Atlas Second Quarter 2010 Review

Atlas Holdings LLC had a strong Q2 2010, with nearly all of our business units generating improved operational and financial performance. We are thankful to our 3,500 managers and employees and proud of the results of our collective efforts.

Our intense focus on employee safety continues to generate excellent outcomes. Safety metrics at almost every business unit are trending in a positive direction, though many of our operations remain a good distance from our goal of achieving world-class safety performance. Notably, Boehmer Box, Moncure Plywood, Pangborn (U.S.), Ivex Specialty Paper, Hartford City Paper and Shillington Box had ZERO recordable incidents in Q2. In our quest to achieve world-class status, we are reconvening our cross-company Atlas Safety Committee in the Fall to continue to share best practices and to track progress in implementing each business unit’s 5-year safety plan. We believe that these efforts will drive the next “step change” in improved safety performance.

The overall financial performance of our businesses in Q2 2010 exceeded Q1 2010 levels. In general, our businesses continued to experience modest sales growth, driven by the slow recovery in the U.S. industrial economy, inventory restocking and market share gains from weakened competitors. Modest top line growth, in combination with lean cost structures established at the depths of the recession, led to healthy margins and cash generation.

In Q2 2010, a key dynamic that impacted our businesses was the rapid escalation of commodity prices in some of our key markets. The sharp uptick was the result of strong demand from growing international economies (e.g. China and India) and aggressive inventory restocking in North America and Europe, combined with a depleted supply chain. Price escalation in the wood products and pulp markets was particularly steep because of the Chilean earthquake, which temporarily halted significant manufacturing capacity. As a result of this dynamic, our businesses that sell into these markets, including Wood Resources, Northern Pulp and Phoenix Services, enjoyed particularly robust quarters. On the other hand, our businesses that consume certain commodity raw materials, including Forest Resources, Finch Paper and Redbuilt, experienced upward pressure on costs. As we look to the balance of the year, we expect commodity prices to moderate as supply chain issues resolve themselves and the U.S. and European economies continue to sputter.

In the U.S., continued uncertainty about the pace and stability of the recovery remains the key headline — and we believe this condition will persist for many quarters to come. The
political overlay in the United States — the uncertainty of the coming elections, the near
certainty of reduced Democratic control of Congress, the continued tension between Federally funded stimulus and accelerating and unsustainable deficits — adds to a challenging business environment that tests even the best-managed businesses.

For our existing operating companies, this means that, while conditions have improved somewhat, we need to remain vigilant about driving out costs through continuous improvement, winning in the marketplace at the expense of our competitors and preserving our liquidity. We also need to take advantage of these challenging times. Our businesses are well-capitalized and profitable. We have the firepower to go “on offense” — investing in capital projects, pursuing strategic acquisitions and attracting talented people — while many of our competitors are still struggling to survive.

For our investing activities, this persistent economic uncertainty is a positive. Companies that have been wounded during the Great Recession remain in distress and at severe risk. The passage of time without clarity or pathways to resolution of the overarching challenges of the day creates a growing pressure on business owners who are struggling — and this is a primary driver of the opportunities we are pursuing. We have been actively engaged in pursuit of a broad array of transaction opportunities because there are many small to mid-sized businesses that are unable to finance or grow their way out of trouble in this soft and uncertain economic climate.

We are very well-positioned to take advantage of these investment opportunities. In Q2, we held a final closing of Atlas Capital Resources LP (“ACR”), raising a total of $365 million of investable capital. ACR will be our primary investment vehicle for the next several years. We are pleased that many of our existing investing partners committed to participate in ACR and we would like to extend a warm welcome to our new limited partners, a group of institutional investors who are a “who’s who” in the investment community.

We believe ACR represents an important advantage as we pursue operationally stressed and financially distressed opportunities in the middle market. We are most typically engaged in transactions where certainty of closure is a critical consideration of the selling parent corporation, financial institution or bankruptcy estate. Our long track record of effective transactional execution, together with the ready capital afforded by ACR, is a powerful combination and a true differentiator in today’s market.

We are saddened to report that our partner and friend, Richard “Dick” Carota, passed away on July 10 after a long illness. Dick served our company, Finch Paper, for over 53 years, retiring as its President and CEO in February 2009. We have included an obituary that provides an overview of Dick’s lifetime of extraordinary accomplishments. Dick was an amazing person and he will be sorely missed by all of us.

Thank you for your continued support.


Andrew Bursky
Managing Partner

Tomothy Fazio
Managing Partner

Bridgewell Resources LLC
Kyle Burdick, General Manager
Bridgewell Resources LLC is the newest addition to the Atlas family and Atlas’ eighth platform company. Bridgewell, with 134 associates, operates out of its corporate headquarters in Tigard, Oregon, and four other sales offices, and utilizes 130 warehouse and storage locations throughout the United States and Canada. The company is currently comprised of five divisions:
Utility & Construction Division. U&C is the nation’s largest independent distributor of wood poles. U&C trades and distributes treated wood poles and pilings, crane mats, bridge kits, sign posts, guard rails and railroad ties to electric and telephone companies, distributors, contractors and foreign buyers.

Food & Agriculture Division. F&A trades and distributes conventional bakery ingredients, oils, canned goods, lentils and a full line of organic products to food manufacturers and food service distributors, primarily in the Pacific Northwest, as well as feed and seed products and mineral-based soil amendments/fertilizers across the United States and internationally.
Domestic Wood Products. DWP trades and distributes quality hardwood, softwood and industrial products for furniture and cabinet manufacturers, flooring manufacturers and distributors and manufacturers of other consumer and industrial products throughout the United States and Canada.
International Wood Products. IWP imports and exports quality hardwood, softwood and industrial products for customers and suppliers around the world.
Lumber & Panel Products. L&P trades commodity lumber and structural panel products (oriented strand board and plywood) throughout the United States and Canada.

Bridgewell’s first four months of operations were focused on reviving a business that had been weakened from lack of liquidity in 2009, followed by the damage caused by the receivership of its former parent company, North Pacific Group. Upon acquisition, Bridgewell’s immediate focus was to launch the new enterprise, establish new supplier credit, rebuild damaged customer relationships and maintain internal infrastructure. The company has made significant progress on a number of key initiatives launched immediately upon closing the transaction, including introducing the company to the marketplace, reacquainting customers and suppliers with the value-added services that Bridgewell provides, restoring customer relationships that were lost or severely damaged during the receivership, and developing new accounts.

Bridgewell’s primary focus over the next 90 days is on increasing sales and continuing to build trade credit. Although in the near term the U.S. economy — with high unemployment, low housing starts, and high levels of uncertainty — makes this a very challenging operating environment, we expect improved operating performance in Q3 and solid results in 2011.

Capital Equipment Resources LLC
Mike Thuon, Chief Financial Officer
Capital Equipment Resources LLC (CER) designs and markets shotblast surface preparation equipment and provides aftermarket replacement parts and services. North American and European markets continued to strengthen in Q2 2010, benefitting from a sustained, moderate economic recovery.

Asian markets appear to be ahead of other world markets in terms of improvement, and CER is pursuing many new equipment opportunities in China. Aftermarket service and spare-part orders have increased in all markets, and overall by 10% on a consolidated basis over 2009 levels, which is an indication of higher production and utilization of machines by customers. New machine orders continued to be slow, but inquiries and requests for proposals rose by approximately 20% in the first six months of 2010 compared to the last six months of 2009. Overall, it appears that shotblast equipment users are experiencing improved business levels in 2010 over 2009, but that many companies are still waiting to invest in new production equipment. Based upon CER’s experience from prior recessions, the recovery in capital equipment orders for new machines lags behind the improvement in the general economy.

The positive aftermarket trends from Q1 2010 continued into Q2 as utilization of customer machines in CER’s installed base accelerates. In the United States, the company’s Pangborn unit experienced bookings of aftermarket parts orders throughout Q2 at 24% above budget and 12% above the prior quarter. In Europe, the company’s three subsidiaries also experienced improving market conditions in aftermarket parts orders, exceeding budget and the prior quarter by 21% and 32%, respectively.

While optimistic about the continued improvement of the worldwide economies in the second half of 2010, CER remains cautious and focused on cost control and liquidity. CER has taken significant steps to reduce costs and remain prepared to take further cost reduction actions if necessary as the market dictates. In the meantime, the company is making a renewed push to integrate with and capitalize on the breadth of products and knowledge gained with the acquisition of the European companies, and CER is making a concerted effort to expand its geographic market coverage with new manufacturer’s representatives and agents.

Finch Paper LLC
Joseph F. Raccuia, President and Chief Executive
Finch Paper LLC is a leading producer of premium uncoated printing papers, manufacturing more than 250,000 tons per year from its integrated pulp and paper mill. Founded in 1865 in Glens Falls, New York, Finch’s uncoated free sheet paper is used in financial printing, annual reports, brochures, books, direct mail and other applications that demand high levels of print quality. Finch also manages approximately 161,000 acres of Adirondack forestland owned by The Nature Conservancy. All of the company’s products utilize a percentage of Adirondack forest-derived wood fiber. Finch papers have earned the most respected responsible forestry certifications from the world’s forestry certification groups.

Finch continues to achieve significant improvements in safety performance. The company established a five-year plan to move its Recordable Incident Rate (RIR) and its Lost Time Incident Rate (LTI) to world-class levels of 1.00 and 0.50 respectively, and Finch has already attained these milestones.

While current market activity remains weak in the North American paper industry, recent evidence suggests that the uncoated free sheet market is holding up relatively well, with year-todate shipments up 1.1% over 2009 levels. The recent price hikes in uncoated free sheet should enable improved performance in the second half of 2010.

Finch’s pulp mill remains a bright spot as it experienced consistent performance improvements through the period. However, operating difficulties in Finch’s paper mill led to lower than anticipated paper production volume for Q2. On the positive side, efforts to reduce energy consumption contributed to a 29% decrease in total energy costs and helped reduce variable cost of production.

The near-term demand outlook for the uncoated market remains flat, with the fall seasonal uptick dependent upon overall economic conditions. We anticipate an increase in net selling price and paper production during the remainder of 2010 as the company continues to focus on improvements in its production process, sourcing of raw materials and product mix.

Forest Resources LLC
Larry Richard, President and Chief Executive
Forest Resources LLC is a holding company engaged in manufacturing industrial and food packaging products, including recycled corrugated medium, clay-coated boxboard, kraft, crepe and specialty packaging papers, as well as corrugated boxes and folding cartons, at six facilities in the U.S. and Canada.

Forest began 2010 facing a very challenging market, driven by higher fiber costs and a strong Canadian dollar. However, in Q2 containerboard producers implemented two price increases sufficient to cover unprecedented fiber cost increases, and as fiber cost relief began to emerge late in Q2, more normal margins have been restored.

Forest addressed the market challenges in its U.S. Mill Division with aggressive cost control initiatives and adjusted production to match increasing customer demand. Mill Division sales experienced stronger demand driven by low customer inventories and tight mill capacity. Costs for the domestic mills’ fiber increased during the period as the economic slowdown negatively impacted generation of waste paper and foreign exports drove up costs. CanAmPac’s (Strathcona Paper and Boehmer Box) revenues remained strong but profitability was impacted by the same fiber cost pressures as the Mill Division. The strong Canadian dollar increases competitiveness of U.S. coated recycled board manufacturers and pressured earnings at Strathcona Paper in Q2. Cost-reduction programs across all business units and operating efficiency improvements contributed positively to EBITDA, and remain a companywide focus.

Major producers have announced Q3 price increases for both coated recycled board and containerboard. Industry-wide, inventories remain at historic low volumes and demand is increasing, but only modestly. With fiber costs moderating, a proposed third price increase in less than one year will be difficult for box buyers to accept. Continued discipline will be required by major producers to maintain production/demand balance for this to succeed. Margins returned to “cycle average” levels at the end of Q2, so even without a successful third price increase, we anticipate a stronger performance during the second half of 2010.

Northern Resources Nova Scotia Corporation
(Parent of Northern Pulp Nova Scotia Corporation)
Wayne Gosse, President, Northern Resources
Nova Scotia Corporation
Tim Lowe, Chief Executive, Northern Pulp
Nova Scotia Corporation
Northern Pulp Nova Scotia Corporation owns and operates a Northern Bleached Softwood Kraft (NBSK) pulp mill in Pictou County, Nova Scotia. In the first half of 2010, NPNS experienced improved pulp market pricing and mill reliability. Pulp prices continued to rise throughout the period as world pulp supply tightened, reflecting the global economic recovery, increased demand from China and supply disruptions due to the earthquake in Chile. On the mill reliability front, production volumes have vastly improved from year ago periods as a result of the company’s Continuous Improvement initiatives. Through the first half of 2010, NPNS averaged production of 777 air-dried metric tons (ADMT) per day compared to 621 ADMT per day in 2009.

The company achieved excellent safety performance in the first half, with a Recordable Incident Rate of 1.38. In addition, the remaining two modules of the SAFESTART program were rolled out during the quarter. NPNS also continued its focus on improving reliability of its operations and achieved a record production month in June at 816 ADMT per day with several days during the quarter in the 900 ADMT per day range. Daily production averaged 796 ADMT for the quarter and is forecast to average in excess of 800 tons per day during the second half of the year. Under the leadership of Tim Lowe, mill personnel have worked tirelessly on improving daily production rates and have achieved great success.

During the quarter, lumber markets rebounded briefly but quickly dropped off again by quarter’s end. As a result, reduced sawmill operating rates continued, resulting in high wood fiber cost and significant fiber inventory management issues as chip inventories stayed well below targeted levels. Cost for wood fiber is expected to increase once again in Q3. On the Continuous Improvement front, work continued on a number of cost-saving initiatives identified under the mill’s Continuous Improvement Program. The annual major maintenance shutdown was executed safely during the quarter, on time and on budget.

Finally, significant progress was made in the quarter on advancing the engineering design of the various mill projects to be funded under the Federal Government’s Pulp & Paper Green Transformation Program, through which NPNS has been granted approximately C$28 million. This effort included the design of a renewable energy project to be submitted in response to a request for proposal by Nova Scotia Power. The company also made a concerted effort to proactively celebrate the work that Northern Pulp has been doing to benefit local communities. It also announced the creation of a new Forest Research Program in collaboration with Dalhousie University; broad subjects of study will include forest ecosystem function, carbon storage and sequestration, climate change and Acadian Forest pre-condition.

Phoenix Services International LLC
Doug Lane, President and Chief Executive
Phoenix Services LLC provides mission-critical steel mill services to premier steel clients, including ArcelorMittal, Gerdau and Severstal. The company had its most profitable quarter in its history. The increase in profitability is largely attributable to the ramping of operations at ArcelorMittal’s Indiana Harbor-West complex and increasing steel production across the industry, including the client steel mills of Phoenix Services.

The company is continuing to realize the impact of spreading corporate infrastructure over an expanding revenue base. For the year-to-date period ended June 30, 2010, Phoenix Services’ corporate expense represented 7.3% of revenues. For the same period of 2009, corporate expense represented 14.9% of revenues.

The company continues to grow rapidly and has expanded its operations internationally, having recently initiated mill services for ArcelorMittal’s Galati, Romania mill. Phoenix Services is currently exploring a host of additional opportunities, predominantly in North America (including Mexico) and Eastern Europe, and has the “dry powder” provided by the refinancing completed in Q1 2010 to execute its growth plans. We remain extremely optimistic about the continuation of strong performance and growth at Phoenix Services.

RedBuilt LLC
Kurt Liebich, President and Chief Executive
RedBuilt is a leading national provider of structural roof and floor system solutions for commercial buildings and an innovator of patented engineered wood products. RedBuilt’s engineered wood structural systems are used in the construction of schools, hospitals, banks, multifamily residences, restaurants and hotels, as well as all other types of commercial construction. RedBuilt’s sales are primarily in the continental United States, with additional business in Hawaii, Alaska and now Canada and Japan. As a secondary matter, RedBuilt also sells niche commercial applications including concrete forms, scaffold planks and other ancillary industrial products.

While the company’s sales are small compared to the entire commercial construction industry, RedBuilt is the dominant supplier of engineered wood commercial structures and operates at higher margins than competing commercial structure providers due chiefly to its large, experienced, industry-leading consultative sales and engineering team.

RedBuilt continued to experience a very difficult operating environment in Q2 2010. Both the residential and commercial construction industries in the United States remain very weak, and while the markets appear to have stabilized, the amount of construction activity is leveling off near the trough of the cycle. Additionally, during the quarter, the cost of RedBuilt’s primary raw materials (OSB and veneer) increased by roughly 25% on average from Q1 2010. While this raw material price increase was short-lived, it had an impact on Redbuilt’s gross margins.

We do not expect any improvement in the fundamentals of the U.S. commercial construction industry for the balance of this year; however, RedBuilt expects its financial performance to improve significantly. This improvement will be driven by several factors. First, during Q2, RedBuilt raised prices to offset the increase it had experienced in raw material costs. Second, the rapid run-up in raw material costs was not sustainable, and by the end of Q2, these costs had free-fallen to the levels of early Q1. Third, the company has completed a capital project at its Stayton facility that will lower its manufacturing costs and open access to new industrial markets (primarily scaffold plank and concrete forming). Finally, the company has received the requisite code approvals to export product into Canada and Japan, creating the ability to grow the business in these new geographic segments.

RedBuilt has many difficult quarters ahead, but we remain confident that we have positioned the company to weather the storm and to create value when the recovery in the construction industry begins to emerge.

Wood Resources LLC
Richard Yarbrough, President and Chief Executive
Wood Resources is a producer and distributor of engineered wood panels for industrial and commercial customers, operating in Washington, the Carolinas and Florida. Q2 2010 saw significant positive momentum in the markets served by Wood Resources. Notwithstanding the challenging economy, Wood Resources generated its best quarterly performance since the business was established in 2003.

The company’s commodity business, Chester Wood Products, led its financial performance, with product pricing 25% above that of Q1. Strong demand early in the quarter extended the order backlog and Chester took advantage by pushing production volume to the highest levels realized under our ownership.

Moncure Plywood recovered from Q1 operational difficulties and substantially increased production to meet increased demand. Moncure has historically produced exclusively hardwood plywood for the upholstered furniture industry; however, the mill has been focused on adjusting its product mix to diversify its business. Although furniture still remains an important market for Moncure, almost one-third of sales are now other specialties, including sanded pine, platforms and ply-form. In Q2 2010, these products benefitted from improved pricing and helped Moncure generate its best quarterly performance since Q2 2006. Safety performance at Moncure was exemplary, with no incidents for the quarter and only one incident in the last five quarters.

Olympic Panel Products, our overlay plywood facility, continued its trend of stable performance. Inventory rebuilding in its distribution network generated improved demand throughout the quarter, allowing the highest level of production since Q3 2008.

We are anticipating commodity plywood prices to remain approximately at current levels during Q3, well below pricing achieved in Q2 2010, before normal seasonal declines in Q4. Although operating results are not expected to repeat the record set in Q2, Wood Resources anticipates continued positive operating results above our 2010 operating plan.

Finally, we want to welcome Bill Corbin as the new Chairman of the Board of Wood Resources. Bill has been a Director of the company since 2008 after having retired as Executive Vice President of Weyerhaeuser Corporation, where he was responsible for the wood products operations.

Richard J. Carota
June 5, 1937 - July 10, 2010
Richard J. Carota, the one-time union laborer who rose to become Paper Industry Executive of the Year as chairman, president and chief executive officer of Finch, Pruyn &
Co. Inc., and its successor, Finch Paper LLC, passed away on Saturday, July 10, at a hospital in Schenectady, N.Y., surrounded by his loving family. He was 73 years old, and had determinedly fought an illness that began in September 2009.

Dick retired from Finch on Feb. 2, 2009, after 53 years of service, 26 as the company’s chairman, president and CEO. He was the first person who was not a member of the founding families of Finch, Pruyn to be elected chairman, president and CEO. He was also one of the few former labor union officers to become the CEO of a major American paper manufacturer.

In 1993, Dick was honored as the Paper Industry Executive of the Year by the Paper Industry Management Association. At the time, he told hundreds of industry executives gathered in his honor in San Diego, “I’ve never considered myself the only idea person at Finch, Pruyn. I’ve had more responsibility than other people, but I’ve believed the only way we could succeed was if we pooled everyone’s ideas. Teamwork has helped us accomplish some great things.”

Dick’s leadership was widely credited for keeping the Finch mill operating during the late 1990s and early 2000s as dozens of other American paper mills were forced to close due to troublesome economic conditions. Among his most significant career accomplishments at Finch, Dick expanded the company’s market presence and product mix, developing a nationwide network of Finch Paper merchants; spearheaded the company’s entrance into the premium text and cover paper market, with the introductions of the Finch Fine and Finch Premium Blend products; and championed Finch’s receipt of the coveted Forest Stewardship Council and Sustainable Forestry Initiative (SFI) green certifications for the company’s forestry practices and its products. He also oversaw a $20 million modernization of the company’s largest and most productive paper machine; the development of a $25 million cogeneration plant that has made the company largely energy-independent; and the company’s $10 million conversion to an elemental chlorine-free pulp bleaching process to protect the environment.

In 2007, Dick guided Finch Pruyn & Co., Inc., through the sale of the business by its local owners to the partnership of Atlas Holdings LLC and Blue Wolf Capital Management LLC.

Born on June 5, 1937, at Glens Falls Hospital, Dick was the eldest of three children of Gladys and Patrick Carota of Hudson Falls, N.Y. After graduating from high school in 1954, he entered Miami University in Coral Gables, Fla., as a pre-med student.

In the spring of 1956, following his freshman year at Miami, Dick’s paper industry career began almost accidentally. He took a temporary job as a laborer at Finch, Pruyn, earning $1.35 an hour sweeping out rail cars that were used to ship paper from the mill. When he returned to the University of Miami in the fall of 1956 for his sophomore year, he was unable to find part-time work to help pay his tuition, and his family lacked the resources for him to continue his studies. He came home and returned to work at Finch, Pruyn.

Shortly after rejoining the company as a full-time employee in 1956, Dick was elected secretary-treasurer of Local 20 of the International Brotherhood of Pulp, Sulfite and Paper Mill Workers, a union representing hundreds of Finch, Pruyn employees.

In 1958, Dick left the hourly union ranks and began to earn a steady series of promotions into management. He held positions in the company’s Quality Control, Paper Production, Mill Scheduling and Customer Service departments. As customer service manager for 10 years, Dick traveled widely to meet with Finch, Pruyn’s customers, many of whom became lifelong friends.

In 1970, at age 32, he became one of the youngest paper mill plant managers in the United States. In this capacity, he oversaw the implementation of Finch, Pruyn’s innovative
ammonium bisulfite pulping process. Most American paper mills use a kraft pulping process, but Finch, Pruyn’s owners, sensitive to the mill’s proximity to homes and businesses in downtown Glens Falls, chose sulfite in the late 1960s to avoid the unpleasant odors often associated with kraft mills. Finch, Pruyn turned to its corporate neighbor, Kamyr Inc., to develop a one-of-a-kind continuous digesting process in which both hardwoods and softwoods would be pulped together. The goal was to provide pulp for high-strength, highbrightness premium papers, but the innovative process was plagued with serious operational problems. Months went by without the sulfite process actually producing pulp suitable for making paper.

In 1972, then-Finch, Pruyn Chairman, President and CEO Lyman Beeman selected Dick to go to the pulp mill and straighten out the problems for good. Dick worked more than 300 days there without a day off to get the new process to run properly. He succeeded, and the highquality pulp the mill produced was pivotal to the company’s future success, earning Dick a promotion to vice president of manufacturing, a position he held from 1974 to 1982.

In 1979, he was elected to the Finch, Pruyn Board of Directors and, in 1980, was named executive vice president. He was elected president in 1982, and chairman and CEO in 1983.

Dick had a long and colorful history with the seven unions that represent Finch employees. As an hourly worker and union officer, he served on the union negotiating committee that bargained with company leaders for labor agreements in 1956 and 1958. Later, as a senior manager at the mill, he led the company’s negotiating team, working out 20 labor agreements with the unions during a span of 40 years. He took particular pride in leading the development of a line of lucrative premium papers that allowed the company to negotiate contracts that provided local workers with some of the highest wages and benefits in the U.S. paper industry.

When demand for paper began dropping in the late 1990s and the industry went into a long recession in which more than a dozen U.S. paper mills closed, Dick led the company in seeking necessary economic concessions from the unions. Strikes resulted, but new contracts were eventually reached that helped keep Finch, Pruyn competitive.

Dick was a member of the Paper Industry Management Association for more than 30 years, and served as a member of the Association’s Leadership Council. He was also a sustaining member of the Technical Association of the Pulp & Paper Industry.

Dick’s survivors include three children, four grandchildren, and his longtime companion, Nancy Sawyer.