Edgar Filing: BUCKEYE TECHNOLOGIES INC

March 31, 2006 10-Q

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 March 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 April 21, 2006, there were outstanding 37,661,164 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 Nine Months Ended March 31, 2006 and 2005	3

	Condensed Consolidated Balance Sheets as of March 31, 2006 and June 30, 2005	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended March 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	22

3.	Quantitative and Qualitative Disclosures About Market Risk	33

4.	Controls and Procedures	34

	PART II - OTHER INFORMATION


6.	Exhibits	35

	SIGNATURES	36

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 March 31						Nine Months Ended March 31
	2006			2005			2006			2005
Net sales	$	181,407		$	180,910		$	535,117		$	528,855
Cost of goods sold		157,063			150,700			460,872			437,869
Gross margin		24,344			30,210			74,245			90,986

Selling, research and administrative expenses		12,293			11,076			35,053			31,550
Amortization of intangibles and other		486			613			1,494			1,819
Impairment of long-lived assets		1,469			-			1,469			12,010
Restructuring costs		333			616			3,425			2,175
Operating income		9,763			17,905			32,804			43,432

Net interest expense and amortization of debt costs		(11,061	)		(11,076	)		(31,819	)		(33,633	)
Gain on sale of assets held for sale		-			30			-			7,203
Loss on early extinguishment of debt		-			(242	)		(151	)		(242	)
Foreign exchange and other		148			(971	)		(242	)		(737	)

Income (loss) before income taxes		(1,150	)		5,646			592			16,023
Income tax expense (benefit)		(355	)		1,552			(178	)		4,601

Net income (loss)	$	(795	)	$	4,094		$	770		$	11,422

Earnings (loss) per share
Basic		($0.02	)	$	0.11		$	0.02		$	0.31
Diluted		($0.02	)	$	0.11		$	0.02		$	0.30

Weighted average shares for basic earnings per share		37,638			37,499			37,606			37,400
Adjusted weighted average shares for diluted earnings per share		37,638			37,723			37,646			37,595

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

	March 31 2006			June 30 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	11,146		$	9,926
Accounts receivable, net		113,354			118,215
Inventories		117,209			107,895
Deferred income taxes and other		8,289			10,468
Total current assets		249,998			246,504

Property, plant and equipment		948,870			902,970
Less accumulated depreciation		(412,406	)		(377,039	)
		536,464			525,931
Goodwill		143,633			139,430
Intellectual property and other, net		39,639			37,872
Total assets	$	969,734		$	949,737

Liabilities and stockholders’ equity
Current liabilities:
Trade accounts payable	$	32,097		$	37,226
Accrued expenses		48,599			48,401
Current portion of capital lease obligation		774			685
Current portion of long-term debt		998			1,376
Total current liabilities		82,468			87,688

Long-term debt		552,959			535,539
Accrued postretirement benefits		19,393			19,206
Deferred income taxes		30,816			34,660
Capital lease obligation		785			1,382
Other liabilities		1,916			1,673
Stockholders’ equity		281,397			269,589
Total liabilities and stockholders’ equity	$	969,734		$	949,737

See accompanying notes.

BUCKEYE TECHNOLOGIES INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Nine Months Ended March 31
	2006			2005
Operating activities
Net income	$	770		$	11,422
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of long-lived assets		1,469			12,010
Depreciation		34,947			34,703
Amortization		2,408			2,699
Loss on early extinguishment of debt		151			242
Deferred income taxes and other		(2,887	)		5,466
Gain on sale of assets held for sale		-			(7,203	)
Changes in operating assets and liabilities:
Accounts receivable		6,545			(1,752	)
Inventories		(8,758	)		(4,786	)
Other assets		(4,267	)		(4,027	)
Accounts payable and other current liabilities		(5,338	)		9,021
Net cash provided by operating activities		25,040			57,795
Investing activities
Purchases of property, plant and equipment		(41,179	)		(23,014	)
Proceeds from sale of assets		42			13,662
Other		(376	)		(401	)
Net cash used in investing activities		(41,513	)		(9,753	)
Financing activities
Net borrowings under lines of credit		33,486			1,200
Payments for debt issuance costs		-			(5	)
Payments on long-term debt and other		(16,636	)		(67,344	)
Net proceeds from sale of equity interests and other		549			2,672
Net cash provided by (used in) financing activities		17,399			(63,477	)
Effect of foreign currency rate fluctuations on cash		294			1,061
Increase (decrease) in cash and cash equivalents		1,220			(14,374	)
Cash and cash equivalents at beginning of period		9,926			27,235
Cash and cash equivalents at end of period	$	11,146		$	12,861

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 months and nine months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the year ending June 30, 2006. 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, 2005. Except as otherwise specified, references to years indicate our fiscal year ending June 30, 2006 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:

COMPUTATION OF EARNINGS PER SHARE

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

	Three Months Ended March 31					Nine Months Ended March 31
	2006			2005		2006		2005
Net income (loss) applicable to common shareholders	$	(795	)	$	4,094	$	770	$	11,422

Weighted-average shares of common stock outstanding		37,638			37,499		37,606		37,400
Effect of diluted shares		-			224		40		195
Weighted-average common and common equivalent shares outstanding		37,638			37,723		37,646		37,595

Earnings per share
Basic	$	(0.02	)	$	0.11	$	0.02	$	0.31
Diluted	$	(0.02	)	$	0.11	$	0.02	$	0.30

NOTE 3:

SEGMENT INFORMATION

We report results for two segments, specialty fibers and nonwoven materials. The specialty fiber segment is an aggregation of 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 March 31		Specialty Fibers		Nonwoven Materials		Corporate			Total
Net sales	2006	$	127,223	$	61,171	$	(6,987	)	$	181,407
	2005		132,344		56,617		(8,051	)		180,910
Operating income (loss)	2006		7,010		5,105		(2,352	)		9,763
	2005		15,192		3,552		(839	)		17,905
Depreciation and amortization of	2006		7,439		3,842		802			12,083
intangibles	2005		6,931		4,412		893			12,236
Capital expenditures	2006		5,999		484		338			6,821
	2005		9,566		943		726			11,235

Nine Months Ended March 31		Specialty Fibers		Nonwoven Materials		Corporate			Total
Net sales	2006	$	379,682	$	176,957	$	(21,522	)	$	535,117
	2005		380,244		170,604		(21,993	)		528,855
Operating income (loss)	2006		28,732		10,404		(6,332	)		32,804
	2005		49,140		10,568		(16,276	)		43,432
Depreciation and amortization of	2006		22,119		11,942		2,489			36,550
intangibles	2005		21,015		13,038		2,636			36,689
Capital expenditures	2006		38,591		1,489		1,099			41,179
	2005		19,768		2,180		1,066			23,014

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.

NOTE 4: IMPAIRMENT OF LONG-LIVED ASSETS AND ASSETS HELD FOR SALE

In December 2005, we ceased production of specialty fibers at our Glueckstadt, Germany facility. See Note 5 - Restructuring costs for more information on this closure. During the three months ended March 31, 2006, we began to actively market the land and buildings, and the equipment which had carrying values of $1,600 and $496, respectively. During the three months ended March 31, 2006, management determined that the plan of sale criteria in SFAS No. 144, Accounting for Impairment or Disposal of Long-lived Assets, had been met. Accordingly, management reevaluated its estimate of fair value less the cost to sell the assets and determined an additional impairment should be recognized for the land and buildings. Current markets and third party interest for the land and buildings indicate we will not be able to recover the carrying value through the sales process. Therefore, we wrote down the carrying value of the land and buildings to their fair value less costs to sell of $121 and recorded an impairment charge of $1,469 during the three months ended March 31, 2006. Although we believe the current carrying value less cost to sell represents the fair value of the land and buildings, and the equipment, it is possible the actual results of a sale could materially differ from amounts estimated.

The carrying value of the land and buildings, and the equipment was classified in property, plant and equipment as of June 30, 2005 and has been reclassified to current assets held for sale and is presented under the "Deferred income taxes and other" caption in the balance sheet as of March 31, 2006.

NOTE 5:

RESTRUCTURING COSTS

During fiscal year 2003, we initiated the first phase of a restructuring program designed to deliver cost reductions through reduced expenses across our company. During fiscal year 2004, we entered into a second phase of that restructuring program. This program was a continuation of the program initiated in fiscal year 2003 and enabled us to improve our operating results through reduced salaries, benefits, other employee-related expenses and operating expenses. As a result of this restructuring, 78 positions were eliminated. These positions included manufacturing, sales, product development and administrative functions throughout the organization. We do not expect any further expenses related to this program.

During fiscal 2005, we entered into another restructuring program. As part of this program, we discontinued production of cotton-based specialty fibers at our Glueckstadt, Germany facility during December 2005. The closure of the Glueckstadt facility resulted in the termination of 101 employees as of March 31, 2006 and will result in an additional two terminations during the remainder of calendar year 2006. We expect restructuring expenses related to the closure to be approximately $6,500 and payments related to the restructuring program to extend through the end of fiscal year 2006.

Restructuring expenses are included in “Restructuring costs” in our condensed consolidated statements of operations. The additional charges below reflect severance and employee benefits accrued over the retention period, and other miscellaneous expenses. Accrual balances are included in “Accrued expenses” in the balance sheet. The following table summarizes the expenses and accrual balances by reporting segment for the nine months ended March 31, 2006.

	Nine Months Ended March 31, 2006
	Accrual Balance as of June 30, 2005		Additional Charges		Impact of Foreign Currency			Payments			Accrual Balance as of March 31, 2006		Program Charges to Date		Total Estimated Charges
2003 Restructuring Program-Phase 2
Severance and employee benefits
Specialty fibers	$	13	$	10	$	(1	)	$	(22	)	$	-	$	1,894	$	1,894
Nonwoven materials		-		-		-			-			-		39		39
Corporate		-		-		-			-			-		1,514		1,514
Total 2003 Program-Phase 2		13		10		(1	)		(22	)		-		3,447		3,447
2005 Restructuring Program
Specialty fibers
Severance and employee benefits		2,311		2,608		11			(4,705	)		225		5,080		5,100
Other miscellaneous expenses		147		807		(1	)		(832	)		121		1,286		1,400
Total 2005 Program		2,458		3,415		10			(5,537	)		346		6,366		6,500

Total All Programs	$	2,471	$	3,425	$	9		$	(5,559	)	$	346	$	9,813	$	9,947

NOTE 6:

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:

	March 31 2006		June 30 2005

Raw materials	$	34,823	$	33,433
Finished goods		59,941		53,353
Storeroom and other supplies		22,445		21,109
	$	117,209	$	107,895

NOTE 7:

DEBT

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

	March 31 2006		June 30 2005
Senior Notes due:
2013	$	200,000	$	200,000
Senior Subordinated Notes due:
2008		64,890		79,832
2010		152,184		152,558
Credit facility		131,883		99,525
Other		5,000		5,000
		553,957		536,915
Less current portion		998		1,376
	$	552,959	$	535,539

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.

During fiscal year 2005, we redeemed $20,000 of the 2008 Notes. Also during the nine months ended March 31, 2006, we called and redeemed an additional $15,000 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 the nine months ended March 31, 2006, we recorded non-cash expenses of $151 related to the early extinguishment of debt.

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, 2003, at redemption prices varying from 104% of principal amount to 100% of principal amount on or after October 15, 2006, together with accrued and unpaid interest to the date of redemption.

Under the indentures governing our senior subordinated notes, as well as the indenture that governs 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. Currently, we exceed 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 the senior subordinated notes to the extent that future incurrence of debt does not cause us to exceed the 2:1 threshold on a pro forma basis.

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 through March 31, 2010 with final maturity remaining on April 15, 2010.

The term loan also requires an annual excess cash flow payment (as defined under the credit agreement). During the nine months ending March 31, 2006, we made an excess cash flow payment of $378 based on fiscal 2005 operating and cash flow performance.

We had $131,883 outstanding on this facility ($97,997 on the term loan and $33,886 on the revolver) at an average variable interest rate of 7.0% as of March 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.

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. During the nine months ended March 31, 2006, we were in compliance with these financial covenants.

As of March 31, 2006, we had $31,739 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 March 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 March 31, 2006, we have accrued interest on the note of $1,779.

NOTE 8:

COMPREHENSIVE INCOME

The components of comprehensive income consist of the following:

	Three Months Ended March 31						Nine Months Ended March 31
	2006			2005			2006		2005

Net income (loss)	$	(795	)	$	4,094		$	770	$	11,422
Foreign currency translation adjustments - net		6,003			(5,284	)		10,146		21,470
Comprehensive income (loss)	$	5,208		$	(1,190	)	$	10,916	$	32,892

For the three and nine months ended March 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 euro of $2,064 and $(137), the Brazilian real of $3,956 and $2,339 and the Canadian dollar of $(17) and $7,944.

For the three and nine months ended March 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 euro of $(4,202) and $5,197, the Brazilian real of $(114) and $3,346 and the Canadian dollar of $(968) and $12,927.

NOTE 9:

INCOME TAXES

Our effective tax rates for the three and nine month periods ended March 31, 2006 were 31% and (30%), respectively. Our effective tax rates for the same periods of 2005 were 27.5% and 28.7%, respectively. Our tax rate is impacted by several factors including operations in jurisdictions with varying tax rates and the extraterritorial income tax exclusion. Our income tax expense (benefit) differs from the amount computed by applying the statutory federal income tax rate of 35% to income (loss) before income taxes (benefit) due to the following:

	Three Months Ended March 31						Nine Months Ended March 31
	2006			2005			2006			2005

Expected tax expense at 35%	$	(402	)	$	1,976		$	207		$	5,608
Impairment of long-lived assets		(44	)		-			(44	)		(360	)
Effect of foreign operations		183			287			984			884
Extraterritorial income benefit		(1,085	)		(306	)		(1,341	)		(796	)
Adjustment of foreign valuation allowance		2,000			-			2,153			-
Correction of prior year’s provision		(1,116	)		-			(1,711	)		-
Other		109			(405	)		(426	)		(735	)
Income tax expense	$	(355	)	$	1,552		$	(178	)	$	4,601

During the three months ended March 31, 2006, we corrected the methodology used to record the tax benefits of certain tax deductions related to our Canadian operations. The resulting adjustment was a $1,116 ($0.03 per share) net tax benefit. Also during the nine months ended March 31, 2006, we analyzed and corrected the rates and methodology used to value our state deferred taxes. The resulting adjustment was a $595 net tax benefit.

Due to larger losses associated with the slower than expected start-up of the Brazilian operations, we increased our valuation allowance for Brazil’s net operating loss by $2,000 ($0.05 per share).

NOTE 10:

STOCK-BASED COMPENSATION

On December 16, 2004, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard (“SFAS”) 123 (revised 2004), Share-Based Payments (“SFAS 123(R)”), which is a revision of SFAS 123, Accounting for Stock Based Compensation (“SFAS 123”). SFAS 123(R) supersedes Accounting Principles Bulletin 25 (“APB 25”), Accounting for Stock Issued to Employees, and amends SFAS 95, Statement of Cash Flows. Generally, the approach in SFAS 123(R) is similar to the approach described in SFAS 123. However,

SFAS 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. SFAS 123(R) eliminates the alternative to use the intrinsic value method of accounting that was provided in SFAS 123, which generally resulted in no compensation expense recorded in the financial statements related to the issuance of share-based awards to employees. SFAS 123(R) requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. SFAS 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all companies to apply a fair-value-based measurement method in accounting for generally all share-based payment transactions with employees.

On July 1, 2005 (the first day of our 2006 fiscal year), we adopted SFAS 123(R). We adopted SFAS 123(R) using a modified prospective application, as permitted under SFAS 123(R). Accordingly, prior period amounts have not been restated. Under this application, we are required to record compensation expense for all share-based awards granted after the date of adoption and for the unvested portion of previously granted stock-based awards that remain outstanding at the date of adoption.

On June 7, 2005, prior to our adoption of FSAS 123(R), the Compensation Committee of our Board of Directors approved the acceleration of vesting of out-of-the-money options with an exercise price greater than $8.32 to purchase shares of our common stock that remained unvested at June 30, 2005. We estimate the compensation expense, before tax, which was avoided as a result of the acceleration, would have totaled approximately $4,900 (approximately $2,100 in 2006, $1,400 in 2007, $800 in 2008 and $600 in 2009) based on fair value calculations using the Black-Scholes methodology.

The following table illustrates the effect on net income and earnings per share had compensation expense for the employee stock-based awards been recorded in the three and nine months ended March 31, 2005 based on the fair value method under SFAS 123(R).

	March 31, 2005
	Three Months Ended			Nine Months Ended
Net income as reported	$	4,094		$	11,422
Deduct: Total stock-based compensation expense determined under fair-value-based method, net of related tax effects		(372	)		(1,345	)
Pro forma net income	$	3,722		$	10,077
Basic earnings per share:
As reported	$	0.11		$	0.31
Pro forma	$	0.10		$	0.27
Diluted earnings per share:
As reported	$	0.11		$	0.30
Pro forma	$	0.10		$	0.27

Stock-based compensation expense for the three and nine months ended March 31, 2006 was $168 ($109 after tax and $0.00 per share) and $334 ($217 after tax and $0.01 per share), respectively.

Stock Compensation Plans

Our stock option plans provide for the granting of either incentive or nonqualified stock options to employees and non-employee directors. Options are subject to terms and conditions determined by the Compensation Committee of our Board of Directors, and generally are exercisable in increments of 20% per year beginning one year from date of grant and expire ten years from date of grant. During the nine months ended March 31, 2006, our employee stock option plans expired, and no further options can be granted under these plans. We are evaluating a new employee stock compensation plan, but no decision has been reached.

We use the Black-Scholes option-pricing model to calculate the fair value of options for our disclosures. The key assumptions for this valuation method include the expected life of the option, stock price volatility, risk-free interest rate, dividend yield, exercise price and forfeiture rate. Many of these assumptions are judgmental and highly sensitive in the determination of compensation expense. The table below indicates the key assumptions used in the option valuation calculations for options granted in the three and nine months ended March 31, 2006 and a discussion of our methodology for developing each of the assumptions used in the valuation model:

Expected lives	6.3 years
Expected volatility	54.8%
Risk-free interest rate	4.4%
Forfeiture rate	12%

Expected Lives - This is the period of time over which the options granted are expected to remain outstanding. Options granted have a maximum term of ten years. An increase in the expected life will increase compensation expense.

Expected Volatility - This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. We use actual changes in the market value of our stock to calculate the volatility assumption. We calculate daily market value changes from the date of grant over a past period representative of the expected life of the options to determine volatility. An increase in the expected volatility will increase compensation expense.

Risk-Free Interest Rate - This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option. An increase in the risk-free interest rate will increase compensation expense.

Dividend Yield - We did not make any dividend payments during the last five fiscal years and we have no plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease compensation expense.

Forfeiture Rate - This is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense. The forfeiture rate is based on our historic forfeiture experience.

The following table summarizes information about our stock option plans for the three and nine months ended March 31, 2006.

	Three Months Ended March 31, 2006					Nine Months Ended March 31, 2006
	Number of Options			Weighted Average Exercise Price		Number of Options			Weighted Average Exercise Price
Options outstanding, beginning of period		4,479,900		$	13.27		4,765,150		$	13.57
Granted		-			-		348,000			7.63
Exercised		(63,500	)		7.60		(73,500	)		7.47
Forfeited		(4,000	)		7.62		(627,250	)		12.53
Options outstanding, end of period		4,412,400		$	13.36		4,412,400		$	13.36
Options exercisable, end of period		4,019,600		$	13.91		4,019,600		$	13.91

Using the Black-Scholes valuation method calculated under the assumptions indicated above, the weighted-average fair value of the grants at market during the nine months ended March 31, 2006 was $4.37 for a total compensation cost, net of estimated forfeitures, of $1,343 that will be expensed over the options respective vesting period.

NOTE 11:

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. This amendment reduced the accumulated postretirement benefit obligation by $4,089. The benefit is being amortized over 7.75 years. The components of net periodic benefit costs are as follows:

	Three Months Ended March 31						Nine Months Ended March 31
	2006			2005			2006			2005
Service cost for benefits earned	$	157		$	176		$	471		$	527
Interest cost on benefit obligation		314			358			942			1,074
Amortization of unrecognized prior service cost		(264	)		(282	)		(792	)		(844	)
Loss		150			97			450			292
Total cost	$	357		$	349		$	1,071		$	1,049

The Medicare Modernization Act provides prescription drug benefits to Medicare eligible participants effective January 1, 2006. Since our plan only provides a subsidy toward supplemental Medicare insurance coverage, the Medicare Modernization Act does not impact our plan.

NOTE 12: ACCOUNTING PRONOUNCEMENTS

In May 2005, the FASB issued SFAS 154, Accounting Changes and Error Correction Replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS 154). SFAS 154 replaces APB Opinion No. 20, Accounting Changes (APB 20), and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. APB No. 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principle. SFAS 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used. SFAS 154 also requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change in accounting estimate affected by a change in accounting principle. We are required to adopt the provision of SFAS 154 as of June 1, 2006, although earlier adoption is permitted. We are currently evaluating the provisions of SFAS 154.

In February 2006, the FASB issued SFAS 155, Accounting for Certain Hybrid Financial Instruments - an amendment of SFAS 133 and SFAS 140 which is effective for fiscal years beginning after September 15, 2006. The statement was issued to clarify the application of SFAS 133 to beneficial interests in securitized financial assets and to improve the consistency of accounting for similar financial instruments, regardless of the form of the instruments. The statement eliminates the exemption from applying SFAS 133 to interests in securitized financial assets so that similar instruments are accounted for similarly regardless of the form of the instruments. SFAS 155 also allows the election of fair value measurement at acquisition, at issuance, or when a previously recognized financial instrument is subject to a remeasurement event. Adoption is effective for all financial instruments acquired or issued after the beginning of the first fiscal year that begins after September 15, 2006. We have evaluated the new statement and have determined that the adoption of SFAS 155 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

In March 2006, the FASB issued SFAS 156, Accounting for Servicing of Financial Assets - an amendment of SFAS 140 which is effective for fiscal years beginning after September 15, 2006. This statement was issued to simplify the accounting for servicing rights and to reduce the volatility that results from using different measurement attributes. We have evaluated the new statement and have determined that the adoption of SFAS 156 is not expected to have a material effect on our consolidated financial position, results of operations or cash flows.

NOTE 13:

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 March 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	28,169		$	119,294		$	43,542		$	(9,598	)	$	181,407
Cost of goods sold		24,736			102,898			38,900			(9,471	)		157,063
Gross margin		3,433			16,396			4,642			(127	)		24,344

Selling, research and administrative expenses, and other		3,694			7,308			1,777			-			12,779
Restructuring and impairment costs		-			-			1,802			-			1,802
Operating income (loss)		(261	)		9,088			1,063			(127	)		9,763

Other income (expense):
Net interest income (expense) and amortization of debt		(11,416	)		118			237			-			(11,061	)
Other income (expense), including equity income (loss) in affiliates		2,490			(8	)		95			(2,429	)		148
Intercompany interest income (expense)		7,321			(5,092	)		(2,229	)		-			-
Income (loss) before income taxes		(1,866	)		4,106			(834	)		(2,556	)		(1,150	)

Income tax expense (benefit)		(1,071	)		(158	)		1,769			(895	)		(355	)
Net income (loss)	$	(795	)	$	4,264		$	(2,603	)	$	(1,661	)	$	(795	)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Three Months Ended March 31, 2005

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	25,840		$	109,146		$	54,292		$	(8,368	)	$	180,910
Cost of goods sold		21,912			90,291			46,838			(8,341	)		150,700
Gross margin		3,928			18,855			7,454			(27	)		30,210

Selling, research and administrative expenses, and other		1,543			8,120			2,026			-			11,689
Restructuring and impairment costs		(1	)		45			572			-			616
Operating income (loss)		2,386			10,690			4,856			(27	)		17,905

Other income (expense):
Net interest income (expense) and amortization of debt costs		(11,325	)		41			208			-			(11,076	)
Other income (expense), including equity income (loss) in affiliates		8,752			(13	)		(423	)		(9,499	)		(1,183	)
Intercompany interest income (expense)		7,149			(5,429	)		(1,720	)		-			-
Income (loss) before income taxes		6,962			5,289			2,921			(9,526	)		5,646

Income tax expense (benefit)		2,868			98			2,044			(3,458	)		1,552
Net income (loss)	$	4,094		$	5,191		$	877		$	(6,068	)	$	4,094

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended March 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	78,232		$	338,255		$	143,758		$	(25,128	)	$	535,117
Cost of goods sold		67,740			289,529			128,812			(25,209	)		460,872
Gross margin		10,492			48,726			14,946			81			74,245

Selling, research and administrative expenses, and other		9,714			21,534			5,299			-			36,547
Restructuring and impairment costs		-			-			4,894			-			4,894
Operating income		778			27,192			4,753			81			32,804

Other income (expense):
Net interest income (expense) and amortization of debt		(33,721	)		302			1,600			-			(31,819	)
Other income (expense), including equity income (loss) in affiliates		11,972			29			(459	)		(11,935	)		(393	)
Intercompany interest income (expense)		21,710			(15,492	)		(6,218	)		-			-
Income (loss) before income taxes		739			12,031			(324	)		(11,854	)		592

Income tax expense (benefit)		(31	)		1,889			2,113			(4,149	)		(178	)
Net income (loss)	$	770		$	10,142		$	(2,437	)	$	(7,705	)		770

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

Nine Months Ended March 31, 2005

	Buckeye Technologies Inc.			Guarantors US Subsidiaries			Non- Guarantor Subsidiaries			Consolidating Adjustments			Consolidated
Net sales	$	78,251		$	317,195		$	156,969		$	(23,560	)	$	528,855
Cost of goods sold		63,712			258,511			138,899			(23,253	)		437,869
Gross margin		14,539			58,684			18,070			(307	)		90,986

Selling, research and administrative expenses, and other		8,672			18,531			6,166			-			33,369
Restructuring and impairment costs		-			166			14,019			-			14,185
Operating income (loss)		5,867			39,987			(2,115	)		(307	)		43,432

Other income (expense):
Net interest income (expense) and amortization of debt costs		(34,182	)		65			484			-			(33,633	)
Other income (expense), including equity income in affiliates		24,630			161			6,780			(25,347	)		6,224
Intercompany interest income (expense)		22,660			(17,401	)		(5,259	)		-			-
Income (loss) before income taxes		18,975			22,812			(110	)		(25,654	)		16,023

Income tax expense (benefit)		7,553			6,844			(47	)		(9,749	)		4,601
Net income (loss)	$	11,422		$	15,968		$	(63	)	$	(15,905	)	$	11,422

CONDENSED CONSOLIDATING BALANCE SHEETS

As of March 31, 2006

	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	1,229		$	233	$	9,684	$	-		$	11,146
Accounts receivable, net of allowance		18,892			67,844		26,618		-			113,354
Inventories		29,938			64,251		23,717		(697	)		117,209
Other current assets		2,674			4,726		889		-			8,289
Intercompany accounts receivable		-			28,195		-		(28,195	)		-
Total current assets		52,733			165,249		60,908		(28,892	)		249,998

Property, plant and equipment, net		56,574			334,245		145,645		-			536,464
Goodwill and intangibles, net		20,925			52,214		96,305		-			169,444
Intercompany notes receivable		347,024			-		-		(347,024	)		-
Other assets, including investment in subsidiaries		312,677			343,210		118,727		(760,786	)		13,828
Total assets	$	789,933		$	894,918	$	421,585	$	(1,136,702	)	$	969,734

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	5,156		$	19,338	$	7,603		-		$	32,097
Other current liabilities		24,911			14,351		11,109		-			50,371
Intercompany accounts payable		26,323			-		1,872		(28,195	)		-
Total current liabilities		56,390			33,689		20,584		(28,195	)		82,468

Long-term debt		552,959			-		-		-			552,959
Deferred income taxes		(44,625	)		60,734		14,707		-			30,816
Other long-term liabilities		7,156			13,562		1,376		-			22,094
Intercompany notes payable		-			207,265		139,759		(347,024	)		-
Stockholders’/invested equity		218,053			579,668		245,159		(761,483	)		281,397
Total liabilities and stockholders’ equity	$	789,933		$	894,918	$	421,585	$	(1,136,702	)	$	969,734

CONDENSED CONSOLIDATING BALANCE SHEETS

As of June 30, 2005

	Buckeye Technologies Inc.			Guarantors US Subsidiaries		Non- Guarantor Subsidiaries		Consolidating Adjustments			Consolidated
Assets
Current assets
Cash and cash equivalents	$	860		$	151	$	8,915	$	-		$	9,926
Accounts receivable, net		16,147			70,636		31,432		-			118,215
Inventories		21,745			57,932		28,997		(779	)		107,895
Other current assets		4,521			3,995		1,952		-			10,468
Intercompany accounts receivable		-			22,741		-		(22,741	)		-
Total current assets		43,273			155,455		71,296		(23,520	)		246,504

Property, plant and equipment, net		55,720			342,455		127,756		-			525,931
Goodwill and intangibles, net		20,962			53,827		92,217		-			167,006
Intercompany notes receivable		333,295			-		-		(333,295	)		-
Other assets, including investment in subsidiaries		301,239			323,095		113,840		(727,878	)		10,296
Total assets	$	754,489		$	874,832	$	405,109	$	(1,084,693	)	$	949,737

Liabilities and stockholders’ equity
Current liabilities
Trade accounts payable	$	7,213		$	20,841	$	9,172	$	-		$	37,226
Other current liabilities		20,450			18,094		11,918		-			50,462
Intercompany accounts payable		20,179			-		2,562		(22,741	)		-
Total current liabilities		47,842			38,935		23,652		(22,741	)		87,688

Long-term debt		535,539			-		-		-			535,539
Deferred income taxes		(43,918	)		62,764		15,814		-			34,660
Other long-term liabilities		6,822			14,081		1,358		-			22,261
Intercompany notes payable		-			212,620		120,675		(333,295	)		-
Stockholders’/invested equity		208,204			546,432