expect crude oiland energy costs to remain volatile for the foreseeable future.

 

Generally,operating rates in the coated paper market continued to improve in the firstquarter of 2006 and we believe that business drivers such as capacity closures,Gross Domestic Product (“GDP”) growth and advertising spending remain favorableto us in realizing higher sales prices. In 2006, we announced a $50 per tonprice increase on most coated paper grades and believe we will realize aportion of the increase in the first quarter of 2006 and an additionalsubstantive portion in the second quarter of 2006.

 

***Liquidity and Capital Resources***

 

We expect thatcash generated from operating activities and availability under our revolvingsenior secured credit facility will be our principal sources of liquidity. Asof March 21, 2006, there was $73 million outstanding under therevolving senior secured credit facility and based on availability under theborrowing base as of that date, we had $233 million of additional borrowingavailability under the revolving senior secured credit facility. In accordancewith the excess cash flow covenant in the senior secured term loan agreement,we are required to repay $103 million of the senior secured term loan by March 31,2006. We expect that we will draw the funds to make this payment from the revolvingsenior secured credit facility. Additionally, we anticipate that the amount ofour borrowing base availability under the revolving senior secured creditfacility will be reduced by approximately $60 million upon the sale of thecarbonless paper business. We anticipate closing both the sale of thecarbonless paper business and the sale of the hydroelectric-generatingfacilities in the first half of 2006. We will use the proceeds to repayoutstanding borrowings or to reinvest in our continuing business, as allowed bythe senior secured term loan agreement. Based on our current level ofoperations, we believe our cash flow from operations and available borrowingsunder our revolving senior secured credit facility will be adequate to meet ourliquidity needs for at least the next twelve months. We cannot assure you,however, that our business will generate sufficient cash flows from operations,or that future borrowings will be available to us under our senior securedcredit facilities in an amount sufficient to enable us to repay ourindebtedness, or to fund our other liquidity needs.

 

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Our aggregateindebtedness at December 31, 2005, was $1,563 million. We are highlyleveraged. Beginning in 2010, our debt service requirements substantiallyincrease as a result of scheduled payments of our indebtedness. We anticipatethat we will refinance these borrowings prior to the expiration and/or retireportions of the indebtedness with issuances of equity securities or proceedsfrom the sale of assets. Our ability to operate our business, service our debtrequirements and reduce our total debt will depend upon our future operatingperformance, which will be affected by prevailing economic conditions andfinancial, business and other factors, certain of which are beyond our control,as well as the availability of revolving credit borrowings and borrowings torefinance our existing indebtedness.

 

Concurrentlywith the completion of the acquisition, we entered into our senior securedcredit facilities. Our senior secured credit facilities include a $750 millionterm loan, maturing in 2011, and up to $350 million in available revolving loanborrowings, maturing in 2010. Our senior secured credit facilities containcustomary financial and other covenants, including minimum interest coverageand fixed charge coverage ratios and maximum total debt and senior debt toEBITDA ratios. Our senior secured credit facilities also place certainrestrictions on our ability to make capital expenditures. As of December 31,2005, we were in compliance with all covenants. Below are the requiredfinancial covenant levels and the actual levels as of December 31, 2005:

 
| ** **                            | ** ** | **Required** | ** ** | **Actual** | ** ** |
|---------------------------------------|------------|--------------|------------|------------|------------|
| Maximum  Leverage Ratio               |       | 6.00         |       | 4.99       |       |
| Maximum  Senior Leverage Ratio        |       | 3.00         |       | 2.53       |       |
| Minimum  Interest Coverage Ratio      |       | 2.00         |       | 2.23       |       |
| Minimum  Fixed Charges Coverage Ratio |       | 1.00         |       | 1.25       |       |

 

The revolvingsenior secured term loan facility has a first lien on NewPage’s and itsguarantor domestic subsidiaries’ cash, deposit accounts, accounts receivable,inventory and intercompany debt owed to NewPage Holding, NewPage andits guarantor domestic subsidiaries. The term loan has a first lien on thecapital stock of NewPage, the capital stock of its guarantor domestic subsidiaries,and all of its assets and the assets of its guarantor domestic subsidiaries,other than cash, deposit accounts, accounts receivable, inventory andintercompany debt owed to NewPage Holding, NewPage and its guarantordomestic subsidiaries. It also has a second lien on NewPage’s and its guarantordomestic subsidiaries’ cash, deposit accounts, accounts receivable, inventory,and intercompany debt owed to NewPage Holding, NewPage and itsguarantor domestic subsidiaries. The senior secured notes have a second lien onall of NewPage’s assets and the assets of its guarantor domestic subsidiariesother than the capital stock of its guarantor domestic subsidiaries,intercompany debt owed to NewPage Holding, NewPage and its guarantordomestic subsidiaries, cash, deposit accounts, accounts receivable andinventory.

 

Concurrentlywith the completion of consummation of the acquisition, NewPage issued thefloating-rate senior secured notes due 2012, the 10% senior secured notes due2012 and the 12% senior subordinated notes due 2013. The 2012 senior securednotes and the related subsidiary guarantees are secured equally and ratably bysecond priority liens on substantially all of the assets of NewPage andits subsidiaries, other than cash deposit accounts, accounts receivables,inventory, the stock of NewPage’s subsidiaries and intercompany debt. Theindentures governing these NewPage notes contain customary financial andother covenants.

 

We do not haveany off-balance sheet arrangements.

 

As of June 30,2005, we entered into two interest rate swap agreements and one interest ratecap agreement to hedge the variability of cash flows on a portion of ourfloating-rate debt. We entered into a $150 million notional amount interestrate swap expiring June 2009 and a $150 million notional amount 

 

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interest rateswap expiring June 2010. We purchased a $150 million notional amountinterest rate cap with a cap rate of 4.50% that expires June 2008 for $1million.

 

Inventory hasincreased from $321 million at December 31, 2004, to $437 million at December 31,2005. Approximately two-thirds of this increase is a result of the changescaused in recording the initial acquired values at the date of acquisition andthe elimination of the MeadWestvaco LIFO reserve.

 

Capitalexpenditures were $67 million for the eight months ended December 31, 2005and were $84 million for the full year ended December 31, 2005. Capitalexpenditures for 2006 are expected to be approximately $90 million and areexpected to consist of maintenance capital projects, environmental projects andcapital improvements, such as a paper machine rebuild at our mill in Escanaba, Michigan.Compliance with environmental laws and regulations is a significant factor inour business. We have made, and will continue to make, significant expendituresto comply with these requirements. In connection with compliance withenvironmental laws and regulations we expect to incur capital expenditures of $18million in 2006 and $27 million in 2007 in order to maintain compliance with applicablefederal, state and local environmental laws and regulations and to meet newregulatory requirements. We anticipate that environmental compliance willcontinue to require increased capital expenditures over time as environmentallaws or regulations, or interpretations thereof, change or the nature of ouroperations require us to make significant additional capital expenditures. Weexpect to fund our capital expenditures from cash flows from operations and ourexisting revolving senior secured credit facility.

 

***Contractual Commitments***

 

The followingtable reflects our contractual commitments associated with our debt and otherobligations as of December 31, 2005:

 
| **(in millions)  Contractual Obligations**  | ** ** | **Total**  | ** ** | **2006**   | ** ** | **2007-08** | ** ** | **2009-10** | ** ** | **There-  after** | ** ** |
|-------------------------------------------------------|------------|------------|------------|------------|------------|-------------|------------|-------------|------------|-------------------|------------|
| Long-term  debt (1)                                   |       | $          | 1,569      |       | $          | 8           |       | $           | 16         |              | $          | 237 |   | $ | 1,308 |   |
| Interest  expense (2)                                 |       | 857        |       | 139        |       | 276         |       | 269         |       | 173               |       |
| Operating  leases                                     |       | 14         |       | 6          |       | 5           |       | 2           |       | 1                 |       |
| Fiber supply  agreements (3)                          |       | 601        |       | 50         |       | 98          |       | 98          |       | 355               |       |
| Information  technology/human resources agreement (4) |       | 173        |       | 33         |       | 55          |       | 54          |       | 31                |       |
| Purchase  obligations                                 |       | 37         |       | 35         |       | 2           |       | —      |       | —            |       |
| Landfill  closure costs                               |       | 9          |       | —     |       | —      |       | —      |       | 9                 |       |
| Total                                                 |       | $          | 3,260      |       | $          | 271         |       | $           | 452        |              | $          | 660 |   | $ | 1,877 |   |
| ** **                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **        | ** ** |
| **Other  Commercial Commitments**                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** **  | ** ** | ** **  | ** ** | ** **        | ** ** |
| Standby  letters of credit (5)                        |       | 24         |       | 24         |       | —      |       | —      |       | —            |       |
| Total                                                 |       | $          | 24         |       | $          | 24          |       | $           | —     |              | $          | — |   | $ | — |   |

 

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(1)          Amounts shown representscheduled maturities and do not take into account any acceleration ofindebtedness resulting from mandatory payments required for events such asasset sales or under the excess cash flows provisions.

(2)          Amounts includecontractual interest payments using the interest rates as of December 31,2005 applicable to our variable-rate debt and stated fixed interest rate forfixed-rate debt.

(3)          The contractualcommitments consist of minimum required expenditures to be made pursuant to thefiber supply agreements.

(4)   The contractual commitments listed in thistable with regard to the outsourcing of our information technology and humanresources services agreement with Accenture consist of the minimum requiredexpenditures under our agreement with Accenture.

(5)          We are required to postletters of credit or other financial assurance obligations with our energy andother suppliers.

 

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***Critical Accounting Estimates***

 

Thepreparation of financial statements in accordance with GAAP requires managementto make estimates and assumptions that affect the reported amounts of someassets and liabilities and, in some instances, the reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthese estimates. Management believes the accounting estimates discussed belowrepresent those accounting estimates requiring the exercise of judgment where adifferent set of judgments could result in the greatest changes to reportedresults.

 

*Incometaxes*. Income taxes are accounted for in accordancewith SFAS No. 109, *Accounting for Income Taxes*,which recognizes deferred tax assets and liabilities based on the estimatedfuture tax effects of differences between the financial statement and tax basesof assets and liabilities given the enacted tax laws. We evaluate the need fora deferred tax asset valuation allowance by assessing whether it is more likelythan not that we will realize our deferred tax assets in the future. Theassessment of whether or not a valuation allowance is required often requiressignificant judgment, including the forecast of future taxable income and theevaluation of tax planning initiatives. Adjustments to the deferred taxvaluation allowance are made to earnings in the period when such assessment ismade. We have tax jurisdictions located in many states and are subject to auditin these states, as well as at the federal level. Tax audits by their natureare often complex and can require several years to resolve. In the preparationof our financial statements, management exercises judgments in estimating thepotential exposure to unresolved tax matters. While actual results could vary,in management’s judgment we have adequate accruals with respect to the ultimateoutcome of such unresolved tax matters.

 

*Pension andpostretirement obligations*. Assumptions used in thedetermination of pension expense and postretirement benefit expense, includingthe discount rate, the expected return on plan assets and increases in futuremedical costs, are evaluated by management, reviewed with the plans’ actuariesannually and updated as appropriate. Actual asset returns and medical coststhat are more favorable than assumptions can have the effect of loweringexpense and conversely, actual results that are less favorable than assumptionscould increase expense and future cash contributions. In accordance with GAAP,actual results that differ from assumptions are accumulated and amortized overfuture periods and, therefore, affect expense in such future periods.Unrecognized prior service cost and actuarial gains and losses in the retirementand postretirement benefit plans subject to amortization are amortized over theaverage remaining service of the participants.

 

*Derivativefinancial instruments*. Derivative financialinstruments are accounted for in accordance with SFAS No. 133, *Accounting for Derivative Instruments and Hedging Activities*.We have elected to recognize the unwind value of derivative financialinstruments as the fair value. This means that the fair value for purchasedcontracts is based on the amount we could receive from the counterparty tosettle the contract. Fair value at any point in time is based upon periodicconfirmation of values received from the counterparty. Our commodity basketoption is a complex derivative financial instrument for which we have limitedability to unwind the position with a counterparty other than the seller of theoption.

 

*Environmentaland legal liabilities.* We record accruals forestimated environmental liabilities when remedial efforts are probable and thecosts can be reasonably estimated. These estimates reflect assumptions andjudgments as to the probable nature, magnitude and timing of requiredinvestigation, remediation and monitoring activities as well as availability ofinsurance coverage and contribution by other potentially responsible parties.Due to the numerous uncertainties and variables associated with theseassumptions and judgments, and changes in governmental regulations andenvironmental technologies, accruals are subject to substantial uncertainties,and actual costs could be materially greater or less than the estimatedamounts. We record accruals for other legal contingencies, which are also 

 

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subject tonumerous uncertainties and variables associated with assumptions and judgments,when the contingency is probable of occurring and reasonably estimable.

 

***Recently Issued Accounting Standards***

 

In July 2005,the Emerging Issues Task Force issued EITF Issue 04-5, *Investor’sAccounting for an Investment in a Limited Partnership When the Investor Is theSole General Partner and the Limited Partners Have Certain Rights*.This issue clarifies the accounting for investments by general partners inlimited partnerships and states that general partners are presumed to controlthe partnership absent certain rights of the limited parties. This issueaffects the accounting for our minority ownership interest in RumfordCogeneration Company, L.P., a limited partnership created to generate power forus and for third-party sale, for which we are the general partner. This issueis effective for fiscal years beginning after December 15, 2005 (as of January 1,2006 for us). This Statement will require that we consolidate the limitedpartnership as of January 1, 2006, but it is not expected to have amaterial effect on our financial position, results of operations, or compliancewith our debt covenants.

 

**ITEM 7A.**                    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK

 

***Interest Rate Risk***

 

We issuedfixed- and floating-rate debt in financing the acquisition, in order to manageour variability to cash flows from interest rates. As of December 31,2005, $1,019 million of our debt consisted of borrowings with variable interestrates under our senior secured credit facilities and our floating-rate seniorsecured notes due 2012. The potential increase in interest expense resultingfrom a 100 basis point increase in quoted interest rates on our debt balancesoutstanding at December 31, 2005 would be $10 million without taking intoaccount any interest rate hedging agreements. While we may enter intoagreements limiting our exposure to higher interest rates, any such agreements may notoffer complete protection from this risk. We are a party to two interest rateswap agreements and one interest rate cap agreement to hedge the variability ofcash flows on $450 million of our floating-rate debt. Taking into account ourinterest rate hedging agreements and rates in effect at December 31, 2005,a 100 basis point increase in quoted interest rates would result in an increasein interest expense of $6 million.

 

***Commodity Price Risk***

 

As of May 2,2005, we entered into a commodity basket option contract. This commodity basketoption contract is a purchased basket of options on a mix of natural gas,market pulp and the Euro. While the commodity basket option contract wasdesigned to help protect against decreases in the North American prices ofcoated paper by reference to the prices of natural gas and market pulp, andmaterial decreases in the value of the Euro relative to the U.S. dollar, thereis no assurance that the commodity basket option contract will actually protectus against any such price decreases or that the historical level of correlationwill continue during the three-year period of the contract. The value of thebasket option contract is not specific to changes in coated paper prices, butinstead is tied to market prices for a mix of commodities and currencies. Thedesign of the contract was such that it is expected to have a similar responseto movements in market pricing that would be equivalent to essentially all ofour coated paper sales each year for three years. This option is currentlyout-of-the-money but because of the effect of changes in the underlyingcommodities and the leverage involved in the contract, we may experiencematerial changes in fair value of the contract. As we account for this contractat fair value with changes recorded as other income (expense), we may experiencesignificant variability in reported income (loss) from operations. Because thecontract is a purchased option contract, we are not exposed to cash flow risksfrom changes in market rates. This contract expires April 2008 and had afair value of $47 million at December 31, 2005.

 

37

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**ITEM 8.****                            ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

***Index to Financial Statements***
| ** **                                                                                                                                     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| **Successor**                                                                                                                                  | ** ** |
| NewPage Corporation and Subsidiaries:                                                                                                     |       |
| Report of Independent Registered Public Accounting Firm                                                                                        |       |
| Consolidated  Balance Sheet as of December 31, 2005                                                                                       |       |
| Consolidated Statement of Operations for the eight months ended December 31, 2005                                                    |       |
| Consolidated Statement of Stockholder’s Equity for the eight months  ended December 31, 2005                                         |       |
| Consolidated Statement of Cash Flows for the eight months ended December 31,  2005                                                        |       |
| Notes to Consolidated Financial Statements                                                                                                     |       |
|                                                                                                                                           |       |
| **Predecessor**                                                                                                                                | ** ** |
| Printing and Writing Papers Business (A  Business of MeadWestvaco Corporation):                                                                |       |
| Report of  Independent Registered Public Accounting Firm                                                                                       |       |
| Combined Balance Sheet as of December 31,  2004                                                                                           |       |
| Combined  Statements of Operations for the four months ended April 30, 2005 and  the years  ended December 31, 2004 and 2003         |       |
| Statements of  Changes in Combined Equity for the four months ended April 30, 2005 and  the   years ended December 31, 2004 and 2003 |       |
| Combined  Statements of Cash Flows for the four months ended April 30, 2005  and the years   ended December 31, 2004 and 2003   |       |
| Notes to  Combined Financial Statements                                                                                                        |       |

** **

**38**

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To the Stockholderand Board of Directors of NewPage Corporation

 

In ouropinion, the accompanying consolidated balance sheet and the relatedconsolidated statements of operations, changes in stockholder’s equity and cashflows present fairly, in all material respects, the financial position of NewPage Corporationand its subsidiaries at December 31, 2005, and the results of itsoperations and its cash flows for the eight months ended December 31, 2005in conformity with accounting principles generally accepted in the UnitedStates of America. These financial statements are the responsibility of theCompany’s management. Our responsibility is to express an opinion on thesefinancial statements based on our audit. We conducted our audit of thesestatements in accordance with the standards of the Public Company AccountingOversight Board (United States). Those standards require that we plan and perform theaudit to obtain reasonable assurance about whether the financial statements arefree of material misstatement. An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements,assessing the accounting principles used and significant estimates made bymanagement, and evaluating the overall financial statement presentation. Webelieve that our audit provides a reasonable basis for our opinion.

 
| /s/  PricewaterhouseCoopers LLP |   |
|---------------------------------|--------|
|                            |
| PricewaterhouseCoopers  LLP     |
| Dayton, Ohio                    |
| March 24,  2006            |

 

** **

**39**

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** **

**NEWPAGE CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEET**

**DECEMBER 31,2005**

Dollars in millions

 
| **ASSETS**                                                                               | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------------------------|------------|------------|------------|
| Cash and  cash equivalents                                                               |       | $          | 1          |   |
| Accounts  receivable, net of allowance for doubtful accounts of $4                       |       | 233        |       |
| Inventories  (Note D)                                                                    |       | 437        |       |
| Other  current assets                                                                    |       | 22         |       |
| Total  current assets                                                                    |       | 693        |       |
|                                                                                     |       |       |       |
| Property,  plant and equipment, net (Note E)                                             |       | 1,414      |       |
| Intangibles  and other assets (Note F)                                                   |       | 195        |       |
| TOTAL ASSETS                                                                             |       | $          | 2,302      |   |
|                                                                                     |       |       |       |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                           |       |       |       |
| Accounts  payable                                                                        |       | $          | 184        |   |
| Accrued  expenses (Note H)                                                               |       | 135        |       |
| Current  maturities of long term debt (Note I)                                           |       | 8          |       |
| Total  current liabilities                                                               |       | 327        |       |
|                                                                                     |       |       |       |
| Long-term  debt (Note I)                                                                 |       | 1,555      |       |
| Other  long-term obligations                                                             |       | 57         |       |
| Deferred  income taxes (Note J)                                                          |       | 16         |       |
|                                                                                     |       |       |       |
| Commitments  and contingencies (Note N)                                                  |       |       |       |
|                                                                                     |       |       |       |
| **STOCKHOLDER’S  EQUITY**                                                           |       |       |       |
| Common  stock, 100 shares authorized, issued and outstanding, $0.01 per share par  value |       | —     |       |
| Additional  paid-in capital                                                              |       | 399        |       |
| Accumulated  deficit                                                                     |       | (57        | )          |
| Accumulated  other comprehensive income                                                  |       | 5          |       |
| Total  stockholder’s equity                                                         |       | 347        |       |
| TOTAL  LIABILITIES AND STOCKHOLDER’S EQUITY                                         |       | $          | 2,302      |   |

 

See notes toconsolidated financial statements.

** **

**40**

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** **

**NEWPAGE CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS**

**EIGHTMONTHS ENDED DECEMBER 31, 2005**

Dollars in millions

 
| ** **                                                                                                                             | ** ** | **Eight  Months  Ended  December  31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Net sales                                                                                                                              |       | $                                                 | 1,564      |   |
|                                                                                                                                   |       |                                              |       |
| Cost of  sales                                                                                                                         |       | 1,418                                             |       |
| Selling,  general and administrative expenses                                                                                          |       | 79                                                |       |
| Interest  expense (including $17 for amortization of debt issuance costs and debt  discount   and write-off of bridge financing costs) |       | 111                                               |       |
| Other  (income) expense, net (Note G)                                                                                                  |       | 17                                                |       |
|                                                                                                                                   |       |                                              |       |
| Income  (loss) before taxes                                                                                                            |       | (61                                               | )          |
|                                                                                                                                   |       |                                              |       |
| Income tax  benefit                                                                                                                    |       | (4                                                | )          |
|                                                                                                                                   |       |                                              |       |
| Net income  (loss)                                                                                                                     |       | $                                                 | (57        | ) |

 

See notes toconsolidated financial statements.

** **

**41**

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** **

**NEWPAGE CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDER’S EQUITY**

**EIGHTMONTHS ENDED DECEMBER 31, 2005**

Dollars in millions

 
| ** **                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | ** **      | ** ** | ** **        | ** ** | **Accumulated** | ** ** | ** **        | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|-------------------|------------|-----------------|------------|-------------------|------------|
| ** **                                                       | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **        | ** ** | **Other**       | ** ** | **Comprehensive** | ** ** |
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comprehensive** | ** ** | **Income**      | ** ** |
| ** **                                                       | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit**       | ** ** | **Income**      | ** ** | **(Loss)**        | ** ** |
| Issuance of  common stock                                        |       | 100                   |       | $           | —     |            | $          | 394               |       | $               |       | $                 |       |   |   |
| Net income  (loss)                                               |       |                  |       |        |       |            |       | (57               | )          |            |       | $                 | (57        | ) |
| Additional  capital contribution by Escanaba Timber (Note O)     |       |                  |       |        |       | 4               |       |              |       |            |       |              |       |
| Change in  unrealized gain on cash-flow hedges, net of tax of $3 |       |                  |       |        |       |            |       |              |       | 5               |       | 5                 |       |
| Equity award  expense                                            |       |                  |       |        |       | 1               |       |              |       |            |       |              |       |
| Balance at December 31,  2005                               |       | 100                   |       | $           | —     |            | $          | 399               |       | $               | (57        | )                 | $          | 5 |   | $ | (52 | ) |
|                                                                  |            |                       |            |             |            |                 |            |                   |            |                 |            |                   |            |  |  |  |  |  |

 

See notes toconsolidated financial statements.

 

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**NEWPAGE CORPORATIONAND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

**EIGHTMONTHS ENDED DECEMBER 31, 2005**

Dollars in millions

 
| **CASH  FLOWS FROM OPERATING ACTIVITIES:**                                                                           | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| Net income  (loss)                                                                                                   |       | $          | (57        | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities:                            |       |       |       |
| Depreciation  and amortization                                                                                       |       | 99         |       |
| Amortization  of debt issuance costs and debt discount and write-off of bridge financing  costs                      |       | 17         |       |
| Unrealized  loss on option contracts                                                                                 |       | 25         |       |
| Deferred  income taxes                                                                                               |       | (4         | )          |
| LIFO effect                                                                                                          |       | 10         |       |
| Investees—earnings  and distributions                                                                           |       | 5          |       |
| Equity award  expense                                                                                                |       | 1          |       |
| Change in  operating assets and liabilities:                                                                         |       |       |       |
| Accounts  receivable                                                                                                 |       | (37        | )          |
| Inventories                                                                                                          |       | 19         |       |
| Other operating  assets                                                                                              |       | (17        | )          |
| Accounts  payable                                                                                                    |       | 57         |       |
| Accrued  expenses and other liabilities                                                                              |       | 51         |       |
| Net cash  provided by operating activities                                                                           |       | 169        |       |
|                                                                                                                 |       |       |       |
| **CASH  FLOWS FROM INVESTING ACTIVITIES:**                                                                           |       |       |       |
| Cash paid  for acquisition                                                                                           |       | (1,974     | )          |
| Capital  expenditures                                                                                                |       | (67        | )          |
| Cash paid  for option contracts                                                                                      |       | (73        | )          |
| Net cash  used in investing activities                                                                               |       | (2,114     | )          |
|                                                                                                                 |       |       |       |
| **CASH  FLOWS FROM FINANCING ACTIVITIES:**                                                                           |       |       |       |
| Proceeds  from capital contributions                                                                                 |       | 441        |       |
| Proceeds  from issuance of long-term debt and initial draw of revolver                                               |       | 1,694      |       |
| Payment of  debt issuance costs                                                                                      |       | (58        | )          |
| Payments of  long-term debt                                                                                          |       | (2         | )          |
| Net  borrowings (payments) on revolving credit facility                                                              |       | (129       | )          |
| Net cash  provided by financing activities                                                                           |       | 1,946      |       |
|                                                                                                                 |       |       |       |
| Net increase  in cash and cash equivalents and cash and cash equivalents at end of period                            |       | $          | 1          |   |
|                                                                                                                 |       |       |       |
| **SUPPLEMENTAL  INFORMATION:**                                                                                       |       |       |       |
| Cash paid  for interest                                                                                              |       | $          | 67         |   |
| Non-cash  transaction—Issuance of NewPage Holding PIK Notes to MeadWestvaco   Corporation as consideration |       | $          | 100        |   |

 

See notes toconsolidated financial statements.

 

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**NEWPAGE CORPORATIONAND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**EIGHTMONTHS ENDED DECEMBER 31, 2005**

Dollars in millions

 

**A.**                                                            BASIS OF PRESENTATION

 

NewPage Corporationand its subsidiaries are engaged in the manufacturing, marketing anddistribution of coated, carbonless and uncoated papers, which are manufacturedat five mills in the United States. The consolidated financial statementsinclude the accounts of the Company and its majority-owned or controlledsubsidiaries. We account for our equity investee using the equity method ofaccounting. All intercompany transactions and balances have been eliminated. Unlessotherwise noted, the terms “we,” “our,” “us,” “Company” and “NewPage” refer toNewPage Corporation and its consolidated subsidiaries.

 

**B.**                                                            SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

***Estimates and assumptions***

 

Thepreparation of these combined financial statements required management to makeestimates and assumptions that affect the reported amounts of some assets andliabilities and, in some instances, the reported amounts of revenues andexpenses during the reporting period. Actual results could differ from theseestimates.

 

***Concentration of credit risk***

 

We are potentiallysubject to concentrations of credit risk related to our accounts receivable. Themajority of the accounts receivable are with paper merchants and printers. Welimit our credit risk by performing ongoing credit evaluations, and when deemednecessary, requiring letters of credit, guarantees or collateral. For the eightmonths ended December 31, 2005, sales to our largest customer were 18% ofnet sales. Accounts receivable at December 31, 2005, relating to thiscustomer were 18% of accounts receivable, net. Our ten largest customersaccounted for 51% of our net sales for the eight months ended December 31,2005.

 

***Inventories***

 

Inventoriesare valued at the lower of cost or market. Cost is determined using thelast-in, first-out (LIFO) method for substantially all raw materials, finishedgoods and production materials. Cost of all other inventories, mainly storesand supplies inventories, is determined by the average cost method.

 

***Property, plant and equipment***

 

Owned assetsare recorded at cost. Costs of renewals and betterments of properties arecapitalized; costs of maintenance and repairs are charged to expense. The costof plant and equipment is depreciated utilizing the straight-line method overthe estimated useful lives of the assets, which range from 20 to 40 years forbuildings and 5 to 30 years for machinery and equipment.

 

***Impairment of long-lived assets***

 

Weperiodically evaluate whether current events or circumstances indicate that thecarrying value of our long-lived assets to be held and used may not berecoverable. If such circumstances are determined to exist, an estimate ofundiscounted future cash flows produced by the long-lived asset, or theappropriate

 

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grouping ofassets, is compared to the carrying value to determine whether an impairmentexists. We report an asset to be disposed of at the lower of its carrying valueor its estimated net realizable value.

 

***Capitalized software***

 

Capitalizedsoftware is included in other assets and is amortized using the straight-linemethod over the estimated useful lives of 4 to 10 years. We record softwaredevelopment costs in accordance with the American Institute of Certified PublicAccountants’ Statement of Position 98-1, *Accounting for the Costsof Computer Software Developed or Obtained for Internal Use*.

 

***Derivative financial instruments***

 

We usederivative financial instruments primarily to manage our exposure to changes ininterest rates. Interest rate swap contracts are accounted for as cash-flowhedges with changes in fair value recorded as a component of othercomprehensive income. The intrinsic portion of interest rate cap contracts areaccounted for as cash-flow hedges, with changes in fair value attributed tointrinsic value recorded as a component of other comprehensive income and anychange in fair value attributed to time value recorded currently in interestexpense. Other comprehensive income (loss) is reclassified into current periodearnings when the hedged transaction affects earnings. We also have a purchasedbasket option contract on a mix of natural gas, market pulp and the Eurodesigned to help protect against decreases in the North American prices ofcoated paper. The basket option contract is accounted for at fair value withchanges in the fair value of the contract recorded in other (income) expense.The fair value for a purchased derivative financial instrument is based on theamount we could receive from the counterparty to settle the instrument.

 

***Fair value of financial instruments***

 

At December 31,2005, the book value of long-term debt was $1,563 and the fair value was $1,544.The fair value of long-term debt is based upon quoted market prices for thesame or similar issues or on the current interest rates available to the Companyfor debt of similar terms and maturities. The fair value and carrying amount ofthe interest rate swaps was a receivable of $8 at December 31, 2005. Thefair value and carrying amount of the interest rate cap was a receivable of $2at December 31, 2005. The fair value and carrying amount of the basketoption contract was a receivable of $47 at December 31, 2005. The fairvalues of the interest rate swaps and cap and the basket option contract werebased on quotes from brokers. At December 31, 2005, the carrying amountsof all other assets and liabilities that qualify as financial instrumentsapproximated their fair value.

 

***Environmental***

 

Environmentalexpenditures that increase useful lives of assets are capitalized, while otherenvironmental expenditures are expensed. Liabilities are recorded when remedialefforts are probable and the costs can be reasonably estimated.

 

***Landfills and other asset retirement obligations***

 

We follow SFASNo. 143, *Accounting for Asset Retirement Obligations*,which requires that an obligation associated with the retirement of a tangiblelong-lived asset be recognized as a liability when incurred, in accounting forcosts related to the closure and post-closure monitoring of our owned landfills.Subsequent to initial measurement, an entity recognizes changes in the amountof the liability resulting from the passage of time and revisions to either thetiming or amount of estimated cash flows.

 

45

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In March 2005,the Financial Accounting Standards Board issued FASB Interpretation No. 47,*Accounting for Conditional Asset RetirementObligations, an interpretation of FASB Statement No. 143*. ThisInterpretation clarifies the accounting for conditional asset retirementobligations in which the timing and/or method of settlement are conditional ona future event that may or may not be within the control of theentity. An entity is required to recognize a liability for the fair value of aconditional asset retirement obligation if the fair value of the liability canbe reasonably estimated. Uncertainty about the timing and/or method ofsettlement of a conditional asset retirement obligation should be factored intothe measurement of the liability when sufficient information exists. We adoptedthis Statement as of December 31, 2005. As of the adoption date thisStatement did not have a material effect on our financial position, results ofoperations, or compliance with our debt covenants.

 

***Revenue recognition***

 

We recognizerevenue at the point when title and the risk of ownership passes to thecustomer. Substantially all of our revenues are generated through productsales, and shipping terms generally indicate when title and the risk ofownership have passed. Revenue is recognized at shipment for sales whereshipping terms are FOB (free on board) shipping point. For sales where shippingterms are FOB destination, revenue is recognized when the goods are received bythe customer. For sales made under consignment programs, revenue is recognizedin accordance with the terms of the contract. We provide allowances forestimated returns and other customer credits such as discounts, returns andvolume rebates, when the revenue is recognized, based on historical experience,current trends and any notification of pending returns. Sales of byproductsproduced during the manufacturing process are recognized as a reduction of costof sales.

 

***Income taxes***

 

Deferredincome taxes are recorded for temporary differences between financial statementcarrying amounts and the tax bases of assets and liabilities. Deferred taxassets and liabilities reflect the enacted tax rates in effect for the yearsthe differences are expected to reverse. We evaluate the need for a deferredtax asset valuation allowance by assessing whether it is more likely than notthat we will realize the deferred tax assets in the future.

 

***Stock compensation***

 

Effective asof the acquisition, we adopted SFAS No. 123 (Revised), *Share-based Payment*. SFAS No. 123R requires that allequity awards to employees be expensed over the vesting period of the award. Inaccordance with SFAS No. 123R, we have not recorded unvested equityinterests as paid-in capital.

 

**C.**                                                            ACQUISITION AND RELATED TRANSACTIONS

 

On May 2,2005, NewPage and subsidiaries funded the acquisition of the Printing andWriting Papers Business (the “predecessor”) from MeadWestvaco Corporation (“MeadWestvaco”)(the “acquisition”), which was deemed to have been completed on April 30,2005. On January 14, 2005, our indirect parent, Escanaba Timber LLC (“EscanabaTimber”), and MeadWestvaco entered into an equity and asset purchase agreement(the “purchase agreement”) pursuant to which we and our subsidiaries acquiredthe printing and writing papers group of MeadWestvaco. The purchase agreementand related documents contemplated the occurrence of the following events (collectively,the “Transactions”):

 

•    EscanabaTimber contributed $415 of cash equity, as an investment in common stock, toNewPage Holding Corporation (“NewPage Holding”).

 

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•    NewPage Holdingissued $100 of NewPage Holding PIK notes to MeadWestvaco as part ofthe consideration and an additional $25 of NewPage Holding PIK notes forcash. NewPage Holding contributed the net cash proceeds from the NewPage HoldingPIK notes and the $415 of cash contributed by Escanaba Timber to NewPage, as aninvestment in the common stock of NewPage.

•    NewPage enteredinto two senior secured credit facilities, consisting of a $750 senior securedterm loan and a $350 senior secured asset-based revolving credit facility.

•    NewPage issued$225 of floating rate senior secured notes due 2012 and $350 of 10% seniorsecured notes due 2012.

•    NewPage issued$200 of 12% senior subordinated notes due 2013.

•    NewPage paidapproximately $2,060 for MeadWestvaco’s Printing and Writing Papers Group,excluding fees and expenses, of which $1,960 was paid in cash and $100 was paidin the form of NewPage Holding PIK notes.

 

Theconsolidated balance sheet in these financial statements include the assetsacquired and liabilities assumed of MeadWestvaco’s printing and writing papers businessand reflect an allocation of purchase price based on fair values at the date ofacquisition. The acquisition of the printing and writing papers business by NewPage andthe timber business by our parent, Escanaba Timber, were acquired under onepurchase agreement. The allocation of the purchase price to each entity wasmade in proportion to each entity’s share of the fair value of the total assetsacquired and not based on the individual entity’s issuance of consideration toMeadWestvaco. The resulting purchase price allocated to NewPage is lessthan the sum of the payments made through NewPage to MeadWestvaco becausethe relative fair value of the assets acquired by NewPage to the fairvalue of the total assets acquired was in a different proportion than thepayments made by NewPage and Escanaba Timber. This difference is recordedas a reduction of $129 from the cash capital contribution from Escanaba Timberand a corresponding reduction in the value allocated to long-term assets. Thefollowing shows the reconciliation of the purchase price paid by NewPage tothe net purchase price allocation allocated to NewPage:

 
| Cash paid  for acquisition disclosed in statement of cash flows                     |   | $     | 1,974  |   |
|-------------------------------------------------------------------------------------|--------|-------|--------|--------|
| NewPage Holding  PIK notes issued to MeadWestvaco (net of discount)            |   | 86    |   |
| Total paid  for acquisition                                                         |   | 2,060 |   |
| Excess of  cash contributed from Escanaba Timber over fair value of assets acquired |   | (129  | )      |
| Net purchase  price allocated                                                       |   | $     | 1,931  |   |

 

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A summary ofthe purchase price allocated to NewPage for the fair value of the assetsacquired and the obligations assumed at the date of the acquisition ispresented below.

 
| Accounts  receivable           |   | $     | 198    |   |
|--------------------------------|--------|-------|--------|--------|
| Inventory                      |   | 466   |   |
| Other  current assets          |   | 3     |   |
| Property,  plant and equipment |   | 1,442 |   |
| Intangible  assets             |   | 26    |   |
| Other assets                   |   | 68    |   |
| Total assets  acquired         |   | 2,203 |   |
| Accounts  payable              |   | (126  | )      |
| Other  current liabilities     |   | (86   | )      |
| Other long-term  obligations   |   | (60   | )      |
| Total  liabilities assumed     |   | (272  | )      |
| Net purchase  price allocated  |   | $     | 1,931  |   |

 

The followingtable summarizes selected unaudited pro forma consolidated statements ofoperations data of the predecessor for the years ended December 31, 2005and 2004 as if the acquisition had been completed at the beginning of the year.

 
| **Unaudited pro forma financial data** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|
| Net sales                                                  |       | $        | 2,280      |     | $          | 2,176 |   |
| Net loss                                                   |       | (72      | )          | (344     | )          |
|                                                            |            |          |            |          |            |  |  |

 

This selectedunaudited pro forma consolidated financial data is included only for thepurposes of illustration and does not necessarily indicate what the operatingresults would have been if the acquisition had been completed on such date.Moreover, this information does not necessarily indicate what our future operatingresults will be. This information includes eight months of actual data in 2005for the period subsequent to the date of the acquisition. For periods prior tothe acquisition, the unaudited pro forma information includes allocations tothe predecessor of certain expenses maintained by MeadWestvaco for periodsafter the date of the acquisition.

 

**D.**                                                            INVENTORIES

 

Inventories asof December 31, 2005, consist of:

 
| Finished and  in-process goods |   | $  | 304    |   |
|--------------------------------|--------|----|--------|--------|
| Raw  materials                 |   | 59 |   |
| Stores and  supplies           |   | 74 |   |
|                           |   | $  | 437    |   |

 

If inventorieshad been valued at current costs, they would have been valued at $420 at December 31,2005. During the eight months ended December 31, 2005, inventoryquantities were reduced. This reduction resulted in a liquidation of LIFOinventory quantities carried at higher costs prevailing at the acquisition dateas compared with the cost of purchases, the effect of which increased cost ofgoods sold and net loss by approximately $1.

 

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**E.**                                                              PROPERTY, PLANT AND EQUIPMENT

 

Property,plant and equipment as of December 31, 2005, consist of:

 
| Land and  land improvements     |   | $     | 99     |   |
|---------------------------------|--------|-------|--------|--------|
| Buildings                       |   | 115   |   |
| Machinery  and other            |   | 1,242 |   |
| Construction  in progress       |   | 50    |   |
|                            |   | 1,506 |   |
| Less:  accumulated depreciation |   | (92   | )      |
|                            |   | $     | 1,414  |   |

 

**F.**                                                              INTANGIBLES AND OTHER ASSETS

 

Intangiblesand other assets as of December 31, 2005, consist of:

 
| Commodity  basket option contract                               |   | $      | 47     |   |
|-----------------------------------------------------------------|--------|--------|--------|--------|
| Financing  costs (net of accumulated amortization of $5)        |   | 42     |   |
| Prepaid  pension asset                                          |   | 43     |   |
| Intangibles—                                               |   |   |   |
| Customer  relationships (net of accumulated amortization of $1) |   | 25     |   |
| Other                                                           |   | 38     |   |
|                                                            |   | $      | 195    |   |

 

Amortizationexpense was $9 for the eight months ended December 31, 2005. Amortizationexpense for the next five years is expected to be $14 in 2006, $14 in 2007, $14in 2008, $11 in 2009 and $10 in 2010.

 

**G.**                                                            DERIVATIVE FINANCIAL INSTRUMENTS

 

As of May 2,2005, we entered into a commodity basket option contract with J. Aron &Company, an affiliate of Goldman, Sachs & Co., as part of theTransactions and paid a premium of $72 for the contract, which was the fairvalue of the option at inception. This commodity basket option contract is apurchased basket of options on a mix of natural gas, market pulp and the Euro.While the commodity basket option contract was designed to help protect againstdecreases in the North American prices of coated paper by reference to theprices of natural gas and market pulp, and material decreases in the value ofthe Euro relative to the U.S. dollar, there is no assurance that the commoditybasket option contract will actually protect us against any such pricedecreases or that the historical level of correlation will continue during thethree-year period of the contract. Because of the uncertainty of futurecorrelation, we do not apply hedge accounting treatment for this contract andrecord changes in the fair value of the contract in other (income) expense.Other (income) expense for the eight months ended December 31, 2005,includes an unrealized loss of $25 determined based on the mark-to-market valueof the option contract.

 

As of June 30,2005, we entered into two interest rate swap agreements and one interest ratecap agreement to hedge the variability of cash flows on a portion of our variable-ratedebt. We entered into a $150 notional amount interest rate swap expiring June 2009and a $150 notional amount interest rate swap expiring June 2010. Wepurchased a $150 notional amount interest rate cap with a cap rate of 4.50%that expires June 2008 for $1.

 

49

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**H.**                                                            ACCRUED EXPENSES

 

Accruedexpenses as of December 31, 2005, consist of:

 
| Payroll and  employee benefit costs |   | $  | 48     |   |
|-------------------------------------|--------|----|--------|--------|
| Accrued  interest                   |   | 28 |   |
| Accrued  rebates and allowances     |   | 26 |   |
| Other                               |   | 33 |   |
|                                |   | $  | 135    |   |

 

**I.**                                                                 LONG-TERM DEBT

 

In conjunctionwith the acquisition, we issued $1,694 of long-term debt on May 2, 2005.The initial balances and the balances as of December 31, 2005 are asfollows:

 
| ** **                                                                           | ** ** | **December  31, 2005** | ** ** | **May 2,  2005** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------|------------|
| Revolving  senior secured credit facility                                            |       | $                           | 46         |                  | $          | 175 |   |
| Term loan  senior secured credit facility                                            |       | 748                         |       | 750                   |       |
| Floating  rate senior secured notes                                                  |       | 225                         |       | 225                   |       |
| 10% senior  secured notes (face amount $350; effective interest rate of 10.25%)      |       | 346                         |       | 346                   |       |
| 12% senior  subordinated notes (face amount $200; effective interest rate of 12.25%) |       | 198                         |       | 198                   |       |
| Total  long-term debt, including current portion                                     |       | 1,563                       |       | 1,694                 |       |
| Current  portion of long-term debt                                                   |       | 8                           |       | 8                     |       |
| Long-term  debt                                                                      |       | $                           | 1,555      |                  | $          | 1,686 |   |

 

We incurred$47 of financing fees related to the issuance of the above debt. In addition,we recognized an expense of $11 after the acquisition related to bridgefinancing commitment fees. We will amortize the remainder of the financingcosts to interest expense over the terms of the related debt issues.

 

Principal paymentson long-term debt for the next five years are payable as follows: $8 in 2006, $8in 2007, $8 in 2008, $8 in 2009 and $230 in 2010.

 

***Senior Secured Credit Facilities***

 

The seniorsecured credit facilities consist of a senior secured term loan of $750 and asenior secured revolving credit facility of $350. Subject to customaryconditions, including the absence of defaults under the revolving facility,amounts available under the revolving facility may be borrowed, repaid andre-borrowed, including in the form of letters of credit and swing lineloans, until the maturity date thereof. The revolving facility was partiallyutilized to fund the acquisition and pay related expenses, and may beutilized to fund our working capital, to fund permitted acquisitions andcapital expenditures, and for other general corporate purposes. Theavailability under our revolving credit facility is reduced by our outstandingletters of credit, which totaled $24 at December 31, 2005. The amount ofloans and letters of credit available to us pursuant to the revolving facilityis limited to the lesser of $350 or an amount determined pursuant to aborrowing base. The borrowing base at any time will be equal to 85% of the bookvalue of our and our subsidiaries’ eligible account receivables, plus thelesser of (i) 75% of the lower of cost or market value of our and oursubsidiaries’ eligible inventory or (ii) 85% of the “net cost recoverypercentage” of our and our subsidiaries’ eligible inventory, minus certainreserves established by the collateral agent under the revolving facility. Thecollateral agent has the right to change these advance 

 

50

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rates under certaincircumstances. The eligibility of accounts receivable and inventory forinclusion in the borrowing base is determined in accordance with certaincustomary criteria specified pursuant to the revolving facility. For purposesof the borrowing base, “net cost recovery percentage” is the percentagedetermined by dividing the amount that would be recovered in an orderlyliquidation of the inventory, as determined from the most recent inventoryappraisal conducted under the terms of the revolving facility, by the cost ofthe inventory covered by such appraisal. Based on availability under theborrowing base as of December 31, 2005, we had $242 of additional borrowing availabilityunder the revolving senior secured credit facility. Unless terminated earlier,the revolving facility matures at May 1, 2010. Amounts outstanding under ourrevolving facility initially bear interest, at our option, at a rate per annumequal to either: (i) the base rate plus an applicable margin (initially 1.00%),or (ii) LIBOR plus an applicable margin (initially 2.00%). Our weighted-averageinterest rate on the outstanding balance at December 31, 2005 was 6.82%. Certaincustomary fees are payable to the lenders and the agents under the seniorsecured credit facilities, including, without limitation, a commitment fee forour revolving facility based upon non-use of available funds and letter ofcredit fees and issuer fronting fees.

 

The senior term facilitymatures at May 1, 2011 and will amortize in 20 consecutive equal quarterlyinstallments in an aggregate annual amount equal to 1% of the originalprincipal amount of the senior term facility during the first five yearsthereof, with the balance payable in four equal quarterly installments in yearsix. The senior term facility is subject to mandatory prepayment with, ingeneral, (i) 100% of the net cash proceeds of certain asset sales, subject tocertain reinvestment rights; (ii) 100% of the net cash proceeds of certaininsurance and condemnation payments, subject to certain reinvestment rights;(iii) 50% of the net cash proceeds of equity offerings; (iv) 100% of the netcash proceeds of debt incurrences (other than debt incurrences permitted underthe term facility); and (v) 75% of our excess cash flow, as defined in the seniorsecured credit facility (declining in stages to zero, in accordance with aleverage ratio test). The loans under the senior term facility bear interest,at our option, at a rate per annum equal to either: (i) the base rate plus2.00%, or (ii) LIBOR plus 3.00%. Our weighted-average interest rate on theoutstanding balance at December 31, 2005 was 7.56%.

 

The senior secured creditfacilities are jointly and severally guaranteed by our parent and each of ourdomestic subsidiaries. Subject to certain customary exceptions, we and each ofthe guarantors granted to the lenders under the revolving facility a firstpriority security interest in and lien on our and our domestic subsidiaries’present and future cash, deposit accounts, accounts receivable, inventory andintercompany debt owed to us, our parent and our guarantor domesticsubsidiaries. Subject to certain customary exceptions, we and each of theguarantors granted to the lenders under the term facility (i) a first prioritysecurity interest in and lien on substantially all of our and our domesticsubsidiaries’ present and future property and assets (other than cash, depositaccounts, accounts receivable, inventory and intercompany debt owed to us, ourparent and our guarantor domestic subsidiaries), including the capital stock ofour domestic subsidiaries and 65% of the capital stock of our foreignsubsidiaries, if any, as well as our capital stock owned by our parent and (ii)a second priority security interest in and lien on our and our domestic subsidiaries’present and future cash, deposit accounts, accounts receivable, inventory andintercompany debt owed to us, our parent or our guarantor domesticsubsidiaries.

 

The senior secured creditfacilities contain various customary affirmative and negative covenants(subject to customary exceptions and certain existing obligations andliabilities), including, but not limited to, restrictions on our ability andthe ability of our subsidiaries to (i) dispose of assets, (ii) incur additionalindebtedness and guarantee obligations, (iii) repay other indebtedness, (iv)pay certain restricted payments and dividends, (v) create liens on assets orprohibit the creation of liens on assets, (vi) make investments, loans oradvances, (vii) restrict distributions to our company from our subsidiaries,(viii) make certain acquisitions, (ix) engage in mergers or consolidations, (x)enter into sale and leaseback transactions, (xi) engage in certain transactionswith subsidiaries that are not guarantors of the senior secured creditfacilities or with affiliates or (xii) amend the terms of the notes andotherwise restrict corporate activities.

 

51

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In addition, under the seniorterm facility (and under the revolving facility to the extent that our unusedborrowing availability under the revolving facility plus excess cash are below$40 for 10 consecutive business days), we are required to comply with specifiedfinancial ratios and tests, including a minimum interest and fixed chargecoverage ratios, maximum senior and total leverage ratios and maximum capitalexpenditures.

 

***Floating Rate and 10% Senior Secured Notes***

 

We issued $350 face value of10% senior secured notes and $225 of floating rate senior secured notes. Thesenior secured notes mature on May 1, 2012. Interest on the 10% senior securednotes accrues at the rate of 10% per annum and is payable semi-annually inarrears on May 1 and November 1, commencing on November 1, 2005. Interest onthe 10% senior secured notes is computed on the basis of a 360-day yearcomprised of twelve 30-day months. Interest on the floating rate senior securednotes accrues at a rate per annum, reset quarterly, equal to LIBOR (4.25% atDecember 31, 2005) plus 6.25%. We pay interest on the floating rate seniorsecured notes quarterly, in arrears, on every February 1, May 1, August 1 andNovember 1.

 

The senior secured notes aresecured on a second-priority basis by liens on all of the assets of the Companyand the guarantors other than the collateral securing the revolving seniorcredit facility and the stock of our subsidiaries; are subordinated, to theextent of the value of the assets securing such indebtedness, to the seniorsecured credit facility; are senior in right of payment to our existing andfuture subordinated indebtedness, including the senior subordinated notes; andare jointly and severally unconditionally guaranteed by our domesticsubsidiaries.

 

At any time prior to May 1,2008, we may redeem up to 30% of the 10% senior secured notes at a redemptionprice of 110% with the net cash proceeds of one or more equity offerings by theCompany or a contribution to the common equity capital of the Company from thenet proceeds of one or more Equity Offerings by a direct or indirect parent ofthe Company. At any time prior to May 1, 2009, we may also redeem all or a partof the 10% senior secured notes at a redemption price equal to 100% plus a “make-whole”premium. On or after May 1, 2009, we may redeem all or a part of the 10% seniorsecured notes at an initial redemption price of 106%. At any time prior to May1, 2008, we may redeem up to 30% of the floating rate senior secured notes at aredemption price of 100%, plus LIBOR on the date of redemption, plus 6.25% withthe net cash proceeds of one or more Equity Offerings by the Company or acontribution to the common equity capital of the Company from the net proceedsof one or more Equity Offerings by a direct or indirect parent of the Company.On or after May 1, 2009, we may redeem all or a part of the floating ratesenior secured notes at an initial redemption price of 103%. If a Change ofControl occurs, each holder of senior secured notes has the right to require usto repurchase all or any part of that holder’s senior secured notes at 101% ofthe face value.

 

The senior secured notescontain various customary covenants (subject to customary exceptions andcertain existing obligations and liabilities), including, but not limited to,restrictions on our ability and the ability of our subsidiaries to (i) disposeof assets, (ii) incur additional indebtedness and guarantee obligations orissue preferred stock, (iii) repay other indebtedness, (iv) pay certainrestricted payments and dividends, (v) create liens on assets or prohibit thecreation of liens on assets, (vi) make investments, loans or advances, (vii)restrict distributions to our company from our subsidiaries, (viii) makecertain acquisitions, (ix) engage in mergers or consolidations, (x) enter intosale and leaseback transactions, (xi) engage in certain transactions withsubsidiaries that are not guarantors of the senior secured credit facilities orwith affiliates or (xii) amend the terms of the notes and otherwise restrictcorporate activities.

 

52

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***12% Senior Subordinated Notes***

 

We issued $200 face value ofsenior subordinated notes that mature on May 1, 2013. The senior subordinatednotes are general unsecured obligations and are subordinated in right ofpayment to all our existing and future senior debt, including the seniorsecured notes and borrowings under the senior secured credit facilities.Interest on the senior subordinated notes accrues at the rate of 12.0% perannum and is payable semi-annually in arrears on May 1 and November 1,commencing on November 1, 2005. The senior subordinated notes are jointly andseverally guaranteed by each of our domestic subsidiaries.

 

At any time prior to May 1,2008, we may redeem up to 30% of the senior subordinated notes at a redemptionprice of 112% with the net cash proceeds of one or more equity offerings by theCompany or a contribution to the common equity capital of the Company from thenet proceeds of one or more equity offerings by a direct or indirect parent ofthe Company. At any time prior to May 1, 2009, we may also redeem all or a partof the senior subordinated notes at a redemption price equal to 100% plus a “make-whole”premium. On or after May 1, 2009, we may redeem all or a part of the seniorsubordinated notes at an initial redemption price of 106%. If a Change ofControl occurs, each holder of the senior subordinated notes has the right torequire us to repurchase all or any part of that holder’s senior subordinatednotes at 101% of the face value.

 

The senior subordinated notescontain various customary covenants (subject to customary exceptions andcertain existing obligations and liabilities), including, but not limited to,restrictions on our ability and the ability of our subsidiaries to (i) disposeof assets, (ii) incur additional indebtedness and guarantee obligations orissue preferred stock, (iii) repay other indebtedness, (iv) pay certainrestricted payments and dividends, (v) create liens on assets or prohibit thecreation of liens on assets, (vi) make investments, loans or advances, (vii)restrict distributions to our company from our subsidiaries, (viii) makecertain acquisitions, (ix) engage in mergers or consolidations, (x) enter intosale and leaseback transactions, (xi) engage in certain transactions with subsidiariesthat are not guarantors of the senior secured credit facilities or withaffiliates or (xii) amend the terms of the notes and otherwise restrictcorporate activities.

 

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**J.                     INCOME TAXES**

 

The principal current andnoncurrent deferred tax assets and liabilities are as follows:

 
| ** **                                   | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2005**         | ** ** |
| Deferred tax  assets:                        |       |             |       |
| Intangible assets                            |       | $                | 79         |   |
| Compensation-related costs                   |       | 23               |       |
| Net operating loss carryforwards             |       | 9                |       |
| Other accruals and reserves                  |       | 16               |       |
| Total  deferred tax assets                   |       | 127              |       |
| Valuation  allowance                         |       | (22              | )          |
| Net deferred  tax assets                     |       | 105              |       |
|                                         |       |             |       |
| Deferred tax  liabilities:                   |       |             |       |
| Property, plant and equipment                |       | (97              | )          |
| Inventory                                    |       | (6               | )          |
| Other                                        |       | (6               | )          |
| Total  deferred tax liabilities              |       | (109             | )          |
|                                         |       |             |       |
| Net deferred  liability                      |       | $                | (4         | ) |
|                                         |       |             |       |
| Included in  the balance sheet:              |       |             |       |
| Other current assets—deferred tax asset |       | $                | 4          |   |
| Noncurrent assets—deferred tax asset    |       | 8                |       |
| Noncurrent net deferred tax liability        |       | (16              | )          |
| Net deferred  liability                      |       | $                | (4         | ) |

 

The significant components ofthe income tax provision (benefit) are as follows:

** **
| ** **                                | ** ** | **Eight  Months** | ** ** |
|-------------------------------------------|------------|-------------------|------------|
| ** **                                | ** ** | **Ended**         | ** ** |
| ** **                                | ** ** | **December  31,** | ** ** |
| ** **                                | ** ** | **2005**          | ** ** |
| Deferred:                                 |       |              |       |   |
| U.S. federal                              |       | $                 | (16        | ) |
| State and local                           |       | (7                | )          |
| Benefit for  deferred income taxes        |       | (23               | )          |
| Valuation  allowance                      |       | 22                |       |
|                                      |       | (1                | )          |
| Allocation  to other comprehensive income |       | 3                 |       |
| Income tax  (benefit)                     |       | $                 | (4         | ) |

 

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The following table summarizesthe major differences between the actual income tax provision (benefit)attributable to continuing operations and taxes computed at the U.S. federalstatutory rate:
| ** **                                                             | ** ** | **Eight**        | ** ** |
|------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                             | ** ** | **Months**       | ** ** |
| ** **                                                             | ** ** | **Ended**        | ** ** |
| ** **                                                             | ** ** | **December 31,** | ** ** |
| ** **                                                             | ** ** | **2005**         | ** ** |
| Income tax  benefit computed at the U.S. federal statutory rate of 35% |       | $                | (21        | ) |
| State and  local income taxes, net of federal benefit                  |       | (5               | )          |
| Valuation  allowance                                                   |       | 22               |       |
| Income tax  (benefit)                                                  |       | $                | (4         | ) |
| Effective  tax rate                                                    |       | 6.3              | %          |

 

The federal net operating losscarryforward at December 31, 2005, was $21 and is available to reduce federaltaxable income through 2025. For the period subsequent to the acquisition, wehave recorded a valuation allowance against our net deferred tax assets forfederal income taxes and for certain states since it is more likely than notthat we will not realize these benefits, as defined in SFAS No. 109, as aresult of the negative evidence presented by our current period loss and our predecessor’shistory of losses over the past three years. In accordance with SFAS No. 109,we have allocated $3 of tax expense to other comprehensive income and thecorresponding offset as an allocation to tax benefit from operations.

 

**K.                    EQUITY**

 

In conjunction with theacquisition, we received an equity investment of $539 in common stock from ourparent, NewPage Holding. We have 100 shares issued and outstanding of $0.01 parvalue common stock.

 

As discussed in Note C, theallocation of the purchase price to Escanaba Timber and NewPage was made inproportion to each entity’s share of the fair value of the total assetsacquired and not based on the individual legal entity’s issuance ofconsideration to MeadWestvaco. Below is a reconciliation between the $539equity investment and the amount recorded in additional paid-in capital:

 
| Equity contribution from NewPage Holding                                                   |   | $    | 539    |   |
|--------------------------------------------------------------------------------------------|--------|------|--------|--------|
| Discount on  NewPage Holding PIK notes issued to MeadWestvaco as consideration             |   | (14  | )      |
| Unvested  restricted equity awards                                                         |   | (2   | )      |
| Proceeds  from capital contributions                                                       |   | 523  |   |
| Excess  consideration contributed from Escanaba Timber over fair value of assets  acquired |   | (129 | )      |
| Proceeds  from capital contributions in statement of stockholder’s equity             |   | $    | 394    |   |

 

***Equity Awards***

 

Certain members of ourmanagement and our chairman were granted Class A Common Percentage Interestsand Class B Common Percentage Interests of Maple Timber Acquisition LLC (ourultimate parent) (the “Management Interests”) relating to our business. Theequity interests of Maple Timber Acquisition LLC are classified into twoseparate series: one relating to our business and one relating to the businessof Escanaba Timber. The series of equity interests relating to our businessconsists of Class A Common Percentage Interests, Class B Common PercentageInterests and Preferred Percentage Interests. The Class A and Class B CommonPercentage Interests participate in distributions only after

 

55

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holders of the PreferredPercentage Interests have received a return of their capital plus a preferredreturn thereon. Additionally, the Class B Common Percentage Interests willparticipate in the equity of our business only after the Class A CommonPercentage Interests have received $200 in distributions. Of the ManagementInterests, 50% will vest over time; 20% vesting at the close of theacquisition, 40% vesting at December 31, 2006 and the other 40% vesting at December31, 2007. The other 50% of the Management Interests will vest only ifperformance targets are met during 2006 and 2007. All Management Interests willvest only to the extent the employee remains employed by us on each vestingdate or, if our chairman remains chairman of our company on each vesting date.However, all Management Interests will automatically vest upon a “change ofcontrol” or an “initial public offering.” The fair value of the restrictedManagement Interests granted to our members of management and our chairmantotaled $2. We have recognized expense of $1 during the eight months endedDecember 31, 2005, and will recognize the additional compensation expense overthe vesting periods with the offset recorded as an increase in additional paid-incapital. Furthermore, certain other members of our management were issuedoptions to purchase Class A Common Percentage Interests that only vest upon theoccurrence of a “change of control” or an “initial public offering.” Theseoptions expire after ten years from the date of issuance.

 

**L.                    BUSINESS SEGMENTS**

 

Our principal business segmentsare Coated Paper System and Carbonless Paper System.

 

The Coated Paper System isengaged in the manufacturing, marketing and distribution of coated papersprimarily used for commercial printing, magazines, catalogs, textbooks, andlabels. The products in this segment include: coated papers, uncoated papersproduced in Michigan and Kentucky, and market pulp production. This segment’sproducts are manufactured at four U.S. mills and supported by multiple distributionand converting locations.

 

The Carbonless Paper System isengaged in the manufacturing, marketing and distribution of carbonless andtechnical papers used primarily for business forms. The products in this segmentinclude: value-added carbonless papers, uncoated papers, and specialty papers.This segment’s products are manufactured at one U.S. mill and one off-sitecoating facility.

 

The segments are measured onearnings before interest, taxes and certain other (income) expenses that arecorporate items. Sales between the segments are transacted based on marketprices. We have no operations or long-lived assets outside of the UnitedStates. We had export sales of $166 for the eight months ended December 31, 2005.

 

Selected information by segmentfor the eight months ended December 31, 2005, is as follows:

** **
| ** **                             | ** ** | **Carbonless** | ** ** | **Coated** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                             | ** ** | **Paper**      | ** ** | **Paper**  | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **System**     | ** ** | **System** | ** ** | **Total**  | ** ** |
| Net sales                              |       | $              | 283        |       | $          | 1,281      |       | $ | 1,564 |   |
| Segment  operating profit              |       | 3              |       | 70         |       | 73         |       |
| Segment  depreciation and amortization |       | —         |       | 99         |       | 99         |       |
| Capital  expenditures                  |       | 5              |       | 62         |       | 67         |       |
|                                        |            |                |            |            |            |            |            |  |  |  |

 

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The following is areconciliation of the segment operating profit reported above to the amount of income(loss) before taxes reported in the consolidated financial statements:

** **
| ** **                                  | ** ** | **Eight**    | ** ** |
|---------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **Months**   | ** ** |
| ** **                                  | ** ** | **Ended**    | ** ** |
| ** **                                  | ** ** | **December** | ** ** |
| ** **                                  | ** ** | **31, 2005** | ** ** |
| Segment  operating profit                   |       | $            | 73         |   |
| Interest  expense                           |       | (111         | )          |
| Other income                                |       | 2            |       |
| Unrealized  gain (loss) on option contracts |       | (25          | )          |
| Income (loss) before taxes                  |       | $            | (61        | ) |

 
| ** **              | ** ** | **December** | ** ** |
|-------------------------|------------|--------------|------------|
| ** **              | ** ** | **31, 2005** | ** ** |
| Segment  assets:        |       |         |       |
| Coated Paper System     |       | $            | 1,992      |   |
| Carbonless Paper System |       | 145          |       |
| Corporate               |       | 165          |       |
| Total                   |       | $            | 2,302      |   |

 

**M.                   RETIREMENT AND OTHERPOSTRETIREMENT BENEFITS**

 

At the acquisition we assumed certainretirement obligations for active hourly employees and received relatedretirement plan assets. Plan assets were measured as of September 30, 2005. Wedo not expect to contribute to the plan during 2006 as a result of theoverfunded status of the plan.

 

At the acquisition we assumedcertain postretirement health care obligations for active employees. We providehealth care benefits for retirees prior to their reaching age 65. We fund thepostretirement health care benefits on a pay-as-you-go basis so that ourcontributions are equal to the benefits paid to participants. For 2006, weexpect the required employers’ contribution to be $1.

 

We also sponsor definedcontribution plans for certain employees, which provide for companycontributions of a specified percentage of each employee’s total compensation.Certain of these plans include a discretionary profit-sharing component thatvaries depending on the achievement of certain objectives. During the eightmonths ended December 31, 2005, we incurred expenses of $12 for contributionsto the defined contribution benefit plans.

 

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The funded status of thedefined benefit plans at December 31, 2005, were as follows:

** **
| ** **                                                          | ** ** | ** **     | ** ** | **Post-**      | ** ** |
|---------------------------------------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                                                          | ** ** | **Retirement** | ** ** | **retirement** | ** ** |
| ** **                                                          | ** ** | **Plan**       | ** ** | **Plan**       | ** ** |
| Obligations  assumed from acquisition                               |       | $              | 259        |           | $          | 29 |   |
| Service cost                                                        |       | 8              |       | 1              |       |
| Interest  cost                                                      |       | 9              |       | 1              |       |
| Benefits  paid                                                      |       | (5             | )          | —         |       |
| Plan  amendments                                                    |       | 2              |       | —         |       |
| Actuarial  (gains) losses                                           |       | (19            | )          | (1             | )          |
| Benefit  obligation at end of period                                |       | 254            |       | 30             |       |
|                                                                |       |           |       |           |       |
| Fair value  of plan assets acquired                                 |       | 303            |       | —         |       |
| Return on  plan assets                                              |       | 7              |       | —         |       |
| Benefits  paid                                                      |       | (5             | )          | —         |       |
| Fair value  of plan assets at end of period                         |       | 305            |       | —         |       |
| Funded  status                                                      |       | 51             |       | (30            | )          |
| Unrecognized  prior service cost                                    |       | 2              |       | —         |       |
| Unrecognized  net actuarial (gains) losses                          |       | (10            | )          | (1             | )          |
| Prepaid  asset (accrued liability)—long-term asset (liability) |       | $              | 43         |           | $          | (31 | ) |
| Weighted-average  assumptions:                                      |       |           |       |           |       |
| Discount rate                                                       |       | 5.71           | %          | 5.30           | %          |
| Long-term rate of return on plan assets                             |       | 7.40           | %          | —         |       |

 

The assumed discount rates usedin determining the benefit obligations were determined by reference to theyield on zero-coupon corporate bonds rated Aa or AA maturing in conjunctionwith the expected timing and amount of future benefit payments.

 

We have invested plan assets ina mix of equity securities and debt securities. The expected long-term rate ofreturn for the plan’s total assets is based on the expected return of each ofthe above categories, weighted based on the target allocation for each class.Equity securities are expected to return 7% to 11% over the long-term, whiledebt securities are expected to return between 4% and 6%. The Committee expectsthat the Plan’s asset managers will provide a modest (0.5% to 1.0% per annum)premium to the respective market benchmark indices. The following is scheduleof the investment allocation at September 30, 2005, and the expected returns bysecurity type:

** **
| ** **         | ** ** | ** **     | ** ** | **Plan**       | ** ** | **Weighted-** | ** ** |
|--------------------|------------|----------------|------------|----------------|------------|---------------|------------|
| ** **         | ** ** | **Target**     | ** ** | **Asset**      | ** ** | **Average**   | ** ** |
| ** **         | ** ** | **Allocation** | ** ** | **Allocation** | ** ** | **Return**    | ** ** |
| Equity  securities |       | 70             | %          | 71             | %          | 7.70          | %          |
| Debt  securities   |       | 27             |       | 26             |       | 5.20          |       |
| Other              |       | 3              |       | 3              |       | 4.30          |       |
| Total              |       | 100            | %          | 100            | %          | 7.40          | %          |

 

Plan assets will be managed asa balanced portfolio comprised of two major components: an equity portion and afixed income portion. The expected role of Plan equity investments will be toinvest in well-diversified portfolios of domestic and international stocks. Therole of fixed income investments will be to invest in well-diversifiedportfolios of debt instruments that the average weighted duration should notexceed the duration of the Lehman Brothers Aggregate Index by more than twoyears. The Committee will review this investment policy statement at least onceper year. In addition, the portfolio will be reviewed quarterly to determinethe deviation from target weightings and will be rebalanced as necessary.

 

58

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The postretirement benefit planutilized a weighted-average assumed rate of increase in the per capita cost ofcovered benefits (i.e., health care cost trend rate) of 12.0% for 2006 anddecreasing 1.0% per year to an ultimate trend rate of 5.0% in 2013 andremaining at that level thereafter. A one percentage point increase in theassumed health care cost trend rate would have increased the accumulatedbenefit obligation by $2 at December 31, 2005, and the interest and servicecost would have been less than $1 higher for the year ended December 31, 2005.A one percentage point decrease in the assumed health care cost trend ratewould have decreased the accumulated benefit obligation by $2 at December 31,2005, and the interest and service cost would have been less than $1 lower forthe year ended December 31, 2005.

 

A summary of the components ofnet periodic costs for the eight months ended December 31, 2005, is as follows:

** **
| ** **                              | ** ** | ** **     | ** ** | **Post-**      | ** ** |
|-----------------------------------------|------------|----------------|------------|----------------|------------|
| ** **                              | ** ** | **Retirement** | ** ** | **retirement** | ** ** |
| ** **                              | ** ** | **Plan**       | ** ** | **Plan**       | ** ** |
| Service cost                            |       | $              | 8          |           | $          | 1 |   |
| Interest  cost                          |       | 9              |       | 1              |       |
| Expected  return on plan assets         |       | (16            | )          | —         |       |
| Net periodic  costs                     |       | $              | 1          |           | $          | 2 |   |
| Weighted-average  assumptions:          |       |           |       |           |       |
| Discount rate                           |       | 5.25           | %          | 5.25           | %          |
| Long-term rate of return on plan assets |       | 8.00           | %          | —         |       |

 

Future benefit payments for theplans for each of the next five years and for the five years thereafter areexpected to be paid as follows:
| ** **        | ** ** | ** **     | ** ** | **Post-**      | ** ** |
|-------------------|------------|----------------|------------|----------------|------------|
| ** **        | ** ** | **Retirement** | ** ** | **retirement** | ** ** |
| ** **        | ** ** | **Plan**       | ** ** | **Plan**       | ** ** |
| 2006              |       | $              | 12         |           | $          | 1 |   |
| 2007              |       | 13             |       | 1              |       |
| 2008              |       | 16             |       | 2              |       |
| 2009              |       | 18             |       | 3              |       |
| 2010              |       | 19             |       | 3              |       |
| 2011 though  2015 |       | 113            |       | 22             |       |
|                   |            |                |            |                |            |  |  |

 

**N.                    COMMITMENTS ANDCONTINGENCIES**

*** ***

***Contingencies***

 

Claims have been made againstus for the costs of environmental remedial measures taken or to be taken.Reserves for such liabilities have been established and no insurance recoverieshave been anticipated in the determination of the reserves. We are involved invarious other litigation and administrative proceedings arising in the normalcourse of business. Although the ultimate outcome of such matters cannot bepredicted with certainty, we do not believe that the currently expected outcomeof any matter, lawsuit or claim that is pending or threatened, or all of themcombined, will have a material adverse effect on our financial condition,results of operations or liquidity.

 

59

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***Commitments***

 

We are party to fiber supplyagreements whereby we are entitled to purchase minimum volumes of wood atmarket prices for periods through 2026, with renewal periods at our option. Weare required to purchase minimum levels and have optional volumes that we canpurchase under some of the agreements. The agreements include limitation ofdamages sections under which our maximum potential damages for default arebased on a price per ton of wood not delivered, unless the failure is theresult of a *force majeure* event that would haveprevented either party from performing its obligations. The aggregate maximumamount of potential damages declines from approximately $23 per year in 2006and totals an aggregate of $292 for all periods. These contracts are assignableby either party with mutual consent.

 

On August 31, 2005, we enteredinto a Master Services Agreement with Accenture LLP. Under the agreement,Accenture will provide information technology services necessary to support ouroperations through January 31, 2012 and human resources services necessary tosupport our operations through January 31, 2013, at specified monthly baseprices (with incremental charges for additional services provided) plustransition charges. The information technology services include development,maintenance and support of our software, mainframe, server, managed network andapplication management systems. Accenture is also obligated to support andmaintain third-party software and hardware currently used in our operations.The human resource services include maintenance and support of employeebenefits, payroll and tax services. The base price for services under theagreement is approximately $30 annually. We may terminate the agreement aftertwo years by providing Accenture at least 12 months prior notice and payment ofa termination fee, which varies depending on the termination date, but not to exceed$15 for termination of the information technology services and $3 fortermination of the human resources services. Additionally, Accenture mayimmediately terminate the agreement in the event that we materially breach anyof our duties and/or obligations under the agreement and fail to cure suchbreach within 30 days. In addition, if Accenture fails to perform its servicesat or above fixed service levels, we have the ability to terminate theinformation technology services portion of the agreement.

*** ***

***Operating Leases***

 

The Company leases certainbuildings, transportation equipment and office equipment under operating leaseswith terms of one to 10 years. Rental expense for the eight months endedDecember 31, 2005 was $8. The following is a schedule by year of future annualminimum lease payments under non-cancelable operating leases as of December 31,2005:

 
| 2006       |   | $ | 6      |   |
|------------|--------|---|--------|--------|
| 2007       |   | 4 |   |
| 2008       |   | 1 |   |
| 2009       |   | 1 |   |
| 2010       |   | 1 |   |
| Thereafter |   | 1 |   |
|       |   | $ | 14     |   |

 

**O.                    RELATED PARTY TRANSACTIONS**

 

At the time of the acquisition,we entered into fiber supply agreements with our indirect parent, EscanabaTimber LLC, whereby we were entitled to purchase wood fibers from them atprevailing market rates. During the eight months ended December 31, 2005, we madepurchases of $22 from them. In addition, we provide certain management servicesto them, including human resources, information technology and accounting. Ourbillings to them for these services were not significant. As of December 31,2005, Escanaba Timber has sold substantially all of its timberlands. Theacquirers have assumed the

 

60

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commitments under the fibersupply agreements and we have negotiated certain revisions to the agreements.We received $4 for changes made to a fiber supply agreement in conjunction withone of Escanaba Timber’s dispositions. We have accounted for this payment as anadditional capital contribution from Escanaba Timber.

 

We are the general partner and havea 30% interest in Rumford Cogeneration Company, L.P., a limited partnershipwhich operates the cogeneration facility located at the Rumford, Maine, papermill. Sales of byproducts and charges for management services to the limitedpartnership were $36 for the eight months ended December 31, 2005. Purchasesfrom the limited partnership were $32 for the eight months ended December 31,2005. Distributions received from the limited partnership were $8 for the eightmonths ended December 31, 2005.

 

Cerberus Capital Management,L.P., our equity sponsor, retains consultants that specialize in operationsmanagement and support and who provide Cerberus with consulting adviceconcerning portfolio companies in which funds and accounts managed by Cerberusor its affiliates have invested. From time to time, Cerberus makes the servicesof these consultants available to Cerberus portfolio companies. We believe thatthe terms of these consulting arrangements are materially consistent with thoseterms that would have been obtained in an arrangement with an unaffiliated thirdparty. We reimbursed Cerberus at the time of the acquisition of our businessfrom MeadWestvaco for $1 of costs and expenses incurred in connection with theAcquisition on our behalf by Cerberus. We have normal purchases and salesarrangements with other entities that are owned or controlled by Cerberus. Webelieve that these transactions are at arms’ length terms and are not materialto our results of operations or financial position. An affiliate of Cerberuswas paid a fee by Escanaba Timber in connection with the Transactions.

 

**P.                    SUBSEQUENT EVENTS**

 

On January 7, 2006, RumfordFalls Power Company, an indirect wholly-owned subsidiary of NewPage, enteredinto a definitive agreement with Brascan Power Inc. to sell two hydroelectricgenerating facilities located on the Androscoggin River in Rumford, Maine, fora cash sales price of $144. The transaction is expected to close in the secondquarter of 2006. We have classified these assets as held and used as ofDecember 31, 2005 as approval for the sale did not occur prior to December 31,2005. The major class of assets to be sold consists of property, plant andequipment with a book value of approximately $80.

 

61

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On February 21, 2006, weentered into a definitive agreement to sell our carbonless paper business,including our paper mill in Chillicothe, Ohio and a converting facility inFremont, Ohio to P.H. Glatfelter Company for a cash sales price of $80, subjectto a working capital adjustment. The transaction is expected to close in thefirst half of 2006. We have continued to classify the assets as held and usedat December 31, 2005 as approval for the sale did not occur prior to December31, 2005. The following shows the approximate book value of the major classesof assets and liabilities as of December 31, 2005 that will be disposed of aspart of the sale:

 
| Accounts receivable            |   | $   | 43     |   |
|--------------------------------|--------|-----|--------|--------|
| Inventory                      |   | 94  |   |
| Other  current assets          |   | 2   |   |
| Property,  plant and equipment |   | 6   |   |
| Prepaid  pension asset         |   | 10  |   |
| Total assets                   |   | 155 |   |
| Accounts  payable              |   | (22 | )      |
| Other  current liabilities     |   | (28 | )      |
| Other  long-term obligations   |   | (3  | )      |
| Total liabilities              |   | (53 | )      |
| Net assets                     |   | $   | 102    |   |

 

**Q.                    RECENTLY ISSUED ACCOUNTINGSTANDARDS**

 

In July 2005, the EmergingIssues Task Force issued EITF Issue 04-5, *Investor’s Accounting foran Investment in a Limited Partnership When the Investor Is the Sole GeneralPartner and the Limited Partners Have Certain Rights*. This issueclarifies the accounting for investments by general partners in limitedpartnerships and states that general partners are presumed to control thepartnership absent certain rights of the limited parties. This issue affectsthe accounting for our minority ownership interest in Rumford CogenerationCompany, L.P., a limited partnership created to generate power for us and forthird-party sale, for which we are the general partner. This issue is effectivefor fiscal years beginning after December 15, 2005 (as of January 1, 2006 forus). This Statement will require that we consolidate the limited partnership,but it is not expected to have a material effect on our financial position,results of operations, or compliance with our debt covenants.

 

* * * * *

** **

**62**

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** **

**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

To MeadWestvaco Corporation

 

In our opinion, theaccompanying combined balance sheet and the related combined statements ofoperations, changes in combined equity and cash flows present fairly, in allmaterial respects, the financial position of the Printing and Writing PapersBusiness of MeadWestvaco Corporation at December 31, 2004 and 2003, and theresults of its operations and its cash flows for the four months ended April30, 2005 and each of the two years in the period ended December 31, 2004 inconformity with accounting principles generally accepted in the United Statesof America. These financial statements are the responsibility of the Business’management. Our responsibility is to express an opinion on these financialstatements based on our audits. We conducted our audits of these statements inaccordance with the standards of the Public Company Accounting Oversight Board(United States). Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management,and evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion.

 
| /s/  PricewaterhouseCoopers LLP |
|---------------------------------|
|                            |
| PricewaterhouseCoopers  LLP     |
| Cincinnati,  Ohio               |
| December 16,  2005              |

 

63

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**PRINTINGAND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**COMBINED BALANCE SHEET**

Dollars in millions

** **
| ** **                          | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|------------------|------------|
| ** **                          | ** ** | **2004**         | ** ** |
| ASSETS                              |       |             |       |
| Accounts  receivable, net           |       | $                | 200        |   |
| Inventories                         |       | 321              |       |
| Other  current assets               |       | 20               |       |
| Total current assets                |       | 541              |       |
|                                |       |             |       |
| Property,  plant and equipment, net |       | 2,033            |       |
| Other  assets, net                  |       | 73               |       |
|                                |       | $                | 2,647      |   |
|                                |       |             |       |
| LIABILITIES  AND COMBINED EQUITY    |       |             |       |
| Accounts  payable                   |       | $                | 123        |   |
| Accrued  expenses                   |       | 144              |       |
| Total current liabilities           |       | 267              |       |
|                                |       |             |       |
| Long-term  debt                     |       | 145              |       |
| Other  long-term obligations        |       | 16               |       |
| Deferred  income taxes              |       | 506              |       |
|                                |       |             |       |
| Commitments  and contingencies      |       |             |       |
|                                |       |             |       |
| Combined  equity                    |       | 1,713            |       |
|                                |       | $                | 2,647      |   |

 

The accompanying notes are anintegral part of these financial statements.

 

64

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**PRINTINGAND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**COMBINEDSTATEMENTS OF OPERATIONS**

Dollars in millions

** **
| ** **                                                             | ** ** | **Four**      | ** ** | ** **       | ** ** | ** ** | ** ** |
|------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                                                             | ** ** | **Months**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                             | ** ** | **Ended**     | ** ** | **Years ended**  | ** ** |
| ** **                                                             | ** ** | **April 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                             | ** ** | **2005**      | ** ** | **2004**         | ** ** | **2003**   | ** ** |
| Net sales  (including sales to related parties of $10, $30 and $30)    |       | $             | 716        |             | $          | 2,176      |       | $ | 1,989 |   |
|                                                                   |       |          |       |             |       |       |       |
| Cost of  sales                                                         |       | 673           |       | 2,145            |       | 1,995      |       |
| Selling,  general and administrative expenses                          |       | 39            |       | 129              |       | 136        |       |
| Goodwill  impairment                                                   |       | —        |       | 238              |       | —     |       |
| Interest  expense, including loss on defeasance of debt of $18 in 2005 |       | 21            |       | 9                |       | 10         |       |
| Other  income, net                                                     |       | (2            | )          | (6               | )          | (7         | )          |
|                                                                   |       |          |       |             |       |       |       |
| Loss before  income taxes                                              |       | (15           | )          | (339             | )          | (145       | )          |
| Income tax  benefit                                                    |       | (7            | )          | (38              | )          | (51        | )          |
|                                                                   |       |          |       |             |       |       |       |
| Net loss                                                               |       | $             | (8         | )                | $          | (301       | )          | $ | (94 | ) |

 

The accompanying notes are anintegral part of these financial statements.

** **

**65**

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** **

**PRINTINGAND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**STATEMENTSOF CHANGES IN COMBINED EQUITY**

Dollars in millions

** **
| ** **                                                     | ** ** | **EQUITY** | ** ** |
|----------------------------------------------------------------|------------|------------|------------|
| BALANCE,  DECEMBER 31, 2002                                    |       | $          | 2,199      |   |
|                                                           |       |       |       |
| Net loss for  the year ended December 31, 2003                 |       | (94        | )          |
| Transactions  with MeadWestvaco Corporation, net               |       | 23         |       |
|                                                           |       |       |       |
| BALANCE,  DECEMBER 31, 2003                                    |       | 2,128      |       |
|                                                           |       |       |       |
| Net loss for  the year ended December 31, 2004                 |       | (301       | )          |
| Transactions  with MeadWestvaco Corporation, net               |       | (114       | )          |
|                                                           |       |       |       |
| BALANCE,  DECEMBER 31, 2004                                    |       | 1,713      |       |
|                                                           |       |       |       |
| Net loss for  the four months ended April 30, 2005             |       | (8         | )          |
| Payment by  MeadWestvaco Corporation to defease long-term debt |       | 162        |       |
| Transactions  with MeadWestvaco Corporation, net               |       | 16         |       |
|                                                           |       |       |       |
| BALANCE,  APRIL 30, 2005                                       |       | $          | 1,883      |   |

 

The accompanying notes are anintegral part of these financial statements.

 

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**PRINTINGAND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**COMBINEDSTATEMENTS OF CASH FLOWS**

Dollars in millions

** **
| ** **                                                                       | ** ** | **Four**      | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                                                                       | ** ** | **Months**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                                       | ** ** | **Ended**     | ** ** | **Years ended**  | ** ** |
| ** **                                                                       | ** ** | **April 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                       | ** ** | **2005**      | ** ** | **2004**         | ** ** | **2003**   | ** ** |
| Cash flows  from operating activities                                            |       |          |       |             |       |       |       |
| Net loss                                                                         |       | $             | (8         | )                | $          | (301       | )          | $ | (94 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |          |       |             |       |       |       |
| Depreciation and amortization                                                    |       | 76            |       | 230              |       | 236        |       |
| Deferred income taxes                                                            |       | (7            | )          | (38              | )          | (50        | )          |
| Loss on sales of assets, net                                                     |       | —        |       | 5                |       | 2          |       |
| Investee—earnings and distributions                                         |       | 1             |       | 9                |       | 9          |       |
| Impairment of goodwill and long-lived  assets                                    |       | —        |       | 238              |       | —     |       |
| Loss on defeasance of debt                                                       |       | 18            |       | —           |       | —     |       |
| Changes in operating assets and  liabilities:                                    |       |          |       |             |       |       |       |
| Accounts receivable, net                                                         |       | (3            | )          | 10               |       | (9         | )          |
| Inventories                                                                      |       | (59           | )          | 48               |       | (33        | )          |
| Other current assets                                                             |       | (3            | )          | (4               | )          | (5         | )          |
| Other assets                                                                     |       | (2            | )          | (5               | )          | (7         | )          |
| Accounts payable                                                                 |       | 4             |       | 43               |       | 10         |       |
| Accrued expenses                                                                 |       | (16           | )          | 1                |       | (15        | )          |
| Other liabilities                                                                |       | 1             |       | 4                |       | 6          |       |
| Net cash provided by operating activities                                        |       | 2             |       | 240              |       | 50         |       |
|                                                                             |       |          |       |             |       |       |       |
| Cash flows  from investing activities                                            |       |          |       |             |       |       |       |
| Additions to  property, plant and equipment                                      |       | (17           | )          | (88              | )          | (78        | )          |
| Proceeds  from sale of property, plant and equipment                             |       | —        |       | 1                |       | 2          |       |
| Net cash used in investing activities                                            |       | (17           | )          | (87              | )          | (76        | )          |
|                                                                             |       |          |       |             |       |       |       |
| Cash flows  from financing activities                                            |       |          |       |             |       |       |       |
| Proceeds  from issuance of long-term debt                                        |       | —        |       | —           |       | 12         |       |
| Repayment of  long-term debt                                                     |       | —        |       | (39              | )          | (9         | )          |
| Net  transactions with MeadWestvaco Corporation                                  |       | 15            |       | (114             | )          | 23         |       |
| Net cash (used in) provided by financing  activities                             |       | 15            |       | (153             | )          | 26         |       |
|                                                                             |       |          |       |             |       |       |       |
| Increase  (decrease) in cash and cash equivalents                                |       | $             | —     |             | $          | —     |       | $ | — |   |

 

The accompanying notes are anintegral part of these financial statements.

 

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**PRINTINGAND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**NOTESTO COMBINED FINANCIAL STATEMENTS**

Dollars in millions

 

**A.                    DESCRIPTION OF BUSINESS ANDBASIS OF PRESENTATION**

 

These combined financialstatements present the historical results of the Printing and Writing PapersBusiness, which is sometimes referred to as the Coated and Carbonless PapersGroup (the “Business”), which was purchased from MeadWestvaco Corporation (“MeadWestvaco”)by NewPage Corporation (the “Acquisition”) pursuant to the Acquisition, whichwas funded on May 2, 2005, but deemed to have been completed on April 30, 2005.The Business consists of the historical Papers business segment of MeadWestvacoadjusted to exclude MeadWestvaco’s investment in Northwood Panelboard and theoperations of Specialty Papers, which is a distinct and different businessunder separate management that will not be purchased. The Business is engagedin the manufacturing, marketing and distribution of coated, uncoated andcarbonless papers, which are manufactured at five domestic mills. MeadWestvacowill retain certain assets and liabilities related to the Business (includedwithin these financial statements). These include certain tax receivables andcertain liabilities for environmental and employee matters, including theenvironmental matters discussed in Note M. These amounts are not material inregard to the Business’ financial position.

 

These combined financialstatements are intended to present the historical results of the Businessoperations during each respective period. As such, these combined financialstatements include allocations of certain expenses, as well as assets and liabilitieshistorically maintained by MeadWestvaco and not recorded in the accounts of theBusiness. The Business and MeadWestvaco management believe such allocationshave been made on a reasonable basis. However, these combined financialstatements may not necessarily be indicative of the results that would havebeen obtained if the Business had operated as a separate entity during theperiods presented.

 

The combined equity of theBusiness comprises the excess of the Business’ assets over its liabilities.Combined equity is affected by the Business’ operating results, expenseallocations from MeadWestvaco and cash transfers between the Business andMeadWestvaco, including settlement of intercompany transactions and amountspaid or received relating to interest and income taxes, as MeadWestvaco managesall treasury activities of the Business.

 

**B.                    SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

*** ***

***Estimates and assumptions***

 

The preparation of thesecombined financial statements required management to make estimates and assumptionsthat affect the reported amounts of some assets and liabilities and, in someinstances, the reported amounts of revenues and expenses during the reportingperiod. Actual results could differ from these estimates.

*** ***

***Concentration of credit risk***

 

The financial instruments thatpotentially subject the Business to concentrations of credit risk are accountsreceivable. The Business limits its credit risk by performing ongoing creditevaluations, and when deemed necessary, requiring letters of credit, guarantees,or collateral. The majority of the Business’s accounts receivable are withpaper merchants and printers.

 

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For the four months ended April30, 2005 and the years ended December 31, 2004 and 2003, the Business’s salesto its largest customer was 18%, 17% and 15% of net sales, respectively.Accounts receivable at December 31, 2004 relating to this customer was 15% ofaccounts receivable, net.

*** ***

***Inventories***

 

Inventories are valued at thelower of cost or market. Cost is determined using the last-in, first-out (LIFO)method for substantially all raw materials, finished goods and productionmaterials. Cost of all other inventories, mainly stores and suppliesinventories, is determined by the average cost method.

*** ***

***Property, plant and equipment***

 

Owned assets are recorded atcost. Also included in the cost of these assets is interest on funds borrowedduring the construction period. When assets are sold, retired or disposed of,their cost and related accumulated depreciation are removed from the accountsand any resulting gain or loss is reflected in the statement of operations.Costs of renewals and betterments of properties are capitalized; costs ofmaintenance and repairs are charged to expense. The cost of plant and equipmentis depreciated, utilizing the straight-line method, over the estimated usefullives of the assets, which range from 20 to 40 years for buildings and 5 to 30years for machinery and equipment.

*** ***

***Impairment of long-lived assets***

 

The Business periodicallyevaluates whether current events or circumstances indicate that the carryingvalue of its long-lived assets, including intangible assets, to be held andused may not be recoverable. If such circumstances are determined to exist, anestimate of undiscounted future cash flows produced by the long-lived asset, orthe appropriate grouping of assets, is compared to the carrying value todetermine whether impairment exists. If an asset is determined to be impaired,the loss is measured based on quoted market prices in active markets, ifavailable. If quoted market prices are not available, the estimate of fairvalue is based on various valuation techniques, including a discounted value ofestimated future cash flows. The Business reports an asset to be disposed of atthe lower of its carrying value or its estimated net realizable value.

*** ***

***Goodwill***

 

The Business has classified asgoodwill the excess of the acquisition cost over the fair values of the nettangible and intangible assets of businesses acquired. These financialstatements included the applicable portion of goodwill associated with Papersbusiness subsequent to and created by the merger of Mead and Westvaco.Statement of Financial Accounting Standards (SFAS) No. 142, *Goodwill and Other Intangible Assets*, requires that goodwillbe tested for impairment on an annual basis unless conditions arise that wouldrequire a more frequent evaluation. See footnote E for further information.

*** ***

***Capitalized software***

 

Capitalized software isincluded in other assets and is amortized using the straight-line method overthe estimated useful lives of 2 to 8 years. The Business records softwaredevelopment costs in accordance with the American Institute of Certified PublicAccountants’ Statement of Position 98-1, *Accounting for the Costsof Computer Software Developed or Obtained for Internal Use*.

 

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***Environmental***

 

Environmental expenditures thatincrease useful lives of assets are capitalized, while other environmentalexpenditures are expensed. Liabilities are recorded when remedial efforts areprobable and the costs can be reasonably estimated.

*** ***

***Landfills***

 

The Business follows SFAS No.143, *Accounting for Asset Retirement Obligations*,which requires that an obligation associated with the retirement of a tangiblelong-lived asset be recognized as a liability when incurred. Subsequent toinitial measurement, an entity recognizes changes in the amount of theliability resulting from the passage of time and revisions to either the timingor amount of estimated cash flows.

*** ***

***Revenue recognition***

 

The Business recognizesrevenues at the point when title and the risk of ownership passes to thecustomer. Substantially all of the Business’s revenues are generated through productsales, and shipping terms generally indicate when title and the risk ofownership have passed. Revenue is recognized at shipment for sales whereshipping terms are FOB (free on board) shipping point. For sales where shippingterms are FOB destination, revenue is recognized when the goods are received bythe customer. The Business provides allowances for estimated returns and othercustomer credits such as discounts, returns and volume rebates, when therevenue is recognized, based on historical experience, current trends and anynotification of pending returns. Sales of byproducts produced during themanufacturing process are recognized as a reduction of cost of sales.

*** ***

***Interest Expense***

 

Included in these combinedfinancial statements are amortization of deferred financing cost and interestexpense of long-term debt specifically related to the Business facilities.MeadWestvaco has not historically allocated corporate interest cost to itssegments and none of that interest cost has been allocated within thesefinancial statements.

*** ***

***Pension and postretirement benefits***

 

The employees of the Businessare participants in various defined benefit pension and postretirement planssponsored by MeadWestvaco and the assets and liabilities are combined withthose related to other MeadWestvaco businesses. Similarly, MeadWestvaco managesits domestic postretirement benefit plans on a combined basis and claims dataand liability information related to the Business is aggregated and combined,by plan, with those related to other MeadWestvaco businesses. As a result, noassets or liabilities are reflected on the Business’s combined balance sheetand pension and postretirement expense for the Business has been determined ona multi-employer plan basis.

 

Pension costs recorded by theBusiness with respect to the defined benefit pension plans for the four monthsended April 30, 2005 and the years ended December 31, 2004 and 2003 were $7, $20and $19.

 

The employees of the Businessare also eligible to participate in defined contribution benefit planssponsored by MeadWestvaco. Under the terms of the defined contribution benefitplans, participant contributions may be directed into a number of investmentoptions. MeadWestvaco matching contributions are made to a fund that invests inMeadWestvaco shares. During the four months ended April 30, 2005 and the yearsended December 31, 2004 and 2003, the Business incurred expenses of $4, $11 and$11 for matching contributions to the defined contribution benefit plans.

 

70

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Upon retirement, MeadWestvacoprovides life insurance and other postretirement benefits for certainMeadWestvaco retirees, including certain Business employees. MeadWestvaco alsofunds certain medical benefits on a current basis with retirees paying aportion of the costs. Costs of providing these benefits to both active andretired employees of the Business were $18, $54 and $54 for the four monthsended April 30, 2005 and the years ended December 31, 2004 and 2003.

*** ***

***Income taxes***

 

The Business historically isnot an income tax payer, as its results and related tax obligations, if any,are included in the consolidated returns of MeadWestvaco. The income taxbenefit included in these combined financial statements was calculated on aseparate return basis, as if the Business was a separate taxpayer, and theresulting current tax benefit (liability) is settled with MeadWestvaco throughequity. Deferred income taxes are recorded for temporary differences betweenfinancial statement carrying amounts and the tax bases of assets andliabilities. Deferred tax assets and liabilities reflect the enacted tax ratesin effect for the years the differences are expected to reverse. The Businessevaluates the need for a deferred tax asset valuation allowance by assessingwhether it is more likely than not that it will realize its deferred tax assetsin the future.

*** ***

***Stock options***

 

The Business measurescompensation cost for MeadWestvaco stock options issued to employees anddirectors using the intrinsic value-based method of accounting in accordancewith Accounting Principles Board Opinion No. 25, *Accountingfor Stock Issued to Employees* (“APB 25”). The Business adopted thedisclosure requirements of SFAS No. 148, *Accounting for Stock-BasedCompensation—Transition and Disclosure*. If compensation cost forMeadWestvaco stock options had been determined based on the fair value methodof SFAS No. 123, *Accounting for Stock-Based Compensation*(“SFAS 123”), the Business’s pro forma net loss would have been as follows:

** **
| ** **                                                                                                                                   | ** ** | **Four**      | ** ** | ** **       | ** ** | ** ** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------|------------|------------------|------------|------------|------------|
| ** **                                                                                                                                   | ** ** | **Months**    | ** ** | ** **       | ** ** | ** ** | ** ** |
| ** **                                                                                                                                   | ** ** | **Ended**     | ** ** | **Years ended**  | ** ** |
| ** **                                                                                                                                   | ** ** | **April 30,** | ** ** | **December 31,** | ** ** |
| ** **                                                                                                                                   | ** ** | **2005**      | ** ** | **2004**         | ** ** | **2003**   | ** ** |
| Net loss—as  reported                                                                                                                   |       | $             | (8         | )                | $          | (301       | )          | $ | (94 | ) |
| Add: Stock-based employee compensation  expense included in reported net loss, net of related tax effect                                     |       | —        |       | —           |       | —     |       |
| Deduct: Total stock-based employee  compensation expense determined under fair value-based method for all awards,  net of related tax effect |       | —        |       | 1                |       | —     |       |
| Pro forma  net loss                                                                                                                          |       | $             | (8         | )                | $          | (302       | )          | $ | (94 | ) |

 

***Reclassification***

 

The presentation of theearnings of the Business’ investee has been revised from previous presentationsand reclassification of the Business’ share of the earnings of the partnershiphave been made to include the earnings in other income.

 

**C.                    CURRENT ASSETS**

 

Trade receivables have beenreduced by an allowance for doubtful accounts of $4 at December 31, 2004.Receivables also include $8 from sources other than trade at December 31, 2004.

 

71

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Inventories at December 31, 2004are comprised of:

** **
| ** **                                 | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------|------------|
| ** **                                 | ** ** | **2004**         | ** ** |
| Raw  materials                             |       | $                | 53         |   |
| Production  materials, stores and supplies |       | 68               |       |
| Finished and  in-process goods             |       | 200              |       |
|                                       |       | $                | 321        |   |

 

Approximately 81% ofinventories at December 31, 2004 are valued using the LIFO method. Ifinventories had been valued at current cost, they would have been $368 atDecember 31, 2004. During 2004, inventory quantities were reduced. Thisreduction resulted in a liquidation of LIFO inventory quantities carried atlower costs prevailing in prior years as compared with the cost of 2004purchases, the effect of which decreased cost of goods sold by approximately $3and decreased net loss by approximately $1.

 

**D.                    PROPERTY, PLANT ANDEQUIPMENT**

 

Depreciation expense was $71,$215 and $219 for the four months ended April 30, 2005 and the years endedDecember 31, 2004 and 2003.

** **
| ** **                      | ** ** | **December 31,** | ** ** |
|---------------------------------|------------|------------------|------------|
| ** **                      | ** ** | **2004**         | ** ** |
| Land and  land improvements     |       | $                | 108        |   |
| Buildings                       |       | 291              |       |
| Machinery  and other            |       | 3,317            |       |
|                            |       | 3,716            |       |
| Less:  accumulated depreciation |       | (1,703           | )          |
|                            |       | 2,013            |       |
| Construction  in progress       |       | 20               |       |
|                            |       | $                | 2,033      |   |

 

**E.                     GOODWILL AND OTHERINTANGIBLE ASSETS**

 

Unless otherwise deemednecessary by changes in circumstances, the Business performs its annualimpairment review of goodwill during the fourth quarter of each year. In 2003,the year following the adoption of SFAS No. 142, no impairment charge wasnecessary. In 2004 the Business recorded an impairment charge of $238 (pre-taxand after-tax) as the carrying value of goodwill exceeded the fair value. Thischarge is included in Goodwill impairment in the accompanying combinedstatements of operations.

 

72

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The changes in the carryingamount of goodwill for the years ended December 31 are as follows:

** **
| ** **         | ** ** | **Years ended**  | ** ** |
|--------------------|------------|------------------|------------|
| ** **         | ** ** | **December 31,** | ** ** |
| ** **         | ** ** | **2004**         | ** ** | **2003** | ** ** |
| Beginning  balance |       | $                | 244        |   | $ | 236 |   |
| Adjustments(1)     |       | (6               | )          | 8 |   |
| Impairments        |       | (238             | )          | — |   |
| Ending  balance    |       | $                | —     |   | $ | 244 |   |

 

----

(1)   Reflects the adoption of SFAS No. 143 forformer Mead-related landfills in 2003 and various contingencies related touncertain tax matters in 2004 and 2003 related to the merger.

 

Intangible assets subject toamortization, included in other assets, include customer contracts and lists.The gross carrying amount for these identifiable intangible assets was $49 atDecember 31, 2004. Accumulated amortization associated with these identifiableintangible assets was $19 at December 31, 2004.

 

The Business recordedamortization expense of $2, $7 and $7 for the four months ended April 30, 2005and the years ended December 31, 2004 and 2003, relating to those identifiableintangible assets, subject to amortization.

 

**F.                     OTHER ASSETS**

** **
| ** **                                        | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|------------------|------------|
| ** **                                        | ** ** | **2004**         | ** ** |
| Identifiable  intangibles                         |       | $                | 30         |   |
| Capitalized  software                             |       | 20               |       |
| Investment  in Rumford Cogeneration Company, L.P. |       | 15               |       |
| Other  miscellaneous                              |       | 8                |       |
|                                              |       | $                | 73         |   |

 

Identifiable intangiblesconsist of arrangements whereby the Business is the exclusive supplier ofcertain products to customers. Certain arrangements include minimum purchaselevels by customers, as well as required up-front and/or periodic payments bythe Business to the customer over the life of the agreement. Terms of thesearrangements range from two to nine years with a weighted average of eightyears.

 

The Business recordedamortization expense of $2, $6 and $9 in the four months ended April 30, 2005and the years ended December 31, 2004 and 2003, relating to capitalizedsoftware.

 

The Business has a 30% interestin Rumford Cogeneration Company, L.P., a limited partnership which operates thecogeneration facility located at the Rumford, Maine, paper mill. Sales ofbyproducts and charges for management services from the Business to the limitedpartnership were $19, $51 and $50 for the four months ended April 30, 2005 andthe years ended December 31, 2004 and 2003. Purchases made by the Business fromthe limited partnership were $17, $47 and $45 for the four months ended April30, 2005 and the years ended December 31, 2004 and 2003. Distributions receivedfrom the limited partnership were $2, $12 and $12 for the four months endedApril 30, 2005 and the years ended December 31, 2004 and 2003.

 

73

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**G.                    ACCOUNTS PAYABLE AND ACCRUEDEXPENSES**

** **
| ** **                         | ** ** | **December 31,** | ** ** |
|------------------------------------|------------|------------------|------------|
| ** **                         | ** ** | **2004**         | ** ** |
| Accounts  payable:                 |       |             |       |
| Trade                              |       | $                | 95         |   |
| Other                              |       | 28               |       |
|                               |       | $                | 123        |   |
| Accrued  expenses:                 |       |             |       |
| Payroll and employee benefit costs |       | $                | 82         |   |
| Accrued rebates and allowances     |       | 27               |       |
| Accrued energy                     |       | 13               |       |
| Other                              |       | 22               |       |
|                               |       | $                | 144        |   |

 

**H.                    LONG-TERM DEBT**

** **
| ** **                                       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------|------------|
| ** **                                       | ** ** | **2004**         | ** ** |
| Pollution  Control Revenue Bonds, 9.6%, due 2006 |       | $                | 3          |   |
| Industrial  Revenue Bonds:                       |       |             |       |
| Rates from 5.88%-6.45%, due 2018-2027            |       | 125              |       |
| Floating rate, due 2009                          |       | 17               |       |
| Long-term  debt                                  |       | $                | 145        |   |

 

In conjunction with theAcquisition, MeadWestvaco repaid or defeased all outstanding debt of theBusiness. Included in interest expense for the four months ended April 30,2005, is a loss of $18 on the defeasance of the debt and write-off ofunamortized financing costs.

 

During 2004, the Businessretired $6 of fixed rate pollution control revenue bonds and $33 of floatingrate pollution control revenue bonds. The fixed rate bonds had a weightedaverage coupon rate of 6%. The interest rate on the floating rate pollutioncontrol revenue bonds was fixed for an initial term to end on November 1, 2004at a weighted average rate of 2.1%.

 

At December 31, 2004, the bookvalue of long-term debt was $145, and the fair value was estimated to be $147.The difference between book value and market value is derived from thedifference between the period-end market interest rate and the stated rate forthe Business’s fixed-rate long-term debt. The Business has estimated the fairvalue of long-term debt based upon quoted market prices for the same or similarissues or on the current interest rates available to the Business for debt ofsimilar terms and maturities. Certain covenants of MeadWestvaco are applicableto the debt of the Business. As of December 31, 2004, MeadWestvaco is incompliance with such covenants. All debt associated with the Business isuncollateralized and is guaranteed by MeadWestvaco.

 

**I.                      LEASING ACTIVITIES**

 

The Business leases a varietyof assets for use in its operations. Certain leases provide for escalation ofthe lease payments as maintenance costs and taxes increase. Rental expenseunder operating leases was $6, $17 and $22 for the four months ended April 30,2005 and the years ended December 31, 2004 and 2003.

 

74

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**J.                     STOCK OPTION PLANS**

 

Certain employees of theBusiness participate in MeadWestvaco’s stock option plans and receiveMeadWestvaco’s restricted stock. Grants of stock options and other stock-basedcompensation awards are approved by the Compensation Committee of MeadWestvaco’sBoard of Directors. The exercise prices of all options equal the market priceof MeadWestvaco’s stock on the date of grant. Under certain employee plans,stock options may be granted with or without stock appreciation rights, with orwithout limited stock appreciation rights, which are exercisable upon theoccurrence of certain events related to changes in corporate control and areexercisable after a period of six months to three years and expire not laterthan ten years from the date of grant. No new grants for stock appreciationrights were awarded to the employees of the Business in the periods presented.

 

Options to purchase 1.3 millionMeadWestvaco shares issued to all participants of the plan (including Businessemployees) under MeadWestvaco’s 1996 Stock Option Plan are accompanied by afeature that allows option holders who exercise their stock options and holdthe common shares they received at exercise to receive an additional stockoption grant with an exercise price at the then-current market price. Optionsgranted with this feature are accounted for as a fixed award.

 

The following table summarizesactivity in the plans as it relates to activity of employees of the Business:

** **
| ** **                                                             | ** ** | ** **  | ** ** | **Weighted-** | ** ** |
|------------------------------------------------------------------------|------------|-------------|------------|---------------|------------|
| ** **                                                             | ** ** | ** **  | ** ** | **average**   | ** ** |
| ** **                                                             | ** ** | ** **  | ** ** | **exercise**  | ** ** |
| **Shares of MeadWestvaco issuable  under stock options, in thousands** | ** ** | **Options** | ** ** | **price**     | ** ** |
| Outstanding  at December 31, 2002                                      |       | 1,901       |       | $             | 28.82      |   |
| Granted                                                                |       | 253         |       | 24.00         |       |
| Other  Division options assumed                                        |       | 24          |       | 29.13         |       |
| Other  Division options removed                                        |       | (18         | )          | 29.37         |       |
| Exercised                                                              |       | (91         | )          | 21.88         |       |
| Cancelled                                                              |       | (193        | )          | 27.52         |       |
| Outstanding  at December 31, 2003                                      |       | 1,876       |       | 28.60         |       |
| Granted                                                                |       | 106         |       | 28.59         |       |
| Other  Division options assumed                                        |       | 191         |       | 28.35         |       |
| Other  Division options removed                                        |       | (19         | )          | 26.68         |       |
| Exercised                                                              |       | (273        | )          | 25.40         |       |
| Cancelled                                                              |       | (96         | )          | 24.75         |       |
| Outstanding  at December 31, 2004                                      |       | 1,785       |       | 28.86         |       |
| Other  Division options removed                                        |       | (12         | )          | 28.05         |       |
| Exercised                                                              |       | (265        | )          | 27.22         |       |
| Cancelled                                                              |       | (18         | )          | 27.46         |       |
| Outstanding  at April 30, 2005                                         |       | 1,490       |       | 29.13         |       |
|                                                                        |            |             |            |               |            |  |

 

75

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The following table showsvarious information about stock options outstanding at April 30, 2005 as itrelates to activity of employees of the Business:

 
| ** **                                 | ** ** | **Range of exercise prices** | ** ** |
|--------------------------------------------|------------|------------------------------|------------|
| **Shares in thousands**                    | ** ** | **$24.00 –  $25.84**    | ** ** | **$26.16 –  $29.74** | ** ** | **$30.24 –  $40.46** | ** ** | **Total** | ** ** |
| Number outstanding                         |       | 225                          |       | 717 |   | 548 |   | 1,490 |   |
| Weighted average price                     |       | $                            | 24.48      |   | $ | 28.30 |   | $ | 32.12 |   | $ | 29.13 |   |
| Weighted average remaining life (in years) |       | 5.93                         |       | 4.99 |   | 4.31 |   | 4.88 |   |
| Number exercisable                         |       | 172                          |       | 655 |   | 522 |   | 1,349 |   |
| Weighted average price                     |       | $                            | 24.63      |   | $ | 28.28 |   | $ | 32.16 |   | $ | 29.31 |   |

 

The Business applies APB No. 25as amended, in accounting for MeadWestvaco’s plans. No stock option expense hasbeen recorded in the periods presented as the option price is set at the marketvalue of the underlying MeadWestvaco stock at the date of grant.

 

Assumptions used to calculatethe pro forma effects of option grants in accordance with SFAS 123 were thefollowing (see *Summary of Significant Accounting Policies*for pro forma disclosures):

 
| ** **                                                                                              | ** ** | **Years ended  December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                                              | ** ** | **2004**                      | ** ** | **2003** | ** ** |
| Weighted average fair value of options  granted during the period using a binomial option pricing model |       | $                             | 7.67       |   | $ | 6.85 |   |
| Weighted average assumptions used for  grants:                                                          |       |                          |       |   |   |
| Expected dividend yield                                                                                 |       | 3.22                          | %          | 3.83 | % |
| Expected volatility                                                                                     |       | 32                            | %          | 36 | % |
| Risk-free interest rate                                                                                 |       | 3.29                          | %          | 3.27 | % |
| Expected life of option (in years)                                                                      |       | 6                             |       | 6 |   |
|                                                                                                         |            |                               |            |  |  |  |  |

 

**K.                    RESTRUCTURINGAND OTHER MERGER-RELATED EXPENSES**

** **

***Year ended December 31, 2004***

*** ***

As of December 31, 2004,substantially all of the approximate 690 originally affected employees from2002, 2003 and 2004 had been separated.

 

***Year ended December 31, 2003***

*** ***

For the year ended December 31,2003, the Business recorded net pretax charges of $11 relating to assetwrite-downs and employee separation costs, of which $3 and $8 were recordedwithin cost of sales and selling, general and administrative expenses,respectively.

 

As part of the Business’splanned integration strategy and various restructuring activities, the Businessincurred charges of $14 for the separation benefits to approximately 120employees. As of December 31, 2004, all of the affected employees had beenseparated. In addition, in 2003 the Business sold a previously written-downfacility. As a result of the sale of that facility, the Business recorded again of $2.

 

76

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***Summary of other restructuring charges, other than Westvaco and Meadmerger related***

*** ***

The activity in the accruedrestructuring balances related to all of the plans described above was asfollows:

 
| ** **                                        | ** ** | **Employee  costs** | ** ** | **Other  costs** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Balance of related accruals at December 31,  2002 |       | $                   | 3          |             | $          | 1         |       | $ | 4 |   |
| Add: current charges in 2003                      |       | 14                  |       | —           |       | 14        |       |
| Less: payments in 2003                            |       | 13                  |       | 1                |       | 14        |       |
| Balance of related accruals at December 31,  2003 |       | 4                   |       | —           |       | 4         |       |
| Less: payments in 2004                            |       | 3                   |       | —           |       | 3         |       |
| Balance of related accruals at December 31,  2004 |       | 1                   |       | —           |       | 1         |       |
| Less: payments                                    |       | 1                   |       | —           |       | 1         |       |
| Balance of related accruals at April 30,  2005    |       | $                   | —     |             | $          | —    |       | $ | — |   |

 

***Westvaco and Mead Merger Related Restructuring***

*** ***

MeadWestvaco establishedaccruals relating primarily to employee separation costs, facility closurecosts and other actions relating to the integration of certain Mead operationsinto MeadWestvaco. Costs associated with these integration actions wererecognized as a component of purchase accounting, resulting in theestablishment of liabilities and adjustments to goodwill. The integrationactions included the closure of three older, high-cost coated paper machinesand related facilities at the Chillicothe, Ohio, paper mill and the integrationof the Mead and Westvaco paper groups. Costs associated with decommissioningthe machines and most employee termination benefits for 347 employees totaled$23, of which $2 was for asset impairments.

 

***Summary of Westvaco and Mead merger related restructuring***

*** ***

The activity in the accruedliability related to all of the plans described above was as follows:

 
| ** **                                                           | ** ** | **Employee  costs** | ** ** | **Other  costs** | ** ** | **Total** | ** ** |
|----------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Balance of related accruals at December 31,  2002                    |       | $                   | 2          |             | $          | 3         |       | $ | 5 |   |
| Less: payments in 2003                                               |       | 2                   |       | 1                |       | 3         |       |
| Balance of related accruals at December 31,  2003                    |       | —              |       | 2                |       | 2         |       |
| Less: payments in 2004                                               |       | —              |       | 1                |       | 1         |       |
| Balance of related accruals at December 31,  2004 and April 30, 2005 |       | $                   | —     |             | $          | 1         |       | $ | 1 |   |

 

77

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**L.                    INCOME TAXES**

** **

Loss from continuing operationsbefore income taxes was $(15), $(339) and $(145) in the four months ended April30, 2005 and the years ended December 31, 2004 and 2003.

 

The significant components ofthe income tax provision (benefit) are as follows:

 
| ** **                                | ** ** | **Four  Months  Ended  April 30,** | ** ** | **Years ended  December 31,** | ** ** |
|-------------------------------------------|------------|-----------------------------------------|------------|-----------------------------------------|------------|
| ** **                                | ** ** | **2005**                                | ** ** | **2004**                                | ** ** | **2003** | ** ** |
| Currently receivable—state and local |       | $                                       | —     |                                    | $          | (1 | ) | $ | (1 | ) |
|                                      |       |                                    |       |                                    |       |   |   |
| Deferred:                                 |       |                                    |       |                                    |       |   |   |
| U.S. federal                              |       | (6                                      | )          | (34                                     | )          | (51 | ) |
| State and local                           |       | (1                                      | )          | (3                                      | )          | 1 |   |
| Benefit for deferred income taxes         |       | (7                                      | )          | (37                                     | )          | (50 | ) |
| Income tax (benefit)                      |       | $                                       | (7         | )                                       | $          | (38 | ) | $ | (51 | ) |

 

The following table summarizesthe major differences between the actual income tax provision (benefit)attributable to loss before taxes and taxes computed at the U.S. federalstatutory rate:

 
| ** **                                                             | ** ** | **Four  Months  Ended  April 30,  2005** | ** ** | **Years ended  December 31,** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|
| **2004**                                                               | ** ** | **2003**                                 |
| Income tax benefit computed at the U.S.  federal statutory rate of 35% |       | $                                        | (5         | )                             | $          | (119 | ) | $ | (50 | ) |
| State and local income taxes, net of  federal benefit                  |       | (2                                       | )          | (7                            | )          | (7 | ) |
| Goodwill                                                               |       | —                                   |       | 83                            |       | — |   |
| Permanent differences                                                  |       | (1                                       | )          | —                        |       | (1 | ) |
| Provision to return adjustments                                        |       | (1                                       | )          | —                        |       | — |   |
| Valuation allowances                                                   |       | 2                                        |       | 5                             |       | 7 |   |
| Income tax (benefit)                                                   |       | $                                        | (7         | )                             | $          | (38 | ) | $ | (51 | ) |
| Effective tax rate                                                     |       | 47.8                                     | %          | 11.3                          | %          | 35.4 | % |

 

78

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The principal current andnoncurrent deferred tax assets and liabilities are as follows:

 
| ** **                                | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------|------------|------------------------|------------|
| Deferred tax assets:                      |       |                   |       |
| Employee benefits                         |       | $                      | 12         |   |
| Net operating loss carryforwards          |       | 121                    |       |
| Other accruals and reserves               |       | 22                     |       |
| Total deferred tax assets                 |       | 155                    |       |
| Valuation allowance                       |       | (12                    | )          |
| Net deferred tax assets                   |       | 143                    |       |
|                                      |       |                   |       |
| Deferred tax liabilities:                 |       |                   |       |
| Depreciation and impairment               |       | (601                   | )          |
| Inventory                                 |       | (30                    | )          |
| Other                                     |       | (15                    | )          |
| Total deferred tax liabilities            |       | (646                   | )          |
|                                      |       |                   |       |
| Net deferred liability                    |       | $                      | (503       | ) |
|                                      |       |                   |       |
| Included in the balance sheet:            |       |                   |       |
| Other current assets - deferred tax asset |       | $                      | 3          |   |
| Noncurrent net deferred tax liability     |       | (506                   | )          |
| Net deferred liability                    |       | $                      | (503       | ) |

 

The federal net operating losscarryforward at April 30, 2005 is approximately $270 and is available to reducefederal taxable income through 2024. The Business’s valuation allowance againstdeferred tax assets primarily relates to state tax net operating losses forwhich the ultimate realization of future benefits is uncertain. The amount ofnet operating loss carryforwards has been derived on a separate return basis asif the Business were a separate income tax payer. These amounts have beenincluded in the consolidated income tax filings of MeadWestvaco and may besettled with MeadWestvaco through combined equity in a future period.

 

The Business has operations inseveral domestic tax jurisdictions and is subject to audit in thesejurisdictions. Tax audits by their nature are often complex and can requireseveral years to resolve. While actual results could vary, in management’sjudgment the Business has adequate accruals with respect to the ultimateoutcome of such audits.

 

**M.                   ENVIRONMENTAL AND LEGAL MATTERS**

** **

The Business has been notifiedby the U.S. Environmental Protection Agency (the “EPA”) or by various state orlocal governments that it may be liable under federal environmental laws orunder applicable state or local laws with respect to the cleanup of hazardoussubstances at sites previously operated or used by the Business. The Businessis currently named as a potentially responsible party (“PRP”) or has receivedthird-party requests for contribution under the Comprehensive EnvironmentalResponse, Compensation and Liability Act (“CERCLA”) and similar state or locallaws with respect to a number of sites. There are other sites which may containcontamination or which may be potential Superfund sites, but for which theBusiness has not received any notice or claim. The potential liability for allthese sites will depend upon several factors, including the extent ofcontamination, the method of remediation, insurance coverage and contributionby other PRPs. The Business regularly evaluates its potential liability atthese various sites. At April 30, 2005, the Business has recorded liabilitiesof approximately $2 for estimated potential 

 

79

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cleanup costs based upon itsclose monitoring of ongoing activities and its past experience with thesematters. The Business believes that it is reasonably possible that costsassociated with these sites may exceed amounts of recorded liabilities by anamount that could range from an insignificant amount to as much as $2. Thisestimate is less certain than the estimate upon which the environmentalliabilities were based. After consulting with legal counsel and afterconsidering established liabilities, it is our judgment that the resolution ofpending litigation and proceedings is not expected to have a material adverseeffect on the Business’s consolidated financial condition or liquidity. In anygiven period or periods, however, it is possible such proceedings or matterscould have a material effect on the results of operations.

 

The Business is involved invarious other litigation and administrative proceedings arising in the normalcourse of business. Although the ultimate outcome of such matters cannot bepredicted with certainty, management does not believe that the currentlyexpected outcome of any matter, lawsuit or claim that is pending or threatened,or all of them combined, will have a material adverse effect on the Business’sfinancial condition or liquidity. In any given period or periods, however, itis possible such proceedings or matters could have a material effect on theresults of operations.

 

**N.                    BUSINESS SEGMENT INFORMATION**

** **

The Business’s principalbusiness segments are Coated Paper System and Carbonless Paper System.

 

The Coated Paper System isengaged in the manufacturing, marketing and distribution of coated papersprimarily used for commercial printing, magazines, catalogs, textbooks, andlabels. The products in this segment include: coated papers, uncoated papersproduced in Michigan & Kentucky, and market pulp production. This segment’sproducts are manufactured at four domestic mills and supported by multipledistribution and converting locations.

 

The Carbonless Paper System isengaged in the manufacturing, marketing and distribution of carbonless andtechnical papers used primarily for business forms. The products in thissegment include: value-added carbonless papers, uncoated papers, and specialtypapers. This segment’s products are manufactured at one domestic mill and oneoff-site coating facility.

 

The segments are measured onearnings before taxes, extraordinary items and cumulative effect of accountingchanges. The segments follow the same accounting principles described in the *Summary of Significant Accounting Policies*. Sales betweenthe segments are transacted based on market prices. There are no operations,including long-lived assets, outside of the United States.

 
| ** **                           | ** ** | **Four  Months  Ended  April 30,  2005** | ** ** | **Years ended  December 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------|------------|-------------------------------|------------|
| **2004**                             | ** ** | **2003**                                 |
| Export sales  from the United States |       | $                                        | 75         |                          | $          | 216 |   | $ | 242 |   |
|                                      |            |                                          |            |                               |            |  |  |  |  |  |

 

80

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Financial information bybusiness segment follows:

 
| ** **                           | ** ** | **Trade  sales** | ** ** | **Segment  loss** | ** ** | **Depr.  and  amort.** | ** ** | **Capital  expend-  itures** | ** ** |
|--------------------------------------|------------|------------------|------------|-------------------|------------|------------------------|------------|------------------------------|------------|
| **Four Months Ended April 30, 2005** | ** ** | ** **       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **                   | ** ** |
| Coated Paper                         |       | $                | 581        |              | $          | (5                     | )          | $                            | 60         |   | $ | 14 |   |
| Carbonless Paper                     |       | 135              |       | (10               | )          | 16                     |       | 3                            |       |
| Total                                |       | $                | 716        |              | $          | (15                    | )          | $                            | 76         |   | $ | 17 |   |
|                                 |       |             |       |              |       |                   |       |                         |       |
| **Year ended December 31, 2004**     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **                   | ** ** |
| Coated Paper                         |       | $                | 1,779      |              | $          | (300                   | )          | $                            | 182        |   | $ | 67 |   |
| Carbonless Paper                     |       | 397              |       | (39               | )          | 48                     |       | 21                           |       |
| Total                                |       | $                | 2,176      |              | $          | (339                   | )          | $                            | 230        |   | $ | 88 |   |
|                                 |       |             |       |              |       |                   |       |                         |       |
| **Year ended December 31, 2003**     | ** ** | ** **       | ** ** | ** **        | ** ** | ** **             | ** ** | ** **                   | ** ** |
| Coated Paper                         |       | $                | 1,603      |              | $          | (112                   | )          | $                            | 190        |   | $ | 68 |   |
| Carbonless Paper                     |       | 386              |       | (33               | )          | 46                     |       | 10                           |       |
| Total                                |       | $                | 1,989      |              | $          | (145                   | )          | $                            | 236        |   | $ | 78 |   |

 
| **December 31, 2004** | ** ** | **Segment Assets** | ** ** |
|-----------------------|------------|--------------------|------------|
| Coated Paper          |       | $                  | 2,171      |   |
| Carbonless  Paper     |       | 476                |       |
| Total                 |       | $                  | 2,647      |   |

 

A loss of $18 related to thedefeasance of debt prior to the Acquisition is included in the Coated Papersegment loss for the four months ended April 30, 2005.

 

**O.                    RELATED PARTY TRANSACTIONS**

** **

Transactions between theBusiness and other business segments of MeadWestvaco commonly occur in thenormal course of business. In addition, the Business also had purchases from MeadWestvaco’sForestry Operations of $2, $6 and $7 for the four months ended April 30, 2005and the years ended December 31, 2004 and 2003. Sales to other MeadWestvacobusiness segments were $10, $30 and $30 for the four months ended April 30,2005 and the years ended December 31, 2004 and 2003. Purchases from other MeadWestvacobusiness segments were $1, $3 and $2 for the four months ended April 30, 2005and the years ended December 31, 2004 and 2003.

 

The Business’s combinedfinancial statements include expense allocations for certain corporatefunctions provided by MeadWestvaco, such as human resources, legal, finance,information systems, purchasing, executive management and other corporatestaff. Allocations were based on relative headcount for people-related costs,the Business’s assets as a percentage of total MeadWestvaco assets, theBusiness’s sales as a percentage of total MeadWestvaco sales, or by specificidentification of costs directly associated with the Business’s operations. TheBusiness and MeadWestvaco management believe such allocations have been made ona reasonable basis. These costs are included in cost of sales or selling,general and administrative expenses, consistent with MeadWestvacoclassification, in the accompanying combined statements of operations. Costsallocated by or charged by MeadWestvaco to the Business for services performedby MeadWestvaco on behalf of the Business totaled $11, $42 and $53 for the fourmonths ended April 30, 2005 and the years ended December 31, 2004 and 2003.

 

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In addition to the above, theBusiness shares facilities and related costs (utilities and services) withother business segments of MeadWestvaco. Costs charged by the Business toMeadWestvaco for shared facilities totaled $1, $3 and $3 for the four monthsended April 30, 2005 and the years ended December 31, 2004 and 2003. Thesecharges were based on estimates of actual usage for utilities and head countfor other services and are recorded as a reduction of the related cost.

 

**P.                    SUPPLEMENTAL CASH FLOWINFORMATION**

 
| ** **                                                                 | ** ** | **Four  Months  Ended  April 30,****2005** | ** ** | **Years ended  December 31,** | ** ** |
|----------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------|------------|
| **2004**                                                                   | ** ** | **2003**                                   |
| Cash paid (received) by MeadWestvaco on  behalf of the Business:           |       |                                       |       |                          |       |   |   |
| Interest                                                                   |       | $                                          | 3          |                          | $          | 9 |   | $ | 11 |   |
| Taxes                                                                      |       | —                                     |       | (1                            | )          | (1 | ) |
| Non-Cash Transactions:                                                     |       |                                       |       |                          |       |   |   |
| Payment by MeadWestvaco Corporation to  defease long-term debt             |       | 162                                        |       | —                        |       | — |   |
| Contribution of property, plant and  equipment by MeadWestvaco Corporation |       | 1                                          |       | —                        |       | — |   |
|                                                                            |            |                                            |            |                               |            |  |  |  |  |  |

 

* * * * *

 

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**ITEM 9.          CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

** **

None.

 

**ITEM 9A.       CONTROLS AND PROCEDURES**

** **

We maintain a system ofinternal accounting controls designed to provide reasonable assurance thattransactions are properly recorded and summarized so that reliable financialrecords and reports can be prepared and assets safeguarded. In addition, asystem of disclosure controls is maintained to ensure that information requiredto be disclosed is recorded, processed, summarized and reported in a timely mannerto management responsible for the preparation and reporting of our financialinformation.

 

Management, with theparticipation of our Chief Executive Officer and Chief Financial Officer,assesses the disclosure control systems as being effective as they encompassmaterial matters for the quarter ended December 31, 2005. To the best of ourknowledge, there were no changes in the internal control over financialreporting that occurred during the quarter ended December 31, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**ITEM 9B.       OTHER INFORMATION**

** **

None.

 

**PARTIII**

** **

**ITEM 10.       DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

The following are the names,ages and a brief account of the business experience for the last five years of thedirectors and executive officers of NewPage as of March 15, 2006.

 
| **Name**            | ** ** | **Age** | ** ** | **Position**                                                                                                                                                                                                                                                                                                                                       |
|---------------------|------------|---------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Mark A. Suwyn       |       | 63      |       | Chairman of the Board and interim Chief  Executive Officer                                                                                                                                                                                                                                                                                         |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| John Sheridan       |       | 51      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Robert S. Silberman |       | 48      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Jerome F. Tatar     |       | 59      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Lenard B. Tessler   |       | 53      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Michael S. Williams |       | 56      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Alexander M. Wolf   |       | 31      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Steven E. Wynne     |       | 53      |       | Director                                                                                                                                                                                                                                                                                                                                           |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Charles J. Aardema  |       | 47      |       | Vice President, Human Resources and  Communications since May 2005, prior to that Vice President, Human Resources  for MeadWestvaco’s Papers Group since June 2004, prior to that Director,  Human Resources for MeadWestvaco since February 2002, prior to that Director,  Human Resources for the Mead Corporation since 1999               |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Daniel A. Clark     |       | 47      |       | Chief Information Officer and Vice  President of Order Management since May 2005, prior to that Vice President of  Order Management for MeadWestvaco’s Papers Group since February 2002, prior  to that Vice President of Order Management for the Mead Corporation Paper  Division since 2000                                                |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Douglas K. Cooper   |       | 58      |       | Vice President, General Counsel and  Secretary since November 2005, prior to that a partner with Arent Fox PLLC  since 2003, prior to that, Mr. Cooper was senior vice president of law for  GDX automotive since 2001; prior to that he served as executive vice  president, general counsel and secretary for Peregrine Incorporated since  1997 |
|                |       |    |       |                                                                                                                                                                                                                                                                                                                                               |
| Matthew L. Jesch    |       | 41      |       | Vice President and Chief Financial Officer  since May 2005, prior to that Vice President of Finance and Strategy for  MeadWestvaco’s Papers Group since February 2002, prior to that Vice President  of Economics and Strategy for the Mead Corporation Paper Division                                                                        |

 

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|             |   |   |   | since August 2001, prior to that Vice  President of Information Technology and ERP for the Mead Corporation Paper  Division since October 2000                                                                                                                                                                                                        |
|------------------|--------|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                  |
| George F. Martin |   | 49     |   | Vice President, Coated Operations since May  2005, prior to that Vice President, Operations of the Escanaba Mill of  MeadWestvaco’s Papers Group since February 2003, prior to that Director of  Integration for MeadWestvaco’s Papers Group since February 2002, prior to  that Production Manager of the Luke Mill of Westvaco since 1997 |
|             |   |   |   |                                                                                                                                                                                                                                                                                                                                                  |
| James C. Tyrone  |   | 51     |   | Senior Vice President, Sales and Marketing  since May 2005, prior to that Senior Vice President, Sales and Marketing for  MeadWestvaco’s Papers Group since February 2002, prior to that Vice President  of Sales and Marketing for the Mead Corporation Paper Division since 1998                                                               |

 

Mark A. Suwyn has been thechairman of NewPage Corporation’s board of directors and the board of directorsof NewPage Holding, our direct parent, Escanaba Timber, our indirect parent,and Maple Timber Acquisition, our ultimate parent, since May 2005. Since March2006, he has acted as interim chief executive officer of NewPage, NewPageHolding and Escanaba Timber. Mr. Suwyn was chairman and chief executive officerof Louisiana-Pacific Corporation from 1996 until his retirement in 2004. Heserves as a board member of BlueLinx Holdings Inc. United Rentals Inc. and BallardPower Systems Inc., where he served on the compensation committee of the boarduntil March 1, 2006.

 

John Sheridan has been a memberof the board of directors of NewPage, NewPage Holding and the paper series ofMaple Timber Acquisition since August 2005. In February 2006, Mr. Sheridan wasappointed chief executive officer of Ballard Power Systems Inc. after servingas interim chief executive officer since October 2005. Since 2003, Mr. Sheridanhas served in various positions in Ballard Power Systems Inc. and served as thechairman of the board of Ballard Power Systems Inc. from June 2004 until February2006. Mr. Sheridan served as the president and chief operating officer of BellCanada from 2000 to 2003.

 

Robert S. Silberman has been amember of the board of directors of NewPage, NewPage Holding and Maple TimberAcquisition since August 2005. Mr. Silberman has been chairman of the board ofStrayer Education, Inc. since February 2003, and chief executive officer ofStrayer since March 2001 when he also began serving as a board member. He wasExecutive in Residence at New Mountain Capital, LLC from August 2000 to March2001. He also serves on the board of directors of Covanta Holding Corporation.

 

Jerome F. Tatar has been amember of the board of directors of NewPage, NewPage Holding and Maple TimberAcquisition since August 2005. Mr. Tatar most recently served as chairman ofthe board of directors of MeadWestvaco Corporation from February 2002 toDecember 2002. Prior to that, Mr. Tatar served as chairman, chief executiveofficer and president of the Mead Corporation from 1997 to January 2002. He alsoserves on the board of directors of Robbins & Myers, Inc.

 

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Lenard B. Tessler has been amember of the board of directors of NewPage, NewPage Holding and Maple TimberAcquisition since May 2005. Mr. Tessler is a managing director of CerberusCapital Management, L.P., an affiliate, which he joined in May 2001. Prior tojoining Cerberus, he was a founding partner of TGV Partners, a privateinvestment partnership formed in April 1990. Mr. Tessler serves as a member ofthe board of directors of BlueLinx Holdings Inc. and Anchor Glass ContainerCorporation.

 

Michael S. Williams has been amember of the board of directors of NewPage, NewPage Holding and Maple TimberAcquisition since August 2005. Mr. Williams has been a managing director forCerberus Capital Management, L.P. since October 2004. Mr. Williams was thePresident and CEO of WamNet Government Series Inc. from February 2002 through October2004. From December 2000 through January 2002, Mr. Williams was President andGeneral Manager of Systems & Technology for the Global TelecommunicationsDivision of Lockheed Martin.

 

Alexander M. Wolf has been amember of the board of directors of NewPage, NewPage Holding, Escanaba Timberand Maple Timber Acquisition since May 2005. Mr. Wolf has been a managingdirector of Cerberus Capital Management, L.P. since March 2006, and was aSenior Vice President from April 2004 through February 2006 and a VicePresident from December 2001 through March 2004. Mr. Wolf serves as a member ofthe board of directors of Anchor Glass Container Corporation.

 

Steven E. Wynne has been amember of the board of directors of NewPage, NewPage Holding and Maple TimberAcquisition since August 2005. Mr. Wynne has been the President and Chief ExecutiveOfficer of Sport Brands International Ltd. since March 2004. From April 2001through March 2002, and from April 2003 through February 2004, Mr. Wynne was apartner in the Portland, Oregon, law firm of Ater Wynne LLP. Mr. Wynne servedas Acting Senior Vice President and General Counsel of FLIR Systems, Inc. fromApril 2002 through March 2003. Mr. Wynne was formerly Chairman and ChiefExecutive Officer of eteamz, Inc. from June 2000 through January 2001. He alsoserves on the board of directors of FLIR Systems, Inc. and Planar Systems, Inc.

 

***Committees of the Board of Directors***

*** ***

Our board of directors hasestablished an audit committee, a compensation committee and a compliancecommittee.

 

Our audit committee consists ofJohn Sheridan and Jerome F. Tatar. As of December 31, 2005, both Mr. Sheridanand Mr. Tatar were independent directors. Mr. Sheridan serves as the chairmanof the audit committee. Duties of the audit committee include: appointing orreplacing independent accountants; meeting with our independent accountants todiscuss the planned scope of their examinations, the adequacy of our internalcontrols and our financial reporting; reviewing the results of the annualexamination of our financial statements and periodic internal audit examinations;reviewing and approving the services and fees of our independent accountants;monitoring and reviewing our compliance with applicable legal requirements; andperforming any other duties or functions deemed appropriate by our board ofdirectors.

 

Our compensation committeeconsists of Michael S. Williams, Robert S. Silberman, Mark A. Suwyn andAlexander M. Wolf. Mr. Williams serves as the chairman of the compensationcommittee. Duties of the compensation committee include administration of ourstock option plans and approval of compensation arrangements for our executiveofficers.

 

85

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Our compliance committeeconsists of Steven E. Wynne, Robert S. Silberman and Michael S. Williams. Mr.Wynne serves as the chairman of the compliance committee. Duties of thecompliance committee include the oversight of our policies, programs andprocedures to ensure compliance with relevant laws.

 

***Compensation of Directors***

*** ***

Mr. Suwyn is a party to aconsulting agreement with us pursuant to which he received a signing bonus of$697,500 at the completion of the acquisition and receives a fee of $500,000per annum as compensation for serving as our chairman and the chairman of theboard of NewPage Holding and Maple Timber Acquisition. If Mr. Suwyn isterminated as chairman or he terminates his chairmanship for any reason, hewill be entitled to receive the portion of his annual fee accrued through thetermination date.

 

Board members, other than Mr.Suwyn, who are not employees of NewPage Holding, NewPage or its subsidiariesreceive an annual retainer of $50,000 plus certain additional amounts forattending meetings and serving as a member or chairman of a committee. Otherthan Mr. Suwyn and our independent directors, our directors do not receiveadditional consideration for serving as directors. All directors are entitledto reimbursement for travel and out-of-pocket expenses in connection with theirattendance at board and committee meetings.

 

***Audit Committee Financial Expert***

*** ***

Our board of directors hasdetermined that we do not have an audit committee financial expert serving onthe audit committee. We began operations in May 2005 as a new company and beganthe process of recruiting appropriately qualified individuals to serve on ourboard. We are currently seeking to recruit an additional independent director,who would have expertise in finance and accounting, to serve on the auditcommittee as the audit committee financial expert.

 

***Code of Ethics***

*** ***

We have adopted a code of ethicsfor all associates, including the chief executive officer, chief financialofficer, controller and treasurer, addressing business ethics and conflicts ofinterest. A copy of the code of ethics has been posted on our website atwww.newpagecorp.com.

 

**ITEM 11.       EXECUTIVE COMPENSATION**

** **

The following table sets forthinformation concerning the compensation for our then chief executive officerand the four other most highly compensated executive officers of the Company atthe end of 2005. The compensation amounts referred to below do not reflectparticipation in any MeadWestvaco stock-based incentive plan. The amounts for2005 represent the sum of compensation paid by MeadWestvaco through April 30,2005 and compensation paid by NewPage after that date. The amounts for prioryears represent compensation paid by MeadWestvaco.

 

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| ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **         | ** ** | ** **                | ** ** | **Long Term**        | ** ** | ** **  | ** ** |
|-----------------------------|------------|------------|------------|------------------------------|------------|--------------------|------------|---------------------------|------------|---------------------------|------------|-------------|------------|
| ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | ** **         | ** ** | ** **                | ** ** | **Compensation (5)** | ** ** | ** **  | ** ** |
| ** **                  | ** ** | ** ** | ** ** | ** **                   | ** ** | **Other**          | ** ** | **Restr.**                | ** ** | ** **                | ** ** | **All**     | ** ** |
| **Name and**           | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Annual**         | ** ** | **Stock**                 | ** ** | **LTIP**                  | ** ** | **Other**   | ** ** |
| **Principal Position** | ** ** | **Year**   | ** ** | **Salary**                   | ** ** | **Bonus (1)** | ** ** | **Compensation (2)** | ** ** | **Awards**                | ** ** | **Payouts** | ** ** | **Compensation (3)** | ** ** |
| Peter H.  Vogel, Jr. (4)    |       | 2005       |       | $                            | 377,044    |               | $          | 520,108                   |       | $                         | —     |        | $          | 547,500 |   | $ | 213,960 |   | $ | 34,696 |   |
| President and Chief         |       | 2004       |       | 318,223                      |       | 180,400            |       | 50,973                    |       | —                    |       | 107,000     |       | 19,303 |   |
| Executive Officer           |       | 2003       |       | 283,947                      |       | 110,000            |       | 177,046                   |       | —                    |       | 35,700      |       | 21,799 |   |
|                        |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
| Charles J.  Aardema         |       | 2005       |       | 187,567                      |       | 125,592            |       | —                    |       | 63,876                    |       | —      |       | 19,262 |   |
| Vice President,             |       | 2004       |       | 166,695                      |       | 39,488             |       | —                    |       | —                    |       | —      |       | 10,448 |   |
| Human Resources and         |       | 2003       |       | 162,030                      |       | 35,373             |       | —                    |       | —                    |       | —      |       | 6,458 |   |
| Communications              |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
|                        |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
| Daniel A.  Clark            |       | 2005       |       | 225,844                      |       | 278,825            |       | —                    |       | 127,750                   |       | —      |       | 19,680 |   |
| Chief Information Officer   |       | 2004       |       | 213,033                      |       | 50,501             |       | 20,975                    |       | —                    |       | —      |       | 10,021 |   |
| and Vice President of       |       | 2003       |       | 212,301                      |       | 15,181             |       | 49,702                    |       | —                    |       | —      |       | 11,122 |   |
| Order Management            |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
|                        |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
| Matthew L.  Jesch           |       | 2005       |       | 237,031                      |       | 290,525            |       | —                    |       | 209,875                   |       | —      |       | 15,978 |   |
| Vice President and          |       | 2004       |       | 203,773                      |       | 62,000             |       | 13,225                    |       | —                    |       | —      |       | 9,751 |   |
| Chief Financial Officer     |       | 2003       |       | 201,791                      |       | 25,182             |       | 19,449                    |       | —                    |       | —      |       | 10,291 |   |
|                        |       |       |       |                         |       |               |       |                      |       |                      |       |        |       |   |   |
| James C.  Tyrone            |       | 2005       |       | 304,835                      |       | 389,604            |       | —                    |       | 209,875                   |       | 213,960     |       | 34,725 |   |
| Senior Vice President,      |       | 2004       |       | 287,004                      |       | 145,000            |       | 28,289                    |       | —                    |       | 107,000     |       | 15,697 |   |
| Sales and Marketing         |       | 2003       |       | 286,421                      |       | 39,688             |       | 14,227                    |       | —                    |       | 35,700      |       | 16,199 |   |
|                             |            |            |            |                              |            |                    |            |                           |            |                           |            |             |            |  |  |  |  |  |  |  |  |

 

----

(1) Consists of annual incentive payments for 2005 and retentionbonuses paid by MeadWestvaco and signing bonuses paid by NewPage at the time ofthe acquisition.

(2) Consists of interest on deferred compensation accounts in excess ofapplicable Federal tax rates paid by MeadWestvaco.

(3) Consists of (i) matching payments to a deferred compensation planby MeadWestvaco for Messrs. Vogel, Aardema, Clark, Jesch and Tyrone, (ii)matching payments to a 401(k) plan by NewPage/MeadWestvaco for Messrs. Vogel, Aardema,Clark, Jesch and Tyrone, (iii) the payment of executive life insurance premiumsby MeadWestvaco for Messrs. Vogel, Aardema, Clark, Jesch and Tyrone, and (iv)payment of financial consulting services by MeadWestvaco for Messrs. Vogel andTyrone.

(4) Mr. Vogel resigned as a director and as president and chiefexecutive officer as of March 1, 2006.

(5) The above table excludesdistributions in respect of the timber series interests of Maple TimberAcquisition LLC.

 

***Employment Agreements/Employment Letters***

 

*General*.Each of Messrs. Aardema, Clark, Cooper, Jesch, Martin and Tyrone are subject toemployment letters******under which each of themwill be paid an annual base salary of $190,000, $225,000, $235,000, $250,000,$235,000 and $310,000, respectively, and each of them received a signing bonusof $81,375, $162,750, $94,080, $267,375, $162,750 and $267,375, respectively,at the completion of the Transactions or upon beginning employment. Beginningin 2006, each of them will be eligible to receive an annual bonus of 35%, 40%,45%, 50%, 45% and 65% of his base salary, respectively, for achievingperformance targets specified in his employment letter.

 

*TerminationProvisions*.******If any of NewPage’snamed executive officers are terminated without “cause” or terminates hisemployment******with “good reason,” as thoseterms are defined in the applicable employment agreement or employment letter,in addition to******receiving accrued basesalary and accrued benefits to the date of termination, such executive officerwill receive the following******afterexecuting an irrevocable employment release:******(1)the pro rata portion of his bonus for the year of termination based on thenumber of days worked during that year******and (a) ifthe date of termination is prior to June 1, based on his bonus from the prioryear or (b) if the date of******terminationis on or after June 1, based on what his bonus would have been had he not beenterminated;******(2) an amount equal to twicehis base salary less his 

 

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purchase price for the paperseries units of Maple Timber******Acquisitionpurchased by him, but if the termination of his employment is within 12 monthsfollowing a significant******acquisitionof a company of similar size by us, the amount will be equal to three times hisbase salary less his******purchase price for thosesecurities; however, if at the time of his termination, the fair market valueof the paper******series Class A CommonPercentage Interests is less than his purchase price, he will also receive thatdifference;******(3) continuation of welfarebenefits for 24 months after his termination date or until he is hired byanother company******and is eligible to receiveits benefits; and******(4) outplacement servicessubstantially similar to those provided in our severance plan.******If any of the executive officersare terminated for any other reason, other than death or disability, neither henor his******estate will be entitled toany severance payments other than salary and benefits accrued through thetermination date. If any of******theexecutives die or becomes disabled, he or his estate will be entitled toreceive the pro rata bonus referred to in clause******(1)above.

 

*Non-CompetitionProvisions*. Each of NewPage’s named executive officersare subject to a non-competition and non-solicitation restriction for one******year following termination ofemployment for any reason.

 

*FormerChief Executive Officer*. Mr. Vogel resigned as adirector and as president and chief executive officer of NewPage and NewPageHolding, effective March 1, 2006. Mr. Vogel was subject to a three-yearemployment agreement with us under which he served as the chief executiveofficer and president of NewPage, NewPage Holding Corporation and EscanabaTimber. Mr. Vogel was paid an annual base salary of $400,000 and, beginning in2006, was eligible to receive an annual bonus equal to 100% of his base salaryif he met performance targets specified in his employment agreement. Mr. Vogelis entitled to the same benefits listed under “Termination Provisions” above.The actual termination benefits that Mr. Vogel will receive are still beingdetermined. Mr. Vogel is subject to non-competition and non-solicitationrestrictions for one year following his resignation.

 

***Management RestrictedPercentage Interests***

 

The equity interests of MapleTimber Acquisition are classified into two separate series: one relating to ourbusiness and one relating to the business of Escanaba Timber. The series ofequity interests relating to our business consists of Class A Common PercentageInterests, Class B Common Percentage Interests and Preferred PercentageInterests. The Class A and Class B Common Percentage Interests participate indistributions only after holders of the Preferred Percentage Interests havereceived a return of their capital plus a preferred return thereon.Additionally, the Class B Common Percentage Interests will participate in theequity of our business only after the Class A Common Percentage Interests havereceived $200 million in distributions. NewPage Corporation’s named executiveofficers and chairman have purchased the percentage of Class A CommonPercentage Interests and Class B Common Percentage Interests relating to ourbusiness specified in “Security Ownership of Certain Beneficial Owners andManagement.” In addition, certain other members of NewPage Corporation’smanagement acquired Class A and Class B Common Percentage Interests relating toour business aggregating approximately 2% and 19% of the percentage interestsof each class, respectively. Furthermore, certain other members of NewPageCorporation’s management were issued options to purchase Class A CommonPercentage Interests. Of the Class A and Class B Common Percentage Interests,50% will vest over time, of which 20% vested immediately upon grant, 40% willvest at December 31, 2006 and another 40% will vest at December 31, 2007. Theother 50% of the percentage interests will vest only if performance targets aremet during 2006 and 2007. All Class A and Class B Percentage Interests issuedto NewPage Corporation’s named executives officers will vest only to the extentthe applicable named executive officer remains employed by NewPage Corporationon each vesting date or, in the case of Mr. Suwyn, if Mr. Suwyn remainschairman of NewPage Corporation on each vesting date. However, all Class A andClass B Common Percentage Interests held by a named executive officer andchairman of NewPage Corporation will automatically vest upon a “change ofcontrol” or an “initial public offering,” as each term is defined in theexecutive purchase agreements. If a named executive officer is terminated with “cause”or resigns without “good reason,” Maple Timber Acquisition may purchase fromthat named 

 

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executive officer and thatnamed executive officer must sell to Maple Timber Acquisition, all (a) vestedClass A and Class B Common Percentage Interests held by him at fair marketvalue and (b) non-vested Class A and Class B Common Percentage Interests heldby him at the lesser of 50% of his purchase price and fair market value. IfMaple Timber Acquisition does not exercise its right to repurchase the units,Cerberus and its affiliates (the “Permitted Holders”) will have the right torepurchase the percentage interests on the same terms. If a named executiveofficer’s employment is terminated without “cause” or the named executiveofficer resigns with “good reason,” Maple Timber Acquisition must purchase fromthat named executive officer all of his vested and unvested percentageinterests for fair market value. Maple Timber Acquisition’s and the PermittedHolders’ obligation to repurchase percentage interests from the named executiveofficers will terminate upon an initial public offering of NewPage Holding. IfNewPage Corporation’s chairman is terminated with “cause” or resigns voluntary,vested Class A and Class B Common Percentage Interests are subject torepurchase at fair market value and his non-vested Class A and Class B CommonPercentage Interests are subject to repurchase at the lesser of his purchaseprice and fair market value. If NewPage Corporation’s chairman is terminatedwithout “cause,” his vested and unvested percentage interests must berepurchased by Maple Timber Acquisition at fair market value.

 

***Compensation Committee Interlocks and Insider Participation***

*** ***

For the eight months endedDecember 31, 2005, none of our executive officers had a relationship that wouldconstitute an interlocking relationship with executive officers or directors ofanother entity or insider participation in compensation decisions.

 

**ITEM 12.       SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

** **

NewPage is a wholly-ownedsubsidiary of NewPage Holding. NewPage Holding is a wholly-owned subsidiary ofEscanaba Timber. Escanaba Timber is a wholly-owned subsidiary of Maple TimberAcquisition. The equity interests of Maple Timber Acquisition are classifiedinto two separate series: one relating to our business, the paper series, andone relating to the business of Escanaba Timber. The series of equity interestsrelating to our business consists of Class A Common Percentage Interests, ClassB Common Percentage Interests and Preferred Percentage Interests. Each of theseseries differs with respect to the right to receive dividends and distributionsupon liquidation. The following table sets forth information with respect tothe beneficial ownership of the series of equity interests relating to ourbusiness as of March 15, 2006 by: each person who is known by us to beneficiallyown 5% or more of the outstanding interests of such series; each member of ourboard of directors and the board of directors of NewPage Holding and MapleTimber Acquisition; each of the named executive officers; and all directors andexecutive officers as of March 15, 2006, as a group.

 

Beneficial ownership isdetermined in accordance with the rules of the SEC. The following table doesnot include equity interests in Maple Timber Acquisition that relate to theseries of equity interests not relating to our business. None of the namedexecutive officers or other named parties have any options to acquireadditional interests. To our knowledge, each of the holders of interests listedbelow has sole voting and investment power as to the units owned unless otherwisenoted.

 

**89**

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| **Name of Beneficial Owner**                              | ** ** | **% of  Total  Class A  Common  Percentage  Interests  of Paper  Series (%)** | ** ** | **% of  Total  Class B  Common  Percentage  Interests  of Paper  Series (%)** | ** ** | **% of  Total  Preferred  Percentage  Interests  of Paper  Series (%)** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|
| Stephen Feinberg (1)(2)                                   |       | 88.6                                                                          |       | —                                                                        |       | 100                                                                     | %          |
| Peter H.  Vogel, Jr. (3)                                  |       | 3.0                                                                           |       | 26.2                                                                          |       | —                                                                  |       |
| Charles J. Aardema (3)                                    |       |                                                                          | *          | 3.1                                                                           |       | —                                                                  |       |
| Daniel A. Clark (3)                                       |       |                                                                          | *          | 6.1                                                                           |       | —                                                                  |       |
| Douglas K.  Cooper (3)                                    |       |                                                                          | *          | 3.1                                                                           |       | —                                                                  |       |
| George F.  Martin (3)                                     |       |                                                                          | *          | 6.1                                                                           |       | —                                                                  |       |
| Michael L.  Marziale (3)                                  |       |                                                                          | *          | 6.1                                                                           |       | —                                                                  |       |
| Matthew L.  Jesch (3)                                     |       | 1.2                                                                           |       | 10.0                                                                          |       | —                                                                  |       |
| James C.  Tyrone (3)                                      |       | 1.2                                                                           |       | 10.0                                                                          |       | —                                                                  |       |
| Mark A.  Suwyn (3)                                        |       | 3.0                                                                           |       | 26.2                                                                          |       | —                                                                  |       |
| John  Sheridan                                            |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Robert S.  Silberman                                      |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Jerome F.  Tatar                                          |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Lenard B.  Tessler                                        |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Michael S.  Williams                                      |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Alexander M.  Wolf                                        |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Steven E.  Wynne                                          |       | —                                                                        |       | —                                                                        |       | —                                                                  |       |
| Directors  and Executive Officers as a group (14 persons) |       | 7.4                                                                           |       | 64.6                                                                          |       | —                                                                  |       |

 

----

*              Denotes beneficial ownership ofless than 1% of the class of units.

(1)           One or more affiliates of Cerberus own 88.6% of the ClassA Common Percentage Interests of the paper series of Maple Timber AcquisitionLLC and 100% of the Preferred Percentage Interests of the paper series of MapleTimber Acquisition LLC. Stephen Feinberg exercises sole voting and investmentauthority over all of Maple Timber Acquisition’s securities owned by theaffiliates of Cerberus. Thus, pursuant to Rule 13d-3 under the Exchange Act,Stephen Feinberg is deemed to beneficially own 88.6% of the Class A CommonPercentage Interests of the paper series of Maple Timber Acquisition and 100%of the Preferred Percentage Interests of the paper series of Maple TimberAcquisition.

(2)           The address for Mr. Feinberg, is c/o Cerberus CapitalManagement, L.P., 299 Park Avenue, New York, New York 10171.

(3)           The address for the listed person is c/o NewPageCorporation, Courthouse Plaza Northeast, Dayton, Ohio 45463.

 

**ITEM 13.       CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

** **

***Fiber Supply Agreements with Escanaba Timber***

*** ***

Contemporaneously with theconsummation of the acquisition, we entered into three separate butsubstantially similar fiber supply agreements with Escanaba Timber, pursuant towhich Escanaba Timber supplied our Escanaba, Chillicothe and Wickliffe millswith hardwood, softwood and aspen pulpwood. We believe that the terms of theseagreements are the same as if they were determined on an arms’ length basis andare materially consistent with those that would have been obtained in a transactionwith an unaffiliated third party. The agreements require Escanaba Timber tosell to us for each of the three mills, and required us to purchase adesignated minimum number of tons of each type of pulpwood during the term.During November and December 2005, Escanaba Timber sold substantially all ofits timberlands and we amended and restated our existing fiber supply andstumpage agreements as discussed below.

 

The agreements provide forspecified fair market prices at which we purchased each type of pulpwood basedon comparable arms’ length sales of each product in the relevant market and thedelivery distance 

 

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between the forest and the millor other delivery destination. Prices were adjusted semi-annually based on thevolume-weighted average of prices on comparable purchases by the applicablemill from other pulpwood suppliers during the prior six month period, subjectto third party verification.

 

In November 2005, in connectionwith Escanaba Timber’s sale of all of the timberlands located in Michigan’sUpper Peninsula to affiliates of Plum Creek Timberlands, L.P., we entered intoan Amended and Restated Fiber Supply Agreement with Plum Creek Marketing, Inc.,pursuant to which Plum Creek Marketing, Inc. supplies our Escanaba mill withhardwood, softwood and aspen pulpwood in place of Escanaba Timber under similarterms and conditions as our fiber supply agreement with Escanaba Timber. InDecember 2005, Escanaba Timber sold its remaining timberlands locatedpredominately in Kentucky, Ohio and Tennessee to Scioto Land Company, LLC, toan affiliate of Scioto Land Company, LLC and to certain affiliates of E&CLand Co., LLP. In connection with the sale to Scioto Land Company, LLC and toan affiliate of Scioto Land Company, LLC, we entered into stumpage agreementswith each of Scioto Land Company, LLC and Clynelish LLC, respectively. Pursuantto the stumpage agreement with Scioto Land Company, LLC, Scioto Land Company,LLC supplies our Chillicothe mill with hardwood pulpwood, softwood pulpwood andhardwood stringers in place of Escanaba Timber under substantially the sameterms and conditions as the then existing fiber supply agreement with EscanabaTimber. Pursuant to the stumpage agreement with Clynelish LLC, Clynelish suppliesour Wickliffe mill with hardwood pulpwood and pine pulpwood in place ofEscanaba Timber under substantially the same terms and conditions as the then existingfiber supply agreement with Escanaba Timber. In connection with the sale toaffiliates of E&C Land Co., LLP, we entered into an Amended and RestatedFiber Supply Agreement with Cypress Creek, LLC, pursuant to which CypressCreek, LLC supplies our Wickliffe mill with pine pulpwood and hardwood pulpwoodin place of Escanaba Timber under substantially the same terms and conditionsas the then existing fiber supply agreement with Escanaba Timber.

 

***Commodity Basket Option Contract***

*** ***

On April 6, 2005, Cerberusentered into a commodity basket option contract with J. Aron & Company. Concurrentlywith the completion of the Transactions, Cerberus assigned all of its rightsunder the commodity basket option contract to NewPage and NewPage assumed allof Cerberus’ obligations thereunder. Because the commodity basket optioncontract was originally entered into by Cerberus and J. Aron & Company, anunaffiliated third party, we believe that the terms are materially consistentwith those that would have been obtained in a transaction with an unaffiliatedthird party.

 

***Escanaba Timber Profits Interest***

*** ***

Certain of NewPage’s executiveofficers and directors, including Messrs. Aardema, Clark, Jesch, Martin, Tyroneand Suwyn, in addition to owning paper series units of Maple Timber Acquisitionspecified in “Security Ownership of Certain Beneficial Owners and Management,”also own profits interests in the timber series of Maple Timber Acquisition,our indirect parent. As a consequence, in the aggregate, these personsparticipate in up to approximately 10% of the profits of Escanaba Timber, butonly after the other holders of the capital interests in the timber seriesreceive a return of their capital, a preferred return thereon, plus $240million in distributions.

 

***Allocation and Services Agreement with Escanaba Timber***

*** ***

Contemporaneously with theconsummation of the acquisition, we entered into an allocation and servicesagreement with Escanaba Timber. We believe that the terms of the allocation andservice agreement are materially consistent with those terms that would havebeen obtained in a similar type of agreement with an unaffiliated third party.The agreement provides for us and Escanaba Timber to cooperate on post-

 

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closing purchase priceadjustment matters and to allocate between us and Escanaba Timber rights andresponsibilities relating to any post-closing purchase price adjustmentsrequired under the purchase agreement. The agreement also provided for anallocation of all fees, costs and expenses related to the acquisition fromMeadWestvaco between us and Escanaba Timber, based on whether the fee, cost orexpense is clearly attributable to the acquisition and financing of ourbusiness or the timberlands. To the extent any such fees, costs or expenseswere not clearly attributable to the acquisition of our business or thetimberlands, they were allocated generally based on a good faith determinationof the portion of the fee, cost or expense that relates to the acquisitionand/or financing of the timberlands and our business. The agreement also assignsrights and responsibilities under the purchase agreement, whereby we maintainall rights and responsibilities under the purchase agreement relating to theacquisition of MeadWestvaco’s paper business and Escanaba Timber maintains allrights and responsibilities under the purchase agreement relating to the acquisitionof the timberlands. The agreement also provides for us to furnishadministrative, financial, accounting, tax, human resources, procurement,information technology and other related services to Escanaba Timber. We haveagreed to continue to provide these services directly to Escanaba Timber forfive years, subject to Escanaba Timber’s right to terminate any such servicesat any time during the five-year period. We also provide certain other servicesto Escanaba Timber, including by making available to Escanaba Timber theservices of certain members our senior management on a limited basis foroperational and management support. We charge Escanaba Timber for theseservices based on proportionate costs. We have agreed to make these servicesavailable for up to five years. We also subleased or licensed office space toEscanaba Timber at each of our Escanaba, Chillicothe and Wickliffe milllocations, at a cost allocated based on the relative usage by us and EscanabaTimber employees.

 

***Registration Rights Agreement***

*** ***

Contemporaneously with theclosing of the acquisition, Maple Timber Acquisition and NewPage Holdingentered into a registration rights agreement with Cerberus and NewPage’sexecutive officers, other members of NewPage’s senior management and MarkSuwyn, pursuant to which common units in Maple Timber Acquisition and/or commonstock of NewPage Holding will be subject to registration. Under the agreement,Cerberus has the right to demand that Maple Timber Acquisition and/or NewPageHolding register under the Securities Act the common units of Maple TimberAcquisition and/or any shares of common stock of NewPage Holding held byCerberus. NewPage’s executive officers, other members of senior management andMr. Suwyn will have the right to participate in any registration demand made byCerberus, subject to certain limitations and exceptions. Cerberus, NewPage’sexecutive officers, other members of NewPage’s senior management and Mark Suwynwill also have “piggyback” registration rights with respect to any equityoffering of securities made by Maple Timber Acquisition and/or NewPage Holding,subject to certain limitations and exceptions. Pursuant to the registrationrights agreement, Maple Timber Acquisition or NewPage Holding, as applicable,will pay all registration expenses and indemnify each holder of registrablesecurities with respect to each registration which has been effected.

 

***Consulting Arrangements with Rapid Change Technologies***

*** ***

Dan Suwyn, the son of NewPageCorporation’s chairman and interim chief executive officer, Mark Suwyn, is theprincipal owner of Rapid Change Technologies. We paid Rapid Change Technologies$891,000 for the eight months ended December 31, 2005, for consulting andtraining services. Rapid Change Technologies developed a training program and aprocess to improve communication skills, consensus building and problem solvingabilities at our Chillicothe, Ohio, mill. Rapid Change Technologies alsofacilitated the training of all of our employees at the mill on improvingcommunication skills, resolving conflict and developing a process to improveproductivity/operations through greater collaboration between hourly employeesand supervisors/management. The terms of this arrangement 

 

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were determined on an arms’length basis and are materially consistent with those terms that would havebeen obtained in an arrangement with another unaffiliated third party.

 

***Cerberus Arrangements***

*** ***

Cerberus retains consultantsthat specialize in operations management and support and who provide Cerberuswith consulting advice concerning portfolio companies in which funds andaccounts managed by Cerberus or its affiliates have invested. From time totime, Cerberus makes the services of these consultants available to Cerberusportfolio companies. In the future, we may employ the consulting services ofone or more of these Cerberus consultants. Any such retention will require theapproval of the independent members of our Board of Directors and will be forspecific projects in areas in which the consultants have expertise. Inaddition, any such consultants will be subject to the supervision of theindependent members of our Board of Directors, and the consultants’ duty ofloyalty in their performance of their consulting services to our company shallbe solely to us. Any such consulting services shall be provided at monthlyrates not greater than the monthly fees that Cerberus pays to the applicable consultant,together with reimbursement of out of pocket expenses incurred by theconsultant in providing such services. We believe that the terms of theseconsulting arrangements are materially consistent with those terms that wouldhave been obtained in an arrangement with an unaffiliated third party.Depending upon the nature of the assignment, consultants retained by us mayprovide services for Cerberus and other entities affiliated with Cerberus,including other Cerberus portfolio companies, at the same time as they areperforming consulting services to us. For the eight months ended December 31,2005, we paid the amount of $136,000 to Cerberus related to reimbursements for thesecosts directly related to our business. We also reimbursed Cerberus at the timeof the acquisition of our business from MeadWestvaco for $1,300,000 of costsand expenses incurred in connection with the acquisition on our behalf by Cerberus.An affiliate of Cerberus was paid a fee by our indirect parent company,Escanaba Timber LLC, in connection with the financing of the acquisition.

 

We have normal purchases andsales arrangements with other entities that are owned or controlled byCerberus. We believe that these transactions are at arms’ length terms and arenot material to our results of operations or financial position.

 

**ITEM 14.       PRINCIPAL ACCOUNTANT FEES AND SERVICES**

** **

***Fees***

*** ***

Our Audit Committee hasselected PricewaterhouseCoopers LLP as our independent auditor. The followingtable presents fees for professional services rendered byPricewaterhouseCoopers LLP for the eight months ended December 31, 2005.

 
| **(in thousands)** | ** ** | **2005** | ** ** |
|--------------------|------------|----------|------------|
| Audit fees         |       | $        | 2,763      |   |
| Audit-related fees |       | 975      |       |
| All other fees     |       | 2        |       |
| Total              |       | $        | 3,740      |   |

 

Audit fees consist of feesbilled or agreed to be billed for services related to the audit of the Company’sconsolidated annual financial statements and reviews of the interim consolidatedfinancial statements and services that are normally provided byPricewaterhouseCoopers LLP in connection with regulatory filings. The amountdisclosed also includes costs related to the audit of the financial statementsof the Printing and Writing Papers Business for the four months ended April 30,2005.

 

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Audit-related fees consist offees billed for assurance and related services that are reasonably related tothe performance of the audit and not reported under “Audit fees.” This categoryincludes services related to the issuance of the offering memorandum and FormS-4 registration statement related to the debt issued in conjunction with theacquisition of the business from MeadWestvaco and for financial due diligencein conjunction with the acquisition of the business from MeadWestvaco.

 

***Policy on Pre-Approval of Services of the Independent Auditor***

*** ***

The policy of the AuditCommittee of the Board of Directors is to pre-approve all audit and non-auditservices provided by the independent auditors. These services may include auditservices, audit-related services, tax services and other permitted non-audit services.Pre-approval is generally provided for up to one year and any pre-approval isdetailed as to the particular service or category of services. Any generalpre-approved service with fees in excess of $100,000 or other permitted non-auditservices requires specific approval of the Audit Committee or their designee. TheAudit Committee has delegated pre-approval authority to the Chairman of theAudit Committee when expedition of services is necessary, with follow-up withthe Audit Committee at their next meeting. The Audit Committee pre-approved allof the services for the company performed by the independent auditor in 2005.

 

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**PartIV**

** **

**ITEM 15.       EXHIBITS, FINANCIAL STATEMENT SCHEDULES**

** **

***(a)(1)      FinancialStatements***

*** ***

The following consolidatedfinancial statements of the Company and its subsidiaries and its predecessorare incorporated by reference as part of this Report at Item 8 hereof.

 

**Successor**

NewPage Corporation andSubsidiaries:

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheet as of December 31, 2005

Consolidated Statement of Operations for the eight months endedDecember 31, 2005

Consolidated Statement of Stockholder’s Equity for the eight monthsended December 31, 2005

Consolidated Statement of Cash Flows for the eight months endedDecember 31, 2005

Notes to Consolidated Financial Statements

 

**Predecessor**

Printing and Writing PapersBusiness (A Business of MeadWestvaco Corporation):

Report of Independent Registered Public Accounting Firm

Combined Balance Sheet as of December 31, 2004

Combined Statements of Operations for the four months ended April 30,2005 and the years ended December 31, 2004 and 2003

Statements of Changes in Combined Equity for the four months endedApril 30, 2005 and the years ended December 31, 2004 and 2003

Combined Statements of Cash Flows for the four months endedApril 30, 2005 and the years ended December 31, 2004 and 2003

Notes to Combined Financial Statements

 

***(a)(2)      Financial StatementSchedules***

*** ***

The information required to besubmitted in the Financial Statement Schedules for NewPage Corporation andconsolidated subsidiaries and the Printing and Writing Papers Business ofMeadWestvaco Corporation has either been shown in the financial statements ornotes, or is not applicable or required under Regulation S-X; therefore, thoseschedules have been omitted.

 

***(a)(3)      Exhibits***

*** ***
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                                                                            |
|---------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1 *               |       | Certificate of Incorporation of NewPage  Corporation                                                                                                                                                       |
|                |       |                                                                                                                                                                                                       |
| 3.2 *               |       | Bylaws of NewPage Corporation                                                                                                                                                                              |
|                |       |                                                                                                                                                                                                       |
| 4.1 *               |       | Indenture for the Floating Rate Senior  Secured Notes due 2012 dated as of May 2, 2005 by and among NewPage  Corporation, the guarantors named herein and HSBC Bank USA, National  Association, as Trustee |

 

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| 4.2 *  |   | Indenture for the 10% Senior Secured Notes  due 2012 dated as of May 2, 2005 among NewPage Corporation, as Issuer, the  guarantors named herein, HSBC Bank USA, National Association, as Trustee                                                                       |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                   |
| 4.3 *  |   | Indenture for the 12% Senior Subordinated  Notes due 2013 dated as of May 2, 2005 among NewPage Corporation, the  guarantors named herein, HSBC Bank USA, National Association, as Trustee                                                                             |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.4 *  |   | Form of Floating Rate Senior Notes due 2012  (included in Exhibit 4.1)                                                                                                                                                                                                 |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.5 *  |   | Form of 10% Senior Secured Notes due 2012  (included in Exhibit 4.2)                                                                                                                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.6 *  |   | Form of 12% Senior Subordinated Notes due  2013 (included in Exhibit 4.3)                                                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.7 *  |   | Form of Guarantee for each of the Floating  Rate Senior Notes due 2012, the 10% Senior Secured Notes due 2012, and the  12% Senior Subordinated Notes due 2013 (included in Exhibit 4.1)                                                                               |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.8 *  |   | Exchange and Registration Rights Agreement,  dated May 2, 2005, among NewPage Corporation, the guarantors named herein and  the Initial Purchasers set forth therein                                                                                                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.9 *  |   | Intercreditor Agreement, dated as of May 2,  2005 among NewPage Corporation, NewPage Holding Corporation, certain  subsidiaries of NewPage Corporation, JPMorgan Chase Bank, N.A., as revolving  loan collateral agent and The Bank of New York, as collateral trustee |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.10 * |   | Collateral Trust Agreement dated as of May  2, 2005 among NewPage Corporation, the Pledgors from time to time party  thereto, Goldman Sachs Credit Partners L.P., HSBC Bank USA, National  Association, and The Bank of New York                                       |
|   |   |                                                                                                                                                                                                                                                                   |
| 4.11 * |   | Priority Lien Debt Pledge and Security  Agreement, dated as of May 2, 2005 in favor of The Bank of New York, as  collateral by and among NewPage Corporation, certain subsidiaries thereof and  The Bank of New York                                                   |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.1 * |   | Equity and Asset Purchase Agreement, dated  as of January 14, 2005, among MeadWestvaco Corporation and Maple Acquisition  LLC (n/k/a Escanaba Timber LLC)                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.2 * |   | First Amendment to Equity Asset and  Purchase Agreement, dated as of January 14, 2005, by and between MeadWestvaco  Corporation and Escanaba Timber LLC                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.3 * |   | Second Amendment to Equity Asset and  Purchase Agreement, dated as of January 14, 2005, by and between MeadWestvaco  Corporation and Escanaba Timber LLC                                                                                                               |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.4 * |   | Fiber Supply Agreement dated as of May 2,  2005, between Escanaba Timber LLC and Escanaba Paper Company                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.5 * |   | Fiber Supply Agreement dated as of May 2,  2005, between Escanaba Timber LLC and Chillicothe Paper Inc.                                                                                                                                                                |
|   |   |                                                                                                                                                                                                                                                                   |
| 10.6 * |   | Fiber Supply Agreement dated as of May 2,  2005, between Escanaba Timber LLC and Wickliffe Paper Company                                                                                                                                                               |

 

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| 10.7 *  |   | Revolving Credit and Guaranty Agreement  dated as of May 2, 2005, among NewPage Corporation, the guarantors named  herein, the lenders party thereto from time to time, Goldman Sachs Credit  Partners L.P., JPMorgan Chase Bank, N.A., Wachovia Capital Markets LLC, Bank  of America, N.A. and UBS Securities LLC; as amended September 23, 2005  (incorporated by reference to Exhibit 10.1 to the Form 8-K dated February 23,  2006); as further amended February 23, 2006 (incorporated by reference to  Exhibit 10.2 to the Form 8-K dated February 23, 2006) |
|---------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.8 *  |   | Term Loan Credit and Guaranty Agreement,  dated May 2, 2005, by and among NewPage Corporation, NewPage Holding  Corporation and certain of its affiliates, the lenders party thereto, Goldman  Sachs Credit Partners L.P. and USB Securities LLC; as amended February 23,  2006 (incorporated by reference to Exhibit 10.3 to the Form 8-K dated  February 23, 2006)                                                                                                                                                                                                |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.9 *  |   | Priority Lien Debt Pledge and Security  Agreement, dated May 2, 2005, by and among NewPage Corporation and certain of  its affiliates and The Bank of New York                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.10 * |   | Revolving Credit Pledge and Security  Agreement dated as of May 2, 2005, among NewPage Corporation, the guarantors  named herein and JPMorgan Chase Bank, N.A.                                                                                                                                                                                                                                                                                                                                                                                                      |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.11 * |   | Allocation and Services Agreement dated as  of April 30, 2005 between NewPage Corporation and Escanaba Timber LLC                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.12+* |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and Daniel A. Clark                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.13+* |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and Matthew L. Jesch                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.14+* |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and James C. Tyrone                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.15+* |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and Peter H. Vogel, Jr.                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.16+* |   | Consulting Agreement dated May 2, 2005, by  and between NewPage Corporation and Mark A. Suwyn                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.17+  |   | Employment Letter Agreement dated October  6, 2005, by and between NewPage Corporation and Douglas K. Cooper  (incorporated by reference to Exhibit 99.1 to the Form 8-K dated October 7,  2005)                                                                                                                                                                                                                                                                                                                                                                    |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.18   |   | Asset Purchase Agreement among NewPage  Corporation, Chillicothe Paper Inc. and P.H. Glatfelter Company dated  February 21, 2006 (incorporated by reference to Exhibit 10.1 to the Form 8-K  dated February 22, 2006)                                                                                                                                                                                                                                                                                                                                               |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.19   |   | Amended and Restated Fiber Supply Agreement  dated as of November 15, 2005, by and among Plum Creek Marketing, Inc. and  Escanaba Paper Company                                                                                                                                                                                                                                                                                                                                                                                                                     |
|    |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.20   |   | Amended and Restated Fiber Supply Agreement  dated as of December 16, 2005, by and between Cypress Creek, LLC and  Wickliffe Paper Company                                                                                                                                                                                                                                                                                                                                                                                                                          |

 

97

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| 10.21  |   | Stumpage Agreement dated as of December 16,  2005, between Scioto Land Company, LLC and Wickliffe Paper Company                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                 |
| 10.22  |   | Stumpage Agreement dated as of December 16,  2005 between Scioto Land Company and Chillicothe Paper Inc.                                             |
|   |   |                                                                                                                                                 |
| 10.23  |   | Asset Purchase Agreement dated January 6,  2006, between Brascan Power, Inc., Rumford Falls Power Company and Rumford  Paper Company                 |
|   |   |                                                                                                                                                 |
| 10.24+ |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and Charles J. Aardema                                            |
|   |   |                                                                                                                                                 |
| 10.25+ |   | Employment Letter Agreement dated May 2,  2005, by and between NewPage Corporation and George F. Martin                                              |
|   |   |                                                                                                                                                 |
| 21.1 * |   | Subsidiaries of the registrant                                                                                                                       |
|   |   |                                                                                                                                                 |
| 24.1   |   | Power of Attorney—John Sheridan                                                                                                                 |
|   |   |                                                                                                                                                 |
| 24.2   |   | Power of Attorney—Robert S. Silberman                                                                                                           |
|   |   |                                                                                                                                                 |
| 24.3   |   | Power of Attorney—Jerome F. Tatar                                                                                                               |
|   |   |                                                                                                                                                 |
| 24.4   |   | Power of Attorney—Lenard B. Tessler                                                                                                             |
|   |   |                                                                                                                                                 |
| 24.5   |   | Power of Attorney—Michael S. Williams                                                                                                           |
|   |   |                                                                                                                                                 |
| 24.6   |   | Power of Attorney—Alexander M. Wolf                                                                                                             |
|   |   |                                                                                                                                                 |
| 24.7   |   | Power of Attorney—Steven E. Wynne                                                                                                               |
|   |   |                                                                                                                                                 |
| 31.1   |   | Certification of Chief Executive Officer  pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                 |
| 31.2   |   | Certification of Chief Financial Officer  pursuant to Rules 13a-14 and 15d-14, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002 |
|   |   |                                                                                                                                                 |
| 32.1   |   | Certification of Chief Executive Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of The  Sarbanes-Oxley Act of 2002  |
|   |   |                                                                                                                                                 |
| 32.2   |   | Certification of Chief Financial Officer  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 Of The  Sarbanes-Oxley Act of 2002  |

 

----

*              Incorporated by reference from the Registration Statementon Form S-4 (Reg. No. 333-125952), filed on June 20, 2005.

 

+              Management contract or compensatory plan orarrangement.

 

98

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**SIGNATURES**

** **

Pursuant to the requirements ofSection 13 or 15(d) of the Securities Exchange Act of 1934, NewPage Corporationhas duly caused this Report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
| NEWPAGE  CORPORATION     |
|--------------------------|
|                     |
|                     |
| By:                      | /s/ Mark A.  Suwyn |   |
| Mark A.  Suwyn           |
| Chief  Executive Officer |
| Date:                    | March 24,  2006 |
|                          |  |  |  |

 

Pursuant to the requirements ofthe Securities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of NewPage Corporation and in the capacities and onthe dates indicated.

 

 
| /s/ Mark A.  Suwyn                          |
|---------------------------------------------|
| Mark A.  Suwyn                              |
| Chief  Executive Officer and Director       |
| (Principal  Executive Officer)              |
| Date:                                       | March 24,  2006 |
|                                        |
|                                        |
| /s/ Matthew  L. Jesch                       |
| Matthew L.  Jesch                           |
| Vice  President and Chief Financial Officer |
| (Principal  Financial Officer)              |
| Date:                                       | March 24,  2006 |
|                                        |
|                                        |
| /s/ John E. Kurila                          |
| John E. Kurila                              |
| Controller                                  |
| (Principal  Accounting Officer)             |
| Date:                                       | March 24,  2006 |
|                                        |
|                                        |
| *                                           |   |
| John  Sheridan                              |
| Director                                    |
| Date:                                       | March 24,  2006 |
|                                        |
|                                        |
| *                                           |   |
| Robert S.  Silberman                        |
| Director                                    |
| Date:                                       | March 24,  2006 |
|                                             |  |  |  |  |

 

99

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| *                    |            |
|----------------------|-----------------|
| Jerome F.  Tatar     |
| Director             |
| Date:                | March 24,  2006 |
|                 |
|                 |
| *                    |            |
| Lenard B.  Tessler   |
| Director             |
| Date:                | March 24,  2006 |
|                 |
|                 |
| *                    |            |
| Michael S.  Williams |
| Director             |
| Date:                | March 24,  2006 |
|                 |
|                 |
| *                    |            |
| Alexander M.  Wolf   |
| Director             |
| Date:                | March 24,  2006 |
|                 |
|                 |
| *                    |            |
| Steven E.  Wynne     |
| Director             |
| Date:                | March 24,  2006 |
|                 |
|                      |                 |  |

----

| * By:  |             | /s/ Douglas  K. Cooper |   |
|--------|------------------|------------------------|--------|
|   |             | Douglas K.  Cooper     |
|   | Attorney-in-fact |
|        |                  |                        |        |  |

 

100

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