Edgar Filing: BUCKEYE TECHNOLOGIES INC

10-Q for December 31, 2006

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended December 31, 2006

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From ____ to ____

Commission file number: 33-60032

Buckeye Technologies Inc.

Delaware

(state or other jurisdiction of incorporation)

Internal Revenue Service — Employer Identification No. 62-1518973

1001 Tillman Street, Memphis, TN 38112

901-320-8100

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

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

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

As of February 2, 2007, there were outstanding 37,813,606 Common Shares of the Registrant.

INDEX

BUCKEYE TECHNOLOGIES INC.

ITEM		PAGE

	PART I - FINANCIAL INFORMATION

1.	Financial Statements:

	Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2006 and 2005	3

	Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2006	4

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005	5

	Notes to Condensed Consolidated Financial Statements	6

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17

3.	Quantitative and Qualitative Disclosures About Market Risk	25

4.	Controls and Procedures	25

	PART II - OTHER INFORMATION

4.	Submission of Matters to a Vote of Security Holders	26

6.	Exhibits	26

	SIGNATURES	27

Item 1. Financial Statements

PART I - FINANCIAL INFORMATION

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except per share data)

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Net sales	$	184,730		$	188,254		$	376,136		$	353,710
Cost of goods sold		155,711			162,546			317,782			303,809
Gross margin		29,019			25,708			58,354			49,901

Selling, research and administrative expenses		11,163			11,354			22,367			22,760
Amortization of intangibles and other		507			477			1,138			1,008
Restructuring costs		11			1,141			24			3,092
Operating income		17,338			12,736			34,825			23,041

Net interest expense and amortization of debt costs		(10,440	)		(10,574	)		(21,191	)		(20,758	)
Gain on sale of assets held for sale		-			-			355			-
Loss on early extinguishment of debt		(96	)		-			(652	)		(151	)
Foreign exchange and other		246			(22	)		252			(390	)

Income before income taxes		7,048			2,140			13,589			1,742
Income tax expense		3,228			286			5,962			177

Net income	$	3,820		$	1,854		$	7,627		$	1,565

Earnings per share
Basic	$	0.10		$	0.05		$	0.20		$	0.04
Diluted	$	0.10		$	0.05		$	0.20		$	0.04

Weighted average shares for basic earnings per share		37,702			37,592			37,682			37,590
Adjusted weighted average shares for diluted earnings per share		38,010			37,630			37,851			37,633

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	December 31 2006			June 30 2006
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	12,693		$	8,734
Accounts receivable - net		111,055			114,098
Inventories		86,094			98,567
Deferred income taxes and other		7,078			8,473
Total current assets		216,920			229,872

Property, plant and equipment		970,466			957,677
Less accumulated depreciation		(448,632	)		(425,779	)
		521,834			531,898
Goodwill		145,844			149,106
Intellectual property and other, net		36,461			38,677
Total assets	$	921,059		$	949,553

Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	33,771		$	32,973
Accrued expenses		47,311			48,416
Current portion of capital lease obligation		383			627
Current portion of long-term debt		998			1,294
Total current liabilities		82,463			83,310

Long-term debt		482,749			519,414
Accrued postretirement benefits		19,542			19,367
Deferred income taxes		38,503			35,686
Capital lease obligation		560			755
Other liabilities		1,957			1,304
Stockholders’ equity		295,285			289,717
Total liabilities and stockholders’ equity	$	921,059		$	949,553

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months Ended December 31
	2006			2005
Operating activities
Net income	$	7,627		$	1,565
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		24,311			23,385
Amortization		1,648			1,599
Deferred income taxes and other		3,913			(1,675	)
Gain on sale of assets held for sale		(355	)		-
Loss on disposal of equipment		215			-
Changes in operating assets and liabilities:
Accounts receivable		6,860			(3,130	)
Inventories		12,392			(12,387	)
Other assets		(2,857	)		(2,798	)
Accounts payable and other current liabilities		334			2,336
Net cash provided by operating activities		54,088			8,895
Investing activities
Purchases of property, plant and equipment		(14,325	)		(34,358	)
Proceeds from sale of assets		521			-
Other		(280	)		(276	)
Net cash used in investing activities		(14,084	)		(34,634	)
Financing activities
Net borrowings (payments) under lines of credit		(1,487	)		42,250
Payments on long-term debt and other		(35,689	)		(15,963	)
Net proceeds from sale of equity interests		1,099			66
Net cash provided by (used in) financing activities		(36,077	)		26,353
Effect of foreign currency rate fluctuations on cash		32			(63	)
Increase in cash and cash equivalents		3,959			551
Cash and cash equivalents at beginning of period		8,734			9,926
Cash and cash equivalents at end of period	$	12,693		$	10,477

See accompanying notes.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(In thousands)

NOTE 1:

BASIS OF PRESENTATION

Our accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six months ended December 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2007. All significant intercompany accounts and transactions have been eliminated in consolidation. For further information and a listing of our significant accounting policies, refer to the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended June 30, 2006. Except as otherwise specified, references to years indicate our fiscal year ending June 30, 2007 or ended June 30 of the year referenced and comparisons are to the corresponding period of the prior year.

Translation adjustment

Management has determined that the local currency of our German, Canadian, and Brazilian subsidiaries is the functional currency, and accordingly European euro, Canadian dollar, and Brazilian real denominated balance sheet accounts are translated into U.S. dollars at the rate of exchange in effect at the balance sheet date. Income and expense activity for the period is translated at the weighted average exchange rate during the period. Translation adjustments are included as a separate component of stockholders' equity.

Use of estimates

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from the estimates and assumptions used.

Changes in estimates are recognized in accordance with the accounting rules for the estimate, which is typically in the period when new information becomes available to management. Areas where the nature of the estimate makes it reasonably possible that actual results could materially differ from amounts estimated include: impairment assessments on long-lived assets (including goodwill), allowance for doubtful accounts, inventory reserves, income tax liabilities, and contingent liabilities.

NOTE 2:

SEGMENT INFORMATION

We report results for two segments, specialty fibers and nonwoven materials. The specialty fiber segment is an aggregation of operating segments producing cellulosic fibers based on both wood and cotton. Management makes financial decisions and allocates resources based on the sales and operating income of each segment. We allocate selling, research, and administrative expenses to each segment, and management uses the resulting operating income to measure the performance of the segments. The financial information attributed to these segments is included in the following table:

Three Months Ended December 31		Specialty Fibers		Nonwoven Materials		Corporate			Total
Net sales	2006	$	130,126	$	62,488	$	(7,884	)	$	184,730
	2005		137,898		58,460		(8,104	)		188,254
Operating income (loss)	2006		13,194		4,846		(702	)		17,338
	2005		11,559		2,739		(1,562	)		12,736
Depreciation and amortization of	2006		7,859		3,965		851			12,675
intangibles	2005		7,406		4,062		842			12,310
Capital expenditures	2006		6,083		580		1,057			7,720
	2005		13,262		406		410			14,078

Six Months Ended December 31		Specialty Fibers		Nonwoven Materials		Corporate			Total
Net sales	2006	$	265,001	$	127,455	$	(16,320	)	$	376,136
	2005		252,459		115,786		(14,535	)		353,710
Operating income (loss)	2006		25,482		10,825		(1,482	)		34,825
	2005		21,722		5,299		(3,980	)		23,041
Depreciation and amortization of	2006		15,557		8,136		1,805			25,498
intangibles	2005		14,680		8,100		1,687			24,467
Capital expenditures	2006		11,656		997		1,672			14,325
	2005		32,592		1,005		761			34,358

Management evaluates operating performance of the specialty fibers and nonwoven materials segments excluding amortization of intangibles, the impact of impairment of long-lived assets and charges related to restructuring. Therefore, the corporate segment includes operating elements such as segment eliminations, amortization of intangibles, impairment of long-lived assets and charges related to restructuring. Corporate net sales represent the elimination of intersegment sales included in the specialty fibers reporting segment. We account for intersegment sales as if the sales were made to third parties, that is, at current market prices. Corporate operating income in 2005 included $1,141 and $3,092 of restructuring cost for the three and six month periods, respectively.

NOTE 3: RESTRUCTURING COSTS AND ASSETS HELD FOR SALE

During the six months ended December 31, 2005, we incurred restructuring costs, related to the closure of our specialty fibers facility in Glueckstadt, Germany of $3,082. Severance and employee benefit costs comprised $2,583 of these costs. For the six months ending December 31, 2006, $24 was recorded.

In September 2006, the remaining assets located at our Glueckstadt facility were sold for $520. Since we previously had written the value of these assets down to $165, we recorded a gain on sale of assets held for sale of $355.

NOTE 4: INVENTORIES

Inventories are valued at the lower of cost or market. The costs of manufactured cotton-based specialty fibers and costs for nonwoven raw materials are generally determined on the first-in, first-out basis. Other manufactured products and raw materials are generally valued on an average cost basis. Manufactured inventory costs include material, labor and manufacturing overhead. Slash pine timber, cotton fibers and chemicals are the principal raw materials used in the manufacture of our specialty fiber products. Fluff pulp is the principal raw material used in our nonwoven materials products. We take physical counts of inventories at least annually, and we review periodically the provision for potential losses from obsolete, excess or slow-moving inventories.

The components of inventory consist of the following:

	December 31 2006		June 30 2006

Raw materials	$	22,030	$	30,028
Finished goods		42,549		45,759
Storeroom and other supplies		21,515		22,780
	$	86,094	$	98,567

NOTE 5:

DEBT

The components of long-term debt consist of the following:

	December 31 2006		June 30 2006
Senior Notes due:
2013	$	200,000	$	200,000
Senior Subordinated Notes due:
2008		64,923		64,902
2010		151,814		152,059
Credit facility		62,010		98,747
Other		5,000		5,000
		483,747		520,708
Less current portion		998		1,294
	$	482,749	$	519,414

Senior Notes - During September 2003, we placed privately $200,000 in aggregate principal amount of 8.5% Senior Notes due October 1, 2013. In fiscal year 2004, we exchanged these outstanding notes for public notes with the same terms. The notes are unsecured obligations and are senior to any of our subordinated debt. The notes are guaranteed by our direct and indirect domestic subsidiaries that are also guarantors on our senior secured indebtedness.

Senior Subordinated Notes - During July 1996, we completed a public offering of $100,000 principal amount of 9.25% unsecured Senior Subordinated Notes due September 15, 2008 (the “2008 Notes”). These notes have been redeemable at our option, in whole or in part, at any time since September 15, 2004, at a redemption price of 100% of principal amount together with accrued and unpaid interest to the date of redemption.

Through fiscal year 2006, we redeemed $35,000 of the 2008 Notes. As a result of these redemptions, we wrote off a portion of the deferred financing costs and unamortized discount related to the redeemed bonds.

During June 1998, we completed a private placement of $150,000 principal amount of 8% unsecured Senior Subordinated Notes due October 15, 2010. In fiscal year 1999, we exchanged these outstanding notes for public notes with the same terms. These notes have been redeemable at our option, in whole or in part, at any time since October 15, 2006, at a redemption price of 100% of principal amount together with accrued and unpaid interest to the date of redemption.

Under the indentures governing our senior subordinated notes and our senior notes, our ability to incur additional debt is limited. Under these indentures, additional debt must be incurred as so-called “Ratio Debt” or, alternatively, must be permitted in form and amount as “Permitted Indebtedness.” In order to incur Ratio Debt, a specified consolidated fixed charge coverage ratio (as defined in the indentures) must equal or exceed 2:1 (measured on a rolling four-quarter basis). Falling below the 2:1 ratio does not breach any covenant or constitute an event of default under any of our debt agreements. As of December 31, 2006, we exceeded the required 2:1 ratio and as a result are not limited to the Ratio Debt restrictions under the indentures governing the senior notes and each series of the senior subordinated notes.

Revolving credit facility - On November 5, 2003, we established a $220,000 senior secured credit facility (the “credit facility”), comprised of a $70,000 revolving credit facility (the “revolver”) maturing on September 15, 2008 and a $150,000 term loan (the “term loan”) with serial maturities of $249 quarterly with final payment at maturity. The term loan maturity date is March 15, 2008, unless we retire or refinance the 2008 Notes, with a due date after October 15, 2010, in which case the maturity date would be April 15, 2010. The term loan also requires an annual excess cash flow payment (as defined under the credit agreement). During the six months ending December 31, 2006, we made an excess cash flow payment of $296 based on fiscal 2006 operating and cash flow performance.

We had $62,010 outstanding on this facility ($60,497 on the term loan and $1,513 on the revolver) at an average variable interest rate of 7.5% as of December 31, 2006. The interest rate applicable to borrowings under the revolver is the agent’s prime rate plus 1.50% to 1.75%, or a LIBOR-based rate ranging from LIBOR plus 2.50% to LIBOR plus 3.25%. The interest rate applicable to the term loan is the agent’s prime rate plus 1.00% or a LIBOR-based rate plus 2.00%. The credit facility is secured by substantially all of our assets located in the United States.

During the three months ended December 31, 2006, we made additional voluntary prepayments on the term loan of $13,750, which makes the voluntary prepayments for the six months ended December 31, 2006 equal to $34,454. As a result of these prepayments, we wrote off a portion of the deferred financing costs related to the term loan. The non-cash charges, related to early extinguishment of debt, were $96 and $652 during the three and six months ended December 31, 2006, respectively.

The credit facility contains covenants customary for financing of this type. The financial covenants include: maximum ratio of consolidated net senior secured debt to consolidated earnings before interest, taxes, depreciation and amortization (“EBITDA”), minimum ratio of consolidated EBITDA to consolidated interest expense and minimum ratio of consolidated EBITDA minus capital expenditures and taxes to consolidated fixed charges; as well as limitations on capital expenditures, share repurchases and dividend payments. As of December 31, 2006, we were in compliance with these financial covenants.

As of December 31, 2006, we had $63,455 of borrowing capacity on our revolving credit facility. The portion of this capacity that we could borrow on a particular date will depend on our financial results and ability to comply with certain borrowing conditions under the revolving credit facility.

Other long-term debt - On March 1, 2000, we purchased certain technology from Stac-Pac Technologies Inc. In connection with the purchase, we entered into an unsecured promissory note with Stac-Pac Technologies Inc. The principal amount of the note is $5,000 and bears interest at a rate of 7%. In accordance with the purchase agreement, we are entitled to withhold or retain the final installment of the purchase price until and unless there is final resolution of patent rights and to cancel the final installment of the purchase price if the patent rights in certain jurisdictions are not resolved according to the terms of the purchase agreement. As of December 31, 2006, these patent rights were not resolved. Therefore, the principal amount of the note remains unpaid and has been classified as long-term debt. As of December 31, 2006, we have accrued interest on the note of $2,042.

NOTE 6:

COMPREHENSIVE INCOME

The components of comprehensive income consist of the following:

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Net income	$	3,820		$	1,854		$	7,627		$	1,565
Foreign currency translation adjustments - net		(2,632	)		(4,032	)		(3,607	)		4,143
Comprehensive income (loss)	$	1,188		$	(2,178	)	$	4,020		$	5,708

For the three and six months ended December 31, 2006, the change in the foreign currency translation adjustment is primarily due to fluctuations in the exchange rate of the U.S. dollar against the European euro of $2,550 and $2,317 , the Brazilian real of $36 and $(254) and the Canadian dollar of $(5,345) and $(5,975).

For the three months and six months ended December 31, 2005, the change in the foreign currency translation adjustment was primarily due to fluctuations in the exchange rate of the U.S. dollar against the European euro of $(1,622) and $(1,962), the Brazilian real of $(2,888) and $(1,617) and the Canadian dollar of $505 and $7,961.

NOTE 7:

INCOME TAXES

Our effective tax rates for the three and six month period ended December 31, 2006 were 45.8% and 43.9%. Our effective tax rates for the same periods of 2005 were 13.4% and 10.2%, respectively. Our tax rate is impacted by several factors including operations in jurisdictions with varying tax rates and the extraterritorial income tax exclusion. Due to the low level of our earnings before taxes for the six months ended December 31, 2005, these factors had a more significant impact on our effective tax rate in those periods. The rate increase for the six month period ended December 31, 2006 was also impacted by a change in estimate related to the valuation allowance for the Brazil net operating loss carryforwards. Our income tax expense differs from the amount computed by applying the statutory federal income tax rate of 35% to income before income taxes due to the following:

	Three Months Ended						Six Months Ended
	December 31						December 31
	2006			2005			2006			2005
Expected tax expense at 35%	$	2,467		$	748		$	4,756		$	609
Effect of foreign operations		200			341			(390	)		648
Extraterritorial income benefit		(117	)		(104	)		(213	)		(256	)
Brazilian valuation allowance		700			153			2,139			153
Adjustment of state deferred taxes		-			(595	)		-			(595	)
Other		(22	)		(257	)		(330	)		(382	)
Income tax expense	$	3,228		$	286		$	5,962		$	177

NOTE 8: EMPLOYEE BENEFIT PLANS

We provide medical, dental and life insurance postretirement plans covering certain U.S. employees who meet specified age and service requirements. Pursuant to an amendment, effective January 1, 2006, Medicare eligible retirees age 65 or older are no longer covered under the self-funded plan. Instead they are provided a subsidy towards the purchase of supplemental insurance. The components of net periodic benefit costs are as follows:

	Three Months Ended December 31						Six Months Ended December 31
		2006			2005			2006			2005
Service cost for benefits earned	$	150		$	157		$	299		$	314
Interest cost on benefit obligation		352			314			704			628
Amortization of unrecognized prior service credit		(251	)		(264	)		(501	)		(528	)
Actuarial loss		142			150			284			300
Total cost	$	393		$	357		$	786		$	714

NOTE 9: COMPUTATION OF EARNINGS PER SHARE

The calculation of basic and diluted earnings per common share was as follows:

	Three Months Ended December 31				Six Months Ended December 31
	2006		2005		2006		2005
Net income applicable to common shareholders	$	3,820	$	1,854	$	7,627	$	1,565

Weighted-average shares of common stock Outstanding		37,702		37,592		37,682		37,590
Effect of diluted shares		308		38		169		43
Weighted-average common and common equivalent shares outstanding		38,010		37,630		37,851		37,633

Earnings per share
Basic	$	0.10	$	0.05	$	0.20	$	0.04
Diluted	$	0.10	$	0.05	$	0.20	$	0.04

NOTE 10: SUBSEQUENT EVENT

On January 23, 2007, we announced our intention to sell our Fiberline operation located in Lumberton, North Carolina. Our Fiberline operation, which is a part of our specialty fibers segment, has the capacity to produce 8,000 tons of fiber annually and is currently operating at about 90% capacity with annual sales revenue of approximately $14,000. If a suitable sales arrangement is not found, we intend to continue to operate and optimize this operation. We believe that there is no impairment of the carrying value of the Fiberline assets.

NOTE 11: CONDENSED CONSOLIDATING FINANCIAL STATEMENTS

The guarantor subsidiaries presented below represent our subsidiaries that are subject to the terms and conditions outlined in the indenture governing the senior notes and that guarantee the notes, jointly and severally, on a senior unsecured basis. The non-guarantor subsidiaries presented below represent the foreign subsidiaries which do not guarantee the senior notes. Each subsidiary guarantor is 100% owned directly or indirectly by us and all guarantees are full and unconditional.

Our supplemental financial information and our guarantor subsidiaries and non-guarantor subsidiaries for the senior notes is presented in the following tables.

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	29,563		$	116,259		$	47,737		$	(8,829	)	$	184,730
Cost of goods sold		24,660			96,826			42,898			(8,673	)		155,711
Gross margin		4,903			19,433			4,839			(156	)		29,019

Selling, research and administrative expenses, and other		1,898			7,879			1,893			-			11,670
Restructuring and impairment costs		-			-			11			-			11

Operating income (loss)		3,005			11,554			2,935			(156	)		17,338

Other income (expense):
Net interest income (expense) and amortization of debt		(10,453	)		(37	)		50			-			(10,440	)
Other income (expense), including equity income (loss) in affiliates		14,717			(75	)		559			(15,051	)		150
Intercompany interest income (expense)		7,092			(4,736	)		(2,356	)		-			-

Income (loss) before income taxes		14,361			6,706			1,188			(15,207	)		7,048

Income tax expense (benefit)		10,541			2,226			1,346			(10,885	)		3,228

Net income (loss)	$	3,820		$	4,480		$	(158	)	$	(4,322	)	$	3,820

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	60,706		$	239,442		$	94,010		$	(18,022	)	$	376,136
Cost of goods sold		50,144			200,230			85,292			(17,884	)		317,782
Gross margin		10,562			39,212			8,718			(138	)		58,354

Selling, research and administrative expenses, and other		3,919			15,956			3,630			-			23,505
Restructuring and impairment costs		-			-			24			-			24

Operating income (loss)		6,643			23,256			5,064			(138	)		34,825

Other income (expense):
Net interest income (expense) and amortization of debt		(21,162	)		(99	)		70			-			(21,191	)
Other income (expense), including equity income (loss) in affiliates		16,506			(70	)		866			(17,347	)		(45	)
Intercompany interest income (expense)		14,312			(9,729	)		(4,583	)		-			-

Income (loss) before income taxes		16,299			13,358			1,417			(17,485	)		13,589

Income tax expense (benefit)		8,672			4,432			2,125			(9,267	)		5,962

Net income (loss)	$	7,627		$	8,926		$	(708	)	$	(8,218	)	$	7,627

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended December 31, 2005


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	27,604		$	118,965		$	50,181		$	(8,496	)	$	188,254
Cost of goods sold		23,793			101,621			45,722			(8,590	)		162,546
Gross margin		3,811			17,344			4,459			94			25,708

Selling, research and administrative expenses, and other		3,063			7,188			1,580			-			11,831
Restructuring and impairment costs		-			-			1,141			-			1,141

Operating income		748			10,156			1,738			94			12,736

Other income (expense):
Net interest income (expense) and amortization of debt		(11,388	)		117			697			-			(10,574	)
Other income (expense), including equity income (loss) in affiliates		6,376			(5	)		(127	)		(6,266	)		(22	)
Intercompany interest income (expense)		7,263			(5,117	)		(2,146	)		-			-

Income (loss) before income taxes		2,999			5,151			162			(6,172	)		2,140

Income tax expense (benefit)		1,145			1,116			185			(2,160	)		286

Net income (loss)	$	1,854		$	4,035		$	(23	)	$	(4,012	)	$	1,854

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Six Months Ended December 31, 2005


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	50,063		$	218,961		$	100,216		$	(15,530	)	$	353,710
Cost of goods sold		43,004			186,631			89,912			(15,738	)		303,809
Gross margin		7,059			32,330			10,304			208			49,901

Selling, research and administrative expenses, and other		6,020			14,226			3,522			-			23,768
Restructuring and impairment costs		-			-			3,092			-			3,092

Operating income		1,039			18,104			3,690			208			23,041

Other income (expense):
Net interest income (expense) and amortization of debt		(22,305	)		184			1,363			-			(20,758	)
Other income (expense), including equity income (loss) in affiliates		9,482			37			(554	)		(9,506	)		(541	)
Intercompany interest income (expense)		14,389			(10,400	)		(3,989	)		-			-

Income (loss) before income taxes		2,605			7,925			510			(9,298	)		1,742

Income tax expense (benefit)		1,040			2,047			344			(3,254	)		177

Net income (loss)	$	1,565		$	5,878		$	166		$	(6,044	)	$	1,565

CONDENSED CONSOLIDATING BALANCE SHEETS

As of December 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	542		$	720	$	11,431		-		$	12,693
Accounts receivable, net of allowance		17,064			62,016		31,975		-			111,055
Inventories		16,425			49,859		20,391		(581	)		86,094
Other current assets		2,589			4,278		211		-			7,078
Intercompany accounts receivable		-			74,595		-		(74,595	)		-
Total current assets		36,620			191,468		64,008		(75,176	)		216,920

Property, plant and equipment, net		55,516			323,046		143,272		-			521,834
Goodwill and intangibles, net		20,887			50,663		98,331		-			169,881
Intercompany notes receivable		335,824			-		-		(335,824	)		-
Other assets, including investment in subsidiaries		323,225			331,247		96,428		(738,476	)		12,424
Total assets	$	772,072		$	896,424	$	402,039	$	(1,149,476	)	$	921,059

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	5,779		$	20,201	$	7,791		-		$	33,771
Other current liabilities		19,138			13,934		15,620		-			48,692
Intercompany accounts payable		67,967			-		6,627		(74,594	)		-
Total current liabilities		92,884			34,135		30,038		(74,594	)		82,463

Long-term debt		482,749			-		-		-			482,749
Deferred income taxes		(41,814	)		60,501		19,815		-			38,502
Other long-term liabilities		6,541			13,897		1,622		-			22,060
Intercompany notes payable		-			203,850		131,972		(335,822	)		-
Stockholders’/invested equity		231,712			584,041		218,592		(739,060	)		295,285
Total liabilities and stockholders’ equity	$	772,072		$	896,424	$	402,039	$	(1,149,476	)	$	921,059

CONDENSED CONSOLIDATING BALANCE SHEETS

As of June 30, 2006


	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	1,535		$	162	$	7,037	$	-		$	8,734
Accounts receivable, net		17,395			66,207		30,496		-			114,098
Inventories		24,680			53,756		20,573		(442	)		98,567
Other current assets		2,422			4,845		1,206		-			8,473
Intercompany accounts receivable		-			57,105		-		(57,105	)		-
Total current assets		46,032			182,075		59,312		(57,547	)		229,872

Property, plant and equipment, net		55,440			329,020		147,438		-			531,898
Goodwill and intangibles, net		20,913			51,730		101,636		-			174,279
Intercompany notes receivable		342,478			-		-		(342,478	)		-
Other assets, including investment in subsidiaries		304,581			337,654		93,066		(721,797	)		13,504
Total assets	$	769,444		$	900,479	$	401,452	$	(1,121,822	)	$	949,553

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	4,857		$	21,077	$	7,039	$	-		$	32,973
Other current liabilities		20,416			17,390		12,530		1			50,337
Intercompany accounts payable		52,297			-		4,808		(57,105	)		-
Total current liabilities		77,570			38,467		24,377		(57,104	)		83,310

Long-term debt		519,414			-		-		-			519,414
Deferred income taxes		(48,099	)		64,030		19,755		-			35,686
Other long-term liabilities		6,414			13,476		1,536		-			21,426
Intercompany notes payable		-			201,993		140,485		(342,478	)		-
Stockholders’/invested equity		214,145			582,513		215,299		(722,240	)		289,717
Total liabilities and stockholders’ equity	$	769,444		$	900,479	$	401,452	$	(1,121,822	)	$	949,553

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2006


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidated
Net cash provided by (used in) operations	$	44,129		$	13,016		$	(3,057	)	$	54,088

Investing activities:
Purchases of property, plant and equipment		(2,828	)		(9,882	)		(1,615	)		(14,325	)
Other		-			(279	)		520			241
Net cash used in investing activities		(2,828	)		(10,161	)		(1,095	)		(14,084	)

Financing activities
Net borrowings under revolving line of credit		(1,487	)		-			-			(1,487	)
Net borrowings (payments) on long-term debt and other		(41,906	)		(2,297	)		8,514			(35,689	)
Net proceeds from sale of equity interests		1,099			-			-			1,099
Net cash provided by (used in) financing activities		(42,294	)		(2,297	)		8,514			(36,077	)

Effect of foreign currency rate fluctuations on cash		-			-			32			32

Increase (decrease) in cash and cash equivalents		(993	)		558			4,394			3,959
Cash and cash equivalents at beginning of period		1,535			162			7,037			8,734
Cash and cash equivalents at end of period	$	542		$	720		$	11,431		$	12,693

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

Six Months Ended December 31, 2005


	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidated
Net cash provided by (used in) operations	$	(11,971	)	$	15,857		$	5,009		$	8,895

Investing activities:
Purchases of property, plant and equipment		(3,885	)		(10,775	)		(19,698	)		(34,358	)
Other		-			(276	)		-			(276	)
Net cash used in investing activities		(3,885	)		(11,051	)		(19,698	)		(34,634	)

Financing activities
Net borrowings under revolving line of credit		42,250			-			-			42,250
Net borrowings (payments) on long-term debt and other		(26,223	)		(4,766	)		15,092			(15,897	)
Net cash provided by (used in) financing activities		16,027			(4,766	)		15,092			26,353

Effect of foreign currency rate fluctuations on cash		-			-			(63	)		(63	)