Exhibit 99.1
CITYFOREST CORPORATION
INDEX TO FINANCIAL STATEMENTS
The following financial statements of CityForest Corporation are included:
Independent Auditor’s Report
Balance Sheets-December 31, 2006 and 2005
Statements of Income-For the years ended December 31, 2006 and 2005
Statements of Stockholders’ Equity-For the years ended December 31, 2006 and 2005
Notes to Financial Statements
Independent Auditor’s Report
Balance Sheets-December 31, 2005 and 2004
Statements of Income –For the years ended December 31, 2005 and 2004
Statements of Stockholders’ Equity- For the years ended December 31, 2005 and 2004
Notes to Financial Statements
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted.
F-1
Independent Auditor’s Report
Board of Directors
CityForest Corporation
Ladysmith, Wisconsin
We have audited the accompanying balance sheets of CityForest Corporation as of December 31, 2006 and 2005, and the related statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CityForest Corporation as of December 31, 2006 and 2005, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
/s/ Wipfli LLP |
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| |
Wipfli LLP | |
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March 14, 2007 | |
Hudson, Wisconsin |
F-2
CityForest Corporation
Balance Sheets
December 31, 2006 and 2005
Assets |
| 2006 |
| 2005 |
| ||
|
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|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash |
| $ | 5,041,929 |
| $ | 7,832,447 |
|
Accounts receivable - Net |
| 5,711,854 |
| 4,582,457 |
| ||
Inventories |
| 1,437,337 |
| 1,479,286 |
| ||
Prepaid expenses |
| 1,077,935 |
| 1,182,916 |
| ||
Prepaid interest |
| 125,392 |
| 183,303 |
| ||
|
|
|
|
|
| ||
Total current assets |
| 13,394,447 |
| 15,260,409 |
| ||
|
|
|
|
|
| ||
Property, plant, and equipment |
| 34,929,115 |
| 36,823,297 |
| ||
|
|
|
|
|
| ||
Other assets: |
|
|
|
|
| ||
Restricted cash |
| 1,643,583 |
| 1,695,372 |
| ||
Bond issuance costs - Net |
| 1,817,410 |
| 2,039,950 |
| ||
|
|
|
|
|
| ||
Total other assets |
| 3,460,993 |
| 3,735,322 |
| ||
|
|
|
|
|
| ||
|
|
|
|
|
| ||
TOTAL ASSETS |
| $ | 51,784,555 |
| $ | 55,819,028 |
|
F-3
Liabilities and Stockholders’ Equity |
| 2006 |
| 2005 |
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current maturities - Long-term debt |
| $ | 1,150,000 |
| $ | 1,150,000 |
|
Accounts payable |
| 2,497,336 |
| 2,482,015 |
| ||
Accrued expenses and other liabilities: |
|
|
|
|
| ||
Interest |
| 62,077 |
| 612,697 |
| ||
Accrued expenses |
| 1,520,935 |
| 1,466,181 |
| ||
Distributions payable |
| 1,379,916 |
| 961,099 |
| ||
|
|
|
|
|
| ||
Total current liabilities |
| 6,610,264 |
| 6,671,992 |
| ||
|
|
|
|
|
| ||
Long-term liabilities: |
|
|
|
|
| ||
Long-term debt |
| 17,875,000 |
| 25,532,741 |
| ||
Accrued employee benefits |
| 457,601 |
| 347,947 |
| ||
|
|
|
|
|
| ||
Total long-term liabilities |
| 18,332,601 |
| 25,880,688 |
| ||
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Common stock |
| 19,778 |
| 19,767 |
| ||
Additional paid-in capital |
| 525,636 |
| 524,522 |
| ||
Retained earnings |
| 26,296,276 |
| 22,722,059 |
| ||
|
|
|
|
|
| ||
Total stockholders’ equity |
| 26,841,690 |
| 23,266,348 |
| ||
|
|
|
|
|
| ||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 51,784,555 |
| $ | 55,819,028 |
|
See accompanying notes to financial statements.
F-4
CityForest Corporation
Statements of Income
Years Ended December 31, 2006 and 2005
|
| 2006 |
| 2005 |
| ||
|
|
|
|
|
| ||
Sales |
| $ | 47,663,421 |
| $ | 43,121,204 |
|
Cost of sales |
| 30,374,834 |
| 29,623,382 |
| ||
|
|
|
|
|
| ||
Gross profit on sales |
| 17,288,587 |
| 13,497,822 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Selling, general, and administrative |
| 2,579,931 |
| 2,660,632 |
| ||
Depreciation |
| 2,675,181 |
| 2,642,178 |
| ||
|
|
|
|
|
| ||
Total operating expenses |
| 5,255,112 |
| 5,302,810 |
| ||
|
|
|
|
|
| ||
Income from operations |
| 12,033,475 |
| 8,195,012 |
| ||
Loss on extinguishment of debt |
| 2,029,011 |
| 0 |
| ||
Interest expense |
| 2,130,778 |
| 3,424,009 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 7,873,686 |
| $ | 4,771,003 |
|
See accompanying notes to financial statements.
F-5
CityForest Corporation
Statements of Stockholders’ Equity
Years Ended December 31, 2006 and 2005
|
| Common Stock |
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|
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|
|
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| ||||||
|
| $.01 Par Value |
| Additional |
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|
| Total |
| ||||||
|
| Authorized 10,000,000 |
| Paid-In |
| Retained |
| Stockholders’ |
| ||||||
|
| Shares |
| Amount |
| Capital |
| Earnings |
| Equity |
| ||||
Balances at December 31, 2004 |
| 1,939,223 |
| $ | 19,392 |
| $ | 426,397 |
| $ | 20,838,770 |
| $ | 21,284,559 |
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| 0 |
| 0 |
| 0 |
| 4,771,003 |
| 4,771,003 |
| ||||
Stock options exercised |
| 37,500 |
| 375 |
| 98,125 |
| 0 |
| 98,500 |
| ||||
Distributions to stockholders |
| 0 |
| 0 |
| 0 |
| (2,887,714 | ) | (2,887,714 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balances at December 31, 2005 |
| 1,976,723 |
| 19,767 |
| 524,522 |
| 22,722,059 |
| 23,266,348 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| 0 |
| 0 |
| 0 |
| 7,873,686 |
| 7,873,686 |
| ||||
Stock warrants exercised |
| 1,125 |
| 11 |
| 1,114 |
| 0 |
| 1,125 |
| ||||
Distributions to stockholders |
| 0 |
| 0 |
| 0 |
| (4,299,469 | ) | (4,299,469 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balances at December 31, 2006 |
| 1,977,848 |
| $ | 19,778 |
| $ | 525,636 |
| $ | 26,296,276 |
| $ | 26,841,690 |
|
See accompanying notes to financial statements.
F-6
CityForest Corporation
Statements of Cash Flows
Years Ended December 31, 2006 and 2005
|
| 2006 |
| 2005 |
| ||
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|
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Increase (decrease) in cash: |
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|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 7,873,686 |
| $ | 4,771,003 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Provision for depreciation |
| 2,675,181 |
| 2,642,178 |
| ||
Provision for amortization |
| 222,540 |
| 190,904 |
| ||
Provision for losses on accounts receivable |
| 19,330 |
| 0 |
| ||
Provision for amortization of discount |
| 386,926 |
| 112,333 |
| ||
Loss (gain) on property, plant, and equipment disposals |
| (750 | ) | 324,293 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| (1,148,727 | ) | (140,477 | ) | ||
Inventories |
| 41,949 |
| (110,009 | ) | ||
Prepaid expenses |
| 104,981 |
| (96,795 | ) | ||
Prepaid interest |
| 57,911 |
| (88,141 | ) | ||
Accounts payable |
| 15,321 |
| 109,787 |
| ||
Accrued interest |
| (550,620 | ) | (141,193 | ) | ||
Accrued expenses |
| (418,592 | ) | 828,762 |
| ||
|
|
|
|
|
| ||
Total adjustments |
| 1,405,450 |
| 3,631,642 |
| ||
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|
|
|
|
| ||
Net cash provided by operating activities |
| 9,279,136 |
| 8,402,645 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (780,999 | ) | (535,270 | ) | ||
Proceeds from sale of property, plant, and equipment |
| 750 |
| 0 |
| ||
Restricted cash |
| 51,789 |
| 558,356 |
| ||
|
|
|
|
|
| ||
Net cash provided by (used in) investing activities |
| (728,460 | ) | 23,086 |
| ||
F-7
|
| 2006 |
| 2005 |
| ||
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Increase (decrease) in cash: (continued) |
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|
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Cash flows from financing activities: |
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|
|
|
| ||
Repayment of long-term debt |
| (7,461,667 | ) | (1,150,000 | ) | ||
Bond issuance costs |
| 0 |
| (611,638 | ) | ||
Proceeds from issuance of capital stock |
| 1,125 |
| 98,500 |
| ||
Distributions to stockholders |
| (3,880,652 | ) | (1,926,615 | ) | ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (11,341,194 | ) | (3,589,753 | ) | ||
|
|
|
|
|
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Net change in cash |
| (2,790,518 | ) | 4,835,978 |
| ||
Cash at beginning |
| 7,832,447 |
| 2,996,469 |
| ||
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|
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Cash at end |
| $ | 5,041,929 |
| $ | 7,832,447 |
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Supplemental cash flow information: |
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|
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Cash paid during the year for: |
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|
|
|
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Interest |
| $ | 2,623,486 |
| $ | 3,653,343 |
|
Noncash investing and financing activities:
Retained earnings at December 31, 2006 and 2005 reflects a reduction of $1,379,916 and $961,099, respectively, of stockholders’ distributions accrued but not paid.
See accompanying notes to financial statements.
F-8
CityForest Corporation
Notes to Financial Statements
Note 1 Summary of Significant Accounting Policies
Principal Business Activity
CityForest Corporation (the “Company”) was formed on November 8, 1991. The primary operations of the Company commenced on August 27, 1993, through the acquisition of certain assets of Pope & Talbot, Wisconsin, Inc. (“Pope & Talbot”). The Company is primarily engaged in producing parent rolls of tissue paper from recycled paper for customers throughout the United States.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements.
The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 60 days from invoice date and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance for potential credit losses was $60,000 as of December 31, 2006 and 2005, and is reflected as an offset to accounts receivable in the accompanying balance sheets.
F-9
Inventories
Inventories are valued at the lower of cost or market with cost determined on a weighted average basis, which approximates first in, first out (FIFO) basis.
Property, Plant, Equipment, and Depreciation
Property, plant, and equipment are valued at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of property, plant, and equipment are reflected in income. Depreciation is computed on the straight-line method for financial reporting purposes, based on the estimated useful lives of the assets.
Buildings |
| 10-40 years |
|
Machinery and equipment |
| 5-20 years |
|
Furniture and office equipment |
| 3-10 years |
|
The Company has included all depreciation expense in operating expenses.
Bond Issuance Costs
Bond issuance costs have been capitalized and are being amortized to interest expense over the related bond terms using the straight-line method which approximates the interest method.
Revenue Recognition
Product sales are recognized when the product is shipped and all significant obligations of the Company have been satisfied.
F-10
Stock Compensation Plan
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting standards (SFAS) No. 123R, Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires that the cost of share-based payment transactions (including those with employees and nonemployees) be recognized in the financial statements. SFAS No. 123R applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities (1) in amounts based on the price of the entity’s shares or other equity instruments, or (2) that require settlement by the issuance of an entity’s shares or other equity instruments.
The Company adopted SFAS No. 123R, as required, on January 1, 2006, using the prospective transition method. As allowed under SFAS No. 123, the minimum value method was used to determine the fair value of previously issued options. As such, no compensation expense was recognized on options issued prior to the adoption of SFAS 123R.
There were no new stock grants in 2006, therefore, no compensation expense was recognized during 2006. In 2005, 30,000 options were granted with a weighted average fair value of $1.52 calculated using the minimum value method with an expected option life of seven years and risk-free interest rate of 4.27%.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code and comparable state regulations. Under these provisions, the Company does not pay federal or state corporate income taxes on its taxable income. Instead, the stockholders report on their personal income tax returns their proportionate share of the Company’s taxable income and tax credits.
The Company’s policy is to generally fund income tax liabilities to the shareholders at the highest effective federal and state tax rate.
F-11
Shipping and Handling
Revenue received from shipping and handling fees is reflected in net sales. Costs incurred for shipping and handling are reported in cost of sales.
Note 2 Inventories
Inventories consist of the following:
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
At current cost: |
|
|
|
|
| ||
Raw materials |
| $ | 992,316 |
| $ | 1,014,236 |
|
Finished goods |
| 445,021 |
| 465,050 |
| ||
|
|
|
|
|
| ||
Totals |
| $ | 1,437,337 |
| $ | 1,479,286 |
|
Note 3 Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
Land |
| $ | 1,138,164 |
| $ | 1,138,164 |
|
Buildings |
| 10,303,541 |
| 10,193,717 |
| ||
Machinery and equipment |
| 44,780,656 |
| 44,164,851 |
| ||
Furniture and office equipment |
| 602,165 |
| 592,128 |
| ||
|
|
|
|
|
| ||
Totals |
| 56,824,526 |
| 56,088,860 |
| ||
Less - Accumulated depreciation |
| 22,013,943 |
| 19,339,763 |
| ||
|
|
|
|
|
| ||
Net depreciated value |
| 34,810,583 |
| 36,749,097 |
| ||
Construction in progress |
| 118,532 |
| 74,200 |
| ||
|
|
|
|
|
| ||
Net property, plant, and equipment |
| $ | 34,929,115 |
| $ | 36,823,297 |
|
F-12
Note 4 Restricted Cash
Restricted cash consists of cash reserves required as a result of long-term debt financing.
Note 5 Bond Issuance Costs
Bond issuance costs consist of the following:
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
Bond issuance costs |
| $ | 3,305,907 |
| $ | 3,305,907 |
|
|
|
|
|
|
| ||
Totals |
| 3,305,907 |
| 3,305,907 |
| ||
Less - Accumulated amortization |
| 1,488,497 |
| 1,265,957 |
| ||
|
|
|
|
|
| ||
Net |
| $ | 1,817,410 |
| $ | 2,039,950 |
|
Note 6 Note Payable - Revolving Credit Agreements
As of December 31, 2006, the Company had a revolving credit agreement with Associated Bank in the amount of $3,500,000, of which none was in use at that date at an annual interest rate of the bank’s reference rate plus 1.75%, currently 7.10%. The borrowings are secured by accounts receivable, inventory, property, plant, and equipment.
As of December 31, 2005, the Company had a revolving credit agreement with Associated Bank in the amount of $3,500,000 of which none was in use at that date at an annual interest rate of the bank’s reference rate plus 2.25%, 6.54% at December 31, 2005. The borrowings are secured by accounts receivable, inventory, property, plant, and equipment.
F-13
Note 7 Long-Term Debt
Long-term debt consists of the following:
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
Variable rate City of Ladysmith Industrial Revenue Bonds, which require semiannual principal payments of $575,000 due March and September and interest which is due monthly. In 2005, the Company also paid fees to Union Bank of California for bond servicing and a bank letter of credit related to the bonds which it includes in net interest expense. On June 29, 2005, the Company entered into a bank letter of credit with Associated Bank related to the bonds. The Company also pays fees to Associated Bank which it includes in net interest expense. The variable interest rate for the week which includes December 31, 2006 was 4.11%. The bonds have a final maturity date of March 1, 2028, and are collateralized by substantially all assets of the Company. |
| $ | 19,025,000 |
| $ | 20,175,000 |
|
|
|
|
|
|
| ||
Secured Subordinated Convertible Note A with the State of Wisconsin Investment Board bearing interest at 28.7%. The note was paid in two payments, one in the amount of $500,000, which was due and paid at closing, and the balance due June 11, 2009 was paid off on June 12, 2006. Interest was payable twice annually in March and September. In 2006, the second interest payment was paid June 12 with the pay off of principal. |
| 0 |
| 4,645,000 |
| ||
|
|
|
|
|
| ||
Discount on Note A, original discount amount $145,000. This was written off as of June 12, 2006. |
| 0 |
| (99,889 | ) | ||
F-14
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
Secured Subordinated Convertible Note B with the State of Wisconsin Investment Board bearing interest at 20.0%. The note was due in one payment on June 11, 2009, but was paid off in two payments on June 12, 2006 and September 1, 2006. Interest was payable twice annually in March and September. In 2006, interest was paid in March and with both the June 12 and September 1 principal payments. |
| $ | 0 |
| $ | 1,666,667 |
|
|
|
|
|
|
| ||
Discount on Note B, original discount amount $416,667. This was written off as of September 1, 2006. |
| 0 |
| (287,037 | ) | ||
|
|
|
|
|
| ||
Subordinated Convertible Notes A and B Success Fee. At the maturity date or payment of the Subordinated Notes A and B, the Company will pay the note holders a fee equal to the lesser of $2.5 million or 10% of the Company’s Residual Value as defined in the loan agreement. The Company was accruing the present value of the success fee based on the Residual Value calculation. The success fee was paid off on September 1, 2006. |
| 0 |
| 583,000 |
| ||
|
|
|
|
|
| ||
Totals |
| 19,025,000 |
| 26,682,741 |
| ||
Less - Current maturities |
| 1,150,000 |
| 1,150,000 |
| ||
|
|
|
|
|
| ||
Long-term portion |
| $ | 17,875,000 |
| $ | 25,532,741 |
|
The bonds and notes payable are subject to a Collateral Agency Agreement which provides, among other matters, certain restrictive covenants, including limitations on additional borrowing and payment of distributions.
F-15
Required payments of principal on long-term notes payable at December 31, 2006, including current maturities, are summarized as follows:
2007 |
| $ | 1,150,000 |
|
2008 |
| 1,150,000 |
| |
2009 |
| 1,150,000 |
| |
2010 |
| 1,150,000 |
| |
2011 |
| 1,150,000 |
|
Note 8 Employee Benefit Plans
The Company sponsors a 401(k) retirement savings plan that covers substantially all full-time employees. Contributions to the plan are based on eligible employees’ voluntary pretax contributions. The Company makes an annual contribution to the savings plan of 3% of each participant’s qualified salary for all employees contributing a minimum of 1%. For 2006 and 2005, the amount of costs and expenses related to the plan was $113,879 and $122,805, respectively.
The Company also sponsors an Employee Share Incentive Plan (the “Plan”) covering substantially all non-officer full-time employees. Under the provisions of the Plan, eligible employees are allocated share units annually that have a zero value at the date of issuance. The share units become fully vested four years from the date of issuance. The Plan provides for two possible means of payment. First, a dividend is paid for each share unit employees hold that is equal to any non-tax related distribution issued for each share of CityForest stock. Second, an appreciation value is paid for each share unit that becomes vested on the fourth Accounting Date (December 31). The appreciation value is the difference between the value of a share of actual CityForest stock on the fourth Accounting Date and the greater of the value on the Accounting Date when issued or any previous Accounting Date. The value of a share of Company’s stock at each Accounting Date is determined by the Company’s Board of Directors.
At December 31, 2006 and 2005, there were 202,813 and 202,994, share units outstanding under the Plan, respectively. The balance sheets at December 31, 2006 and 2005, include an accrual of approximately $1,036,000 and $733,000 under the terms of the Plan, respectively.
F-16
Note 9 Stock Option Plan
During 1992, the Company adopted the 1992 Stock Option Plan (the “Plan”) and reserved 800,000 shares of Company common stock for issuance to directors, officers, and employees upon exercise of options. Options were granted under the Plan at the discretion of the Company’s Board of Directors and are incentive options intended to qualify for favorable tax treatment. Options were granted until February 7, 2002, the expiration date of the plan. Options to purchase shares of the Company’s common stock were granted at a price not less than the market price of the stock at the date of grant.
During 2003, the Company adopted the 2003 Stock Option Plan (the “Plan”) and reserved 500,000 shares of Company common stock for issuance to directors, officers, and employees upon exercise of options. Options granted under this Plan are also at the discretion of the Company’s Board of Directors and are incentive options intended to qualify for favorable tax treatment. Options may be granted until July 24, 2013, the expiration date of the plan. Options to purchase shares of the Company’s common stock are granted at a price not less than the market price of the stock at the date of grant.
The options under both plans generally vest over a four-year period following the grant date. The options expire if not exercised within seven years from the date of grant.
A summary of stock option activity for the years ended 2006 and 2005 follows:
| Weighted |
|
|
| ||
|
| Average |
|
|
| |
|
| Exercise Price |
| Outstanding |
| |
Outstanding at December 31, 2004 |
| 3.88 |
| 147,500 |
| |
Granted |
| $ | 6.00 |
| 30,000 |
|
Exercised |
| 2.63 |
| (37,500 | ) | |
|
|
|
|
|
| |
Outstanding at December 31, 2005 |
| 4.68 |
| 140,000 |
| |
Expired |
| 6.50 |
| (40,000 | ) | |
|
|
|
|
|
| |
Outstanding at December 31, 2006 |
| $ | 3.95 |
| 100,000 |
|
F-17
At December 31, 2006, the range of exercise prices for outstanding stock options was $1.00 to $6.50 and the weighted average remaining contractual life of outstanding options was 3.38 years.
At December 31, 2006, 66,000 were exercisable with a range of exercise prices from $1.00 to $6.50. The weighted average exercise price and weighted average remaining contractual life of exercisable options was $3.80 and 2.22 years, respectively.
A summary of nonvested options as of December 31, 2006 follows:
| Weighted |
|
|
| |||
|
| Average |
|
|
| ||
|
| Grant Date |
|
|
| ||
|
| Fair Value |
| Options |
| ||
|
|
|
|
|
| ||
Nonvested at December 31, 2004 |
| 0.20 |
| $ | 34,000 |
| |
Granted |
| 1.52 |
| 30,000 |
| ||
Vested |
| 0.13 |
| (12,000 | ) | ||
|
|
|
|
|
| ||
Nonvested at December 31, 2005 |
| 0.96 |
| 52,000 |
| ||
Vested |
| 0.76 |
| (18,000 | ) | ||
|
|
|
|
|
| ||
Outstanding at December 31, 2006 |
| $ | 1.07 |
| $ | 34,000 |
|
As of December 31, 2006, there was $36,400 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted under the plans. That cost is expected to be recognized over a weighted-average period of 2.71 years.
F-18
Warrants
On April 27, 2004, the Company’s Board of Directors authorized the issuance of warrants for the purchase of 62,500 shares of common stock at $1.00 per share to be executed simultaneously with the restructuring close. The outstanding warrants are exercisable through June 11, 2014.
Information with respect to these warrants is summarized as follows:
| Weighted |
|
|
| ||
|
| Average |
|
|
| |
|
| Exercise Price |
| Outstanding |
| |
|
|
|
|
|
| |
Outstanding at December 31, 2004 |
| $ | 1.00 |
| 62,500 |
|
Granted |
| 0.00 |
| 0 |
| |
Exercised |
| 0.00 |
| 0 |
| |
Outstanding at December 31, 2005 |
| 1.00 |
| 62,500 |
| |
Exercised |
| 1.00 |
| (1,125 | ) | |
|
|
|
|
|
| |
Outstanding at December 31, 2006 |
| $ | 1.00 |
| 61,375 |
|
At December 31, 2006, the weighted average remaining life of outstanding and exercisable warrants was 7.45 years.
F-19
Note 10 Self-Funded Insurance
The Company had a self-funded health care plan which provided medical benefits to employees and their dependents that ended September 30, 2006. This health care cost was expensed as incurred. The health care expense was based upon actual claims paid, reinsurance premiums, administration fees, and unpaid claims at year-end. The Company bought reinsurance to cover catastrophic individual claims over $30,000 but not until those claims are over $57,000 in the aggregate.
On October 1, 2006, the Company entered into a standard health insurance plan through Security Health Plan.
Health care expense for the self-funded insurance for 2006 and 2005 was approximately $680,000 and $1,137,000, respectively. A liability of $100,000 was recorded for claims outstanding at 2005. Management believed this liability was sufficient to cover estimated claims including claims incurred but not yet reported.
Note 11 Concentrations
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash equivalents, sales to a major customer, and trade receivables.
The Company maintains its cash in bank deposit accounts at various financial institutions. The balances, at times, may exceed federally insured limits. At December 31, 2006 and 2005, the Company exceeded the insured limit by $7,040,080 and $9,736,125, respectively.
The Company has one customer whose sales were 15% and 11% of total sales in 2006 and 2005, respectively.
To reduce credit risk, the Company performs credit evaluations of its customers’ financial conditions but does not generally require collateral.
F-20
Note 12 EBITDA Calculation
The Company’s earnings before interest, taxes, depreciation, and amortization is as follows:
| 2006 |
| 2005 |
| |||
|
|
|
|
|
| ||
Net income |
| $ | 7,873,686 |
| $ | 4,771,003 |
|
Plus: Interest expense |
| 2,130,778 |
| 3,424,009 |
| ||
Depreciation and loss on property, plant, and equipment disposals |
| 2,675,181 |
| 2,966,471 |
| ||
Amortization |
| 222,540 |
| 190,904 |
| ||
Loss on extinguishment of debt |
| 2,029,011 |
| 0 |
| ||
EBITDA |
| $ | 14,931,196 |
| $ | 11,352,387 |
|
Management has elected not to show a reduction for interest income in the amounts of $328,920 and $156,136. The EBITDA calculated above agrees with Company reported EBITDA.
Note 13 Commitments and Contingencies
Employment Contracts
The Company entered into Non-Competition and Continuing Employment Agreements with three key officers of the Company on April 29, 2005, which were amended effective November 7, 2006. These agreements replaced the prior employee contracts that expired November 15, 2004. The new employee agreements are terminable at will by the employer or employee at any time. Upon a termination of the employee without cause or a resignation of employee for Good Reason the employer will provide the employee with a severance package that includes one year’s salary and the employee’s portion of any required COBRA for the continuation of health insurance.
F-21
Purchase Commitments
From time to time, the Company engages in natural gas pricing strategies such as commodity locks, maximum pricing, and commodity price range purchasing. At December 31, 2006, the Company had entered into a commodity lock for 20,000 dtherms per month for the period of January through March 2007 and a commodity price range purchase for 10,000 dtherms per month for the period of January 2007 through September 2008.
The Company has also entered into a Wastepaper Purchase/Supply Agreement with one of its suppliers to provide approximately 30% (approximately 1900 tons) of the Company’s fiber purchases through October 20, 2007, with the price per ton based on market prices.
Lawsuits
In the ordinary course of conducting business, the Company occasionally becomes involved in legal proceedings relating to contracts, environmental issues, or other matters. While any proceeding or litigation asserted against the Company has an element of uncertainty, management of the Company believes that the outcome of any pending or threatened actions will not have a material adverse effect on the business or financial condition of the Company.
Note 14 Extinguishment of Debt
In 2006, the Company completely paid off, as stated in Note 7 Long-Term Debt, both Note A and Note B subordinated debt. This was an early payoff of notes that had maturity dates of June 2009. As a consequence of these early payoffs, certain costs associated with these notes that were being accrued and amortized over the entire term of the notes were expensed at the times of payoff. These costs included $1,703,122 of success fee, $87,000 remaining discount on Note A, and $238,889 remaining discount on Note B.
F-22
Note 15 Subsequent Event
On February 26, 2007 the Company signed a definitive merger agreement to sell all of the outstanding capital stock to Cellu Tissue Holdings (“Cellu Tissue”). The merger is subject to various conditions and approvals, and upon completion, the Company will become a wholly-owned subsidiary of Cellu Tissue. The Company expects to complete the transaction by March 31, 2007.
Note 16 Management’s Discussion and Analysis of Financial Condition and Results of Operations (Unaudited)
The Company benefited in 2006 from healthy external market conditions and from the Company’s internal performance. The economy and the parent roll tissue market strengthened in 2004 and these conditions continued throughout 2005 and 2006. The Company responded by continuing its effort to migrate to higher valued commodity products and specialty products and to implement price increases in 2005 and 2006.
The Company was able to utilize the resulting cash from its financial performance by repaying all of its Senior Subordinated Debt and related Success Fees in 2006.
The Company’s cost management along with continued production improvements further enhanced the Company’s financial performance resulting in historical highs to income and EBITDA.
Note 17 Reclassification
Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 classifications.
F-23
Independent Auditor’s Report
Board of Directors
CityForest Corporation
Ladysmith, Wisconsin
We have audited the accompanying balance sheets of CityForest Corporation as of December 31, 2005 and 2004, and the related statements of income, stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of CityForest Corporation as of December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States.
Wipfli LLP
January 26, 2006
Hudson, Wisconsin
F-1
CityForest Corporation
Balance Sheets
December 31, 2005 and 2004
Assets |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash |
| $ | 7,832,447 |
| $ | 2,996,469 |
|
Accounts receivable |
| 4,582,457 |
| 4,441,980 |
| ||
Inventories |
| 1,479,286 |
| 1,369,277 |
| ||
Prepaid expenses |
| 1,182,916 |
| 1,086,121 |
| ||
Prepaid interest |
| 183,303 |
| 95,162 |
| ||
|
|
|
|
|
| ||
Total current assets |
| 15,260,409 |
| 9,989,009 |
| ||
|
|
|
|
|
| ||
Property, plant, and equipment |
| 36,823,297 |
| 39,254,498 |
| ||
|
|
|
|
|
| ||
Other assets: |
|
|
|
|
| ||
Restricted cash |
| 1,695,372 |
| 2,253,728 |
| ||
Bond issuance costs - Net |
| 2,039,950 |
| 1,619,216 |
| ||
|
|
|
|
|
| ||
Total other assets |
| 3,735,322 |
| 3,872,944 |
| ||
|
|
|
|
|
| ||
TOTAL ASSETS |
| $ | 55,819,028 |
| $ | 53,116,451 |
|
F-2
Liabilities and Stockholders’ Equity |
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Current maturities - Long-term debt |
| $ | 1,150,000 |
| $ | 1,150,000 |
|
Accounts payable |
| 2,482,015 |
| 2,372,228 |
| ||
Accrued expenses and other liabilities: |
|
|
|
|
| ||
Interest |
| 612,697 |
| 753,890 |
| ||
Accrued expenses |
| 1,466,181 |
| 975,702 |
| ||
Distributions payable |
| 961,099 |
| 0 |
| ||
|
|
|
|
|
| ||
Total current liabilities |
| 6,671,992 |
| 5,251,820 |
| ||
|
|
|
|
|
| ||
Long-term liabilities: |
|
|
|
|
| ||
Long-term debt |
| 25,532,741 |
| 26,308,408 |
| ||
Accrued employee benefits |
| 347,947 |
| 271,664 |
| ||
|
|
|
|
|
| ||
Total long-term liabilities |
| 25,880,688 |
| 26,580,072 |
| ||
|
|
|
|
|
| ||
Stockholders’ equity: |
|
|
|
|
| ||
Common stock |
| 19,767 |
| 19,392 |
| ||
Additional paid-in capital |
| 524,522 |
| 426,397 |
| ||
Retained earnings |
| 22,722,059 |
| 20,838,770 |
| ||
|
|
|
|
|
| ||
Total stockholders’ equity |
| 23,266,348 |
| 21,284,559 |
| ||
|
|
|
|
|
| ||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
| $ | 55,819,028 |
| $ | 53,116,451 |
|
See accompanying notes to financial statements.
F-3
Statements of Income
Years Ended December 31, 2005 and 2004
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Sales |
| $ | 43,121,204 |
| $ | 40,488,307 |
|
Cost of sales |
| 29,623,382 |
| 31,011,265 |
| ||
|
|
|
|
|
| ||
Gross profit on sales |
| 13,497,822 |
| 9,477,042 |
| ||
|
|
|
|
|
| ||
Operating expenses: |
|
|
|
|
| ||
Selling, general, and administrative |
| 2,660,632 |
| 2,594,124 |
| ||
Depreciation |
| 2,642,178 |
| 2,653,062 |
| ||
|
|
|
|
|
| ||
Total operating expenses |
| 5,302,810 |
| 5,247,186 |
| ||
|
|
|
|
|
| ||
Income from operations |
| 8,195,012 |
| 4,229,856 |
| ||
Interest expense |
| 3,424,009 |
| 3,769,982 |
| ||
|
|
|
|
|
| ||
Income before extraordinary item |
| 4,771,003 |
| 459,874 |
| ||
Extraordinary item - Gain on restructuring of troubled debt - Net |
| 0 |
| 30,105,898 |
| ||
|
|
|
|
|
| ||
Net income |
| $ | 4,771,003 |
| $ | 30,565,772 |
|
See accompanying notes to financial statements.
F-4
Statements of Stockholders’ Equity
Years Ended December 31, 2005 and 2004
|
| Common Stock |
|
|
|
|
|
|
| ||||||
|
| $.01 Par Value |
| Additional |
| Retained |
| Total |
| ||||||
|
| Authorized 10,000,000 |
| Paid-In |
| Earnings |
| Stockholders’ |
| ||||||
|
| Shares |
| Amount |
| Capital |
| (Deficit) |
| Equity (Deficit) |
| ||||
Balances at |
| 1,939,223 |
| $ | 19,392 |
| $ | 426,397 |
| $ | (9,727,002 | ) | $ | (9,281,213 | ) |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| 0 |
| 0 |
| 0 |
| 30,565,772 |
| 30,565,772 |
| ||||
Stock issued |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||
Distributions to stockholders |
| 0 |
| 0 |
| 0 |
| 0 |
| 0 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balances at |
| 1,939,223 |
| 19,392 |
| 426,397 |
| 20,838,770 |
| 21,284,559 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| 0 |
| 0 |
| 0 |
| 4,771,003 |
| 4,771,003 |
| ||||
Stock issued |
| 37,500 |
| 375 |
| 98,125 |
| 0 |
| 98,500 |
| ||||
Distributions to stockholders |
| 0 |
| 0 |
| 0 |
| (2,887,714 | ) | (2,887,714 | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
| ||||
Balances at |
| 1,976,723 |
| $ | 19,767 |
| $ | 524,522 |
| $ | 22,722,059 |
| $ | 23,266,348 |
|
See accompanying notes to financial statements.
F-5
Statements of Cash Flows
Years Ended December 31, 2005 and 2004
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Increase (decrease) in cash: |
|
|
|
|
| ||
Cash flows from operating activities: |
|
|
|
|
| ||
Net income |
| $ | 4,771,003 |
| $ | 30,565,772 |
|
|
|
|
|
|
| ||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| ||
Extraordinary item, gross |
| 0 |
| (32,405,325 | ) | ||
Provision for bond issuance costs |
| 0 |
| 1,073,561 |
| ||
Provision for depreciation |
| 2,642,178 |
| 2,653,062 |
| ||
Provision for amortization |
| 190,904 |
| 242,650 |
| ||
Provision for deferred interest payments |
| 0 |
| 1,641,371 |
| ||
Provision for success fee |
| 262,000 |
| 77,000 |
| ||
Provision for amortization of discount |
| 112,333 |
| 62,407 |
| ||
Provision for losses on accounts receivable |
| 0 |
| 72,622 |
| ||
Loss on property, plant, and equipment disposals |
| 324,293 |
| 427,291 |
| ||
Changes in operating assets and liabilities: |
|
|
|
|
| ||
Accounts receivable |
| (140,477 | ) | (298,766 | ) | ||
Inventories |
| (110,009 | ) | (82,290 | ) | ||
Prepaid expenses |
| (96,795 | ) | (32,566 | ) | ||
Prepaid interest |
| (88,141 | ) | (14,588 | ) | ||
Accounts payable |
| 109,787 |
| 130,604 |
| ||
Accrued interest |
| (141,193 | ) | 20,472 |
| ||
Accrued expenses |
| 566,762 |
| 471,268 |
| ||
|
|
|
|
|
| ||
Total adjustments |
| 3,631,642 |
| (25,961,227 | ) | ||
|
|
|
|
|
| ||
Net cash provided by operating activities |
| 8,402,645 |
| 4,604,545 |
| ||
|
|
|
|
|
| ||
Cash flows from investing activities: |
|
|
|
|
| ||
Capital expenditures |
| (535,270 | ) | (668,519 | ) | ||
Restricted cash |
| 558,356 |
| 1,000,787 |
| ||
|
|
|
|
|
| ||
Net cash provided by investing activities |
| 23,086 |
| 332,268 |
| ||
F-6
|
| 2005 |
| 2004 |
| ||
|
|
|
|
|
| ||
Increase (decrease) in cash: (continued) |
|
|
|
|
| ||
Cash flows from financing activities: |
|
|
|
|
| ||
Net decrease in short-term debt |
| $ | 0 |
| $ | (2,380,144 | ) |
Repayment of long-term debt |
| (1,150,000 | ) | (2,150,000 | ) | ||
Debt restructuring reserve |
| 0 |
| (1,288,859 | ) | ||
Bond issuance costs |
| (611,638 | ) | 0 |
| ||
Proceeds from issuance of capital stock |
| 98,500 |
| 0 |
| ||
Distributions to stockholders |
| (1,926,615 | ) | 0 |
| ||
|
|
|
|
|
| ||
Net cash used in financing activities |
| (3,589,753 | ) | (5,819,003 | ) | ||
|
|
|
|
|
| ||
Net change in cash |
| 4,835,978 |
| (882,190 | ) | ||
Cash at beginning |
| 2,996,469 |
| 3,878,659 |
| ||
|
|
|
|
|
| ||
Cash at end |
| $ | 7,832,447 |
| $ | 2,996,469 |
|
|
|
|
|
|
| ||
Supplemental cash flow information: |
|
|
|
|
| ||
Cash paid during the year for: |
|
|
|
|
| ||
Interest |
| $ | 3,653,343 |
| $ | 2,122,729 |
|
Noncash investing and financing activities:
Retained earnings at December 31, 2005 reflects a reduction of $961,099 of stockholders’ distributions accrued but not paid.
During 2004, the Company retired debt, accrued interest, and fees of $38.9 million with a payment of $6.25 million resulting in a $32.4 million noncash debt forgiveness.
See accompanying notes to financial statements.
F-7
Notes to Financial Statements
Note 1 Summary of Significant Accounting Policies
Principal Business Activity
CityForest Corporation (the “Company”) was formed on November 8, 1991. The primary operations of the Company commenced on August 27, 1993, through the acquisition of certain assets of Pope & Talbot, Wisconsin, Inc. (“Pope & Talbot”). The Company is primarily engaged in producing parent rolls of tissue paper from recycled paper for customers throughout the United States.
Use of Estimates in Preparation of Financial Statements
The preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United States requires management to make certain estimates and assumptions that directly affect the results of reported assets, liabilities, revenue, and expenses. Actual results may differ from these estimates.
Accounts Receivable
Accounts receivable are stated at the amount management expects to collect from outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based on its assessment of the current status of individual accounts. Balances that are still outstanding after management has used reasonable collection efforts are written off through a charge to the valuation allowance and a credit to trade accounts receivable. Changes in the valuation allowance have not been material to the financial statements.
The carrying amount of accounts receivable is reduced by an allowance that reflects management’s best estimate of the amounts that will not be collected. Management individually reviews all accounts receivable balances that exceed 60 days from invoice date and, based on an assessment of current creditworthiness, estimates the portion, if any, of the balance that will not be collected. The allowance for potential credit losses was $60,000 as of December 31, 2005 and 2004, and is reflected as an offset to accounts receivable in the accompanying balance sheets.
F-8
Inventories
Inventories are valued at the lower of cost or market with cost determined on a weighted average basis, which approximates first in, first out (FIFO) basis.
Property, Plant, Equipment, and Depreciation
Property, plant, and equipment are valued at cost. Maintenance and repair costs are charged to expense as incurred. Gains or losses on disposition of property, plant, and equipment are reflected in income. Depreciation is computed on the straight-line method for financial reporting purposes, based on the estimated useful lives of the assets.
Buildings |
| 20-40 years |
Machinery and equipment |
| 5-20 years |
Furniture and office equipment |
| 3-10 years |
The Company has included all depreciation expense in operating expenses.
Debt Issuance Costs
Debt issuance costs have been capitalized and are being amortized to interest expense over the related debt terms using the straight-line method which approximates the interest method.
Revenue Recognition
Product sales are recognized when the product is shipped and all significant obligations of the Company have been satisfied.
F-9
Stock Compensation Plan
Generally accepted accounting principles encourage all entities to adopt a fair value based method of accounting for employee stock compensation plans, whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. However, they also allow an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting, whereby compensation cost is the excess, if any, of the fair value of the stock at the grant date (or other measurement date) over the amount an employee must pay to acquire the stock.
The Company has elected to adopt the intrinsic value based method. Stock options issued under the Company’s stock option plan have no intrinsic value at the grant date, and no compensation cost is recognized for them. Had compensation cost been determined on the basis of fair value, net income would have changed for the years ended December 31, 2005 and 2004 as follows:
| 2005 |
| 2004 |
| |||
Net income, as reported |
| $ | 4,771,003 |
| $ | 30,565,772 |
|
Total stock-based compensation expense determined under the fair value based method |
| (6,030 | ) | (6,030 | ) | ||
|
|
|
|
|
| ||
Pro forma net income |
| $ | 4,764,973 |
| $ | 30,559,742 |
|
F-10
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code and comparable state regulations. Under these provisions, the Company does not pay federal or state corporate income taxes on its taxable income. Instead, the stockholders report on their personal income tax returns their proportionate share of the Company’s taxable income and tax credits.
The Company’s policy is to generally fund income tax liabilities to the shareholders at the highest effective federal and state tax rate.
New Accounting Pronouncement
In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting standards (SFAS) No. 123R, Share-Based Payment, which replaces SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. SFAS No. 123R requires that the cost of share-based payment transactions (including those with employees and nonemployees) be recognized in the financial statements. SFAS No. 123R applies to all share-based payment transactions in which an entity acquires goods or services by issuing (or offering to issue) its shares, share options, or other equity instruments or by incurring liabilities (1) in amounts based on the price of the entity’s shares or other equity instruments, or (2) that require settlement by the issuance of an entity’s shares or other equity instruments.
The Company adopted SFAS No. 123R, as required, on January 1, 2006. Since the statement was adopted using the modified-prospective method, the effect the adoption will have on the financial statements can be materially impacted by the number of options granted in future periods. As allowed under SFAS No. 123, the minimum value method was used to determine the fair value of previously issued options. As such, no compensation expense was recognized on options issued prior to the adoption of SFAS 123R.
F-11
Note 2 Inventories
Inventories consist of the following:
| 2005 |
| 2004 |
| |||
|
|
|
|
|
| ||
At current cost: |
|
|
|
|
| ||
Raw materials |
| $ | 1,014,236 |
| $ | 956,691 |
|
Finished goods |
| 465,050 |
| 412,586 |
| ||
|
|
|
|
|
| ||
Totals |
| $ | 1,479,286 |
| $ | 1,369,277 |
|
Note 3 Property, Plant, and Equipment
Property, plant, and equipment consist of the following:
| 2005 |
| 2004 |
| |||
Land |
| $ | 1,138,164 |
| $ | 1,138,164 |
|
Buildings |
| 10,193,717 |
| 10,193,717 |
| ||
Machinery and equipment |
| 44,164,851 |
| 44,465,458 |
| ||
Furniture and office equipment |
| 592,128 |
| 459,469 |
| ||
|
|
|
|
|
| ||
Total |
| 56,088,860 |
| 56,256,808 |
| ||
Less - Accumulated depreciation |
| 19,339,763 |
| 17,093,995 |
| ||
|
|
|
|
|
| ||
Net depreciated value |
| 36,749,097 |
| 39,162,813 |
| ||
Construction in progress |
| 74,200 |
| 91,685 |
| ||
|
|
|
|
|
| ||
Net property, plant, and equipment |
| $ | 36,823,297 |
| $ | 39,254,498 |
|
Note 4 Restricted Cash
Restricted cash consists of cash reserves required as a result of long-term debt financing.
F-12
Note 5 Note Payable - Revolving Credit Agreements
As of December 31, 2005, the Company had a revolving credit agreement with Associated Bank in the amount of $3,500,000, of which none was in use at that date at an annual interest rate of the bank’s reference rate plus 2.25%, currently 6.54%. The borrowings are secured by accounts receivable, inventory, property, plant, and equipment.
As of December 31, 2004, the Company had a revolving credit agreement with Union Bank of California in the amount of $3,500,000 of which none was in use at that date at an annual interest rate of the bank’s reference rate plus 3.00%, or 8.25%.
Note 6 Long-Term Debt
Long-term debt consist of the following:
| 2005 |
| 2004 |
| |||
|
|
|
|
|
| ||
Variable rate City of Ladysmith Industrial Revenue Bonds, which require semiannual principal payments of $575,000 due March and September and interest which is due monthly. In 2005 and 2004, the Company also paid fees to Union Bank of California for bond servicing and a bank letter of credit related to the bonds which it includes in net interest expense. On June 29, 2005, the Company entered into a bank letter of credit with Associated Bank related to the bonds. The Company also pays fees to Associated Bank which it includes in net interest expense. The variable interest rate for the week which includes December 31, 2005 was 3.73%. The bonds have a final maturity date of March 1, 2028, and are collateralized by substantially all assets of the Company. |
| $ | 20,175,000 |
| $ | 21,325,000 |
|
F-13
| 2005 |
| 2004 |
| |||
|
|
|
|
|
| ||
Secured Subordinated Convertible Note A with the State of Wisconsin Investment Board bearing interest at 28.7%. The note is due in two payments, one in the amount of $500,000, which was due and paid at closing, and the balance due June 11, 2009. Interest is payable twice annually in March and September. |
| $ | 4,645,000 |
| $ | 4,645,000 |
|
|
|
|
|
|
| ||
Discount on Note A, original discount amount $145,000. |
| (99,889 | ) | (128,889 | ) | ||
|
|
|
|
|
| ||
Secured Subordinated Convertible Note B with the State of Wisconsin Investment Board bearing interest at 20.0%. The note is due in one payment on June 11, 2009. Interest is payable twice annually in March and September. |
| 1,666,667 |
| 1,666,667 |
| ||
|
|
|
|
|
| ||
Discount on Note B, original discount amount $416,667. |
| (287,037 | ) | (370,370 | ) | ||
|
|
|
|
|
| ||
Subordinated Convertible Notes A and B Success Fee. At the maturity date or payment of the Subordinated Notes A and B, the Company will pay the note holders a fee equal to the lesser of $2.5 million or 10% of the Company’s Residual Value as defined in the loan agreement. The Company is accruing the present value of the success fee based on the Residual Value calculation. |
| 583,000 |
| 321,000 |
| ||
|
|
|
|
|
| ||
Totals |
| 26,682,741 |
| 27,458,408 |
| ||
Less - Current maturities |
| 1,150,000 |
| 1,150,000 |
| ||
|
|
|
|
|
| ||
Long-term portion |
| $ | 25,532,741 |
| $ | 26,308,408 |
|
F-14
The bonds and notes payable are subject to a Collateral Agency Agreement which provides, among other matters, certain restrictive covenants, including limitations on additional borrowing and payment of distributions.
Required payments of principal on long-term notes payable at December 31, 2005, including current maturities, are summarized as follows:
2006 |
| $ | 1,150,000 |
|
2007 |
| 1,150,000 |
| |
2008 |
| 1,150,000 |
| |
2009 |
| 7,461,667 |
| |
2010 |
| 1,150,000 |
|
Note 7 Employee Benefit Plans
The Company sponsors a 401(k) retirement savings plan that covers substantially all full-time employees. Contributions to the plan are based on eligible employees’ voluntary pretax contributions. The Company makes an annual contribution to the savings plan of 3% of each participant’s qualified salary for all employees contributing a minimum of 1%. For 2005 and 2004, the amount of costs and expenses related to the plan was $122,805 and $123,817, respectively.
The Company also sponsors an Employee Share Incentive Plan (the “Plan”) covering substantially all non-officer full-time employees. Under the provisions of the Plan, eligible employees are allocated share units annually that have a zero value at the date of issuance. The share units become fully vested four years from the date of issuance. The Plan provides for two possible means of payment. First, a dividend is paid for each share unit employees hold that is equal to any non-tax related distribution issued for each share of CityForest stock. Second, an appreciation value is paid for each share unit that becomes vested on the fourth Accounting Date (December 31). The appreciation value is the difference between the value of a share of actual CityForest stock on the fourth Accounting Date and the greater of the value on the Accounting Date when issued or any previous Accounting Date. The value of a share of Company’s stock at each Accounting Date is determined by the Company’s Board of Directors.
F-15
At December 31, 2005 and 2004, there were 202,994 and 188,821, share units outstanding under the Plan, respectively. The financial statements at December 31, 2005 and 2004, include an accrual of approximately $733,000 and $423,000 under the terms of the Plan, respectively.
Note 8 Stock Option Plan
During 1992, the Company adopted the 1992 Stock Option Plan (the “Plan”) and reserved 800,000 shares of Company common stock for issuance to directors, officers, and employees upon exercise of options. Options were granted under the Plan at the discretion of the Company’s Board of Directors and are incentive options intended to qualify for favorable tax treatment. Options were granted until February 7, 2002, the expiration date of the plan. Options to purchase shares of the Company’s common stock were granted at a price not less than the market price of the stock at the date of grant.
During 2003, the Company also adopted the 2003 Stock Option Plan (the “Plan”) and reserved 500,000 shares of Company common stock for issuance to directors, officers, and employees upon exercise of options. Options granted under this Plan are also at the discretion of the Company’s Board of Directors and are incentive options intended to qualify for favorable tax treatment. Options may be granted until July 24, 2013, the expiration date of the plan. Options to purchase shares of the Company’s common stock are granted at a price not less than the market price of the stock at the date of grant.
The options under both plans generally vest over a four-year period following the grant date. The options expire if not exercised within seven years from the date of grant.
F-16
Following is a summary of stock option transactions for the years ended December 31, 2005 and 2004:
| Number of |
|
|
| ||
|
| Options |
| Price Range |
| |
Outstanding at December 31, 2003 |
| 167,500 |
| $ | 1.00 - $6.50 |
|
Granted |
| 0 |
|
|
| |
Exercised |
| 0 |
|
|
| |
Expired |
| (20,000 | ) |
|
| |
|
|
|
|
|
| |
Outstanding at December 31, 2004 |
| 147,500 |
| $ | 1.00 - $6.50 |
|
Granted |
| 30,000 |
| $ | 6.00 |
|
Exercised |
| (37,500 | ) | $ | 1.00 - $6.50 |
|
Expired |
| 0 |
|
|
| |
|
|
|
|
|
| |
Outstanding at December 31, 2005 |
| 140,000 |
| $ | 1.00 - $6.50 |
|
|
|
|
|
|
| |
Exercisable at end of year |
| 88,000 |
| $ | 1.00 - $6.50 |
|
|
|
|
|
|
| |
Available for grant |
| 412,000 |
|
|
|
The weighted average fair value of each option granted in 2005 was estimated on the grant date to be $1.52 using the minimum value method as allowed for nonpublic companies. The minimum value of the Company’s stock options is determined by a present value calculation. The current price of the stock is reduced by the expected dividends on the stock, if any, during the option’s term minus the present value of the exercise price. The present value calculated used a risk-free rate of return of 4.27% for the seven-year period.
Warrants
On April 27, 2004, the Company’s Board of Directors authorized the issuance of warrants for the purchase of 62,500 shares of common stock at $1.00 per share to be executed simultaneously with the restructuring close. None of the warrants were exercised as of December 31, 2005. The warrants are exercisable through June 11, 2014.
F-17
Note 9 Self-Funded Insurance
The Company has a self-funded health care plan which provides medical benefits to employees and their dependents. This health care cost is expensed as incurred. The health care expense is based upon actual claims paid, reinsurance premiums, administration fees, and unpaid claims at year-end. The Company buys reinsurance to cover catastrophic individual claims over $30,000 but not until those claims are over $57,000 in the aggregate.
Health care expense for 2005 and 2004 was approximately $984,000 and $759,000, respectively. A liability of $100,000 and $60,000 has been recorded for claims outstanding at December 31, 2005 and 2004, respectively. Management believes this liability is sufficient to cover estimated claims including claims incurred but not yet reported.
Note 10 Major Customers
The Company has three customers that exceed 10% of sales. They are as follows:
| 2005 |
| 2004 |
| |
Customer A |
| 11 | % | 8 | % |
Customer B |
| 8 | % | 14 | % |
Customer C |
| 7 | % | 13 | % |
F-18
Note 11 EBITDA Calculation
The Company’s earnings before interest, taxes, depreciation, and amortization is as follows:
| 2005 |
| 2004 |
| |||
|
|
|
|
|
| ||
Income before extraordinary item |
| $ | 4,771,003 |
| $ | 459,874 |
|
Plus: Interest expense |
| 3,424,009 |
| 3,769,982 |
| ||
Depreciation and loss on property, plant, and equipment disposals |
| 2,966,471 |
| 3,080,353 |
| ||
Amortization |
| 190,904 |
| 242,650 |
| ||
Restructuring costs |
| 195,636 |
| 51,273 |
| ||
Less: Interest income |
| (156,136 | ) | (40,982 | ) | ||
|
|
|
|
|
| ||
EBITDA |
| $ | 11,391,887 |
| $ | 7,563,150 |
|
Note 12 Commitments and Contingencies
Employment Contracts
The Company entered into employment agreements with three key officers of the Company April 29, 2005 to replace prior employee contracts that expired November 15, 2004. The new employee agreements are terminable at will by the employer or employee at any time. Upon a termination of the employee without cause, a resignation of an employee within six months of a Change in Control, or a resignation of employee for Good Reason the employer will provide the employee with a severance package that includes one year’s salary and the employee’s portion of any required COBRA for the continuation of health insurance.
Lawsuits
In the ordinary course of conducting business, the Company occasionally becomes involved in legal proceedings relating to contracts, environmental issues, or other matters. While any proceeding or litigation asserted against the Company has an element of uncertainty, management of the Company believes that the outcome of any pending or threatened actions will not have a material adverse effect on the business or financial condition of the Company.
F-19
Note 13 Extraordinary Item
In 2004, the Company finalized a settlement agreement with Enron North America Corporation and Enron Power Marketing, Inc. (Enron) in US Bankruptcy Court regarding their Senior and Junior Subordinated Loans, accrued interest and fees due Enron. The Company retired debt, accrued interest, and fees in the amount of $38.9 million due Enron with a payment of $6.25 million to Enron derived from new borrowing. The Company also wrote-off $1.1 million of debt issuance costs associated with the Enron loans and incurred approximately $1.2 million in restructuring costs resulting in an extraordinary gain of $30.1 million.
Note 14 Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company benefited in 2005 from healthy external market conditions and the Company’s internal performance. The economy and the parent roll tissue market strengthened in 2004 and this continued strong throughout 2005. This allowed the Company to continue to migrate to higher valued commodity products and specialty products and to implement two price increases in 2005. The price increases were partially offset by the significant increase in the cost of natural gas. In addition to passing some of these higher costs through to the customers, natural gas purchasing strategies reduced the impact of the rising costs of gas.
The Company also completed the second phase of debt restructuring in June 2005 by replacing Union Bank of California with Associated Bank as its senior lender thus reducing related interest expense and fees.
The Company’s focus on cost management along with production improvements further enhanced the Company’s financial performance resulting in record high income and EBITDA.
Note 15 Reclassification
Certain reclassifications have been made to the 2004 financial statements to conform to the 2005 classifications.
F-20