** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

** **

----

** **

**FORM 10-Q**

** **

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the Quarterly Period ended September 30, 2005**

** **

**Commission File No. 333-125952**

 

**NEWPAGECORPORATION**

**Courthouse Plaza Northeast**

**Dayton, Ohio  45463**

**877.855.7243**

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

 

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

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).  Yes  o     No  ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).    Yes o     No  ý

 

There were 100 CommonShares, $0.01 par value, outstanding as of November 1, 2005.

 

 

----

 

**NEWPAGE CORPORATION**

**INDEX**

 
| **PART I**  | **FINANCIAL INFORMATION**                                                                                                                                      | ** ** |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       | ** **                                                                                                                                                     | ** ** |
| Item 1.          | Financial Statements:                                                                                                                                          |       |
|             |                                                                                                                                                           |       |
|             | Successor                                                                                                                                                      |       |
|             | NewPage Corporation and Subsidiaries:                                                                                                                     |       |
|             | Condensed  Consolidated Balance Sheet as of September 30, 2005                                                                                            |       |
|             | Consolidated  Statement of Operations for the third quarter and five months ended  September 30, 2005                                                     |       |
|             | Consolidated  Statement of Stockholder’s Equity for the five months ended  September 30, 2005                                                        |       |
|             | Condensed  Consolidated Statement of Cash Flows for the five months ended  September 30, 2005                                                             |       |
|             | Notes  to Condensed Consolidated Financial Statements                                                                                                          |       |
|             |                                                                                                                                                           |       |
|             | Predecessor                                                                                                                                                    |       |
|             | Printing and Writing Papers Business (A Business of  MeadWestvaco Corporation):                                                                                |       |
|             | Combined Statements of  Operations for the four months ended April 30, 2005 and the third  quarter and first three quarters ended September 30, 2004 |       |
|             | Condensed  Combined Balance Sheet as of December 31, 2004                                                                                                 |       |
|             | Statement  of Changes in Combined Equity                                                                                                                       |       |
|             | Combined Statements of Cash Flows for the  four months ended April 30, 2005 and the first three quarters ended  September 30, 2004                   |       |
|             | Notes to  Condensed Combined Financial Statements                                                                                                              |       |
|             |                                                                                                                                                           |       |
| Item 2.          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                                    |       |
|             |                                                                                                                                                           |       |
| Item 3.          | Quantitative  and Qualitative Disclosures About Market Risk                                                                                                    |       |
|             |                                                                                                                                                           |       |
| Item 4.          | Controls  and Procedures                                                                                                                                       |       |
|             |                                                                                                                                                           |       |
| **PART II** | **OTHER INFORMATION**                                                                                                                                          | ** ** |
| ** **       | ** **                                                                                                                                                     | ** ** |
| Item 6.          | Exhibits                                                                                                                                                       |       |
|             |                                                                                                                                                           |       |
| Signature        |                                                                                                                                                           |       |
|                  |                                                                                                                                                                |            |  |

 

2

----

 

**PARTI       FINANCIALINFORMATION**

** **

## **ITEM 1.**     FINANCIALSTATEMENTS

## ** **

**NEWPAGE CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED BALANCE SHEET (unaudited)**

**SEPTEMBER 30, 2005**

**(In thousands)**

** **
| **ASSETS**                                                                  | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------|------------|------------|------------|
| Cash and cash  equivalents                                                  |       | $          | 412        |   |
| Accounts receivable,  net                                                   |       | 238,280    |       |
| Inventories (Note C)                                                        |       | 444,215    |       |
| Other current assets                                                        |       | 13,315     |       |
| Total  current assets                                                       |       | 696,222    |       |
|                                                                        |       |       |       |
| Property, plant and  equipment, net of accumulated depreciation of $66,770  |       | 1,399,634  |       |
| Intangibles and other  assets (Note D)                                      |       | 228,621    |       |
| TOTAL ASSETS                                                                |       | $          | 2,324,477  |   |
|                                                                        |       |       |       |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**                              | ** ** | ** ** | ** ** |
| Accounts payable                                                            |       | $          | 149,273    |   |
| Accrued expenses                                                            |       | 156,511    |       |
| Current maturities of  long-term debt (Note F)                              |       | 7,500      |       |
| Total  current liabilities                                                  |       | 313,284    |       |
|                                                                        |       |       |       |
| Long-term debt (Note F)                                                     |       | 1,581,507  |       |
| Other long-term  obligations                                                |       | 58,673     |       |
|                                                                        |       |       |       |
| Commitments and  contingencies                                              |       |       |       |
|                                                                        |       |       |       |
| STOCKHOLDER’S EQUITY:                                                  |       |       |       |
| Common  stock, 100 shares issued and outstanding, $0.01 per share par value |       |       |       |
| Additional  paid-in capital                                                 |       | 399,898    |       |
| Accumulated  deficit                                                        |       | (34,351    | )          |
| Accumulated  other comprehensive income                                     |       | 5,466      |       |
| Total  stockholder’s equity                                            |       | 371,013    |       |
| TOTAL LIABILITIES AND  STOCKHOLDER’S EQUITY                            |       | $          | 2,324,477  |   |

 

See notes to condensedconsolidated financial statements.

 

3

----

 

**NEWPAGE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF OPERATIONS (unaudited)**

**THIRD QUARTER AND FIVE MONTHS ENDED SEPTEMBER 30,2005**

**(In thousands)**

 
| ** **                                                                                                                                                                               | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Five  Months  Ended  September  30, 2005** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| Net sales                                                                                                                                                                                |       | $                                              | 617,594    |                                         | $          | 969,275 |   |
|                                                                                                                                                                                     |       |                                           |       |                                         |       |
| Cost of sales                                                                                                                                                                            |       | 555,639                                        |       | 889,637                                      |       |
| Selling, general and  administrative expenses                                                                                                                                            |       | 31,131                                         |       | 50,758                                       |       |
| Interest  expense (including amortization of debt issuance costs and debt discount and  write-off of bridge financing costs of $2,162 and $14,616 in the third  quarter and five months) |       | 36,812                                         |       | 72,647                                       |       |
| Other (income) expense,  net (Note E)                                                                                                                                                    |       | (27,240                                        | )          | (8,202                                       | )          |
|                                                                                                                                                                                     |       |                                           |       |                                         |       |
| Income (loss) before income  taxes and equity in earnings of investee                                                                                                                    |       | 21,252                                         |       | (35,565                                      | )          |
|                                                                                                                                                                                     |       |                                           |       |                                         |       |
| Income taxes                                                                                                                                                                             |       | 110                                            |       | 110                                          |       |
| Equity in earnings of  investee                                                                                                                                                          |       | 774                                            |       | 1,324                                        |       |
|                                                                                                                                                                                     |       |                                           |       |                                         |       |
| Net income (loss)                                                                                                                                                                        |       | $                                              | 21,916     |                                         | $          | (34,351 | ) |

 

See notes to condensedconsolidated financial statements.

 

4

----

 

**NEWPAGE CORPORATION AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENT OF STOCKHOLDER’S EQUITY (unaudited)**

**FIVE MONTHS ENDED SEPTEMBER 30, 2005**

**(In thousands)**

** **
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | ** **      | ** ** | ** **  | ** ** | **Accumulated** | ** ** |
|-------------------------------------------------------|------------|------------------|------------|-------------|------------|-----------------|------------|-------------|------------|-----------------|------------|
| ** **                                            | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** **  | ** ** | **Other**       | ** ** |
| ** **                                            | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | **Comp.**   | ** ** |
| ** **                                            | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**     | ** ** | **Deficit** | ** ** | **Income**      | ** ** |
| Issuance of common  stock                             |       | 100              |       | $           | —     |            | $          | 399,385     |       | $               |       | $ |   |
| Net income (loss)                                     |       |             |       |        |       |            |       | (34,351     | )          |            |       |
| Change  in unrealized gain (loss) on cash flow hedges |       |             |       |        |       |            |       |        |       | 5,466           |       |
| Equity award expense                                  |       |             |       |        |       | 513             |       |        |       |            |       |
|                                                  |       |             |       |        |       |            |       |        |       |            |       |
| Balance at  September 30, 2005                   |       | 100              |       | $           | —     |            | $          | 399,898     |       | $               | (34,351    | ) | $ | 5,466 |   |
|                                                       |            |                  |            |             |            |                 |            |             |            |                 |            |  |  |  |  |

 

See notes to condensedconsolidated financial statements.

 

5

----

 

**NEWPAGE CORPORATION AND SUBSIDIARIES**

**CONDENSEDCONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)**

**FIVE MONTHS ENDED SEPTEMBER 30, 2005**

**(In thousands)**

** **
| CASH  FLOWS FROM OPERATING ACTIVITIES:                                                               |   |       |    |
|------------------------------------------------------------------------------------------------------|--------|------------|---------|
| Net income (loss)                                                                                    |   | $          | (34,351 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by (used in) operating  activities: |   |       |    |
| Depreciation,  depletion and amortization                                                            |   | 70,275     |    |
| Amortization  of debt issuance costs and debt discount and write-off of bridge financing  costs      |   | 14,616     |    |
| Unrealized  (gain) loss on option contracts                                                          |   | (5,801     | )       |
| Investee—earnings  and distributions                                                            |   | 2,816      |    |
| Change  in LIFO reserve                                                                              |   | 5,807      |    |
| Equity  award expense                                                                                |   | 513        |    |
| Change  in operating assets and liabilities                                                          |   | 56,086     |    |
| Net  cash provided by (used in) operating activities                                                 |   | 109,961    |    |
|                                                                                                 |   |       |    |
| CASH FLOWS FROM  INVESTING ACTIVITIES:                                                               |   |       |    |
| Cash paid for  acquisition                                                                           |   | (1,973,186 | )       |
| Capital expenditures                                                                                 |   | (31,359    | )       |
| Cash paid for option  contracts                                                                      |   | (72,957    | )       |
| Net  cash used in investing activities                                                               |   | (2,077,502 | )       |
|                                                                                                 |   |       |    |
| CASH FLOWS FROM  FINANCING ACTIVITIES:                                                               |   |       |    |
| Proceeds from issuance  of common stock                                                              |   | 437,287    |    |
| Proceeds from issuance  of long-term debt and initial draw of revolver                               |   | 1,693,571  |    |
| Payment of debt  issuance costs                                                                      |   | (57,905    | )       |
| Net borrowings  (payments) on revolving credit facility                                              |   | (105,000   | )       |
| Net  cash provided by financing activities                                                           |   | 1,967,953  |    |
|                                                                                                 |   |       |    |
| Net increase (decrease)  in cash and cash equivalents and cash and cash equivalents at end of period |   | $          | 412     |   |
|                                                                                                 |   |       |    |
| SUPPLEMENTAL  INFORMATION—Cash paid for interest                                                |   | $          | 16,645  |   |

 

See notes to condensedconsolidated financial statements.

 

6

----

 

**NEWPAGE CORPORATION AND SUBSIDIARIES**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(In thousands)**

** **

**A.**                                    BASIS OF PRESENTATION

** **

NewPage Corporationand its subsidiaries are engaged in the manufacturing, marketing anddistribution of coated, uncoated and carbonless papers, which are manufacturedat five mills in the United States. The consolidated financial statementsinclude the accounts of the Company and its majority-owned or controlled subsidiaries.Unless otherwise noted, the terms “we,” “our,” “ours,” “us,” “Company” and “NewPage”refer to NewPage Corporation and its consolidated subsidiaries. Allintercompany transactions and balances have been eliminated.

 

These interim consolidatedfinancial statements have not been audited. However, in the opinion ofmanagement, all normal recurring adjustments necessary to present fairly thefinancial position and the results of operations for the interim periodpresented have been made. These interim financial statements have been preparedon the basis of accounting principles and practices generally accepted in theUnited States of America.

 

Certain information andfootnote disclosures normally included in annual financial statements presentedin accordance with accounting principles and practices generally accepted inthe United States of America have been condensed or omitted. The results ofoperations for interim periods are not necessarily indicative of the results tobe expected for the full year. The accompanying financial statements should beread in conjunction with our predecessor’s annual financial statements andnotes thereto for the year ended December 31, 2004, included in theregistration statement on Form S-4, as filed on June 20, 2005, asamended.

 

**B.**                                    ACQUISITION AND RELATED TRANSACTIONS

** **

On May 2, 2005, NewPage Corporationand subsidiaries acquired the Printing and Writing Papers Business (the “predecessor”)from MeadWestvaco Corporation (“MeadWestvaco”) (the “acquisition”). On January 14,2005, our indirect parent, Escanaba Timber LLC (“Escanaba Timber”), andMeadWestvaco entered into an equity and asset purchase agreement (the “purchaseagreement”) pursuant to which we and our subsidiaries acquired the coated andcarbonless papers group of MeadWestvaco. The purchase agreement and relateddocuments contemplated the occurrence of the following events, which wecollectively refer to as the “Transactions,” which were completed on May 2,2005:

 

•Escanaba Timber contributed $415,000 of cash equity, as an investment in commonstock, to NewPage Holding Corporation, also referred to as NewPage Holding.

•NewPage Holding issued $100,000 of NewPage Holding PIK notes toMeadWestvaco as part of the consideration and an additional $25,000 of NewPage HoldingPIK notes for cash. NewPage Holding contributed the net cash proceeds fromthe PIK notes and the $415,000 of cash contributed by Escanaba Timber to NewPage Corporation,as an investment in the common stock of NewPage Corporation.

•We entered into two senior secured credit facilities, consisting of a $750,000senior secured term loan and a $350,000 senior secured asset-based revolvingcredit facility.

 

7

----

 

•We issued $225,000 of floating rate senior secured notes due 2012 and $350,000of 10% senior secured notes due 2012.

•We issued $200,000 of 12% senior subordinated notes due 2013.

•NewPage Corporation and its subsidiaries paid approximately $2,080,000 forMeadWestvaco’s Coated and Carbonless Papers Group, excluding fees and expensesand subject to the post-closing purchase price adjustments specified in the purchaseagreement, of which $1,980,000 was paid in cash and $100,000 was paid in theform of NewPage Holding PIK notes.

 

During the third quarterof 2005, we received $18,141 from MeadWestvaco for the estimated post-closingpurchase price adjustments.

 

The consolidated balancesheets in these financial statements include the assets acquired andliabilities assumed of MeadWestvaco’s coated and carbonless papers group andreflect an allocation of purchase price based on estimated fair value at thedate of acquisition. The amount of the purchase price allocated to NewPage isdifferent from the sum of the payments made through NewPage toMeadWestvaco as a result of a difference between the relative fair value of theassets acquired by NewPage and Escanaba Timber and the relative paymentsmade by each company. A summary of the preliminary purchase price allocated toNewPage for the fair value of the assets acquired and the obligationsassumed at the date of the acquisition is presented below. The purchase priceallocation is preliminary and is subject to completion of final appraisals andfinal determination of post-closing purchase price adjustments.

 
| Current  assets                |   | $         | 672,291   |   |
|--------------------------------|--------|-----------|-----------|--------|
| Property, plant and  equipment |   | 1,434,936 |      |
| Intangibles and other  assets  |   | 98,649    |      |
| Total  assets acquired         |   | 2,205,876 |      |
| Current liabilities            |   | (214,552  | )         |
| Other long-term  obligations   |   | (58,010   | )         |
| Total  liabilities assumed     |   | (272,562  | )         |
| Net  purchase price allocated  |   | $         | 1,933,314 |   |

 

The following table summarizesselected unaudited pro forma consolidated statements of operations data as ifthe acquisition had been completed at the beginning of the year.

 
| ** **                               | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Third  Quarter  Ended  September  30, 2004** | ** ** | **Three  Quarters  Ended  September  30, 2005** | ** ** | **Three  Quarters  Ended  September  30, 2004** | ** ** |
|------------------------------------------|------------|------------------------------------------------|------------|------------------------------------------------|------------|-------------------------------------------------|------------|-------------------------------------------------|------------|
| **Unuaudited pro forma financial  data** | ** ** | **Actual**                                     | ** ** | **Pro forma**                                  | ** ** | **Pro forma**                                   | ** ** | **Pro forma**                                   | ** ** |
| Net sales                                |       | $                                              | 617,594    |                                           | $          | 587,191                                         |       | $                                               | 1,685,164  |   | $ | 1,642,604 |   |
| Net income (loss)                        |       | 21,916                                         |       | (1,199                                         | )          | (48,352                                         | )          | (82,764                                         | )          |
|                                          |            |                                                |            |                                                |            |                                                 |            |                                                 |            |  |  |  |  |

 

This selected unauditedpro forma consolidated financial data is included only for the purposes ofillustration and does not necessarily indicate what the operating results wouldhave been if the acquisition had been completed on such date. Moreover, thisinformation does not necessarily indicate what our future operating resultswill be. This information includes five months of actual data in 2005 for theperiod subsequent to the date of the acquisition. For periods prior to theacquisition, the unaudited pro forma information includes allocations ofcertain expenses retained by MeadWestvaco for periods after the date of theacquisition.

 

8

----

 

**C.**                                    INVENTORIES

** **

Inventories as of September 30,2005, consist of:

 
| Finished  and in-process goods |   | $      | 306,740 |   |
|--------------------------------|--------|--------|---------|--------|
| Raw materials                  |   | 63,825 |    |
| Stores and supplies            |   | 73,650 |    |
|                           |   | $      | 444,215 |   |

 

Inventories are valued atthe lower of cost or market. Cost is determined using the last-in, first-out(LIFO) method for substantially all raw materials, finished goods andproduction materials. Cost of all other inventories, mainly stores and suppliesinventories, is determined by the average cost method. If inventories had beenvalued at current cost, they would have been $419,786 at September 30,2005. During the five months ended September 30, 2005, inventoryquantities were reduced. This reduction resulted in a liquidation of LIFO inventoryquantities carried at higher costs prevailing at the acquisition date ascompared with the cost of purchases, the effect of which increased cost ofgoods sold and net loss by approximately $3,800.

 

**D.**                                    INTANGIBLES AND OTHER ASSETS

** **

Intangibles and otherassets as of September 30, 2005, consist of:

 
| Commodity  basket option contract        |   | $      | 77,298  |   |
|------------------------------------------|--------|--------|---------|--------|
| Financing costs                          |   | 43,725 |    |
| Prepaid pension asset                    |   | 43,160 |    |
| Intangibles—customer  relationships |   | 28,713 |    |
| Other                                    |   | 35,725 |    |
|                                     |   | $      | 228,621 |   |

 

**E.**                                      DERIVATIVE FINANCIAL INSTRUMENTS

** **

As of May 2, 2005,we entered into a commodity basket option contract as part of the Transactionsand paid a premium of $72,000 for the contract. This commodity basket optioncontract is a purchased basket of options on a mix of natural gas, market pulpand the Euro. While the option was designed to help protect against decreasesin the North American prices of coated paper by reference to the prices ofnatural gas and market pulp, and material decreases in the value of the Eurorelative to the U.S. dollar, there is no assurance that the commodity basketoption contract will actually protect us against any such price decreases orthat the historical level of correlation will continue during the three-yearperiod of the contract. Because of the uncertainty of future correlation, we donot apply hedge accounting treatment for this contract and record changes inthe fair value of the contract in other (income) expense. Other (income)expense for the third quarter and five months ended September 30, 2005,includes an unrealized (gain) loss of $(25,839) and $(5,801) determined basedon the mark-to-market values of the option contracts. The fair value forpurchased contracts is based on the amount we could receive from thecounterparty to settle the contract.

 

As of June 30, 2005,we entered into two interest rate swap agreements and one interest rate capagreement to hedge the variability of cash flows on a portion of ourfloating-rate debt. We entered into a $150,000 notional amount interest rateswap expiring June 2009 and a $150,000 notional amount

 

9

----

 

interest rate swapexpiring June 2010. We purchased a $150,000 notional amount interest ratecap with a cap rate of 4.50% that expires June 2008 for $957. Thesecontracts are accounted for as cash-flow hedges, with changes in fair valuerecorded as a component of other comprehensive income and any ineffectivenessrecorded in interest expense.

 

**F.**                                      LONG-TERM DEBT

** **

In conjunction with the acquisition,we issued $1,693,571 of long-term debt on May 2, 2005. The initialbalances and the balances as of September 30, 2005 are as follows:

 
| ** **                                            | ** ** | **September  30, 2005** | ** ** | **May 2,  2005** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| Revolving senior  secured credit facility             |       | $                       | 70,367     |                  | $          | 175,367 |   |
| Term loan senior  secured credit facility             |       | 750,000                 |       | 750,000               |       |
| Floating rate senior  secured notes                   |       | 225,000                 |       | 225,000               |       |
| 10% senior secured  notes (face amount $350,000)      |       | 346,012                 |       | 345,706               |       |
| 12% senior subordinated  notes (face amount $200,000) |       | 197,628                 |       | 197,498               |       |
| Total long-term debt,  including current portion      |       | $                       | 1,589,007  |                  | $          | 1,693,571 |   |

 

We incurred $46,905 offinancing fees related to the issuance of the above debt. In addition, werecognized an expense of $11,000 after the acquisition related to bridgefinancing commitment fees. We are amortizing the remainder of the financingcosts to interest expense over the terms of the related debt issues.

 

### ***SeniorSecured Credit Facilities***

### *** ***

The senior secured creditfacilities consist of a senior secured term loan of $750,000 and a seniorsecured revolving credit facility of $350,000. Subject to customary conditions,including the absence of defaults under the revolving facility, amountsavailable under the revolving facility may be borrowed, repaid and re-borrowed,including in the form of letters of credit and swing line loans, until thematurity date thereof. The revolving facility was partially utilized to fundthe acquisition and pay related expenses, and may be utilized to fund ourworking capital, to fund permitted acquisitions and capital expenditures, andfor other general corporate purposes. The availability under our revolvingcredit facility is reduced by our outstanding letters of credit, which totaled$9,882 at September 30, 2005. The amount of loans and letters of creditavailable to us pursuant to the revolving facility is limited to the lesser of$350,000 or an amount determined pursuant to a borrowing base. The borrowingbase at any time will be equal to 85% of the book value of our and oursubsidiaries’ eligible account receivables, plus the lesser of (i) 75% ofthe lower of cost or market value of our and our subsidiaries’ eligibleinventory or (ii) 85% of the “net cost recovery percentage” of our and oursubsidiaries’ eligible inventory, minus certain reserves established by thecollateral agent under the revolving facility. The collateral agent has theright to change these advance rates under certain circumstances. Theeligibility of accounts receivable and inventory for inclusion in the borrowingbase is determined in accordance with certain customary criteria specifiedpursuant to the revolving facility. For purposes of the borrowing base, “netcost recovery percentage” is the percentage determined by dividing the amountthat would be recovered in an orderly liquidation of the inventory, asdetermined from the most recent inventory appraisal conducted under the termsof the revolving facility, by the cost of the inventory covered by suchappraisal. Based on availability under the borrowing base as of September 30,2005, we had

 

10

----

 

$249,415 of additionalborrowing availability under the revolving senior secured credit facility. Unlessterminated earlier, the revolving facility matures at May 1, 2010. Amountsoutstanding under our revolving facility initially bear interest, at ouroption, at a rate per annum equal to either: (i) the base rate plus anapplicable margin (initially 1.00%), or (ii) LIBOR plus an applicablemargin (initially 2.00%). Certain customary fees are payable to the lenders andthe agents under the senior secured credit facilities, including, withoutlimitation, a commitment fee for our revolving facility based upon non-use ofavailable funds and letter of credit fees and issuer fronting fees.

 

The senior term facility maturesat May 1, 2011 and will amortize in 20 consecutive equal quarterlyinstallments in an aggregate annual amount equal to 1.0% 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, subjectto certain reinvestment rights; (ii) 100% of the net cash proceeds ofcertain insurance and condemnation payments, subject to certain reinvestmentrights; (iii) 50% of the net cash proceeds of equity offerings; (iv) 100%of the net cash proceeds of debt incurrences (other than debt incurrencespermitted under the term facility); and (v) 75% of our excess cash flow,as defined in the senior secured credit facility (declining in stages to zero,in accordance with a leverage ratio test). The loans under the senior termfacility bear interest, at our option, at a rate per annum equal to either: (i) thebase rate plus 2.00%, or (ii) LIBOR plus 3.00%.

 

The senior secured creditfacilities are jointly and severally guaranteed by our parent and each of our domesticsubsidiaries. Subject to certain customary exceptions, we and each of theguarantors granted to the lenders under the revolving facility a first prioritysecurity interest in and lien on our and our domestic subsidiaries’ present andfuture cash, deposit accounts, accounts receivable, inventory and intercompanydebt owed to us, our parent and our guarantor domestic subsidiaries. Subject tocertain customary exceptions, we and each of the guarantors granted to thelenders under the term facility (i) a first priority security interest inand lien on substantially all of our and our domestic subsidiaries’ present andfuture property and assets (other than cash, deposit accounts, accountsreceivable, inventory and intercompany debt owed to us, our parent and ourguarantor domestic subsidiaries), including the capital stock of our domesticsubsidiaries and 65% of the capital stock of our foreign subsidiaries, if any,as well as our capital stock owned by our parent and (ii) a secondpriority 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 (subjectto customary exceptions and certain existing obligations and liabilities),including, but not limited to, restrictions on our ability and the ability ofour subsidiaries to (i) dispose of assets, (ii) incur additionalindebtedness and guarantee obligations, (iii) repay other indebtedness, (iv) paycertain 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 oursubsidiaries, (viii) make certain acquisitions, (ix) engage inmergers or consolidations, (x) enter into sale and leaseback transactions, (xi)engage in certain transactions with subsidiaries that are not guarantors of thesenior secured credit facilities or with affiliates or (xii) amend the terms ofthe notes and otherwise restrict corporate activities. In addition, under thesenior term facility (and under the revolving facility to the extent that on orafter September 30, 2005, our unused borrowing availability under therevolving

 

11

----

 

facility plus excess cashare below $40,000 for 10 consecutive business days), we are required to complywith specified financial ratios and tests, including a minimum interest andfixed charge coverage ratios, maximum senior and total leverage ratios andmaximum capital expenditures.

 

### ***FloatingRate and 10% Senior Secured Notes***

### *** ***

We issued $350,000 facevalue of 10% senior secured notes and $225,000 of floating rate senior securednotes. The senior secured notes mature on May 1, 2012. Interest on the 10%senior secured notes accrues at the rate of 10% per annum and is payablesemi-annually in arrears on May 1 and November 1, commencing on November 1,2005. Interest on the 10% senior secured notes is computed on the basis of a 360-dayyear comprised of twelve 30-day months. Interest on the floating rate seniorsecured notes accrues at a rate per annum, reset quarterly, equal to LIBOR plus6.25% and is payable quarterly, in arrears, on every February 1, May 1,August 1 and November 1.

 

The senior secured notesare secured on a second-priority basis by liens on all of our 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 apart of 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 partof the 10% senior secured notes at an initial redemption price of 106.0%. Atany time prior to May 1, 2008, we may redeem up to 30% of the floatingrate senior secured notes at a redemption price of 100%, plus LIBOR on the dateof redemption, plus 6.25% with the net cash proceeds of one or more EquityOfferings by the Company or a contribution to the common equity capital of theCompany from the net proceeds of one or more Equity Offerings by a direct orindirect parent of the Company. On or after May 1, 2009, we may redeem allor a part of the floating rate senior secured notes at an initial redemptionprice of 103.0%. If a Change of Control occurs, each holder of senior securednotes has the right to require us to repurchase all or any part of that holder’ssenior secured notes at 101% of the 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) paycertain 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 oursubsidiaries, (viii) make certain acquisitions, (ix) engage inmergers or consolidations, (x) enter into sale and leaseback transactions, (xi)engage in certain transactions with subsidiaries that are not guarantors of thesenior secured credit

 

12

----

 

facilities or withaffiliates or (xii) amend the terms of the notes and otherwise restrictcorporate activities.

 

### ***12%Senior Subordinated Notes***

### *** ***

We issued $200,000 facevalue of senior subordinated notes that mature on May 1, 2013. The seniorsubordinated notes are general unsecured obligations and are subordinated inright of payment to all our existing and future senior debt, including thesenior secured 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 jointlyand severally 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 112.0% with the net cash proceeds of one or more equity offerings bythe Company or a contribution to the common equity capital of the Company fromthe net proceeds of one or more equity offerings by a direct or indirect parentof the Company. At any time prior to May 1, 2009, we may also redeem allor a part of the senior subordinated notes at a redemption price equal to 100% plusa “make-whole” premium. On or after May 1, 2009, we may redeem all or apart of the senior subordinated notes at an initial redemption price of 106.0%.If a Change of Control occurs, each holder of the senior subordinated notes hasthe right to require us to repurchase all or any part of that holder’s seniorsubordinated notes at 101% of the face value.

 

The senior subordinatednotes contain 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) paycertain 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 oursubsidiaries, (viii) make certain acquisitions, (ix) engage inmergers or consolidations, (x) enter into sale and leaseback transactions, (xi)engage in certain transactions with subsidiaries that are not guarantors of thesenior secured credit facilities or with affiliates or (xii) amend the terms ofthe notes and otherwise restrict corporate activities.

 

**G.**                                    EQUITY

** **

In conjunction with the acquisition,we received an equity investment of $539,313 in common stock from our parent,NewPage Holding. We have 100 shares issued and outstanding of $0.01 parvalue common stock.

 

### ***EquityAwards***

### *** ***

Certain members of ourmanagement and our chairman were granted Class A Common PercentageInterests and Class B Common Percentage Interests of Maple TimberAcquisition LLC (our ultimate parent) (the “Management Interests”) relating toour business. The equity interests of Maple Timber Acquisition LLC areclassified into two separate series: one relating to our business and onerelating to the business of Escanaba Timber. The series of equity interestsrelating to our business consists of Class

 

13

----

 

A Common PercentageInterests, Class B Common Percentage Interests and Preferred PercentageInterests. The Class A and Class B Common Percentage Interestsparticipate in distributions only after holders of the Preferred PercentageInterests have received a return of their capital plus a preferred returnthereon. Additionally, the Class B Common Percentage Interests willparticipate in the equity of our business only after the Class A CommonPercentage Interests have received $200,000 in distributions. Of the ManagementInterests, 50% will vest over time, 10% vesting at the close of the acquisition,45% vesting at December 31, 2006 and the other 45% vesting at December 31,2007. The other 50% of the Management Interests will vest only if performancetargets are met during 2006 and 2007. All Management Interests will vest onlyto the extent the employee remains employed by us on each vesting date or, ifour chairman remains chairman of our company on each vesting date. However, allManagement Interests will automatically vest upon a “change of control” or an “initialpublic offering.” The fair value of the restricted Management Interests grantedto our members of managements and our chairman totaled $2,026. Effective as ofthe acquisition, we adopted SFAS No. 123 (Revised), *Share-based Payment.* In accordance withSFAS No. 123R, we have not recorded the unvested shares as paid-in capital.Furthermore, certain other members of our management were issued options topurchase Class A Common Percentage Interests that only vest upon theoccurrence of a “change of control” or an “initial public offering.” We haverecognized expense of $348 and $513 during the third quarter and five monthsended September 30, 2005, and will recognize the additional compensationexpense over the vesting periods with the offset recorded as an increase inadditional paid-in capital.

 

**H.**                                    BUSINESS SEGMENTS

** **

Our principal businesssegments are Coated Paper System and Carbonless Paper System.

 

The Coated Paper Systemis engaged 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 PaperSystem is engaged in the manufacturing, marketing and distribution ofcarbonless and technical papers used primarily for business forms. The productsin this segment include: value-added carbonless papers, uncoated papers, andspecialty papers. This segment’s products are manufactured at one U.S. mill andone off-site coating facility.

 

The segments are measuredon earnings 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.

 

14

----

 
| ** **                                         | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Five  Months  Ended  September  30, 2005** | ** ** |
|----------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| Net sales:                                         |       |                                           |       |                                         |       |
| Coated  Paper System                               |       | $                                              | 507,028    |                                         | $          | 785,847 |   |
| Carbonless  Paper System                           |       | 110,566                                        |       | 183,428                                      |       |
| Total                                              |       | $                                              | 617,594    |                                         | $          | 969,275 |   |
|                                               |       |                                           |       |                                         |       |
| Segment operating  profit (loss):                  |       |                                           |       |                                         |       |
| Coated  Paper System                               |       | $                                              | 29,594     |                                         | $          | 36,529 |   |
| Carbonless  Paper System                           |       | 2,996                                          |       | (4,444                                       | )          |
| Total                                              |       | $                                              | 32,590     |                                         | $          | 32,085 |   |
|                                               |       |                                           |       |                                         |       |
| Segment depreciation,  depletion and amortization: |       |                                           |       |                                         |       |
| Coated  Paper System                               |       | $                                              | 41,370     |                                         | $          | 68,516 |   |
| Carbonless  Paper System                           |       | 1,071                                          |       | 1,759                                        |       |
| Total                                              |       | $                                              | 42,441     |                                         | $          | 70,275 |   |

 

The following is areconciliation of the segment operating profit (loss) reported above to theamount of income (loss) before equity in earnings of investee reported in theconsolidated financial statements:

 
| ** **                                                            | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Five  Months  Ended  September  30, 2005** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| Segment operating  profit (loss)                                      |       | $                                              | 32,590     |                                         | $          | 32,085 |   |
| Interest expense                                                      |       | (36,812                                        | )          | (72,647                                      | )          |
| Other income (expense)                                                |       | 409                                            |       | 520                                          |       |
| Unrealized gain (loss)  on option contracts                           |       | 25,839                                         |       | 5,801                                        |       |
| Pre-tax equity in  earnings of investee                               |       | (774                                           | )          | (1,324                                       | )          |
| Income  (loss) before income taxes and equity in earnings of investee |       | $                                              | 21,252     |                                         | $          | (35,565 | ) |

 
| ** **               | ** ** | **September  30, 2005** | ** ** |
|--------------------------|------------|-------------------------|------------|
| Segment assets:          |       |                    |       |
| Coated  Paper System     |       | $                       | 1,978,917  |   |
| Carbonless  Paper System |       | 160,739                 |       |
| Corporate                |       | 184,821                 |       |
| Total                    |       | $                       | 2,324,477  |   |

 

**I.**                                         CONTINGENCIES

** **

Claims have been madeagainst us for the costs of environmental remedial measures taken or to betaken. Reserves for such liabilities have been established and no insurancerecoveries have been anticipated in the determination of the reserves. We areinvolved in various other litigation and administrative proceedings arising inthe normal course of business. Although the ultimate outcome of such matterscannot be predicted with certainty, we do not believe that the currentlyexpected outcome of

 

15

----

 

any matter, lawsuit orclaim that is pending or threatened, or all of them combined, will have amaterial adverse effect on our financial condition, results of operations orliquidity.

 

**J.**                                      RETIREMENT AND OTHER POSTRETIREMENT BENEFITS

** **

At the acquisition weassumed certain retirement obligations for active hourly employees and receivedrelated retirement plan assets. We do not expect to make any contributions tothe retirement plan during the current year.

 

At the acquisition weassumed certain postretirement health care obligations for active employees. Wefund the postretirement health care benefits on a pay-as-you-go basis so thatour contributions are equal to the benefits paid to participants.

 

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 profit-sharing component that varies dependingon the achievement of certain objectives.

 

The funded status of thedefined benefit plans at May 1, 2005, was as follows:

 
| ** **                                      | ** ** | **Retirement  Plan** | ** ** | **Post-  retirement  Plan** | ** ** |
|-------------------------------------------------|------------|----------------------|------------|-----------------------------|------------|
| Benefit obligation                              |       | $                    | 259,229    |                        | $          | 28,798 |   |
| Fair value of plan assets                       |       | 302,786              |       |                        |       |
| Funded status—long-term  asset (liability) |       | $                    | 43,557     |                        | $          | (28,798 | ) |
|                                            |       |                 |       |                        |       |
| Weighted-average  assumptions:                  |       |                 |       |                        |       |
| Discount  rate                                  |       | 5.25                 | %          | 5.25                        | %          |
| Long-term  rate of return on plan assets        |       | 8.00                 | %          |                        |       |

 

The postretirementbenefit plan utilized a weighted-average assumed rate of increase in the percapita cost of covered benefits (i.e., health care cost trend rate) of 13.0% for2005 and decreasing 1.0% per year to an ultimate trend rate of 5.0% in 2013 andremaining at that level thereafter.

 

A summary of thecomponents of net periodic costs for the third quarter and five months ended September 30,2005, is as follows:

 
| ** **                      | ** ** | **Retirement Plan**                            | ** ** | **Postretirement Plan**                      | ** ** |
|---------------------------------|------------|------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                      | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Five  Months  Ended  September  30, 2005** | ** ** | **Third  Quarter  Ended  September  30, 2005** | ** ** | **Five  Months  Ended  September  30, 2005** | ** ** |
| Service cost                    |       | $                                              | 2,850      |                                         | $          | 4,750 |   | $ | 245 |   | $ | 409 |   |
| Interest cost                   |       | 3,335                                          |       | 5,559                                        |       | 376 |   | 626 |   |
| Expected return on plan  assets |       | (5,947                                         | )          | (9,912                                       | )          |   |   |   |   |
| Net  periodic costs             |       | $                                              | 238        |                                         | $          | 397 |   | $ | 621 |   | $ | 1,035 |   |

 

16

----

 

Future benefit payments for the plans for May 1through December 31, 2005, each of the next five years and for the fiveyears thereafter are expected to be paid as follows:

 
| ** **          | ** ** | **Retirement  Plan** | ** ** | **Post-  retirement  Plan** | ** ** |
|---------------------|------------|----------------------|------------|-----------------------------|------------|
| 2005 (eight months) |       | $                    | 8,000      |                        | $          | 230 |   |
| 2006                |       | 11,793               |       | 818                         |       |
| 2007                |       | 12,901               |       | 1,456                       |       |
| 2008                |       | 15,337               |       | 2,175                       |       |
| 2009                |       | 16,257               |       | 2,892                       |       |
| 2010                |       | 16,691               |       | 3,458                       |       |
| 2011 through 2015   |       | 89,274               |       | 19,776                      |       |
|                     |            |                      |            |                             |            |  |  |

 

## **K.**                                    INCOME TAX EXPENSE

 

For the five months ended September 30, 2005, werecorded an income tax benefit of $13,806 offset by a valuation allowance ofthe same amounts. For the three months ended September 30, 2005, we didnot record any income tax provision as a result of the reversal of thevaluation allowance recorded in the two months ended June 30, 2005. Wehave not recorded a deferred tax benefit for the amount of our loss beforeincome taxes subsequent to the acquisition since it is more likely than notthat we will not realize this benefit, as defined in SFAS No. 109, as aresult of the negative evidence presented by our predecessor’s history oflosses over the past three years.

 

## **L.**                                     COMPREHENSIVE INCOME (LOSS)

## ** **

Total comprehensiveincome (loss) is comprised of net income (loss) and net unrealized gains andlosses on cash flow hedges. Total comprehensive income (loss) for the thirdquarter and five months ended September 30, 2005 was $27,382 and $(28,885).

 

## **M.**                                  RELATED PARTY TRANSACTIONS

## ** **

At the acquisition, we entered into fiber supplyagreements with our indirect parent, Escanaba Timber LLC, whereby we areentitled to purchase timber fibers from them at prevailing market rates. Duringthe third quarter and five months ended September 30, 2005, we madepurchases of $10,018 and $16,038 from them. At the acquisition, we wererequired to deposit $4,624 with them as a result of our lack of credit historyas a stand-alone entity. In addition, we provide certain management services tothem, including human resources, information technology and accounting. Ourbillings to them for these services are not significant.

 

An affiliate of CerberusCapital Management, L.P., our equity sponsor, was paid a fee by our indirect parent,Escanaba Timber, in connection with the Transactions.

 

## **N.**                                    RECENTLY ISSUED ACCOUNTING STANDARDS

## ** **

In November 2004, the Financial AccountingStandards Board issued SFAS No. 151, *InventoryCosts*. This Statement amends ARB No. 43, Chapter 4 to clarifythe accounting for abnormal amounts of idle facility expense, freight, handlingcosts, and wasted material. In addition, this Statement requires thatallocation of fixed production overheads to the costs of conversion be based onthe normal capacity of

 

17

----

 

the production facilities. The adoption of thisStatement has no effect on us as our current accounting complies with theguidance.

 

In March 2005, theFinancial Accounting Standards Board issued FASB Interpretation No. 47, *Accounting for Conditional Asset Retirement Obligations, aninterpretation of FASB Statement No. 143*. This Interpretationclarifies the accounting for conditional asset retirement obligations in whichthe timing and (or) method of settlement are conditional on a future event thatmay or may not be within the control of the entity. An entity is required torecognize a liability for the fair value of a conditional asset retirementobligation if the fair value of the liability can be reasonably estimated.Uncertainty about the timing and (or) method of settlement of a conditionalasset retirement obligation should be factored into the measurement of theliability when sufficient information exists. This Interpretation is effectiveno later than the end of fiscal years ending after December 15, 2005 (December 31,2005 for us). This Statement is not expected to have a material effect on our financialposition, results of operations, or compliance with our debt covenants.

 

In July 2005, theEmerging Issues Task Force issued EITF Issue 04-05, *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 the 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, but it is not expected to have a material effect on our financialposition, results of operations, or compliance with our debt covenants.

 

* * * * *

 

18

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSORCOMBINED STATEMENTS OFOPERATIONS**

**(Unaudited)**
| **In  thousands**                                                  | ** ** | **Four Months Ended  April 30, 2005** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                         | ** ** | **(As Restated)**                          | ** ** |
| Net sales (including  sales to related parties of $10,238)         |       | $                                          | 716,226    |   |
|                                                               |       |                                       |       |
| Cost of sales                                                      |       | 673,286                                    |       |
| Selling, general and  administrative expenses                      |       | 39,493                                     |       |
| Interest expense,  including loss on defeasance of debt of $17,776 |       | 20,557                                     |       |
| Other income, net                                                  |       | (1,253                                     | )          |
|                                                               |       |                                       |       |
| Loss before income  taxes and equity income from investee          |       | (15,857                                    | )          |
| Income tax benefit                                                 |       | (7,459                                     | )          |
| Equity income from  investee (net of income tax of $383)           |       | 681                                        |       |
|                                                               |       |                                       |       |
| Net loss                                                           |       | $                                          | (7,717     | ) |

 

*The accompanying notes are anintegral part of these financial statements.*

 

19

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSORCOMBINED STATEMENTS OF OPERATIONS**

**(Unaudited)**

 
| **In  thousands**                                                                   | ** ** | **Third Quarter Ended  September 30, 2004** | ** ** | **Three Quarters Ended  September 30, 2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
| Net sales (including  sales to related parties of $7,786 and $19,863, respectively) |       | $                                                | 587,191    |                                              | $          | 1,642,604 |   |
|                                                                                |       |                                             |       |                                              |       |
| Cost of sales                                                                       |       | 537,243                                          |       | 1,623,036                                         |       |
| Selling, general and  administrative expenses                                       |       | 33,291                                           |       | 96,605                                            |       |
| Interest expense                                                                    |       | 2,337                                            |       | 7,052                                             |       |
| Other income, net                                                                   |       | (867                                             | )          | (2,665                                            | )          |
|                                                                                |       |                                             |       |                                              |       |
| Income (loss) before  income taxes and equity income from investee                  |       | 15,187                                           |       | (81,424                                           | )          |
| Income tax expense  (benefit)                                                       |       | 5,765                                            |       | (30,791                                           | )          |
| Equity income from  investee (net of income tax of $264 and $852, respectively)     |       | 470                                              |       | 1,514                                             |       |
|                                                                                |       |                                             |       |                                              |       |
| Net income (loss)                                                                   |       | $                                                | 9,892      |                                              | $          | (49,119 | ) |

 

*The accompanying notes are anintegral part of these financial statements.*

 

20

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**CONDENSED COMBINEDBALANCE SHEET**

**(Unaudited)**
| **In  thousands**                   | ** ** | **December 31, 2004** | ** ** |
|-------------------------------------|------------|----------------------------|------------|
| ASSETS                              |       |                       |       |
| Accounts receivable,  net           |       | $                          | 199,506    |   |
| Inventories                         |       | 321,409                    |       |
| Other current assets                |       | 19,902                     |       |
| Current  assets                     |       | 540,817                    |       |
|                                |       |                       |       |
| Property, plant and  equipment, net |       | 2,033,373                  |       |
|                                |       |                       |       |
| Other assets, net                   |       | 72,697                     |       |
|                                |       | $                          | 2,646,887  |   |
|                                |       |                       |       |
| LIABILITIES AND  COMBINED EQUITY    |       |                       |       |
| Accounts payable                    |       | $                          | 123,183    |   |
| Accrued expenses                    |       | 144,056                    |       |
| Current  liabilities                |       | 267,239                    |       |
|                                |       |                       |       |
| Long-term debt                      |       | 145,035                    |       |
| Other long-term  obligations        |       | 15,765                     |       |
| Deferred income taxes               |       | 506,335                    |       |
| Total  liabilities                  |       | 934,374                    |       |
|                                |       |                       |       |
| Commitments and  contingencies      |       |                       |       |
|                                |       |                       |       |
| Combined equity                     |       | 1,712,513                  |       |
|                                |       | $                          | 2,646,887  |   |

 

*The accompanying notes are anintegral part of these financial statements.*

 

21

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**STATEMENT OF CHANGES IN COMBINED EQUITY**

**(Unaudited)**

 
| **In  thousands**                                              | ** ** | **EQUITY**        | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|
| ** **                                                     | ** ** | **(As Restated)** | ** ** |
| BALANCE,  DECEMBER 31, 2004                          |       | $                 | 1,712,513  |   |
|                                                           |       |              |       |
| Net  loss for the four months ended April 30, 2005        |       | (7,717            | )          |
| Payment  by MeadWestvaco Corporation to defease long-term debt |       | 161,930           |       |
| Transactions  with MeadWestvaco Corporation, net               |       | 16,617            |       |
|                                                           |       |              |       |
| BALANCE,  APRIL 30, 2005                             |       | $                 | 1,883,343  |   |

 

*The accompanying notes are an integral part of these financial statements.*

 

22

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**COMBINED STATEMENTOF CASH FLOWS****(Unaudited)**

 
| **In thousands**                                                                                                      | ** ** | **Four Months Ended  April 30, 2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                            | ** ** | **(As Restated)**                          | ** ** |
| **Cash flows from operating  activities:**                                                                            |       |                                       |       |
| Net loss                                                                                                         |       | $                                          | (7,717     | ) |
| Adjustments to reconcile net income  to net cash provided by operating activities: |       |                                       |       |
| Depreciation  and amortization                                                                                   |       | 75,906                                     |       |
| Deferred income taxes                                                                                       |       | (7,076                                     | )          |
| Loss on sales of assets,  net                                                                     |       | 515                                        |       |
| Investee—earnings  and distributions                                                                             |       | 1,006                                      |       |
| Loss  on extinguishment of debt                                                                                       |       | 17,776                                     |       |
| Changes in operating  assets and liabilities:                                                               |       |                                       |       |
| Accounts  receivable, net                                                                                             |       | (3,002                                     | )          |
| Inventories                                                                                                           |       | (59,296                                    | )          |
| Other  current assets                                                                                                 |       | (3,010                                     | )          |
| Other  long-term assets                                                                                               |       | (2,499                                     | )          |
| Accounts  payable                                                                                                     |       | 3,916                                      |       |
| Accrued  expenses                                                                                                     |       | (15,518                                    | )          |
| Other  liabilities                                                                                                    |       | 601                                        |       |
| Net cash provided  by operating activities                                                             |       | 1,602                                      |       |
|                                                                                                                  |       |                                       |       |
| **Cash flows from investing  activities:**                                                                            |       |                                       |       |
| Additions  to property, plant and equipment                                                                           |       | (17,356                                    | )          |
| Net  cash used in investing activities                                                                                |       | (17,356                                    | )          |
|                                                                                                                  |       |                                       |       |
| **Cash flows from financing  activities:**                                                                            |       |                                       |       |
| Net  transactions with MeadWestvaco Corporation                                                                       |       | 15,754                                     |       |
| Net  cash provided by financing activities                                                                            |       | 15,754                                     |       |
|                                                                                                                  |       |                                       |       |
| **Increase (decrease) in cash and  cash equivalents**                                                                 |       | $                                          | —     |   |
| ** **                                                                                                            |       |                                       |       |
| **Non-Cash Transactions–**                                                                                       |       |                                       |       |
| Payment  by MeadWestvaco Corporation to defease long-term debt                                                        |       | $                                          | 161,930    |   |
| Contribution  of property, plant and equipment by MeadWestvaco Corporation                                            |       | $                                          | 863        |   |

 

*The accompanying notes are anintegral part of these financial statements.*

 

23

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

**PREDECESSOR**

**COMBINEDSTATEMENT OF CASH FLOWS****(Unaudited)**

 
| **In  thousands**                                                                                                   | ** ** | **Three Quarters Ended  September 30, 2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **Cash flows from operating  activities:**                                                                          |       |                                              |       |
| Net loss                                                                                                       |       | $                                                 | (49,119    | ) |
| Adjustments to reconcile net loss  to net cash provided by operating activities: |       |                                              |       |
| Depreciation and amortization                                                                             |       | 172,045                                           |       |
| Deferred income taxes                                                                                     |       | (30,205                                           | )          |
| Loss on sales of assets,  net                                                                   |       | 2,792                                             |       |
| Investee  – earnings and distributions                                                                         |       | 4,339                                             |       |
| Changes in operating  assets and liabilities:                                                             |       |                                              |       |
| Accounts receivable,  net                                                                                           |       | (27,603                                           | )          |
| Inventories                                                                                                         |       | 57,237                                            |       |
| Other current assets                                                                                                |       | (3,219                                            | )          |
| Other long-term assets                                                                                              |       | (2,748                                            | )          |
| Accounts payable                                                                                                    |       | 36,072                                            |       |
| Accrued expenses                                                                                                    |       | 7,631                                             |       |
| Other liabilities                                                                                                   |       | 4,317                                             |       |
| Net cash provided  by operating activities                                                           |       | 171,539                                           |       |
|                                                                                                                |       |                                              |       |
| **Cash flows from investing  activities:**                                                                          |       |                                              |       |
| Additions  to property, plant and equipment                                                                         |       | (54,113                                           | )          |
| Proceeds  from sale of property, plant and equipment                                                                |       | 137                                               |       |
| Net  cash used in investing activities                                                                              |       | (53,976                                           | )          |
|                                                                                                                |       |                                              |       |
| **Cash flows from financing  activities:**                                                                          |       |                                              |       |
| Repayment  of long-term debt                                                                                        |       | (5,900                                            | )          |
| Net  transactions with MeadWestvaco Corporation                                                                     |       | (111,663                                          | )          |
| Net  cash used in financing activities                                                                              |       | (117,563                                          | )          |
|                                                                                                                |       |                                              |       |
| **Increase (decrease) in cash and  cash equivalents**                                                               |       | $                                                 | —     |   |

 

*The accompanying notes are anintegral part of these financial statements.*

 

24

----

 

**PRINTING AND WRITING PAPERS BUSINESS**

**(ABUSINESS OF MEADWESTVACO CORPORATION)**

 

**NOTES TOUNAUDITED COMBINED FINANCIAL STATEMENTS (IN THOUSANDS)**

 

**1.  Description of Business and Basis ofPresentation**

 

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” or the “Predecessor”), which was purchased fromMeadWestvaco Corporation (“MeadWestvaco”) by NewPage Corporation (the “Acquisition”)pursuant to the Acquisition, which was funded on May 2, 2005, but deemedto have been completed on April 30, 2005. The Business consists of the historical Papers business segment ofMeadWestvaco adjusted to exclude MeadWestvaco’s investment in NorthwoodPanelboard and the operations of Specialty Papers, which is a distinct anddifferent business under separate management that will not be purchased.  The Business is engaged in the manufacturing,marketing and distribution of coated, uncoated and carbonless papers, which aremanufactured at five domestic mills.

 

These combined financialstatements are intended to present the historical results of the Businessoperations during each respective period. As such, these combined financial statements include allocations ofcertain expenses, as well as assets and liabilities historically maintained byMeadWestvaco and not recorded in the accounts of the Business.  The Business and MeadWestvaco management believesuch allocations have been made on a reasonable basis.  However, these combined financial statementsmay not necessarily be indicative of the results that would have been obtainedif the Business had operated as a separate entity during the periods presented.

 

The combined equity ofthe Business comprises the excess of the Business’ assets over itsliabilities.  Combined equity is affectedby the Business’ operating results, expense allocations from MeadWestvaco andcash transfers between the Business and MeadWestvaco, including settlement ofintercompany transactions and amounts paid or received relating to interest andincome taxes, as MeadWestvaco manages all treasury activities of the Business.

 

These interim combinedfinancial statements have not been audited. However, in the opinion of management, all normal recurring adjustmentsnecessary to present fairly the financial position and the results ofoperations for the interim periods presented have been made.  These interim financial statements have beenprepared on the basis of accounting principles and practices generally acceptedin the United States of America (“GAAP”) applied consistently with those usedin the preparation of the Business’s annual financial statements for the yearended December 31, 2004.

 

Certain information and footnotedisclosures normally included in annual financial statements presented inaccordance with GAAP have been condensed or omitted.  The results of operations for interim periodsare not necessarily indicative of the results to be expected for the fullyear.  The accompanying financialstatements should be read in conjunction with the Business’s annual financialstatements and notes thereto for the year ended December 31, 2004,included in the registration statement on Form S-4, as filed on June 20,2005, as amended.

 

**Stock Options**

 

The Business measurescompensation cost for MeadWestvaco stock options issued to employees using theintrinsic value-based method of accounting in accordance with AccountingPrinciples Board Opinion No. 25, *Accounting for StockIssued to Employees*(“APB 25”). The Business adopted the disclosure requirements of SFAS No. 148, *Accounting for Stock-Based Compensation – Transition and Disclosure.*  If compensation cost for MeadWestvaco stockoptions had been determined based on the fair value method of SFAS No. 123,*Accounting for Stock-Based Compensation,*the Business’s pro forma net loss would have been as follows:

 

25

----

 
| ** **                                                                                                                                                   | ** ** | **Four Months Ended  April 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                                                                   | ** ** | **(As Restated)**                          | ** ** |
| Net loss—as reported                                                                                                                                    |       | $                                          | (7,717     | ) |
| Add:  Stock-based employee compensation expense included in reported net income  (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 |       | 261                                        |       |
| Pro forma net loss                                                                                                                                           |       | $                                          | (7,978     | ) |

 
| ** **                                                                                                                                                   | ** ** | **Third Quarter Ended  September 30, 2004** | ** ** | **Three Quarters Ended  September 30, 2004** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|---------------------------------------------------|------------|
| Net income  (loss)—as reported                                                                                                                     |       | $                                                | 9,892      |                                              | $          | (49,119 | ) |
| Add:  Stock-based employee compensation expense included in reported net income  (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 |       | 197                                              |       | 575                                               |       |
| Pro forma net income  (loss)                                                                                                                  |       | $                                                | 9,695      |                                              | $          | (49,694 | ) |

 

**2.  Restatement of Previously Issued FinancialStatements**

 

The condensed combined statements of operations forthe four months ended April 30, 2005, have been restated to reflect theloss on the defeasance of debt by MeadWestvaco in connection with theAcquisition. The restatement reflects an increase in interest expense of$17,776 ($11,283, net of tax) to record the premium paid as an expense of theBusiness. The restatement was required as the accounting for the defeasance of debtfor these separate company financial statements should have included the costsof the defeasance in the period ended April 30, 2005, since the debt wasrelated to the Business. The condensed combined financial statements have beenfurther adjusted for the following: an income tax adjustment of $1,215 toincrease income tax benefit for the reconciliation of the income taxesreflected on the 2004 tax return of the Predecessor to the income taxesreflected in the condensed combined financial statements; and the immaterialeffect of the adjustment of $305 for other corporate allocations and accountingadjustments, including a restructuring charge reversal of $936. Conformingchanges have also been made to the combined statement of cash flows for thefour months ended April 30, 2005. Changes have also been made to theaccompanying notes to the condensed combined financial statements. Thefollowing table summarizes restated amounts within the 2005 combined statementsof operations and cash flows:

 

26

----

 
| ** **                                                       | ** ** | **Four Months Ended  April 30, 2005** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                       | ** ** | **As Reported**                            | ** ** | **As Restated** | ** ** |
| Statement of  Operations:                                        |       |                                       |       |   |   |
| Net sales                                                   |       | $                                          | 715,889    |   | $ | 716,226 |   |
| Cost of sales                                          |       | 672,034                                    |       | 673,286 |   |
| Selling,  general and administrative expenses     |       | 39,445                                     |       | 39,493 |   |
| Interest expense                                                 |       | 2,781                                      |       | 20,557 |   |
| Other income, net                                      |       | (1,122                                     | )          | (1,253 | ) |
| Income (loss) before  income taxes and equity income in investee |       | 2,751                                      |       | (15,857 | ) |
| Income tax expense  (benefit)                                    |       | 776                                        |       | (7,459 | ) |
| Equity income in  investee                                       |       | 681                                        |       | 681 |   |
| Net income (loss)                                                |       | $                                          | 2,656      |   | $ | (7,717 | ) |
|                                                             |       |                                       |       |   |   |
| Combined Statements of  Cash Flows:                              |       |                                       |       |   |   |
| Net cash provided by  operating activities                       |       | 1,471                                      |       | 1,602 |   |
| Net cash used in  investing activities                           |       | (18,768                                    | )          | (17,356 | ) |
| Net cash provided by  financing activities                       |       | 17,297                                     |       | 15,754 |   |

 

**3.  Restructuring**

 

**Four months ended April 30,2005**

 

During the four monthsended April 30, 2005, the Business recorded total pretax adjustments ofexpense of $169 for employee separation costs, all of which was recorded withincost of sales.

 

**Quarter ended September 30,2004**

 

For the quarter ended September 30,2004, the company recorded total pretax adjustments of expense of $(1,000) foremployee separation costs, all of which were recorded within cost of sales.

 

**Three quarters ended September 30,2004**

 

During the first threequarters ended September 30, 2004, the company recorded total pretaxadjustments of expense of $(575) for employee separation costs, of which $(600)and $25 were recorded within cost of sales and selling, general andadministrative expenses, respectively.

 

**Prior periods**

 

As part of the company’splanned integration strategy and various restructuring activities, includingthe integration of Westvaco’s operations into MeadWestvaco, the Business hadrestructuring charges in 2002 and 2003 for the separation benefits of anaggregate of approximately 340 employees. As of December 31, 2004, all of the affected employees had beenseparated.

 

27

----

 

**Summary of other restructuringcharges, other than Westvaco and Mead merger related**

 

The activity related tothe plans above was as follows for the four months ended April 30, 2005:

 
| ** **                                                                       | ** ** | **Employee  costs** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------|------------|
| Balance of  related accruals at December 31, 2004       |       | $                   | 852        |   |
| Add:  adjustments  in 2005                                             |       | 169                 |       |
| Less:  payments                                                        |       | 533                 |       |
| Balance of related accruals at April 30, 2005 |       | $                   | 488        |   |

 

The activity related tothe plans above was as follows for the first three quarters of 2004:

 
| ** **                                                                           | ** ** | **Employee  costs** | ** ** | **Other  costs** | ** ** | **Total** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------|------------|------------------|------------|-----------|------------|
| Balance of related accruals at December 31, 2003  |       | $                   | 3,904      |             | $          | (8        | )          | $ | 3,896 |   |
| Add:  adjustments  in 2004                                                 |       | (575                | )          | —           |       | (575      | )          |
| Less:  payments                                                            |       | 2,710               |       | (8               | )          | 2,702     |       |
| Balance of related accruals at September 30, 2004 |       | $                   | 619        |             | $          | —    |       | $ | 619 |   |

 

**Westvaco and Mead merger-relatedrestructuring**

 

In 2002 MeadWestvacoestablished accruals relating primarily to employee separation costs, facilityclosure costs and other actions relating to the integration of certain Meadoperations into MeadWestvaco.  Costsassociated with these integration actions were recognized as a component ofpurchase accounting, resulting in the establishment of liabilities andadjustments to goodwill.  Accordingly,these costs did not affect 2002 earnings and were not allocated tosegments.  The integration actionsincluded the closure of three older, high-cost coated paper machines andrelated facilities at the Chillicothe, Ohio, paper mill and the integration ofthe Mead and Westvaco paper groups.

 

**Summary of Westvaco and Meadmerger-related restructuring**

 

The activity in theaccrued liability related to the plan described above was as follows for thefour months ended April 30, 2005:

 
| ** **                                                                          | ** ** | **Other costs**   | ** ** | **Other costs**   | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| ** **                                                                          | ** ** | **(As Reported)** | ** ** | **(As Restated)** | ** ** |
| Balance of related accruals at December 31, 2004 |       | $                 | 1,326      |              | $          | 1,326 |   |
| Add:  charge for adjustment to accrual                                              |       | —            |       | 121               |       |
| Less:  payments                                                           |       | 1,326             |       | 48                |       |
| Balance of related accruals at April 30, 2005    |       | $                 | —     |              | $          | 1,399 |   |

 

The activity in theaccrued liability related to the plan described above was as follows for thefirst three quarters of 2004:

 
| ** **                                              | ** ** | **Other  costs** | ** ** |
|---------------------------------------------------------|------------|------------------|------------|
| Balance of related  accruals at December 31, 2003  |       | $                | 1,591      |   |
| Less:  payments                                         |       | 132              |       |
| Balance of related  accruals at September 30, 2004 |       | $                | 1,459      |   |

 

28

----

 

**4.  Inventories and Property, Plant andEquipment**
| ** **                                 | ** ** | **December 31, 2004** | ** ** |
|--------------------------------------------|------------|----------------------------|------------|
|                                       |       |                       |       |
| Raw materials                              |       | $                          | 52,840     |   |
| Production materials,  stores and supplies |       | 68,676                     |       |
| Finished and in-process  goods             |       | 199,893                    |       |
| Total  inventories                         |       | $                          | 321,409    |   |

 

Property, plant andequipment is net of accumulated depreciation of $1,702,617 at December 31,2004.

 

**5.  Goodwill and Other Intangible Assets**

 

Unless otherwise deemednecessary by events or changes in circumstances, the Business performs itsannual impairment review of goodwill during the fourth quarter of each yearunder the guidance of SFAS No. 142, *Goodwill and OtherIntangible Assets.*

 

Intangible assets subject to amortization, included inother assets, include customer contracts and lists.  The gross carrying amount for theseidentifiable intangible assets was $49,550 at December 31, 2004.  Accumulated amortization associated withthese identifiable intangible assets was $19,399 at December 31, 2004.

 

The Business recordedamortization expense of $1,785, $1,980 and $5,369 for the four months ended April 30,2005 and the quarter and three quarters ended September 30, 2004,respectively, relating to those identifiable assets, subject to amortization.

 

**6.  Long-term Debt**

 

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 $17,776 on the defeasance of the debt and write-off ofunamortized financing costs.

 

**7.  Employee Retirement and PostretirementBenefits**

 

The employees of theBusiness are participants in various defined benefit pension and postretirementplans sponsored by MeadWestvaco, and the assets and liabilities are combinedwith those related to other MeadWestvaco businesses.  Similarly, MeadWestvaco manages its domesticpostretirement benefit plans on a combined basis, and claims data and liabilityinformation related to the Business is aggregated and combined, by plan, withthose related to other MeadWestvaco businesses. As a result, no assets or liabilities are reflected on the Business’scombined balance sheet, and pension and postretirement expense for the Businesshas been determined on a multi-employer plan basis.

 

Pension costs recorded bythe Business with respect to defined benefit pension plans for the four monthsended April 30, 2005 and the quarter and three quarters ended September 30,2004 were approximately $7,129, $4,986 and $14,959, respectively.

 

The employees of theBusiness are also eligible to participate in defined contribution benefit planssponsored by MeadWestvaco.  Under theterms of the defined contribution benefit plans, participant contributions maybe directed into a number of investment options.  MeadWestvaco matching contributions are madeto a fund that invests in MeadWestvaco shares. During the four months ended April 30,2005 and the quarter and three quarters ended September 30, 2004, theBusiness incurred expenses of approximately $3,695, $2,615 and $8,045,respectively, for matching contributions to the defined contribution benefitplans.

 

Upon retirement,MeadWestvaco provides life insurance and other post retirement benefits forcertain MeadWestvaco retirees, including certain Business employees.  MeadWestvaco also funds certain medicalbenefits on a current basis with retirees paying a portion of the costs.  Costs of providing these benefits to bothactive and retired employees of the Business

 

29

----

 

were approximately$18,200, $13,800 and $40,600 for the four months ended April 30, 2005 andthe quarter and three quarters ended September 30, 2004, respectively.

 

**8.  Income Tax Provision**

 

The Business’s effectiveincome tax rate for the four months ended April 30, 2005, is significantlydifferent from the statutory rates in effect as a result of a change inestimate of income taxes related to the reconciliation of the income taxesreflected on the 2004 tax return of the Predecessor with the income taxprovision reflected in the condensed combined financial statements at December 31,2004.

 

**9.  Segment Information**

 

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

 

The Coated Paper Systemis engaged in the manufacturing, marketing and distribution of coated papersprimarily used for commercial printing, magazines, catalogs, textbooks, andlabels.  The products in this segmentinclude:  coated papers, uncoated papersproduced in Michigan and Kentucky, and market pulp production.  This segment’s products are manufactured atfour domestic mills and supported by multiple distribution and convertinglocations.

 

The Carbonless PaperSystem is engaged in the manufacturing, marketing and distribution ofcarbonless and technical papers used primarily for business forms.  The products in this segment include:  value-added carbonless papers, uncoatedpapers, and specialty papers.  Thissegment’s products are manufactured at one domestic mill and one off-sitecoating facility.

 

The segments are measuredon earnings before taxes and extraordinary items.  The segments follow the same accountingprinciples described in the *Summary of SignificantAccounting Policies*, as included in the Business’s annual financialstatements for the year ended December 31, 2004.  Sales between the segments are transactedbased on market prices. There are no operations, including long-lived assets,outside of the United States.

 
| ** **                                 | ** ** | **Trade**         | ** ** | **Segment**       | ** ** |
|--------------------------------------------|------------|-------------------|------------|-------------------|------------|
| **Four  Months Ended April 30, 2005** | ** ** | **Sales**         | ** ** | **Profit (Loss)** | ** ** |
| ** **                                 | ** ** | **(As Restated)** | ** ** | **(As Restated)** | ** ** |
| Coated Paper                               |       | $                 | 581,203    |              | $          | (5,244 | ) |
| Carbonless Paper                           |       | 135,023           |       | (9,549            | )          |
| Total                                      |       | $                 | 716,226    |              | $          | (14,793 | ) |

 
| ** **                                  | ** ** | **Trade** | ** ** | **Segment**       | ** ** |
|---------------------------------------------|------------|-----------|------------|-------------------|------------|
| **Third  Quarter Ended September 30, 2004** | ** ** | **Sales** | ** ** | **Profit (Loss)** | ** ** |
| Coated Paper                                |       | $         | 485,923    |              | $          | 17,710 |   |
| Carbonless Paper                            |       | 101,268   |       | (1,789            | )          |
| Total                                       |       | $         | 587,191    |              | $          | 15,921 |   |

 
| ** **                                   | ** ** | **Trade** | ** ** | **Segment**       | ** ** |
|----------------------------------------------|------------|-----------|------------|-------------------|------------|
| **Three  Quarters Ended September 30, 2004** | ** ** | **Sales** | ** ** | **Profit (Loss)** | ** ** |
| Coated Paper                                 |       | $         | 1,343,015  |              | $          | (51,219 | ) |
| Carbonless Paper                             |       | 299,589   |       | (27,839           | )          |
| Total                                        |       | $         | 1,642,604  |              | $          | (79,058 | ) |

 

A loss of $17,776 related tothe defeasance of debt prior to the Acquisition is included in the Coated Papersegment loss for the four months ended April 30, 2005.

 

30

----

 

**10.  Environmental and Legal Matters**

 

The Business has beennotified by the U.S. Environmental Protection Agency (the “EPA”) or by variousstate or local governments that it may be liable under federal environmentallaws or under applicable state or local laws with respect to the cleanup ofhazardous substances at sites previously operated or used by the Business.  The Business is currently named as apotentially responsible party (“PRP”) or has received third-party requests forcontribution under the Comprehensive Environmental Response, Compensation andLiability Act (CERCLA) and similar state or local laws with respect to a numberof sites.  There are other sites whichmay contain contamination or which may be potential Superfund sites, but forwhich the Business has not received any notice or claim.  The potential liability for all these siteswill depend upon several factors, including the extent of contamination, themethod of remediation, insurance coverage and contribution by other PRPs.  The Business regularly evaluates itspotential liability at these various sites. At April 30, 2005, the Business has recorded liabilities ofapproximately $2.2 million (restated) for estimated potential cleanup costsbased upon its close monitoring of ongoing activities and its past experiencewith these matters.  The Businessbelieves that it is reasonably possible that costs associated with these sitesmay exceed amounts of recorded liabilities by an amount that could range froman insignificant amount to as much as $2 million. This estimate is less certainthan the estimate upon which the environmental liabilities 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 anygiven period or periods, however, it is possible such proceedings or matterscould have a material effect on the results of operations.

 

**11.  Related Party Transactions**

 

Transactions between theBusiness and other business segments of MeadWestvaco commonly occur in thenormal course of business.  In addition,the Business had purchases from MeadWestvaco’s Forestry Operations of $2,491, $1,721and $4,197 for the four months ended April 30, 2005 and the quarter and threequarters ended September 30, 2004, respectively.  Sales to other MeadWestvaco business segmentswere $10,238, $7,786 and $19,863 for the four months ended April 30, 2005and the quarter and three quarters ended September 30, 2004,respectively.  Purchases from otherMeadWestvaco business segments were $1,459, $536 and $1,907 for the four monthsended April 30, 2005 and the quarter and three quarters ended September 30,2004, respectively.

 

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 onrelative headcount for people-related costs, the Business’s assets as apercentage of total MeadWestvaco assets, the Business’s sales as a percentageof total MeadWestvaco sales, or by specific identification of costs directlyassociated with the Business’s operations. The Business and MeadWestvaco management believe such allocations havebeen made on a reasonable basis.  Thesecosts are included in cost of sales or selling, general and administrativeexpenses, consistent with the MeadWestvaco classification, in the accompanyingcombined statements of operations.  Costsallocated by or charged by MeadWestvaco to the Business for services performedby MeadWestvaco on behalf of the Business totaled $11,000, $7,500 and $28,542 forthe four months ended April 30, 2005 and the quarter and three quartersended September 30, 2004, respectively.

 

In addition to the above,the Business shares facilities and related costs (utilities and services) withother business segments of MeadWestvaco. Costs charged by the Business to MeadWestvaco for shared facilitiestotaled $922, $679 and $2,037 for the four months ended April 30, 2005 andthe quarter and three quarters ended September 30, 2004,respectively.  These charges were based onestimates of actual usage for utilities and head count for other services andare recorded as a reduction of the related cost.

 

* * * * *

 

31

----

 

## **ITEM 2.**                                                     MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussionand analysis of our financial condition and results of operations coverscertain periods prior to the acquisition. Accordingly, the discussion andanalysis of historical operations of our predecessor during the periods priorto the acquisition do not reflect the significant effect that the accountingfor the acquisition will have on the reporting of our financial condition andresults of operations. The following discussion of our financial condition andresults of operations should be read in conjunction with our financialstatements and notes thereto included elsewhere in this Quarterly Report. Youshould also read the following discussions in conjunction with risk factors andforward-looking statements (including those factors specifically relevant tothe operations and financial condition of NewPage Corporation for periodssubsequent to the acquisition) contained in the Registration Statement on Form S-4,as filed on June 20, 2005, as amended.

 

This Quarterly Reportcontains “forward-looking statements.” All statements other than statements ofhistorical fact are “forward-looking statements” for purposes of federal andstate securities laws. Forward-looking statements may include the words “may,” “will,”“plans,” “estimates,” “anticipates,” “believes,” “expects,” “intends” andsimilar expressions. Although we believe that such statements are based onreasonable assumptions, these forward-looking statements are subject tonumerous factors, risks and uncertainties that could cause actual outcomes andresults to be materially different from those projected or assumed in ourforward-looking statements. These factors, risks and uncertainties include,among others, the following: our substantial level of indebtedness; changes inthe supply and/or demand and/or prices for our products; the activities ofcompetitors; changes in significant operating expenses, including raw materialand energy costs; changes in currency exchange rates; changes in the availabilityof capital; general economic and business conditions in the United States andelsewhere in the world; changes in the regulatory environment, includingrequirements for enhanced environmental compliance; and our ability to operateas a stand-alone business.

 

Given these risks anduncertainties, we caution you not to place undue reliance on forward-lookingstatements. We undertake no obligation to update or revise any forward-lookingstatements, either to reflect new developments, or for any other reason, exceptas required by law.

 

## **Company Background**

 

On May 2, 2005, weacquired the Printing and Writing Papers Business of MeadWestvaco Corporation. Weare the largest coated paper manufacturer in North America based on productioncapacity according to industry publications. Coated paper is used primarily inmedia and marketing applications, including corporate annual reports, high-endadvertising brochures, magazines and catalogs and direct mail advertising. Ourlargest product 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.

 

32

----

 

## **Net Sales**

 

Our net sales are a functionof the 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 of macro-economicfactors, such as supply and demand, that are largely out of our control. Pricehas historically been substantially more variable than volume and can changesignificantly over relatively short time periods. Coated paper purchasestypically are made by customers pursuant to purchase orders on an as-neededbasis, and generally are not made under contracts that provide for fixed pricesor minimum volume commitments. Uncoated paper and pulp prices historically havenot materially affected our operating results because uncoated paper and pulphave not comprised a material portion of our net sales.

 

Carbonless paper prices have historically been lessvariable than our coated paper prices, and in some cases prices are fixed bycontract. Because of competition from competing products and technologies,carbonless paper markets have been declining and we expect carbonless paper tocontribute a smaller percentage of our net sales in the future. We have supplyagreements with several of our carbonless paper customers.

 

Our earnings are sensitive to price changes for ourprincipal products, with price changes in coated paper having the greatesteffect. Fluctuations in paper prices (and coated paper prices in particular)historically have had a direct effect on our results for several reasons:

 

•                                          Marketprices for paper products are a function of supply and demand, factors overwhich we have limited control.

 

•                                          Marketprices for paper products typically are not directly affected by raw materialcosts or other costs of sales, and consequently we have limited ability to passthrough increases in our costs to our customers absent increases in the marketprice.

 

•                                          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 our cost of sales arechemicals, wood, energy, labor, maintenance and depreciation, amortization anddepletion. Costs for commodities, including chemicals, wood and energy, are themost variable component of our cost of sales because the prices of many of thecommodities 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.

 

33

----

 

### ***Energy***

 

We produce a large portion of our energy requirements,historically purchasing approximately 40% of our energy needs from third-partysuppliers. The energy we purchase from third-party suppliers consists ofelectricity and fuel used by us, primarily consisting of natural gas and coal,to create some of our own energy. We expect energy costs to remain volatile overthe foreseeable future.

 

### ***Laborcosts***

 

Labor costs include wages, salary and benefit expensesattributable to our mill personnel. Mill employees at a non-managerial levelare compensated on an hourly basis in accordance with our union contracts.Management employees at our mills are compensated on a salaried basis. Wages,salary and benefit expenses included in cost of sales do not vary significantlyover the short term. The size of our hourly labor force is not expected toincrease. In addition, we have not experienced significant labor shortages.

 

### ***Maintenance***

 

Maintenance expense includes day-to-day maintenance,equipment repairs and larger maintenance projects, such as paper machineshutdowns for annual maintenance. Day-to-day maintenance expenses have notvaried significantly from year to year. Larger maintenance projects andequipment expenses can produce year to year fluctuations in our maintenanceexpenses. Maintenance spending is typically highest in the second quarter ofeach year as a result of scheduled annual maintenance shutdowns occurringduring that quarter. In conjunction with our annual maintenance shutdowns, wehave incidental incremental costs that are primarily comprised of unabsorbedfixed costs from lower production volumes and other incremental costs forpurchased materials and energy that would otherwise be produced as part ofnormal operations of our mills.

 

### ***Depreciation,amortization and depletion***

 

Depreciation, amortization and depletion expense forour assets associated with our mill operations is included in cost of sales.Depreciation and amortization expense for our assets associated with ournon-mill related assets is included in selling, general and administrativeexpense. The depletion expense portion of our cost of sales relates to thedepletion of capitalized timber assets that we purchase. Our depreciation,amortization and depletion expense will be lower after the acquisition as aresult of the lower asset bases assigned to property, plant and equipment.

 

## **Selling, Generaland Administrative (“SG&A”) Expenses**

 

The principal components of our SG&A expenses arewages, salaries and benefits for our office personnel at our headquarters andour sales force, travel and entertainment expenses, advertising expenses,expenses relating to our information technology systems and research anddevelopment expenses. Our SG&A expenses have not historically fluctuatedsignificantly from year to year. We expect that our SG&A expenses(excluding transitional costs related to the acquisition) will decrease ascompared to prior to the acquisition as a result of the elimination ofcorporate allocations that were charged by MeadWestvaco that are not related toour business as a stand-alone company, partially offset

 

34

----

 

by an increase in SG&A expenses that we expect toincur directly as a stand-alone company, such as costs for informationtechnology, legal and finance support and human resources.

 

## **Interest**

 

MeadWestvaco only allocated interest expense to ourpredecessor for borrowings specifically related to certain mill operations.These borrowings were repaid prior to the acquisition or were retained byMeadWestvaco. Our interest expense will be substantially higher as a result ofthe financing arrangements related to the acquisition.

 

## **Taxes**

 

For periods prior to the acquisition, our predecessorwas included in the consolidated income tax returns of MeadWestvaco. Incometaxes have been presented based on a calculation of the income tax benefit wewould have generated if we had operated as a separate taxpayer. However, pursuantto the acquisition purchase agreement, any prior tax benefits will be retainedby MeadWestvaco. For federal income tax purposes, the acquisition is beingtreated as an asset purchase and we generally will have a tax basis in theacquired assets equal to the purchase price. We have not recorded a deferredtax benefit for the amount of our loss before income taxes subsequent to theacquisition since it is more likely than not that we will not realize thisbenefit, as defined in SFAS No. 109, as a result of the negative evidencepresented by our predecessor’s history of losses over the past three years.

 

## **Results ofOperations**

 

The following discussions of the combined results ofoperations are based on the combination of the Printing and Writing Papers Businessof MeadWestvaco Corporation and our post-acquisition results. Accordingly, theresults of operations for historical as well as future periods may not becomparable to the prior periods. For the 2005 results shown, our actual resultsfor the five months ended September 30, 2005, are included in the total.

 

35

----

 

### ***ThirdQuarter 2005 Compared to Third Quarter 2004***

 
| ** **                                                                          | ** ** | **Successor –  NewPage  Corporation  Third  Quarter  Ended  Sept. 30,  2005** | ** ** | **Predecessor  Third  Quarter  Ended  Sept. 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(dollars  in millions)**                                                          | ** ** | **$**                                                                              | ** ** | **%**                                                   | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                                                                           |       | 617.6                                                                              |       | 100.0                                                   |       | 587.2 |   | 100.0 |   |
| Cost of sales                                                                       |       | 555.6                                                                              |       | 90.0                                                    |       | 537.2 |   | 91.5 |   |
| Selling, general and  administrative expense                                        |       | 31.1                                                                               |       | 5.0                                                     |       | 33.3 |   | 5.7 |   |
| Interest expense                                                                    |       | 36.8                                                                               |       | 6.0                                                     |       | 2.3 |   | 0.4 |   |
| Other (income) expense                                                              |       | (27.2                                                                              | )          | (4.4                                                    | )          | (0.8 | ) | (0.2 | ) |
| Income  before income taxes and equity in earnings of investee                      |       | 21.3                                                                               |       | 3.4                                                     |       | 15.2 |   | 2.6 |   |
| Income tax expense                                                                  |       | 0.1                                                                                |       | 0.0                                                     |       | 5.8 |   | 1.0 |   |
| Equity in earnings of  investee                                                     |       | 0.7                                                                                |       | 0.1                                                     |       | 0.5 |   | 0.1 |   |
| Net income                                                                          |       | 21.9                                                                               |       | 3.5                                                     |       | 9.9 |   | 1.7 |   |
|                                                                                |       |                                                                               |       |                                                    |       |   |   |   |   |
| **Supplemental Information:**                                                       |       |                                                                               |       |                                                    |       |   |   |   |   |
| Earnings  before interest, taxes, depreciation, depletion and amortization (EBITDA) |       | 101.3                                                                              |       |                                                    |       | 76.8 |   |   |   |
| Net cash provided by  (used in) operating activities                                |       | 98.7                                                                               |       |                                                    |       | 81.1 |   |   |   |

 

Net sales for the third quarter of 2005 were $617.6million compared to $587.2 million for the third quarter of 2004, an increaseof 5.2%. The increase was largely the result of an increase in average coatedpaper prices to $878 per ton in the third quarter of 2005 from $814 per ton inthe third quarter of 2004 and higher sales volumes of uncoated papers in thethird quarter of 2005 partially offset by decreases in coated paper salesvolumes to 549,000 tons in the third quarter of 2005 from 569,000 tons in thethird quarter of 2004. The decrease in coated paper sales volume was largelycaused by a decrease in industry demand, which we believe was due to loweradvertising and promotional spending and customer inventory reductions. Duringthe third quarter of 2005 we took market-related downtime of 27,000 tons ofcoated paper and 2,000 tons of carbonless paper compared to no market-relateddowntime in the third quarter of 2004. The number of tons of market-relateddowntime is calculated by comparing actual results to planned production intons for each machine that is taken down. Planned production is based onhistorical production and includes relevant factors such as capitalimprovements and planned maintenance downtime.

 

Cost of sales for the third quarter of 2005 was $555.6million compared to $537.2 million for the third quarter of 2004, an increaseof 3.4%. The increase was primarily attributable to higher costs of wood,energy, and chemicals and market downtime partially offset by savings fromproductivity improvement initiatives, lower coated paper sales volume in the thirdquarter of 2005 and lower depreciation,

 

36

----

 

amortization and depletion expense. Depreciation,amortization and depletion expense decreased to $42.5 million in the thirdquarter of 2005 from $58.5 million for the third quarter of 2004 as a result oflower asset bases assigned to property, plant and equipment after theacquisition. Wood costs increased due to higher logistics costs for deliveriesto the mills and logging expenses, caused primarily from higher fuel costs. Energycosts have recently increased sharply as a result of temporarily lower industrysupply of natural gas and refined petroleum products. The increase in the costof chemicals was primarily driven by increases in latex prices, whichhistorically have been volatile, fluctuating with the price of crude oil, fromwhich they are derived. During 2004 and continuing into 2005, we have completedvarious productivity improvement initiatives consisting of programs for materialsubstitution, process efficiency enhancements and waste reduction programs,among others.

 

Our gross margin for the third quarter of 2005improved to 10.0%, compared to 8.5% for the third quarter of 2004. This was dueto higher sales prices, product mix improvements and productivity improvement initiativesoffset by higher wood, energy, and chemical costs and more market-relateddowntime in 2005.

 

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. During the third quarter of 2005 and 2004, our costs ofproduction included $119.0 million and $112.1 million for variouschemicals used in the manufacturing of paper, $74.6 million and $69.2 millionfor wood and $40.0 million and $34.6 million for purchased energy. During the thirdquarter of 2005 and 2004, our aggregate cost of chemicals amounted to $182 and$167 per ton of paper we produced. During the third quarter of 2005, wepurchased 2.0 million tons of wood at a weighted-average cost of $35 perton. During the third quarter of 2004, we purchased 2.0 million tons of woodat a weighted-average cost of $30 per ton. Electricity, natural gas and coal representedapproximately 35%, 28% and 25%, of our total third-party energy costs duringthe third quarter of 2005.

 

Maintenance expense at our mills totaled $54.8 millionand $53.3 million in the third quarter of 2005 and 2004. In conjunction withour annual maintenance shutdowns, we have incidental incremental costs for the thirdquarter of 2005 and 2004 of $1.1 million and $1.0 million that are primarilycomprised of unabsorbed fixed costs from lower production volumes and otherincremental costs for purchased materials and energy that would otherwise beproduced as part of normal operations of our mills.

 

Selling, general and administrative expenses were $31.1 millionfor the third quarter of 2005 compared to $33.3 million for the thirdquarter of 2004, a decrease of 6.5%. The decrease was a result of theelimination of corporate allocations that were charged to us by MeadWestvacothat are not directly related to our business, partially offset by an increasein SG&A expenses that we incurred directly as a stand-alone company, suchas costs for information technology, legal and finance support and humanresources. Included in 2005 are transitional costs, primarily professionalservices, of $5.0 million relating to the setup of our business as astand-alone company. We expect that the transitional costs will continue into2006 as we complete our information technology and human resources transitions.As a percentage of net sales, selling, general and administrative expenses decreasedin the third quarter of 2005 to 5.0% from 5.7% in the third quarter of 2004.

 

37

----

 

Other (income) expense for the third quarter of 2005primarily consists of an unrealized gain of $25.8 million determined basedon the mark-to-market value of a purchased option contract. As of May 2,2005, we entered into a commodity basket option contract as part of theTransactions and paid a premium of $72.0 million for the contract. Thiscommodity basket option contract is a purchased basket of options on a mix ofnatural gas, market pulp and the Euro. While the option contract was designedto help protect against decreases in the North American prices of coated paperby reference to the prices of natural gas and market pulp, and materialdecreases in the value of the Euro relative to the U.S. dollar, there is noassurance that the commodity basket option contract will actually protect usagainst any such price decreases or that the historical level of correlationwill continue during the three-year period of the contract. Because of theuncertainty of future correlation, we do not apply hedge accounting treatmentfor this contract and are recording changes in the fair value of the contractin other (income) expense, which may result in significant variability inearnings. We recognize the unwind value of derivative financial instruments asthe fair value. This means that the fair value for purchased contracts would beequal to the amount that we could receive from the counterparty to settle theirobligation. Fair value at any point in time is based upon periodic confirmationof values received from the counterparty. The remaining amounts consistprimarily of agent commissions for fiber sales.

 

EBITDA was $101.3 million and $76.8 million for the thirdquarter of 2005 and 2004. The increase in EBITDA was primarily a result of anunrealized gain on the commodity basket option contract, as well as highersales prices and productivity improvements made over the last twelve monthsoffset by higher costs for energy, wood and chemicals. Net cash provided by(used in) operating activities was $98.7 million and $81.1 million for thethird quarter of 2005 and 2004. The change in net cash provided by operatingactivities was primarily a result of a greater decrease in inventory levels inthe third quarter of 2005 compared to the third quarter of 2004. See *Reconciliation of Net Cash Provided by (Used in) Operating Activitiesto EBITDA* below for further information on the use of EBITDA as ameasurement tool.

 

38

----

 

### ***FirstThree Quarters 2005 Compared to First Three Quarters 2004***

### *** ***

| ** **                                                                          | ** ** | **Successor -  NewPage  Corporation  Five Months  Ended  Sept. 30,  2005** | ** ** | **Predecessor  Four Months  Ended  April 30,  2005** | ** ** | **Combined  Successor and  Predecessor  First  Three  Quarters  Ended  Sept. 30,  2005** | ** ** | **Predecessor  First  Three  Quarters  Ended  Sept. 30,  2004** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                          | ** ** | ** **                                                                 | ** ** | ** **                                                | ** ** | **(As Restated)**                                                                        | ** ** | ** **                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **(dollars  in millions)**                                                          | ** ** | **$**                                                                      | ** ** | **%**                                                     | ** ** | **$**                                                                                    | ** ** | **%**                                                           | ** ** | **$** | ** ** | **%** | ** ** | **$** | ** ** | **%** | ** ** |
| Net sales                                                                           |       | 969.3                                                                      |       | 100.0                                                     |       | 716.2                                                                                    |       | 100.0                                                           |       | 1,685.5 |   | 100.0 |   | 1,642.6 |   | 100.0 |   |
| Cost of sales                                                                       |       | 889.6                                                                      |       | 91.8                                                      |       | 673.3                                                                                    |       | 94.0                                                            |       | 1,562.9 |   | 92.7 |   | 1,623.0 |   | 98.8 |   |
| Selling,  general and administrative expense                                        |       | 50.8                                                                       |       | 5.2                                                       |       | 39.5                                                                                     |       | 5.5                                                             |       | 90.3 |   | 5.4 |   | 96.6 |   | 5.9 |   |
| Interest expense                                                                    |       | 72.6                                                                       |       | 7.5                                                       |       | 20.6                                                                                     |       | 2.9                                                             |       | 93.2 |   | 5.5 |   | 7.1 |   | 0.4 |   |
| Other (income) expense                                                              |       | (8.2                                                                       | )          | (0.8                                                      | )          | (1.3                                                                                     | )          | (0.2                                                            | )          | (9.5 | ) | (0.5 | ) | (2.7 | ) | (0.1 | ) |
| Income  (loss) before income taxes and equity in earnings of investee               |       | (35.5                                                                      | )          | (3.7                                                      | )          | (15.9                                                                                    | )          | (2.2                                                            | )          | (51.4 | ) | (3.1 | ) | (81.4 | ) | (5.0 | ) |
| Income tax expense  (benefit)                                                       |       | 0.2                                                                        |       | 0.0                                                       |       | (7.5                                                                                     | )          | (1.0                                                            | )          | (7.3 | ) | (0.5 | ) | (30.8 | ) | (1.9 | ) |
| Equity in earnings of  investee                                                     |       | 1.3                                                                        |       | 0.2                                                       |       | 0.7                                                                                      |       | 0.1                                                             |       | 2.0 |   | 0.1 |   | 1.5 |   | 0.1 |   |
| Net income (loss)                                                                   |       | (34.4                                                                      | )          | (3.5                                                      | )          | (7.7                                                                                     | )          | (1.1                                                            | )          | (42.1 | ) | (2.5 | ) | (49.1 | ) | (3.0 | ) |
|                                                                                |       |                                                                       |       |                                                      |       |                                                                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| **Supplemental Information:**                                                       |       |                                                                       |       |                                                      |       |                                                                                     |       |                                                            |       |   |   |   |   |   |   |   |   |
| Earnings  before interest, taxes, depreciation, depletion and amortization (EBITDA) |       | 108.7                                                                      |       |                                                      |       | 81.7                                                                                     |       |                                                            |       | 190.4 |   |   |   | 100.0 |   |   |   |
| Net  cash provided by (used in) operating activities                                |       | 110.0                                                                      |       |                                                      |       | 1.6                                                                                      |       |                                                            |       | 111.6 |   |   |   | 171.5 |   |   |   |

 

Net sales for the first three quarters of 2005 were $1,685.5million compared to $1,642.6 million for the first three quarters of 2004,an increase of 2.6%. The increase was largely the result of an increase inaverage coated paper prices to $872 per ton in the first three quarters of 2005from $785 per ton in the first three quarters of 2004. This increase was partiallyoffset by a decrease in coated paper sales volume to 1,495,000 tons in thefirst three quarters of 2005 from 1,621,000 tons in the first three quarters of2004. The decrease in coated paper sales volume was largely caused by a decreasein industry demand, which we believe was due to lower advertising spending andcustomer inventory reductions, and by a management decision to discontinuesales of certain low margin paper sold during the beginning of 2004. During thefirst three quarters of 2005 we took market-related downtime of 46,000 tons ofcoated paper and 11,000 tons of carbonless paper compared to market-relateddowntime in the first three quarters of 2004 of 27,000 tons of coated paper and10,000 tons of carbonless paper.

 

39

----

 

Cost of sales for the first three quarters of 2005 was$1,562.9 million compared to $1,623.0 million for the first three quartersof 2004, a decrease of 3.7%. The decrease was primarily attributable to savingsfrom productivity improvement initiatives, lower coated paper sales volume inthe first three quarters of 2005 and lower depreciation, amortization anddepletion expense offset by higher costs of wood, energy, and chemicals and marketdowntime. Depreciation, amortization and depletion expense decreased to $146.2million in the first three quarters of 2005 from $172.0 million for the first threequarters of 2004 as a result of lower asset bases assigned to property, plantand equipment after the acquisition. Wood costs increased due to higherlogistics costs for deliveries to the mills and logging expenses, caused primarilyfrom higher fuel costs. Energy costs have recently increased sharply as aresult of temporarily lower industry supply of natural gas and 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.

 

Our gross margin for the first three quarters of 2005improved to 7.3%, compared to 1.2% for the first three quarters of 2004. Thiswas due to higher sales prices, product mix improvements and productivityimprovement initiatives offset by higher wood, energy, and chemical costs andslightly more market-related downtime. We improved product and customer mix by sellinga more profitable mix of products to existing customers and discontinuing salesof certain low margin paper sold during the beginning of 2004.

 

During the first three quarters of 2005 and 2004, ourcosts of production included $357.4 million and $324.8 million for variouschemicals used in the manufacturing of paper, $230.1 million and $216.8 millionfor wood and $119.1 million and $104.1 million for purchased energy. During thefirst three quarters of 2005 and 2004, our aggregate cost of chemicals amountedto $182 and $166 per ton of paper we produced. During the first three quartersof 2005, we purchased 5.9 million tons of wood at a weighted-average costof $35 per ton. During the first three quarters of 2004, we purchased 6.1 milliontons of wood at a weighted-average cost of $33 per ton. Electricity, naturalgas and coal represented approximately 30%, 27% and 28%, respectively, of ourtotal third-party energy costs during the first three quarters of 2005.

 

Maintenance expense at our mills totaled $174.1 millionand $167.9 million in the first three quarters of 2005 and 2004. In conjunctionwith our annual maintenance shutdowns, we have incidental incremental costs forthe first three quarters of 2005 and 2004 of $8.5 million and $11.1 millionthat are primarily comprised of unabsorbed fixed costs from lower productionvolumes and other incremental costs for purchased materials and energy thatwould otherwise be produced as part of normal operations of our mills.

 

Selling, general and administrative expenses were $90.3million for the first three quarters of 2005 compared to $96.6 million for thefirst three quarters of 2004, a decrease of 6.6%. The decrease was a result ofthe elimination of corporate charges that were allocated to us by MeadWestvacothat are not related to our business, partially offset by an increase inSG&A expenses that we incurred directly as a stand-alone company, such ascosts for information technology, legal and finance support and humanresources. In addition, we incurred transitional costs of $7.2 million relatingto the setup of our business as a stand-alone business, including professionalservices and consulting costs related to information

 

40

----

 

technology, human resources and finance. We expectthat the transitional costs will continue into 2006 as we complete ourinformation technology and human resources transitions. As a percentage of netsales, selling, general and administrative expenses decreased in the first threequarters of 2005 to 5.4% from 5.9% in the first three quarters of 2004.

 

Other (income) expense for the first three quarters of2005 primarily consists of an unrealized gain of $5.8 million determined based onthe mark-to-market value of the purchased option contract. The remainingamounts consist primarily of agent commissions for fiber sales.

 

EBITDA was $190.4 million and $100.0 million for thefirst three quarters of 2005 and 2004. The increase in EBITDA was primarily aresult of higher sales prices and productivity improvements made over the lasttwelve months offset by lower sales volumes and higher costs for energy, woodand chemicals. Net cash provided by operating activities was $111.6 million and$171.5 million for the first three quarters of 2005 and 2004. The change in netcash provided by operating activities was primarily a result of an increase ininventory levels in the first three quarters of 2005 compared to a decrease ininventory levels in the first three quarters of 2004. See *Reconciliationof Net Cash Provided by (Used in) Operating Activities to EBITDA*below for further information on the use of EBITDA as a measurement tool.

 

### ***Reconciliationof Net Cash Provided by (Used in) Operating Activities to EBITDA***

### *** ***

EBITDA is not a measureof our liquidity under accounting principles generally accepted in the UnitedStates (“GAAP”), is not intended to represent cash flow from operations, asdefined under GAAP, and should not be used as an alternative to cash flow fromoperations as an indicator of liquidity. EBITDA is shown because it is aprimary component of certain covenants under our senior secured credit facilityand is a basis upon which our management assesses liquidity. In addition, ourmanagement believes EBITDA is useful to investors because it and similarmeasures are frequently used by securities analysts, investors and otherinterested parties in the evaluation of companies with substantial financialleverage. The use of EBITDA instead of cash flow from operations haslimitations as an analytical tool, and you should not consider it in isolation,or as a substitute for analysis of our results as reported under GAAP.

 

41

----

 

The following tablepresents a reconciliation of net cash provided by operating activities toEBITDA:

 
| ** **                                            | ** ** | **Third Quarter  Ended September 30,** | ** ** | **First Three Quarters  Ended September 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|
| **(dollars  in millions)**                            | ** ** | **2005**                                    | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net cash provided by  (used in) operating activities  |       | $                                           | 98.7       |                                               | $          | 81.1 |   | $ | 111.6 |   | $ | 171.5 |   |
| Cash interest expense                                 |       | 34.7                                        |       | 2.3                                                |       | 60.8 |   | 7.1 |   |
| Income tax expense  (benefit)                         |       | 0.1                                         |       | 5.8                                                |       | (7.4 | ) | (30.8 | ) |
| Income tax expense on  equity in earnings of investee |       | 0.0                                         |       | 0.2                                                |       | 0.4 |   | 0.8 |   |
| Loss on sale of assets                                |       | 0.0                                         |       | (1.2                                               | )          | (0.5 | ) | (2.8 | ) |
| Investee—earnings and  distributions             |       | (3.4                                        | )          | (1.5                                               | )          | (3.8 | ) | (4.3 | ) |
| Unrealized gain (loss)  on option contract            |       | 25.8                                        |       | 0.0                                                |       | 5.8 |   | 0.0 |   |
| Deferred income taxes                                 |       | 0.0                                         |       | 4.3                                                |       | 7.1 |   | 30.2 |   |
| Change in LIFO reserve                                |       | (5.8                                        | )          | 0.0                                                |       | (5.8 | ) | 0.0 |   |
| Equity award expense                                  |       | (0.3                                        | )          | 0.0                                                |       | (0.5 | ) | 0.0 |   |
| Changes in operating  assets and liabilities          |       | (48.5                                       | )          | (14.2                                              | )          | 22.7 |   | (71.7 | ) |
| EBITDA                                                |       | $                                           | 101.3      |                                               | $          | 76.8 |   | $ | 190.4 |   | $ | 100.0 |   |

 

### ***SegmentData***

### *** ***

The following table setsforth net sales and segment profit (loss) for our coated and carbonless papersegments:

 
| ** **                                             | ** ** | **Third Quarter  Ended September 30,** | ** ** | **First Three Quarters  Ended September 30,** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                             | ** ** | **2005**                                    | ** ** | **2004**                                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(dollars  in millions)**                             | ** ** | **Successor**                               | ** ** | **Predecessor**                                    | ** ** | **Combined  Successor and  Predecessor** | ** ** | **Predecessor** | ** ** |
| Net sales:                                             |       |                                        |       |                                               |       |   |   |   |   |
| Coated  paper                                          |       | $                                           | 507.1      |                                               | $          | 485.9 |   | $ | 1,367.1 |   | $ | 1,343.0 |   |
| Carbonless  paper                                      |       | 110.5                                       |       | 101.3                                              |       | 318.4 |   | 299.6 |   |
|                                                   |       | $                                           | 617.6      |                                               | $          | 587.2 |   | $ | 1,685.5 |   | $ | 1,642.6 |   |
|                                                   |       |                                        |       |                                               |       |   |   |   |   |
| Segment profit (loss)  (1):                            |       |                                        |       |                                               |       |   |   |   |   |
| Coated  paper                                          |       | $                                           | 29.6       |                                               | $          | 17.7 |   | $ | 49.1 |   | $ | (51.2 | ) |
| Carbonless  paper                                      |       | 3.0                                         |       | (1.7                                               | )          | (14.0 | ) | (27.8 | ) |
|                                                   |       | $                                           | 32.6       |                                               | $          | 16.0 |   | $ | 35.1 |   | $ | (79.0 | ) |
|                                                   |       |                                        |       |                                               |       |   |   |   |   |
| Segment depreciation,  amortization and depletion (2): |       |                                        |       |                                               |       |   |   |   |   |
| Coated  paper                                          |       | $                                           | 41.4       |                                               | $          | 46.6 |   | $ | 128.9 |   | $ | 136.3 |   |
| Carbonless  paper                                      |       | 1.1                                         |       | 11.9                                               |       | 17.3 |   | 35.7 |   |
|                                                   |       | $                                           | 42.5       |                                               | $          | 58.5 |   | $ | 146.2 |   | $ | 172.0 |   |

 

----

(1)   Segment profit(loss) includes pre-tax equity in earnings of investee and excludes interestexpense, taxes and certain corporate items that are included in other (income)expense.

(2)   Depreciation,amortization and depletion expense is not comparable across different periods asa result of lower asset bases assigned to property, plant and equipment afterthe acquisition.

 

42

----

 

### ***CoatedPaper***

### *** ***

Net sales for the coatedpaper segment were $507.1 million for the third quarter of 2005, compared to $485.9million for the third quarter of 2004, an increase of 4.3%. The increase wasdue to an increase in coated paper prices offset in part by a decrease in salesvolume. Average coated paper prices rose to $878 per ton in the third quarterof 2005 from $814 per ton in the third quarter of 2004; coated paper volumesdecreased to 549,000 tons in the third quarter of 2005 from 569,000 tons in thethird quarter of 2004. The decrease in sales volume was largely caused by afall off in industry demand, which we believe was due to lower advertising andpromotional spending and customer inventory reductions.

 

The coated paper segmentprofit was $29.6 million in the third quarter of 2005 compared to $17.7 millionin the third quarter of 2004. The increase in segment profitability wasprimarily due to improved pricing and product mix, cost improvement programsand lower depreciation, amortization and depletion offset in part by lowersales volumes, increased costs for chemicals, wood and energy and higher levelsof market-related downtime taken. We took market-related downtime in the thirdquarter of 2005 of 27,000 tons compared to no market-related downtime in the thirdquarter of 2004.

 

Net sales for the coatedpaper segment were $1,367.1 million for the first three quarters of 2005,compared to $1,343.0 million for the first three quarters of 2004, an increaseof 1.8%. The increase was due to an increase in coated paper prices offset inpart by a decrease in sales volume. Average coated paper prices rose to $872per ton in the first three quarters of 2005 from $785 per ton in the first threequarters of 2004; coated paper volumes decreased to 1,495,000 tons in the firstthree quarters of 2005 from 1,621,000 tons in the first three quarters of 2004.The decrease in sales volume was largely caused by a fall off in industry demand,which we believe was due to lower advertising and promotional spending andcustomer inventory reductions, and by a management decision to discontinuesales of certain low margin paper sold during the beginning of 2004.

 

The coated paper segmentprofit was $49.1 million in the first three quarters of 2005 compared to a lossof $51.2 million in the first three quarters of 2004. The increase in segmentprofitability was primarily due to improved pricing and product mix, costimprovement programs and lower levels of market-related downtime taken offsetin part by lower sales volumes and increased costs for chemicals, wood andenergy. We took market-related downtime in the first three quarters of 2005 of 46,000tons compared to 27,000 tons of market-related downtime in the first threequarters of 2004.

 

### ***CarbonlessPaper***

### *** ***

Net sales for thecarbonless paper segment, which includes carbonless papers and uncoatedproducts, increased to $110.5 million in the third quarter of 2005 from $101.3 millionin the third quarter of 2004, an increase of 9.2%. The sales increase wasdriven by an increase in the sales price per ton on carbonless products,increased export sales of carbonless paper and an increase in uncoated paper salesvolume offset by a decrease in carbonless paper sales volumes and a decrease inthe sales price per ton of uncoated products. The average price per ton ofpaper for this segment decreased to $1,234 per ton in the third quarter of 2005from $1,306 per ton in the third quarter of 2004, largely driven by a highermix of uncoated sales in 2005.

 

43

----

 

The carbonless segment profitwas $3.0 million in the third quarter of 2005, compared to a loss of $1.7 millionin the third quarter of 2004. The increase in the segment profit during the thirdquarter of 2005 was largely due to lower depreciation, amortization anddepletion expense and productivity initiatives that were not in place duringthe third quarter of 2004 offset by higher levels of market-related downtimeand higher costs for energy, wood and chemicals. We took market-relateddowntime in the third quarter of 2005 of 2,000 tons compared to nomarket-related downtime in the third quarter of 2004.

 

Net sales for thecarbonless paper segment increased to $318.4 million in the first threequarters of 2005 from $299.6 million in the first three quarters of 2004,an increase of 6.3%. The sales increase was driven by an increase in salesprices per ton of carbonless and uncoated paper, increased export sales ofcarbonless paper and an increase in uncoated volume offset in part by lowervolumes of carbonless paper. The average price per ton of paper for thissegment decreased to $1,250 per ton in the first three quarters of 2005 from $1,265per ton in the first three quarters of 2004, largely driven by a higher mix ofuncoated sales in 2005.

 

The carbonless segmentincurred a loss of $14.0 million in the first three quarters of 2005, comparedto a loss of $27.8 million in the first three quarters of 2004. The decreasein the segment loss during the first three quarters of 2005 was largely due tolower depreciation, amortization and depletion expense for the five monthssubsequent to the acquisition and productivity initiatives that were not inplace during the first three quarters of 2004 offset by higher costs forenergy, wood and chemicals. We took market-related downtime in the first threequarters of 2005 of 11,000 tons compared to 10,000 tons of market-relateddowntime in the first three quarters of 2004.

 

## **Seasonality**

## ** **

We are exposed tofluctuations in quarterly sales volumes and expenses due to seasonal factors.These seasonal factors are common in the coated paper industry. The firstquarter is typically a light sales volume quarter with some inventory build inanticipation of maintenance outages to be taken in the second quarter andhigher sales volumes in the third quarter. Our second quarter typically beginsto build to higher sales rate and is our quarter with the highest maintenancespending as a result of scheduled annual maintenance shutdowns. Our thirdquarter is typically our strongest quarter, reflecting a substantial increasein sales volume as printers prepare for year-end holiday catalogs andadvertising. Our accounts receivable and payable generally peak in the thirdquarter, while inventory generally peaks in the second quarter in anticipationof the third quarter season. The fourth quarter is typically our secondstrongest sales quarter as printing for year-end holidays continues. We expectthese trends to continue for the foreseeable future.

 

## **Outlook**

## ** **

We expect sales volumesin our fourth quarter of 2005 to improve over the sales rate for the fourthquarter of 2004, but to seasonally decline from the third quarter of 2005. Wewill consider market-related downtime in the fourth quarter of 2005 in aneffort to balance inventory levels to market demand as necessary.

 

Increases in the price ofcrude oil have affected the cost of certain papermaking chemicals, purchasedenergy, and logistics and distribution. Overall, we expect crude oil and energycosts to remain volatile

 

44

----

 

throughout the remainderof 2005 and into 2006. During the fourth quarter of 2005, we plan to begin tophase-in a cost-sharing surcharge of $20 per ton of paper and a new freightpolicy for shipments of coated paper on or after October 31, 2005. Becauseof market and customer considerations, it is not certain what the effect ofthese changes will be in the fourth quarter of 2005 or in future periods.

 

On June 2, 2005, weannounced that we would be evaluating steps needed to ensure the carbonlesspaper business and associated facilities would remain viable for the long term.Options being considered include a sale of the segment to a buyer with betteralignment to its core business or to the carbonless management team and/or itsemployees. As a third option, we would retain the operations and would performa major restructuring and streamlining of the existing facilities to reducecosts.

 

## **Liquidity andCapital Resources**

## ** **

We expect that cashgenerated from operating activities and availability under our revolving seniorsecured credit facility will be our principal sources of liquidity. Based onour current level of operations, we believe our cash flow from operations andavailable borrowings under our revolving senior secured credit facility will beadequate to meet our liquidity needs for at least the next twelve months.

 

As of September 30,2005, there was $70.4 million outstanding under the revolving senior creditfacility and based on availability under the borrowing base as of that date, wehad $249.4 million of borrowing availability under the revolving senior creditfacility. Our aggregate indebtedness at September 30, 2005, was $1,589.0 million.We are highly leveraged. 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. See ourRegistration Statement on Form S-4, as filed on June 20, 2005, asamended, for a more extensive discussion of liquidity and capital resources.

 

Inventory has increasedfrom $321.4 million at December 31, 2004, to $444.2 million at September 30,2005. 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 that was retained byMeadWestvaco’s LIFO pool. The remaining increase is primarily because of strongoperating performance exceeding current industry demands.

 

Capital expenditures were$31.4 million for the five months ended September 30, 2005 and were $48.7million for the first three quarters of 2005. Capital expenditures for all of2005 are expected to be approximately $85 million and are expected toconsist of maintenance capital projects, environmental projects and capitalimprovements, such as a paper machine rebuild at our mill in Luke, Maryland. Compliancewith environmental laws and regulations is a significant factor in ourbusiness. We have made, and will continue to make, significant expenditures tocomply with these requirements. In connection with compliance withenvironmental laws and regulations we expect to incur capital expenditures of$11 million in 2005 and $18 million in 2006 in order to maintain compliancewith applicable federal, state and local environmental laws and regulations andto meet new regulatory requirements. We anticipate that environmentalcompliance will continue to require increased capital expenditures over time asenvironmental laws or regulations, or interpretations thereof, change or the

 

45

----

 

nature of our operationsrequire us to make significant additional capital expenditures. We expect tofund our capital expenditures from cash flows from operations.

 

### ***DebtCovenants***

 

The senior secured termloan agreement (and the revolving credit agreement in certain circumstances)requires us to maintain compliance with certain covenants, including financialcovenants. As of September 30, 2005, we were in compliance with allcovenants. Below are the required financial covenant levels and the actuallevels as of September 30, 2005:

 
| ** **                            | ** ** | **Required at  September  30, 2005** | ** ** | **Actual at  September  30, 2005** | ** ** |
|---------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| Maximum Leverage Ratio                |       | 6.00                                 |       | 5.04                               |       |
| Maximum Senior Leverage  Ratio        |       | 3.00                                 |       | 2.60                               |       |
| Minimum Interest  Coverage Ratio      |       | 2.00                                 |       | 2.27                               |       |
| Minimum Fixed Charges  Coverage Ratio |       | 1.00                                 |       | 1.42                               |       |

 

## **CriticalAccounting Policies**

## ** **

The preparation offinancial statements in accordance with GAAP requires 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. Management believes the accounting policies discussed belowrepresent those accounting policies requiring the exercise of judgment where adifferent set of judgments could result in the greatest changes to reportedresults.

 

*Environmental and legalliabilities*. We record accruals for estimated environmentalliabilities when remedial efforts are probable and the costs can be reasonablyestimated. These estimates reflect assumptions and judgments as to the probablenature, magnitude and timing of required investigation, remediation and monitoringactivities as well as availability of insurance coverage and contribution byother potentially responsible parties. Due to the numerous uncertainties andvariables associated with these assumptions and judgments, and changes ingovernmental regulations and environmental technologies, accruals are subjectto substantial uncertainties, and actual costs could be materially greater orless than the estimated amounts. We record accruals for other legalcontingencies, which are also subject to numerous uncertainties and variablesassociated with assumptions and judgments, when the contingency is probable ofoccurring and reasonably estimable.

 

*Long-lived assets*:

 

*Useful lives*.Useful lives of tangible and intangible assets are based on management’sestimates of the periods over which the assets will be productively utilized inthe revenue generation process or for other useful purposes. Factors thataffect the determination of lives include prior experience with similar assets,product life expectations and industry practices. The determination of usefullives dictates the period over which tangible and intangible long-lived assetsare depreciated or amortized, typically using the straight-line method.

 

46

----

 

*Tangible assets*.We review long-lived assets for impairment in accordance with SFAS No. 144,*Accounting for the Impairment or Disposal ofLong-lived Assets*. The statement requires that long-lived assets bereviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. The review forimpairment requires management to predict the estimated cash flows that will begenerated by the long-lived asset over its remaining estimated useful life. Considerablejudgment must be exercised to determine future cash flows and their timing and,possibly, choosing business value comparables or selecting discount rates touse in any value computations.

 

*Intangible assets*.Business acquisitions often result in recording intangible assets, the valuesof which are often based upon, in part, independent third-party appraisals.Like long-lived tangible assets, intangible assets are subject to periodicimpairment reviews whenever events or changes in circumstances indicate thatthe carrying amount of an asset may not be recoverable. As with tangibleassets, considerable judgment must be exercised to determine future cash flowsand their timing and, possibly, choosing business value comparables orselecting discount rates to use in any value computations.

 

*Revenue recognition*.We recognize revenue at the point when title and the risk of ownership passesto the customer. Substantially all of our revenues are generated throughproduct sales, and shipping terms generally indicate when title and the risk ofownership have passed. Revenue is recognized at shipment for sales whenshipping 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. We provide all allowances for estimated returns and othercustomer credits such as discounts and volume rebates, when the revenue isrecognized, based on historical experience, current trends and any notificationof pending returns. The customer allowances are in many instances subjectiveand are determined with significant management judgment and are reviewedregularly to determine the adequacy of the amounts. Changes in economicconditions, markets and customer relationships may require adjustments to theseallowances from period to period.

 

*Income taxes*.Income taxes are accounted for in accordance with SFAS No. 109, *Accounting for Income Taxes*, which recognizes deferred taxassets and liabilities based on the estimated future tax effects of differencesbetween the financial statement and tax bases of assets and liabilities giventhe enacted tax laws. We evaluate the need for a deferred tax asset valuationallowance by assessing whether it is more likely than not that we will realizeour deferred tax assets in the future. The assessment of whether or not avaluation allowance is required often requires significant judgment, includingthe forecast of future taxable income and the evaluation of tax planninginitiatives. Adjustments to the deferred tax valuation allowance are made toearnings in the period when such assessment is made. We have tax jurisdictionslocated in many states and are subject to audit in these states, as well as atthe federal level. Tax audits by their nature are often complex and can requireseveral years to resolve. In the preparation of our financial statements,management exercises judgments in estimating the potential exposure tounresolved tax matters. While actual results could vary, in management’s judgmentwe have adequate accruals with respect to the ultimate outcome of suchunresolved tax matters.

 

*Derivative financial instruments*.Derivative financial instruments are accounted for in accordance with SFAS No. 133,*Accounting for Derivative Instruments and HedgingActivities*. We recognize the unwind

 

47

----

 

value of derivativefinancial instruments as the fair value. This means that the fair value forpurchased contracts is based on the amount we could receive from thecounterparty to settle the contract. Fair value at any point in time is basedupon periodic confirmation of values received from the counterparty. Ourcommodity basket option is a complex derivative financial instrument for whichwe have limited ability to unwind the position with a counterparty other thanthe seller of the option.

 

## **ITEM 3.**                                                     QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK

## ** **

Not applicable.

 

## **ITEM 4.**                                                     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 timelymanner to management responsible for the preparation and reporting of ourfinancial information.

 

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 September 30, 2005. To the best of ourknowledge, there were no changes in the internal control over financialreporting that occurred during the quarter ended September 30, 2005, that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

48

----

 

**PART II**   OTHER INFORMATION

 

## **ITEM 6.**                                                     EXHIBITS

## ** **

**(31)****                          Rule 13a-14(a)/15d-14(a) Certifications**

31.1                           ChiefExecutive Officer Certification

31.2                           ChiefFinancial Officer Certification

 

**(32)****                          Section 1350Certifications**

32.1                           ChiefExecutive Officer Certification

32.2                           ChiefFinancial Officer Certification

 

 

**SIGNATURE**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|   |   | NewPage Corporation       |   |
|--------|--------|--------------------------------|--------|
|   |   | (Registrant)                   |   |
|   |   |                           |   |
|   |   |                           |   |
|   | Date:  | November 14, 2005         |   |   /s/ Matthew  L. Jesch |   |
|   |   | Matthew L. Jesch               |   |
|   |   | Vice President and             |   |
|   |   | Chief Financial Officer        |   |
|   |   | (Principal Financial  Officer) |   |
|        |        |                                |        |  |  |

 

49

----