CORRESP 1 filename1.htm

December 12, 2006

John Reynolds, Assistant Director
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re:: Stone Arcade Acquisition Corporation

Dear Mr. Reynolds:

On behalf of our client, Stone Arcade Acquisition Corporation, a Delaware corporation (the "Company,"), we hereby file for your review three (3) copies of the fourth amendment to the Preliminary Schedule 14A of the Company (the "Amended Proxy Statement"), and five (5) additional copies marked to indicate changes made from the amended Preliminary Schedule 14A filed on November 28, 2006. This amendment is being filed in order to respond to the comments set forth in the Staff's letter dated December 7, 2006 (the "Staff's Letter").

In order to facilitate your review of the Amended Proxy Statement, we have responded, on behalf of the Company, to each of the comments set forth in the Staff's Letter, on a point-by-point basis. The numbered paragraphs set forth below respond to the Staff's comments and correspond to the numbered paragraphs in the Staff's Letter. Page numbers refer to the marked copy of the Amended Proxy Statement.

The Company's responses to the Staff's comments set forth in the Staff's Letter are as follows:

Comment
Number

Response

Stone Insider Stock Ownership, page 9

1.: The exact nature of the order to purchase the warrants is correctly and fully disclosed on page 12 as: " a limit order on a "not held" basis to purchase up to 3,500,000 warrants at prices not to exceed $.70 per warrant during the first 40 trading days that the warrants were eligible to trade separately. A "not held" order gives the broker discretion with respect to price, size and time of execution with the expectation that the broker can obtain a better price than what might be available at the time, but does not hold the broker responsible (hence "not held") for any losses that might result from their exercise of such discretion."

We have added to the disclosure noting that such an order is more accurately called a 'limit' order rather than a 'discretionary' order, which, in industry parlance is more commonly used to describe an order where the broker has full discretion over the price paid as well as the size and time of execution. Disclosure has also been revised on pages 10, 12, 14, 36 and 50 to properly characterize the order as a 'limit' order.

Summary of the Proxy Statement, page 7

2.: The disclosure on page 7 has been expanded to (i) provide further detail regarding the nature of the transaction expenses and the finance fee and to separate such fees, and (ii) clarify that an $855,000 finance fee is being paid to LaSalle Bank in connection with extending the credit facility.

3.: We have added a cross-reference to the detailed discussion on page 12 of Morgan Joseph's investment banking fee. In addition, we have amended the 8-K referenced in the Staff's Letter to clarify that the advisory fee is not being paid for Morgan Joseph's assistance in the efforts described in the relevant paragraph, but it is receiving the $1,200,000 as an investment banking fee pursuant to an agreement entered into at the time of the Company's initial public offering. We understand that as written the language was not clear in this regard.

Proposal I The Acquisition Proposal, page 37

4.: The disclosure has been expanded to clarify and confirm that the discussion referenced in the Staff's Letter took place after the effective date of the Company's Form S-1.
5.: The language change from "is not a complete list" to "may not be a complete list" was made simply because it was felt the sentence read better in the context of the revised paragraph. However, the paragraph makes clear that certain companies were excluded for reasons that were explained, and so the sentence has been revised to restore the former language ("is not a complete list"). The Company has no knowledge of any companies that were excluded from the list other than as described in the paragraph.
6.: We have expanded the disclosure beginning on page 42 to provide further detail on the method used to screen companies and the rationale for doing so, and also added disclosure to note management's belief that the large firms chosen are considered comparable and would not necessarily have a materially different cost structure than KPB. Please note that the $3 billion figure referred to in the Staff's Letter is a measure of revenues, not of market value.

Management's Discussion and Analysis of Financial Condition and Results of Operations of Stone, page 86

7.: The first paragraph under the caption "Liquidity and Capital Resources" has been expanded to include a discussion of the investment banking and finance fees, including the amount of such fees.
8.: As previously disclosed on page 84, there are no significant creditors of the Company that have not waived their claims against the trust account. This same statement has been added to the first paragraph under the caption "Liquidity and Capital Resources" following the discussion of the Company's total current liabilities.

Stone Arcade Acquisition Corporation Audited Financial Statements General

9.: Attached hereto as Appendix A is an amended and restated unit purchase option clarification agreement which reflects the deletion from the option of Section 5.3—Damages in its entirety. The amended and restated agreement has been filed with the Company's 10-Q/A for the period ended September 30, 2006.

Note C—Initial Public Offering, F-15

10.: The footnote disclosure has been expanded to include all of the provisions on exercise contained in Section 2.2.1 of the UPO, as clarified. The Company is filing amendments to all of its interim financial statements to include such language, as well as the language referenced in the Staff's prior comment letters regarding the exercise of the warrants. Please note that the warrants issuable upon exercise of the UPO, not only the warrants issued in the public offering, are governed by the warrant agreement, as clarified.

Kraft Papers Business Interim Financial Statements for the Three and Six Months ended June 30, 2005 and 2005

11.: In response to the further oral comment of the Staff communicated to us by Brian Bhandari on December 11, 2006, the disclosure on page 109 in the Liquidity section under the caption "Liquidity and Capital Resources", on page F-21 in Note 1 of the Notes to the Unaudited

Condensed Combined Financial Statements as of September 30, 2006 and December 31, 2005 and the Three and Nine Months ended September 30, 2006 and 2005, and on page F-41 in Note 13 to the Notes to the Combined Financial Statements as of December 31, 2005 and 2004 and the years ended December 31, 2005, 2004 and 2003 has been substantially expanded to provide the basis behind IP's and KPB's accounting treatment of the impairment charge and an explanation to the Company's stockholders of such reasoning and its relationship to the pro forma presentation in the Amended Proxy Statement.

12.: Attached hereto as Appendix B is the undiscounted cash flow analysis and related assumptions requested by the Staff and provided to us by IP.

Other Regulatory

13.: The Company has amended its Exchange Act reports to include the information requested in comment 10 of the Staff's Letter and comment 12 of the prior letter.

Form 8-K, filed June 27, 2006

14.: The Company has filed a third amendment to the Form 8-K originally filed on June 27, 2006 (the "Original 8-K") to explicitly describe under Item 8.01 why the Company was required to amend the Original 8-K and the language that has been added. The Company hereby confirms that it will send the Form 8-K/A to those parties which received the presentation directly from the Company, as noted in our response to prior comment 18.

Your prompt attention to this filing would be greatly appreciated. Should you have any questions concerning any of the foregoing please contact me by telephone at (212) 407-4935.

Very truly yours,

/s/ Fran Stoller
Partner

Enclosures

cc:: Roger Stone

APPENDIX A

AMENDED AND RESTATED UNIT PURCHASE OPTION CLARIFICATION AGREEMENT

This Amended and Restated Unit Purchase Option Clarification Agreement (this "Agreement"), dated December 7, 2006 amends and restates the Unit Purchase Option Clarification Agreement dated September 20, 2006, to the Unit Purchase Option, dated as of August 15, 2005 (the "Option"), issued by Stone Arcade Acquisition Corporation, a Delaware corporation, with offices at c/o Stone-Kaplan Investments, LLC, One Northfield Plaza, Suite 480, Northfield, Illinois 60093 ("Company"), to Morgan Joseph & Co. Inc., with offices at 600 Fifth Avenue, 19^th Floor, New York, New York 10020 ("Option Holder").

WHEREAS, as a result of certain questions that have arisen regarding the accounting treatment applicable to the Option, the parties hereto deem it necessary and desirable to amend the Option to clarify that the Option Holder does not have the right, and did not have the right at the time of issuance of the Option, to receive a net cash settlement in the event the Company does not maintain a current prospectus relating to the units, common stock and warrants issuable upon exercise of the Option at the time such Option is exercisable.

NOW, THEREFORE, in consideration of the mutual agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, and intending to be legally bound hereby, the parties hereto agree to amend the Option as set forth herein.

1. Option. The undersigned hereby agree that the Option is hereby amended by adding the following as Section 2.1.1 to the Option:

"2.1.1 No Exercise of Purchase Option if a Registration Statement is not Effective. Notwithstanding anything herein to the contrary, the Company shall not be obligated to deliver any securities pursuant to the exercise of this Purchase Option unless (i) a registration statement under the Act with respect to the Units, Warrants and Common Stock issuable upon such exercise is effective, or (ii) in the opinion of counsel to the Company or counsel to the Holder reasonably satisfactory to the Company, the exercise of this Purchase Option is exempt from the registration requirements of the Act and such securities are qualified for sale or exempt from qualification under applicable securities laws of the states or other jurisdictions in which the registered holders reside. This Purchase Option may not be exercised by, or securities issued to, any registered holder in any state in which such exercise or issuance would be unlawful. The Holders are not, and at the time of the initial issuance of this Purchase Option were not, entitled to receive a net-cash settlement or other consideration in lieu of physical settlement in securities if the securities underlying this Purchase Option are not covered by an effective registration statement.

2. Damages. The undersigned hereby agree that solely for the reason outlined in the recital clause of this Agreement and without otherwise in any way limiting any rights the Holder may have under applicable law as a result of a breach by the Company of any provision of the Option, the Option is hereby amended by deleting Section 5.3 in its entirety.

3. Miscellaneous.

a. Governing Law; Jurisdiction. The validity, interpretation, and performance of this Agreement shall be governed in all respects by the laws of the State of New York, without giving effect to conflict of laws. The Company hereby agrees that any action, proceeding or claim against it arising out of or relating in any way to this Agreement shall be brought and enforced in the courts of the State of New York or the United States District Court for the Southern District of New York, and irrevocably submits to such jurisdiction, which jurisdiction shall be exclusive. The Company hereby waives any objection to such exclusive jurisdiction and that such courts represent an inconvenient forum. Any such process or summons to be served upon the Company may be served by transmitting a copy thereof by registered or certified mail, return receipt requested, postage prepaid, addressed to it in care of the address set forth above or such other address as the

undersigned shall furnish in writing to the other. Such mailing shall be deemed personal service and shall be legal and binding upon the Company in any action, proceeding or claim.

b. Binding Effect. This Agreement shall be binding upon and inure to the benefit of the parties hereto and to their respective heirs, legal representatives, successors and assigns.

c. Entire Agreement. This Agreement sets forth the entire agreement and understanding between the parties as to the subject matter thereof and merges and supersedes all prior discussions, agreements and understandings of any and every nature among them. Except as set forth in this Agreement, provisions of the original Option which are not inconsistent with this Agreement shall remain in full force and effect. This Agreement may be executed in counterparts.

d. Severability. This Agreement shall be deemed severable, and the invalidity or unenforceability of any term or provision hereof shall not affect the validity or enforceability of this Agreement or of any other term or provision hereof. Furthermore, in lieu of any such invalid or unenforceable term or provision, the parties hereto intend that there shall be added as a part of this Agreement a provision as similar in terms to such invalid or unenforceable provision as may be possible and be valid and enforceable

IN WITNESS WHEREOF, the parties hereto have executed this Unit Purchase Option Clarification Agreement as of the date first written above.

		STONE ARCADE ACQUISITION CORPORATION
		By:	/s/ ROGER W. STONE
			Name: Roger W. Stone Title: Chairman and CEO
		MORGAN JOSEPH & CO. INC.
		By:	/s/ MARY LOU MALANOSKI
			Name: Mary Lou Malanoski Title: Executive Vice President

APPENDIX B

PROJECT NAME: Kraft Papers Business-A Division of International Paper Company

PROJECT EVALUATION SUMMARY (Form CB-10B) PROJECT—Roanoke Rapids Mill-Unbleached Kraft																							USD 000
				Total Project			1 2005		2 2006		3 2007		4 2008		5 2009		6 2010		7 2011		8 2012		9 2013		10 2014		11 2015		12 2016		13 2017		14 2018		15 2019		16 2020
INVESTMENT
	Environmental			$	9,700		2,988		5,312		0		0		350		350		0		0		350		0		350		0		0		0		0		0
	Strategic & Cost Savings				34,548		3,048		3,500		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000		2,000
	Working Capital				26,933		24,368		796		(65	)	394		90		84		78		118		110		103		37		162		163		165		166		166
	Maintenance				72,542		1,574		6,920		5,748		4,300		4,500		4,500		4,500		4,500		4,500		4,500		4,500		4,500		4,500		4,500		4,500		4,500
	On-Hand Capital				223,796		223,796		0		0		0		0		0		0		0		0		0		0		0		0		0		0		0
TOTAL INVESTMENT				$	367,519		255,774		16,528		7,683		6,694		6,940		6,934		6,578		6,618		6,960		6,603		6,887		6,662		6,663		6,665		6,666		6,666
EARNINGS BEFORE INT. & TAXES (EBIT)
	Sales Revenue			$	3,433,452		200,348		208,387		207,678		211,547		212,300		213,002		213,603		214,600		215,512		216,382		216,752		217,984		219,224		220,470		221,723		223,940
	Other Income				(154,474	)	(9,000	)	(8,602	)	(8,705	)	(8,810	)	(8,915	)	(9,094	)	(9,276	)	(9,461	)	(9,650	)	(9,843	)	(10,040	)	(10,241	)	(10,446	)	(10,655	)	(10,868	)	(10,868	)
TOTAL INCOME				$	3,278,978		191,348		199,785		198,973		202,737		203,384		203,909		204,327		205,139		205,861		206,539		206,711		207,743		208,778		209,815		210,855		213,072
	Freight			$	275,679		14,535		15,337		15,314		15,848		16,134		16,419		16,701		17,022		17,342		17,662		17,940		18,299		18,665		19,039		19,419		20,002
	Total Direct Variable Costs				1,206,614		66,411		70,269		69,228		70,731		71,262		72,208		73,096		74,160		75,180		76,188		77,209		78,754		80,329		81,935		83,574		86,081
	Total Conversion Cost				1,162,176		62,748		64,359		65,473		66,666		67,821		69,046		70,293		71,563		72,856		74,174		75,515		77,026		78,566		80,137		81,740		84,192
	Total Fac. Cost (Ex. Depr.)				59,679		3,288		3,327		3,367		3,407		3,448		3,517		3,588		3,659		3,732		3,807		3,883		3,961		4,040		4,121		4,203		4,329
	Sector/Corporate S&A				93,397		5,145		5,207		5,269		5,332		5,396		5,504		5,614		5,727		5,841		5,958		6,077		6,199		6,323		6,449		6,578		6,776
	Business S&A				71,399		4,300		4,149		3,994		4,042		4,091		4,172		4,256		4,341		4,428		4,516		4,607		4,699		4,793		4,889		4,986		5,136
	Commercial/DC Expenses				93,177		7,000		6,882		5,223		5,079		5,139		5,242		5,347		5,454		5,563		5,674		5,788		5,904		6,022		6,142		6,265		6,453
	Manufacturing Excellence Savings				(127,806	)	0		(1,700	)	(3,400	)	(5,100	)	(6,800	)	(8,500	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,200	)	(10,506	)
	Cost Savings -capital				(53,535	)	0		(212	)	(624	)	(1,046	)	(1,478	)	(1,936	)	(2,411	)	(2,905	)	(3,417	)	(3,948	)	(4,500	)	(5,072	)	(5,665	)	(6,280	)	(6,917	)	(7,124	)
	Book Depreciation				263,476		18,890		18,555		18,321		17,502		17,220		16,823		16,878		16,856		16,843		16,507		14,959		14,911		14,863		14,815		14,767		14,767
TOTAL EXPENSES				$	3,044,255		182,317		186,172		182,165		182,461		182,233		182,496		183,161		185,678		188,168		190,338		191,279		194,480		197,735		201,048		204,417		210,106
EBIT				$	234,724		9,031		13,613		16,807		20,276		21,151		21,413		21,166		19,461		17,693		16,200		15,432		13,264		11,043		8,768		6,439		2,966
CASH INCOME/(LOSS)
	Income Taxes	38.00	%	$	89,195		3,432		5,173		6,387		7,705		8,037		8,137		8,043		7,395		6,723		6,156		5,864		5,040		4,196		3,332		2,447		1,127
	Net Income (Loss)			$	145,529		5,599		8,440		10,421		12,571		13,114		13,276		13,123		12,066		10,970		10,044		9,568		8,224		6,846		5,436		3,992		1,839
	Non-Cash Charges/Adj.			$	217,097		16,765		16,636		15,807		14,894		14,679		14,346		14,843		14,212		13,395		12,831		11,880		11,809		11,739		10,974		11,186		11,100
CASH INCOME/(LOSS)				$	362,626		22,365		25,076		26,228		27,465		27,793		27,622		27,966		26,278		24,365		22,876		21,448		20,033		18,586		16,410		15,178		12,939
	Cash Flow (annual)								8,549		18,545		20,771		20,853		20,688		21,388		19,660		17,405		16,273		14,561		13,371		11,922		9,745		8,512		6,273
	Cash Flow (cumulative)			$	228,517		0		8,549		27,094		47,865		68,718		89,406		110,794		130,454		147,859		164,132		178,693		192,064		203,987		213,732		222,244		228,517
Terminal value @ 5X EBITDA				$	88,664
Sum of cash flows and TV				$	317,181
Book value as of Dec 31, 2005				$	210,000

PROJECT EVALUATION SUMMARY (Form CB-10B)																											USD $000's
PROJECT—Fordyce Plant-Dunnage Bags
				Total Project		1 2006			2 2007			3 2008			4 2009			5 2010			6 2011			7 2012			8 2013			9 2014			10 2015
INVESTMENT:
	New Capital
	Strategic & Cost Savings						2,000			150			150			150			150			150			150			150			150			150
	Working Capital						6,058
	Maintenance & Enviromental						200			200			200			200			200			200			200			200			200			200
	On-Hand Capital

TOTAL INVESTMENT							2,200			350			350			350			350			350			350			350			350			350

EARNING BEFORE INT. & TAXES (EBIT):
	Sales Revenue				356,555		32,438			33,898			35,423			35,600			35,778			35,957			36,317			36,680			37,047			37,417
	Other Income						0			0			0			0			0			0			0			0			0			0
TOTAL INCOME							32,438			33,898			35,423			35,600			35,778			35,957			36,317			36,680			37,047			37,417

	Freight						667			680			694			707			722			736			751			766			781			781
	Total Plant cash costs						24,969			26,339			27,761			28,131			28,518			28,911			29,312			29,718			30,132			30,552
	Corp / Business S&A						932			932			932			932			932			932			932			932			932			932
	Cost Savings—Capital (tuber)						0			(460	)		(469	)		(479	)		(488	)		(498	)		(508	)		(518	)		(528	)		(539	)
	Cost Savings—Noncapital						(50	)		(100	)		(150	)		(200	)		(250	)		(300	)		(350	)		(400	)		(450	)		(450	)
	Other Capital Savings						0			(50	)		(100	)		(150	)		(200	)		(250	)		(300	)		(350	)		(400	)		(450	)
	Book Depreciation						303			403			403			403			403			403			403			403			403			403
TOTAL COSTS & EXPENSES						$	26,821		$	27,744		$	29,071		$	29,345		$	29,636		$	29,935		$	30,239		$	30,551		$	30,870		$	31,229

EARNING BEFORE INT. & TAXES (EBIT):						$	5,617		$	6,154		$	6,353		$	6,255		$	6,142		$	6,023		$	6,077		$	6,129		$	6,177		$	6,188

CASH INCOME/(LOSS)
	Income Taxes	38.00	%			$	2,134		$	2,339		$	2,414		$	2,377		$	2,334		$	2,289		$	2,309		$	2,329		$	2,347		$	2,351
	Net Income (Loss)					$	3,482		$	3,816		$	3,939		$	3,878		$	3,808		$	3,734		$	3,768		$	3,800		$	3,830		$	3,837
	Non-Cash Charges/Adj.					$	303		$	403		$	403		$	403		$	403		$	403		$	403		$	403		$	403		$	403
CASH INCOME/(LOSS						$	3,785		$	4,219		$	4,342		$	4,281		$	4,211		$	4,137		$	4,171		$	4,203		$	4,233		$	4,240

	Cash Flow (annual)			$	36,471		1,585			3,869			3,992			3,931			3,861			3,787			3,821			3,853			3,883			3,890
	Terminal value @ 5X EBITDA			$	32,955																													32,955
Sum of cash flows and TV				$	69,426
Book value as of 12/31/05				$	3MM

Kraft Papers Business
Roanoke Rapids Mill—Unbleached Kraft
Discussion of Undiscounted Cash Flow Analysis Assumptions

The attached cash flow analyses were prepared by IP as part of its strategic planning and budgeting process. These analyses also served as the basis for the Division's recoverability analysis. The assumptions used in developing these cash flow projections are consistent with the guidance in paragraph 17 of SFAS 144, which requires that estimates of cash flows be reasonable in relation to the assumptions used in developing other information used by the entity for comparable periods, such as internal budgets and projections, accruals related to incentive compensation plans, or information communicated to others.

The following is a discussion of the key assumptions utilized by the Company in estimating cash flows for the Roanoke Rapids asset group. Similar assumptions were utilized by the Company in estimating cash flows for the Fordyce asset group.

A. Expected Useful Economic Life

Paragraph 18 of SFAS 144 requires that estimates of future cash flows used to test the recoverability of a long-lived asset group be made for the remaining useful life of the asset group. Further, it states that the remaining useful life of an asset group shall be based on the remaining useful life of the primary asset of the group, which for the Roanoke Rapids Mill asset group are the paper machines. Paragraph 16 of SFAS 144 states that estimates of future cash flows used to test the recoverability of a long-lived asset group shall include only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group.

The remaining useful life of the primary assets, the paper machines, considering proper maintenance as forecast below in Investment cash flows, is estimated to be in excess of 20 years. For cash flow forecasting purposes, we determined that cash flows for the first 15 years could be reasonably projected. For the estimated useful life remaining after year 15, a terminal value based on a multiple of "5 × EBITDA" was used as a proxy for the expected cash flows to be generated. We believe this approach captures the existing service potential of the primary assets of the asset group being tested for recoverability.

B. Investment Capital Expenditures

Cash outflows for Total Investments includes expected capital spending for the following:

1): Maintenance capital necessary to maintain existing assets in order to sustain current production levels
2): Environmental capital to ensure regulatory compliance
3): Cost reduction capital to improve efficiencies of existing mill assets

Paragraph 19 of SFAS 144 states that estimates of future cash flows used to test the recoverability of a long-lived asset shall be based on the existing service potential of the asset at the date it is tested. The service potential of a long-lived asset encompasses its remaining useful life, cash-flow-generating capacity, and for tangible assets, physical output capacity. The Total Investment cash outflows exclude cash flows associated with future capital spending that would increase the service potential of the mill. The capital spending described above includes only that which is required to maintain the current production levels, maintain compliance with expected regulatory requirements (such as emission standards), and capital spending that will provide for future cost savings primarily through increased fiber and energy yields (see discussion of expected cash savings from this capital spending below).

C. Sales Revenue and Other Income

Paragraph 17 of SFAS 144 states that estimates of future cash flows used to test the recoverability of a long-lived asset group should consider all available evidence and that the assumptions used in

developing those estimates should be reasonable. The Sales Revenue assumption includes a constant volume based on the current service potential of the asset group. Sales prices have been forecasted based on trend line pricing, which is representative of the historical average pricing over a 3 to 5 year business cycle. Trend line pricing was developed by IP's Corporate Planning department in conjunction with external consultants, and is based on 20 years of historical prices. The trend line pricing assumption utilizes a nominal growth rate of less than 1% per year. Other income (which is negative) represents discounted pricing for large volume contracts, which exist in our customer base currently.

D. Total Expenses

As noted above, paragraph 17 of SFAS 144 states that estimates of future cash flows used to test the recoverability of a long-lived asset group should consider all available evidence and that the assumptions used in developing those estimates should be reasonable. Total Expenses include freight & distribution centers, manufacturing—direct variable, manufacturing—conversion & other fixed, manufacturing—depreciation, business selling & administrative, and Corporate support (i.e. centralized invoicing, IT, legal, H/R etc.). These costs are based on current estimates and standards and are escalated for inflation. Escalation factors were provided by IP's Corporate Planning department based on long-term cost studies. In general, inflation was estimated to be approximately 1% to 1.5% per year; however, the inflation escalation factors were applied to each specific cost item (i.e. freight costs were escalated for inflation at 2% to 3% per year, wood costs were escalated for inflation at 1.2% per year, coal costs declining at 1% per year, and labor costs escalated at 2% per year).

Included in Total Expenses are two categories of cost savings including Manufacturing Excellence Cost Savings and Capital Cost Savings. Manufacturing Excellence is a formal mill cost reduction program targeting annual non-capital savings (equal to approximately 1% of total cash costs) in the areas of labor reduction, lower maintenance expenses, fiber and energy efficiencies, etc. due to implementation of world class maintenance and operating practices. Cost savings goals are derived from extensive benchmarking activities (i.e. comparing average annual fiber losses to best 3 months average) and incorporated into mill objectives and the management compensation system. These annual cost savings are from non-capital initiatives and comparable with historical performance. Capital Cost Savings are based on returns expected from the Cost Reduction capital investment noted above, assuming an average return on investment of 20%, which is conservative based on the return on investment achieved on historical capital cost saving projects of 50% or greater.

E. Income Taxes

The cash flow analysis assumes a corporate tax rate of 38%, which is a standard assumption used for all mill strategic studies regarding future cash flow projections and valuations. We understand that estimates of cash flows used to test recoverability of an asset group should generally exclude income taxes. If income taxes were excluded from the cash flow analysis, the cumulative undiscounted cash flows would be increased by $85.8 million to $403 million.

FRAN STOLLER
Partner

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fstoller@loeb.com