SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[X]* ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
*THIS SPECIAL REPORT CONTAINS ONLY FINANCIAL STATEMENTS FOR THE FISCAL YEAR
ENDED DECEMBER 31, 1997 IN ACCORDANCE WITH THE PROVISIONS OF RULE 15-D(2)
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE EXCHANGE ACT OF 1934
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
(State or other jurisdiction of (I.R.S. Employer Identification
Incorporation or organization) Number)
10026 Old Ridge Road
Ashland, VA 23005
(Address of principal executive offices)
Registrant's telephone number, including area code (804) 227-3394
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X] NOT APPLICABLE
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
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Bear Island Paper Company L.L.C.
Report of Independent Accountants
Balance Sheet as of December 31, 1997
Statements of Operations for the one month ended December 31, 1997 and the
eleven months ended November 30, 1997
Statement of Changes in Member's Interest for the one month ended December 31,
1997 and Statement of Changes in Partner's Equity for the eleven months ended
November 30, 1997
Statements of Cash Flows for the one month ended December 31, 1997 and the
eleven months ended November 30, 1997
Notes to Financial Statements
Bear Island Timberlands Company L.L.C.
Report of Independent Accountants
Balance Sheet as of December 31, 1997
Statements of Operations for the one month ended December 31, 1997 and the
eleven months ended November 30, 1997
Statement of Changes in Member's Interest for the one month ended December 31,
1997 and Statement of Changes in Partner's Equity for the eleven months ended
November 30, 1997
Statements of Cash Flows for the one month ended December 31, 1997 and the
eleven months ended November 30, 1997
Notes to Financial Statements
F.F. Soucy's Inc.
Auditor's Report
Consolidated Balance Sheet as of December 31, 1997
Consolidated Statement of Retained Earnings for the year ended December 31, 1997
Consolidated Statement of Earnings for the year ended December 31, 1997
Consolidated Statement of Changes in Financial Position for the year ended
December 31, 1997
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Accountants
To the Board of Directors of
Bear Island Paper Company, L.L.C. and to the
Partners of Bear Island Paper Company, L.P.:
We have audited the accompanying balance sheet of Bear Island Paper Company,
L.L.C. (a Virginia limited liability corporation) (the "Company") as of December
31, 1997, and the related statements of operations, changes in member's interest
and cash flows for the one month ended December 31, 1997 and the related
statements of operations, changes in partners' equity and cash flows for the
eleven months ended November 30, 1997 of Bear Island Paper Company, L.P. (a
Virginia limited partnership) (the "Predecessor") (collectively the
"Companies"). These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 3 to the financial statements, the Companies had numerous
significant related-party transactions with an affiliate, Bear Island
Timberlands Company, L.L.C. for the one month period ended December 31, 1997 and
with Bear Island Timberlands Company, L.P. for the eleven months ended November
30, 1997, which significantly impacted the financial position at December 31,
1997 and the results of operations and cash flows of the Companies for the one
month ended December 31, 1997 and the eleven months ended November 30, 1997.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bear Island Paper Company,
L.L.C. as of December 31, 1997, and the results of the Company's operations and
cash flows for the one month ended December 31, 1997, and the results of the
Predecessor's operations and cash flows for the eleven months ended November 30,
1997, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
Richmond, Virginia
March 19, 1998
<PAGE>
<TABLE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEET
<CAPTION>
December 31,
ASSETS 1997
----------------
<S> <C>
Cash and short-term investments $ 1,353,049
Accounts receivable:
Trade, less allowance for doubtful accounts of $73,100 10,189,307
Affiliates 3,123,853
Other 820,175
Inventories 14,213,313
Other current assets 147,911
----------------
Total current assets 29,847,608
----------------
Property, plant and equipment, at cost 195,084,008
Less accumulated depreciation 822,264
----------------
Net property, plant and equipment 194,261,744
----------------
Deferred financing costs, net of accumulated amortization of $79,386 8,375,199
----------------
$ 232,484,551
================
LIABILITIES
Current portion of long-term debt 700,000
Current portion of long-term purchase obligations 180,304
Accounts payable and accrued expenses 9,294,855
Due to affiliates 151,930
Interest payable 1,344,915
----------------
Total current liabilities 11,672,004
----------------
Long-term debt 195,300,000
Long-term purchase obligations 255,000
----------------
195,555,000
----------------
MEMBER'S EQUITY
Member's:
Interest 25,469,737
Accumulated deficit (212,190)
----------------
$ 232,484,551
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Company Predecessor
---------------- ------------------
One month Eleven months
ended ended
December 31, November 30,
---------------- ------------------
1997 1997
<S> <C>
Net sales - unaffiliated $ 8,881,972 $ 59,547,722
Net sales - affiliated 1,924,961 46,039,980
---------------- ------------------
Total net sales 10,806,933 105,587,702
Cost of sales 9,068,701 95,404,127
---------------- ------------------
Gross profit 1,738,232 10,183,575
Selling, general and administrative expenses:
Management fees to affiliate 324,835 3,174,722
Other direct 45,658 572,644
---------------- ------------------
Income from operations 1,367,739 6,436,209
---------------- ------------------
Other income (deductions):
Interest income 590,971
Interest expense (1,633,043) (4,331,563)
Other income (expense) 53,114 (41,231)
---------------- ------------------
(1,579,929) (3,781,823)
---------------- ------------------
Income (loss) before extraordinary item (212,190) 2,654,386
Extraordinary item:
Early extinguishment of debt (4,367,418)
---------------- ------------------
Net loss $ (212,190) $ (1,713,032)
================ ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CHANGES IN MEMBER'S INTEREST AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
Dow Jones
Brant-Allen Virginia
Industries, Company, Newsprint,
Inc. Inc. Inc. Total
Predecessor
<S> <C>
Partners' equity:
Contributed capital:
Balances, December 31, 1996 and
November 30, 1997 $ 24,656,681 $ 31,882,500 $ 31,882,500 $ 88,421,681
=============== ================ ================ =================
Retained earnings (accumulated deficit):
Balances, December 31, 1996 1,326,966 3,020,084 3,020,084 7,367,134
Net loss - eleven months ended
November 30, 1997 (513,910) (599,561) (599,561) (1,713,032)
--------------- ---------------- ---------------- -----------------
Balances, November 30, 1997 $ 813,056 $ 2,420,523 $ 2,420,523 $ 5,654,102
=============== ================ ================ =================
-------------------------------------------------------------------------------------------------------------------------
Company
Member's interest:
Aggregate equity balances of Bear Island
Paper Company L.P. at December 1, 1997 and
conversion to Bear Island
Mergco, L.L.C. 25,469,737 34,303,023 34,303,023 $ 94,075,783
Acquisition of 70% limited partnership
interest by Bear Island Paper Company,
L.L.C. and merger with Bear Island
Mergco L.L.C. (34,303,023) (34,303,023) (68,606,046)
Contribution from parent 3,564,585 3,564,585
Distribution to parent (3,564,585) (3,564,585)
--------------- ---------------- ---------------- -----------------
Balance, December 31, 1997 $ 25,469,737 - - $ 25,469,737
=============== ================ ================ =================
Accumulated deficit:
Net loss - one month ended December 31, 1997 $ (212,190)
------------------
Balance, December 31, 1997 $ (212,190)
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Company Predecessor
------------------ ------------------
One month Eleven months
ended ended
December 31, November 30,
------------------ ------------------
1997 1997
<S> <C>
Operating activities:
Net loss $ (212,190) $ (1,713,032)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation 822,264 9,735,450
Depletion 12,501
Amortization of deferred financing costs 79,386 54,307
Noncash portion of extraordinary item 419,930
Net loss on disposal of property, plant and equipment 588,873
(Increase) decrease in:
Accounts receivable 207,797 868,132
Inventories (454,791) 378,964
Other current assets 7,008 106,781
Increase (decrease) in:
Accounts payable and accrued expenses for operating activities (3,856,796) 2,516,245
Due to affiliate (1,416,656) 70,600
Interest payable 800,228 (492,813)
------------------ ------------------
Net cash provided by (used in) operating activities (4,023,750) 12,545,938
------------------ ------------------
Investing activities:
Purchases of property, plant and equipment (238,518) (4,835,971)
Proceeds from disposition of property, plant and equipment 134,300
Payment for purchase of partnership interest, net of cash acquired (139,930,098)
------------------ ------------------
Net cash used in investing activities (140,168,616) (4,701,671)
------------------ ------------------
Financing activities:
Contributions from parent 3,564,585
Distributions to parent (3,564,585)
Principal payments on long-term debt (47,000,000) (6,000,000)
Principal payments on promissory notes (3,917,764)
Principal payments on long-term purchase obligations (2,549,049)
Proceeds from issuance of long-term debt 201,000,000
Payment of deferred financing costs (8,454,585)
------------------ ------------------
Net cash provided by (used in) financing activities 145,545,415 (12,466,813)
------------------ ------------------
Net increase (decrease) in cash and short-term investments 1,353,049 (4,622,546)
Cash and short-term investments, beginning of period 13,625,322
------------------ ------------------
Cash and short-term investments, end of period $ 1,353,049 $ 9,002,776
================== ==================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 288,128 $ 4,824,376
================== ==================
Noncash investing and financing activities:
Increase in long-term purchase obligations $ 305,000
==================
Increase in promissory notes for equipment acquisition $ 2,425,856
==================
<PAGE>
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Acquisition:
Effective December 1, 1997, Bear Island Paper Company, L.L.C., a newly
formed Virginia limited liability corporation (the "Company") completed
the purchase of the 70% partnership interest (the "Acquisition") in Bear
Island Paper Company, L.P. (the "Predecessor") (collectively the
"Companies") previously owned by subsidiaries of Dow Jones & Company,
Inc. ("Dow Jones") and The Washington Post Company ("The Washington
Post"). Immediately before the Acquisition and certain related financings
which were used to facilitate the funding of the Acquisition (see Note
6), the Predecessor was converted into Bear Island Mergerco, L.L.C.
("Mergerco") and Mergerco was then merged into the Company with the
Company being the surviving entity. The Company is a wholly owned
subsidiary of Brant-Allen Industries, Inc. ("Brant-Allen"), a Delaware
corporation.
The Company accounted for the Acquisition as a purchase. The allocation
of the purchase price resulted in purchase adjustments being applied to
assets and liabilities acquired. In this connection, since Brant-Allen
was the owner of 30% interests in the Predecessor prior to the
Acquisition, purchase adjustments have been applied to adjust 70% of the
basis of the assets and liabilities acquired to fair value. The total
purchase price of approximately $149.6 million was allocated to the
acquired assets and liabilities based on their respective fair values at
December 1, 1997 as follows:
Working capital $ 11,598,450
Property, plant and equipment 163,383,956
Other liabilities (25,378,500)
-----------------
Total purchase cost $ 149,603,906
Less cash acquired 9,002,776
Less amount payable at
December 31, 1997 671,032
-----------------
Total cash paid $ 139,930,098
=================
As a result of the Acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the Acquisition are
not comparable to the Predecessor's financial statements for the
period prior to the Acquisition.
The Predecessor was constituted as a limited partnership on May 18, 1978,
under the Virginia Uniform Limited Partnership Act, pursuant to a Limited
Partnership Agreement, as amended (the "Partnership Agreement"), among:
o Brant-Allen;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones; and
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization and Acquisition, continued:
Brant-Allen was the general partner and D J Virginia and Newsprint were
limited partners. Under the terms of the Partnership Agreement, as
amended, D J Virginia's and Newsprint's equity interests were 35% each
and Brant-Allen's equity interest was 30%. The Partnership Agreement, as
amended, contained the following provisions:
o The purpose of the Predecessor was to engage in the business of
producing, selling and distributing newsprint by constructing, owning
and operating a paper mill (the "Mill") in Hanover County, Virginia.
o Brant-Allen, as general partner, had full and exclusive control of the
business of the Predecessor, had active control of its management and
provided marketing and certain administrative services for which it
received a monthly management fee calculated at three percent of the
newsprint sales after deducting related distribution costs.
Brant-Allen was authorized to incur on behalf of the Predecessor,
without the approval or consent of the partners, debt of up to
$97,900,000.
o The limited partners were not liable for any net losses or other debt
or liability of the Predecessor to any extent, except for their
respective contributions to capital.
o Subject to the aforementioned provisions, the partners shared the net
profits and losses, computed in accordance with generally accepted
accounting principles consistently applied, based on their interests,
as defined by the Partnership Agreement.
o No partner was allowed to sell, assign or otherwise dispose of its
interest, or any part thereof, in the Predecessor, unless it first
offered such interest to the other partners as prescribed in the
Partnership Agreement.
2. Summary of Significant Accounting Policies:
Cash and Short-Term Investments: Cash and short-term investments include
all cash balances and highly liquid investments. Short-term investments
are stated at cost plus accrued interest, which approximates market
value. For purposes of the statements of cash flows, the Companies
consider all highly liquid short-term investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories: Finished goods and raw materials inventories are valued at
the lower of cost or market, with cost determined on the first-in,
first-out ("FIFO") basis. Stores inventories are valued at the lower of
average cost or market and are shown net of an allowance for obsolescence
of approximately $421,300.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Property, Plant and Equipment: The costs of major renewals and
betterments are capitalized while the costs of maintenance and repairs
are charged to income as incurred. When properties are sold or retired,
their cost and the related accumulated depreciation or depletion are
eliminated from the accounts and the gain or loss is reflected in income.
The Companies capitalize interest costs as part of the cost of
constructing significant assets. There were no capitalized interest costs
during the month ended December 31, 1997 or the eleven months ended
November 30, 1997.
The carrying value of property, plant and equipment is evaluated whenever
significant events or changes occur that might indicate an impairment
through comparison of the carrying value to total undiscounted cash
flows.
Depreciation and Depletion: Depreciation of plant and equipment is
computed principally on the straight-line basis over the estimated useful
lives of the assets. Lives range from 10 to 50 years for buildings and
improvements, 40 years for recycling facilities, 35 years for tanks, 30
years for specialized building improvements, 25 years for newsprint
manufacturing equipment, and from three to 50 years for other machinery
and equipment. The portion of the cost of timberlands attributed to
standing timber is charged against income as timber is cut and utilized
in the manufacturing process at rates determined annually, based on the
relationship of unamortized timber costs to the estimated volume of
recoverable timber.
Deferred Financing Costs: Costs directly associated with the issuance of
debt have been deferred and are being amortized using the interest method
over the life of the related debt. The Predecessor amortized deferred
financing costs using the straight-line method which approximated the
interest method.
Income Taxes: No provision for income taxes is required in the financial
statements since each member or partner is individually liable for any
income tax that may be payable on its share of the Companies' taxable
income.
Revenue Recognition: Net sales to affiliates and non-affiliates are
recognized by the Companies at the time title transfers to the customer,
which occurs at the point of shipment of the newsprint to the customer.
Earnings Per Share: No earnings per share calculations have been
provided in the financial statements since such calculations are not
required.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Fair Value of Financial Instruments: The fair value of the Company's
long-term debt is estimated using discounted cash flow analyses based on
the incremental borrowing rates currently available to the Company with
loans of similar terms and maturity. The fair value of trade receivables
and payables approximates the carrying amount because of the short
maturity of these instruments.
Risks and Uncertainties: Financial instruments which potentially
subjects the Company to concentrations of credit risk consist
principally of cash, cash equivalents and receivables. The Company's
cash balance is maintained at a major financial institution. Cash
equivalents, which consist of U.S. government securities, are with a
high-credit-quality financial institution. Receivables consist
principally of trade accounts receivable resulting primarily from sales
to newspaper publishers. Credit is extended to customers after an
evaluation of creditworthiness. Generally, the Companies do not require
collateral or other security from customers for trade accounts
receivable. Substantially all of the Company's customers operate in
the printing sectors, consequently their ability to honor their
obligations are dependent upon the financial strength of the printing
and publishing sectors.
The Companies had four customers whose sales represent a significant
portion of sales. Sales to one of these customers approximated 18% and
22% for the one month ended December 31, 1997 and the eleven months ended
November 30, 1997. Sales to a second customer approximated 20% and 22%
for the one month ended December 31, 1997 and the eleven months ended
November 30, 1997. Sales to a third customer approximated 23% and 10% for
the one month ended December 31, 1997 and the eleven months ended
November 30, 1997. Sales to a fourth customer approximated 13% and 14%
for the one month ended December 31, 1997 and the eleven months ended
November 30, 1997.
3. Related-Party Transactions:
The Companies have contracted to sell newsprint to Dow Jones and The
Washington Post (the "Sales Contracts"). The Sales Contracts will
terminate on December 31, 2000; however, they will be extended for four
years if, prior to January 1, 2000, the parties agree to pricing
provisions for the four-year period. Both Dow Jones and The Washington
Post are subject to
<PAGE>
3. Related-Party Transactions, continued:
minimum purchase quantities under the Sales Contracts. The prices payable
under the Sales Contracts are defined in the Sales Contracts, as amended,
and during the periods presented represented the average price paid by
Dow Jones and The Washington Post to third-party suppliers geographically
located in the eastern United States. Additionally, the parties to the
Sales Contracts have the option to purchase additional quantities of
newsprint as available.
All sales and related collections are made through Newsprint Sales, a
division of Brant-Allen. Brant-Allen provides similar sales and
collection activities for F.F. Soucy, Inc., an affiliated Canadian
newsprint company. As part of the $70 million Term Loan Facility and the
$50 million Revolving Credit Facility (see Note 6), Brant-Allen entered
into a cash collateral agreement on December 1, 1997 (the "Collateral
Agreement"). The Collateral Agreement requires collections of the
Company's receivables, by Newsprint Sales, at the end of any business day
are not to exceed the sum of (i) the collected funds received by
Newsprint Sales for the Company for such business day and the immediately
preceding business day plus (ii) an additional amount not exceeding
$100,000.
The Company received payment of approximately $21,200 and the Predecessor
received payment of approximately $230,000 from Brant-Allen as
reimbursement for expenses incurred on behalf of Brant-Allen during the
month ended December 31, 1997 and the eleven months ended November 30,
1997.
A component of selling, general and administrative expenses as shown on
the statements of operations includes aggregate management fees to
Brant-Allen. The management fee includes senior management, treasury,
financial, marketing and sales services. There are restrictions on
payment of the management fee as described in Note 6. The level of these
fees, as if the Companies operated on a stand-alone, basis are not
practicably determinable.
The Predecessor was a party to a wood supply contract with Bear Island
Timberlands Company, L.P. ("Timberlands"), which was owned
proportionately by the same partners of the Predecessor, whereby
Timberlands had guaranteed to supply all of the Predecessor's log and
pulp chip requirements at prices negotiated annually. Purchases under the
wood supply contract approximated $13,280,000 during the eleven months
ended November 30, 1997. The actual price during the period was $95.50
per cord with the market price ranging from $60.00 to $66.00 per cord.
<PAGE>
3. Related-Party Transactions, continued:
Concurrent with the Acquisition, the Company modified certain terms of
the wood supply contract with Bear Island Timberlands Company L.L.C.
("BITCO"), the successor to Timberlands resulting from the purchase by
Brant-Allen of the 70% interest in Timberlands not previously owned by
Brant-Allen. The modification occurred to be reflective of wood purchases
at market prices. Modified terms included changing the point of purchase
of wood from the point of production to delivery to the Company's plant
site and changing the purchase price from a negotiated price to market
price. For the one month ended December 31, 1997, the Company purchased
approximately $1,637,000 from BITCO under the wood supply contract.
Prior to December 1, 1997, the Predecessor had contracted to pay
Timberlands a fee on a per ton basis for procuring recycled paper, of
$24.31 for the eleven months ended November 30, 1997. The Predecessor
recognized costs of approximately $2,028,500 for such procurement fees
during the eleven months ended November 30, 1997, which are included in
cost of sales in the accompanying financial statements. The actual costs
of the procurement services provided to the Predecessor by Timberlands
for the same period was approximately $213,000.
The Companies charged BITCO and Timberlands for certain administrative
and other expenses. These charges approximated $60,000 and $1,319,000
during the one month ended December 31, 1997 and the eleven months ended
November 30, 1997, respectively. The Companies also paid BITCO
approximately $5,300 and Timberlands $55,000 during the one month ended
December 31, 1997 and the eleven months ended November 30, 1997,
respectively, for managing their timberlands.
The Company's receivables, payables and the Companies sales to
partners and their affiliates were as follows:
December 31,
----------------
1997
Due from Brant-Allen $ 107,915
Due from Newsprint Sales 1,085,400
Due from Dow Jones 1,930,538
Due to BITCO 42,029
Due to F. F. Soucy, Inc. 109,901
<PAGE>
3. Related-Party Transactions, continued:
<TABLE>
One Month Eleven Months
Ended Ended
December 31, November 30,
----------------- ------------------
1997 1997
<S> <C>
Net sales to Dow Jones $ 1,924,961 $ 23,012,477
Net sales to The Washington Post * 23,027,503
</TABLE>
*Effective December 1, 1997, not considered a related party.
Sales to Dow Jones represented approximately 18% and 22% of total sales
during the one month ended December 31, 1997 and the eleven months
ended November 30, 1997. Sales to The Washington Post represented
approximately 22% of total sales during the eleven months ended
November 30, 1997. The remaining sales were to other unaffiliated
printing and publishing enterprises located primarily in the eastern
United States.
4. Inventories:
Inventories consisted of:
December 31,
-----------------
1997
Raw materials $ 4,085,044
Stores 9,105,893
Finished goods 1,022,376
-----------------
$ 14,213,313
=================
5. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
December 31,
-----------------
1997
Land $ 1,492,007
Timberlands 3,526,259
Building 28,412,280
Machinery and equipment 160,887,599
Construction in progress 765,863
-----------------
195,084,008
Less accumulated depreciation and depletion (822,264)
-----------------
Total $ 194,261,744
=================
During the eleven month period ended November 30, 1997, the Predecessor
recorded charges for a net loss of $723,173 to record a write-down and
disposal of assets.
<PAGE>
6. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consisted of:
December 31,
---------------
1997
<S> <C>
Senior Secured Notes bearing interest at 10% (interest payable
semiannually commencing June 1, 1998); due 2007 $ 100,000,000
Term Loan Facility bearing interest at 8.91% (interest payable
quarterly); principal of $175,000 due in 31 quarterly payments
commencing March 31, 1998; balance due December 31, 2005 70,000,000
$50 million Revolving Credit Facility bearing interest at LIBOR plus
2.75% (8.72% at December 31, 1997) for $20,000,000 and interest
due monthly; prime plus 1.75% (10.25% at December 31, 1997) for
the remainder in excess of $20,000,000 and interest due
quarterly commencing on March 30, 1998; due December 31, 2003 26,000,000
----------------
196,000,000
Less current portion 700,000
----------------
Total long-term debt $ 195,300,000
================
</TABLE>
On December 1, 1997, the Company sold in a private placement debt
securities of $100 million Senior Secured Notes (the "Notes"). On
December 1, 1997 the Company also entered into Indenture Agreements for a
$70 million Term Loan Facility ("Term Loan") and a $50 million Revolving
Credit Facility ("Revolving Loans"). The proceeds from the Notes, Term
Loan and Revolving Loans were used by the Company to purchase the 70%
interest of the Predecessor previously owned by certain
subsidiaries of Dow Jones and The Washington Post. The extraordinary item
in the eleven month period ended November 30, 1997 represents the
write-off of unamortized financing costs and prepayment penalties paid
related to Predecessor Notes that were extinguished at the time of the
Acquisition.
The Notes are redeemable, together with accrued interest, at the option
of the Company, in whole or in part, at any time on or after December 1,
2002, with sufficient notice at the redemption prices set forth below
calculated beginning on December 1 of the years indicated:
Redemption
Year Price
2002 105.000%
2003 103.333
2004 101.667
2005 and thereafter 100.000
<PAGE>
6. Long-Term Debt, continued:
Notwithstanding the foregoing, at any time prior to December 1, 2000, the
Company may redeem up to 20% of the aggregate principal amount of the
Notes within 60 days of one or more public equity offerings with the net
proceeds of such offering at a redemption price equal to 110% of the
principal amount thereof, together with accrued and unpaid interest, if
any, to the date of redemption; provided that immediately after giving
effect to any such redemption, at least $80 million aggregate principal
amount of the Notes originally issued remains outstanding.
The Term Loan and Revolving Loans are redeemable at the option of the
Company, in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent. Partial
prepayments on the Term Loan or Revolving Loans shall be in an aggregate
principal amount of $5,000,000 or a whole multiple thereof. Prepayment of
the Term Loans and Revolving Loans is required for any excess cash flow
("ECF"), as computed on the ECF date.
The Notes are collateralized by (i) a second priority security interest
in all real property of the Company and all personal property of the
Company, to the extent such personal property is assignable, (ii) a third
priority security interest in 100% of the membership interests in BITCO
and (iii) a second priority security interest in 65% of the issued and
outstanding capital stock of F.F. Soucy Inc. ("Soucy Inc.") ("Soucy
Collateral) behind a shared first lien. Soucy Inc. is an affiliate
newsprint company in Canada 100% owned by Brant-Allen. The remaining 35%
of the issued and outstanding capital stock of Soucy Inc. is subject to
certain restrictions that follow. At any time when either (a) the Company
has reduced its total committed debt to an amount that is not greater
than $145 million as of the date of determination or (b) the Notes are
rated investment grade, the Soucy Collateral will be released and all of
the covenants and other provisions of the Notes with respect to Soucy
Inc. will terminate.
The Term Loan and Revolving Loans are partly collateralized by (i) a
first priority security interest in a substantial portion of the assets
of the Company, (ii) a shared first priority security interest (pro rata
along with a $35 million senior secured two-year term loan to Brant-Allen
from several banks and other financial institutions) in 65% of the common
stock of Soucy Inc. and (iii) a second priority security interest in 100%
of Brant-Allen's membership interest in BITCO. The Term Loan and
Revolving Loan are guaranteed by Brant-Allen.
The most restrictive covenants of the Notes, Term Loan and Revolving
Loans state that the Company has a limitation on incurring additional
indebtedness, making restricted payments, creating, incurring or assuming
any liens, making sales of capital stock of subsidiaries, conducting
transactions with affiliates, and selling assets. Furthermore under
the Notes, the Company is not permitted to be charged management fees
by Brant-Allen that exceed 3% of the Company's annual revenues. Only
one-third of these fees may be paid.
<PAGE>
6. Long-Term Debt, continued:
On December 5, 1997, the Company entered into an interest rate exchange
agreement ("Interest Exchange") effectively fixing the interest rate on a
notational amount of $70 million of its outstanding Term Debt, decreasing
by $10 million a year on each December 5th, until expiration of the
Interest Exchange on December 5, 2002. Under this Interest Exchange, the
Company either receives or pays the difference between the three month
LIBOR rate of interest and a fixed rate of interest of 6.13% on the
applicable notational amount of the debt outstanding for each interest
quarter ending on the 5th day of each March, June, September and
December.
The fair value of the Company's Notes, Term Loan and Revolving Loan were
estimated to approximate fair value at December 31, 1997.
Maturities on long-term debt for the four years after 1998 are
approximately as follows: 1999 - $700,000; 2000 - $700,000; 2001 -
$700,000; and 2002 - $700,000.
7. Long-Term Purchase Obligations:
Capitalized purchase obligations for purchases of machinery and
equipment, which approximate fair value, consisted of:
<TABLE>
<CAPTION>
December 31,
----------------
1997
<S> <C>
Long-term purchase obligations bearing interest at various rates
ranging from approximately 7% to 8%; with principal payments
ending in 1999 $ 435,304
Less current portion 180,304
----------------
$ 255,000
================
</TABLE>
8. Employee Benefit Plans:
The Companies provide a defined contribution retirement plan for
substantially all employees. The annual cost of the plan, which is
currently funded, is based on the compensation of participants. The
Predecessor increased its contribution from 5% to 6% of employees' base
compensation effective July 1, 1996.
The Companies provide a thrift plan for substantially all employees which
incorporates the provisions of Internal Revenue Code Subsection 401(k),
whereby employees can make voluntary, tax-deductible contributions within
specified limits. The Companies matched employee contributions at 60%
during the one month ended December 31, 1997 and the eleven months ended
November 30, 1997, up to a maximum of 6% of an employee's base pay.
<PAGE>
8. Employee Benefit Plans, continued:
The Companies' expense for both plans approximated $95,000 and
$1,138,000 for the month ended December 31, 1997 and the eleven months
ended November 30, 1997, respectively.
The Companies are self-insured for employee medical, dental and
disability claims up to $35,000 per claim per year. The Company
provided an accrual of approximately $313,000 for claims incurred but not
reported at December 31, 1997.
9. Subsequent Events:
On January 30, 1998, the Company completed its initial registration
process which became effective pursuant to Section 8(A) of the Securities
Act of 1933. Concurrent with becoming effective, the Company is subject
to the information requirements of the Securities Exchange Act of 1934,
as amended, and required to file reports and other information with the
United States Securities and Exchange Commission.
On March 1, 1998, Newsprint Sales, a division of Brant-Allen, which
makes all sales and related collections for the Company, entered into
certain supply contracts (the "Supply Contracts") with two customers.
Under the terms of the Supply Contracts, Newsprint Sales is required
to provide to these customers certain fixed volumes of newsprint at
fixed prices through December 31, 2000.
<PAGE>
Report of Independent Accountants
To the Board of Directors of Bear Island Timberlands Company, L.L.C.
and Partners of Bear Island Timberlands Company, L. P.:
We have audited the accompanying balance sheet of Bear Island Timberlands
Company, L.L.C. (a Virginia limited liability corporation) (the "Company") as of
December 31, 1997, and the related statements of operations, changes in member's
interest and cash flows for the one month ended December 31, 1997, and the
related statements of operations, changes in partners' equity and cash flows for
the eleven months ended November 30, 1997 of Bear Island Timberlands Company,
L.P. (a Virginia limited partnership) (the "Predecessor") (collectively the
"Companies"). These financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 7 to the financial statements, the Companies had numerous
significant related-party transactions with an affiliate, Bear Island Paper
Company, L.L.C. for the one month period ended December 31, 1997 and with Bear
Island Paper Company, L.P., for the eleven months ended November 30, 1997 which
significantly impacted the financial position at December 31, 1997 and the
results of operations and cash flows of the Companies for the one month ended
December 31, 1997 and the eleven months ended November 30, 1997.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bear Island Timberlands
Company, L.L.C. as of December 31, 1997, and the results of the Company's
operations and cash flows for the one month ended December 31, 1997, and the
results of the Predecessor's operations and cash flows for the eleven months
ended November 30, 1997, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Richmond, Virginia
March 19, 1998
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEETS
<TABLE>
<CAPTION>
Company
----------------
December 31,
----------------
1997
<S> <C>
Cash and short-term investments $ 1,530,996
Restricted cash and investments 2,899,076
Accounts and notes receivable 125,875
Due from affiliate 42,029
Inventory 405,561
Other current assets 57,308
----------------
Total current assets 5,060,845
----------------
Property and equipment 475,688
Less accumulated depreciation (7,406)
----------------
Net property and equipment 468,282
Timberlands, net 60,598,527
----------------
61,066,809
----------------
Notes receivable 113,898
Deferred financing costs, net of accumulated amortization of $30,217 813,813
----------------
927,711
----------------
$ 67,055,365
================
LIABILITIES
Current portion of long-term debt 264,485
Accounts payable and accrued expenses 64,866
Due to affiliate 298,956
Interest payable 365,938
----------------
Total current liabilities 994,245
----------------
Deferred profit on land sales
Long-term debt 58,009,415
----------------
MEMBER'S EQUITY
Member's interest 8,326,302
Accumulated deficit (274,597)
----------------
8,051,705
----------------
$ 67,055,365
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Company Predecessor
---------------- ------------------
One month Eleven months
ended ended
December 31, November 30,
---------------- ------------------
1997 1997
<S> <C>
Sales:
Timber - affiliated $ 1,637,035 $ 13,280,395
Timber - unaffiliated 470,744 4,300,796
Land 19,380 953,295
---------------- ------------------
Total sales 2,127,159 18,534,486
---------------- ------------------
Cost of sales:
Timber 1,839,241 10,746,095
Land 2,362 114,503
---------------- ------------------
Total cost of sales 1,841,603 10,860,598
---------------- ------------------
Gross profit 285,556 7,673,888
Fees for recycled fiber 2,028,481
Selling, general and administrative expenses (133,977) (2,556,594)
---------------- ------------------
Income from operations 151,579 7,145,775
---------------- ------------------
Other income (deductions):
Interest income 22,193 479,266
Interest expense (413,806) (2,671,766)
Other (34,563) 137,746
---------------- ------------------
(426,176) (2,054,754)
---------------- ------------------
Income (loss) before extraordinary item (274,597) 5,091,021
Extraordinary item:
Early extinguishment of debt (2,313,385)
---------------- ------------------
Net income (loss) $ (274,597) $ 2,777,636
================ ==================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY AND MEMBER'S INTEREST
<TABLE>
<CAPTION>
Dow Jones
Brant-Allen Virginia
Industries, Company, Newsprint,
Inc. Inc. Inc. Total
Predecessor
<S> <C>
Partners' equity:
Contributed capital:
Balances, December 31, 1996 and November
30, 1997 $ 6,332,292 $ 6,264,102 $ 6,264,102 $ 18,860,496
============== ============== ============== ================
Retained earnings:
Balances, December 31, 1996 2,006,231 2,340,604 2,340,604 6,687,439
Net income - eleven months ended November
30, 1997 833,290 972,173 972,173 2,777,636
-------------- -------------- -------------- ----------------
Balances, November 30, 1997 $ 2,839,521 $ 3,312,777 $ 3,312,777 $ 9,465,075
============== ============== ============== ================
-----------------------------------------------------------------------------------------------------------------------
Company
Aggregate equity balances of Bear Island
Timberlands Company, L.P. upon conversion
of Bear Island Timberlands, L.P.
from a limited partnership to a limited
liability corporation $ 9,171,813 $ 9,576,879 $ 9,576,879 $ 28,325,571
Purchase by Brant-Allen of 70% selling members'
interests (9,576,879) (9,576,879) (19,153,758)
Distribution to parent (2,346,000) (2,346,000)
Contribution by parent 1,500,489 1,500,489
-------------- -------------- -------------- ----------------
Member's interest, December 31, 1997 $ 8,326,302 - - $ 8,326,302
============== ============== ============== ================
Accumulated deficit:
Net loss - month ended December 31, 1997
$ (274,597)
----------------
Accumulated deficit, December 31, 1997 $ (274,597)
================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Company Predecessor
---------------- -----------------
One month Eleven
ended months ended
December 31, November 30,
---------------- -----------------
1997 1997
<S> <C>
Operating activities:
Net income (loss) $ (274,597) $ 2,777,636
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 7,406 110,868
Depletion 129,686 1,077,290
Noncash portion of extraordinary item 189,295
Amortization of deferred financing costs 30,217 31,078
Net book value of land sold 2,363 184,616
Gain on disposal of machinery and equipment (31,297)
(Increase) decrease in:
Accounts and notes receivable 715,992 19,083
Due from affiliate 1,416,656 (70,600)
Inventory 1,017,215 (131,243)
Other current assets 43,262 (84,136)
Increase (decrease) in:
Accounts payable and accrued expenses (2,132,381) 2,364,575
Due to affiliate 298,956
Interest payable (802,358) (464,064)
Deferred profit on land sales (49,960)
---------------- -----------------
Net cash provided by operating activities 452,417 5,923,141
---------------- -----------------
Investing activities:
Purchases of machinery and equipment (142,257)
Purchases of timberlands (81,857) (654,733)
Proceeds from disposal of machinery and equipment 45,288
Decrease in restricted cash and investments (2,617,826) 2,884,192
Payment for purchase of partnership interest (net of cash acquired) (25,232,197)
---------------- -----------------
Net cash provided by (used in) investing activities (27,931,880) 2,132,490
---------------- -----------------
Financing activities:
Distribution to Brant-Allen (2,346,000)
Contribution from Brant-Allen 1,500,489
Proceeds from issuance of long-term debt 38,000,000
Payment of deferred financing costs (844,030)
Principal payments on long-term debt (7,300,000) (4,844,866)
---------------- -----------------
Net cash provided by (used in) financing activities 29,010,459 (4,844,866)
---------------- -----------------
Net increase in cash and short-term investments 1,530,996 3,210,765
Cash and short-term investments, beginning of period 7,535,254
---------------- -----------------
Cash and short-term investments, end of period $ 1,530,996 $ 10,746,019
================ =================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 1,216,164 $ 3,135,830
================ =================
Noncash investing and financing activity:
Increase in long-term debt for purchase of timberlands $ 384,650
=================
Increase in promissory notes for equipment acquisition $ 155,616
=================
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Acquisition:
Effective December 1, 1997, Brant-Allen Industries, Inc. ("Brant-Allen"),
a Delaware corporation, completed the acquisition of the 70% partnership
interest (the "Acquisition") in Bear Island Timberlands Company, L.P.
(the "Predecessor") previously owned by subsidiaries of Dow Jones &
Company, Inc. ("Dow Jones") and The Washington Post Company ("The
Washington Post"). Funding for the Acquisition was provided from
borrowings and cash from the Company. Immediately before the Acquisition
and certain related financings, the Predecessor was converted into Bear
Island Timberlands Company, L.L.C. (the "Company") (collectively the
"Companies"). At December 31, 1997, the Company was a wholly owned
subsidiary of Brant-Allen.
The Company accounted for the Acquisition as a purchase. The allocation
of the purchase price resulted in purchase adjustments being applied to
assets and liabilities acquired. In this connection, since Brant-Allen
was the owner of 30% interests in the Predecessor prior to the
Acquisition, purchase adjustments have been applied to adjust 70% of the
basis of the assets and liabilities acquired to fair value. The total
purchase price of approximately $36 million was allocated to the acquired
assets and liabilities based on their respective fair values at December
1, 1997 as follows:
Working capital $ 8,079,904
Timberlands 46,803,415
Other noncurrent assets 396,025
Other liabilities (19,301,730)
----------------
Total purchase cost $ 35,977,614
================
As a result of the Acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the Acquisition are not
comparable to the Predecessor's financial statements for the period
prior to the Acquisition.
The Predecessor was constituted as a limited partnership on August 14,
1985, under the Virginia Uniform Limited Partnership Act, pursuant to a
Limited Partnership Agreement, as amended (the "Partnership Agreement"),
among:
o Brant-Allen Timberlands Company, Inc., which was merged into
Brant-Allen on October 31, 1988;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones; and
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
1. Organization, continued:
Brant-Allen was the general partner and D J Virginia and Newsprint were
limited partners. Under the terms of the Partnership Agreement, D J
Virginia's and Newsprint's equity interests in the Predecessor were 35%
each and Brant-Allen's equity interest was 30%.
The Partnership Agreement included the following provisions:
o The Predecessor was established for an initial term of 43 years and
was renewable for additional terms of 20 years.
o The purpose of the Predecessor was to engage in the business of
acquiring, or otherwise investing in, holding, managing, maintaining,
operating, harvesting and disposing of (i) real property containing
timberlands or to be planted for production of timber, (ii) timber
rights, (iii) logs, and (iv) pulp chips, and to engage in other
activities desirable or incidental to timber management, production
and sales.
o Brant-Allen, as general partner, had full and exclusive control of
the business of the Predecessor and had active control of its
management. Brant-Allen received no fees or other compensation for
managing the Predecessor.
o The limited partners were not liable for any net losses or other debt
or liability of the Predecessor to any extent, except for (i) their
respective contributions to capital and (ii) their guarantee of the
Predecessor's long-term debt up to $7,933,333 each.
o Subject to the aforementioned provisions, the partners shared the net
profits and losses based on their interests, as defined by the
Partnership Agreement, computed in accordance with generally accepted
accounting principles consistently applied.
o No partner could sell, assign or otherwise dispose of its interest,
or any part thereof, in the Predecessor, unless it first offered such
interest to the other partners as prescribed in the Partnership
Agreement.
o No partner could mortgage, pledge, hypothecate or otherwise encumber
its interest in the Predecessor without the prior written consent of
the other partners.
2. Summary of Significant Accounting Policies:
Cash and Cash Equivalents: Cash equivalents include repurchase agreements
of $1,385,671 at December 31, 1997, and are stated at cost plus accrued
interest which approximates market value. For purposes of the statements
of cash flows, the Companies consider all highly liquid short-term
investments purchased with an original maturity of three months or less
to be cash equivalents.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Notes Receivable: As certain timberlands are sold, the Companies may
accept a note as part of the sales transaction. The current portion of
notes receivable approximated $82,421 at December 31, 1997.
Inventory: Inventory for the Company consists primarily of wood stored at
wood yards. Concurrent with the Acquisition, the Company modified certain
terms of a wood supply contract with Bear Island Paper Company L.L.C.
("BIPCO") to be reflective of market prices. Prior to the Acquisition,
the Predecessor was party to a wood supply contract with Bear Island
Paper Company L.P. ("Paperco") which was owned proportionately by the
same partners of the Predecessor, where by the Predecessor had guaranteed
to suppply all of Paperco's log and pulp chip requirements at prices
negotiated annually. Modified terms included changing the point of
purchase for wood from the point of production to delivery on BIPCO's
mill site and changing the purchase price from a negotiated price to
market price. Inventory is valued at the lower of actual costs or
market, with cost determined on the first-in, first-out ("FIFO") basis.
Property, Equipment and Timberlands: Land, machinery and equipment are
stated at cost. Timberlands are stated at cost net of accumulated
depletion. The cost of reforestation is capitalized. The cost of major
renewals and betterments to equipment are capitalized while the costs of
maintenance and repairs are charged to income as incurred. When
properties are sold or retired, their cost and the related accumulated
depreciation or depletion are eliminated from the accounts and the gain
or loss is reflected in income.
The carrying value of property, plant and equipment, including
timberlands, is evaluated whenever significant events or changes occur
that might indicate an impairment through comparison of the carrying
value to total future undiscounted cash flows. To derive the data
necessary to determine expected future cash flows, management conducts
annual cruises (a detailed forestry evaluation of the tracts) of 20% of
the timberlands, such that in five years the entire timber holdings have
been completely cruised. Using the results of the cruises, the quantity
of standing timber is determined. From this information, management
determines the future undiscounted cash flows of the timber property.
Depreciation: Depreciation of machinery and equipment is computed
principally on the straight-line basis over the estimated useful lives of
the assets which range from three to five years.
Depletion: The portion of the cost of timberlands attributed to standing
timber is charged against income as timber is cut, at rates determined
annually, based on the relationship of unamortized timber costs to the
estimated volume of recoverable timber.
<PAGE>
NOTES TO FINANCIAL STATEMENTS, Continued
2. Summary of Significant Accounting Policies, continued:
Deferred Financing Costs: Costs directly associated with the issuance of
long-term debt have been deferred and are being amortized on a
straight-line basis over the life of the related debt, which approximates
the interest method.
Deferred Profit on Land Sales: Profit on land sales for which the buyer
has not fully paid is recognized on the installment method when cash is
received from the buyer.
Revenue Recognition: Revenue is recognized at the point where title of
the product transfers. Affiliated sales are recognized by the Company
upon delivery of the wood to BIPCO; whereas affiliated sales of the
Predecessor were recognized when wood was placed into production by
PaperCo.
Income Taxes: No provision for income taxes is required in the
accompanying financial statements since each member or partner is
individually liable for any income tax that may be payable on its share
of the Company's or the Predecessor's taxable income.
Earnings Per Share: No earnings per share calculations have been
provided in the financial statements since such calculations are not
required.
Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments: The fair value of the long-term debt
is estimated discounting the future cash flows using currently available
borrowing rates. The fair value of trade receivables and payables
approximates the carrying amounts because of the short maturity of these
instruments.
Risk and Uncertainties: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of
cash, short term investments, U.S. Government securities and receivables.
The cash and restricted cash balances are maintained at a major financial
institution. Cash equivalents at December 31, 1997 consisted of
repurchase agreements with a high-credit-quality financial institution.
The repurchase agreements were collateralized by United States Government
agency obligations. The credit rating of the issuing institution for the
repurchase agreements indicates the issuing entity has a strong capacity
to repay short-term obligations.
<PAGE>
2. Summary of Significant Accounting Policies, continued:
Receivables consist principally of trade accounts receivable resulting
primarily from sales to Paperco and BIPCO (collectively the "Paper
Companies") and notes receivable resulting from land sales. Notes
receivable credit is extended after an evaluation of creditworthiness
and are collateralized by a first deed of trust on the land sold.
The Companies' sales of timber are made almost entirely to the Paper
Companies. Sales to BIPCO represented approximately 77% of total sales
during the one month ended December 31, 1997, and sales to PaperCo
represented 72% for the eleven months ended November 30, 1997.
3. Restricted Cash and Investments:
Restricted cash and investments consist of U.S. Government securities
which are stated at amortized cost which approximates market value. Cash
and investments are restricted for the payment of principal under the
terms of escrow agreements entered into in connection with the Company's
and Predecessor's long-term debt.
4. Timberlands:
At December 31, 1997, the Companies' timberlands consisted of the cost of
land and standing timber owned by the Companies ("Fee Lands") and the
cost of the right to cut timber from land owned by third parties within a
specified period of time ("Timber Deeds").
Timberlands consisted of:
December 31,
----------------
1997
Fee Lands $ 60,674,543
Timber Deeds 53,670
----------------
60,728,213
Less accumulated depletion (129,686)
----------------
Timberlands, net $ 60,598,527
================
<PAGE>
5. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
December 31,
----------------
1997
Land $ 25,421
Machinery and equipment 450,267
----------------
475,688
Less accumulated depreciation (7,406)
----------------
Total $ 468,282
================
6. Long-Term Debt:
Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31,
----------------
1997
<S> <C>
Senior notes bearing annual interest at 8.91% (interest payable
quarterly); principal of $30,000,000 due at maturity on December
31, 1999 $ 30,000,000
Term loan and revolving credit facility of Brant-Allen bearing
interest on the term loan at 8.91% and prime plus 1.75% on the
revolving loan; outstanding principal due December 31, 1999 27,700,000
Promissory note bearing interest at 6%; principal and interest due in
three annual installments of $189,250, which commenced on
January 1, 1996 and will continue through January 1, 1998;
collateralized by a deed of trust on certain timberland with a
book value of approximately $259,000 189,250
Promissory note bearing interest at 7%; principal and interest due in
three annual installments; first and second installments of
$67,980 are due on January 31, 1998 and 1999, with the balance
due in the third installment on January 31, 2000; collateralized
by a deed of trust on certain timberland with a book value of
approximately $229,500 178,400
Promissory note bearing interest at 7.5%; principal and interest due
in eight annual installments of $17,994 commencing on November
13, 1998; collateralized by a deed of trust on certain
timberland with a book value of approximately $145,500 105,394
Promissory note bearing interest at 7.5%; principal and interest due
in eight annual installments of $17,219 commencing on November
13, 1998; collateralized by a deed of trust on certain
timberland with a book value of approximately $139,000 100,856
----------------
58,273,900
Less current portion 264,485
----------------
Total long-term debt $ 58,009,415
================
</TABLE>
<PAGE>
6. Long-Term Debt, continued:
On December 1, 1997 and concurrent with the Acquisition described in Note
1, Brant-Allen entered into Indenture Agreements for a $32 million Term
Loan Facility ("Timberlands Term Loan") and a $3 million Revolving Credit
Facility ("Timberlands Revolving Loans") (collectively the "Timberlands
Loans") that have been pushed down in the Company's financial statements
since the Timberlands Loans are collateralized by Brant-Allen's 100%
membership interest in the Company. Additionally as part of the
aforementioned Acquisition, the Company renegotiated certain terms of the
Predecessor's senior notes through an amended Timberlands Loan and
Maintenance Agreement (the "Amended Agreement") and increased the
existing $27 million principal balance to $30 million through an
additional $3 million issuance. This renegotiation constituted an
extinguishment of debt. The proceeds from the Timberlands Loans and the
Amended Agreement were used by Brant-Allen and the Company to purchase
the 70% interest of the Predecessor which was previously owned by certain
subsidiaries of Dow Jones and The Washington Post. The extraordinary item
in the eleven month period ended November 30, 1997 represents the write
off of unamortized financing costs and prepayment penalties paid related
to the Predecessor's senior notes that were renegotiated at the time of
the Acquisition.
Under the terms of the Timberlands Revolving Loans, until the maturity
date, Brant-Allen may elect to convert amounts outstanding under the
revolving loans from prime plus 1.75% to the monthly LIBOR rate plus
2.75%. The Timberlands Loans are redeemable at the option of the Company,
in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent.
The Timberlands Loans are partially collateralized by (i) a first
priority security interest in 100% of Brant-Allen's membership interest
in the Company and (ii) a first priority security interest (pro rata
along with BIPCO's $120 million Bank Credit Facilities) in 65% of the
common stock of F. F. Soucy, Inc., a wholly owned subsidiary of
Brant-Allen. The Timberlands Loans are also guaranteed by the Company.
The remaining 35% of F. F. Soucy, Inc.'s common stock cannot be assumed,
pledged, hypothecated, transferred or otherwise disposed of by
Brant-Allen without the consent of the required lenders.
The most restrictive covenants under the Timberlands Loans are that the
Company has a limitation on incurring additional debt, making restricted
payments, creating, incurring or assuming any liens, sales of capital
stock of subsidiaries, and transactions with affiliates.
Certain debt of BIPCO is collateralized by a second and third priority
security interest in Brant-Allen's 100% membership interests in the
Company.
<PAGE>
6. Long-Term Debt, continued:
Under the more financially significant covenants of the Amended
Agreement, the Company agreed to (i) limit distributions, (ii) restrict
investments, (iii) limit the incurrence of additional indebtedness, (iv)
not pay renumeration of any nature to the parent, (v) limit timberland
sales, (vi) restrict the cutting of timber, and (vii) maintain a ratio of
Administrative Value of timberland to Net Principal Balance (as defined
in the Agreement) of at least 1.33 to 1. The $30,000,000 Senior Notes
are collateralized by a deed of trust on approximately 130,000 acres
of timberland.
The Amended Agreement also requires that the Company make certain
payments to an escrow account (see Note 3) in the event (i) any of the
timberland property acquired with the proceeds of the loan is sold or
(ii) the volume of timber cut from the timberland property exceed the
volume permitted by the lender. The balance in the escrow account was
approximately $11,500 at December 31, 1997 and is classified as
restricted cash and investments in the accompanying balance sheet.
The promissory note bearing interest at 6% was issued in December 1995 in
connection with the purchase of timberland at an aggregate price of
approximately $757,000. The Company is permitted to prepay outstanding
principal and interest balances with lender approval. The promissory note
is collateralized by a deed of trust on timberland which is not part of
the collateralized assets under the Amended Agreement.
The Company's long-term debt at December 31, 1997 approximated fair
value.
Maturities on long-term debt for the four years after 1998 are
approximately as follows: 1999 - $57,803,193; 2000 - $77,653; 2001 -
$35,213; and 2002 - $35,213.
7. Related-Party Transactions:
The Predecessor was a party to a wood supply contract with PaperCo
whereby the Predecessor had guaranteed to supply all of PaperCo's log and
pulp chip requirements at a price determined annually.
<PAGE>
7. Related-Party Transactions, continued:
Wood prices charged by the Predecessor to PaperCo are compared to market
prices below:
Eleven Months
Ended
November 30,
--------------------
1997
Actual $ 95.50
Market $ 60.00 to $66.00
At December 31, 1997, BIPCO owed the Company $42,029. All other sales
of wood were made to unaffiliated companies primarily located in
Virginia.
The Predecessor had agreed to procure recycled paper for PaperCo on a fee
per ton basis. The procurement fee charged on a per ton basis for the
eleven months ended November 30, 1997 was $24.31.
The actual costs of procurement services provided to PaperCo by the
Predecessor was approximately $213,000 for the eleven months ended
November 30, 1997, respectively.
The Company and Predecessor share employees, facilities and recordkeeping
systems with BIPCO and PaperCo, respectively, and reimbursed BIPCO and
PaperCo, respectively, monthly for their share of these costs.
Accordingly, these shared employees receive benefits under BIPCO's and
formerly PaperCo's defined contribution retirement plan and are eligible
to participate in BIPCO's thrift plan. Costs associated with these plans
are reimbursed monthly by the Company and formerly its Predecessor.
Amounts paid to BIPCO and PaperCo for shared costs, which are included in
general and administrative expenses, approximated $60,000 and $1,319,000
for the month ended December 31, 1997 and the eleven months ended
November 30, 1997, respectively. The Companies received approximately
$5,300 and $55,000 from the Paper Companies for the month ended
December 31, 1997 and the eleven months ended November 30, 1997 for
managing certain of its timberlands. Such amounts are included in
other income in the accompanying statements of operations.
8. Subsequent Events:
On January 30, 1998, BIPCO completed its initial registration process
which became effective pursuant to Section 8(A) of the Securities Act of
1933. Concurrent with becoming effective, BIPCO is subject to the
information requirements of the Securities Exchange Act of 1934, as
amended, and required to file reports and other information with the
United States Securities and Exchange Commission.
<PAGE>
Auditors' Report
To the Shareholders of
F.F. Soucy, Inc.
We have audited the consolidated balance sheet of F.F. Soucy, Inc. as at
December 31, 1997 and the consolidated statements of earnings, retained earnings
and changes in financial position for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31,
1997, and the consolidated results of its operations and the changes in its
financial position for the year then ended, in accordance with generally
accepted accounting principles in Canada.
COOPERS & LYBRAND
Chartered Accountants
General Partnership
Montreal, Canada
January 16, 1998
<PAGE>
F.F. Soucy, Inc.
Consolidated Balance Sheet as at December 31, 1997
(expressed in Canadian dollars)
Assets
Current assets
Cash 6,494,426
Accounts receivable -
Parent company 812,579
Other 24,861,178
Advances to parent company -
Inventories 12,118,057
Prepaid expenses 538,060
------------------
44,824,300
Property, plant and equipment 93,797,758
Deferred pension costs 1,139,719
Unamortized foreign exchange loss on
long-term debt
1,674,864
------------------
$ 141,436,641
==================
Liabilities
Current liabilities
Bank indebtedness -
Accounts payable and accrued liabilities 13,945,365
Income taxes 4,190,606
Current portion of long-term debt 4,957,173
------------------
23,093,144
Long-term debt 21,426,483
Deferred income taxes 12,665,826
Non-controlling interest in F.F. Soucy, Inc.
& Partners, Limited Partnership
47,008,132
------------------
104,193,585
------------------
Shareholders' Equity
Capital stock 1,621,851
Contributed surplus 1,133,850
Retained earnings 34,487,355
------------------
37,243,056
------------------
$ 141,436,641
==================
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
F.F. Soucy, Inc.
Consolidated Statement of Retained Earnings
For the year ended December 31, 1997
(expressed in Canadian dollars)
Retained earnings - Beginning of period 43,138,862
Net earnings for the period 6,428,752
------------------
49,567,614
Dividends 6,000,000
Premium on redemption of common shares 9,080,259
------------------
Retained earnings - End of period $ 34,487,355
==================
Dividends per share $ 14.37
==================
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
F.F. Soucy, Inc.
Consolidated Statement of Earnings
For the year ended December 31, 1997
(expressed in Canadian dollars)
Sales 151,250,406
Freight 15,670,318
------------------
Net sales 135,580,088
Cost of sales 104,480,103
------------------
31,099,985
------------------
Expenses
Selling, general and administrative -
To parent company 13,191,943
To other 389,722
Interest on long-term debt 2,736,088
Other interest 48,364
------------------
16,366,117
------------------
14,733,868
------------------
Other income
Compensation for power interruption 2,436,040
Interest income 224,135
Loss on foreign exchange and translation - net (490,666)
------------------
2,169,509
------------------
Non-controlling interest in earnings of
F.F. Soucy, Inc. & Partners, Limited
Partnership
(7,454,625)
------------------
Earnings before income taxes 9,448,752
Provision for income taxes 3,020,000
------------------
Net earnings for the period $ 6,428,752
==================
Net earnings per share $ 15.32
==================
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
F.F. Soucy, Inc.
Consolidated Statement of Changes in Financial Position
For the year ended December 31, 1997
(expressed in Canadian dollars)
Cash provided by (used for)
Operations
Net earnings for the period 6,428,752
Items not affecting cash -
Depreciation of property, plant and equipment 8,974,173
Non-controlling interest of a limited partnership 7,454,625
Deferred income taxes 1,700,000
Foreign exchange loss on long-term debt 648,153
Loss on disposal of capital assets 71,254
------------------
Provided by operations 25,276,957
Cash used for non-cash working capital (3,910,159)
------------------
21,366,798
------------------
Financing
Decrease in long-term debt (5,003,834)
Redemption of common shares (9,400,000)
Dividends paid (6,000,000)
Distribution to minority interest in F.F. Soucy, Inc.
& Partners, Limited Partnership
(4,224,301)
------------------
(24,628,135)
------------------
Investment
Additions to property, plant and equipment (9,571,202)
Investment tax credits resulting from the purchase of
capital assets
1,061,893
Proceeds from disposal of capital assets -
Decrease in deferred pension costs 105,732
Advances to parent company 2,041,272
------------------
(6,362,305)
------------------
Increase (decrease) in net cash
during the period
(9,623,642)
Net cash - Beginning of period 16,118,068
------------------
Net cash - End of period $ 6,494,426
==================
Net cash includes cash less bank indebtedness.
The accompanying notes are an integral part of the
consolidated financial statements
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
1. Summary of significant accounting policies
Basis of consolidation
These consolidated financial statements have been prepared in conformity
with accounting principles generally accepted in Canada and include the
accounts of the wholly-owned subsidiary, Arrimage de Gros Cacouna Inc.,
and F.F. Soucy, Inc. & Partners, Limited Partnership (the "Partnership"),
a Quebec limited partnership in which the Company is general partner and
shares in 50.1% of the profits and losses.
Use of estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods. Actual results could differ from
those estimates.
Fair value of financial instruments
The fair market values of the financial instruments included in the
consolidated financial statements approximate the carrying values of those
instruments except for long-term debt as disclosed in note 7.
Cash
Cash includes all cash balances and all highly liquid short-term
investments, exclusive of bank indebtedness, where applicable. As at
December 31, 1997, the Company held no short-term investments. For
purposes of the statement of changes in financial position, the Company
considers all highly liquid short-term investments with an original
maturity of three months or less to be cash equivalents.
Credit and market risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and accounts
receivable. The Company's cash balance is maintained at a major financial
institution. Receivables consist principally of trade accounts receivable
resulting primarily from sales to newspaper publishers. Credit is extended
to customers after an evaluation of credit worthiness. Generally, the
Company does not require collateral or other security from customers for
trade accounts receivable. Substantially all of the Company's debtors'
ability to honor their obligations are dependent upon the printing and
publishing sectors.
The Company operates solely to produce newsprint which is subject to
fluctuations in paper prices. The paper industry has experienced highly
volatile price changes over the past few years.
Inventories
Inventories are valued at the lower of cost (first in, first out) or
market. Cost as applied to finished goods includes cost of materials,
direct labour and overhead.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
1. Summary of significant accounting policies (cont'd)
Property, plant and equipment
Cost of property, plant and equipment is recorded net of applicable
government grants, including investment tax credits, on capital
expenditures. Depreciation of property, plant and equipment is computed
using the declining balance method by the Company and the straight-line
method by the Partnership as follows:
Buildings 2% - 10%
Machinery and equipment 4% - 20%
Furniture and fixtures 20%
The Company and the Partnership commence depreciating property, plant and
equipment at the time the assets are put into use. As at December 31,
1997, there was capitalized costs of $2,718,903 with respect to property,
plant and equipment not yet in use.
For income tax purposes, depreciation is computed principally on an
accelerated basis.
The Partnership capitalizes interest costs, where material, as part of the
cost of constructing major facilities and equipment. No such interest
costs have been capitalized in 1997.
The carrying value of property, plant and equipment is evaluated whenever
significant events or changes occur that might indicate an impairment
through comparison of the carrying value to fair market value or total
undiscounted cash flows.
Revenue recognition
Sales and related costs of goods sold are included in earnings when goods
are delivered to the customer in accordance with the delivery terms.
Pension costs
The pension costs include the cost of pension benefits related to
employees' services in the current year and the amortization of the
difference between pension fund assets and the actuarial present value of
accrued pension benefits for services rendered to date. This difference is
being amortized over the expected average remaining service life of the
employee groups which extends for periods of up to 15 years. The Company
makes appropriate provision against deferred pension costs where there is
uncertainty regarding its ability to benefit from the underlying pension
surplus.
Compensation for power interruption
The compensation for power interruption (note 10) is comprised of a fixed
portion, which is recognized as earned by the Company in equal amounts
over a period of four months from December to March, and a variable
portion which is recognized as earned when the power interruptions occur.
At such time as the maximum amount of power consumption has been
interrupted, any remaining balance of the fixed portion is recognized as
income.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
1. Summary of significant accounting policies (cont'd)
Income taxes
The Company provides deferred income taxes for timing differences which
relate principally to differences between financial and tax reporting in
the recognition of depreciation charges. For income tax reporting
purposes, the Company includes its proportionate share of earnings and
losses of the Partnership. In accordance with the Partnership Agreement,
maximum capital cost allowances are being claimed by the Partnership
including accelerated depreciation of production machinery and equipment.
Foreign currency translation
Transactions denominated in foreign currencies are recorded at the rate of
exchange prevailing at the transaction date. Monetary assets and
liabilities in foreign currencies are translated at year-end rates, and
non-monetary assets and liabilities at rates prevailing at the transaction
dates. Gains or losses arising on translation are included in earnings for
the current year except those relating to long-term debt (note 7) which
are deferred and amortized over the remaining life of the debt.
Forward exchange contracts
Forward exchange contracts are entered into to hedge contracted revenue
streams from foreign currency exchange rate fluctuations. As such, these
non-speculative forward exchange contracts are not recorded on the
Company's balance sheet. Also, unrealized gains and losses on these
forward exchange contracts are deferred and recognized upon settlement of
the related transactions. Accordingly, cash flows resulting from forward
exchange contract settlements are classified as cash provided by
operations as are the corresponding cash flows from the revenue streams
being hedged (note 13).
Dividends
Dividends on common shares, when declared, are paid to shareholders in
United States dollars.
2. F.F. Soucy, Inc. & Partners, Limited Partnership
F.F. Soucy, Inc. & Partners, Limited Partnership (the "Partnership") was
constituted as a limited partnership on May 31, 1974 under the Civil Code
of the Province of Quebec, Canada, pursuant to a limited partnership
agreement (the "Partnership Agreement") between the Company, Dow Jones
Newsprint Company, Inc. ("DJ Newsprint"), a Delaware corporation and a
wholly-owned subsidiary of Dow Jones and Company, Inc. ("Dow Jones"), and
Rexfor, a Crown corporation of the Quebec Provincial Government. The
Partnership Agreement, as amended, includes the following provisions:
o The Partnership is for an initial term expiring December 31, 2004,
renewable for further terms of ten years and is subject to
dissolution with the consent of two or more partners and in certain
other circumstances.
o The purpose of the Partnership is to engage in the business of
producing, selling and distributing newsprint by constructing, owning
and operating a paper mill (the "Partnership Mill") at Riviere du
Loup, Quebec.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
2. F.F. Soucy, Inc. & Partners, Limited Partnership (cont'd)
o The Company, as general partner, has full and exclusive control of
the business of the Partnership and has active control of its
management. DJ Newsprint and Rexfor, as limited partners, are not
liable for any net losses or other debt or liability of the
Partnership to any extent, except for their respective contributions
to capital.
o Subject to the above, the partners shall share the net profits or
losses of the Partnership in the following proportions:
F.F. Soucy, Inc. 50.1%
DJ Newsprint 39.9%
Rexfor 10.0%
------------------
100.0%
==================
o No partner may sell, assign or otherwise dispose of its interest,
or any part thereof, in the Partnership, unless it first offers such
interest to the other partners as prescribed in the Partnership
Agreement.
Brant-Allen Industries, Inc. ("Brant-Allen"), along with one of its
subsidiaries, is party to a long-term financing agreement whereby 65% of
the common shares of the Company have been pledged as security. The
Company, Brant-Allen and the subsidiary are all subject to certain
financial and non-financial covenants. Should any of these parties not
comply with their respective covenants, a change in control of the Company
may result, under certain circumstances, which could trigger a dissolution
of the Partnership.
3. Accounts receivable and related party transactions
(a) All sales are made through Newsprint Sales, a division of Brant-Allen,
the parent company. At December 31, 1997, accounts receivable include
an amount of $812,579 receivable from Newsprint Sales representing
amounts received by Newsprint Sales on collection of receivable
balances yet to be transferred to the Company.
(b) During the year ended December 31, 1997, Brant-Allen charged the
Company approximately $13,192,000 for management and selling services.
At December 31, 1997, the balance owing by the Company to Brant-Allen
amounted to $120,323.
4. Inventories comprise:
Raw materials 6,072,243
Finished goods 1,575,121
Stores 4,470,693
------------------
$ 12,118,057
==================
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
5. Property, plant and equipment
Land and buildings 30,954,331
Machinery and equipment 183,185,005
Furniture and fixtures 343,351
------------------
214,482,687
Less: Accumulated depreciation 120,684,929
------------------
$ 93,797,758
==================
Machinery and equipment include assets under capital leases with a cost of
$4,299,000 and accumulated depreciation of $2,198,000 as at December 31,
1997.
6. Bank indebtedness
The Company and the Partnership have available lines of credit from a bank
amounting to Cdn. $3,000,000 and Cdn. $5,000,000, respectively. As at
December 31, 1997, there were no advances drawn down under the Company's
line of credit and under the Partnership's line of credit. Outstanding
balances under the lines of credit are payable on demand and interest is
payable at 1/4% and 1/2% above the bank's prime rate respectively which
was at 6.00% as at December 31, 1997. The Company and the Partnership have
assigned their accounts receivable and pledged their inventories to the
bank as security for any advances under the lines of credit. Also,
Newsprint Sales has assigned its accounts receivable and provided an
unlimited guarantee and postponement of claim against the Company and the
Partnership.
7. Long-term debt
Long-term debt comprises:
Sinking fund bonds maturing 2004 (note 7(a)) 21,175,018
Sinking fund bonds maturing 1999 (note 7(a)) 5,208,638
Obligation under capital leases -
------------------
26,383,656
Less: Current portion 4,957,173
------------------
$ 21,426,483
==================
(a) In 1979, the Partnership, through Riviere du Loup Finance Ltd., its
wholly-owned subsidiary, issued U.S. $20,000,000, 10 3/4% and Cdn.
$5,000,000, 10 7/8% bonds to several insurance companies maturing on
April 1, 1999. In 1987, the Partnership, through Riviere du Loup
Finance Ltd., issued U.S. $27,500,000, 9.65% bonds to an insurance
company maturing on July 1, 2004.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
7. Long-term debt (cont'd)
The trust indenture contains certain restrictive covenants including
equity and working capital requirements. The Partnership has assigned
the sale agreement (note 11(a)) and collateralized substantially all
of its property, plant and equipment having a net book value of
$78,587,000 as at December 31, 1997 for the bonds.
(b) The aggregate fair market value of the Company's long-term debt was
$29,037,000 as at December 31, 1997 based on discounted future cash
flows using interest rates available to the Company for issues with
similar terms and average conditions.
(c) Interest incurred on long-term debt in 1997 amounted to $2,718,000.
(d) Long-term debt maturities are as follows as at December 31, 1997:
U.S. $ Cdn. $
Year ending December 31, 1998 3,265,385 287,000
1999 4,065,385 488,000
2000 2,115,385 -
2001 2,115,385 -
2002 2,115,385 -
8. Capital stock
The authorized capital stock of the Company is comprised of 500,000 common
shares without par value. As at December 31, 1997, the number of issued
and paid shares was 417,660. On January 10, 1997, the Company redeemed
82,340 of its common shares, with a book value of $319,741, for a cash
consideration of $9,400,000. The excess of $9,080,259 of the redemption
price over book value has been charged to retained earnings.
9. Wood chips and round wood supply agreements
The Company has entered into a number of agreements for the supply of its
wood chips and round wood requirements. The duration of these agreements
varies between one and five years. The estimated future purchase
commitments, based on current prices which are renewable annually, for the
next five years are as follows:
1998 $ 14,930,000
1999 11,584,000
2000 11,408,000
2001 9,600,000
2002 4,345,000
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
10. Power interrruption agreement
Under an agreement with Hydro-Quebec, expiring on September 30, 2000, the
Company will be compensated by a fixed annual amount, plus a variable
annual amount based on the actual power usage and power interruptions
requested by Hydro-Quebec. The agreement establishes a maximum amount of
power consumption which may be interrupted at the request of Hydro-Quebec
during the months of December to March inclusively.
11. Sales
(a) The Partnership has contracted to sell Dow Jones the basis weight
equivalent of a minimum of 45,000 short tons of 32 lb. basis weight
newsprint per annum, through December 31, 2004. Dow Jones has the
option to purchase additional quantities of newsprint, as available.
The price payable has been agreed to annually based upon market
conditions. This sale agreement has been assigned as partial
collateral for the sinking fund bonds (note 7(a)).
(b) The Company and the Partnership sold newsprint to Dow Jones and its
subsidiaries during the year ended December 31, 1997, amounting to
$29,580,000. At December 31, 1997, the balance owing to the Company
and the Partnership by Dow Jones and its subsidiaries amounted to
$2,895,947.
(c) With the exclusion of Dow Jones and its subsidiaries, which is
disclosed above, in 1997 no corporation represented 10% or more of the
Company's sales.
(d) The Company operates two newsprint paper mills in Quebec, Canada, and
sells most of its production to the following regions as a percentage
of sales:
United States 68%
South America 12
Europe 18
Asia 2
12. Pension costs and obligations
The Company has defined benefit plans for its employees and charges the
Partnership its share of the related pension costs. The Company maintains
separate defined benefit plans for its unionized plant employees, its
unionized office employees and its non-unionized employees. The benefits
are based on career average earnings of the employee. The Company's
funding policy is to contribute amounts not exceeding those that may be
deducted for income tax purposes. Contributions are intended to provide
not only for benefits attributed to service to date but also for those
expected to be earned in the future.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
12. Pension costs and obligations (cont'd)
The Company's net pension cost comprises:
Current service costs 666,000
Interest cost on projected benefit obligation 2,087,000
Return on plans' assets (2,314,000)
Amortization of unrecorded pension asset (80,000)
Amortization of experience gains (274,000)
Amortization of cost of amendments 185,000
Amortization of change in assumptions 81,000
Provision against deferred pension costs 468,000
------------------
Net pension cost $ 819,000
==================
In order to measure the projected benefit obligation, the weighted-average
discount rate used was 7.5%; the rate of increase in future compensation
levels used for the non-unionized plan was 5.5% and the rate used for the
unionized office plan and the unionized plant plan was 5.5%. The expected
long-term rate of return on assets of the plans was 8%.
The funded status of the plans as at December 31, 1997, was:
Actuarial present value of accumulated
benefit obligations including vested
benefits of $24,601,000 $ 25,063,000
==================
Projected benefit obligation for services
rendered to date 29,722,303
Plans' assets at fair value, primarily
listed Canadian stocks and Canadian bonds 39,721,796
------------------
Plans' assets in excess of projected benefit
obligation 9,999,493
Unrecognized gains 6,055,472
Provision against pension assets 2,804,302
------------------
Pension asset recognized as deferred pension
costs $ 1,139,719
==================
The excess of the plans' assets is being amortized over the expected
average remaining service life of the employees which extends for periods
of up to 15 years. The Company makes appropriate provision against
deferred pension costs where there is uncertainty regarding its ability to
benefit from the underlying pension surplus. The Company's contributions
for the year ended December 31, 1997 were $717,000.
13. Forward exchange contracts
The Partnership entered into contracts which mature in less than twelve
months to sell forward U.S. dollars in exchange for Canadian dollars. As
at December 31, 1997, the Partnership held forward exchange contracts of
U.S. $10,000,000 with a contracted value of $14,188,800 against a fair
value of $14,291,000, representing a deferred loss of $102,200.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
14. United States accounting principles
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in Canada ("Canadian GAAP").
In certain respects, Canadian GAAP differs from accounting principles
generally accepted in the United States ("U.S. GAAP").
Net earnings and shareholders' equity
(a) The following summary sets out the material adjustments to the
Company's reported net earnings and shareholders' equity which would
be made in order to conform to U.S. GAAP:
Net earnings for the year under Canadian GAAP 6,428,752
U.S. GAAP adjustments -
Translation gains and losses (note 14(b)) (399,861)
Income taxes (note 14(c)) (287,000)
------------------
Net earnings for the year under U.S. GAAP $ 5,741,891
==================
Shareholders' equity under Canadian GAAP 37,243,056
U.S. GAAP adjustments -
Translation gains and losses (note 14(b)) (1,674,864)
Income taxes (note 14(c)) 734,000
------------------
Shareholders' equity under U.S. GAAP $ 36,302,192
==================
(b) Under Canadian GAAP, translation gains and losses arising on the
translation, at exchange rates prevailing at the balance sheet date,
of long-term debt denominated in foreign currency are deferred and
amortized over the remaining life of the related debt. Under U.S.
GAAP, such gains and losses are included in the statement of earnings
in the period in which the exchange rate changes.
(c) Under Canadian GAAP, the Company follows the tax allocation method in
providing for income taxes while under U.S. GAAP, the liability method
would be used. Under this method, deferred income taxes are calculated
on the difference between accounting and tax values of the assets and
liabilities. The current tax rate is used to calculate deferred income
taxes at the balance sheet date. Deferred tax assets arising from
losses and temporary differences are subject to a valuation allowance
whenever it is more likely that the assets will not be realized.
(d) Under Canadian GAAP, costs of providing life insurance and health care
benefits to employees after retirement are recognized as incurred
while under U.S. GAAP, these costs are accrued during the employees'
years of active service. This difference in GAAP would not result in a
material change to the Company's consolidated financial statements.
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
14. United States accounting principles (cont'd)
Cash flows
(e) Under U.S. GAAP, the following amounts would be reported:
Net cash provided by (used in):
Operating activities 21,366,798
Financing activities (26,828,135)
Investment activities (6,362,305)
------------------
Net increase (decrease) in cash $ (11,823,642)
==================
Cash - End of period $ 6,494,426
==================
(f) Under U.S. GAAP, the definition of cash in the statement of cash flows
would exclude bank indebtedness which amounted to nil as at December
31, 1997. Under U.S. GAAP, changes in bank indebtedness would be
disclosed as a financing activity.
(g) Canadian GAAP allows the disclosure of a subtotal of the amount of
cash provided by operating activities before cash provided by non-cash
operating working capital items. U.S. GAAP requires a statement of
cash flows without subtotal.
(h) Net change in non-cash operating working capital balances details as
follows:
Decrease (increase) in:
Accounts receivable (9,055,072)
Inventories 5,185,054
Prepaid expenses 14,216
Increase (decrease) in:
Accounts payable and accrued liabilities (1,647,325)
Income taxes 1,592,968
------------------
$ (3,910,159)
==================
Other disclosure
(i) The disclosure of the following amounts is required under U.S. GAAP:
Payments under capital leases $ 260,000
Interest paid 2,907,000
Income taxes paid 645,000
Foreign exchange loss (gain):
Realized (136,000)
Unrealized 627,000
<PAGE>
F.F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the year ended December 31, 1997
- --------------------------------------------------------------------------------
(expressed in Canadian dollars)
14. United States accounting principles (cont'd)
Trade accounts receivable $ 23,395,000
Other accounts receivable 1,466,000
Allowance for doubtful accounts 216,000
Trade accounts payable 9,635,000
Accrued employees costs 2,939,000
Interest payable 1,169,000
(j) The provision for income taxes and effective tax rates are detailed as
follows:
Provision for income taxes based on combined basic
Canadian and Quebec income tax rate of 44.25% 4,181,000
Increase (decrease) in income taxes arising
from the following:
Active business income deduction (694,000)
Deduction for manufacturing and processing (556,000)
Surtax 73,000
Other 16,000
------------------
$ 3,020,000
==================
(k) Deferred tax assets and liabilities of the Company were as follows:
Deferred tax assets:
Net capital loss carryforwards 131,000
Valuation allowance (131,000)
------------------
-
------------------
Deferred tax liabilities:
Depreciation (11,516,611)
Pension costs (229,029)
Other (186,186)
------------------
(11,931,826)
------------------
Net deferred income taxes under
U.S. GAAP $ (11,931,826)
==================
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on
April, 30, 1998.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
----------------------
Peter M. Brant
President, Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C>
/s/ Peter M. Brant President, Chairman of the Board April 30, 1998
- ------------------------ and Chief Executive Officer
Peter M. Brant (Principal Executive Officer)
/s/ Joseph Allen Executive Vice President, April 30, 1998
- ------------------------ Co-Chairman of the Board
Joseph Allen and Chief Operating Officer
/s/ Edward D. Sherrick Vice President of Finance and April 30, 1998
- ------------------------ Director (Principal Financial Officer)
Edward D. Sherrick (Principal Accounting Officer)
/s/ Thomas E. Armstrong
- ------------------------ Vice President of Sales April 30, 1998
Thomas E. Armstrong and Marketing and Director
/s/ Michael Conroy Director April 30, 1998
- ------------------------
Michael Conroy
/s/ Robert Flug Director April 30, 1998
- ------------------------
Robert Flug
</TABLE>
