SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
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
Incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report: 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 and
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
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Not Applicable.
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
INDEX
<TABLE>
Page(s)
Part I. Financial Information
<S><C>
Item 1
Condensed Balance Sheets 1
Condensed Statements of Income 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4
Item 2
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II. Other Information
Item 6 Exhibits and Reports on Form 8-K
Exhibit 27, Financial Data Schedule 11
Signatures 12
</TABLE>
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
<S> <C>
March 31, December 31,
ASSETS 1998 1997
---------------- -----------------
(Unaudited)
Current assets:
Cash and short-term investments $ 3,727,103 $ 1,353,049
Accounts receivable 13,961,416 14,133,335
Inventories 13,230,106 14,213,313
Other current assets 149,607 147,911
---------------- -----------------
Total current assets 31,068,232 29,847,608
Property, plant and equipment 196,095,885 195,084,008
Less accumulated depreciation 3,321,018 822,264
---------------- -----------------
Net property, plant and equipment 192,774,867 194,261,744
---------------- -----------------
Deferred financing costs 8,277,512 8,375,199
---------------- -----------------
Total assets $ 232,120,611 $ 232,484,551
================ =================
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Current portion of long-term debt 1,085,304 880,304
Accounts payable and accrued liabilities 8,592,199 9,446,785
Accrued interest payable 3,888,648 1,344,915
---------------- -----------------
Total current liabilities 13,566,151 11,672,004
Long-term debt 191,625,000 195,555,000
---------------- -----------------
Total liabilities 205,191,151 207,227,004
---------------- -----------------
Member's equity:
Contributed capital 25,469,737 25,469,737
Retained earnings (accumulated deficit) 1,459,723 (212,190)
---------------- -----------------
Total member's equity 26,929,460 25,257,547
---------------- -----------------
Total liabilities and member's equity $ 232,120,611 $ 232,484,551
================ =================
See accompanying notes to the condensed financial statements.
</TABLE>
1
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF INCOME
(UNAUDITED)
[CAPTION]
<TABLE>
<S><C>
Company Predecessor
---------------- -----------------
Three months ended March 31,
------------------------------------
1998 1997
Net sales $ 30,380,468 $ 27,059,699
Cost of sales (22,675,137) (25,473,898)
---------------- -----------------
Gross profit 7,705,331 1,585,801
Selling, general and administrative expenses:
Management fees to affiliate (911,414) (811,791)
Other (276,067) (176,654)
---------------- -----------------
Income from operations 6,517,850 597,356
Other income (deductions):
Interest expense (4,881,360) (1,259,811)
Other income (expense) 35,423 174,503
---------------- -----------------
Net income (loss) $ 1,671,913 $ (487,952)
================ =================
See accompanying notes to the condensed financial statements.
</TABLE>
2
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
[CAPTION]
<TABLE>
Company Predecessor
---------------- -----------------
Three months ended March 31,
------------------------------------
1998 1997
<S><C>
Operating activities:
Net income (loss) $ 1,671,913 $ (487,952)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and depletion 2,498,754 2,268,968
Amortization of deferred financing costs 238,158 14,811
Changes in current assets and liabilities:
Accounts receivable 171,919 2,401,464
Inventory 983,207 417,009
Other current assets (1,696) (783,411)
Accounts payable and accrued liabilities (854,586) (4,528,058)
Accrued interest payable 2,543,733 1,245,000
---------------- -----------------
Cash provided by operating activities 7,251,402 547,831
---------------- -----------------
Investment activities:
Purchases of property, plant and equipment (1,011,877) (759,084)
---------------- -----------------
Net cash used in investing activities (1,011,877) (759,084)
---------------- -----------------
Financing activities:
Proceeds from issuance of long-term debt 284,838
Principal payments on long-term debt (3,725,000) (2,320,316)
Payment of deferred financing costs (140,471)
Distribution to partners 34,771
---------------- -----------------
Net cash used in financing activities (3,865,471) (2,000,707)
---------------- -----------------
Net increase (decrease) in cash 2,374,054 (2,211,960)
Cash and short-term investments, beginning of period 1,353,049 13,625,322
---------------- -----------------
Cash and short-term investments, end of period $ 3,727,103 $ 11,413,362
================ =================
See accompanying notes to the condensed financial statements.
</TABLE>
3
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying condensed financial
statements of Bear Island Paper Company, L.L.C. (the "Company") contain
all adjustments necessary to present fairly, in all material respects,
the Company's financial position as of March 31, 1998 and December
31, 1997 and the Company's condensed results of operations and cash
flows for the three month period ended March 31, 1998 as well as the
condensed results of operations and cash flows of the predecessor, Bear
Island Paper Company, L.P. (the "Predecessor"), for the three month
period ended March 31, 1997. All adjustments are of a normal and
recurring nature. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's Form 10K filed on April 30, 1998. The December
31, 1997 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the three-month period ended March 31, 1998
should not be regarded as necessarily indicative of the results that may
be expected for the entire year.
2. Effective December 1, 1997, the Company completed the purchase of the 70%
partnership interest (the "Acquisition") in the Predecessor (the Company
and Predecessor are collectively referred to as the "Companies")
previously owned by subsidiaries of Dow Jones & Company ("Dow Jones"),
Inc. 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, 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 were applied to adjust 70% of the basis
of the assets and liabilities acquired to fair value. 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 periods
prior to the Acquisition.
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.
4
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. No provision for income taxes is required in the financial statements
since each member or partner (prior to the Acquisition) is individually
liable for any income tax that may be payable on its share of the
Companies' taxable income.
4. 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.
Inventories consisted of:
<TABLE>
<CAPTION>
<S> <C>
March 31, December 31,
--------------- ----------------
1998 1997
Raw materials $ 3,067,683 $ 4,085,044
Stores 8,893,016 9,105,893
Finished goods 1,269,407 1,022,376
--------------- ----------------
$ 13,230,106 $ 14,213,313
=============== ================
5. Long-term debt consisted of:
March 31, December 31,
---------------- -----------------
1998 1997
Senior Secured Notes $ 100,000,000 $ 100,000,000
Term Loan Facility 69,825,000 70,000,000
Revolving Credit Facility 22,500,000 26,000,000
Long-term purchase obligations 385,304 435,304
---------------- -----------------
192,710,304 196,435,304
Less current portion 1,085,304 880,304
---------------- -----------------
Total long-term debt $ 191,625,000 $ 195,555,000
================ =================
</TABLE>
5
<PAGE>
6. A component of selling, general and administrative expenses as shown on
the statements of operations includes aggregate management fees charged
by Brant-Allen. There are restrictions on payment of the management fee.
The Predecessor was a party to a wood supply contract with Bear Island
Timberlands Company, L.P. ("Timberlands"), an affiliate, whereby
Timberlands had guaranteed to supply all of the Predecessor's log and
pulp chip requirements at prices negotiated annually. 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 and a wholly owned subsidiary of Brant-Allen.
Purchases under the wood supply contract approximated $740,000 and
$3,458,000 for the three months ended March 31, 1998 and 1997,
respectively.
The Predecessor recognized costs of approximately $493,000 for recycling
procurement fees during the three months ended March 31, 1997, which are
included in cost of sales in the accompanying condensed financial
statements.
The Companies charged BITCO and Timberlands for certain administrative
and other expenses. These charges approximated $160,000 and $333,000
during the three months ended March 31, 1998 and 1997, respectively.
The Company's receivables and payables and the Companies' sales to
partners and affiliates were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
-------- -----------
1998 1997
<S> <C>
Due from Brant-Allen $ 52,280 $1,193,315
Due from Dow Jones 2,173,704 1,930,538
Due from BITCO 42,029
Due to Brant-Allen 824,167
Due to F.F. Soucy, Inc., a wholly owned subsidiary of
Brant-Allen 86,200 109,901
Three Months Ended
March 31,
------------------------
1998 1997
Net sales to Dow Jones $6,098,144 $4,533,692
Net sales to The Washington Post * 7,133,172
</TABLE>
*After the Acquisition, not considered a related party.
7. The Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
("SFAS No. 131") in June 1997, which became effective for fiscal years
beginning after December 31, 1997. SFAS No. 131 establishes standards for
reporting information about operating segments, including related
disclosures about products and services, geographic areas, and major
customers. Interim reporting disclosures are not required in the first
year of adoption and are therefore not provided. At the time of adoption
of SFAS No. 131, this standard is not expected to have a material impact
on the financial position or results of operations of the Company since
the Company operates as one segment.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain
significant factors affecting the results of operations of Bear Island Paper
Company, L.L.C. (the "Company") and its predecessor, Bear Island Paper Company,
L .P. ( the "Predecessor") during the periods included in the accompanying
condensed statements of income and the changes in the Company's financial
condition since December 31, 1997.
General
The Company manufactures and is dependent on one product, newsprint,
which is used in general printing and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage which may
significantly impact the Company's selling price of newsprint and, therefore,
its revenues and profitability. In addition, variation in the balance between
supply and demand as a result of global capacity additions have an increasing
impact on both selling prices and inventory levels in the North American
markets. Capacity is typically added in large blocks because of the scale of new
newsprint machines.
As a result, the newsprint market is highly cyclical, depending on
changes in global supply, demand and inventory levels. These factors
significantly impact the Company's sales volume and newsprint prices and,
therefore, the Company's revenues and profitability. Given the commodity nature
of newsprint, the Company, like other suppliers to this market, has little
influence over the timing and extent of price changes. Sales are recognized at
the time of shipment from the Company's mill. However, significant fluctuations
in revenue can and do occur as a result of the timing of shipments caused by
order patterns of customers.
In December, 1997, the Company purchased the 70% Limited Partnership
interests of the Predecessor owned equally by subsidiaries of The Washington
Post Company, Inc. and Dow Jones & Company, Inc. ( the "Transaction"). Funding
for the Transaction was provided through the issuance of $100,000,000 of 10%
Senior Secured Notes due 2007 ( the "Notes") , and $120,000,000 of bank debt (
the "Bank Credit Facilities") comprised of a $70,000,000 Term Loan Facility and
a $50,000,000 Revolving Credit Facility. Following the Transaction, 100% of
the Company was owned by Brant-Allen Industries, Inc. ( "Brant-Allen") ,
the original general partner of the Predecessor.
THREE MONTHS ENDED MARCH 31, 1998, COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Net sales increased by $3.3 million, or 12.2%, to $30.4 million for
the Company in the first quarter of 1998, from $27.1 million in the first
quarter of 1997 for the Predecessor. This increase was attributable to a
15.8% increase in the average net selling price of the Company's products and
was offset in part by a 3% decrease in sales volumes to approximately
54,600 tons in the first quarter of 1998, from approximately 56,400 tons
in the first quarter of 1997. The Company's net selling price for newsprint
increased to an average of $556 per ton in the first quarter of 1998 from an
average of $480 per ton in the first quarter of 1997.
Cost of sales as a percentage of net sales decreased to 74.6% in the
first quarter of 1998, from 94.1% in the first quarter of 1997, due to depressed
newspring selling prices in the first quarter of 1997 and reduced unit costs of
manufacturing. Cost of sales decreased by $2.8 million, or 11%, to $22.7
million in the first quarter of 1998 from $25.5 million in the first quarter of
1997. This decrease was attributable primarily to a 8.2% decrease in unit
manufacturing costs per ton and a 3% decrease in sales volumes. The
decrease in unit manufacturing cost per ton resulted from a decrease in raw
material costs whereby the price of wood was reduced by 26.7% in the three
months ended March 31, 1998 compared to the three months ended March 31, 1997 of
the Predecessor. This change occurred because wood was purchased from an
affiliated company on a market price basis in 1998 compared to a non-arms length
price basis in the first quarter of 1997. This change had the result of reducing
cost of sales 6.6% on a cost per ton basis.
8
<PAGE>
Selling, general and administrative expenses increased by $0.2 million,
or 20.0%, to $1.2 million in the first quarter of 1998 from $1.0 million in the
first quarter of 1997. This increase was primarily attributable to an increase
in the management fee paid by the Company to Brant-Allen that resulted from
higher net sales and the additional administrative and regulatory
expenses.
As a result of the above factors, income from operations increased by
$5.9 million to $6.5 million in the first quarter of 1998 from $0.6 million in
the first quarter of 1997.
Interest expense increased by $3.6 million to $4.9 million in the first
quarter of 1998 from $1.3 million in the first quarter of 1997, due to the
increase in the Company's indebtedness as a result of the Transaction. Of the
$3.6 million, $3.9 million resulted from higher debt outstanding offset by $0.3
million resulting from lower interest rates.
As a result of the above factors, the Company's net income increased by
$2.2 million to $1.7 million in the first quarter of 1998 from a loss of $ 0.5
million in the first quarter of 1997.
Liquidity and Capital Resources
Historically, the Company's principal liquidity requirements have been
for working capital, capital expenditures and debt service. These requirements
have been met through cash flows from operations and/or loans and equity
contributions from either Brant-Allen or the Predecessor's limited partners,
subsidiaries of Dow Jones and The Washington Post. Following the Transaction,
the Company's principal liquidity requirements are expected to be principally
for working capital, debt service under the Bank Credit Facilities and the Notes
and the funding of capital expenditures. The Company anticipates that cash
provided from operations in the future, combined with borrowings under the
Revolving Credit Facility will be sufficient to pay its operating expenses,
satisfy debt-service obligations and fund capital expenditures.
The Company's cash and short-term investments at March 31, 1998 were
$3.7 million, representing an increase of $2.4 million from $1.3 million at
December 31, 1997. Cash flows from operating activities during the three months
ended March 31, 1998 were used to cover capital expenditures and reduce
long-term debt by $3.7 million.
In the first quarter of 1998, the Company's cash provided by operating
activities increased by over 100 % to $7.2 million from $0.5 million in the
first quarter of 1997 for the Predecessor, primarily due to higher selling
prices and lower costs of sales resulting in higher net income.
The Company made capital expenditures of $1.0 million and $ 0.8 million
in the first quarter of 1998 and the first quarter of 1997 for the
Prececessor, respectively, in connection with upgrading its manufacturing
facility. Management anticipates that the Company's total capital expenditures
for the balance of 1998 and 1999 will primarily relate to continuing capital and
cost reduction projects of its newsprint facilities.
At March 31, 1998, the Company had approximately $192.7 million of
indebtedness, consisting of borrowings of $22.5 million under the Revolving
Credit Facility, $69.8 million under the Term Loan Facility, $100 million under
the Notes and approximately $0.4 million in long-term purchase obligations. In
addition, $26.2 million was available in unused borrowing capacity under the
Revolving Credit Facility.
9
<PAGE>
Year 2000 Compliance
The Company is in the process of modifying, upgrading or replacing its
computer software applications and systems which the Company expects will
accommodate the "Year 2000" dating changes necessary to permit correct recording
of year dates for 2000 and later years. The Company does not expect that the
cost of its Year 2000 compliance program will be material to its financial
condition or results of operations. The Company believes that it will be able to
achieve compliance by the end of 1999, and does not currently anticipate any
material disruption in its operations as the result of any failure by the
Company to be in compliance. The Company does not currently have any information
concerning the compliance status of its non-affiliated suppliers and customers.
10
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27, Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
---------------------------------
Peter M. Brant
President, Chairman of the Board and
Chief Executive Officer
By: /s/ Edward D. Sherrick
---------------------------------
Edward D. Sherrick
Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
Date: May 15, 1998
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
accompanying condensed balance sheet of Bear Island Paper Company, L.L.C. as of
March 31, 1998 and the related condensed statement of income for the three
months ended March 31, 1998 and is qualified in its entirety by reference to
such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 3,727
<SECURITIES> 0
<RECEIVABLES> 14,034
<ALLOWANCES> 73
<INVENTORY> 13,230
<CURRENT-ASSETS> 31,068
<PP&E> 196,096
<DEPRECIATION> 3,321
<TOTAL-ASSETS> 232,121
<CURRENT-LIABILITIES> 13,566
<BONDS> 191,625
0
0
<COMMON> 0
<OTHER-SE> 26,929
<TOTAL-LIABILITY-AND-EQUITY> 232,121
<SALES> 30,380
<TOTAL-REVENUES> 30,416
<CGS> 22,675
<TOTAL-COSTS> 1,187
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,881
<INCOME-PRETAX> 1,672
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,672
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,672
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
