Atlas First Quarter 2010 Review

Atlas Holdings LLC and our family of companies accomplished a great deal in the first quarter of 2010. We are thankful to our managers and employees and proud of the results of our collective efforts.

The operational performance of our companies in Q1 2010 continued to build on positive momentum that began in the 2nd half of 2009. Safety performance improved at virtually every Atlas facility, a result of intensified focus by our employees and managers. Notably, Northern Pulp, Boehmer Box, Forest Mill Division and Capital Equipment Resources operated throughout Q1 2010 with ZERO lost time accidents.

Financial performance continued to improve in Q1 2010, as well. Aggressive cost reduction initiatives and sales efforts executed by our 3,500 dedicated managers and employees throughout 2009 continued into 2010 and have positioned our companies for success. These efforts, combined with improved business conditions driven by a modest recovery in the overall economy and weakened competition, have resulted in increased sales, margins and cash generation at most of our business units.

A number of our businesses were favorably impacted by global shortages in certain products that we manufacture, including engineered panels and pulp. In these markets, low inventory levels in the supply chain were insufficient to meet stronger worldwide demand, resulting in rapidly escalating prices. While the impact of such supply shortages is positive for our businesses in aggregate, we are concerned that this may foreshadow a period of sustained inflation in certain commodity raw materials that we purchase, particularly energy and wastepaper, if the global economic recovery hits full stride. We will remain vigilant about managing our businesses to minimize the impact of such inflationary pressures. We have advised our employees and managers to focus on addressing supply chain issues now, before input cost increases accelerate.

Atlas Holdings completed two significant investments in Q1 2010. We formed a new business, Bridgewell Resources LLC, to acquire the assets, systems and intellectual property of three niche trading and distribution divisions of North Pacific Group, Inc. Bridgewell acquired the assets from a Federal court receiver who was appointed to liquidate North Pacific after the company defaulted on its bank debt and was unable to voluntarily reorganize its affairs through a bankruptcy process. We provided $27 million to fund the acquisition and to fuel growth. We expect that, once the business is stabilized and regains its footing, Bridgewell will use its strong balance sheet and the capital we provided to strengthen its dominant market positions. Bridgewell’s primary markets include telephone and utility poles, crane mats, hardwood lumber and panel products, where it is a major national player, and specialty food and agricultural products, where it is a force in the Pacific Northwest.

The Bridgewell investment is consistent with our strategy of investing in markets in which we have operating expertise, with a focus on highly complex transactions in distressed environments. We are indebted to our Operating Partners Manco Snapp, Bill Corbin, Arnold Donald and Bob Berg, who assisted us in assessing the operational and market aspects of this transaction. We also appreciate the many managers and employees of Bridgewell who stuck with the company through an arduous and uncertain period. We are very pleased to welcome Bridgewell’s 130 employees into the Atlas family.

Also in Q1 2010, Northern Pulp, through its affiliate Northern Timber, acquired 475,000 acres of Nova Scotia forestland (a parcel about 4/5ths the size of Rhode Island) from Neenah Paper, Inc., for CAD$82 million. This transaction secures a reliable fiber supply for manufacturing operations at our pulp mill and will help Northern Pulp achieve its full potential as a vital contributor to the economy of northeastern Canada.

The transaction was financed in part by a CAD$75-million loan from the Province of Nova Scotia and reflects the Provincial government’s support for and confidence in our business and its 240 employees. As part of this transaction, Northern Pulp sold 55,000 acres of environmentally sensitive forest to the Province of Nova Scotia, providing a major boost to the Provincial government’s land-preservation goals. We are grateful for the assistance of the Provincial government, Nova Scotia community leaders and our partners in Northern Pulp, Dr. John Hamm and Blue Wolf Capital Management, who helped us conceptualize and execute this complex transaction.

As we have discussed in prior quarterly updates, we believe that we have entered the most attractive investment environment of our lifetimes, given our style of investing. While macroeconomic conditions are improving moderately, we expect that the challenging operating and financing environment will persist for some time. There are literally thousands of small and middle market companies and divisions of large corporations that are struggling with overleveraged balance sheets, liquidity shortages, operational issues and rapidly changing market conditions. These struggling businesses provide a large universe of potential candidates to acquire and bring into the Atlas family.

We remain very selective and disciplined. As with the Bridgewell acquisition, we are looking for historically strong and successful franchises that are currently experiencing finite and resolvable financial and operating stress, to which we can apply Atlas’ unique combination of operating and transaction skills. Our transactions are priced and structured so that the resultant business can generate an attractive return on invested capital now, regardless of the pace or prospect of economic recovery. When we acquire businesses, we put a premium on attracting and retaining the most dedicated and capable senior managers, who have responsibility for creating a culture of continuous improvement, safety and sustainable success.

To take advantage of this investment environment, we have expanded our capital base by assembling approximately $365 million of “dry powder” in the form of equity capital from many of our existing investors and a number of new institutional investors. In addition, we are expanding our internal team and capabilities at Atlas. As part of this process, we are pleased to announce that Dan Cromie, Ed Fletcher and Phil Schuch have been promoted to Partner, Jake Hudson and Zach Sufrin have been promoted to Principal, and Sam Astor and Jeff Nathan have been promoted to Senior Associate. Atlas would not be where it is without the hard work and talent of these individuals. We are fortunate to have them on our team.

Bridgewell Resources LLC
Kyle Burdick, General Manager
Bridgewell Resources LLC is the newest addition to the Atlas family and our eighth platform company. Bridgewell focuses on the trading and wholesale distribution of utility and construction products, food and agriculture products and wood products. The company acquired certain assets related to three highly profitable trading divisions of North Pacific Group, Inc., through a courtordered receivership process on March 1, 2010. Concurrently with the purchase, Bridgewell hired traders, managers and support staff of the three trading divisions.

Bridgewell, with more than 130 associates, operates primarily out of its corporate headquarters in Tigard, Oregon, and utilizes approximately 120 warehouse and storage locations throughout the United States and Canada. The company is currently comprised of four lines of business:

Utility & Construction Division. The Utility & Construction Division is the nation’s largest independent distributor of poles. The division also offers a wide variety of construction products, including crane mats, bridge kits, signposts, guard rail and railroad ties, architectural products and renewable energy products.
Food & Agriculture Division. The Food & Agriculture Division trades and distributes conventional bakery ingredients, oils, canned goods, pulses and a full line of organic products to food manufacturers and food service distributors, primarily in the Pacific Northwest. The division also trades and distributes agricultural minerals, fertilizers and specialty agricultural products such as birdseed, grain seed and feed ingredients.
Hardwood & Industrial Products Division. The Hardwood & Industrial Products division trades and distributes wood products, including hardwood lumber for molding and cabinets, softwood lumber products, building materials and engineered and commodity products.
Panel Division. The Panel division trades oriented strand board and plywood panels.

In its first month of operation, the business ramped-up well and established itself as a standalone entity. We have high expectations for the company, given the capability of its deeply experienced employees and the company’s value proposition to its customers and suppliers.

Capital Equipment Resources LLC
Ken Dickson, President and Chief Executive
Capital Equipment Resources LLC designs and markets shotblast surface preparation equipment and provides aftermarket replacement parts and services. Positive trends that first appeared in Q4 2009 have continued into Q1 2010. In the United States, the company’s Pangborn unit experienced bookings of aftermarket parts orders throughout the first quarter that were 26% above plan and 21% above the same period in 2009. In Europe, the company’s three subsidiaries also experienced improving market conditions, exceeding plans for aftermarket parts orders by 12%.

New machine orders remained slow across the globe, but inquiries were much more active than in recent quarters (a 95% increase over last quarter) and the company is close to landing several significant orders. While the market is driving much of this increased activity, the teams at Pangborn and CER Europe have been very aggressive in expanding their market and sales coverage. Increased attention to aftermarket part sales undoubtedly has contributed to the success experienced this quarter.

Pangborn added two important manufacturers’ representatives in Q1 2010. DeLong Equipment (www.delongequipment.com), based in Atlanta, focuses on the southeastern United States and brings the resources of 12 service and sales employees. ADS (www.ads-shotblast.com), based in Ontario, brings a network of relationships in the Canadian shotblast market with its 24 service and sales employees. Historically, both DeLong Equipment and ADS represented Wheelabrator, Pangborn’s largest competitor, before converting to Pangborn. Pangborn is optimistic that these relationships will yield substantial incremental sales.

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 in Glens Falls, New York.

Finch has continued to deliver on internal safety and Continuous Improvement Programs under the leadership of President and CEO Joseph Raccuia. The company closed the period ending April 14, 2010 by logging its 60th day in a row without an OSHA recordable injury, 29 days longer than the company’s previous record. Finch also is seeing results from its Continuous Improvement Program in areas including operational efficiency, energy consumption and business systems. In addition, Finch has been active in its community, leading and participating in several Glens Falls-area volunteer organizations in the first quarter.

Uncoated free sheet producers who compete with Finch have remained disciplined about managing capacity. Notwithstanding relatively weak demand, inventories across the industry are at very low levels and price increases are being passed through to customers. Certain cost inputs are rising, primarily pulp and wood fiber, but natural gas prices have remained low and Finch’s margins are at trend levels. While Q1 2010 performance was slightly below plan due to production shortfalls, we remain optimistic that Finch will achieve strong results in 2010 as a result of the consistent and proactive effort by Finch’s management team to improve efficiency, reduce costs and drive sales of higher-margin grades.

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.

Rapidly increasing wastepaper costs and substantial appreciation of the Canadian dollar resulted in a challenging quarter for the company. But despite the environment, Boehmer Box and Strathcona Paper, Forest Resources’ two Canadian companies, posted respectable performances in Q1.

Boehmer continued to exceed budgeted production efficiency rates, which helped to offset lower-than-budgeted sales volume. Boehmer’s successful start-up of its new, state-of the art KBA press was a major milestone during the first quarter. The new press increases Boehmer’s production capacity, improves efficiencies, reduces waste and is expected to be a real “game changer” for the business.

Strathcona, like the other Forest Resources mills, was impacted by higher-than-budgeted fiber costs. Prices for all grades of wastepaper increased, driven by high Chinese demand and low wastepaper inventories. Price increases tend to lag input cost increases. Consequently, Strathcona expects to regain much of the fiber margin that was lost during the first quarter with price increases that are being implemented.

Forest Resources’ U.S. industrial packaging businesses – Hartford City Paper, Shillington Box, Ivex Packaging Paper and Ivex Specialty Paper – had its margins squeezed during the first quarter as weak market demand for their industrial products combined with increased wastepaper fiber costs. Forest is taking aggressive action on sales and cost-reduction efforts in order to combat the margin compression.

We expect the balance of 2010 to be challenging for Forest Resources because of high raw material costs and a stronger Canadian dollar. While our management teams remain optimistic that price increases will help offset cost increases in materials and supplies, we will continue to focus on cost reduction and productivity improvements to drive results.

Northern Pulp Nova Scotia Corporation
Wayne Gosse, Chief Executive Officer
Northern Pulp Nova Scotia Corporation produces northern bleached kraft pulp from its mill in Pictou County, Nova Scotia.

The first quarter of 2010 saw a substantial rebound of the northern bleached softwood kraft pulp (NBSK) market, with the price of NBSK increasing from $830 per metric ton in December 2009 to $910 per metric ton in March. Increased prices primarily were the result of supplyside problems, in particular the reduction of global pulp supply caused by earthquake damage to several large pulp mills in Chile. As a result of the improved pricing environment as well as continued improvement in the mill’s operations, Northern Pulp was profitable in the first quarter of 2010.

Northern Pulp continued to realize improved operating efficiencies during the first quarter, averaging 791 metric tons per day in March (101% of planned production). Northern Pulp’s increased production is a result of Continuous Improvement Process initiatives that have been under way at the mill since the beginning of 2009 and the leadership of Chief Operating Officer Tim Lowe, who joined Northern Pulp during the third quarter of 2009. Priorities for the second quarter of 2010 include executing the mill’s annual maintenance outage as well as finalizing the plan to effectively utilize the $28 million of Green Transformation funds granted to Northern Pulp by the Canadian Federal Government in 2009.

The acquisition of approximately 475,000 acres of Nova Scotia timberlands was Northern Pulp’s most significant event of Q1 2010. The timberlands were purchased from Neenah Paper in March 2010, financed in large part with loan proceeds from the Province of Nova Scotia. Bringing the mill and these timberlands under common ownership provides substantial benefits to Northern Pulp, including a reduction in stumpage costs, guaranteed long-term security of fiber supply, increased harvesting flexibility and the ability to benefit from long-term appreciation in the value of the timberlands.

Phoenix Services International LLC
(formerly Atlas Industrial Services LLC)
Doug Lane, President and Chief Executive
Phoenix provides mission-critical steel mill services to premier steel clients, including ArcelorMittal, Gerdau and Severstal. Phoenix’s prospects for continued growth ares trong, having recently signed its first international mill service contract in Poland and reporting its most profitable quarter in the company’s history.

Global steel markets continue to improve, with Phoenix benefitting from this trend. Worldwide steel production was 108 million metric tons in February 2010, a 24% increase from February 2009 levels. Consistent with this ramp-up, ArcelorMittal announced expectations to restart operations at its Indiana Harbor West site in April 2010, for which Phoenix is the contracted mill services provider. Indiana Harbor West will provide incremental profitability at the Indiana Harbor site, the company’s largest single contract and the largest steelmaking facility in North America.

Internationally, Phoenix signed a 10-year contract with Gurex Ferrochrome in Poland to process an old slag bank and recover low-carbon and high-carbon ferrochrome. In addition, Phoenix expects to finalize a new contract with ArcelorMittal to provide steel mill services to its facility in Galati, Romania.

In April 2010, Atlas Holdings finalized an add-on financing with Olympus Partners. The financing provides Phoenix with $15 million of additional liquidity to fuel growth, mitigates the risk of excessive dilution to the equity interests of Atlas and management by modifying the terms of the April 2009 financing, and has the added benefit of opening additional sources of senior financing by simplifying the company’s capital structure.

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.

As anticipated, RedBuilt’s sales fell in the first quarter of 2010, reflecting the seasonal lull in commercial and industrial construction activity. The commercial construction market remains in the doldrums. Year-over-year non-residential construction expenditure throughout the United States is down nearly 25% from the slow pace of a year ago. Competition has been fierce in commercial and industrial construction, as building products supply companies and residential builders have aggressively sought to capture new business by bidding on all jobs – residential, commercial, industrial, or highly specialized. It is worth noting that RedBuilt has maintained its strong financial position, despite market conditions. RedBuilt has actually increased its liquidity relative to the date the business was acquired and continued to demonstrate disciplined cost management during the first quarter.

RedBuilt is addressing the challenging market conditions by making great strides in diversifying its product offerings into new industrial markets and remaining aggressive in its core markets. To that end, RedBuilt received a loan from the State of Oregon in February 2010 to fund a series of capital expenditures. These projects will allow the company’s facility in Stayton, Oregon to manufacture products for new markets, such as concrete forming, scaffold planking and other niche industrial markets. RedBuilt has also entered foreign markets, including Japan and Canada. The company successfully navigated the arduous process of receiving certification to sell its engineered wood products into the Japanese market in record time, a testament to the tremendous capability of RedBuilt’s engineers. Finally, RedBuilt completed a transition from Weyerhaeuser’s legacy information system to a new and versatile platform, doing so under budget and on time.

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 manufacturing and distribution facilities in Washington, the Carolinas and Florida.

Despite difficult market conditions, the first quarter of 2010 yielded positive financial results for Wood Resources. Short-term supply constrictions late in the first quarter of 2010, stemming from the Chilean earthquake and heavy rainfall in the Southeast, have improved pricing. Coupled with very low inventory levels in the supply chain, slight improvements in demand should support more stable pricing and volumes in the second quarter of 2010. While there are signs of stabilization in the housing markets, all of Wood Resources’ facilities remain focused on cost control.

The Chester Wood Products subsidiary in Chester, South Carolina, is a world-class commodity panel mill that is positioned to capitalize on a strengthening market. As a result of log-sourcing decisions late in 2009, Chester was in an enviable position with adequate fiber supply to enable full capacity utilization in Q1 2010, a period when a number of its competitors were forced to idle.

Meanwhile, the Moncure Plywood subsidiary in Moncure, North Carolina, managed its fiber sourcing challenges by producing a more diverse product mix from readily available fiber sources. Late in the first quarter of 2010, Moncure returned to profitability.

The Olympic Panel Products subsidiary in Shelton, Washington, which produces specialty overlay plywood for concrete forms, signage and panels for roll-up truck doors, generated positive earnings of almost $1 million in Q1 2010, its best quarterly performance since 2007. Olympic benefitted from the permanent closure of Ainsworth Plywood, its largest North American competitor. Olympic also made significant strides in its safety performance, achieving a 67% improvement in the Q1 2010 total incident rate as compared to 2009, and posting its lowest incident rate ever this far into the year.