<PAGE>
PROSPECTUS
OFFER FOR ALL OUTSTANDING 10% SENIOR SECURED NOTES DUE 2007
IN EXCHANGE FOR 10% SERIES B SENIOR SECURED NOTES DUE 2007,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OF
BEAR ISLAND PAPER COMPANY, L.L.C.
[GRAPHIC OMITTED]
AND
BEAR ISLAND FINANCE COMPANY II
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, MARCH 4,
1998, UNLESS EXTENDED.
Bear Island Paper Company, L.L.C. (the "Company") and Bear Island Finance
Company II ("FinCo" and, together with the Company, the "Issuers") hereby
offer, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange an aggregate principal amount
at maturity of up to $100,000,000 of 10% Series B Senior Secured Notes Due
2007 (the "New Notes") of the Issuers, which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), for a like
principal amount at maturity of the issued and outstanding 10% Senior Secured
Notes Due 2007 (the "Old Notes" and, together with the New Notes, the
"Notes") of the Issuers from the holders (the "Holders") thereof. The terms
of the New Notes are identical in all material respects to the Old Notes
except (i) that the New Notes have been registered under the Securities Act,
(ii) for certain transfer restrictions and registration rights relating to
the Old Notes and (iii) that the New Notes will not contain certain
provisions relating to additional interest to be paid to Holders of Old Notes
under certain circumstances relating to the timing of the Exchange Offer. The
Issuers issued $100,000,000 aggregate principal amount of Old Notes on
December 1, 1997, pursuant to exemptions from, or transactions not subject
to, the registration requirements of the Securities Act and applicable state
securities laws.
Interest on the Notes will be payable semi-annually in arrears on June 1
and December 1 of each year, commencing June 1, 1998. The Notes will mature
on December 1, 2007. The Notes are redeemable at the option of the Issuers,
in whole or in part, at any time on or after December 1, 2002 at the
redemption prices set forth herein, together with accrued and unpaid interest
to the date of redemption. In addition, prior to December 1, 2000, the
Issuers may redeem up to 20% of the original aggregate principal amount of
the Notes with the net proceeds of one or more public offerings of common
stock of the Company at a redemption price equal to 110% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
redemption; provided that at least 80% of the original aggregate principal
amount of the Notes remains outstanding thereafter. Upon a Change of Control
(as defined in "Description of the Notes--Certain Definitions"), each holder
of the Notes may require the Issuers to repurchase all or a portion of such
holder's Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of such purchase.
The Notes are senior secured obligations of the Issuers, rank senior in
right of payment to all subordinated indebtedness of the Issuers and rank
pari passu in right of payment with all other existing and future senior
indebtedness of the Issuers, including, in the case of the Company,
indebtedness under the Bank Credit Facilities (as defined in "Prospectus
Summary--The Acquisition"). The Notes are secured by (i) a second priority
security interest in all real property and certain personal property of the
Company (the "Company Collateral"), (ii) a third priority security interest
in 100% of the membership interests in Bear Island Timberlands Company,
L.L.C. ("Timberlands") (the "Timberlands Collateral") and (iii) a second
priority security interest (behind a shared first priority security interest)
in 65% of the issued and outstanding capital stock of F.F. Soucy, Inc.
("Soucy Inc.") (the "Soucy Collateral" and, together with the Company
Collateral and the Timberlands Collateral, the "Collateral"). The Soucy
Collateral will be released and all of the covenants and other provisions of
the Indenture with respect to Soucy Inc. will terminate under certain
circumstances. The obligations of the Company under the Bank Credit
Facilities are secured by a first priority security interest in the Company
Collateral, a second priority security interest in the Timberlands Collateral
and a shared first priority security interest in the Soucy Collateral. Each
of the Company, Timberlands and Soucy Inc. are wholly owned by Brant-Allen
Industries, Inc. ("Brant-Allen"). As a result, the Notes are subordinated to
the First Priority Debt (as defined under "Risk Factors--Security for the
Notes; Subordination of the Notes") and there may not be sufficient funds to
repay Holders in full after payment of the First Priority Debt. As of
September 30, 1997, after giving pro forma effect to the consummation of the
Transactions (as defined in "Certain References"), the Company, Timberlands
and Soucy Inc., taken together, would have had an aggregate of approximately
$291.9 million of debt outstanding; including $103.9 million with a first
priority security interest in the assets of the Company, $138.9 million with
a first and second priority interest in the membership interests of
Timberlands and $138.9 million with a shared first priority security interest
in 65% of the common shares of Soucy Inc. In the event of an acceleration,
there can be no assurance that there will be sufficient funds available to
repay the Notes after payment in full of all First Priority Debt.
While the Company and FinCo are jointly and severally liable for the
obligations under the Notes, FinCo, a wholly-owned subsidiary of the Company,
has only nominal assets, does not conduct any operations and was formed
solely in order to facilitate the raising of capital for the Company.
(Continued on next page)
<PAGE>
THE NOTES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 14 FOR A DISCUSSION OF FACTORS THAT SHOULD BE CONSIDERED BY
HOLDERS WHO TENDER THEIR OLD NOTES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is January 30, 1998.
<PAGE>
(Continued from previous page)
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. The New Notes will bear interest from the most recent date to which
interest has been paid on the Old Notes or, if no interest has been paid on
the Old Notes, from December 1, 1997. Old Notes accepted for exchange will
cease to accrue interest from and after the date of consummation of the
Exchange Offer. Holders of Old Notes whose Old Notes are accepted for
exchange will not receive any payment in respect of accrued interest on such
Old Notes.
The New Notes are being offered hereunder in order to satisfy certain
obligations of the Issuers contained in the Registration Rights Agreement (as
defined in "The Exchange Offer"). Based on interpretations by the staff of
the Securities and Exchange Commission (the "Commission"), as set forth in
no-action letters issued to third parties, the Issuers believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by Holders thereof
(other than any Holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act), without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement with any person to
engage in a distribution of such New Notes. However, the Commission has not
considered the Exchange Offer in the context of a no-action letter and there
can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each Holder must acknowledge that it is not engaged in, and
does not intend to engage in, a distribution of such New Notes and has no
arrangement or understanding to participate in a distribution of New Notes.
If any Holder is an affiliate of the Issuers, is engaged in or intends to
engage in or has any arrangement with any person to participate in the
distribution of the New Notes to be acquired pursuant to the Exchange Offer,
that Holder (i) could not rely on the applicable interpretations of the staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. The prospectus that must be delivered by that Holder must name
each such Holder and include the other selling securityholder information
required by Regulation S-K under the Securities Act. Each broker-dealer that
receives New Notes for its own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit
that it is an "underwriter" within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Issuers have agreed that, for a period of 90 days after the
Expiration Date (as defined in "The Exchange Offer--Terms of the Exchange
Offer; Period for Tendering Old Notes"), they will make this Prospectus
available to any broker-dealer for use in connection with any such resale.
See "Plan of Distribution."
The Issuers will not receive any proceeds from the Exchange Offer. The
Company will pay all the expenses incident to the Exchange Offer. Tenders of
Old Notes pursuant to the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. If the Issuers terminate the Exchange Offer and do
not accept for exchange any Old Notes, the Issuers will promptly return the
Old Notes to the Holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Notes, and there can be no
assurance regarding the future development of a market for the New Notes. The
Initial Purchasers (as defined in "The Exchange Offer") have advised the
Issuers that they currently intend to make a market in the New Notes. The
Initial Purchasers are not obligated to do so, however, and any market-making
with respect to the New Notes may be discontinued at any time without notice.
The Issuers do not intend to apply for listing or quotation of the New Notes
on any securities exchange or stock market or register or qualify the New
Notes for offer and sale in any jurisdiction (other than the registration of
the New Notes under the Securities Act).
<PAGE>
AVAILABLE INFORMATION
The Issuers have filed with the Commission a registration statement on
Form S-4 (herein, together with all amendments and exhibits, referred to as
the "Registration Statement") under the Securities Act with respect to the
New Notes offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement and the exhibits thereto, certain parts of which
are omitted in accordance with the rules and regulations of the Commission.
For further information with respect to the Issuers and the New Notes offered
hereby, reference is made to the Registration Statement. Any statements made
in this Prospectus concerning the provisions of certain documents are
summaries of such documents, and each such statement is qualified in its
entirety by reference to the copy of such document filed as an exhibit to the
Registration Statement or as otherwise filed with the Commission.
Upon the effectiveness of the Registration Statement, the Issuers will
become subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and in accordance therewith
will file reports and other information with the Commission. The Registration
Statement, the exhibits forming a part thereof and the reports and other
information filed by the Issuers with the Commission in accordance with the
Exchange Act may be inspected, without charge, at the Public Reference
Section of the Commission located at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the following Regional Offices of the
Commission: 7 World Trade Center, 13th Floor, New York, New York 10048; and
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of all
or any portion of the material may be obtained from the Public Reference
Section of the Commission upon payment of the prescribed fees. The Commission
also maintains a site on the World Wide Web that contains reports, proxy and
information statements and other information at http://www.sec.gov.
In the event that the Issuers are not required to be subject to the
reporting requirements of the Exchange Act in the future, the Issuers will be
required under the Indenture pursuant to which the Old Notes were, and the
New Notes will be, issued, to continue to file with the Commission, and to
furnish the Holders of the New Notes with, the information, documents and
other reports specified in Sections 13 and 15(d) of the Exchange Act.
CERTAIN REFERENCES
All references in this Prospectus to the "Company" mean Bear Island Paper
Company, L.L.C., a limited liability company organized under Virginia law,
and, for periods prior to December 1, 1997, its predecessor, Bear Island
Paper Company, L.P., a limited partnership organized under Virginia law
("BIPCO"). References to the "Acquisition" mean the acquisition by the
Company on December 1, 1997, of all the interests in BIPCO that the Company
did not then own and the related financings described in this Prospectus
under "The Acquisition".
All references in this Prospectus to "Timberlands" mean Bear Island
Timberlands Company, L.L.C., a limited liability company organized under
Virginia law and, for periods prior to December 1, 1997, its predecessor,
Bear Island Timberlands Company, L.P., a limited partnership organized under
Virginia law ("BITCO"). References to the "Timberlands Acquisition" mean the
acquisition by Brant-Allen on December 1, 1997, of all the interests in BITCO
that Brant-Allen did not then own and the related financings described in
this Prospectus under "The Timberlands Acquisition." References to the
"Transactions" refer to the Acquisition and the Timberlands Acquisition,
collectively.
Certain industry information and statistical data contained in this
Prospectus has been derived from information published by the Canadian Pulp &
Paper Association (the "CPPA"), Resource Information Systems, Inc. ("RISI")
or Miller Freeman, Inc., each of which regularly publish statistical and
other information relating to the newsprint industry. All references to
"delivered cash cost" refer to the manufacturing costs of newsprint less
depreciation plus transportation costs and, in the case of the Company's
delivered cash costs prior to December 1, 1997, as further adjusted to
reflect the market price of fiber. Delivered cash cost is generally accepted
in the paper and forest products industry as providing useful information
regarding a company's costs on a per ton basis. This measurement provides the
ability to compare large and small mills as well as mills that operate in
different geographical areas on a comparable cost per ton basis. Delivered
cash cost should not be considered in isolation or as a substitute for net
income, cash flow from operations or other income or cash flow data prepared
in accordance with generally accepted accounting principles or as a measure
of a company's profitability or liquidity. All references in this Prospectus
to "tonnes" are to metric tons, which equal 2,204.6 pounds. References to $
are to United States dollars and references to Cdn$ are to Canadian dollars.
2
<PAGE>
EXCHANGE RATE INFORMATION
The following table sets forth certain exchange rates for Canadian dollars
based on the noon buying rate in New York for cable transfers in Canadian
dollars, as certified for customs purposes by the Federal Reserve Bank of New
York (the "Noon Buying Rate"). Such rates are set forth as U.S. dollars per
Cdn$1.00 and are the inverse of rates quoted by the Federal Reserve Bank of
New York for Canadian dollars per U.S.$1.00.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
High.................. 0.8756 0.8046 0.7632 0.7527 0.7513 0.7391 0.7487
Low................... 0.7761 0.7439 0.7103 0.7023 0.7235 0.7235 0.7145
Average(1)............ 0.8235 0.7729 0.7300 0.7305 0.7329 0.7342 0.7253
Rate at period end.... 0.7865 0.7544 0.7128 0.7323 0.7301 0.7310 0.7234
</TABLE>
- ------------
(1) The average of the exchange rate on the last day of each month during
the applicable period.
On January 21, 1998, the inverse of the Noon Buying Rate was Cdn$1.00 =
U.S.$.69266.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial data,
including the financial statements and the notes thereto, appearing elsewhere
in this Prospectus. Certain defined terms are defined under "Glossary of
Defined Terms and Abbreviations."
THE COMPANY
GENERAL
The Company is a low cost producer of high quality newsprint, with a
newsprint machine that is currently, and for the past ten years has been,
ranked number one in North America by the CPPA for overall machine operating
efficiency (the ratio of salable tonnes produced to theoretical production
capacity at a machine's given speed). The Company's mill, located near
Richmond, Virginia, has an annual capacity of 225,000 tonnes with an average
delivered cash cost of $402 per tonne for the first nine months of 1997. The
Company produces high quality newsprint suitable for four-color printing,
which publishers are increasingly using for general circulation. In 1996, and
for the first nine months of 1997, the mill produced approximately 219,000
and 169,000 tonnes of newsprint, and had an estimated operating efficiency
rate of 96.2% and 96.7%, respectively. Over the past four years, the Company
has been able to increase its production by approximately 17,000 tonnes
through productivity and capital improvements, representing an annual average
increase of approximately 2.6%.
The Company's customers include leading newspaper publishers in the United
States, such as Dow Jones & Company, Inc. ("Dow Jones") (publisher of The
Wall Street Journal), The Washington Post Company ("The Washington Post"),
Advance Publications (the "Newhouse Group"), Gannett Co., Inc. (publisher of
USA Today) ("Gannett"), MediaNews Group Inc. ("MediaNews"), Knight-Ridder,
Inc. ("Knight-Ridder"), Media General, Inc. ("Media General"), The Times
Mirror Co. ("Times Mirror") and New York Times Co. ("New York Times").
Approximately 68% of the Company's newsprint production is sold on a contract
basis with the length of most contracts ranging from two to five years.
Approximately 90% of the Company's current newsprint production is purchased
by its top ten customers, eight of whom have been customers of the Company
for over 15 years.
Prior to the consummation of the Transactions, all the Company's wood
requirements were supplied by its affiliate, Timberlands, with approximately
30% coming from Timberlands' own land and the remainder being procured by
Timberlands from local independent wood contractors and independent sawmills.
Timberlands currently owns approximately 130,000 acres of prime timber in
Virginia.
Executive management is provided by Brant-Allen, the owner of the Company,
pursuant to a management contract (the "Management Services Agreement").
Brant-Allen also manages and owns all the capital stock of Soucy Inc., a
Canadian corporation. Soucy Inc. is the general partner of, and owns a 50.1%
interest in, F. F. Soucy, Inc. & Partners, Limited Partnership ("Soucy
Partners" and, together with Soucy Inc., "Soucy"), a Canadian limited
partnership. Soucy Inc. owns a newsprint machine that has an annual capacity
of 67,000 tonnes and Soucy Partners owns a newsprint machine that has an
annual capacity of 150,000 tonnes. Newsprint produced by the Company and
Soucy is sold through Brant-Allen, which currently markets approximately
442,000 tonnes of newsprint (225,000 tonnes for the Company and 217,000
tonnes for Soucy). Brant-Allen intends to continue to manage the Company and
Soucy to maximize any available synergies. The Company benefits from the
centralization of marketing, financial, administrative and distribution
functions at Brant-Allen. These services are provided pursuant to the
Management Services Agreement for which a management fee of 3% of annual net
sales is payable by the Company, of which, beginning December 1, 1997, one
third is payable in cash.
RISK FACTORS
See "Risk Factors" for a discussion of factors that should be considered
by Holders of Old Notes before tendering their Old Notes in the Exchange
Offer. Most of these factors apply to the Old Notes as well as the New Notes.
Such factors include, among others, substantial leverage; ability to service
debt; restrictive debt covenants; inability to
1
<PAGE>
repay the Notes; security for the Notes; subordination of the Notes;
dependence on a single facility; reliance on a single product--newsprint;
cyclical industry; dependence on principal customers; and control by Messrs.
Brant and Allen; related party transactions; and potential conflicts of
interest.
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include:
LOW COST PRODUCTION CAPABILITIES. The Company estimates that over 90% of
newsprint produced in North America is produced in four regions: Eastern
Canada, Western Canada, U.S. Northwest and U.S. South. In 1996, the Company's
average delivered cash cost of $416 per tonne was lower than the average for
the U.S. Northwest, Eastern Canada and Western Canada regions. See "Business
of the Company--Competitive Strengths." The principal reasons for the
Company's low cost structure include:
Efficient Manufacturing Facilities. For the past ten years, the Company's
paper machine has been ranked number one in North America by the CPPA for
overall machine operating efficiency.
Strategic Location of Manufacturing Facilities. The Company's mill is
located close to its major customers and fiber supplies. As a result, the
Company was able to attain an average cash transportation cost for 1996 of
approximately $27 per tonne, which the Company estimates, based on capacity
and transportation statistics published by RISI and the CPPA, is
approximately 50% lower than the estimated North American industry average of
$54 per tonne.
Strategic Fiber Sourcing Capabilities. In actively managing its fiber
costs, the Company has two competitive advantages: a flexible manufacturing
process and easy access to timberlands owned and managed by Timberlands.
Low Energy Costs. The Company's electricity supply contract with a local
utility and its efficient electrical usage patterns have allowed the Company
to obtain electricity at a rate that it believes is approximately 40% below
the national average for industrial users.
Highly Trained and Motivated Non-union Workforce. The Company has a stable
non-union workforce that management believes is highly trained and motivated.
HIGH QUALITY PRODUCT AND STRONG CUSTOMER RELATIONSHIPS. The Company
believes that its newsprint, which is produced primarily from
thermomechanical pulp ("TMP") and recycled fiber, is a high quality product
in terms of printability and runability, as demonstrated by its suitability
for four-color printing, which publishers are increasingly using for general
circulation.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. Management believes that the
commitment and experience of the Company's management team have enabled it to
achieve its low cost position in the industry and to maintain high product
quality and strong customer relationships.
BUSINESS STRATEGY
The Company's objectives are to maximize revenues and cash flow. The key
elements of the Company's strategy are:
COST REDUCTIONS. Management believes that incremental costs savings can be
achieved with respect to its fiber sourcing, raw materials, labor costs per
tonne and shipping and handling costs. In addition, the Company intends to
focus on reducing woodyard handling costs. The Company also plans to reduce
the proportion of more expensive kraft pulp, while increasing the amount of
old newspapers ("ONP") and old magazines ("OMG") used.
IMPROVEMENTS IN PRODUCTION. Management intends to maintain the number one
operating efficiency ranking of its newsprint machine by continuing to focus
on minimizing machine downtime, exploiting departmental efficiencies to
further reduce work hours per tonne and increasing production by increasing
machine speed.
GROWTH OPPORTUNITIES. The Company plans to evaluate opportunities to
expand production capacity through acquisitions of other newsprint businesses
or assets.
2
<PAGE>
FINANCIAL STRATEGY. Management intends to focus on improving the Company's
financial flexibility going forward. Management expects to accomplish this
goal by (i) using available excess cash to reduce indebtedness and (ii)
pursuing other alternatives, which may include equity financing, to fund
growth and reduce indebtedness.
BACKGROUND
The Company's predecessor, BIPCO, was formed in 1978 as a limited
partnership, with Brant-Allen as its general partner. Prior to the
Acquisition, Brant-Allen owned a 30% partnership interest in BIPCO, and
subsidiaries of The Washington Post and Dow Jones each owned 35% partnership
interests in BIPCO. See "The Acquisition" below.
Brant-Allen is a Sub Chapter S corporation jointly owned by Mr. Peter
Brant and Mr. Joseph Allen. Brant-Allen's predecessor was formed in the early
1940s when the fathers of Messrs. Brant and Allen founded a paper conversion
and newsprint sales business. In the early 1970s, Brant-Allen entered into
the newsprint manufacturing business. Messrs. Brant and Allen have been
involved in the management of Brant-Allen for over 30 years: Mr. Brant serves
as the Chairman of the Board, President and Chief Executive Officer of
Brant-Allen and Mr. Allen serves as Co-Chairman of the Board and Chief
Operating Officer of Brant-Allen. Mr. Brant also serves as the Chairman of
the Board, President and Chief Executive Officer of the Company and Mr. Allen
also serves as Vice Chairman of the Board, Executive Vice President and Chief
Operating Officer of the Company.
Prior to the Timberlands Acquisition, Brant-Allen was also the general
partner of, and owned a 30% partnership interest in, BITCO, which was
converted to Timberlands immediately prior to the closing of the Timberlands
Acquisition. See "The Timberlands Acquisition" below. BITCO was formed in
1985 and currently owns and manages approximately 130,000 acres of timberland
in Central Virginia, all within 200 miles of the Company's mill. See
"Business of Timberlands."
In addition, Brant-Allen owns all the capital stock of Soucy Inc. Soucy
Inc., a newsprint manufacturer located in Rivi|f4re-du-Loup in the Province of
Quebec, Canada, owns a newsprint machine that currently has an annual
capacity of 67,000 tonnes. Soucy Inc. is also the general partner and owns a
50.1% interest in Soucy Partners, a limited partnership formed in 1974 with
Dow Jones (39.9%) and Rexfor (a Quebec government-owned company) (10.0%).
Soucy Partners owns and operates a mill, including a newsprint machine, with
an annual production capacity of 150,000 tonnes. The two Soucy newsprint
machines are located on Soucy Partners' plant site. See "Business of Soucy."
FinCo is a wholly owned subsidiary of the Company that was incorporated in
Delaware for the purpose of serving as a co-issuer of the Notes. FinCo will
not have any operations or assets and will not have any revenues. As a
result, holders of the Notes should not expect FinCo to participate in
servicing the interest and principal obligations on the Notes.
THE ACQUISITION
On December 1, 1997, the Company purchased all the partnership interests
in BIPCO owned by subsidiaries of Dow Jones and The Washington Post for an
aggregate purchase price, which is subject to certain post-closing
adjustments, of approximately $149.8 million in cash. The Company financed
this purchase (including approximately $200,000 of transaction costs, as well
as the repayment of approximately $47.1 million of existing debt) with: (i)
borrowings of $103.9 million under the $120 million senior secured bank
credit facilities (the "Bank Credit Facilities") (of which $2.9 million is
anticipated to be drawn down for payment of deferred loan costs due at
December 1, 1997, but not yet paid by the Company); (ii) the net proceeds
from the issuance of the Old Notes; and (iii) $5.2 million existing cash on
hand (of which approximately $1.2 million was distributed to Brant-Allen to
reimburse certain deferred loan costs paid by Brant-Allen on behalf of the
Company in connection with the Acquisition) . The Bank Credit Facilities
consist of two separate facilities: (i) a $50 million 6-year senior secured
reducing revolving credit facility (the "Revolving Credit Facility") and (ii)
a $70 million 8-year senior secured term loan facility (the "Term Loan
Facility"). See "Description of Certain Other Indebtedness -- Company
Indebtedness -- The Bank Credit Facilities."
3
<PAGE>
The following table summarizes the sources and uses of funds (dollars in
millions) in connection with the Acquisition:
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS (A) AMOUNT
- ----------------------------- -------- ------------------------------------------ --------
<S> <C> <C> <C>
Revolving Credit Facility $ 33.9 Cash to purchase selling limited partners'
(a).......................... interests (b)............................. 149.6
Transaction costs.......................... 0.2
Term Loan Facility ........... 70.0 Prepayment of Existing Debt and
accrued interest ......................... 47.1
The Notes (c)................. 100.0 Prepayment penalty......................... 4.0
Existing cash on hand (a) ... 5.2 Deferred loan costs........................ 8.2
-------- --------
Total ...................... $209.1 Total ................................... $209.1
======== ========
</TABLE>
(a) Upon consummation of the Acquisition approximately $5 million of excess
cash on-hand was used to reduce the balance outstanding under the
Revolving Credit Facility. Additional borrowings under the Revolving
Credit Facility will be used for working capital and general business
purposes.
(b) The amount paid to the subsidiaries of Dow Jones and the Washington
Post is subject to certain post-closing adjustments. Any additional
amounts required to be paid to such subsidiaries in respect of any such
post-closing adjustments are intended to be funded by additional
amounts drawn under the Revolving Credit Facility or cash on hand.
(c) After deducting the Initial Purchasers' discount of $3 million, the net
proceeds from the issuance of the Old Notes was $97 million. This
discount is included in the $8.2 million deferred loan costs shown
under "Uses of Funds."
4
<PAGE>
THE TIMBERLANDS ACQUISITION
Concurrently with the closing of the Acquisition, Brant-Allen purchased
the 70% interest in BITCO then owned by subsidiaries of Dow Jones and The
Washington Post for an aggregate purchase price, which is subject to certain
post-closing adjustments, of approximately $36 million in cash. Funding of
this purchase, including an estimated $30,000 in transaction costs, was
provided by (i) borrowings of $35 million under senior secured two-year loan
facilities consisting of a $32 million term facility and a $3 million
revolving facility (collectively, the "Timberlands Loan") borrowed by
Brant-Allen, guaranteed by Timberlands and secured by a first lien on
Brant-Allen's membership interests in Timberlands, and (ii) $1.0 million of
Brant-Allen's existing cash on hand. Brant-Allen anticipates that any
additional amounts required to be paid in respect of any post-closing
adjustments would be funded from cash on hand or advances under its revolving
credit line. Timberlands expects to distribute to Brant-Allen any cash
on-hand that exceeds its own operating and debt requirements so that
Brant-Allen can pay interest on, and reduce principal outstanding under, the
Timberlands Loan. As of September 30, 1997 on a pro forma basis after giving
effect to the Timberlands Acquisition, excess cash and short-term investments
available for such distributions would have been approximately $4.1 million.
Concurrently with the closing of the Timberlands Acquisition, Timberlands
substantially modified the terms of its $27 million loan from John Hancock
Mutual Life Insurance Company (and paid a related modification fee) (as
modified, the "Hancock Loan") and in connection with the modification,
received a $3 million advance from John Hancock Mutual Life Insurance
Company, bringing the total outstanding balance under the Hancock Loan to $30
million. The Hancock Loan matures on November 24, 1999 and is secured by
approximately 125,000 acres of Timberlands' land. Dow Jones' and The
Washington Post's pro rata portion of the modification fee was deducted from
the purchase price paid to them.
The principal executive offices of the Issuers are located at 10026 Old
Ridge Road, Ashland, VA 23005 (Telephone: (804) 227-3394).
5
<PAGE>
The following chart illustrates the current ownership of the Company,
Timberlands, Soucy Inc., Soucy Partners and FinCo (and their respective
principal assets and classes of indebtedness):
[GRAPHIC OMITTED]
- ------------
(1) The Timberlands Loan is secured by: (i) a first priority security
interest in 100% of the membership interests in Timberlands; and (ii) a
first priority security interest (pro rata with the Company's $120
million Bank Credit Facilities) in 65% of the common stock of Soucy
Inc. The remaining 35% of 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 (as defined in
each of the Bank Credit Agreement and the Timberlands Credit
Agreement). The Timberlands Loan is also guaranteed by Timberlands.
(2) The Hancock Loan is secured by a first priority security interest in
approximately 125,000 acres of timberlands owned by Timberlands.
(3) tpy = tonnes per year.
(4) The Bank Credit Agreement is secured by: (i) a first priority security
interest in a substantial portion of the assets of the Company; (ii) a
first priority security interest (pro rata along with the $35 million
Timberlands Loan to Brant-Allen) in 65% of the common stock of Soucy
Inc.; and (iii) a second priority security interest in 100% of the
membership interests in Timberlands. The remaining 35% of common stock
of Soucy Inc. cannot be assumed, pledged, hypothecated, transferred or
otherwise disposed of by Brant-Allen without the consent of the
Required Lenders (as defined in each of the Bank Credit Agreement and
the Timberlands Credit Agreement). The Bank Credit Agreement is also
guaranteed by Brant-Allen.
(5) The Notes are secured by: (i) a second priority security interest in
substantially all of the assets of the Company; (ii) a second priority
security interest in 65% of the common stock of Soucy Inc., subject to
release in certain circumstances; and (iii) a third priority security
interest in 100% of the membership interests in Timberlands.
(6) FinCo is a joint obligor under the Notes.
(7) The Soucy credit facilities are secured by accounts receivable and
inventories. In addition, Brant-Allen has assigned its accounts
receivable and provided an unlimited guarantee and postponement of
claims against Soucy.
(8) The secured bonds are issued by Riviere du Loup Finance Ltd ("RDL"), a
wholly-owned subsidiary of Soucy Partners, in three series under a
trust indenture dated March 30, 1979 with Montreal Trust Company and
are guaranteed by Soucy Partners. This guarantee is secured by (i) a
first priority security interest in the shares of capital stock of RDL,
(ii) a first priority security interest in the immovable property of
Soucy Partners and (iii) an assignment of the rights of Soucy Partners
under certain immovable leases and newsprint sales and other contracts.
6
<PAGE>
THE EXCHANGE OFFER
On December 1, 1997 the Issuers issued $100 million principal amount of
Old Notes. The Old Notes were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities
Act and applicable state securities laws, in order to enable the Issuers to
raise funds on a more expeditious basis than necessarily would have been
possible had the initial sale been pursuant to an offering registered under
the Securities Act. TD Securities (USA) Inc. and Salomon Brothers Inc (the
"Initial Purchasers"), as a condition to their purchase of the Old Notes,
requested that the Issuers agree to commence the Exchange Offer following the
offering of the Old Notes.
Securities Offered ............ Up to $100,000,000 principal amount of 10%
Series B Senior Secured Notes Due 2007,
which have been registered under the
Securities Act. The terms of the New Notes
and the Old Notes are identical in all
material respects, except (i) that the New
Notes have been registered under the
Securities Act, (ii) for certain transfer
restrictions and registration rights
relating to the Old Notes and (iii) that the
New Notes will not contain certain
provisions relating to additional interest
to be paid to the Holders of Old Notes under
certain circumstances relating to the timing
of the Exchange Offer described below under
"--Summary Description of the New Notes."
The Exchange Offer ............ The New Notes are being offered in exchange
for a like principal amount of Old Notes.
The issuance of the New Notes is intended to
satisfy obligations of the Issuers contained
in the Registration Rights Agreement, dated
as of December 1, 1997, among the Issuers
and the Initial Purchasers (the
"Registration Rights Agreement"). For
procedures for tendering, see "The Exchange
Offer."
Tenders, Expiration Date;
Withdrawal .................... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on March 4, 1998, or
such later date and time to which it is
extended. Each Holder tendering Old Notes
must acknowledge that he is not engaging in,
nor intends to engage in, a distribution of
the New Notes. The tender of Old Notes
pursuant to the Exchange Offer may be
withdrawn at any time prior to the
Expiration Date (as defined in "The Exchange
Offer--Terms of the Exchange Offer; Period
for Tendering Old Notes"). Any Old Note not
accepted for exchange for any reason will be
returned without expense to the tendering
Holder thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer.
Federal Income Tax
Considerations ................ The exchange pursuant to the Exchange Offer
should not result in any income, gain or
loss to the Holders or the Issuers for
federal income tax purposes. See "Certain
Federal Income Tax Considerations."
Use of Proceeds ............... There will be no proceeds to the Issuers
from the exchange pursuant to the Exchange
Offer. See "Use of Proceeds."
Exchange Agent ................ First Trust of New York, National
Association is serving as Exchange Agent in
connection with the Exchange Offer.
7
<PAGE>
Shelf Registration Statement .. Under certain circumstances, certain holders
of Notes (including holders who are not
permitted to participate in the Exchange
Offer or who may not freely resell New Notes
received in the Exchange Offer) may, by
giving the Issuers written notice on or
before March 30, 1998, require the Issuers
to file, and cause to become effective, a
shelf registration statement under the
Securities Act, which would cover resales of
Notes by such holders. A Holder of Notes
that sells such Notes pursuant to such a
shelf registration statement generally will
be required to be named as a selling
securityholder in the related prospectus and
to deliver a prospectus to purchasers, will
be subject to certain of the civil liability
provisions under the Securities Act in
connection with such sales and will be bound
by the provisions of the Registration Rights
Agreement which are applicable to such a
Holder (including certain indemnification
obligations). See "Description of the
Notes--Exchange Offer; Registration Rights."
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuers do not
currently anticipate that they will register the Old Notes under the
Securities Act. See "Description of the Notes--Exchange Offer; Registration
Rights."
CONSEQUENCES OF EXCHANGING OLD NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Issuers believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by Holders thereof (other
than any Holder which is an "affiliate" of the Issuers within the meaning of
Rule 405 under the Securities Act) without compliance with the registration
and prospectus delivery requirements of the Securities Act, provided that
such New Notes are acquired in the ordinary course of such Holder's business
and such Holder has no arrangement with any person to participate in the
distribution of such New Notes. However, the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each
Holder must acknowledge that it is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement or
understanding to participate in a distribution of New Notes. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes must acknowledge that such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus (which may be this Prospectus)
in connection with any resale of such New Notes and must represent that they
were acquired as a result of market-making activities or other trading
activities. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions (including any jurisdiction in
Canada), it may be necessary to qualify for sale or register thereunder the New
Notes prior to offering or selling such New Notes. The Issuers have agreed,
pursuant to the Registration Rights Agreement, subject to certain limitations
specified therein, to register or qualify the New Notes for offer or sale under
the applicable state securities laws of such United States jurisdictions as the
Majority Holders of the Old Notes reasonably request before the time the
Registration Statement (of which this Prospectus forms a part) is declared
effective by the Commission. The Issuers do not intend to register or qualify
the sale of the New Notes in any such United States jurisdiction (unless the
Issuers receive such a request) or any other jurisdiction. See "The Exchange
Offer--Consequences of Exchanging Old Notes."
8
<PAGE>
SUMMARY DESCRIPTION OF THE NEW NOTES
The terms of the New Notes and the Old Notes are identical in all material
respect, except (i) that the New Notes have been registered under the
Securities Act, (ii) for certain transfer restrictions and registration
rights relating to the Old Notes and (iii) that the New Notes will not
contain certain provisions relating to additional interest to be paid to
Holders of Old Notes under certain circumstances relating to the timing of
the Exchange Offer. The New Notes will bear interest from the most recent
date to which interest has been paid on the Old Notes or, if no interest has
been paid on the Old Notes, from December 1, 1997. Accordingly, registered
Holders of New Notes on the relevant record date for the first interest
payment date following the consummation of the Exchange Offer will receive
interest accruing from the most recent date to which interest has been paid
or, if no interest has been paid, from December 1, 1997. Old Notes accepted
for exchange will cease to accrue interest from and after the date of
consummation of the Exchange Offer. Holders whose Old Notes are accepted for
exchange will not receive any payment in respect of interest on such Old
Notes otherwise payable on any interest payment date the record date for
which occurs on or after consummation of the Exchange Offer.
Issuers ....................... Bear Island Paper Company, L.L.C. and Bear
Island Finance Company II, as co-obligors.
Notes Offered ................. Up to $100,000,000 principal amount of 10%
Series B Senior Secured Notes due 2007,
which have been registered under the
Securities Act.
Maturity Date ................. December 1, 2007.
Interest Payment Dates ........ June 1 and December 1 of each year,
commencing June 1, 1998.
Optional Redemption ........... The Notes are redeemable at the option of
the Issuers, as a whole or from time to time
in part, at any time on or after December 1,
2002, on or not less than 30 nor more than
60 days' prior notice at the redemption
prices (expressed as percentages of
principal amount) set forth herein, together
with accrued interest, if any, to the
redemption date, if redeemed during the
12-month period beginning on December 1 of
the years indicated herein (subject to the
right of holders of record on relevant
record dates to receive interest due on an
interest payment date). In addition, 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
(subject to the right of holders of record
on relevant record dates to receive interest
due on relevant interest payment dates);
provided that immediately after giving
effect to any such redemption, at least $80
million aggregate principal amount of the
Notes remains outstanding. See "Description
of the Notes--Optional Redemption."
Change of Control ............. Upon a Change of Control (as defined in
"Description of the Notes--Certain
Definitions"), each holder of the Notes will
have the right to require that the Issuers
purchase such holder's Notes, in whole or in
part, in integral multiples of $1,000, at a
purchase price in cash in an amount equal to
101% of the principal amount thereof, plus
accrued interest, if any, to the date of
purchase. See "Description of the
Notes--Certain Covenants of the
Company--Purchase of Notes Upon a Change of
Control."
Ranking ....................... The Notes are senior secured obligations of
the Issuers and rank senior in right of
payment to all subordinated indebtedness of
the Issuers and pari passu in right of
payment with all other existing and future
senior
9
<PAGE>
indebtedness of the Issuers, including, in
the case of the Company, indebtedness under
the Bank Credit Agreement (as defined in
"Description of the Notes--Certain
Definitions"). At September 30, 1997, on a
pro forma basis after giving effect to the
Acquisition, the Timberlands Acquisition and
the financing of those acquisitions, (i) the
Company would have had indebtedness (other
than the Notes) of approximately $106.7
million, $103.9 million of which would have
represented borrowings under the Bank Credit
Agreement and FinCo would have had no
indebtedness, (ii) Brant-Allen would have
had approximately $35.0 million of
indebtedness under the Timberlands Loan and
(iii) Timberlands would have had $30.5
million of indebtedness (excluding the
guarantee under the Timberlands Loan), of
which $30 million would have been under the
Hancock Loan. See "Unaudited Pro Forma
Financial Data."
Security ...................... The Notes are secured by (i) the Company
Collateral, which consists of a second
priority security interest in (x) all real
property of the Company and (y) all personal
property of the Company, to the extent such
personal property is assignable and except
for certain other assets that are not
assignable, (ii) the Timberlands Collateral,
which consists of a third priority security
interest in 100% of the membership interests
in Timberlands, whose assets will continue
to secure the Hancock Loan and (iii) the
Soucy Collateral, which consists of a second
priority security interest in 65% of the
issued and outstanding capital stock of
Soucy Inc. The remaining 35% of the issued
and outstanding capital stock of Soucy Inc.
is subject to certain restrictions described
below. At any time when either (i) the
Company has reduced its Total Committed Debt
(as defined in "Description of the
Notes--Certain Defi-nitions'') to an amount
that is not greater than $145 million as of
the date of determination or (ii) the Notes
are rated Investment Grade (as defined in
"Description of the Notes--Certain
Definitions"), the Soucy Collateral will be
released and all of the covenants and other
provisions of the Indenture with respect to
Soucy Inc. will terminate. Upon repayment by
Brant-Allen of all the outstanding
indebtedness under the Timberlands Loan, the
foregoing security interest in membership
interests of Timberlands shall become a
second priority security interest. See
"Description of the Notes--Collateral and
Security."
Certain Covenants ............. The Indenture contains, among others, the
following covenants with respect to the
Company and its Subsidiaries (as defined in
"Description of the Notes--Certain
Definitions") (including FinCo): (i)
limitation on indebtedness; (ii) limitation
on restricted payments; (iii) limitation on
liens; (iv) guarantees by Restricted
Subsidiaries of the Company; (v) purchase of
Notes upon a change of control; (vi)
limitation on issuances and sales of capital
stock of Subsidiaries; (vii) limitation on
transactions with affiliates; (viii)
limitation on sale of assets; (ix)
limitation on sale and leaseback
transactions; (x) limitation on dividends
and other payment restrictions affecting
Restricted Subsidiaries; (xi) limitation on
conduct of business; (xii) limitation on
Unrestricted Subsidiaries and (xiii)
reports. See "Description of the
Notes--Certain Covenants of the Company" and
"--Certain Covenants of All of the Credit
Parties."
10
<PAGE>
The Indenture contains, among others, the
following covenants with respect to one of
or both of Timberlands and Soucy Inc.
(collectively, the "Security Parties"): (i)
limitation on indebtedness; (ii) limitation
on restricted payments by Timberlands; (iii)
limitation on certain restricted payments by
Soucy Inc. (iv) limitation on liens; (v)
limitation on guarantees of Company
indebtedness by the Security Parties and
their Restricted Subsidiaries; (vi)
limitation on issuances and sales of capital
stock of Subsidiaries; (vii) limitation on
transactions with affiliates; (viii)
limitation on sale of assets; (ix)
limitation on sale and leaseback
transactions; (x) limitation on dividends
and other payment restrictions affecting
Restricted Subsidiaries; (xi) limitation on
conduct of business; (xii) limitation on
Unrestricted Subsidiaries and (xiii)
reports. See "Description of the
Notes--Certain Covenants of the Security
Parties" and "--Certain Covenants of All of
the Credit Parties."
The Indenture contains, among others, the
following covenants with respect to
Brant-Allen: (i) limitation on sales of
collateral stock and certain other
transactions and (ii) limitation on proceeds
of asset sales by Subsidiaries. See
"Description of the Notes--Certain Covenants
of Brant-Allen."
Use of Proceeds ............... The Issuers will not receive any proceeds
from the Exchange Offer. The net proceeds
from the offering of the Old Notes were used
by the Company, which is wholly owned by
Brant-Allen, to acquire the 70% interests in
BIPCO not owned by the Company from certain
subsidiaries of Dow Jones and The Washington
Post. See "The Acquisition" and "Use of
Proceeds."
11
<PAGE>
SUMMARY FINANCIAL DATA
The following summary financial data (except pro forma information and
saleable tonnes produced) are derived from the audited financial statements
of BIPCO for each of the years in the three year period ended December 31,
1996 and the unaudited financial statements of BIPCO as of September 30, 1997
and for the nine months ended September 30, 1997 and 1996, which are included
elsewhere herein. Pro forma information and saleable tonnes produced are
derived from other information provided by the Company. The unaudited
financial statements for the nine months ended September 30, 1997 and 1996,
and the unaudited financial statements of BIPCO as of September 30, 1997, in
the opinion of the Company, reflect all adjustments which are of a normal and
recurring nature, necessary for a fair presentation of the results for the
unaudited periods. The historical results of operations for the nine months
ended September 30, 1997 are not necessarily indicative of the results of
operations to be expected for the full year. The following summary financial
data should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the financial
statements and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
ACTUAL
--------------------------------------------------------
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------
1994 1995 1996 1996 1997
---------- ---------- ---------- ---------- ---------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales
Non-affiliates ................... $ 51,297 $ 70,960 $ 75,460 $ 59,353 $ 47,197
Affiliates (2) ................... 42,543 61,243 53,360 40,794 38,176
---------- ---------- ---------- ---------- ---------
Total sales ..................... 93,840 132,203 128,820 100,147 85,373
Cost of sales ..................... 91,610 100,399 100,591 73,748 77,225
---------- ---------- ---------- ---------- ---------
Gross profit ...................... 2,230 31,804 28,229 26,399 8,148
Selling, general & administrative:
Management fee to Brant-Allen ... 2,820 3,961 3,865 3,004 2,561
Other direct ..................... 208 224 153 569 669
---------- ---------- ---------- ---------- ---------
Income (loss) from operations ..... (798) 27,619 24,211 22,826 4,918
---------- ---------- ---------- ---------- ---------
Other Income (Expense):
Interest income .................. 309 603 666 487 485
Interest expense ................. (6,194) (5,986) (5,398) (4,059) (3,592)
Other income (expense) ........... 2,116 33 (56) 94 (7)
---------- ---------- ---------- ---------- ---------
Total other expense .............. (3,769) (5,350) (4,788) (3,478) (3,114)
---------- ---------- ---------- ---------- ---------
Net (loss) income ................. $ (4,567) $ 22,269 $ 19,423 $ 19,348 $ 1,804
========== ========== ========== ========== =========
Ratio of earnings to fixed
charges (5)(6) ................... -- 4.7x 4.6x 5.7x 1.5x
OTHER DATA:
Operational EBITDA (3) ............ $ 8,971 $ 37,357 $ 34,245 $ 30,485 $ 13,222
Adjusted Operational
EBITDA (4)........................
Summary cash flow information:
Net cash provided by operating
activities ....................... 4,362 27,215 30,368 25,630 10,218
Net cash used in investing
activities ....................... (3,999) (6,502) (7,413) (5,171) (5,590)
Net cash provided by (used in)
financing activities ............. 2,994 (15,695) (21,801) (18,244) (4,948)
Depreciation ...................... 9,730 9,648 9,976 7,629 8,291
Depletion ......................... 39 90 58 30 13
Capital expenditures .............. 9,469 6,645 7,483 5,227 5,724
Saleable metric tonnes produced ... 203,159 208,870 218,642 162,274 168,975
Ratio of Operational EBITDA to
total interest expense (8)........ 1.4x 6.2x 6.3x 7.5x 3.7x
Ratio of Adjusted Operational
EBITDA to interest
expense (9).......................
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
12
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA (1)
-------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
(UNAUDITED)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales
Non-affiliates ................... $128,820 $ 85,373
Affiliates (2) ................... -- --
-------------- ---------------
Total sales ..................... 128,820 85,373
Cost of sales ..................... 93,129 70,839
-------------- ---------------
Gross profit ...................... 35,691 14,534
Selling, general & administrative:
Management fee to Brant-Allen ... 3,865 2,561
Other direct ..................... 153 668
-------------- ---------------
Income (loss) from operations ..... 31,672 11,305
-------------- ---------------
Other Income (Expense):
Interest income .................. 666 485
Interest expense ................. (20,024 ) (14,609)
Other income (expense) ........... (56) (7)
-------------- ---------------
Total other expense .............. (19,414) (14,131)
-------------- ---------------
Net (loss) income ................. $ 12,258 $ (2,826)
============== ===============
Ratio of earnings to fixed
charges (5)(6) ................... 1.6x --
OTHER DATA:
Operational EBITDA (3) ............ $ 40,422 $ 17,837
Adjusted Operational
EBITDA (4)........................ 42,999 19,544
Summary cash flow information:
Net cash provided by operating
activities ....................... -- --
Net cash used in investing
activities ....................... -- --
Net cash provided by (used in)
financing activities ............. -- --
Depreciation ...................... 8,692 6,519
Depletion ......................... 58 13
Capital expenditures .............. 7,483 5,724
Saleable metric tonnes produced ... 218,642 168,975
Ratio of Operational EBITDA to
total interest expense (8)........ 2.0x 1.2x
Ratio of Adjusted Operational
EBITDA to interest
expense (9)....................... 2.1x 1.3x
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
PRO
FORMA
ACTUAL (1)
-------------------------------------------------------- --------
AS OF DECEMBER 31, AS OF AS OF
--------------------------- SEPTEMBER 30, SEPTEMBER 30,
1994 1995 1996 1997 1997
-------- -------- -------- --------------------------- --------
(UNAUDITED)
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and short-term
investments................... $ 7,454 $ 12,472 $ 13,625 $ 13,306 $ 7,658
Working capital ............... 14,400 23,901 22,037 22,701 24,709
Property, plant and equipment,
net .......................... 117,581 115,941 116,953 114,907 196,467
Total indebtedness(7).......... 60,025 55,368 52,171 47,757 206,686
Total assets .................. 150,269 160,523 160,460 156,235 240,143
Total partners'
equity/membership interests . 78,597 91,366 95,789 97,593 24,712
</TABLE>
- ------------
(1) Gives pro forma effect to the Acquisition and the financings therefor
as if such transactions occurred on January 1, 1996, with respect to
the income statement and other data, and as of September 30, 1997, with
respect to the balance sheet data. See "Unaudited Pro Forma Condensed
Consolidated Financial Statements."
(2) The sales are to the Dow Jones and The Washington Post. Upon the
closing of the Acquisition and the Timberlands Acquisition, sales to
Dow Jones and The Washington Post will become sales to non-affiliates.
(3) Operational EBITDA is defined as income (loss) from operations plus
depreciation, depletion and amortization, if any. Operational EBITDA is
generally accepted as providing useful information regarding a
company's ability to service and/or incur debt. Other companies, or
industry analysts, may calculate similarly titled measures through
methods which may prevent such measures from being comparable.
Operational EBITDA should not be considered in isolation or as a
substitute for operating earnings (loss), net income (loss), cash flows
from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
(4) Adjusted Operational EBITDA is defined as Operational EBITDA (as shown
in note (3) above) plus the noncash portion, or two-thirds, of the
management fee paid to Brant-Allen on a pro forma basis for the nine
months ended September 30, 1997 and year ended December 31, 1996.
Pursuant to the limitation on restricted payments covenant of the
Notes, payments by the Company for management fees are limited to
Brant-Allen (or any of its Subsidiaries or Affiliates) to an amount per
annum not in excess of 3% of net sales of the Company, of which no more
than one third may be in cash. Management believes that Adjusted
Operational EBITDA provides useful information regarding the Company's
ability to service its debt and provide for capital investment because
the cash deferral of two-thirds of the management fee to Brant-Allen
provides a significant source of cash flow to the Company that can be
used to service debt. Adjusted Operational EBITDA should not be
compared to Operational EBITDA or be considered in isolation or as a
substitute for net income, cash flows from operations, or other income
or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity. Other companies, or industry analysts may calculate
similarly titled measures through methods which may prevent such
measures from being comparable.
(5) In the computation of the ratio of earnings to fixed charges, earnings
consist of income (loss) plus fixed charges. Fixed charges consist of
interest expense on indebtedness, amortization of deferred financing
costs and that portion of lease rental expense representative of the
interest factor.
(6) Earnings were insufficient to cover fixed charges by $5.0 million for
the year ended December 31, 1994. On a pro forma basis, earnings were
insufficient to cover fixed charges by $2.8 million for the nine months
ended September 30, 1997.
(7) Total indebtedness is defined as long-term debt and long-term purchase
obligations and current portions thereof.
(8) The ratio of Operational EBITDA to total interest expense is an
indication of a company's ability to service interest expense. Other
companies, or industry analysts, may calculate similarly titled
measures through methods which may prevent such measures from being
comparable. The ratio of Operational EBITDA to total interest expense
should not be considered in isolation or as a substitute for operating
earnings (loss), net income (loss), cash flows from operations, or
other income or cash flow data prepared in accordance with generally
accepted accounting principles or as a measure of a company's
profitability or liquidity.
(9) The ratio of Adjusted Operational EBITDA to total interest expense is
an indication of a company's ability to service interest expense, as
adjusted. Other companies, or industry analysts, may calculate
similarly titled measures through methods which may prevent such
measures from being comparable. The ratio of Adjusted Operational
EBITDA to total interest should not be considered in isolation or as a
substitute for net income (loss), operating earnings (loss), cash flows
from operations, or other income or cash flow data prepared in
accordance with generally accepted accounting principles or as a
measure of a company's profitablity or liquidity.
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RISK FACTORS
Holders of Old Notes should carefully consider the following matters, as
well as the other information contained in this Prospectus, before tendering
their Old Notes in the Exchange Offer. The risk factors set forth below
(other than "--Consequences of Failure to Exchange Old Notes") are applicable
to the Old Notes as well as the New Notes. Information contained in this
Prospectus contains "forward-looking statements" which can be identified by
the use of forward-looking terminology such as "believes," "expects," "may,"
"will," "should," "projected," "contemplates" or "anticipates" or the
negative thereof or other variations thereon or comparable terminology. No
assurance can be given that the future results covered by the forward-looking
statements will be achieved. The following matters constitute cautionary
statements identifying important factors with respect to such forward-looking
statements, including certain risks and uncertainties, that could cause
actual results to vary materially from the future results covered in such
forward-looking statements. Other factors, such as the general state of the
economy, U.S. newspaper circulation, advertising lineage, the market prices
for newsprint, fiber costs, electrical rates and environmental regulation
could also cause actual results to vary materially from the future results
covered in such forward-looking statements.
SUBSTANTIAL LEVERAGE; ABILITY TO SERVICE DEBT
The Company has significant indebtedness and is highly leveraged. As of
September 30, 1997, after giving pro forma effect to the Acquisition and the
related financings, the Company would have had $206.7 million of debt
outstanding, including $103.9 million under the Bank Credit Facilities, and
equity of $24.7 million. In addition, for the nine months ended September 30,
1997, earnings would be insufficient to cover fixed charges by a margin of
$2.8 million. Subject to the restrictions in the Bank Credit Facilities and
the Indenture, the Company may also incur additional Indebtedness from time
to time to finance capital expenditures or for other purposes. See
"Description of the Notes--Certain Covenants of the Company." Substantially
all of the Company's assets have been or will be pledged to secure the Notes
and the Bank Credit Facilities.
The significant indebtedness incurred as a result of the Acquisition will
have several important consequences to the Holders of the Notes, including,
without limitation: (i) a substantial portion of the Company's cash flow from
operations must be dedicated to service such indebtedness, and the failure of
the Company to generate sufficient cash flow to service such indebtedness
could result in a default under such indebtedness, including under the Notes;
(ii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions or for other purposes may
be impaired; (iii) the Company's level of indebtedness could limit its
flexibility to expand, make capital expenditures and react to changes in the
industry in which it competes and economic conditions generally; (iv) the
Bank Credit Facilities, the Indenture and the Notes contain, and future
agreements relating to the Company's indebtedness may also contain, numerous
financial and other restrictive covenants and the failure to comply with such
covenants may result in a default under such agreements, which, if not cured
or waived, could have a material adverse effect on the Company; and (v) the
ability of the Company to satisfy its obligations pursuant to such
indebtedness, including pursuant to the Notes and the Indenture, will be
dependent upon factors affecting the business and operations of the Company,
some of which are not in the control of the Company.
The ability of the Company to service its indebtedness (including, without
limitation, the Notes and the Bank Credit Facilities) will depend on the
future operating performance and financial results of the Company and, in the
case of the repayment of the principal amount of the Notes at maturity,
obtaining additional financing, either of which will be subject in part to
factors beyond the control of the Company, such as prevailing economic
conditions and financial and other factors. There can be no assurance,
however, that the Company's business will generate cash flow at the necessary
levels that, together with available additional financing, if any, will allow
the Company to meet its anticipated requirements for working capital, capital
expenditures and debt service. If the Company is unable to generate
sufficient cash flow from operations in the future or to refinance the Notes
at maturity it may be forced to adopt an alternative strategy that may
include reducing the scope of its operations, reducing or delaying capital
expenditures (including expenditures related to acquisitions), selling assets
(including all or a portion of the Collateral securing the Notes),
restructuring or refinancing all or a portion of its existing indebtedness,
seeking additional equity capital or obtaining other additional financing.
The Company currently anticipates that in order to pay the principal
amount of the Notes at maturity, the Company will be required to refinance
such Notes or adopt one or more of such alternatives. None of the affiliates
of the Company will be required to make any capital contributions or other
payments to the Company with respect to the Company's obligations on the
Notes. Although the Company currently has no reason to believe that it will
not be able to refinance the Notes at maturity, there can be no assurance
that such refinancing or any alternative strategy
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could be effected upon satisfactory terms, if at all, or that any of the
foregoing actions would enable the Company to make such principal payments on
the Notes or that any of such actions would be permitted by the terms of any
debt instruments of the Company or of any of the Company's affiliates then in
effect.
RESTRICTIVE DEBT COVENANTS; INABILITY TO REPAY NOTES
The Indenture restricts the ability of the Company and its Subsidiaries
to, among other things, incur additional indebtedness, incur liens, pay
dividends or make certain other restricted payments or investments,
consummate certain asset sales, enter into certain transactions with
affiliates, impose restrictions on the ability of a subsidiary to pay
dividends or make certain payments to the Company, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of the assets of the Company. In
addition, the Bank Credit Facilities contain other and more restrictive
covenants and prohibit the Company from prepaying the Notes, except in
certain circumstances. The Bank Credit Facilities also require the Company to
maintain specified financial ratios and satisfy certain financial tests. The
Company's ability to comply with such covenants, including such financial
ratios and tests, may be affected by events beyond its control. There can be
no assurance that the Company will be able to comply with such requirements.
A breach of any of the covenants contained in the Indenture or the Bank
Credit Facilities could result in an event of default under such instruments
which could result in the acceleration of the related debt and the
acceleration of debt under other debt instruments that may contain
cross-default or cross-acceleration provisions. If such an event of default
occurs, then the lenders under the Bank Credit Facilities would also be able
to terminate all commitments under the Bank Credit Facilities. If the Company
were unable to repay all amounts declared due and payable, then the lenders
under the Bank Credit Facilities could proceed against the collateral granted
to them to satisfy such indebtedness and other obligations due and payable
under the Bank Credit Facilities. If Indebtedness under the Bank Credit
Facilities were to be accelerated, there can be no assurance that the assets
of the Company would be sufficient to repay in full such indebtedness and the
other Indebtedness of the Company, including the Notes. In addition, the
Indenture also contains covenants that restrict certain activities of
Timberlands, Soucy Inc. and their respective Subsidiaries, such as the
incurrence of debt and asset sales. See "Description of the Notes--Certain
Covenants of the Company," "--Certain Covenants of the Credit Parties" and
"Description of Bank Credit Facilities."
SECURITY FOR THE NOTES; SUBORDINATION OF THE NOTES
The Notes are secured on a second priority basis by a pledge of all of the
Company's real property, on a second or lesser priority basis by a pledge of
certain of the Company's personal property, on a third priority basis by a
pledge of 100% of the membership interests in Timberlands (whose timberland
and equipment assets secure the Hancock Loan, subject to existing equipment
financings as of September 30, 1997), and, after a shared first priority
security interest that secures the Timberlands Loan and the Bank Credit
Facilities, on a second priority basis by a pledge by Brant-Allen of 65% of
the capital stock of Soucy Inc. The pledge of the capital stock of Soucy Inc.
may be released in certain circumstances. As of September 30, 1997, after
giving pro forma effect to the consummation of the Transactions, the Company,
Timberlands and Soucy Inc., taken together, would have had an aggregate of
approximately $291.9 million of debt outstanding; including $103.9 million
with a first priority security interest in the assets of the Company, $138.9
million with a first and second priority interest in the membership interests
of Timberlands and $138.9 million with a shared first priority security
interest in 65% of the common shares of Soucy Inc. If an acceleration of the
Bank Credit Facilities or any debt of Brant-Allen, Timberlands or Soucy Inc.
that is senior to the Notes (collectively, the "First Priority Debt") occurs,
then any payments made thereafter in respect of proceeds of enforcement of
any security will be applied first, to repay pro rata any obligations that
are First Priority Debt. Additional proceeds, if any, will be applied to
repay the Notes. Subject to certain limitations, the Company, Timberlands and
Soucy may also issue additional securities which would rank pari passu with
the Notes. See "Description of the Notes--Certain Covenants of the Company."
In the event of an acceleration, there can be no assurance that there will be
sufficient funds available to repay the Notes after payment in full of all
First Priority Debt.
By its nature, some or all of the Collateral will be illiquid and may have
no readily ascertainable market value. Accordingly, there can be no assurance
that the Collateral will be able to be sold in a short period of time, if at
all. Even though the membership interests of Timberlands and the capital
stock of Soucy Inc. are privately held and do not trade on any securities
market, the value of the Timberlands Collateral and the Soucy Collateral is
subject to fluctuation and depends on the fair market value of such
collateral, which may be determined through negotiations
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between the buyers and the sellers of such collateral. There can be no
assurance that the proceeds from the sale of such collateral would be
sufficient to satisfy the amounts due on the First Priority Debt and the
Notes. In addition, the ability of the Trustee or the Holders of Notes to
realize the Timberlands Collateral or the Soucy Collateral may also be
subject to certain bankruptcy law and other limitations and there can be no
assurance that the Trustee or the Holders of the Notes would be able to sell
the Timberlands Collateral or the Soucy Collateral. See "--Fraudulent
Transfer Statutes."
DEPENDENCE ON SINGLE FACILITY
All the Company's revenues are derived from the operations of its single
paper mill located near Richmond, Virginia. In addition, all of that mill's
production capacity is located on one production line. As a result, the
Company's financial performance is completely dependent on the continued
operation of its newsprint machine at the mill. Accordingly, destruction of,
or damage to, the mill or its production line through acts of God or
otherwise, as well as prolonged downtime for repairs or other reasons could
materially and adversely affect the Company's business and results of
operations. The Company maintains property insurance and production
interruption insurance coverage which covers, for certain limited periods of
time, certain potential losses due to business interruption directly
resulting from certain types of casualty occurrences covered under the
policy. Notwithstanding that the Company maintains such insurance, however,
the destruction of, or damage to, the mill or its production line could have
a material adverse effect on the Company's financial position and results of
operations.
RELIANCE UPON SINGLE PRODUCT -- NEWSPRINT
The Company's operations are completely dependent on the production and
sale of a single product, newsprint. Demand for, and sale prices of,
newsprint will depend, among other things, on global newsprint demand, the
level of industry supply, purchases of advertising lineage and general
economic conditions, all of which are factors over which the Company has no
influence or control. In addition, trends in electronic data transmission and
storage could adversely impact the traditional print media, including
products of the Company's customers.
FUTURE CAPITAL REQUIREMENTS; POSSIBLE INABILITY TO OBTAIN ADDITIONAL
FINANCING
The Company made capital expenditures of $7.5 million, $6.6 million and
$9.5 million in 1996, 1995 and 1994, respectively, in connection with
upgrading and maintaining its manufacturing facility. For the nine months
ended September 30, 1997, the Company made capital expenditures of $5.7
million. Management anticipates that the Company's total capital expenditures
for 1997 and 1998 will be relatively consistent with the 1996 capital
expenditure level. The Company will continue, however, to require capital to
fund its capital expenditure and other ongoing operating activities. To date,
the Company has financed its capital requirements principally through cash
flow from operations and bank and other borrowings, including loans and
advances from its owners and affiliates. The Company's future expansion, if
any, will be dependent upon the capital resources available to the Company.
Excluding any additional working capital requirements that may result from
acquisitions, management believes that internally generated funds, unused
available financing under the Revolving Credit Facility will be sufficient to
fund the Company's operations for the foreseeable future, although there is
no assurance that such amounts will be sufficient. The Company's future
growth and acquisitions of additional newsprint businesses or assets will be
dependent on the Company's ability to obtain future equity or debt financing.
There can be no assurance that the Company will be able, or be permitted by
the Bank Credit Agreement and the Indenture, to obtain additional financing
for such purposes or that any additional financing will be available in
amounts required or on terms satisfactory to the Company. See
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
NO ASSURANCE OF FUTURE GROWTH OR ACQUISITIONS
The Company's strategy is to evaluate opportunities to expand production
capacity through strategic acquisitions of other newsprint businesses or
assets. Currently, the Company has no agreements or commitments for such
acquisitions. There can be no assurance that the Company will be successful
in identifying, negotiating and consummating such acquisitions or
arrangements, or that such acquisitions or arrangements that may be
available, if at all, will be on terms acceptable to the Company. The
covenants contained in the Bank Credit Agreement and the Indenture may
prevent certain expansion and other business activities.
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CYCLICAL INDUSTRY
The North American newsprint industry is highly cyclical in nature, with
supply typically being added in large blocks and demand fluctuating with the
economy, U.S. newspaper circulation and purchases of advertising lineage. The
balance of supply and demand can significantly impact selling prices and,
therefore, the Company's profitability. The Company believes that a
substantial majority of the newsprint consumed in North America is used by
U.S. newspapers and other publications. Newsprint demand is, therefore,
particularly dependent on U.S. newspaper circulation and purchases of
advertising lineage. Newsprint prices are typically dependent on general
economic conditions, capacity additions and inventory levels. 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. The
demand for newsprint is particularly sensitive to economic cycles and, in the
short term, deviations in the demand and supply of newsprint are not
uncommon. This short-term volatility has a significant bearing on newsprint
prices and on the financial performance of the Company which results in
alternating periods of financial gain and loss. As a result of the industry's
inherent supply, demand and inventory characteristics, newsprint prices have
fluctuated dramatically and management believes they will continue to do so.
VOLATILITY OF RAW MATERIAL COSTS
The Company has some flexibility to alter its mix of raw material input to
take advantage of changing trends in raw material costs. However, the Company
remains subject to sharp increases in the cost of wood, recycled fiber and
kraft pulp. There can be no assurance that, if such sharp increases occur,
the Company will either be able to alter its mix of raw material inputs or to
pass through to its customers such raw material price increases.
DEPENDENCE ON PRINCIPAL CUSTOMERS
In 1996, and for the nine months ended September 30, 1997, approximately
90% and 93%, respectively, of the Company's total tonnage produced was sold
to its ten largest customers. During those periods, Dow Jones represented 22%
and 22% of the Company's total sales, and The Washington Post represented 19%
and 23%, respectively, of total sales. Dow Jones and The Washington Post each
have a sales contract with the Company, expiring on December 31, 2000, for
the purchase of a minimum of approximately 45,000 tonnes of newsprint per
year at prices based on prevailing market prices paid by those customers to
their non-affiliated East Coast suppliers. Before the consummation of the
Transactions, The Washington Post and Dow Jones each owned a 35% partnership
interest in both the Company and Timberlands. See "Certain
Transactions--Agreements with The Washington Post and Dow Jones." Loss of any
of the Company's key customers, particularly Dow Jones and The Washington
Post, could have a material adverse impact on the Company if it could not
secure replacement buyers on a timely basis for this tonnage. Moreover,
although the sales contracts with these customers together account for a
substantial portion of the Company's production, the prices at which those
purchases will be made are at market prices. In the past, these prices have
been subject to significant fluctuations. Any future recurrence of those
price fluctuations could have a material adverse effect on the Company's
business and results of operations and, therefore, the Company's ability to
meet its obligations under its indebtedness.
In addition, the Company's arrangements with certain of its other key
customers do not contain minimum purchase requirements or are not subject to
written contracts. Therefore, there can be no assurance that any of these
customers will continue to purchase the Company's product in the same
volumes, at the same prices or on the same terms as in the past. In addition,
there can be no assurance that the Company will be able to attract any new
customers.
CONTROL BY MESSRS. BRANT AND ALLEN; RELATED PARTY TRANSACTIONS; POTENTIAL
CONFLICTS OF INTEREST
The Company is wholly owned by Brant-Allen, which, in turn, is wholly
owned by Peter Brant and Joseph Allen. As a result of their ownership of the
Company, Messrs. Brant and Allen, the President and Executive Vice President
of the Company, respectively, will be able to direct and control the policies
of the Company and its subsidiaries, including mergers, sales of assets and
similar transactions. In addition, a majority of the Company's Board of
Directors and all of the Company's executive officers will be representatives
of Brant-Allen. See "Management."
Brant-Allen owns all of the equity of the Company, Timberlands and Soucy
Inc., and manages each of these companies. Brant-Allen sells and markets all
or substantially all the newsprint produced by the Company and Soucy.
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Conflicts of interest between the Company and Soucy could arise from such
combined sales and marketing arrangements and may include the allocation of
sales to Soucy rather than the Company. For such sales, marketing and
management activities, Brant-Allen charges the Company a management fee equal
to 3% of net revenues pursuant to the Management Services Agreement. The
Management Services Agreement has a term of five years and is automatically
renewed for successive five years terms unless terminated by either party by
giving two years' written notice. See "Certain Related Party
Transactions--Relationship with Brant-Allen, Timberlands and
Soucy--Management Services Agreement." Conflicts of interest between
Brant-Allen and the Company could arise in connection with the performance of
duties and the payment of the management fees under the Management Services
Agreement and regarding the Company's enforcement of the provisions of the
Management Services Agreement against Brant-Allen, or the amendment or
possible termination of such agreement.
Brant-Allen also markets all of Soucy's newsprint and is compensated for
these services in the form of monthly management service and royalty fees,
payable in advance, calculated at a combined rate of 9.73% of Soucy Inc.'s
consolidated net sales after transportation costs. Soucy Partners pays Soucy
Inc. a management fee of 3% of Soucy Partners' cumulative annual net sales.
See "Certain Related Party Transactions--Relationship with Brant-Allen,
Timberlands and Soucy--Brant-Allen Fees from Soucy."
A substantial portion of the Company's wood requirements will be provided
by Timberlands pursuant to the Wood Supply Agreement (as defined) between
Timberlands and the Company. See "Certain Related Party
Transactions--Relationship with Brant-Allen, Timberlands and Soucy--Wood
Supply from Timberlands and ONP and OMG Procurement." Conflicts of interest
between Timberlands and the Company could arise in connection with the
performance of duties and payment of fees under this Wood Supply Agreement
and regarding the enforcement of its terms.
The Company may also engage in a variety of other transactions with
Brant-Allen, Timberlands and Soucy. Although the Indenture provides certain
restrictions on affiliate transactions, there are conflicts of interest with
respect to certain decisions which may arise in the ordinary course of the
operation of the businesses of the Company, Timberlands and Soucy, the
resolution of which may be to the detriment of the Company and could have a
material adverse effect on the Company's business and results of operations.
See "Certain Related Party Transactions--Relationship with Brant-Allen,
Timberlands and Soucy," "The Acquisition" and "Management."
DEPENDENCE ON KEY PERSONNEL
Messrs. Brant and Allen as well as the Company's other executive officers
and key employees have substantial experience in the Company's business and
have made significant contributions to its growth. The unexpected loss of
service of one or more of these individuals could adversely affect the
Company. The Company does not have any key-man or similar insurance on any of
its executive officers or employees.
COMPETITION
The Company competes directly with a number of newsprint manufacturers,
many of which have longer histories, larger customer bases, and significantly
greater financial and marketing resources than the Company. Increased
competition could adversely affect the Company's revenues and profitability
through pricing pressure, loss of market share and other factors. Newsprint
price decreases by one or more of the major newsprint producers in North
America may effect material changes in the average price for newsprint and
have the potential adversely to affect the newsprint market in general.
Moreover, existing and prospective competitors of the Company may have
established, or may in the future establish, relationships with the Company's
existing and potential customers, which could have a material adverse effect
on the Company's ability to compete. See "Business--Competition."
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive and changing
environmental regulation by federal, state and local authorities in the
United States, including those requirements that regulate discharges into the
environment, waste management and remediation of environmental contamination.
Environmental permits are required for the operation of the Company's
businesses, and are subject to revocation, modification and renewal.
Governmental authorities have the power to enforce compliance with
environmental requirements and violators are subject to injunctions, civil
penalties and criminal fines. Third parties may also have the right to sue to
enforce compliance with such regulations.
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The Company has in the past made significant capital expenditures to
comply with current federal, state and local environmental laws and
regulations. The Company believes that it is in substantial compliance with
such laws and regulations, although no assurance can be given that it will
not incur material liabilities and costs with respect to such laws and
regulations in the future and no assurances can be given that future
developments, such as the potential for more stringent environmental
standards (such as the proposed "Cluster Rules") or stricter enforcement of
environmental laws, will not cause the Company to incur such expenditures.
See "Business--Environmental Matters."
FRAUDULENT TRANSFER STATUTES
Under applicable provisions of the United States Bankruptcy Code or
comparable provisions of state fraudulent transfer or conveyance law, if the
Company or FinCo, at the time it issued the Notes, (a) incurred such
indebtedness with the intent to hinder, delay or defraud creditors, or (b)(i)
received less than reasonably equivalent value or fair consideration and
(ii)(A) was insolvent at the time of such incurrence, (B) was rendered
insolvent by reason of such incurrence (and the application of the proceeds
thereof), (C) was engaged or was about to engage in a business or transaction
for which the assets remaining with the Company or FinCo, respectively,
constituted unreasonably small capital to carry on its business, or (D)
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they mature, then, in each such case, a court of
competent jurisdiction could avoid, in whole or in part, the Company's or
FinCo's obligations to make payments on the Notes and the security interest
in the Collateral or, in the alternative, could subordinate the Notes to
existing and future indebtedness of the Company or FinCo, respectively,
notwithstanding the fact that the Notes are collateralized. All the net
proceeds of the Old Notes were used by the Company to pay a portion of the
purchase price of the interests of Dow Jones and The Washington Post
subsidiaries in the limited liability company organized under Virginia law
into which BIPCO was converted immediately prior to the closing of the
Acquisition. There is no assurance that a court would find that the
acquisition of those interests constitutes "reasonably equivalent value" or
"fair consideration" to the Company or FinCo. The measure of insolvency for
purposes of the foregoing would likely vary depending upon the law applied in
such case. Generally, however, the Company or FinCo would be considered
insolvent if the sum of its debts, including contingent liabilities, were
greater than all of its assets at a fair valuation, or if the present fair
salable value of its assets were less than the amount that would be required
to pay the probable liabilities on its existing debts, including contingent
liabilities, as such debts become absolute and matured. Additionally, under
the law of certain states, an entity that is generally not paying its debts
as they become due is presumed to be insolvent.
Management of the Company believes that the Old Notes were issued, and
that the New Notes are being issued, without the intent to hinder, delay or
defraud creditors, for proper purposes and in good faith, and that after the
issuance of the New Notes, the Company will be solvent and will have
sufficient capital for carrying on its business. The Company's ability to pay
its debts as they mature will depend, however, on (a) future operating
performance and financial results of the Company and the ability of the
Company to obtain additional financing and (b) the adoption by the Company of
one or more alternative strategies, all as described under "Substantial
Leverage; Ability to Service Debt." Furthermore, there can be no assurance
that a court passing on such issues would agree with the determination of the
Company's management. FinCo is a wholly owned subsidiary of the Company that
was incorporated in Delaware for the purpose of serving as a co-issuer of the
Notes. FinCo will not have any operations or assets and will not have any
revenues. As a result, holders of the Notes should not expect FinCo to
participate in servicing the interest and principal obligations on the Notes.
PURCHASE OF NOTES PURSUANT TO A CHANGE OF CONTROL OFFER OR EXCESS PROCEEDS
OFFER
Upon a Change of Control (as defined in the Indenture), the Issuers are
required to offer to purchase all outstanding Notes at 101% of the principal
amount thereof plus accrued and unpaid interest to the date of purchase. The
source of funds for any such purchase would be the Company's available cash
or cash generated from other sources. However, there can be no assurance that
sufficient funds would be available at the time of any Change of Control to
make any required repurchases of Notes tendered. The Bank Credit Agreement
provides that a Change of Control constitutes an Event of Default, and, upon
a Change of Control, all amounts outstanding under the Bank Credit Agreement
become due and payable. The Bank Credit Agreement also contains restrictions
on any other purchase or redemption of the Notes by the Company, including
pursuant to an Excess Proceeds Offer, prior to full repayment of indebtedness
under the Bank Credit Agreement. There can be no assurance that, in the event
of a Change of Control or an Excess Proceeds Offer, the Issuers will be able
to obtain the necessary consents from the lenders under the Bank Credit
Agreement to consummate a Change of Control Offer or an Excess Proceeds Offer
or to repay or refinance all the Indebtedness of the Lenders under the Bank
Credit Agreement. The failure of the Issuers to make or consummate the Change
of Control Offer or an Excess Proceeds Offer or to pay the requisite
repurchase
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price when due would result in an Event of Default and, subject to the
provisions of the Intercreditor Agreement, would give the holders of the
Notes the rights described under "Description of the Notes--Events of
Default." See "Description of the Notes--Certain Covenants of the
Company--Change of Control."
CONSEQUENCES OF FAILURE TO EXCHANGE OLD NOTES
The Old Notes have not been registered under the Securities Act or any
other securities laws of any jurisdiction and, therefore, may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws
or pursuant to exemptions from, or in transactions not subject to, those
requirements and, in each case, in compliance with certain other conditions
and restrictions. Holders of Old Notes who do not exchange their Old Notes
for New Notes pursuant to the Exchange Offer will continue to be subject to
such restrictions on transfer of such Old Notes as set forth in the legend
thereon. In addition, upon consummation of the Exchange Offer, holders of Old
Notes which remain outstanding will not be entitled to any rights to have
such Old Notes registered under the Securities Act or to any similar rights
under the Registration Rights Agreement (subject to certain limited
exceptions). The Issuers do not currently anticipate that they will register
or qualify any Old Notes which remain outstanding after consummation of the
Exchange Offer for offer or sale in any jurisdiction (subject to such limited
exceptions, if applicable). To the extent that Old Notes are tendered and
accepted in the Exchange Offer, a holder's ability to sell untendered Old
Notes could be adversely affected.
The New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof
have taken certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Description of Notes--Exchange Offer;
Registration Rights."
ABSENCE OF PUBLIC MARKET
The Old Notes were issued to, and the Issuers believe such securities are
currently owned by, a relatively small number of beneficial owners. The Old
Notes have not been registered under the Securities Act and will be subject
to restrictions on transferability if they are not exchanged for the New
Notes. Although the New Notes may be resold or otherwise transferred by the
holders (who are not affiliates of the Issuers) without compliance with the
registration requirements under the Securities Act, they will constitute a
new issue of securities with no established trading market. There can be no
assurance that such a market will develop. In addition, the New Notes will
not be listed on any national securities exchange. The New Notes may trade at
a discount from the initial offering price of the Old Notes, depending upon
prevailing interest rates, the market for similar securities, the Company's
operating results and other factors. The Issuers have been advised by the
Initial Purchasers that they currently intend to make a market in the New
Notes, as permitted by applicable laws and regulations; however, the Initial
Purchasers are not obligated to do so, and any such market-making activities
may be discontinued at any time without notice. In addition, such
market-making activity may be limited during the Exchange Offer and the
pendency of the Shelf Registration. Therefore, there can be no assurance that
an active market for any of the New Notes will develop, either prior to or
after the Issuers' performance of their obligations under the Registration
Rights Agreement. If an active public market does not develop, the market
price and liquidity of the New Notes may be adversely affected.
If a public trading market develops for the New Notes, future trading
prices will depend on many factors, including, among other things, prevailing
interest rates, the financial condition of the Issuers, and the market for
similar securities. Depending on these and other factors, the New Notes may
trade at a discount.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will
not be subject to similar disruptions. Any such disruptions may have an
adverse effect on holders of the New Notes.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities
Act) of the Issuers may publicly offer for sale or resell the New Notes only
in compliance with the provisions of Rule 144 under the Securities Act.
20
<PAGE>
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer--Conditions
to the Exchange Offer," delivery of New Notes in exchange for Old Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be
made only after timely receipt by the Exchange Agent of (i) certificates for
Old Notes or a book-entry confirmation of a book-entry transfer of Old Notes
into the Exchange Agent's account at DTC, including an Agent's Message (as
defined under "The Exchange Offer--Acceptance for Exchange") if the tendering
holder does not deliver a Letter of Transmittal, (ii) a completed and signed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees, or, in the case of a book-entry transfer, an Agent's Message in
lieu of the Letter of Transmittal, and (iii) any other documents required by
the Letter of Transmittal. Therefore, holders of Old Notes desiring to tender
such Old Notes in exchange for New Notes should allow sufficient time to
ensure timely delivery. Neither of the Issuers is under a duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange.
Each broker-dealer that receives New Notes for its own account in exchange
for Securities, where such Securities were acquired by such broker-dealer as
a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale
of such New Notes. See "Plan of Distribution."
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
Since substantially all of the assets of Soucy Inc. are outside the United
States, any judgment obtained in the United States against Soucy Inc. may not
be collectible within the United States. See "Description of the Notes--
Enforceability of Judgments."
21
<PAGE>
THE ACQUISITION
The Company's predecessor, BIPCO, was formed in 1978 as a limited
partnership organized under Virginia law. Prior to the Acquisition
Brant-Allen was the general partner of, and owned a 30% partnership interest
in, BIPCO. Subsidiaries of The Washington Post and Dow Jones each owned a 35%
partnership interest in BIPCO.
On December 1, 1997, the Company purchased all the partnership interests
in BIPCO owned by subsidiaries of Dow Jones and The Washington Post for an
aggregate purchase price, which is subject to post-closing adjustments, of
approximately $149.8 million in cash. The Company financed this purchase
(including approximately $200,000 of transaction costs, as well as the
repayment of approximately $47.1 million of existing debt) with: (i)
borrowings of $103.9 million under the $120 million Bank Credit Facilities
(of which $2.9 million is anticipated to be drawn down for payment of
deferred loan costs due at December 1, 1997, but not yet paid by the
Company); (ii) the net proceeds from the issuance of the Old Notes; and (iii)
$5.2 million existing cash on hand (of which approximately $1.2 million was
distributed to Brant-Allen to reimburse certain deferred loan costs paid by
Brant-Allen on behalf of the Company in connection with the Acquisition). The
Bank Credit Facilities consist of two separate facilities: (i) a $50 million
6-year senior secured reducing Revolving Credit Facility and (ii) a $70
million 8-year senior secured Term Loan Facility. See "Description of Certain
Other Indebtedness--Company Indebtedness--The Bank Credit Facilities."
The following table summarizes the sources and uses of funds (dollars in
millions) in connection with the Acquisition:
<TABLE>
<CAPTION>
SOURCES OF FUNDS AMOUNT USES OF FUNDS (A) AMOUNT
- ----------------------------- -------- ------------------------------------------ --------
<S> <C> <C> <C>
Revolving Credit Facility $ 33.9 Cash to purchase selling limited partners'
(a).......................... interests (b)............................. $149.6
Transaction costs.......................... 0.2
Term Loan Facility ........... 70.0 Prepayment of Existing Debt and
accrued interest ......................... 47.1
The Notes (c)................. 100.0 Prepayment penalty......................... 4.0
Existing cash on hand (a) ... 5.2 Deferred loan costs........................ 8.2
-------- --------
Total ...................... $209.1 Total ................................... $209.1
======== ========
</TABLE>
(a) Upon consummation of the Acquisition approximately $5 million of excess
cash on-hand was used to reduce the balance outstanding under the
Revolving Credit Facility. Additional borrowings under the Revolving
Credit Facility will be used for working capital and general business
purposes.
(b) The amount paid to the subsidiaries of Dow Jones and the Washington
Post is subject to certain post-closing adjustments . Any additional
amounts required to be paid to such subsidiaries in respect of any such
post-closing adjustments are intended to be funded by additional
amounts drawn under the Revolving Credit Facility or cash on hand.
(c) After deducting the Initial Purchasers' discount of $3 million, the net
proceeds from the issuance of the Old Notes was $97 million. This
discount is included in the $8.2 million deferred loan costs shown
under "Uses of Funds."
22
<PAGE>
THE TIMBERLANDS ACQUISITION
Concurrently with the closing of the Acquisition, Brant-Allen purchased
the 70% interest in BITCO then owned by subsidiaries of Dow Jones and The
Washington Post for an aggregate purchase price, which is subject to certain
post-closing adjustments, of approximately $36 million in cash. Funding of
this purchase, including an estimated $30,000 in transaction costs, was
provided by (i) borrowings of $35 million under the Timberlands Loan borrowed
by Brant-Allen, guaranteed by Timberlands and secured by a first lien on
Brant-Allen's membership interests in Timberlands and (ii) $1.0 million of
Brant-Allen's existing cash on hand. Brant-Allen anticipates that any
additional amounts required to be paid in respect of any post-closing
adjustments would be funded from cash on hand or advances under its revolving
credit line. Timberlands expects to distribute to Brant-Allen any cash
on-hand that exceeds its own operating and debt requirements so that
Brant-Allen can pay interest on, and reduce principal outstanding under, the
Timberlands Loan. As of September 30, 1997 on a pro forma basis after giving
effect to the Timberlands Acquisition, excess cash and short-term investments
available for such distributions would have been approximately $4.1 million.
Concurrently with the closing of the Timberlands Acquisition, Timberlands
substantially modified the terms of its $27 million loan from John Hancock
Mutual Life Insurance Company (and paid the related fee) and in connection
with the modification received a $3 million advance from John Hancock Mutual
Life Insurance Company, bringing the total outstanding balance under the
Hancock Loan to $30 million. The Hancock Loan matures on November 24, 1999,
and is secured by approximately 125,000 acres of Timberlands' land. Dow
Jones' and The Washington Post's pro rata portion of the modification fee was
deducted from the purchase price paid to them.
USE OF PROCEEDS
The Issuers will not receive any proceeds from the Exchange Offer. The net
proceeds received by the Company from the issuance of the Old Notes of
approximately $97 million were used by the Company to fund a portion of the
cash purchase price required for the Acquisition. See "Acquisition."
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997 and as adjusted to give effect to the issuance of the Old
Notes, the Acquisition and the other financings of the Acquisition. This
table should be read in conjunction with the other financial information,
including "Unaudited Pro Forma Condensed Financial Statements," appearing
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
---------------------
(MILLIONS OF DOLLARS)
ACTUAL PRO FORMA
-------- -----------
<S> <C> <C>
Cash and short-term investments................. $ 13.3 $ 7.6
======== ===========
Revolving Credit Facility (a)................... -- $ 33.9
Term Loan Facility ............................. -- 70.0
The Notes ...................................... -- 100.0
Senior Secured Notes Due 2004................... $ 45.0 --
Other Debt (b) ................................. 1.6 1.6
Long-term purchase obligations.................. 1.2 1.2
-------- -----------
Total debt and long-term purchase
obligations.................................... $ 47.8 $206.7
Total Partners' Equity/ Members' Interests .... 97.6 24.7
-------- -----------
Total Capitalization.......................... $145.4 $231.4
======== ===========
</TABLE>
- ------------
(a) The Revolving Credit Facility is not assumed to be reduced by the pro
forma remaining cash balance on hand of approximately $7.6 million.
Upon consummation of the closing of the Acquisition approximately $5
million of excess cash on-hand was used to reduce the balance
outstanding under the Revolving Credit Facility.
(b) Amounts outstanding under the other debt agreements were repaid in
October and November of 1997.
23
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following selected historical financial data (except tonnes produced)
are derived from the audited financial statements of BIPCO, for each of the
years in the five year period ended December 31, 1996, and the unaudited
financial statements of BIPCO as of September 30, 1997, and for the nine
months ended September 30, 1997 and 1996, which in the opinion of the Company
reflect all adjustments, which are of a normal and recurring nature,
necessary for a fair presentation of the results for the unaudited periods.
The results of operations for the nine months ended September 30, 1997, are
not necessarily indicative of the results of operations to be expected for
the full year. The following selected historical financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the financial statements and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales ..............................
Non-affiliates......................... $ 42,273 $ 41,137 $ 51,297 $ 70,960 $ 75,460
Affiliates (2)......................... 44,130 43,450 42,543 61,243 53,360
-------- -------- -------- -------- --------
86,403 84,587 93,840 132,203 128,820
Cost of sales........................... 86,190 77,836 91,610 100,399 100,591
-------- -------- -------- -------- --------
Gross profit............................ 213 6,751 2,230 31,804 28,229
Selling, general & administrative:
Management fee to Brant-Allen.......... 2,592 2,568 2,820 3,961 3,865
Other direct expenses.................. 158 469 208 224 153
-------- -------- -------- -------- --------
Income (loss) from operations........... (2,537) 3,714 (798) 27,619 24,211
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income........................ 325 132 309 603 666
Interest expense....................... (7,716) (6,345) (6,194) (5,986) (5,398)
Other income (expense)................. 339 80 2,116 33 (56)
-------- -------- -------- -------- --------
Total other expense..................... (7,052) (6,133) (3,769) (5,350) (4,788)
-------- -------- -------- -------- --------
Net (loss) income....................... $ (9,589)$ (2,419) $ (4,567)$ 22,269 $ 19,423
======== ======== ======== ======== ========
Ratio of earnings to fixed charges
(3)(4)................................. -- -- -- 4.7x 4.6x
OTHER DATA:
Operational EBITDA (1).................. $ 6,229 $ 12,006 $ 8,971 $ 37,357 $ 34,245
Summary cash flow information:
Net cash provided by operating
activities............................. 6,161 1,914 4,362 27,215 30,368
Net cash used in investing activities .. (702) (25,395) (3,999) (6,502) (7,413)
Net cash provided by (used in)
financing activities................... (3,264) 22,885 2,994 (15,695) (21,801)
Depreciation............................ 8,531 8,109 9,730 9,648 9,976
Depletion............................... 235 183 39 90 58
Capital expenditures.................... 4,535 27,682 9,469 6,645 7,483
Saleable tonnes produced................ 197,703 202,102 203,159 208,870 218,642
Ratio of Operational EBITDA to total
interest expense....................... .8x 1.9x 1.4x 6.2x 6.3x
AS OF DECEMBER 31,
----------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and short term investments ....... $ 4,691 $ 4,096 $ 7,454 $ 12,472 $ 13,625
Working capital......................... 8,752 9,541 14,400 23,901 22,037
Property, plant and equipment, net ..... 101,080 120,921 117,581 115,941 116,953
Total indebtedness (5) ................. 72,580 76,309 60,025 55,368 52,171
Total assets............................ 127,111 150,353 150,269 160,523 160,460
Total partners' equity.................. 44,383 61,164 78,597 91,366 95,789
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1996 1997
---------- ---------------
(UNAUDITED)
<S> <C> <C>
INCOME STATEMENT DATA:
Net sales ................................
Non-affiliates........................... $ 59,353 $47,197
Affiliates (2)........................... 40,794 38,176
---------- ---------------
100,147 85,373
Cost of sales............................. 73,748 77,225
---------- ---------------
Gross profit.............................. 26,399 8,148
Selling, general & administrative:
Management fee to Brant-Allen............ 3,004 2,561
Other direct expenses.................... 569 669
---------- ---------------
Income (loss) from operations............. 22,826 4,918
---------- ---------------
OTHER INCOME (EXPENSE):
Interest income.......................... 487 485
Interest expense......................... (4,059) (3,592)
Other income (expense)................... 94 (7)
---------- ---------------
Total other expense....................... (3,478) (3,114)
---------- ---------------
Net (loss) income......................... $ 19,348 $ 1,804
========== ===============
Ratio of earnings to fixed charges
(3)(4)................................... 5.7x 1.5x
OTHER DATA:
Operational EBITDA (1).................... $ 30,485 $13,222
Summary cash flow information:
Net cash provided by operating
activities............................... 25,630 10,218
Net cash used in investing activities .... (5,171) (5,590)
Net cash provided by (used in) financing
activities............................... (18,244) (4,948)
Depreciation.............................. 7,629 8,291
24
<PAGE>
NINE MONTHS
ENDED SEPTEMBER 30,
---------------------------
1996 1997
---------- ---------------
(UNAUDITED)
Depletion................................. 30 13
Capital expenditures...................... 5,227 5,724
Saleable tonnes produced.................. 162,274 168,975
Ratio of Operational EBITDA to total
interest expense......................... 7.5x 3.7x
As of
September 30,
========== ---------------
1997
---------- ---------------
(UNAUDITED)
BALANCE SHEET DATA:
Cash and short term investments .......... $ 13,306
Working capital........................... 22,701
Property, plant and equipment, net ....... 114,907
Total indebtedness (5) ................... 47,757
Total assets.............................. 156,235
Total partners' equity.................... 97,593
</TABLE>
- ------------
(1) Operational EBITDA is defined as income (loss) from operations plus
depreciation and amortization, if any. Operational EBITDA is generally
accepted as providing useful information regarding a company's ability
to service and/or incur debt. Other companies, or industry analysts,
may calculate similarly titled measures through methods which may
prevent such measures from being comparable. Operational EBITDA should
not be considered in isolation or as a substitute for net income
(loss), operating earnings (loss), cash flows from operations, or other
income or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of a company's profitability or
liquidity.
(2) These sales are to Dow Jones and to The Washington Post. Upon the
closing of the Acquisition and the Timberland Acquisition sales to Dow
Jones and The Washington Post will become non-affiliated sales.
(3) In the computation of the ratio of earnings to fixed charges, earnings
consist of income (loss) plus fixed charges. Fixed charges consist of
interest expense on indebtedness, amortization or financing costs and
that portion of lease rental expense representative of the interest
factor.
(4) Earnings were insufficient to cover fixed charges by $9.6 million, $3.3
million and $5.0 million for the years ended December 31, 1992, 1993
and 1994, respectively.
(5) Total indebtedness is defined as long-term debt and long-term purchase
obligations and the current portions thereof.
24
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma condensed consolidated financial
statements are based on the historical financial statements of BIPCO included
elsewhere in this Offering Memorandum and the notes thereto and should be
read in conjunction with these historical statements.
The unaudited pro forma condensed consolidated balance sheet has been
prepared to give effect to the Acquisition and the relating financings as
though such transactions occurred as of September 30, 1997. The unaudited pro
forma condensed consolidated statements of operations for the twelve months
ended December 31, 1996 and for the nine months ended September 30, 1997,
give effect to the Acquisition and related financings as if such transactions
occurred on January 1, 1996. Management has allocated the estimated purchase
price based on a preliminary valuation of the fair value of assets and
liabilities acquired. Final allocation of the purchase price to assets and
liabilities is not anticipated to result in material changes to the pro forma
balance sheet or the statements of operations.
The pro forma adjustments are based upon available information and certain
estimates and assumptions which management of the Company believes are
reasonable. The unaudited pro forma condensed consolidated statements of
operations do not purport to represent what the Company's results of
operations would have actually been had the transactions described in the
respective notes occurred on January 1, 1996. In addition, the unaudited pro
forma condensed consolidated financial statements do not purport to project
the Company's financial position or results of operations for any future date
or period.
25
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- --------------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments..................... $ 13,305,542 $(3,947,488)(b)
(1,700,000)(b) $ 7,658,054
Accounts receivable:
Trade.............................................. 8,045,540 4,644,964 (b) 12,690,504
Affiliates......................................... 4,718,688 (4,644,964)(b) 73,724
Other.............................................. 436,936 436,936
Inventories......................................... 13,853,125 215,100 (b) 14,068,225
Other............................................... 538,198 538,198
-------------- --------------- --------------
Total current assets.............................. 40,898,029 (5,432,388) 35,465,641
Net property, plant and equipment.................... 114,906,758 81,560,135 (b) 196,466,893
Deferred loan costs, net of accumulated
amortization........................................ 429,804 (429,804)(b)
8,210,297 (b) 8,210,297
-------------- --------------- --------------
Total assets...................................... $156,234,591 $ 83,908,240 $240,142,831
============== =============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt................... 6,591,936 700,000 (b)
(6,000,000)(b) 1,291,936
Current portion of long-term purchase obligations .. 720,064 720,064
Due to affiliate.................................... 1,672,705 1,672,705
Accounts payable and accrued expenses............... 7,072,165 7,072,165
Interest payable.................................... 2,139,844 (2,139,844)(b)
-------------- --------------- --------------
Total current liabilities......................... 18,196,714 (7,439,844) 10,756,870
Long-term debt....................................... 40,007,958 203,229,046 (b)
(39,000,000)(b) 204,237,004
Long-term purchase obligations....................... 437,381 437,381
Partners' equity..................................... 97,592,538 (97,592,538)(a)
Members' interest.................................... 97,592,538 (a)
(68,003,670)(b)
(3,947,488)(b)
(1,700,000)(b)
1,200,000 (b)
(429,804)(b) 24,711,576
-------------- --------------- --------------
Total liabilities and equity...................... $156,234,591 $ 83,908,240 $240,142,831
============== =============== ==============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
26
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- --------------- --------------
<S> <C> <C> <C>
Net sales..................................... $85,372,576 $ 85,372,576
Cost of sales................................. 77,224,807 $ (1,772,422)(c)
(3,159,115)(d)
(1,455,121)(e) 70,838,149
------------- --------------- --------------
Gross profit............................... 8,147,769 6,386,658 14,534,427
Selling, general and administrative expenses:
Management fee to Brant-Allen ............... 2,561,177 2,561,177
Other........................................ 668,182 668,182
------------- --------------- --------------
Income from operations..................... 4,918,410 6,386,658 11,305,068
Other income (deductions):
Interest income.............................. 485,242 485,242
Interest expense............................. (3,592,344) (10,569,056)(g)
(447,526)(f) (14,608,926)
Other expense................................ (7,585) (7,585)
------------- --------------- --------------
(3,114,687) (11,016,582) (14,131,269)
------------- --------------- --------------
Net income (loss).......................... $ 1,803,723 $ (4,629,924) $ (2,826,201)
============= =============== ==============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
27
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ---------------- --------------
<S> <C> <C> <C>
Net sales..................................... $128,820,301 $128,820,301
Cost of sales................................. 100,590,600 $ (1,068,815) (c)
(4,544,709)(d)
(1,847,561)(e) 93,129,515
-------------- ---------------- --------------
Gross profit............................... 28,229,701 7,461,085 35,690,786
Selling, general and administrative expenses:
Management fee to Brant-Allen ............... 3,865,000 3,865,000
Other........................................ 153,370 153,370
-------------- ---------------- --------------
Income from operations..................... 24,211,331 7,461,085 31,672,416
Other income (deductions):
Interest income.............................. 665,709 665,709
Interest expense............................. (5,397,959) (14,054,352))(g)
(571,646)(f) (20,023,957)
Other expense................................ (55,859) (55,859)
-------------- ---------------- --------------
(4,788,109) (14,625,998) (19,414,107)
-------------- ---------------- --------------
Net income................................. $ 19,423,222 $ (7,164,913) $ 12,258,309
============== ================ ==============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
28
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed consolidated financial
statements give effect to the acquisition by the Company of a 70% interest in
BIPCO for approximately $149.8 million, including estimated transaction costs
of $200,000. Subsequent to the transaction, Brant-Allen owns a 100% interest
in BIPCO, which is presented as having been merged into the Company. Funding
for the transaction was provided by proceeds from a $70 million Term Loan
Facility, $50 million Revolving Credit Facility and $100 million aggregate
principal amount of the Notes. Existing debt of $45 million at January 1,
1996, and September 30, 1997, is assumed to be repaid by the Company with
proceeds from the new debt. Additionally, at January 1, 1996, $9 million of
existing debt is considered to remain outstanding and is paid off during the
period from January 1, 1996 to September 30, 1997. In connection with the
early repayment of existing debt, a prepayment penalty of $3.9 million at
January 1, 1996, and September 30, 1997, is assumed to be paid by BIPCO using
existing cash on hand. In addition, $1.7 million is expected to be
distributed to Brant-Allen to reimburse approximately $1.2 million in
deferred loan costs paid by Brant-Allen on behalf of the Company in
connection with the Acquisition and approximately $500,000 to fund the income
tax liability for Brant-Allen's proportionate share of BIPCO's estimated
earnings for 1997 prior to closing.
The accompanying unaudited pro forma condensed consolidated financial
statements of the Company have been prepared by management and the pro forma
assumptions are described in the following notes.
The unaudited pro forma condensed consolidated financial statements have
been prepared from the historical financial statements of BIPCO for 1996 and
as of and for the nine months ended September 30, 1997. For purposes of the
unaudited pro forma condensed consolidated statements of operations, the
Acquisition, and the incurrence of debt, are assumed to have occurred at
January 1, 1996. For purposes of the September 30, 1997, unaudited pro forma
condensed consolidated balance sheet, the Acquisition and incurrence of new
debt are assumed to have occurred at September 30, 1997. The pro forma
condensed consolidated statements of operations for 1996 and for the nine
months ended September 30, 1997, are not necessarily indicative of the
results of operations that would have occurred in 1996 and for the nine
months ended September 30, 1997, had the Acquisition and debt incurrence
occurred at January 1, 1996.
In preparation of the pro forma financial statements, management has made
certain estimates and assumptions that affect the amounts reported in the
unaudited pro forma condensed consolidated financial statements. Based on the
preliminary valuation of assets and liabilities acquired, management does not
anticipate final allocation of the purchase price to result in material
changes to the pro forma balance sheet or the statements of operations.
Additionally though not reflected herein, had the Company operated as a
public company management estimates the incremental general and
administrative expenses would approximate $300,000 annually.
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the historical financial statements and related
notes thereto of BIPCO which are included in this Prospectus.
(a) Adjustment to reflect the conversion of the capital structure of BIPCO
from a limited partnership to a limited liability company.
(b) Adjustments to reflect the proceeds to the Company of $100 million
from the Notes, $70 million from the Term Loan Facility and $33.9 million
under the Revolving Credit Facility, and to reflect the payoff of existing
debt of $45 million at September 30, 1997, the related prepayment penalty of
$3.9 million (from existing cash on hand) and accrued interest of $2.1
million with the proceeds from the new loans. In addition, an adjustment of
$1.7 million is recorded to reflect a distribution, concurrent with the
closing of the Offering, to provide $500,000 to fund the income tax liability
for Brant-Allen's proportionate share of BIPCO's estimated earnings for 1997
prior to closing and to reimburse Brant-Allen for $1.2 million of deferred
loan costs paid by Brant-Allen on behalf of the Company. This $1.2 million is
reflected as an increase to members' interest because the related deferred
loan costs are pushed down in the accompanying September 30, 1997 unaudited
condensed consolidated balance sheet. Also to reflect the capitalization of
deferred loan costs of $8.2 million (which includes the $1.2 million pushed
down) associated with the new debt, less the write-off of $429,804 in
deferred loan costs associated with the previous long term debt of BIPCO. The
Company's policy is to amortize these deferred loan costs using the effective
interest method over the terms of the respective note. Additionally, to
reflect the merger of Bear Island Mergerco, LLC (a Virginia limited
29
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
liability company into which BIPCO was converted immediately prior to the
Acquisition) with and into the Company and the allocation of the excess over
book value of the estimated purchase price paid by the Company for a 70%
interest in BIPCO acquired from subsidiaries of Dow Jones and The Washington
Post of approximately $81.8 million to inventory and property, plant and
equipment (including land, timberlands, buildings, machinery and equipment)
based on their approximate fair values and to reflect the reclassification of
Affiliate accounts receivable to trade accounts receivable resulting from the
change in ownership. Final allocation of the purchase price to liabilities
and tangible assets is not anticipated to result in material changes to the
pro forma balance sheet or the statements of operations. Calculation of the
premium paid over the underlying book value using amounts as of September 30,
1997 was as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
Payment to purchase selling limited partners' interest $149,603,905
Transaction costs ...................................... 200,000
---------------
Total purchase price .................................. 149,803,905
Limited partners' equity ............................... (68,003,670)
---------------
Premium paid over underlying book value ............... $ 81,800,235
===============
</TABLE>
The amount of limited partners' equity set forth above of $68,003,670 is
derived from the historical limited partners' equity of $71,067,774 at
September 30, 1997 reduced by the limited partners' 70% proportionate
interests in the (i) write-off of $429,804 of deferred loan costs and (ii)
$3,947,488 prepayment penalty.
(c) Adjustments to reflect pro forma depreciation expense resulting from
the purchase described in note (b) above computed based on plant assets with
estimated remaining useful lives ranging from 14 to 36 years and machinery
and equipment with estimated remaining useful lives with a weighted average of
approximately 21 years. Depreciation has been reduced from amounts set forth
in the historical financial statements because the extension of remaining
useful lives more than offset the increase in depreciation resulting from
purchase price adjustments. In addition, to reflect the impact on cost of
sales for the year ended December 31, 1996 of an assumed $215,100 write-up to
inventory at January 1, 1996 in connection with the allocation of the excess
purchase price.
(d) Adjustments to reflect the effect on cost of goods sold from reducing
to an open market price pulpwood sold by BITCO to BIPCO during 1996 and the
nine months ended September 30, 1997 resulting from elimination of an
arrangement for the upcharge currently paid by BIPCO to BITCO resulting from
the amendment to BIPCO's and Timberlands' supply arrangement in connection
with the Acquisition. The price per cord of timber was reduced from $95.50
per cord to $65.79 and $68.52 per cord for the year ended December 31, 1996
and nine months ended September 30, 1997, respectively, for 152,969 and
117,091 cords consumed during 1996 and the nine months ended September 30,
1997, respectively.
(e) Adjustments to reflect the effect on cost of sales resulting from
termination of the recycled fiber procurement activities of BITCO on behalf
of BIPCO. Following the Acquisition, this activity will be performed by the
Company. Amounts eliminated are an upcharge for recycled fiber acquired from
BITCO less employee costs previously billed to Timberlands which are added
for procuring recycled fiber. This adjustment results from termination of the
procurement arrangement between BIPCO and BITCO upon closing of the
Acquisition. Management estimates that on an ongoing basis the cost of the
recycled fiber procurement activities will approximate $225,000 on an annual
basis.
(f) Adjustments to reflect the net effect of increased amortization for
the $8.2 million in deferred financing costs incurred to fund the
Acquisition, amortized (using the effective interest method) over the
respective lives of the Term Loan Facility, the Revolving Credit Facility and
the Notes.
(g) Adjustments to reflect the incremental interest expense for the year
ended December 31, 1996 and nine months ended September 30, 1997 related to
the balances assumed to be outstanding on $100 million principal
30
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS--(CONTINUED)
amount of the Notes, $70 million Term Loan Facility and $50 million Revolving
Credit Facility for which $33 million was assumed to be outstanding at
January 1, 1996, upon consummation of the Acquisition. The total amount
assumed to be outstanding at January 1, 1996 also includes $9 million of
existing debt which is assumed not to be repaid at January 1, 1996. This
amount represents the difference between the $45 million in debt repaid at
September 30, 1997, and the same debt for which $54 million was outstanding
at January 1, 1996. Interest is calculated at LIBOR plus 2.75% for borrowings
under the Revolving Credit Facility and $70 million Term Loan Facility, and
10% for the $100 million principal amount of the Notes and 10.375% on the $9
million of existing debt. In addition, an annual commitment fee expense of
0.5% of the unused portion of the $50 million Revolving Credit Facility has
been recorded for the year ended December 31, 1996 and nine months ended
September 30, 1997, as approximately $80,000 and $60,000, respectively.
31
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed financial statements are based
on the historical financial statements of BITCO included elsewhere in this
Offering Memorandum and should be read in conjunction with these historical
statements.
The unaudited pro forma condensed balance sheet has been prepared to give
effect to the Timberlands Acquisition and the related financings as though
such transactions occurred as of September 30, 1997. The unaudited pro forma
condensed statements of operations for the twelve months ended December 31,
1996, and for the nine months ended September 30, 1997, give effect to the
Timberlands Acquisition and the related financings as if such transactions
occurred on January 1, 1996. Management has allocated the estimated purchase
price based on a preliminary valuation of the fair value of assets and
liabilities acquired. Final allocation of the purchase price to assets and
liabilities is not anticipated to result in material changes to the pro forma
balance sheet or the statements of operations.
The pro forma adjustments are based upon available information and certain
estimates and assumptions which management believes are reasonable. The
unaudited pro forma condensed statements of operations do not purport to
represent what Timberlands' results of operations would have actually been
had the transactions described in the respective notes occurred on January 1,
1996. In addition, the unaudited pro forma condensed financial statements do
not purport to project Timberlands' financial position or results of
operations for any future date or period.
32
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
as of September 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- --------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and short-term investments ..... $ 9,627,442 $ (347,994)(e) $
(5,300,000)(g)
(2,313,385)(f)
3,000,000 (f) 4,666,063
Restricted cash and investments ..... 341,856 (341,856)(e)
Accounts receivable .................. 410,165 410,165
Due from affiliate ................... 1,672,705 1,672,705
Inventories .......................... 1,039,910 1,039,910
Other current assets ................. 63,388 63,388
-------------- --------------- -------------
Total current assets .............. 13,155,466 (5,303,235) 7,852,231
Net property and equipment ............ 626,442 626,442
Timberlands (net) ..................... 44,056,338 17,726,779 (d) 61,783,117
Long-term notes receivable ............ 175,315 175,315
Deferred loan costs ................... 194,945 (194,945)(b)
807,500 (c) 807,500
-------------- --------------- -------------
Total assets ...................... $58,208,506 $ 13,036,099 $71,244,605
============== =============== =============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt ... 4,835,241 (4,500,000)(f) 335,241
Accounts payable and accrued expenses 403,042 403,042
Interest payable ..................... 700,864 (689,850)(e) 11,014
-------------- --------------- -------------
Total current liabilities ......... 5,939,147 (5,189,850) 749,297
Long-term debt ........................ 22,667,276 3,000,000 (f)
4,500,000 (f)
35,000,000 (c) 65,167,276
Deferred profit ....................... 15,472 15,472
Partners' equity ...................... 29,586,611 (29,586,611)(a)
Members' interest ..................... 29,586,611 (a)
(194,945)(b)
(2,313,385)(f)
(5,300,000)(g)
(36,007,432)(c)
807,500 (c)
1,007,432 (c)
17,726,779 (d) 5,312,560
-------------- --------------- -------------
Total liabilities and equity ..... $58,208,506 $ 13,036,099 $71,244,605
============== =============== =============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed financial statements.
33
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
for the nine months ended September 30, 1997
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ----------------- -------------
<S> <C> <C> <C>
Net sales..................................... $14,507,354 $ (2,846,927)(h) $11,660,427
Cost of sales ................................ 8,372,198 182,790 (i)
(185,599)(j) 8,369,389
-------------- ----------------- -------------
Gross profit ............................. 6,135,156 (2,844,118) 3,291,038
Fees for recycled fiber ...................... 1,640,695 (1,640,695)(j)
Selling, general and administrative expenses 2,086,800 2,086,800
-------------- ----------------- -------------
Income from operations ................... 5,689,051 (4,484,813) 1,204,238
Other income (deductions):
Interest income ............................. 380,333 380,333
Interest expense ............................ (2,203,106) (1,686,394) (k)
(304,688) (l) (4,194,188)
Other income ................................ 172,398 172,398
-------------- ----------------- -------------
(1,650,375) (1,991,082) (3,641,457)
-------------- ----------------- -------------
Net income (loss) ........................ $ 4,038,676 $ (6,475,895) $(2,437,219)
============== ================= =============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed financial statements.
34
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
for the year ended December 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
-------------- ----------------- -------------
<S> <C> <C> <C>
Net sales..................................... $18,859,266 $ (4,593,017)(h) $14,266,249
Cost of sales ................................ 10,528,161 321,944 (i)
(222,908)(j) 10,627,197
-------------- ----------------- -------------
Gross profit ............................. 8,331,105 (4,692,053) 3,639,052
Fees for recycled fiber ...................... 2,070,469 (2,070,469)(j)
Selling, general and administrative expenses 2,695,956 2,695,956
-------------- ----------------- -------------
Income from operations ................... 7,705,618 (6,762,522) 943,096
Other income (deductions):
Interest income ............................. 533,286 533,286
Interest expense ............................ (3,356,985) (2,097,290) (k)
(406,250) (l) (5,860,525)
Other income ................................ 339,160 339,160
-------------- ----------------- -------------
(2,484,539) (2,503,540) (4,988,079)
-------------- ----------------- -------------
Net income (loss) ........................ $ 5,221,079 $ (9,266,062) $(4,044,983)
============== ================= =============
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed financial statements.
35
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS
The accompanying unaudited pro forma condensed financial statements give
effect to the Timberlands Acquisition for an estimated $36 million, including
estimated transaction costs. Following the transaction, Brant-Allen owns 100%
of the membership interests in Timberlands. Funding to Brant-Allen for the
transaction was provided by proceeds from the $35 million Timberlands Loan
and existing Brant-Allen cash on hand. Existing debt of $27 million at
September 30, 1997, is assumed to be increased by $3 million at September 30,
1997, in connection with a substantial modification of the terms of the
existing senior notes agreement.
The accompanying unaudited pro forma condensed financial statements of
Timberlands have been prepared by management and the pro forma assumptions
are described in the following notes.
The unaudited pro forma condensed financial statements have been prepared
from the historical financial statements of BITCO, for 1996 and as of and for
the nine months ended September 30, 1997. For purposes of the unaudited pro
forma condensed statements of operations, the purchase by Brant-Allen is
assumed to have occurred at January 1, 1996. For purposes of the September
30, 1997, unaudited pro forma condensed balance sheet, the Timberlands
Acquisition is assumed to have occurred at September 30, 1997. The unaudited
pro forma condensed statements of operations for 1996 and for the nine months
ended September 30, 1997, are not necessarily indicative of the results of
operations that would have occurred in 1996 and for the nine months ended
September 30, 1997, had the acquisition by Brant-Allen occurred at January 1,
1996.
In preparation of the unaudited pro forma condensed financial statements,
management has made certain estimates and assumptions that affect the amounts
reported in the unaudited pro forma condensed financial statements. Actual
amounts recorded after final adjustments for the transactions may differ from
the estimates.
The unaudited pro forma condensed financial statements should be read in
conjunction with the historical financial statements and notes thereto of
BITCO, which are included in this Prospectus. Based on the preliminary
valuation of assets and liabilities acquired, management does not anticipate
final allocation of the purchase price to result in material changes to the
pro forma balance sheet or the statements of operations. Additionally though
not reflected herein, had Timberlands' financial statements been subject to
public disclosure, management estimates that incremental general and
administrative expenses would approximate $150,000 annually.
(a) Adjustment to reflect the conversion of BITCO from a limited
partnership to a limited liability company.
(b) Adjustment to write-off existing deferred loan costs at September 30,
1997, in connection with substantial modification of terms of the existing
long-term debt agreement.
(c) Adjustment to reflect (i) the push down of the amount of the
Brant-Allen $35 million Timberlands Loan, (ii) the push down of $807,500 from
Brant-Allen resulting from the payment by Brant-Allen of associated deferred
loan costs and (iii) the excess of the estimated purchase price of
$36,007,432 over the $35 million Timberlands Loan. These amounts are pushed
down into the accompanying September 30, 1997 balance sheet of Timberlands
because of the pledge of the membership interests in Timberlands as
collateral for the Timberlands Loan and the guarantee by Timberlands of the
Timberlands Loan. Timberlands policy is to use the effective interest method
to amortize these deferred loan costs over the term of the loan.
(d) Adjustment to reflect purchase accounting impacts in connection with
the purchase by Brant-Allen of the membership interests of Timberlands not
already owned by Brant-Allen. This adjustment is required since Brant-Allen
owns 100% of the membership interests in Timberlands following the
Timberlands Acquisition. Calculation of the premium paid over the underlying
book value, assuming the purchase closed on September 30, 1997, was as
follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
<S> <C>
Payment to purchase selling limited partners' interest $ 35,977,432
Transaction costs ..................................... 30,000
---------------
Total purchase price .............................. 36,007,432
Limited partners' equity .............................. (18,280,653)
---------------
Premium paid over underlying book value .......... $ 17,726,779
===============
</TABLE>
36
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
The amount of limited partners' equity set forth above of $18,280,652 is
different from the historical limited partners' equity of $20,036,484 as of
September 30, 1997 because it has been reduced by the limited partners' 70%
proportionate interests in the (i) write-off of $194,945 of deferred loan
costs and (ii) $2,313,385 in modification fee. The excess over book value of
the estimated purchase price paid by Brant-Allen for a 70% interest in
Timberlands acquired from subsidiaries of Dow Jones and the Washington Post
of approximately $17.7 million has been primarily allocated to timber
properties.
(e) Adjustment to reflect the required payment of accrued interest in
connection with the substantial modification of the terms of the $27 million
of senior notes.
(f) Adjustment to reflect the advance of $3,000,000 in connection with the
substantial modification of the terms of the $27 million senior notes
agreement, a related fee of $2,313,385, and the reclass of the current
portion of the modified debt to long-term.
(g) Adjustment to record a distribution to Brant-Allen necessary to fund
(i) the one year interest escrow requirement of the $35 million Timberlands
Loan of approximately $2,954,000 recorded in the accounts of Brant-Allen,
(ii) the income tax liability for Brant-Allen's proportionate share of
BITCO's earnings for 1997 prior to closing, and (iii) certain other costs.
(h) Adjustments to reflect the effect on net sales from reducing to an
open market price the price of timber sold by BITCO to BIPCO during 1996 and
the nine months ended September 30, 1997, resulting from the amendment to
BITCO's and BIPCO's supply arrangement resulting from the Timberlands
Acquisition. The price per cord of timber was reduced from $95.50 per cord to
$65.79 and $68.52 per cord for the year ended December 31, 1996, and nine
months ended September 30, 1997, respectively, for 154,595 and 105,520 cords
sold during 1996 and the nine months ended September 30, 1997, respectively.
(i) Adjustments to reflect the incremental depletion expense related to
the allocation to Timberlands of the excess purchase price over book value of
the prior interests of Dow Jones and The Washington Post in Timberlands.
(j) Adjustments to reflect the effect on cost of sales and fees from
recycled fiber resulting from termination of the fiber procurement
arrangement between BITCO and BIPCO during 1996 and the nine months ended
September 30, 1997. This entry eliminates revenue from sales of recycled
fiber and eliminates employee costs associated with procuring recycled fiber.
This adjustment resulted from termination of the procurement arrangement
between BIPCO and BITCO upon completion of the closing of the Timberlands
Acquisition.
(k) Adjustments to reflect the incremental interest expense for the year
ended December 31, 1996 and nine months ended September 30, 1997 related to
the $35 million Timberlands Loan and $30 million outstanding under the
Hancock Loan. Interest is calculated at September 30, 1997, at LIBOR plus
2.75% for borrowings under the Timberlands Loan and at LIBOR plus 1.75% for
the $30 million Hancock Loan. Additionally, at January 1, 1996, the
additional $6 million outstanding, which is in excess of the balance of $30
million assumed to be outstanding at September 30, 1997, is assumed to bear
interest at the historical rate of 10.22% applied under the senior notes loan
agreement prior to the substantial modification of terms.
(l) Adjustment to reflect the net effect of increased amortization for the
$807,500 in deferred financing costs incurred to fund the purchase
transaction, amortized (using the effective interest method) over the life of
the $35 million Timberlands Loan.
37
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results
of operations should be read in conjunction with the "Selected Historical
Financial Data" and the financial statements of the Company and related notes
thereto included elsewhere in this Prospectus.
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 and
significantly impacts 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 increases and decreases in mill inventory levels.
Newsprint prices have been extremely volatile over the past three years.
After hitting a low of $420 per tonne in the first quarter of 1994, newsprint
prices increased to a high of $750 per tonne ($765 per tonne on the West
Coast) in the fourth quarter of 1995 and held at those levels through the
first quarter of 1996. Newsprint prices in 1997 recovered from a level of
$510 per tonne in the first quarter of 1997 to $560 per tonne in the third
quarter. Several major newsprint producers have announced price increases for
the fourth quarter which would increase newsprint prices to $610 and $600 per
tonne on the West Coast and East Coast, respectively.
The table below summarizes the annual volumes and net selling prices of
the Company's newsprint during the periods indicated below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ --------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Tonnes sold .............. 215,900 206,800 217,230 159,000 169,300
Average net selling price $ 435 $ 639 $ 593 $ 630 $ 504
</TABLE>
The Company's primary cost components consist of raw materials (wood, ONP,
OMG, kraft pulp and chemicals), electrical energy, direct labor and certain
fixed costs. Fixed costs consist of indirect labor and other plant related
costs including maintenance expenses and mill overhead.
For the first nine months of 1997, raw materials, which are subject to
significant price fluctuations based on supply and demand, represented 27.2%
of the total cost of manufacturing. Electrical energy currently represents
13.8% and direct and indirect labor currently represented 20.5% of total cost
of manufacturing. Historically, the Company's cost of manufacturing has also
included an upcharge (a margin in excess of the market price of the fiber)
paid to Timberlands with respect to wood, and a procurement fee per tonne of
ONP and OMG, supplied or provided by Timberlands to the Company. This
upcharge and procurement fee was eliminated upon consummation of the
Transactions. See "Certain Related Party Transactions." The Company currently
uses a raw material mix of 65% TMP, 28% recycled fiber and 7% kraft pulp in
its production process. As a result of eliminating the upcharge and the
procurement fee and adjusting for the market price of fiber, certain costs
included in the historical financial statements are expected to be
eliminated. See "Unaudited Pro Forma Condensed Consolidated Statements of
Operations."
The Company's product is marketed by Brant-Allen, which also provides
senior management, treasury, financial and administrative services for the
Company pursuant to the Management Services Agreement. Brant-Allen is
compensated for these services in the form of a fee calculated at the rate of
3% of the Company's sales
38
<PAGE>
less transportation costs. This fee amounted to $2,820,000, $3,961,000 and
$3,865,000 for the years ended 1994, 1995 and 1996, and $3,004,410 and
$2,561,177 for the nine months ended September 30, 1996 and 1997,
respectively.
The Company's customers include prestigious newspaper publishers in the
United States such as Dow Jones (publisher of The Wall Street Journal) and
The Washington Post. Following the Acquisition, both Dow Jones and The
Washington Post continue to have a contract to purchase a minimum 45,000
tonnes of newsprint per year (approximately 40% of the Company's total
output) at prices based on the average prices paid by those customers to East
Coast suppliers not affiliated with those customers. These contracts expire
in December 2000, unless extended by mutual agreement. See "Certain Related
Party Transactions --Purchase Agreements with The Washington Post and Dow
Jones." Approximately 90% of the Company's current newsprint production is
purchased by its top ten customers, eight of whom have been customers of the
Company for over 15 years.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1994 1995 1996
--------------------- --------------------- ---------------------
PERCENT PERCENT PERCENT
OF NET OF NET OF NET
AMOUNT SALES AMOUNT SALES AMOUNT SALES
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales ............... $93,840 100.0% $132,203 100.0% $128,820 100.0%
Cost of sales ........... 91,610 97.6 100,399 75.9 100,591 78.1
---------- --------- ---------- --------- ---------- ---------
Gross Profit ............ 2,230 2.4 31,804 24.1 28,229 21.9
Selling, general and
administrative expenses 3,028 3.3 4,185 3.2 4,018 3.1
---------- --------- ---------- --------- ---------- ---------
Income from operations . (798) (.9) 27,619 20.9 24,211 18.8
Interest expense ........ (6,194) (6.6) (5,986) (4.5) (5,398) (4.2)
Other income ............ 2,425 2.6 636 .4 610 .5
---------- --------- ---------- --------- ---------- ---------
Net income (loss) ....... ($ 4,567) (4.9) $ 22,269 16.8 $ 19,423 15.1
========== ========= ========== ========= ========== =========
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------
1996 1997
--------------------- --------------------
(UNAUDITED)
PERCENT PERCENT
OF NET OF NET
AMOUNT SALES AMOUNT SALES
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales ............... $100,147 100.0% $85,373 100.0%
Cost of sales ........... 73,748 73.6 77,225 90.4
---------- --------- --------- ---------
Gross Profit ............ 26,399 26.4 8,148 9.6
Selling, general and
administrative expenses 3,573 3.6 3,230 3.8
---------- --------- --------- ---------
Income from operations . 22,826 22.8 4,918 5.8
Interest expense ........ (4,059) (4.1) (3,592) (4.2)
Other income ............ 581 .6 478 .5
---------- --------- --------- ---------
Net income (loss) ....... $ 19,348 19.3 $ 1,804 2.1
========== ========= ========= =========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996
Net sales decreased by $14.8 million, or 14.7%, to $85.4 million for the
nine months ended September 30, 1997, from $100.1 million for the nine months
ended September 30, 1996. This decrease was attributable to a 20% decrease in
the average net selling price of the Company's products and was offset in
part by an increase in sales volumes to approximately 169,000 tonnes in the
nine months ended September 30, 1997, from approximately 159,000 tonnes in
the nine months ended September 30, 1996. The Company's net selling price for
newsprint decreased from an average of $630 per tonne in the nine months
ended September 30, 1996 to an average of $504 per tonne in the nine months
ended September 30, 1997. The Company's selling price for newsprint increased
approximately 10% from January 1, 1997, to September 30, 1997.
Cost of sales increased by $3.5 million, or 4.7 %, to $77.2 million in
1997 from $73.7 million in the nine months ended September 30, 1996. This
increase was attributable primarily to a 6.5% increase in sales volume net of
1.5% decrease in unit costs attributable to reduction in fiber costs. Cost of
sales as a percentage of net sales increased to 90.4% in the nine months
ended September 30, 1997, from 73.6% in the nine months ended September 30,
1996, due to depressed newsprint selling prices. However, cost of sales on a
per tonne basis decreased in the nine months ended September 30, 1997 from
the nine months ended September 30, 1996, primarily due to lower fiber costs.
Selling, general and administrative expenses decreased by $0.3 million, or
9.6%, to $3.2 million in the nine months ended September 30, 1997 from $3.6
million in the nine months ended September 30, 1996. This decrease was
primarily attributable to a decrease in the management fee paid by the
Company to Brant-Allen that resulted from lower net sales.
As a result of the above factors, income from operations decreased by
$17.9 million, or 78.5%, in the nine months ended September 30, 1997 from
$22.8 million in the nine months ended September 30, 1996.
39
<PAGE>
Interest expense decreased by $0.5 million, or 11.5%, to $3.6 million in
the nine months ended September 30, 1997 from $4.1 million in the nine months
ended September 30, 1996, due to scheduled amortization of the Company's
indebtedness.
As a result of the above factors, the Company's net income decreased by
$17.5 million, or 90.7% to $1.8 million in the nine months ended September
30, 1997 from $19.3 million in the nine months ended September 30, 1996.
1996 COMPARED WITH 1995
Net sales decreased by $3.4 million, or 2.6%, to $128.8 million in 1996
from $132.2 million in 1995. This decrease was attributable to a 7.2%
decrease in the average net selling price of the Company's products and was
offset in part by a 5.0% increase in sales volumes to approximately 217,230
tonnes in 1996 from approximately 206,800 tonnes in 1995.
Cost of sales was relatively flat at $100.6 million in 1996 versus $100.4
million in 1995. The primary offsetting factors were a 5.0% increase in sales
volume and a 4.5% decrease in unit costs attributable to reductions in fiber
costs. Cost of sales as a percentage of net sales increased to 78.1% in 1996
from 75.9% in 1995 primarily due to the net sales decrease resulting from
pricing declines, despite higher sales volumes.
Selling, general and administrative expenses decreased by $0.2 million, or
3.9%, to $4.0 million in 1996 from $4.2 million in 1995. This decrease was
primarily attributable to lower management fees paid by the Company to
Brant-Allen as a result of a decrease in net sales.
Income from operations decreased by $3.4 million, or 12.3%, to $24.2
million in 1996 from $27.6 million in 1995, primarily as a result of decline
in sales.
Interest expense decreased by $0.6 million, or 9.8%, to $5.4 million in
1996 from $6.0 million in 1995, due to scheduled amortization of the
Company's indebtedness outstanding, which reduced principal by $6 million
during 1996.
As a result of the above factors, the Company's net income decreased by
$2.9 million, or 12.8%, to $19.4 million in 1996 from $22.3 million in 1995.
1995 COMPARED WITH 1994
Net sales increased by $38.4 million, or 40.9%, to $132.2 million in 1995
from $93.8 million in 1994. The net sales increase was principally due to a
47% increase in average net selling prices for the Company's product, from an
average net selling price of $435 per tonne in 1994 to an average net selling
price of $639 per tonne in 1995, offset in part as a result of a 4.2%
decrease in sales volume to approximately 206,800 tonnes in 1995 from
approximately 215,900 tonnes in 1994, as a result of larger than normal 1993
inventories which were liquidated in 1994.
Cost of sales increased by $8.8 million, or 9.6%, to $100.4 million in
1995 from $91.6 million in 1994. This increase was attributable primarily to
the increase in both cost and usage of chemical pulp, which is purchased from
outside vendors. Chemical pulp usage was increased in order to achieve
quality improvements in the Company's newsprint. However, costs of sales as a
percentage of net sales decreased from 97.6% in 1994 to 75.9% in 1995 as a
result of an increase in average selling prices.
As a result of the above factors, income from operations increased by
$28.4 million to $27.6 million in 1995 from a net loss of $.8 million in
1994.
The Company's selling, general and administrative expenses increased by
$1.2 million, or 38.2%, to $4.2 million in 1995 from $3.0 million in 1994
primarily because of higher management fees paid by the Company to
Brant-Allen, which resulted directly from increased net sales.
The Company's interest expense decreased by $0.2 million, or 3.4%, to $6.0
million in 1995 from $6.2 million in 1994, due to scheduled amortization of
the Company's indebtedness outstanding, which reduced principal by $6.0
million during 1995, partially offset by the $0.4 million reduction in
capitalized interest in 1995 resulting from the 1994 completion of the
Company's recycling facility.
The Company's other income decreased by $1.8 million, or 73.8%, to $0.6
million in 1995 from $2.4 million in 1994, due to a one-time land sale during
1994.
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As a result of the above factors, the Company's net income increased by
$26.8 million to $22.3 million in 1995 from a net loss of $4.6 million in
1994.
LIQUIDITY AND CAPITAL RESOURCES
Historical
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 Company's limited partners,
subsidiaries of Dow Jones and The Washington Post. Following the Acquisition,
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. These requirements are
expected to be met through cash flows from operations and borrowings under
the Revolving Credit Facility.
The Company's cash provided by operating activities increased to $30.4
million in 1996 from $27.2 million in 1995 primarily due to the decrease in
working capital requirements. The Company's cash provided by operating
activities improved in 1995 to $27.2 million from $4.4 million in 1994
primarily as a result of increased net income due primarily to higher selling
prices for the Company's product. For the nine-month period ending September
30, 1997, the Company's cash provided by operating activities decreased by
60.2% to $10.2 million from $25.6 million during the nine-month period ending
September 30, 1996, primarily due to lower selling prices resulting in lower
net income.
Cash used in investing activities increased to $7.4 million in 1996 from
$6.5 million in 1995 as a result of increased capital expenditures. Cash used
in investing activities increased to $6.5 million in 1995 from $4.0 million
in 1994 on a net basis, although capital expenditures in 1995 approximated
$6.6 million compared to $9.5 million during 1994. Asset sales generated $5.5
million of net proceeds in 1994 and reduced net cash used in investing
activities to $4.0 million. Asset sales in 1995 only approximated $0.1
million. Cash used in investing activities for the nine-month period ended
September 30, 1997 increased by $0.4 million to $5.6 million from $5.2
million for the nine-month period ended September 30, 1996 resulting from an
increase in capital expenditures.
The Company made capital expenditures of $7.5 million, $6.6 million and
$9.5 million in 1996, 1995 and 1994, respectively, in connection with
upgrading and maintaining its manufacturing facility. For the nine months
ended September 30, 1997, the Company made capital expenditures of $5.7
million. Management anticipates that the Company's total capital expenditures
for 1997 and 1998 will be relatively consistent with the 1996 capital
expenditure level, and primarily will relate to maintenance of its newsprint
facilities and cost reduction projects, allowing the Company to improve
quality and increase capacity, and, therefore, enhance its competitive
position.
Following the Acquisition and Related Financings
At the completion of the Acquisition and the related financings on
December 1, 1997, the Company had approximately $201.1 million of
indebtedness, consisting of borrowings of $31 million under the Revolving
Credit Facility, $70.0 million under the Term Loan Facility, $100 million
under the Notes and approximately $130,000 in long-term purchase obligations.
The primary difference between the actual borrowings of $31 million on
December 1, 1997, and the pro-forma borrowings of $33.9 million results from
(i) differences in accrued interest paid at the closing of the Acquisition
and (ii) transaction costs which were presented as advances under the
Company's Revolving Credit Facility in the pro-forma statements, but treated
as accounts payable by the Company on the closing date. In addition, $19
million was available in unused borrowing capacity under the Revolving Credit
Facility. Immediately following the closing of the Acquisition, the Company
used $5 million of cash on hand to reduce the outstanding balance of the
Revolving Credit Facility. The Company's interest expense and indebtedness
following the consummation of the Acquisition and related financings are
significantly greater than they have been historically. Pro forma interest
expense for the year ended December 31, 1996 and nine months ended September
30, 1997 were approximately $20.3 million and $14.8 million, respectively.
See "Unaudited Pro Forma Condensed Consolidated Financial Statements." To the
extent that the Company borrows additional funds under the Revolving Credit
Facility, additional interest and principal payments will be required.
Although there can be no assurances, the Company believes that cash
generated from operations together with cash on-hand and amounts available
under the Revolving Credit Facilities will be sufficient to meet its debt
service
41
<PAGE>
requirements, capital expenditures needs and working capital needs for the
foreseeable future. The Company's future operating performance and ability to
service the Bank Credit Facilities and the Notes and repay other indebtedness
of the Company will be subject to future economic conditions and the
financial success of the Company's business and other factors, many of which
are not in the Company's control, including changes in market prices for
newsprint, fiber costs, electrical rates and future government requirements
as to environmental discharges and recycling content in newsprint. The
Company currently anticipates that in order to pay the principal amount of
the Notes at maturity, the Company will be required to refinance such Notes
or adopt one or more alternatives, including reducing or delaying capital
expenditures, selling assets or seeking additional equity capital or other
additional financing. None of the affiliates of the Company will be required
to make any capital contributions or other payments to the Company with
respect to the Issuer's obligations on the Notes (except to the extent that
Timberlands or Soucy are required under the Indenture to make an Excess
Proceeds Offer to the Holders of the Notes and the consummation of any such
Excess Proceeds Offer is deemed to be a payment to the Company). Although the
Company currently has no reason to believe that it will not be able to
refinance the Notes at maturity, there can be no assurance that such
refinancing or any alternative strategy could be effected upon satisfactory
terms, if at all, or that any of the foregoing actions would enable the
Company to make such principal payments on the Notes or that any of such
actions would be permitted by the terms of any debt instruments of the
Company or of any of the Company's affiliates then in effect. See "Risk
Factors -- Substantial Leverage; Ability to Service Debt."
Historically, the Company has had relatively few foreign sales, all of
which have been denominated in U.S. dollars. To date, the Company has not
used derivative financial instruments.
Environmental Expenditures
The operation of the Company's mill is subject to extensive and changing
environmental regulation by federal, state and local authorities, including
those requirements that regulate discharges into the environment, waste
management, and remediation of environmental contamination. Environmental
permits are required for the operation of the Company's businesses, and are
subject to revocation, modification and renewal. Governmental authorities
have the power to enforce compliance with environmental requirements and
violators are subject to fines, injunctions, civil penalties and criminal
fines. Third parties may also have the right to sue to enforce compliance
with such regulations.
The Company has in the past made significant capital expenditures to
comply with current federal, state and local environmental laws and
regulations. The Company believes that it is in substantial compliance with
such laws and regulations, although no assurance can be given that it will
not incur material liabilities and costs with respect to such laws and
regulations in the future. Although the Company does not currently believe
that it will be required to make significant expenditures for pollution
control in the near future, no assurances can be given that future
developments, such as the potential for more stringent environmental
standards or stricter enforcement of environmental laws, will not cause the
Company to incur such expenditures. The Company anticipates incurring the
following environmental expenditures (over and above routine operating
expenditures) over the next two years, including (i) $125,000 (budgeted for
fiscal year 1998) for the acquisition of new aerators, sludge trucks, and
road paving; (ii) $550,000 (anticipated for fiscal year 1999) for the opening
of a new landfill cell; and (iii) $200,000 and $250,000 for the closure of
two landfills for 1998 and 1999, respectively.
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 suppliers and
customers.
42
<PAGE>
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD NOTES
Upon the terms and conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal (which together constitute the Exchange
Offer), the Issuers will accept for exchange Old Notes which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York
City time, on March 4, 1998; provided, however, that if the Issuers, in their
sole discretion, have extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer is extended.
As of the date of this Prospectus, $100,000,000 aggregate principal amount
of the Old Notes is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date hereof, to all Holders
of Old Notes known to the Issuers. The Issuers' obligation to accept Old
Notes for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below.
The Issuers expressly reserve the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Old Notes, by giving oral or
written notice of such extension to the Holders thereof as described below.
During any such extension, all Old Notes previously tendered will remain
subject to the Exchange Offer and may be accepted for exchange by the
Issuers. Any Old Notes not accepted for exchange for any reason will be
returned without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Old Notes tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
The Issuers expressly reserve the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Notes not theretofore accepted
for exchange, upon the occurrence of any of the conditions of the Exchange
Offer specified below under "--Certain Conditions to the Exchange Offer." The
Issuers will give oral or written notice of any extension, amendment,
non-acceptance or termination to the Holders of the Notes as promptly as
practicable, such notice in the case of any extension to be issued by means
of a press release or other public announcement no later than 9:00 a.m., New
York City time, on the next business day after the previously scheduled
Expiration Date.
PROCEDURES FOR TENDERING OLD NOTES
The tender to the Issuers of Old Notes by a Holder thereof as set forth
below and the acceptance thereof by the Issuers will constitute a binding
agreement between the tendering Holder and the Issuers upon the terms and
subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Old Notes for exchange pursuant to the Exchange Offer must
transmit a properly completed and duly executed Letter of Transmittal,
including all other documents required by such Letter of Transmittal or (in
the case of a book-entry transfer) an Agent's Message in lieu of such Letter
of Transmittal, to First Trust of New York, National Association (the
"Exchange Agent") at the address set forth below under "Exchange Agent" on or
prior to the Expiration Date. In addition, either (i) certificates for such
Old Notes must be received by the Exchange Agent along with the Letter of
Transmittal, or (ii) a timely confirmation of a book-entry transfer (a
"Book-Entry Confirmation") of such Old Notes, if such procedure is available,
into the Exchange Agent's account at The Depository Trust Company (the
"Book-Entry Transfer Facility") pursuant to the procedure for book-entry
transfer described below, must be received by the Exchange Agent prior to the
Expiration Date with the Letter of Transmittal or an Agent's Message in lieu
of such Letter of Transmittal, or (iii) the Holder must comply with the
guaranteed delivery procedures described below. The term "Agent's Message"
means a message, transmitted by the Book-Entry Transfer Facility to and
received by the Exchange Agent and forming a part of a Book-Entry
Confirmation, which states that the Book-Entry Transfer Facility has received
an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Issuers may enforce such
Letter of Transmittal against such participant. THE METHOD OF DELIVERY OF OLD
NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE
ELECTION AND RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT
43
<PAGE>
IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE
TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE
ISSUERS.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Old Notes surrendered for exchange
pursuant thereto are tendered (i) by a Holder of the Old Notes who has not
completed the box entitled "Special Issuance Instructions" or "Special
Delivery Instructions" on the Letter of Transmittal or (ii) for the account
of an Eligible Institution (as defined below). In the event that signatures
on a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a
member of a registered national securities exchange or a member of the
National Association of Securities Dealers, Inc. or by a commercial bank or
trust company having an office or correspondent in the United States
(collectively, "Eligible Institutions"). If Old Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Old
Notes surrendered for exchange must be endorsed by, or be accompanied by a
written instrument or instruments of transfer or exchange, in satisfactory
form as determined by the Issuers in their sole discretion, duly executed by
the registered national securities exchange with the signature thereon
guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Notes tendered for exchange will be determined
by the Issuers in their sole discretion, which determination shall be final
and binding. The Issuers reserve the absolute right to reject any and all
tenders of any particular Old Note not properly tendered or to not accept any
particular Old Note which acceptance might, in the judgment of the Issuers or
their counsel, be unlawful. The Issuers also reserve the absolute right to
waive any defects or irregularities or conditions of the Exchange Offer as to
any particular Old Note either before or after the Expiration Date (including
the right to waive the ineligibility of any Holder who seeks to tender Old
Notes in the Exchange Offer). The interpretation of the terms and conditions
of the Exchange Offer as to any particular Old Note either before or after
the Expiration Date (including the Letter of Transmittal and the instructions
thereto) by the Issuers shall be final and binding on all parties. Unless
waived, any defects or irregularities in connection with tenders of Old Notes
for exchange must be cured within such reasonable period of time as the
Issuers shall determine. Neither the Issuers, the Exchange Agent nor any
other person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Notes for exchange, nor shall
any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered Holder or Holders of Old Notes, such Old Notes must be
endorsed or accompanied by powers of attorney, in either case signed exactly
as the name or names of the registered Holder or Holders that appear on the
Old Notes.
If the Letter of Transmittal or any Old Notes or powers of attorneys are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Issuers, proper evidence satisfactory to the Issuers of their authority
to so act must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to the Issuers that, among other
things, the New Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the Holder and that neither the Holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Notes. If any Holder or any such
other person is an "affiliate", as defined under Rule 405 of the Securities
Act, of the Issuers, is engaged in or intends to engage in or has an
arrangement or understanding with any person to participate in a distribution
of such New Notes to be acquired pursuant to the Exchange Offer, such Holder
or any such other person (i) could not rely on the applicable interpretations
of the staff of the Commission and (ii) must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus (which may be
this Prospectus) in connection with any resale of such New Notes and must
represent that they were acquired as a result of market-making activities or
other trading activities. See "Plan of Distribution." The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-dealer
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
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<PAGE>
ACCEPTANCE OF OLD NOTES FOR EXCHANGE; DELIVERY OF NEW NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange
Offer, the Issuers will accept, promptly after the Expiration Date, all Old
Notes properly tendered and will issue the New Notes promptly after
acceptance of the Old Notes. See "--Certain Conditions to the Exchange Offer"
below. For purposes of the Exchange Offer, the Issuers shall be deemed to
have accepted properly tendered Old Notes for exchange when, as and if the
Issuers have given oral (promptly confirmed in writing) or written notice
thereof to the Exchange Agent.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note. Accordingly, registered Holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from December
1, 1997. Old Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer. Pursuant to the
Registration Rights Agreement, certain additional payments are required to be
made to Holders of Old Notes under certain circumstances relating to the
timing of the Exchange Offer.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of (i) certificates for such Old Notes or a
timely Book-Entry Confirmation of such Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility, (ii) a properly completed and
duly executed Letter of Transmittal or an Agent's Message in lieu thereof and
(iii) all other required documents. If any tendered Old Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Notes are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Notes will
be returned without expense to the tendering Holder thereof (or, in the case
of Old Notes tendered by book-entry transfer into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the book-entry
procedures described below, such non-exchanged Old Notes will be credited to
an account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFERS
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the Book-Entry Transfer Facility for purposes of
the Exchange Offer within two business days after the date of this
Prospectus. Any financial institution that is a participant in the Book-Entry
Transfer Facility systems must make book-entry delivery of Old Notes by
causing the Book-Entry Transfer Facility to transfer such Old Notes into the
Exchange Agent's account at the Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's Automated Tender Offer Program
("ATOP") procedures for transfer. Such participant using ATOP should transmit
its acceptance to the Book-Entry Transfer Facility on or prior to the
Expiration Date or comply with the guaranteed delivery procedures described
below. The Book-Entry Transfer Facility will verify such acceptance, execute
a book-entry transfer of the tendered Old Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility and then send to the Exchange
Agent confirmation of such book-entry transfer, including an Agent's Message
confirming that the Book Entry Transfer Facility has received an express
acknowledgement from such participant that such participant has received and
agrees to be bound by the Letter of Transmittal and that the Issuers may
enforce the Letter of Transmittal against such participant. However, although
delivery of Old Notes may be effected through book-entry transfer at the
Book-Entry Transfer Facility, an Agent's Message and any other required
documents, must, in any case, be transmitted to and received by the Exchange
Agent at the address set forth below under "--Exchange Agent" on or prior to
the Expiration Date or the guaranteed delivery procedures described below
must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Notes desires to tender such Old Notes and the Old
Notes are not immediately available, or time will not permit such Holder's
Old Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed
on a timely basis, a tender may be effected if (i) the tender is made through
an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a Notice of Guaranteed
Delivery, substantially in the form provided by the Issuers (by telegram,
telex, facsimile transmission, mail or hand delivery), setting forth the name
and address of the Holder of the Old Notes and the amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within five New York Stock Exchange ("NYSE") trading days after the date of
execution of the Notice of Guaranteed Delivery, the certificates for all
physically tendered Old Notes, in proper form for transfer, or
45
<PAGE>
a Book-Entry Confirmation, as the case may be, together with a properly
completed and duly executed appropriate Letter of Transmittal (or facsimile
thereof or Agent's Message in lieu thereof) with any required signature
guarantees and any other documents required by the Letter of Transmittal will
be deposited by the Eligible Institution with the Exchange Agent, and (iii)
the certificates for all physically tendered Old Notes, in proper form for
transfer, or a Book-Entry Confirmation, as the case may be, together with a
properly completed and duly executed appropriate Letter of Transmittal (or
facsimile thereof or Agent's Message in lieu thereof) with any required
signature guarantees and all other documents required by the Letter of
Transmittal, are received by the Exchange Agent within five NYSE trading days
after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old
Notes to be withdrawn, (ii) identify the Old Notes to be withdrawn (including
the principal amount of such Old Notes), and (iii) (where certificates for
Old Notes have been transmitted) specify the name in which such Old Notes are
registered, if different from that of the withdrawing Holder. If certificates
for Old Notes have been delivered or otherwise identified to the Exchange
Agent, then, prior to the release of such certificates the withdrawing Holder
must also submit the serial numbers of the particular certificates to be
withdrawn and a signed notice of withdrawal with signatures guaranteed by an
Eligible Institution unless such Holder is an Eligible Institution. If Old
Notes have been tendered pursuant to the procedure for book-entry transfer
described above, any notice of withdrawal must specify the name and number of
the account at the Book-Entry Transfer Facility to be credited with the
withdrawn Old Notes and otherwise comply with the procedures of such
facility. All questions as to the validity, form and eligibility (including
time of receipt) of such notices will be determined by the Issuers, whose
determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer. Any Old Notes which have been tendered for
exchange but which are not exchanged for any reason will be returned to the
Holder thereof without cost to such Holder (or, in the case of Old Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Old Notes will be credited to an account maintained
with such Book-Entry Transfer Facility for the Old Notes) as soon as
practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering Old Notes"
above at any time on or prior to 5:00 p.m., New York City time, on the
Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Issuers
shall not be required to accept for exchange, or to issue New Notes in
exchange for, any Old Notes and may terminate or amend the Exchange Offer, if
at any time before the acceptance of such Old Notes, any of the following
events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking
any damages as a result thereof, or (ii) resulting in a material delay in
the ability of the Issuers to accept for exchange or exchange some or all
of the Old Notes pursuant to the Exchange Offer; or any statute, rule,
regulation, order or injunction shall be sought, proposed, introduced,
enacted, promulgated or deemed applicable to the Exchange Offer or any of
the transactions contemplated by the Exchange Offer by any government or
governmental authority, domestic or foreign, or any action shall have been
taken, proposed or threatened, by any government, governmental authority,
agency or court, domestic or foreign, that in the sole judgment of the
Issuers might directly or indirectly result in any of the consequences
referred to in clauses (i) or (ii) above or, in the sole judgment of the
Issuers, might result in the holders of New Notes having obligations with
respect to resales and transfers of New Notes which are greater than those
described in the interpretation of the Commission referred to on the cover
page of this Prospectus, or would otherwise make it inadvisable to proceed
with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by a
46
<PAGE>
governmental agency or authority which may adversely affect the ability of
the Issuers to complete the transactions contemplated by the Exchange
Offer, (iii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority which adversely affects the extension of
credit or (iv) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United States,
or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(c) any change (or any development involving a prospective change) shall
have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Issuers that, in the sole judgment of the Issuers, is or
may be adverse to the Issuers, or the Issuers shall have become aware of
facts that, in the sole judgment of the Issuers, have or may have adverse
significance with respect to the value of the Old Notes or the New Notes;
which in the sole judgment of the Issuers in any case, and regardless of the
circumstances (including any action by the Issuers) giving rise to any such
condition, makes it inadvisable to proceed with the Exchange Offer and/or
with such acceptance for exchange or with such exchange.
The foregoing conditions are for the sole benefit of the Issuers and may
be asserted by the Issuers regardless of the circumstances giving rise to any
such condition or may be waived by the Issuers in whole or in part at any
time and from time to time in its sole discretion. The failure by the Issuers
at any time to exercise any of the foregoing rights shall not be deemed a
waiver of any such right and each such right shall be deemed an ongoing right
which may be asserted at any time and from time to time.
In addition, the Issuers will not accept for exchange any Old Notes
tendered, and no New Notes will be issued in exchange for any such Old Notes,
if at such time any stop order shall be threatened or in effect with respect
to the Registration Statement of which this Prospectus constitutes a part or
the qualification of the Indenture under the Trust Indenture Act of 1939, as
amended.
EXCHANGE AGENT
First Trust of New York, National Association ("First Trust of New York")
has been appointed as the Exchange Agent for the Exchange Offer. All executed
Letters of Transmittal should be directed to the Exchange Agent at the
address set forth below. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the
Exchange Agent addressed as follows:
Delivery to: First Trust of New York,
As Exchange Agent
<TABLE>
<CAPTION>
<S> <C>
By Hand: By Mail:
First Trust of New York, National Association First Trust National Association
Corporate Trust Operations P.O. Box 64485
100 Wall Street, Suite 2000 St. Paul, Minnesota 55164-9549
New York, New York 10005
By Overnight Courier: By Facsimile:
First Trust National Association (612) 244-1537
Attn: Specialized Finance Attn: Specialized Finance
180 East Fifth Street Telephone: (800) 934-6802
St. Paul, Minnesota 55101
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER
THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER
OF TRANSMITTAL.
47
<PAGE>
FEES AND EXPENSES
The Issuers will not make any payment to brokers, dealers, or others
soliciting acceptances of the Exchange Offer except for reimbursement of
mailing expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by the Company and are estimated in the aggregate to be
$300,000.
TRANSFER TAXES
Holders who tender their Old Notes for exchange will be obligated to pay
any transfer taxes in connection with that exchange, as well as any other
sale or disposition of the Old Notes. Holders who instruct the Issuers to
register New Notes in the name of, or request that Old Notes not tendered or
not accepted in the Exchange Offer be returned to, a person other than the
registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF NOT EXCHANGING OLD NOTES
Holders of Old Notes who do not exchange their Old Notes for New Notes
pursuant to the Exchange Offer will continue to be subject to the provisions
in the Indenture regarding transfer and exchange of the Old Notes and the
restrictions on transfer of such Old Notes as set forth in the legend thereon
as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old
Notes may not be offered or sold, unless registered under the Securities Act,
except pursuant to an exemption from, or in a transaction not subject to, the
Securities Act and applicable state securities laws. The Issuers do not
currently anticipate that they will register under the Securities Act any Old
Notes which remain outstanding after consummation of the Exchange Offer
(subject to such limited exceptions, if applicable). To the extent that Old
Notes are tendered and accepted in the Exchange Offer, a holder's ability to
sell untendered Old Notes could be adversely affected.
Holders of the New Notes and any Old Notes which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof
have taken certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Notes will not be
entitled to any increase in the interest rate thereon or any further
registration rights under the Registration Rights Agreement, except under
limited circumstances. See "Description of Notes--Exchange Offer;
Registration Rights."
CONSEQUENCES OF EXCHANGING OLD NOTES
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Issuers believe that New Notes
issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold or otherwise transferred by Holders thereof (other
than any such Holder which is an "affiliate" of the Issuers within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that such New Notes are acquired in the ordinary course of such
Holder's business and such Holder has no arrangement or understanding with
any person to participate in the distribution of such New Notes. However, the
Commission has not considered the Exchange Offer in the context of a
no-action letter and there can be no assurance that the staff of the
Commission would make a similar determination with respect to the Exchange
Offer as in such other circumstances. Each Holder must acknowledge that it is
not engaged in, and does not intend to engage in, a distribution of such New
Notes and has no arrangement or understanding to participate in a
distribution of New Notes. If any Holder is an affiliate of the Issuers, is
engaged in or intends to engage in or has any arrangement or understanding
with respect to the distribution of the New Notes to be acquired pursuant to
the Exchange Offer, such Holder (i) could not rely on the applicable
interpretations of the staff of the Commission and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes must acknowledge that
such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities and that it will deliver
a prospectus (which may be this Prospectus) in connection with any resale of
such New Notes. See "Plan of Distribution." In addition, to comply with the
securities laws of certain jurisdictions (including any jurisdiction in Canada
or any other jurisdiction outside the United States), the New Notes may not be
offered or sold unless they have been registered or qualified for sale in such
jurisdiction or an exemption from registration or qualification is available
and is complied with. The Issuers have agreed, pursuant to the Registration
Rights Agreement, subject to certain limitations specified therein, to register
<PAGE>
or qualify the New Notes for offer or sale under the applicable state
securities laws of such United States jurisdictions as the Majority Holders of
the Old Notes reasonably request by the time the Registration Statement (of
which this Prospectus forms a part) is declared effective by the Commission.
The Issuers do not intend to register or qualify the sale of the New Notes in
any such United States jurisdictions (unless they receive such a request) or
any other jurisdiction.
48
<PAGE>
BUSINESS OF THE COMPANY
GENERAL
The Company is a low cost producer of high quality newsprint, with a
newsprint machine that is currently, and for the past ten years has been,
ranked number one in North America by the CPPA for overall machine operating
efficiency (the ratio of salable tonnes produced to theoretical production
capacity at a machine's given speed). The Company's mill, located near
Richmond, Virginia, has an annual capacity of 225,000 tonnes with an average
delivered cash cost of $402 per tonne for the first nine months of 1997. The
Company produces high quality newsprint suitable for four-color printing,
which publishers are increasingly using for general circulation. In 1996, and
for the first nine months of 1997, the mill produced approximately 219,000
and 169,000 tonnes of newsprint, and had an estimated operating efficiency
rate of 96.2% and 96.7%, respectively. Over the past four years, the Company
has been able to increase its production by approximately 17,000 tonnes,
through productivity and capital improvements, representing an annual average
increase of approximately 2.6%.
The Company's customers include leading newspaper publishers in the United
States, such as Dow Jones (publisher of The Wall Street Journal), The
Washington Post, the Newhouse Group, Gannett (publisher of USA Today),
MediaNews, Knight-Ridder, Media General, Times Mirror and New York Times.
Approximately 68% of the Company's newsprint production is sold on a contract
basis with the length of most contracts ranging from two to five years.
Approximately 90% of the Company's current newsprint production is purchased
by its top ten customers, eight of whom have been customers of the Company
for over 15 years.
In its manufacturing process, the Company's mill currently uses 65% TMP,
28% de-inked pulp and 7% kraft pulp. The use of TMP provides high wood fiber
yields and higher quality newsprint than that produced by the traditional
mechanical groundwood process. The mill was the first of its kind designed to
produce newsprint from 100% TMP using Southern Pine. The de-inked pulp is
produced at the Company's recycling facility, which is adjacent to the
newsprint mill. The recycling facility commenced operations in 1994 and
features state-of-the-art technology for de-inking, cleaning and screening of
ONP and OMG. The Company believes that the addition of the recycling facility
increased the mill's capacity and improved the Company's manufacturing cost
structure.
Prior to the consummation of the Transactions, all the Company's wood
requirements were supplied by its affiliate, Timberlands, with approximately
30% coming from Timberlands' own land and the remainder being procured by
Timberlands from local independent wood contractors and independent sawmills.
Timberlands currently owns approximately 130,000 acres of prime timber in
Virginia. Brant-Allen may monetize all or a substantial portion of that
acreage to reduce debt incurred in connection with the Timberlands
Acquisition. However, Timberlands will retain long-term fiber supply
arrangements which management believes would allow the Company to maintain
fiber sourcing flexibility. The ONP and OMG used for the Company's recycling
facility are provided by a combination of individual processors, municipal
recovery facilities and brokers. All fiber is currently supplied from sources
within a 200 mile radius of the mill.
Executive management is provided by Brant-Allen, the owner of the Company,
pursuant to a management contract (the "Management Services Agreement").
Brant-Allen's executive management has an average of over 28 years of
experience in the newsprint industry and includes Peter Brant and Joseph
Allen, who together own 100% of the Company indirectly through Brant-Allen.
Brant-Allen's predecessor was engaged in the newsprint industry since its
formation in 1941.
Brant-Allen also manages and owns all the capital stock of Soucy Inc., a
Canadian corporation. Soucy Inc. is the general partner of, and owns a 50.1%
interest in, Soucy Partners, a Canadian limited partnership. Soucy Inc. owns
a newsprint machine that has an annual capacity of 67,000 tonnes and Soucy
Partners owns a newsprint machine that has an annual capacity of 150,000
tonnes. Newsprint produced by the Company and Soucy is sold through
Brant-Allen, which currently markets approximately 442,000 tonnes of
newsprint (225,000 tonnes for the Company and 217,000 tonnes for Soucy).
Brant-Allen intends to continue to manage the Company and Soucy to maximize
any available synergies. The Company benefits from the centralization of
marketing, financial, administrative and distribution functions at
Brant-Allen. These services are provided pursuant to the Management Services
Agreement for which a management fee of 3% of annual net sales is payable by
the Company, of which, beginning December 1, 1997, one third is payable in
cash.
49
<PAGE>
COMPETITIVE STRENGTHS
The Company believes that its competitive strengths include:
LOW COST PRODUCTION CAPABILITIES. The Company estimates that over 90% of
newsprint produced in North America is produced in four regions: Eastern
Canada, Western Canada, U.S. Northwest and U.S. South. In 1996, the Company's
average delivered cash cost of $416 per tonne was lower than the average for
the U.S. Northwest, Eastern Canada and Western Canada regions.
The following are the average delivered cash costs, by region, for the
periods indicated, and the estimated 1995 percentage of North American
capacity in each region (calculated by the Company from RISI and CPPA
statistics):
<TABLE>
<CAPTION>
1996 DELIVERED 1995 ESTIMATED %
CASH COST OF NORTH AMERICAN
REGION (A) $/TONNE (B) CAPACITY (D)
- --------------- -------------- -----------------
<S> <C> <C>
U.S. South 404 24%
U.S. Northwest 437 13%
Eastern Canada 427 46%
Western Canada 451 14%
The Company (c) 416 1%
</TABLE>
- ------------
(a) A minimal amount of North American capacity, approximately 3% in 1995,
is located in the U.S. Northeast and U.S. Midwest regions.
(b) Based on RISI statistics for delivered cash costs for 1996, except for
the Company. All references in this Prospectus to delivered cash cost
of newsprint include manufacturing cost excluding depreciation plus
transportation costs.
(c) All references in this Prospectus to the Company's delivered cash cost
of newsprint prior to December 1, 1997, are adjusted to reflect the
market price of fiber. See "Certain Related Party Transactions."
(d) Based on latest available CPPA statistics for estimated North American
capacity.
The principal reasons for the Company's low cost structure include its
leadership in operating efficiency, the strategic location of its
manufacturing facility, its strategic fiber sourcing capabilities, its low
energy costs and its highly trained and motivated non-union workforce.
Efficient Manufacturing Facilities. For the past ten years, the Company's
paper machine has been ranked number one in North America by the CPPA for
overall machine operating efficiency. With its automated newsprint facility,
the Company has maintained its leadership in machine operating efficiency by
focusing on maximizing machine speeds, minimizing unscheduled downtime and
reducing work hours per tonne. With an average machine operating efficiency
of 96.7% for the first nine months of 1997, the Company's mill is capable of
producing an average of 620 tonnes of newsprint per day. The Company's
newsprint machine currently runs at 3,900 feet per minute.
Strategic Location of Manufacturing Facilities. The Company's mill is
located close to its major customers and fiber supplies. Currently,
approximately 75% of its total customer shipments, 100% of its wood sources
and 100% of its ONP and OMG sources are located within a 200-mile radius of
the mill. In addition, the mill's location facilitates ready access to many
major metropolitan areas, including Atlanta, Baltimore, Charlotte, New York,
Philadelphia, Richmond and Washington, D.C. via rail and major highways. As a
result, the Company was able to attain an average cash transportation cost
for 1996 of approximately $27 per tonne, which the Company estimates, based
on capacity and transportation statistics published by RISI and the CPPA, is
approximately 50% lower than the estimated North American industry average of
$54 per tonne.
Strategic Fiber Sourcing Capabilities. In actively managing its fiber
costs, the Company has two competitive advantages: a flexible manufacturing
process and easy access to timberlands owned and managed by Timberlands. The
Company's manufacturing process allows it to vary the relative percentage of
TMP, de-inked pulp and kraft pulp, within certain limits. This allows the
Company to optimize input costs in times of high costs for wood, ONP or OMG.
Furthermore, Brant-Allen currently has the ability to direct wood
requirements from Timberlands' land to the Company depending on third-party
prices for wood, which can mitigate significant fluctuations in the Company's
raw material costs. See "Business of Timberlands."
Low Energy Costs. The Company's ability to achieve low electricity costs
has had a favorable impact on its cost structure. Its electricity supply
contract with a local utility and its efficient electrical usage patterns
have allowed the
50
<PAGE>
Company to obtain electricity at a rate that it believes is approximately 40%
below the national average for industrial users. The Company has been able to
achieve these results due to its ability to reduce its energy demand at peak
times.
Highly Trained and Motivated Non-union Workforce. The Company has a stable
non-union work force that management believes is highly trained and
motivated. With the majority of employees having over 15 years of experience
at the mill, the Company has avoided the inefficiencies and re-training costs
typically associated with high workforce turnover. Management has implemented
an incentive program that rewards employees with monthly bonuses of up to 10%
of their salaries for attaining certain production and quality targets.
HIGH QUALITY PRODUCT AND STRONG CUSTOMER RELATIONSHIPS. The Company
believes that its newsprint, which is produced primarily from TMP pulp and
recycled fiber, is recognized by publishers as a high quality product in
terms of printability and runability. The high quality of the newsprint
produced by the Company is demonstrated by its suitability for four-color
printing, which publishers are increasingly using for general circulation.
The average breaks per hundred rolls for the Company's newsprint in its
customers' pressrooms was 1.9 in 1996, and 1.8 for the first nine months of
1997, which management believes is below the average for that of its
competitors. In 1996, the Company was ranked by Gannett, the largest
newspaper company in the U.S. and owner of USA Today, as the number three
certified supplier for the USA Today newspaper. In 1996, the Company was
ranked by Knight-Ridder as its number two supplier on the East Coast. Other
major customers of the Company include Dow Jones (publisher of The Wall
Street Journal), The Washington Post, The Newhouse Group, MediaNews, Media
General, Times Mirror and New York Times. The Company believes that the
quality of its product and level of its customer service have enabled it to
maintain these strong customer relationships.
EXPERIENCED AND COMMITTED MANAGEMENT TEAM. The executive officers of the
Company include Peter Brant and Joseph Allen, who together indirectly hold a
100% ownership interest in the Company through Brant-Allen. The current
executive officers of the Company formed the Company, supervised the
construction of the mill and the commencement of the mill's operations and
have managed the Company's business since that time. These executive
officers, together with the other members of the management team of the
Company, have an average of over 15 years of experience with the Company and
30 years of experience in the newsprint industry. Management believes that
the commitment and experience of the Company's management team have enabled
it to achieve its low cost position in the industry and to maintain high
product quality and strong customer relationships.
BUSINESS STRATEGY
The Company's objectives are to maximize revenues and cash flow. The key
elements of the Company's strategy are:
COST REDUCTIONS. Management believes that incremental costs savings can be
achieved with respect to its fiber sourcing, raw materials, labor costs per
tonne and shipping and handling costs. In addition, the Company intends to
focus on reducing woodyard handling costs. Cost reductions with respect to
fiber sourcing and raw materials will be achieved through the increased use
of recycled fiber, which is cheaper than virgin fiber and, the Company
believes, will also lead to lower labor costs in the woodyard. This increase
in the amount of recycled fiber will also lead to a reduction in the
Company's use of kraft pulp, a high-cost fiber. Further cost reductions will
be achieved through increased substitution of wood chips from saw mills in
place of the roundwood previously supplied through Timberlands. Lower costs
in finishing and shipping and handling will be achieved through the reduction
of the labor force in those areas due to the implementation of a new,
computerized roll-handling system which will track orders through the
manufacturing process and shipment. The computer system, installed in 1997,
became fully operational during the second half of the year.
IMPROVEMENTS IN PRODUCTION. Management intends to maintain the number one
operating efficiency ranking of its newsprint machine by continuing to focus
on minimizing machine downtime, exploiting departmental efficiencies to
further reduce work hours per tonne and increasing production by increasing
machine speed. The Company believes that these improvements should favorably
impact its cost structure.
GROWTH OPPORTUNITIES. The Company plans to evaluate opportunities to
expand production capacity through acquisitions of other newsprint businesses
or assets. Management believes that strategic expansion would provide
opportunities for further efficiencies and cost benefits due to economies of
scale, while maintaining its strong customer relationships.
51
<PAGE>
FINANCIAL STRATEGY. Management intends to focus on improving the Company's
financial flexibility going forward. Management expects to accomplish this
goal by (i) using available excess cash to reduce indebtedness and (ii)
pursuing other alternatives, which may include equity financing, to fund
growth and reduce indebtedness. By improving financial flexibility,
management believes that the Company's ability to react to general economic
and industry changes would be enhanced.
BACKGROUND
The Company's predecessor, BIPCO, was formed in 1978 as a limited
partnership, with Brant-Allen as its general partner. Prior to the
Acquisition, Brant-Allen owned a 30% partnership interest in BIPCO, and
subsidiaries of The Washington Post and Dow Jones each owned 35% partnership
interests in BIPCO.
Brant-Allen is a Sub Chapter S corporation jointly owned by Mr. Peter
Brant and Mr. Joseph Allen. Brant-Allen's predecessor was formed in the early
1940s when the fathers of Messrs. Brant and Allen founded a paper conversion
and newsprint sales business. In the early 1970s, Brant-Allen entered into
the newsprint manufacturing business. Messrs. Brant and Allen have been
involved in the management of Brant-Allen for over 30 years: Mr. Brant serves
as the Chairman of the Board, President and Chief Executive Officer of
Brant-Allen and Mr. Allen serves as Co-Chairman of the Board and Chief
Operating Officer of Brant-Allen. Mr. Brant also serves as the Chairman of
the Board, President and Chief Executive Officer of the Company and Mr. Allen
also serves as Vice Chairman of the Board, Executive Vice President and Chief
Operating Officer of the Company.
Prior to the Timberlands Acquisition Brant-Allen was also the general
partner of, and owned a 30% partnership interest in, BITCO, which was
converted to Timberlands immediately prior to the closing of the Timberlands
Acquisition. BITCO was formed in 1985 and currently owns and manages
approximately 130,000 acres of timberland in Central Virginia, all within 200
miles of the Company's mill. See "Business of Timberlands."
In addition, Brant-Allen owns all the capital stock of Soucy Inc. Soucy
Inc., a newsprint manufacturer located in Rivi|f4re-du-Loup in the Province of
Quebec, Canada, owns a newsprint machine that currently has an annual
capacity of 67,000 tonnes. Soucy Inc. is also the general partner and owns a
50.1% interest in Soucy Partners, a limited partnership formed in 1974 with
Dow Jones (39.9%) and Rexfor (a Quebec government-owned company) (10.0%).
Soucy Partners owns and operates a mill, including a newsprint machine, with
an annual production capacity of 150,000 tonnes. The two Soucy newsprint
machines are located on Soucy Partners' plant site. See "Business of Soucy."
FinCo is a wholly owned subsidiary of the Company that was incorporated in
Delaware for the purpose of serving as a co-issuer of the Notes. FinCo will
not have any operations or assets and will not have any revenues. As a
result, holders of the Notes should not expect FinCo to participate in
servicing the interest and principal obligations on the Notes.
THE NEWSPRINT INDUSTRY
The industry information presented below was compiled from published data
provided by the Canadian Pulp and Paper Association, Resource Information
Systems, Inc. and Miller Freeman, Inc.
OVERVIEW
Newsprint represents 15% of all paper and paperboard produced in North
America and is used primarily by newspaper publishers and commercial
printers. Newsprint is produced from a combination of mechanical,
thermomechanical and/or chemical-thermomechanical pulp, and, increasingly,
recycled paper (i.e., ONP and OMG). Although North American consumption of
newsprint has generally declined over the past 5 years, the 1997 demand to
date has increased over 1996 levels, primarily due to factors such as
increased Sunday newspaper circulation, modest publisher inventories and a
more robust advertising environment. International newsprint consumption over
the last several years has been growing more rapidly than in North America
due to the economic growth and demographic trends in selected emerging
markets. Due to the decline in North American newsprint consumption and
substantial increase in foreign consumption, North American newsprint
producers have dramatically increased exports over the last five years.
The newsprint industry is cyclical, with consumption highly dependent on
the economy, purchases of advertising lineage, newspaper circulation and the
price of newsprint. Newsprint prices are in turn dependent on general
economic conditions, capacity additions, inventory levels, foreign currency
fluctuations and to a lesser extent, raw material and energy costs. After
prices escalated rapidly in 1995, they dropped in 1996 despite a period
52
<PAGE>
of strong economic growth, primarily due to a build up in consumer and
producer inventories and reductions in consumption by publishers. In order to
strengthen pricing, newsprint producers rationalized production capacity,
actively managed existing capacity and focused on cost reduction strategies.
Due to the consolidation of the North American newsprint industry during the
past three years, the top 5 newsprint producers now account for over 50% of
North American newsprint capacity. As a result of the changes implemented by
newsprint producers and increasing consumption by newspaper companies,
inventory levels have declined and pricing has increased during 1997.
The following table sets forth North American newsprint shipments,
capacity, capacity utilization, inventories and average Eastern U.S.
transaction prices per tonne in U.S. dollars for North America:
<TABLE>
<CAPTION>
(.000 TONNES) 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Newsprint Shipments .................... 15,069 15,590 15,784 15,506 15,424
Production Capacity .................... 16,294 16,035 16,290 16,221 16,295
Shipments/Capacity Ratio ............... 92.5% 97.2% 96.9% 95.6% 94.7%
Average Eastern U.S. transaction price $632 $658 $466 $453 $ 440
U.S. Consumer Inventories .............. 1,289 1,548 1,216 1,355 1,324
</TABLE>
NEWSPRINT CONSUMPTION AND DEMAND
The North American consumption of newsprint is principally driven by the
performance of U.S. daily newspapers, which is closely linked to circulation
and advertising trends. Although the aggregate circulation of U.S. daily
newspapers has been on the decline over the past several years, the aggregate
consumption for newsprint has declined only marginally as a result of growth
in consumption from other sources. U.S. daily newspapers are the largest
consumers of newsprint in the world. Of the 12.0 million tonnes of newsprint
consumed in North America during 1996, U.S. daily newspapers accounted for
8.8 million tonnes or 73%. Other major uses for newsprint in North America
are weekly newspapers, commercial printers for directories, inserts, flyers
and newspaper supplements, and other publications. Competition from
alternative media has been a factor that the Company believes has for many
years contributed to the changing patterns of newspaper consumption and which
has retarded the overall growth of newspaper consumption in North America and
will continue to do so in the future.
North America, the largest consumer of newsprint in the world, consumed
12.0 million tonnes of newsprint in 1996, which represents 34% of the world's
consumption. The U.S. accounted for 10.9 million tonnes or 91% of the total
North American consumption in 1996. North American newsprint consumption over
the past five years declined by approximately 1.2% on a compound annual
growth rate (CAGR) basis with a 3.9% decline from 1995 to 1996 alone. This
decline in North American newsprint consumption is attributable to the
proliferation of alternative media, declines in newspaper circulation,
capacity additions overseas (which negatively impact exports) and the
consolidation of the retail industry. The decline in 1996 North American
consumption coincided with an even larger drop in newsprint demand. The
decline in 1996 North American demand was caused by an increase in the
inventory of U.S. daily newspapers from approximately 32 days in November
1994 to 53 days in February 1996. The increase in days supply was caused by
U.S. daily newspapers accumulating large inventories in 1995 to avoid
purchasing newsprint at higher prices, as well as U.S. daily newspapers
reducing page widths, high cost circulation and editorial content. However,
the industry has recovered thus far in 1997 with the consumption of newsprint
in the U.S. increasing by approximately 4.4% through August 1997 over 1996
levels. Notwithstanding the decline in newsprint consumption over the past
five years, North American newsprint demand in 1997 and 1998 is expected to
increase over the 1996 level.
NEWSPRINT PRICES
Newsprint prices are highly dependent on general economic conditions,
inventory levels and capacity additions. General economic conditions can
cause increases or decreases in advertising spending, which in turn would
impact newsprint consumption levels. Customer and producer inventory levels
also drive newsprint demand and prices by causing lower prices when
inventories are high and higher prices when inventories are low. Newsprint
capacity levels are also critical in the assessment of demand/supply
imbalances, with excess capacity having downward pressure on transaction
prices.
Newsprint prices have been extremely volatile over the past three years.
After hitting a low of $420 per tonne in the first quarter of 1994, newsprint
prices increased to a high of $750 per tonne ($765 per tonne on the West
Coast)
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<PAGE>
in the fourth quarter of 1995 and held at those levels through the first
quarter of 1996. However, the sharp rise in prices and the expectation of
further price increases caused newspaper publishers and newsprint companies
to build inventories. This inventory buildup had significant negative
consequences for newsprint demand, with resulting downward pressure on
pricing. Newsprint producers moved quickly to resolve the supply/demand
imbalance. Actions taken included taking market related downtime, abandoning
plans to add capacity, converting old machines to higher-value added grades,
expanding business internationally, and seeking less expensive ways to
produce newsprint. The increase in North American newsprint consumption
during 1997, along with the counteractive measures taken by newsprint
producers, helped reduce the average days of supply to 37 days earlier this
year. Newsprint prices in 1997 recovered from a level of $510 per tonne in
the first quarter of 1997 to $560 per tonne in the third quarter. Several
major newsprint producers have announced price increases for the fourth
quarter which would increase newsprint prices to $610 and $600 per tonne on
the West Coast and East Coast, respectively.
NORTH AMERICAN PRODUCTION AND CAPACITY
Approximately 15.3 million of the 34.9 million tonnes of newsprint
produced worldwide in 1996 were produced in North America at 58 mills. North
America's share of worldwide newsprint production has declined from 46% to
44% since 1991. Canada, the largest producer of newsprint in the world,
shipped approximately 60% (5.2 million tonnes) of its production to the U.S.
in 1996, while 12% (1.1 million tonnes) was consumed in Canada and 28% (2.5
million tonnes) was exported to international markets.
The North American newsprint industry's last round of significant capacity
expansion was in the late 1980s, with approximately 3.0 million tonnes of
annual capacity coming online between 1988 and 1993. This capacity expansion
led to an oversupply of newsprint in the North American market, which forced
producers to manage available capacity/production by taking downtime,
converting newsprint machines to other grades of paper or shutting down
newsprint machines. This oversupply was principally responsible for the low
transaction prices that prevailed for newsprint during this period. However
since that time, there have been no major capacity additions that have come
on-line in North America. In fact, the removal of newsprint capacity has
effectively offset the annual capacity creep of existing newsprint machines,
resulting in no significant change in North American newsprint capacity
during the past 5 years. Management believes North American newsprint
capacity expansion will be negligible over the next few years. The only
significant capacity additions are expected to be made overseas as other
countries try to meet the growing demand for the product.
The Company believes that the consolidation in the newsprint industry over
the past three years has contributed to more prudent management of
capacity/production levels through the scheduling of downtime when required
and keeping capacity additions to a minimum. For example, on a pro forma
basis, Abitibi-Consolidated, the largest newsprint producer in the world,
took approximately 345,000 tonnes of downtime in 1996, which represents over
10% of its capacity. Management believes that the effective management of
capacity by the large industry players should reduce the volatility of the
cycles in the future.
FOREIGN MARKETS
The growth in consumption for newsprint in foreign markets has exceeded
that in the North American market in recent years. Consumption in the North
American market declined at a CAGR of approximately 1.2% over the 5 year
period ended in 1996 in comparison to an average increase of approximately
3.7% per year for foreign markets over the same time period. North American
exports over the five year period ended 1996 grew at a CAGR of approximately
3.5%, with a growth rate of 18.6% for the period 1995 to 1996. Asia is the
fastest growing newsprint market in the world with consumption increasing by
11.5% (on a CAGR basis) from 1992 to 1996. The impact of this international
consumption growth on demand from North American companies has been somewhat
mitigated by capacity additions in local markets. At the present time, the
Company is not selling, and has no intention of selling, to foreign markets.
RECYCLED FIBER CONTENT
Recycled fiber content newsprint has increased during the 1990's. Driving
demand is existing and anticipated state and federal legislation that would
require the use of newsprint with minimum levels of recycled fiber content.
In addition, the public at large increasingly prefers to purchase products
that are perceived to be environmentally friendly.
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<PAGE>
Approximately 28 states have either enacted legislation requiring a
specified percentage of total newsprint consumed to contain specified minimum
levels of recycled fiber (typically not more than 40%, although some states
require levels as high as 50%) or had adopted voluntary guidelines
recommending the use of newsprint with a certain percentage of recycled fiber
content. Pending Federal legislation would establish minimum requirements for
recycled fiber content newsprint. This proposed legislation, if adopted in
its current form, would initially require all participants in the U.S.
printing and publishing industry to purchase newsprint with an aggregate 20%
recycled fiber content. For the first nine months of 1997, the average
recycled fiber content of the Company's newsprint was approximately 28%.
THE MILL AND THE PRODUCTION PROCESS
The Company's mill, which began operations in 1979, is located on an
approximately 700 acre site near Richmond, Virginia, which is approximately
100 miles south of Washington, D.C., and 30 miles north of Richmond,
Virginia. The mill's operations consist of a woodyard, a pulping system, a
paper machine and related utility, recycling, storage and transportation
facilities. The Company's mill can produce 225,000 tonnes of newsprint per
year. The mill site is large enough to accommodate a second newsprint machine
and the Company presently has the necessary permits, subject to periodical
renewal, that would allow it to construct a new machine should it decide to
do so.
A combination of pulp material is used to feed the Company's newsprint
machine. Currently, approximately 65% of the Company's pulp requirements are
derived from the Company's TMP process using wood and woodchips,
approximately 28% of the Company's fiber requirements are de-inked pulp from
the mill's recycling facility and approximately 7% is purchased kraft pulp.
The process of creating these pulps from virgin timber and ONP and OMG and
transforming them into newsprint is outlined below.
The Company's mill has a wood requirement of approximately 150,000 cords
per year. All wood is currently supplied from sources within a 200 mile
radius of the Company's mill. See "Supply Requirements" and "Certain Related
Party Transactions." Currently, the Company's wood needs are supplied 50%
from wood harvested by local independent wood contractors, 30% from acreage
owned by Timberlands and 20% from non-Timberlands owned acreage, in chip
form, by independent sawmills.
The Company's mill was the first newsprint mill to use pulp derived from
100% TMP using Southern Pine. In the TMP process, woodchips are first washed
to remove foreign particles, then transported over a dewatering screen to
remove surface water, and eventually softened by exposure to pressurized
steam. The next step is to refine the chips using refiners that reduce the
chips in size and "fiberize" them. The advantage of this process is that it
develops a strong, clean fiber, with minimal chemical additions. Additional
advantages include higher quality pulp than that produced by the traditional
groundwood pulping process, low water use, lack of an unpleasant odor, major
reduction of environmental pollutants and the relative ease of treatment for
the resulting wastewater. The TMP process permits the production of a
superior quality wood fiber pulp produced in a cleaner, more environmentally
friendly manner than the traditional pulping process.
Before pulp or stock, as produced by the TMP refiners, can be used on the
paper machine, it must be screened and thickened to be completely uniform.
Once this treatment is complete, it is blended with de-inked pulp and
purchased kraft pulp. The blended stock is then further diluted and pumped to
the newsprint machine.
The Company's woodroom is where the wood is reduced from log form into a
uniform woodchip that can be used by the TMP process. The bark is removed by
the tumbling action of the logs inside a debarking drum. The bark is
pulverized in a bark shredder and is pneumatically conveyed to the powerhouse
to be used as fuel. The debarked wood is fed into a chipper containing
rotating razor-sharp blades that reduce the logs to chips within seconds. The
chips are then transported to the chip pile where they are cured. When cured
they are then transported pneumatically to a silo in the TMP plant where they
await processing.
The mill's newsprint machine produces newsprint at an average speed of
approximately 3,900 feet per minute. The paper is formed as the pulp travels
vertically upward between two continuous fine mesh fabrics, with water
drainage occurring by means of gravity and vacuum. The paper is then
calendared to its final thickness by heavy iron rollers and wound into reels.
Each reel is then cut to the width and wound to the diameter required by the
customer. The finished rolls are given one final quality inspection before
being sent to a finishing line, where an average of 900 rolls per day are
weighed, coded, and wrapped with a kraft liner to protect them in transit.
They are then either stored or shipped directly to customers.
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<PAGE>
Given the high capital cost associated with operating a newsprint mill, it
is essential for newsprint manufacturers to manage their facilities with a
high rate of utilization in order to provide an adequate return. Since the
Company's mill was built, the Company has been able to operate the mill with
a high rate of utilization. In North America in each of the past ten years,
the CPPA has ranked the Company's newsprint machine number one in North
America for overall machine operating efficiency (defined as the ratio of
salable tonnes produced to theoretical production capacity at a machine's
given speed). Downtime at the mill for maintenance (the replacement of wires,
felts, etc.) and inspection, is scheduled every 21 to 23 days for about four
hours. Additional downtime of between eight and sixteen hours per occasion
for more complex maintenance and repairs is scheduled four times a year to
coincide with the ordinary maintenance schedule. While unscheduled downtime
of between 24 and 36 hours typically occurs once or twice per year, the mill
has rarely experienced an extended period of unscheduled downtime. For the
past four years, the mill has operated for an average of 361 days per year.
The Company's recycling plant, located adjacent to the newsprint mill,
began operation in March 1994. The recycling plant features advanced
technologies for the re-pulping, de-inking, cleaning and screening of ONP and
OMG. The recycling facility turns ONP and OMG into high-grade de-inked pulp.
ONP and OMG is currently procured from a combination of individual
processors, municipal recovery facilities and brokers. After delivery to the
plant, the ONP and OMG are mixed by operators into a blend with a ratio of
ONP to OMG of 85:15, which is then fed into a pulper which mixes in additives
and prepares the stock for ink separation. At full capacity, the recycling
facility processes approximately 80,000 tonnes per year of ONP and OMG. The
stock is diluted and contaminants are removed using screens and coarse
cleaning agents. Ink is removed by creating foam to which the ink attaches.
After being thickened, the stock is again diluted and washed to remove
microscopic particles. Finally, recycled water from the paper machine is
added to the pulp to lower the pH to the proper level and to create the right
consistency to combine with the virgin fiber.
The recycling facility has the capacity to produce a minimum of 180 tonnes
of recycled fiber per day. The recycling mill enables the Company to produce
approximately 620 tonnes per day of newsprint containing a minimum of 20%
recycled fiber and a maximum of 40%. The recycling facility also includes a
50,000 square foot warehouse that holds a thirteen day supply of ONP and OMG.
PRODUCT
While newsprint is essentially a commodity, product characteristics such
as brightness and consistency can differentiate the product in the eyes of
newspaper publishers. The newsprint sheet produced by the Company is suitable
for four-color printing that requires newsprint to be bright and consistent
enough to ensure colors are reproduced clearly and accurately. Publishers are
increasingly using four-color printing for general circulation editions. The
trend towards higher-quality, four-color printing has accelerated since the
debut of USA Today in 1982. In 1996, the Company was ranked the number three
supplier of only ten newsprint producers certified as suppliers to Gannett
for use in USA Today.
Another newsprint sheet quality measure, extremely important to
publishers, is the number of breaks per hundred rolls that occurs in the
publishers' pressroom while running the presses. Breaks per hundred rolls for
the Company's product have declined from an average of 3.2 in 1992 to 1.8 for
the first nine months of 1997, which management believes is below the average
for that of its competitors in their customers' pressrooms.
MARKETS AND CUSTOMERS
The Company's marketing objective is to become a preferred supplier to
each of its newsprint customers. To achieve this goal, the Company focuses on
service, product quality and long term relationships. Eight of the Company's
top ten customers have been customers for over 15 years. In 1996,
approximately 41% of the production of the Company's mill was sold to Dow
Jones and The Washington Post under purchase agreements (the "Purchase
Agreements") that obligate each of those customers to purchase a minimum of
approximately 45,000 tonnes of newsprint per year at prices based on
prevailing market prices paid by those customers to their non-affiliated East
Coast suppliers. The Purchase Agreements are currently scheduled to expire on
December 31, 2000, but are extendable to December 31, 2004, subject to
agreement on a pricing formula. See "Certain Related Party Transactions --
Purchase Agreements with Dow Jones and The Washington Post." The Company has
sold newsprint to Dow Jones since 1980 and The Washington Post since 1979.
The Company, through Brant-Allen, also has a
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<PAGE>
contract with Media General requiring Media General to purchase a minimum of
10,000 tonnes per year at market prices, which is scheduled to expire on
December 31, 1997, and a contract with Times Mirror requiring Times Mirror to
purchase a minimum of 24,000 tonnes per year at market prices, which is
scheduled to expire on December 31, 1999. Each of these agreements has
automatic one year renewal options. In addition, the Company, through
Brant-Allen, has recently entered into a contract with Gannett requiring
Gannett to purchase 36,000 tonnes of its newsprint requirements from the
Company at market prices with an option for Gannett to purchase up to an
additional 5,400 tonnes from the Company. This contract is scheduled to
expire on December 31, 1999, and thereafter is renewable at either party's
option for two terms of two years each. In 1996, and for the nine months
ended September 30, 1997, the Company's ten largest customers represented an
aggregate of 90% and 93%, respectively, of the Company's total sales. Other
than the agreements with Dow Jones, The Washington Post, Media General, Times
Mirror and Gannett, the balance of the Company's production is sold on the
basis of written or oral understandings whereby customers purchase a minimum
volume amount for short periods up to one year based on market prices at the
time of purchase. For 1996, the Company's top ten customers, ranked by volume
of newsprint purchased, were:
<TABLE>
<CAPTION>
PERCENT OF
TONNES TOTAL TONNES PURCHASED
CUSTOMER CUSTOMER SINCE PURCHASED IN 1996 IN 1996
- --------------------- -------------- ----------------- ----------------------
<S> <C> <C> <C>
Dow Jones ............ 1980 45,600 21%
The Washington Post . 1979 40,200 19%
Newhouse Group (a) ... 1980 24,900 11%
Gannett (a) .......... 1980 21,500 10%
MediaNews (a) ........ 1980 17,200 8%
Knight-Ridder ........ 1992 10,700 5%
Media General ........ 1980 10,000 5%
Times Mirror (a) .... 1980 9,500 4%
New Jersey Press
Inc.................. 1980 8,500 4%
New York Times........ 1994 7,500 3%
----------------- ----------------------
Total............... 195,600 90%
================= ======================
</TABLE>
- ------------
(a) Includes their respective predecessors.
Brant-Allen markets all of the Company's production and is able to offer
its customers newsprint from either the Company's mill or from Soucy's mills
in order to satisfy customer demand, which enables Brant-Allen to optimize
shipping costs from each of these mills. Brant-Allen employs three full-time
salesmen and three customer service representatives at the mills, and Messrs.
Brant and Allen are actively involved in its sales and marketing efforts.
Brant-Allen also performs all sales, invoicing, account receivable
maintenance, cash management and treasury functions for the Company pursuant
to the Management Services Agreement. Other than the management fee paid by
the Company to Brant-Allen under the Management Services Agreement, the
Company does not pay Brant-Allen any additional fees for its marketing
services. See "Certain Transactions--Relationship with Brant-Allen,
Timberlands and Soucy."
The Company has developed the BearTracker software package, a newsprint
roll tracking system that tracks newsprint from the origin of shipment
through the pressroom. This software package enables the Company's customers
to control newsprint inventory by monitoring inventory value, weight and size
and identifying its location, and by reporting purchasing, consumption,
newsprint runnability and waste management. The BearTracker software package
is used by many of the Company's customers, including Gannett, Charleston
Newspapers and Chesapeake Publishing Corporation.
DISTRIBUTION
The Company sells approximately 90% of its production to customers in the
ten states surrounding its mill in Virginia, with the balance being sold
elsewhere in the U.S. The Company's mill is situated in a geographically
strategic location to serve its customers, being close to major metropolitan
areas, including Atlanta, Baltimore, Charlotte, New York, Philadelphia,
Richmond and Washington, D.C. The Company has the flexibility to ship its
57
<PAGE>
products to these areas via rail or major highways, as specified by customers
(such as by way of the nearby I-95 and I-64 inter-state highways). For the
first nine months of 1997, the Company shipped its newsprint for an average
transportation cost of $27 per tonne, which the Company estimates, based on
statistics of RISI and the CPPA, is approximately 50% lower than the
estimated North American industry average of $54 per tonne. Timely and
economical delivery of finished products to customers are important factors
in the Company's ability to compete effectively.
SUPPLY REQUIREMENTS
The Company's mill has a wood requirement of approximately 150,000 cords
per year of Southern Pine. Although the Company currently owns approximately
4,900 acres of pine timberlands, historically, the Company's wood
requirements have been supplied principally by Timberlands. Timberlands had
supplied all wood to the Company at market prices plus an upcharge which
include both the value of the wood and the costs of harvesting, hauling and
profit. Concurrently with the consummation of the Transactions, the Company
and Timberlands terminated these arrangements and entered into a 10 year wood
supply agreement (the "Wood Supply Agreement") that provides for Timberlands
to sell to the Company 40,000 cords of wood fiber annually at market prices
determined by reference to the prices paid by the Company for wood fiber
purchased from non-affiliated wood suppliers. Currently, approximately 100%
of the Company's wood needs are satisfied by timber harvested within a 200
mile radius of the mill by local independent wood contractors. Approximately
30% of the Company's wood requirements are provided from Timberlands' land.
The Company procures all its wood fiber requirements in excess of that
supplied by Timberlands under the Wood Supply Agreement. The Company's
recycled fiber requirements are provided by its own state-of-the-art
recycling facility. Prior to the consummation of the Transactions, the
Company relied on Timberlands to procure the Company's ONP and OMG
requirements for its recycling facility from a combination of individual
processors, municipal recovery facilities and brokers and paid Timberlands a
fee per tonne of ONP and OMG procured. These procurement arrangements were
terminated with effect from the consummation of the Transactions. The Company
now purchases its ONP and OMG requirements directly.
In actively managing its fiber costs, the Company has two competitive
strengths: a flexible manufacturing process and easy access to timberlands
owned and managed by Timberlands. The Company's manufacturing process allows
it to vary the relative percentages of TMP, de-inked pulp and kraft pulp,
within certain limits. This allows the Company to optimize input costs in
times of high costs for wood or ONP and OMG. Furthermore, Brant-Allen has the
ability to direct less or more wood from Timberlands' land to the Company
depending on prices of third-party timber and ONP and OMG, which tends to
mitigate the Company's raw materials costs. See "Business of Timberlands."
ENERGY AND WATER REQUIREMENTS
The Company's mill utilizes two forms of energy: steam, which is primarily
used within the paper machine's dryer section to dry the newsprint sheet as
it is being produced, and electricity, which is used to power the remaining
processes, particularly the refining of the woodchips.
All of the mill's process steam (on average, 165,000 pounds per hour) is
generated by an on-site boiler rated at 243.0 million Btu per hour heat
input. The boiler is fired using pulverized coal, as a primary fuel, and bark
and wood wastes as secondary fuels. In addition, a natural gas fired package
boiler, with a capacity of 190,000 pounds per hour, is used as a backup if
the main boiler malfunctions or is down for maintenance.
Through Rapahannock Electrical Cooperative, which is the Company's local
utility, the Company purchases 100% of its electrical power indirectly from
Virginia Electric and Power Company ("VEPCO") and Old Dominion Electric
Cooperative. The Company is, indirectly, VEPCO's third largest customer,
accounting for approximately 1% of VEPCO's normal system load.
Because the Company's electricity usage has an impact on both electricity
generation requirements and costs of VEPCO and Old Dominion Electric,
especially in periods of high demand (i.e., periods of high air conditioning
or heating loads), the Company has been able to negotiate favorable
electricity rates by demonstrating an ability to reduce demand during peak
times by adjustments to its production process. The Company believes that it
is able to obtain its electricity at a rate that is 40% below the national
average for industrial users. The Company's relatively low electricity
expense has been achieved through a combination of the Company's successful
electricity demand management efforts and a lower contractual rate for
electricity.
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The mill's water is supplied by the Hanover County public utility system
and by the mill's own river intake structure and pumping system on the North
Anna River. The mill operates a wastewater treatment facility which connects
to the Hanover County wastewater treatment plant. The mill has its own
on-site industrial landfill for solid waste. The Company's ownership and
operation of the industrial landfill is subject to the requirements of the
Virginia Waste Management Act and the Virginia Solid Waste Management
regulations, which govern the design, construction, operation and closure of
the landfill. The regulations also require the Company to monitor groundwater
conditions during the operation of the landfill and following closure of the
landfill to ensure that the landfill is not causing an adverse impact on
health or the environment.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive and changing
environmental regulation by federal, state, and local authorities in the
United States, including those requirements that regulate discharges into the
environment, waste management, and remediation of environmental
contamination. Environmental permits are required for the operation of the
Company's businesses, and are subject to revocation, modification and
renewal. Governmental authorities have the power to enforce compliance with
environmental requirements and violators are subject to injunctions, civil
penalties and criminal fines. Third parties may also have the right to sue to
enforce compliance with such regulations.
The Company has in the past made significant capital expenditures to
comply with current federal, state and local environmental laws and
regulations. The Company believes that it is in substantial compliance with
such laws and regulations, although no assurance can be given that it will
not incur material liabilities and costs with respect to such laws and
regulations in the future. Although the Company does not currently believe
that it will be required to make significant expenditures for pollution
control in the near future, no assurances can be given that future
developments, such as the potential for more stringent environmental
standards or stricter enforcement of environmental laws, will not cause the
Company to incur such expenditures. The Company anticipates incurring the
following environmental expenditures (over and above routine operating
expenditures) over the next two years: (i) $125,000 (budgeted for fiscal year
1998) for the acquisition of new aerators, sludge trucks, and road paving;
(ii) $550,000 (anticipated for fiscal year 1999) for the opening of a new
landfill cell; and (iii) $200,000 and $250,000 for the estimated cost of
closing two landfills for 1998 and 1999, respectively.
The Company's mill was designed and is operated with one of the most
stringent water use and wastewater flow requirements of any paper mill in the
U.S. At full production of 620 tonnes of newsprint per day, water usage is
approximately 3.5 million gallons per day. Mill effluent is approximately
3.25 million gallons per day. Extensive recycling and reuse of machine
whitewater, thickener and Saveall filtrates and other processed waters enable
the mill to maintain a low fresh water make-up requirement.
The wastewater treatment facility for the mill discharges effluent through
the outfall line of the Hanover County wastewater treatment plant to the
North Anna River. The effluent limits that must be maintained in accordance
with the discharge permit require continuous monitoring and extensive
reporting of numerous tests. The treatment facility consists of primary and
secondary clarification, aerated equalization and activated sludge treatment
including an oxygen-enriched activated sludge treatment system (the UNOX
System). With this degree of sophisticated equipment, the mill is able to
continually produce effluent that meets its permit requirements.
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<PAGE>
The Company maintains valid and current air and water permits and believes
it is currently in substantial compliance with respect to all such permits.
The Company believes that it has good relations with the federal, state and
local regulatory authorities, and management is not aware of any material
problems or costs that might jeopardize the Company's scheduled permit
renewals. A summary of the Company's key environmental permits is shown
below:
<TABLE>
<CAPTION>
PERMIT TYPE EXPIRATION DATE
- ---------------- ----------------------------------------------
<S> <C>
Air ............. No expiration date.
Wastewater ...... 5 year permit; renews in 2000.
Solid Waste ..... No expiration date (30 year life minimum).
Water ........... No expiration date for river withdrawal.
Storm Water ..... 5 year permit; renews in 1999.
- ---------------- ----------------------------------------------
</TABLE>
The U.S. Environmental Protection Agency (the "EPA") has proposed that
pulp and paper mills be required to meet currently proposed new air emissions
and revised wastewater discharge standards for toxic and hazardous pollutants
by early 2000. These proposed standards are commonly known as the "Cluster
Rules" since the EPA has proposed standards for a "cluster" of related air
emission and wastewater sources. The exact requirements of the EPA's proposed
new air and wastewater standards will not be known until the final
regulations are adopted and it is anticipated that compliance will not be
required earlier than 2000. While management does not expect the Cluster
Rules to have an impact on its TMP and recycling operations, the impact on
other aspects of the manufacturing process is still uncertain. In any event,
management does not anticipate that a material amount of capital expenditures
will be required in order to comply with such regulations.
On July 12, 1996, the Company entered into a Reasonably Available Control
Technology ("RACT") Agreement with the Virginia Department of Environmental
Quality ("VDEQ"). Under the RACT Agreement, the Company is not required to
incur any significant capital expenditures for the purchase and installation
of pollution control equipment.
On September 30, 1994, the EPA issued a Notice of Violation (the "Notice")
to the Company alleging that the Company had violated two conditions of its
federally enforceable state air permit. First, the EPA alleged that since at
least October 1, 1993, the Company had been burning coal with a sulfur
content in excess of limits specified in its permit. The Company had
previously notified the EPA and the VDEQ that in April 1994, it had
discovered, through on-site testing of its coal supplies, that coal with
excessive sulfur content had been delivered to the Company, notwithstanding
that the Company had received test results from its supplier that indicated
that the coal met required specifications (including the sulfur content
specification). The Company instituted corrective actions to ensure that this
situation was not repeated. The EPA also alleged that the Company had removed
a sulfur dioxide continuous emissions monitor required by the Company's state
air permit. The Company had received verbal authorization from the VDEQ to
remove this monitor in 1988. This monitoring requirement was deleted from the
Company's air permit when the permit was reissued in October 1992. Although
the EPA has not assessed any penalties since the issuance of the Notice for
either alleged violation, there can be no assurance that the EPA will not
seek administrative or civil penalties with respect to the above-referenced
matters. However, management believes that these matters will not materially
affect the financial position and results of operations of the Company.
COMPETITION
The newsprint industry is highly competitive and is comprised of many
participants. The Company competes directly with a number of newsprint
manufacturers, many of which have longer histories, larger customer bases,
closer geographical proximity to customers and significantly greater
financial and marketing resources than the Company. The Company faces
significant competition from both large, vertically integrated companies and
numerous smaller companies. The Company competes with several other newsprint
manufacturers in Canada, as well as regional manufacturers in the Southern
United States. Competition in the newsprint market is generally based on
price, quality and customer service. Newsprint price decreases announced by
one or more of the major newsprint producers in North America have effected
and may continue to effect material changes in the average price for
newsprint and have the potential to adversely effect the newsprint market in
general.
60
<PAGE>
PROPERTIES
The Company owns approximately 700 acres of land near Richmond, Virginia
on which the mill is located and approximately 4,900 acres of timberland. As
security for the Bank Credit Facilities, the Company has granted the lenders
under the Bank Credit Facilities a first priority security interest mortgage
on all of its real property and, subject to existing security interests, the
improvements thereon, and as security for the Notes, the Company has granted
the Trustee under the Indenture a second priority security interest mortgage
on all of its real property and, subject to existing security interests, the
improvements thereon. See "Description of the Notes -- Collateral and
Security."
EMPLOYEES
As of September 30, 1997, the Company had approximately 260 employees,
approximately 68% of which have been employed by the Company since its
inception in 1979. The Company has a very low employee turnover and believes
it enjoys excellent labor relations with its employees. The workforce is
non-unionized and has been very receptive to flexible working conditions and
requirements.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company believes that there are no material legal proceedings pending or
threatened against the Company or any of its properties.
BUSINESS OF SOUCY
Soucy is a low cost newsprint manufacturer located in Rivi|f4re-du-Loup in
the Province of Quebec, Canada. Soucy Inc. owns a newsprint machine that has
an annual production capacity of 67,000 tonnes and is the general partner of,
and owns a 50.1% interest in, Soucy Partners, a limited partnership formed in
1974 with Dow Jones and Rexfor (a Quebec government-owned company), which own
partnership interests of 39.9% and 10%, respectively. Soucy Partners owns and
operates a mill, including a newsprint machine with an annual production
capacity of 150,000 tonnes. The two Soucy newsprint machines are located on
Soucy Partners' plant site. The marketing of Soucy's products is managed by
Brant-Allen, which also markets the Company's newsprint production.
Soucy, in conjunction with an equipment manufacturer, developed the first
commercially successful TMP refining system used in the production of
newsprint. This process is the preferred technology used industry-wide to
provide mechanical furnish to newsprint mills. In addition, Soucy was the
first Canadian mill to successfully run 100% TMP as a furnish. These
modernizations not only improved the quality of Soucy's finished product, but
increased the mills' production rate and efficiency. Furthermore, Soucy was
the first mill in North America to receive an ISO 9001 certification.
For the year ended December 31, 1996, and the nine months ended September
30, 1997, Soucy had total sales of approximately Cdn$168.7 million and
Cdn$106.4 million, respectively, and net earnings of approximately Cdn$12.4
million and Cdn$1.6 million, respectively. See accompanying "Consolidated
Financial Statements of F.F. Soucy, Inc." and the notes thereto.
BUSINESS OF TIMBERLANDS
Timberlands currently owns and manages approximately 130,000 acres of
timberland in Central Virginia, within 200 miles of the Company's mill. The
land is intensively managed to produce a superior pine fiber. Timberlands'
timber forest is a renewable source which is being replanted and grown as a
crop at rates that exceed usage. Currently, Timberlands' forest is
approximately 85% pine, and maintains an approximate 27-year growth cycle.
Prior to the consummation of the Transactions, Timberlands supplied all the
Company's wood requirements. Under the Wood Supply Agreement there will be no
upcharge and Timberlands will supply to the Company 40,000 cords of wood
fiber annually at market prices determined by reference to the prices paid by
the Company for wood fiber purchased from non-affiliated wood suppliers.
Almost all of Timberlands' sales are currently made to the Company. See
"Certain Related Party Transactions -- Relationship with Brant-Allen,
Timberlands and Soucy."
61
<PAGE>
The majority of the timberlands in the State of Virginia are located in
privately held tracts. The wood supply in Virginia is primarily Virginiana
and Loblolly pine with a high percentage in plantation stands. Plantation
stands are timberlands that have been planted and managed to enhance the
future volume and yield per acre. Plantations in much of Virginia have been
actively managed since the mid-1950's on a sustained-yield basis, and through
continual reforestation efforts, the Company believes, these lands should
maintain the current supply levels.
Brant-Allen may monetize all or a substantial portion of Timberlands' land
to repay the Hancock Loan and the Timberlands Loan, while retaining long-term
fiber supply arrangements that would allow the Company to maintain fiber
sourcing flexibility.
62
<PAGE>
MANAGEMENT
The following table sets forth certain information about the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------- ----- ------------------------------------------------------
<S> <C> <C>
Peter M. Brant...... 50 President, Chairman of the Board of Directors and
Chief Executive Officer of the Company and
Timberlands; Chairman, President and Chief Executive
Officer of Brant-Allen; and Chief Executive Officer of
Soucy Inc.
Joseph Allen........ 56 Executive Vice President, Co-Chairman of the Board of
Directors, Chief Operating Officer and Secretary of
the Company and Timberlands; Co-Chairman and Chief
Operating Officer of Brant-Allen; and Chief Operating
Officer of Soucy Inc.
Edward D. Sherrick . 52 Vice President of Finance and Director of the Company
and Timberlands; Senior Vice President and Chief
Financial Officer of Brant-Allen; and Vice President
of Soucy Inc.
Thomas E.
Armstrong........... .60 Vice President of Sales and Manufacturing and Director
of the Company and Timberlands; Executive Vice
President of Brant-Allen; and Vice President of Soucy
Inc.
Michael Conroy...... 58 Director
Robert Flug......... 50 Director
</TABLE>
The following table sets forth certain information about the Company's key
employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------- ----- -----------------------------------------------
<S> <C> <C>
Robert Snyder .. 49 Vice President and General Manager
Wilton Godwin .. 53 Production Manager
Robert Jackson.. 58 Human Resources Manager
David Jones..... 57 Financial Manager
Donald August .. 51 Woodlands Manager and Recycle Fiber Procurement
Manager
Robert Ellis ... 46 Manager, Engineering Services and Government
Affairs of the Company
</TABLE>
PETER M. BRANT. Mr. Brant is the President, Chairman of the Board of
Directors and Chief Executive Officer of the Company and Timberlands, the
Chairman, President and Chief Executive Officer of Brant-Allen and Chief
Executive Officer of Soucy Inc. Mr. Brant jointly owns Brant-Allen with Mr.
Allen. Mr. Brant has served as executive officer of the Company since its
inception and has served as executive officer of Brant-Allen for over 30
years.
JOSEPH ALLEN. Mr. Allen is Executive Vice President, Co-Chairman of the
Board of Directors, Chief Operating Officer and Secretary of the Company and
Timberlands, Co-Chairman and Chief Operating Officer of Brant-Allen and Chief
Operating Officer of Soucy Inc. Mr. Allen jointly owns Brant-Allen with Mr.
Brant. Mr. Allen has served as an executive officer of the Company since its
inception and has served as executive officer of Brant-Allen for over 30
years.
EDWARD D. SHERRICK. Mr. Sherrick is Vice President of Finance and Director
of the Company and Timberlands, Senior Vice President and Chief Financial
Officer of Brant-Allen and Vice President of Soucy Inc. He has been with the
Company and Brant-Allen for over 20 years.
63
<PAGE>
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and
Manufacturing and Director of the Company and Timberlands, Executive Vice
President of Brant-Allen and Vice President of Soucy Inc. He has been an
executive officer of the Company and Brant-Allen for 27 years and has been
involved in the sale and marketing of the Company's newsprint as well as
overseeing mill operations.
MICHAEL CONROY. Mr. Conroy was appointed as a Director of the Company in
November 1997. Mr. Conroy is the President of the International Herald
Tribune Company US, Inc. He has been with that company for 12 years. Before
joining the International Herald Tribune, he was publisher at Newsweek
Atlantic.
ROBERT FLUG. Mr. Flug was appointed a Director of the Company in November
1997. Mr. Flug has been the President and Chief Executive Officer of S.I.
Danielle, Inc., a junior apparel manufacturer, since 1987.
ROBERT SNYDER. Mr. Snyder has been the Vice President and General Manager
of the Company since 1992. Prior to joining the Company in 1985, Mr. Snyder
was the General Superintendent of the Coated North Mill with Boise Cascade
Corporation from 1983 to 1985, and General Coating Superintendent with Mead
Corporation from 1977 to 1983.
WILTON GODWIN. Mr. Godwin has been Production Manager of the Company since
1992 and has been with the Company since 1979.
ROBERT JACKSON. Mr. Jackson has been the Human Resources Manager of the
Company since 1979.
DAVID JONES. Mr. Jones has been the Financial Manager of the Company since
1979.
DONALD AUGUST. Mr. August has been the Woodlands Manager and Recycle Fiber
Procurement Manager of the Company since 1984.
ROBERT ELLIS. Mr. Ellis has been the Manager of Engineering Services and
Governmental Affairs of the Company since 1992 and has been with the Company
since 1980.
In 1990, Messrs. Brant and Allen pleaded guilty to charges relating to the
improper deduction as business expenses of certain personal expenses with
respect to activities between 1980 and 1984. Messrs. Brant and Allen each
pleaded guilty to a misdemeanor charge of willful failure to maintain tax
records and conspiracy. Mr. Brant paid the government taxes owed, penalties
and a fine, and received a sentence involving community service, 84 days in a
federal facility and probation. Mr. Allen received a fine, probation and
performed community service. Each of them has satisfactorily completed the
term of his probation. Brant-Allen's predecessor company pleaded guilty to
the felony charge of willfully filing false tax returns and was fined. Since
the events leading to the charges, Brant-Allen has improved its system of
internal accounting controls. In 1989, Brant-Allen changed its accounting
firm.
EXECUTIVE COMPENSATION
No executive officer of Brant-Allen was paid any compensation by the
Company between 1994 and 1997. All officers of the Company who also serve as
officers of Brant-Allen have received and will continue to receive
compensation from and participate in employee benefit plans and arrangements
sponsored by Brant-Allen, including, but not limited to, Brant-Allen's
defined contribution retirement plan, employee insurance, long term
disabilities, medical and other plans which are maintained by Brant-Allen or
which may be established by Brant-Allen in the future. These officers are not
entitled to participate in the Company's employee benefit plans and
arrangements.
64
<PAGE>
SECURITY OWNERSHIP
Brant-Allen beneficially owns all the equity of each of the Company,
Timberlands and Soucy Inc. Brant-Allen, in turn, is jointly owned by Peter
Brant and Joseph Allen.
CERTAIN RELATED PARTY TRANSACTIONS
RELATIONSHIP WITH BRANT-ALLEN, TIMBERLANDS AND SOUCY
Brant-Allen owns all of the equity in the Company, Timberlands and Soucy
Inc. See "Risk Factors -- Control by Messrs. Brant and Allen; Related Party
Transactions; Potential Conflict of Interest." Brant-Allen is a Sub Chapter S
corporation jointly owned by Mr. Peter Brant and Mr. Joseph Allen. Mr. Brant
serves as Brant-Allen's Chairman of the Board, President and Chief Executive
Officer and also as President, Chairman of the Board of Directors and Chief
Executive Officer of the Company and Timberlands and Chief Executive Officer
of Soucy Inc. Mr. Allen serves as Brant-Allen's Co-Chairman of the Board and
Chief Operating Officer and also as Executive Vice President, Vice Chairman
of the Board of Directors and Chief Operating Officer of the Company and
Timberlands and Chief Operating Officer of Soucy Inc. The other officers of
Brant-Allen, Mr. Edward Sherrick and Mr. Tom Armstrong, are also directors of
the Company and Timberlands.
Brant-Allen may engage in a variety of transactions with the Company,
Timberlands and/or Soucy. These transactions are expected to include the sale
and marketing of the newsprint produced by the Company and Soucy and the
provision of management and other services described below to the Company and
Soucy.
Management Services Agreement
Concurrently with the closing of the Acquisition, the Company entered into
the Management Services Agreement with Brant-Allen. Pursuant to the
Management Services Agreement, Brant-Allen will continue to provide the
Company with senior management treasury, financial and administrative
(including marketing and sales) services. For these services, Brant-Allen
will continue to be entitled to a monthly fee, payable in advance, calculated
at the rate of 3% of the Company's net sales less transportation costs. This
fee amounted to $2,820,000, $3,961,000 and $3,865,000 for the years ended
1994, 1995 and 1996, and $3,004,410 and $2,561,177 for the nine months ended
September 30, 1996 and 1997, respectively. See the accompanying financial
statements of the Company. The Management Services Agreement has a term of
five years and is automatically renewable for successive five year terms
unless earlier terminated by either party giving two years written notice.
The Management Services Agreement contains customary indemnification
provisions.
Brant-Allen Fees from Soucy
Brant-Allen also markets all of Soucy's newsprint and is, and will
continue to be, compensated for these services in the form of monthly
management service and royalty fees, payable in advance, calculated at a
combined rate of 9.73% of Soucy Inc.'s consolidated net sales after
transportation costs. Soucy Partners pays Soucy Inc. approximately 3% of
Soucy Partners' cumulative annual net sales. More specifically, for
cumulative annual net sales under Cdn$100 million, the fee is comprised of a
sales and management fee at 6% of net sales, plus a royalty fee at 3.73% of
net sales. For cumulative annual net sales over Cdn$100 million, the fee is
comprised of a sales and management fee at 3.5% of net sales, plus a royalty
fee at 6.23%. For the nine months ended September 30, 1997 and 1996, and for
the years ended December 31, 1996, 1995 and 1994, Soucy Inc. paid Brant-Allen
approximately Cdn$9,255,000 and Cdn$12,048,000, Cdn$14,951,000,
Cdn$19,935,000 and Cdn$10,577,000, respectively, for management and selling
services. See Note 3 to the accompanying consolidated financial statements of
Soucy Inc.
During the period from October 1 to December 1, 1997, Soucy Partners
distributed Cdn$8,505,000 to its partners. In addition, on December 1, 1997
Soucy Inc. distributed Cdn$6.0 million to Brant-Allen.
Wood Supply from Timberlands and ONP and OMG Procurement
Prior to the consummation of the Transactions, Timberlands supplied all
the Company's wood requirements at prices, including an upcharge (a margin in
excess of the market price of wood) that were negotiated annually.
Concurrently with the consummation of the Transactions, the Company and
Timberlands terminated these arrangements and entered into the Wood Supply
Agreement. Under the Wood Supply Agreement there will be no upcharge and
Timberlands will supply to the Company 40,000 cords of wood fiber annually at
market prices determined by reference to the prices paid by the Company for
wood fiber purchased from non-affiliated wood suppliers. Almost all of
Timberlands' sales are currently made to the Company. Timberlands' wood sales
to the Company were $10,982,000, $10,702,000, $14,744,000, $13,003,000 and
$11,896,000 during the nine-month periods ended September 30, 1997 and 1996,
and the years ended December 31, 1996, 1995 and 1994, respectively. See Note
3 to the accompanying financial statements of the Company.
65
<PAGE>
Prior to the consummation of the Transactions, Timberlands procured
recycled paper for the Company in exchange for a procurement fee based on the
ONP and OMG tonnage procured. The Company recognized costs of $1,640,695,
$1,554,854, $2,070,469, $147,340 and $122,307 for such fees during the
nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, respectively. For the year ended December
31, 1994, the Company processed 50,671 tonnes. See Note 7 to the accompanying
financial statements of BITCO. The Company terminated this procurement
arrangement concurrently with consummation of the Transactions and now
procures ONP and OMG itself.
The amount of the upcharge paid by the Company in 1996 and 1995 was $33.44
per tonne of newsprint and $17.15 per tonne of newsprint, respectively.
Other Arrangements with Timberlands
The Company shares employees, facilities and recordkeeping systems with
Timberlands, and the Company charges Timberlands monthly for its share of
these costs. Accordingly, these shared employees receive benefits under the
Company's defined contribution retirement plan and are eligible to
participate in the Company's thrift plan. Costs associated with these plans
are reimbursed monthly by Timberlands. Amounts paid to the Company for shared
costs, which are included in selling, general and administrative expenses,
approximated $1,068,000, $1,039,000, $1,370,000, $1,276,000 and $1,128,000
during the nine-month periods ended September 30, 1997 and 1996, and the
years ended December 31, 1996, 1995 and 1994, respectively. Timberlands also
manages the Company's timberlands for which the Company paid Timberlands fees
of approximately $44,500, $43,000, $57,750, $56,000 and $133,000 during the
nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, respectively. See Note 3 to the
accompanying financial statements of the Company.
In 1988 the Company and Timberlands entered into an agreement for certain
marketing and consulting services with The Elebash Company ("Elebash"), a
real estate broker, whereby Timberlands, in the case of sales of
Timberlands-owned land, or the Company, in the case of sales of Company-owned
land, has agreed to pay Elebash two percent of the gross sales price of any
land purchased or sold pursuant to the terms of the agreement. In this
connection, Timberlands paid Elebash approximately $19,000, $71,000, $34,000,
$71,000 and $229,000 for the nine month periods ended September 30, 1997 and
1996, and the years ended December 31, 1996, 1995 and 1994, respectively.
Amounts paid to Elebash are included in selling, general and administrative
expenses in the accompanying statements of income. This agreement is
cancelable by any party by providing 60 days' written notice. Notice of
cancelation of this agreement was given by the Company and Timberlands on
November 6, 1997, and will take effect on January 6, 1998.
PURCHASE AGREEMENTS WITH DOW JONES AND THE WASHINGTON POST
The Company has contracted to sell newsprint to Dow Jones and The
Washington Post pursuant to the Purchase Agreements. The Purchase Agreements
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 formulas for
that four-year period. Each of Dow Jones and The Washington Post is obligated
to purchase a minimum of approximately 45,000 tonnes of newsprint per year
under the Purchase Agreements. The price payable under the Purchase
Agreements is defined in the Purchase Agreements, as amended, and during 1996
and 1995 represented the average price paid by Dow Jones and The Washington
Post to East Coast suppliers of those customers that are not affiliates of
those customers. In addition, the parties to the Purchase Agreements have the
option to purchase additional quantities of newsprint as available.
The Company's sales to Dow Jones represented approximately 22%, 23%, 22%,
24% and 23% of total sales of the Company during the nine-month periods ended
September 30, 1997 and 1996, and the years ended December 31, 1996, 1995 and
1994, respectively. The Company's sales to The Washington Post represented
approximately 23%, 18%, 19%, 22% and 22% of total sales of the Company during
the nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, respectively.
Soucy also sells newsprint to Dow Jones and its subsidiaries. During the
nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, these sales amounted to Cdn$20,804,000,
Cdn$28,668,000, Cdn$35,004,000, Cdn$35,646,000 and Cdn$26,825,000, net of
discounts, respectively.
66
<PAGE>
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
The Company is a limited liability company organized under the Virginia
Limited Liability Company Act (the "LLC Act") and governed by an Operating
Agreement (the "Operating Agreement") between the Company and Brant-Allen.
Brant-Allen is the Company's sole member and as such controls the policies
and operations of the Company. The Company was formed on November 3, 1997,
and is the surviving limited liability company of the merger of BIPCO with
and into the Company. See "The Acquisition."
The Company is managed by its Board of Directors, which consists of not
less than one and not more than eight directors. The initial directors and
executive officers of the Company are Messrs. Peter Brant, Joseph Allen,
Edward Sherrick, Thomas Armstrong, Michael Conroy and Robert Flug. See
"Management."
Under the Operating Agreement, the Board of Directors has exclusive
authority and full discretion with respect to the management of the Company,
subject to certain approval rights reserved to Brant-Allen as sole member.
The approval rights reserved to Brant-Allen include the right to designate
and to remove the directors. In addition, the consent of Brant-Allen is
required for the adoption of a plan of merger or consolidation, the sale,
lease, exchange or other disposition of all, or substantially all, of the
property of the Company, otherwise than in the usual and ordinary course of
business of the Company, dissolution of the Company or amendment of the
Operating Agreement.
The Board of Directors is authorized to delegate general or specific
authority to the officers of the Company, but must retain authority with
respect to appointing or removing any officer, determining the compensation
to be paid to any officer or entering into any agreement with respect to the
employment of an officer, borrowing or incurring indebtedness on behalf of
the Company, assigning, transferring, pledging or compromising any debts due
to the Company, except on full payment, acquiring or starting up any business
activity or venture or interest therein, pledging, assigning, or otherwise
encumbering any property or assets of the Company, selling or otherwise
disposing of, or contracting to sell or otherwise dispose of, any of the
Company's assets in any one transaction or in any series of transactions out
of the ordinary course of the business of the Company, entering into any
contract or commitment obligating the Company to make aggregate capital or
other expenditures of more than $100,000 other than in the ordinary course of
business, reorganizing or restructuring the Company, voluntarily taking any
action that would cause bankruptcy of the Company, and acquiring any equity
or debt securities of any member or any of its affiliates, or otherwise
making loans to any member or any of its affiliates.
Brant-Allen, as the sole member of the Company, and the directors and
officers of the Company, are indemnified by the Company for actions taken in
such capacity pursuant to the Operating Agreement to the fullest extent
permitted under the LLC Act. In addition, the liability of Brant-Allen, as
sole member of the Company, and of the directors and officers of the Company,
is limited to their willful wrongdoing or intentional disregard of the terms
of the Operating Agreement. The liability of Brant-Allen, as sole member, for
obligations of the Company is limited to the amount of its capital
contribution (i.e., $5,000), plus its share of undistributed profits of the
Company.
The interest of Brant-Allen in the Company is transferable upon notice to
the Board of Directors and execution of an amendment to the Operating
Agreement (and execution of such other documents as the Board may reasonably
require). Any transferee shall have the right to participate only in the tax
allocations and distributions to which the transferring member was entitled,
unless it is admitted to the Company as a "Substitute Member" under the
Operating Agreement.
The Company will be dissolved upon the earliest to occur of: (i) December
31, 2028; (ii) the election of Brant-Allen to dissolve the Company; or (iii)
the expiration of 30 days following the sale or transfer of all the assets of
the Company, or as otherwise required by the LLC Act.
Both the Bank Credit Agreement and the Indenture limit the ability of the
Company to pay cash distributions to Brant-Allen other than distributions in
amounts approximately equal to the federal, state, local and foreign tax
liability of its direct and indirect owners arising as a result of their
direct or indirect ownership of interests in the Company.
67
<PAGE>
DESCRIPTION OF THE NOTES
The New Notes offered hereby will be issued under an indenture dated as of
December 1, 1997 (the "Indenture") among the Issuers, as joint and several
obligors, the Security Parties, Brant-Allen and Crestar Bank, as trustee (the
"Trustee"), a copy of the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part. The following
summary of the material provisions of the Indenture is subject to, and
qualified in its entirety by reference to, the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), and to all of the provisions of the
Indenture and the Notes, including the definitions of certain terms contained
therein and those terms made part of the Indenture by reference to the Trust
Indenture Act. For definitions of certain capitalized terms used in the
following summary, see "--Certain Definitions."
FinCo is a wholly owned subsidiary of the Company that was incorporated in
Delaware for the purpose of serving as a co-issuer of the Notes. FinCo will
not have any substantial operations or assets and will not have any revenues.
As a result, holders of the Notes should not expect FinCo to participate in
servicing the interest and principal obligations on the Notes.
GENERAL
The Notes will mature on December 1, 2007 and will be limited to $100
million aggregate principal amount. Each Note bears interest at 10% per annum
from December 1, 1997 or from the most recent interest payment date to which
interest has been paid or duly provided for, payable on June 1, 1998 and
semiannually thereafter on June 1 and December 1 in each year until the
principal thereof is paid or duly provided for to the Person in whose name
the Note (or any predecessor Note) is registered at the close of business on
the May 15 or November 15 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months. Accordingly, registered holders of New Notes on the relevant record
date for the first interest payment date following the consummation of the
Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from December
1, 1997. Old Notes accepted for exchange will cease to accrue interest from
and after the date of consummation of the Exchange Offer. Holders whose Old
Notes are accepted for exchange will not receive any payment in respect of
interest on such Old Notes otherwise payable on any interest payment date the
record date for which occurs on or after the consummation of the Exchange
Offer.
For each Old Note accepted for exchange, the Holder of such Old Note will
receive a New Note having a principal amount equal to that of the surrendered
Old Note.
The interest rate on the Old Notes is subject to increase in certain
circumstances if the Registration Statement is not declared effective on a
timely basis or if certain other conditions are not satisfied, all as further
described under "--Registered Exchange Offer; Registration Rights".
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency
of the Issuers in The City of New York maintained for such purposes (which
initially will be the Trustee); provided, however, that, at the option of the
Issuers, interest may be paid by check mailed to the address of the Person
entitled thereto as such address shall appear on the security register or by
wire transfer to an account located in the United States maintained by the
payee. The Notes will be issued only in registered form without coupons and
only in denominations of $1,000 and any integral multiple thereof. No service
charge will be made for any registration of transfer or exchange or
redemption of Notes, but the Issuers may require payment in certain
circumstances of a sum sufficient to cover any tax or other governmental
charge that may be imposed in connection therewith.
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Issuers, as a whole or
from time to time in part, at any time on or after December 1, 2002, on not
less than 30 nor more than 60 days' prior notice at the redemption prices
(expressed as percentages of principal amount) set forth below, together with
accrued interest, if any, to the
68
<PAGE>
redemption date, if redeemed during the 12-month period beginning on December
1 of the years indicated below (subject to the right of holders of record on
relevant record dates to receive interest due on an interest payment date):
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
- ------------------- ------------
<S> <C>
2002................ 105.000%
2003................ 103.333%
2004................ 101.667%
2005 and
thereafter......... 100.000%
</TABLE>
In addition, 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 (subject to the right of holders of record on
relevant record dates to receive interest due on relevant interest payment
dates); provided that immediately after giving effect to any such redemption,
at least $80 million aggregate principal amount of the Notes originally
issued remains outstanding.
If less than all the Notes are to be redeemed, the particular Notes to be
redeemed will be selected prior to the redemption date by the Trustee, if the
Notes are listed on a national securities exchange, in accordance with the
rules of that exchange or, if the Notes are not so listed, either on a pro
rata basis, by lot or by such other method as the Trustee will deem fair and
appropriate; provided, however, that no such partial redemption will reduce
the principal amount of a Note not redeemed to be held by a holder to less
than $1,000. Notice of redemption will be mailed, first-class postage
prepaid, at least 30 but not more than 60 days before the redemption date to
each holder of Notes to be redeemed at its registered address. On and after
the redemption date, interest will cease to accrue on Notes or portions
thereof called for redemption and accepted for payment.
COLLATERAL AND SECURITY
The Notes are secured by (i) the Company Collateral, which consists of a
second priority security interest in (x) all of the real property of the
Company and (y) all of the personal property of the Company, to the extent
such personal property is assignable, and except for any personal property
that is not assignable; (ii) the Timberlands Collateral, which consists of a
third priority security interest in 100% of the membership interests in
Timberlands; and (iii) the Soucy Collateral, which consists of a second
priority security interest in 65% of the issued and outstanding capital stock
of Soucy Inc. The remaining 35% of the issued and outstanding capital stock
of Soucy Inc. will be subject to certain restrictions described below. See
"--Certain Covenants of Brant-Allen." At any time when either (i) the Company
has reduced its Total Committed Debt to an amount that is not greater than
$145 million, or (ii) the Notes are rated Investment Grade, the foregoing
security interest in the capital stock of Soucy Inc. will be released and all
of the covenants and other provisions of the Indenture with respect to Soucy
Inc. shall terminate. Upon repayment of all the outstanding indebtedness
under the Timberlands Loan, the foregoing security interest in the membership
interest in Timberlands shall become a second priority security interest.
The Notes are senior secured obligations of the Issuers, rank senior in
right of payment to all subordinated indebtedness of the Issuers and rank
pari passu in right of payment with all other existing and future senior
indebtedness of the Issuers, including, in the case of the Company,
indebtedness under the Bank Credit Agreement. However, the obligations of the
Company under the Bank Credit Agreement are secured by a first priority
security interest in the Company Collateral, a second priority security
interest in the Timberlands Collateral and a first priority security interest
in the Soucy Collateral. The obligations of Brant-Allen under the Timberlands
Loan are secured by a first priority security interest in the Timberlands
Collateral, a first priority security interest in the Soucy Collateral (pari
passu with the obligations of the Company under the Bank Credit Agreement)
and a first priority security interest in cash in an amount on any date equal
to the amount of interest payable during the next succeeding 12 months under
term loans made under the Bank Credit Agreement. In addition, the obligations
of Timberlands under the Hancock Loan are secured by a first priority
security interest in approximately 125,000 acres of land owned by
Timberlands. At September 30, 1997, on a pro forma basis after giving effect
to the Transactions: (i) the Company would have had indebtedness (other than
the Notes) of approximately $106.7 million, including borrowings under the
Bank Credit Agreement (and FinCo would have had no indebtedness other than
the Notes),
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(ii) Brant-Allen would have had approximately $35 million of indebtedness
under the Timberlands Loan, (iii) Timberlands would have had $30 million of
indebtedness under the Hancock Loan and (iv) Soucy Inc. had Cdn$27.3 million
of indebtedness. Subject to certain restrictions that are described below,
each of the Issuers and the Security Parties may issue certain additional
Indebtedness pursuant to the terms of the Indenture.
The Collateral securing the obligations of Issuers in respect of the Notes
may be sold or disposed of free and clear of the security interests referred
to above in connection with (i) sales of inventory and collection of accounts
receivable in the ordinary course of business, (ii) sales and other
dispositions of assets permitted under "--Certain Covenants of All of the
Credit Parties--Limitation on Sales of Assets" or under "--Certain Covenants
of Brant-Allen--Sales of Collateral Stock and Certain Other Transactions"
where the Net Cash Proceeds (as defined in "--Certain Definitions") are
applied in accordance with the relevant covenant and (iii) the release of
Collateral with the consent of 66 2/3% of the holders of the outstanding
Notes. Upon the payment of all principal, premium, if any, and interest under
the Indenture and the Notes, the Collateral Documents shall terminate and the
Collateral shall be released from the security interests created by the
Collateral Documents.
Company Collateral consisting of real property (the "Real Property
Collateral") was pledged to the Trustee for the benefit of the Holders
pursuant to a deed of trust. The deed of trust encumbers the Company's fee
interests in the real property and fixtures constituting the Real Property
Collateral, and all proceeds thereof and additions, improvements,
alterations, replacements and repairs thereto, whether now owned or hereafter
acquired by the Company. Company Collateral constituting personal property
(including all equipment and machinery owned by the Company and the Company's
leasehold interest in certain equipment and machinery leased by the Company)
and the Timberlands Collateral and the Soucy Collateral were pledged by the
Company and Brant-Allen, as the case may be, pursuant to the other Collateral
Documents.
If the Notes become due and payable prior to the final Stated Maturity
thereof for any reason or are not paid in full at the final Stated Maturity
thereof, the Trustee has (after the repayment of the creditors under the Bank
Credit Agreement, the Timberlands Loan or the Hancock Loan, as the case may
be) the right to foreclose or otherwise realize upon the Collateral in
accordance with instructions from the Holders of a majority in aggregate
principal amount of the Notes or, in the absence of such instructions, in
such manner as the Trustee deems appropriate in its absolute discretion. The
proceeds received by the Trustee will be applied by the Trustee first to pay
the expenses of such foreclosure or realization and fees and other amounts
then payable to the Trustee under the Indenture and the Collateral Documents,
and, thereafter, to pay all amounts owing to the Holders under the Indenture,
the Notes and the Collateral Documents (with any remaining proceeds to be
payable to the Company or as may otherwise be required in the Intercreditor
Agreement, the Collateral Documents or by law). See "--Intercreditor
Agreement."
By its nature, some or all of the Collateral will be illiquid and may have
no readily ascertainable market value. Accordingly, there can be no assurance
that the Collateral will be able to be sold in a short period of time, if at
all. To the extent that third parties lease real or personal property to the
Company, defaults by the Company under such leases may adversely affect the
value of the respective leasehold interests and may result in the loss of
such leasehold interests. In addition, the ability of the Holders to realize
upon the Collateral may be subject to certain bankruptcy law limitations in
the event of a bankruptcy. See "Risk Factors--Security for the Notes."
INTERCREDITOR AGREEMENT
On the Closing Date, the Trustee, on behalf of the Holders, entered into
an intercreditor agreement (the "Intercreditor Agreement") with the Company,
Brant-Allen and Toronto Dominion (Texas), Inc., as administrative agent under
the Bank Credit Agreement (in such capacity, the "Bank Agent"), and as
administrative agent under the Timberlands Loan (in such capacity, the
"Timberlands Agent"). The Intercreditor Agreement provides, among other
things, for the allocation of rights between the Bank Agent, the Timberlands
Agent and the Trustee with respect to Collateral and for enforcement
provisions with respect thereto.
The Intercreditor Agreement includes provisions in which the Trustee
acknowledges that (i) the relevant lenders under the Bank Credit Agreement
and the Timberlands Loan have been granted senior priority security interests
in the relevant parts of the Collateral, (ii) the Trustee will not have any
claims to the Collateral on a parity with or prior to these of such lenders,
and (iii) so long as the obligations of the Company or Brant-Allen under the
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Bank Credit Agreement and/or the Timberlands Loan have not been satisfied,
the Trustee will not have any right or claims in respect of the rights and
remedies of such lenders, nor will any such lenders have any obligation
regarding the exercise of such rights, or any other obligation or duty in
respect of the Trustee.
The Intercreditor Agreement provides that as long as the obligations or
commitments under the Bank Credit Agreement or the Timberlands Loan have not
been paid in full or terminated, as the case may be, the Trustee will not (i)
exercise any remedies with respect to the relevant Collateral, (ii) institute
any action or proceeding with respect to such rights or remedies, including
without limitation, any action of foreclosure, (iii) contest, protest or
object to any foreclosure proceeding or action brought by the Bank Agent, the
Timberlands Agent or any lender, or any other exercise by any such party, of
any rights and remedies relating to the relevant Collateral under the
Collateral Documents or otherwise, or (iv) object to the forbearance by such
lenders from bringing or pursuing any foreclosure proceeding or action or any
other exercise of any rights or remedies relating to the relevant Collateral.
The Bank Agent or the Timberlands Agent, as the case may be, will be
required, pursuant to the terms of the Intercreditor Agreement, to apply all
proceeds from the sale of the Collateral first to satisfy in full the claims
of the lenders under the Bank Credit Agreement and/or the Timberlands Loan,
as the case may be, and, after all commitments of such lenders to make loans
under the relevant agreements have been terminated, to deliver any remaining
proceeds to the Trustee to be applied to the claims of the Holders of the
Notes. The Uniform Commercial Code (which may not be applicable in a
bankruptcy context) imposes for the benefit of the Trustee and the Holders a
requirement that any foreclosure sale of the Collateral be conducted in a
commercially reasonable manner, which requirement may be modified, but not
waived, by contract. Pursuant to the terms of the Intercreditor Agreement,
the Bank Agent and the Timberlands Agent disclaim any obligation to consider
the interest of the Holders of the Notes in any such foreclosure sale. These
agents are required to act in the interest of the lenders pursuant to the
relevant financing agreement. Neither the Trustee nor the Holders of the
Notes may hold the Collateral or initiate or participate in negotiations
regarding any remedial actions in respect of the Collateral or to contest any
senior lien granted by the Company to the lenders under the relevant
financing agreements.
CERTAIN COVENANTS OF THE COMPANY
The Indenture contains, among others, the following covenants with respect
to the Company and its Restricted Subsidiaries (including FinCo):
Limitation on Indebtedness. The Company will not, and will not permit any
Restricted Subsidiary of the Company to, create, issue, assume, guarantee or
in any manner become directly or indirectly liable for the payment of, or
otherwise incur (collectively, "incur"), any Indebtedness (including any
Acquired Indebtedness), other than Permitted Indebtedness, except for
Indebtedness (including Acquired Indebtedness) of the Company so long as at
the time of such incurrence or issuance the Consolidated Fixed Charge
Coverage Ratio for the Company for the four full fiscal quarters immediately
preceding the incurrence of such Indebtedness, taken as one period (and after
giving pro forma effect to (i) the incurrence of such Indebtedness and (if
applicable) the application of the net proceeds therefrom, including to
refinance other Indebtedness, as if such Indebtedness were incurred, and the
application of such proceeds had occurred, on the first day of such
four-quarter period, (ii) the incurrence, repayment or retirement of any
other Indebtedness by the Company and its Restricted Subsidiaries since the
first day of such four-quarter period as if such Indebtedness were incurred,
repaid or retired on the first day of such four-quarter period (except that,
in making such computation, the amount of Indebtedness under any revolving
credit facility shall be computed based upon the average daily balance of
such Indebtedness during such four-quarter period) and (iii) the acquisition
(whether by purchase, merger or otherwise) or disposition (whether by sale,
merger or otherwise) of any company, entity or business acquired or disposed
of by the Company or its Restricted Subsidiaries, as the case may be, since
the first day of such four-quarter period, as if such acquisition or
disposition had occurred on the first day of such four-quarter period), would
have been at least equal to 2.0 to 1.0.
Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary of the Company to, directly or indirectly,
make any Restricted Payment unless at the time of, and immediately after
giving effect to, the proposed Restricted Payment (the amount of any such
Restricted Payment, if other than cash, as determined by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a Board Resolution), (1) no Default or Event of Default shall
have occurred and be continuing, (2) the Company could
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incur at least $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to the "Limitation on Indebtedness" covenant in the
preceding paragraph and (3) the aggregate amount of all Restricted Payments
declared or made after the date of the Indenture shall not exceed the sum of:
(A) 50% of the Consolidated Adjusted Net Income of the Company accrued on
a cumulative basis during the period beginning on the first day of the
Company's first fiscal quarter after the date of the Indenture and ending
on the last day of the Company's last fiscal quarter ending prior to the
date of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Adjusted Net Income shall be a loss, minus 100% of such
loss); plus
(B) 75% of the aggregate net cash proceeds received after the date of the
Indenture by the Company as capital contributions or from the issuance or
sale (other than to any Subsidiary) of shares of Qualified Capital Stock
of the Company (including upon the exercise of options, warrants or
rights) or warrants, options or rights to purchase shares of Qualified
Capital Stock of the Company; provided that, after the date upon which the
Company shall have reduced its Total Committed Debt to an amount that is
not greater than $105 million, such calculation shall be adjusted to 100%
of the aggregate net cash proceeds of such transactions occurring after
such date; plus
(C) 75% of the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any
Subsidiary) of debt securities or shares of Redeemable Capital Stock that
have been converted into or exchanged for shares of Qualified Capital
Stock of the Company, to the extent such securities were originally sold
for cash, together with the aggregate net cash proceeds received by the
Company at the time of such conversion or exchange; provided that, after
the date upon which the Company shall have reduced its Total Committed
Debt to an amount that is not greater than $105 million, such calculation
shall be adjusted to 100% of the aggregate net proceeds of such
transactions occurring after such date; plus
(D) to the extent not otherwise included in the Consolidated Adjusted Net
Income of the Company, an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments) in Unrestricted
Subsidiaries resulting from the payments in cash of interest on
Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to the Company or a Restricted
Subsidiary after the date of the Indenture from any Unrestricted
Subsidiary or from the redesignation of an Unrestricted Subsidiary as a
Restricted Subsidiary (valued in each case as provided in the definition
of Investment), not to exceed the total amount of Investments (other than
Permitted Investments) made in such Unrestricted Subsidiary by the Company
and its Restricted Subsidiaries.
(b) Notwithstanding paragraph (a) above, the Company may take the
following actions so long as no Default or Event of Default shall have
occurred and be continuing:
(i) the payment of any dividend or the making of any distribution within
60 days after the date of declaration thereof, if at such date of
declaration the payment of such dividend or distribution would have
complied with the provisions of paragraph (a) above and such payment will
be deemed to have been paid on such date of declaration for purposes of
the calculation required by paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Company by conversion into, or
by or in exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) of, shares of
Qualified Capital Stock of the Company;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness of the Company by
conversion into, or by or in exchange for, or out of the net cash proceeds
of a substantially concurrent issuance and sale (other than to a
Subsidiary) of, shares of Qualified Capital Stock of the Company;
(iv) the purchase of any Subordinated Indebtedness of the Company at a
purchase price not greater than 101% of the principal amount thereof in
the event of a "change of control" in accordance with provisions
substantially similar to the "Purchase of Notes upon Change of Control"
covenant; provided that prior to such purchase the Change of Control Offer
as provided in such covenant has been made with respect to the Notes and
all Notes validly tendered for payment in connection with such Change of
Control Offer have been purchased;
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(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness of the Company in
exchange for, or out of the net cash proceeds of a substantially
concurrent incurrence (other than to a Subsidiary) of, new Subordinated
Indebtedness of the Company so long as (A) the principal amount of such
new Subordinated Indebtedness does not exceed the principal amount (or, if
such Subordinated Indebtedness being refinanced provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) of the Subordinated Indebtedness being so purchased,
redeemed, defeased, acquired or retired, plus the lesser of the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of the Subordinated Indebtedness being refinanced or
the amount of any premium reasonably determined by the Company as
necessary to accomplish such refinancing, plus, in either case, the amount
of expenses of the Company incurred in connection with such refinancing,
(B) such new Subordinated Indebtedness is subordinated to the Notes to the
same extent as such Subordinated Indebtedness so purchased, redeemed,
defeased, acquired or retired and (C) such new Subordinated Indebtedness
has (x) an Average Life either (I) longer than the Average Life of the
Notes or (II) equal to or greater than the Average Life of the
Subordinated Indebtedness that is being purchased, redeemed, defeased,
acquired or retired and (y) a final Stated Maturity of principal either
(I) later than the final Stated Maturity of the principal of the Notes or
(II) no earlier than the Subordinated Indebtedness being purchased,
redeemed, defeased, acquired or retired;
(vi) the payment by the Company of certain amounts on account of that
portion of the federal, state, local and foreign income tax liability of
the direct and indirect equityholders that is attributable to their
interests in the Company;
(vii) the payment of a distribution by the Company on the Closing Date
for Brant-Allen to recover expenses incurred on behalf of the Credit
Parties in connection with the Acquisition, the Timberlands Acquisition
and the related financings; provided that such dividend shall not exceed
an aggregate of $2.0 million;
(viii) the payment by the Company of management fees to Brant-Allen (or
any of its Subsidiaries or Affiliates) in an amount per annum not in
excess of 3% of the revenues (less tranportation costs) of the Company in
the applicable fiscal year, of which no more than one third may be in
cash; and
(ix) the payment of a distribution by the Company on the Closing Date to
Brant-Allen in an amount equal to the total federal, state, local and
foreign tax liabilities of Peter Brant and Joseph Allen arising as a
result of their indirect ownership of equity interests in the Company's
predecessor during 1997 through the Closing Date, as calculated by the
Company's Vice President of Finance and recalculated by the Company's
independent accountants; provided, however, that the amount of the payment
pursuant to this clause (ix) shall not exceed the product of the taxable
income of the Company multiplied by the highest combined marginal federal,
state and local tax rates applicable in the United States during 1997.
The actions described in clauses (i), (ii), (iii), (iv) and (viii) (to the
extent that the fees paid in cash referred to in clause (viii) exceed 1% of
the revenues (less transportation costs) of the Company) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph
(a) above and the actions described in clauses (v), (vi), (vii), (viii) (to
the extent that the fees paid in cash referred to in clause (viii) do not
exceed 1% of the revenues (less transportation costs) of the Company) and
(ix) of this paragraph (b) shall be Restricted Payments that shall be
permitted to be taken in accordance with this paragraph (b) and shall not
reduce the amount that would otherwise be available for Restricted Payments
under clause (3) of paragraph (a).
(c) In computing Consolidated Adjusted Net Income of the Company under
paragraph (a) above, (1) the Company shall use audited financial statements
for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
the Company for the remaining portion of such period and (2) the Company
shall be permitted to rely in good faith on the financial statements and
other financial data derived from the books and records of the Company that
are available on the date of determination. In addition, in computing the
amounts under clauses (B) and (C) under paragraph (a) above, to the extent
that the Company issues shares of Qualified Capital Stock to Brant-Allen in
exchange for management fees under the Management Services Agreement, the
value of such shares shall be excluded.
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Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary of the Company to, directly or indirectly, create,
incur, assume or suffer to exist any Lien of any kind (other than Permitted
Liens) on or with respect to any of its property or assets, including any
shares of stock or indebtedness of any Restricted Subsidiary of the Company,
whether owned at the date of the Indenture or thereafter acquired, or any
income, profits or proceeds therefrom, or assign or otherwise convey any
right to receive income thereon, unless (x) in the case of any Lien securing
Subordinated Indebtedness, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien and (y) in the
case of any other Lien, the Notes are equally and ratably secured with the
obligation or liability so secured by such Lien, in each case, for so long as
such obligation is secured by such Lien.
Guarantees by Restricted Subsidiaries of the Company. (a) If, after the
Closing Date, the Company or any of its Subsidiaries acquires or forms a
Restricted Subsidiary, the Company will cause any such Restricted Subsidiary
to (i) execute and deliver to the Trustee a supplemental indenture in form
and substance reasonably satisfactory to such Trustee pursuant to which such
Restricted Subsidiary shall guarantee all of the obligations of the Company
with respect to the Notes issued under such Indenture on a senior basis and
(ii) deliver to such Trustee an opinion of counsel reasonably satisfactory to
such Trustee to the effect that such supplemental indenture has been duly
executed and delivered by such Restricted Subsidiary and is in compliance
with the terms of the Indenture. As of the Closing Date, the Company will
have no Subsidiaries other than FinCo, and FinCo will have no Subsidiaries.
(b) Notwithstanding the foregoing, any Guarantee of the Notes created
pursuant to the provisions described in the foregoing paragraph (a) shall
provide by its terms that it shall be automatically and unconditionally
released and discharged upon any sale, exchange or transfer, to any Person
not a Restricted Subsidiary of the Company, of all of the Capital Stock in,
or all or substantially all the assets of, such Restricted Subsidiary (which
sale, exchange or transfer is not prohibited by the Indenture).
Purchase of Notes upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes will have the right to require
that the Issuers purchase such holder's Notes, in whole or in part in
integral multiples of $1,000, at a purchase price (the "Change of Control
Purchase Price") in cash in an amount equal to 101% of the principal amount
thereof, plus accrued interest, if any, to the date of purchase (the "Change
of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and the other procedures set forth in the
Indenture.
Within 20 days following any Change of Control, the Issuers shall notify
the Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at the address of such
holder appearing in the security register, stating, among other things, (i)
the purchase price and the purchase date, which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed, or such later date as is necessary to comply with requirements under
the Exchange Act or any applicable securities laws or regulations; (ii) that
any Note not tendered will continue to accrue interest; (iii) that, unless
the Issuers default in the payment of the purchase price, any Notes accepted
for payment pursuant to the Change of Control Offer shall cease to accrue
interest after the Change of Control Purchase Date; and (iv) certain other
procedures that a holder of Notes must follow to accept a Change of Control
Offer or to withdraw such acceptance.
If a Change of Control Offer is made, there can be no assurance that the
Issuers will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The Bank Credit
Agreement prohibits the purchase of the Notes by the Company prior to full
repayment of indebtedness under the Bank Credit Agreement, and, upon a Change
of Control, an event of default arises and the lenders may demand that all
amounts outstanding under the Bank Credit Agreement become due and payable.
There can be no assurance that in the event of a Change of Control the
Issuers will be able to obtain the necessary consents from the lenders under
the Bank Credit Agreement to consummate a Change of Control Offer or to repay
or refinance all the Indebtedness of the lenders under the Bank Credit
Agreement. The failure of the Issuers to make or consummate the Change of
Control Offer or pay the Change of Control Purchase Price when due would
result in an Event of Default and would give the Trustee and the holders of
the Notes the rights described under "--Events of Default."
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the holders of the Notes to
require that the Issuers repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
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The Issuers will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Issuers and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
One of the events which constitutes a Change of Control under the
Indenture is the disposition of "all or substantially all" of the Company's
assets. This term has not been interpreted under New York law (which is the
governing law of the Indenture) to represent a specific quantitative test. As
a consequence, in the event holders of the Notes elect to require the Issuers
to purchase the Notes and the Issuers elect to contest such election, there
can be no assurance as to how a court interpreting New York law would
interpret the phrase.
The Issuers will comply with the applicable tender offer rules, including
Rule l4e-l under the Exchange Act, and any other applicable securities laws
and regulations in connection with a Change of Control Offer.
CERTAIN COVENANTS OF THE SECURITY PARTIES
The Indenture contains, among others, the following covenants with respect
to the Security Parties:
Limitation on Indebtedness. Each of the Security Parties will not, and
will not permit any of its Restricted Subsidiaries to, incur Indebtedness
(including any Acquired Indebtedness), other than Permitted Security Party
Indebtedness.
Limitation on Restricted Payments by Timberlands. (a) Timberlands will
not, and will not permit any of its Restricted Subsidiaries to, directly or
indirectly, make any Restricted Payment, unless at the time of, and
immediately after giving effect to, the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors of Timberlands, whose determination shall be
conclusive and evidenced by a Board Resolution), (1) no Default or Event of
Default shall have occurred and be continuing, (2) the Company could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to the "Limitation on Indebtedness" covenant relevant to the Company
and (3) the aggregate amount of all Restricted Payments by Timberlands
declared or made after the date of the Indenture shall not exceed the sum of:
(A) 50% of the Consolidated Adjusted Net Income of Timberlands accrued on
a cumulative basis during the period beginning on the first day of
Timberlands' first fiscal quarter after the date of the Indenture and
ending on the last day of Timberlands' last fiscal quarter ending prior to
the date of such proposed Restricted Payment (or, if such aggregate
cumulative Consolidated Adjusted Net Income shall be a loss, minus 100% of
such loss); plus
(B) 75% of the aggregate net cash proceeds received after the date of the
Indenture by Timberlands as capital contributions or from the issuance or
sale (other than to any Subsidiary) of shares of Qualified Capital Stock
of Timberlands (including upon the exercise of options, warrants or
rights) or warrants, options or rights to purchase shares of Qualified
Capital Stock of Timberlands; provided that, after the date upon which the
Company shall have reduced its Total Committed Debt to an amount that is
not greater than $105 million, such calculation shall be adjusted to 100%
of the aggregate net cash proceeds of such transactions occurring after
such date; plus
(C) 75% of the aggregate net cash proceeds received after the date of the
Indenture by Timberlands from the issuance or sale (other than to any
Subsidiary) of debt securities or shares of Redeemable Capital Stock that
have been converted into or exchanged for shares of Qualified Capital
Stock of Timberlands, to the extent such securities were originally sold
for cash, together with the aggregate net cash proceeds received by
Timberlands at the time of such conversion or exchange; provided that,
after the date upon which the Company shall have reduced its Total
Committed Debt to an amount that is not greater than $105 million, such
calculation shall be adjusted to 100% of the aggregate net proceeds of
such transactions occurring after such date; plus
(D) to the extent not otherwise included in the Consolidated Adjusted Net
Income of Timberlands, an amount equal to the net reduction in Investments
(other than reductions in Permitted Investments) in Unrestricted
Subsidiaries resulting from the payments in cash of interest on
Indebtedness, dividends, repayments of loans or advances, or other
transfers of assets, in each case to Timberlands or a Restricted
Subsidiary
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after the date of the Indenture from any Unrestricted Subsidiary or from
the redesignation of an Unrestricted Subsidiary as a Restricted Subsidiary
(valued in each case as provided in the definition of Investment), not to
exceed the total amount of Investments (other than Permitted Investments)
in such Unrestricted Subsidiary by Timberlands and its Restricted
Subsidiaries.
(b) Notwithstanding paragraph (a) above, Timberlands may take the
following actions so long as no Default or Event of Default shall have
occurred and be continuing:
(i) the payment of any dividend or the making of any distribution within
60 days after the date of declaration thereof, if at such date of
declaration the payment of such dividend or such distribution would have
complied with the provisions of paragraph (a) above and such payment will
be deemed to have been paid on such date of declaration for purposes of
the calculation required by paragraph (a) above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of Timberlands in exchange for, or
out of the net cash proceeds of a substantially concurrent issuance and
sale (other than to any Subsidiary) of, shares of Qualified Capital Stock
of Timberlands;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Subordinated Indebtedness of Timberlands in
exchange for, or out of the net cash proceeds of a substantially
concurrent issuance and sale (other than to any Subsidiary) of, shares of
Qualified Capital Stock of Timberlands;
(iv) the purchase, redemption, defeasance or other acquisition or
retirement for value of Subordinated Indebtedness of Timberlands in
exchange for, or out of the net cash proceeds of a substantially
concurrent incurrence (other than to a Subsidiary) of, new Subordinated
Indebtedness of Timberlands so long as (A) the principal amount of such
new Indebtedness does not exceed the principal amount (or, if such
Subordinated Indebtedness being refinanced provides for an amount less
than the principal amount thereof to be due and payable upon a declaration
of acceleration thereof, such lesser amount as of the date of
determination) of the Subordinated Indebtedness being so purchased,
redeemed, defeased, acquired or retired, plus the lesser of the amount of
any premium required to be paid in connection with such refinancing
pursuant to the terms of the Subordinated Indebtedness being refinanced or
the amount of any premium reasonably determined by Timberlands as
necessary to accomplish such refinancing, plus, in either case, the amount
of expenses of Timberlands incurred in connection with such refinancing,
(B) such new Subordinated Indebtedness is subordinated to the Notes to the
same extent as such Subordinated Indebtedness so purchased, redeemed,
defeased, acquired or retired and (C) such new Subordinated Indebtedness
has (x) an Average Life either (I) longer than the Average Life of the
Notes or (II) equal to or greater than the Average Life of the
Subordinated Indebtedness that is being purchased, redeemed, defeased,
acquired or retired and (y) a final Stated Maturity of principal either
(I) later than the final Stated Maturity of principal of the Notes or (II)
no earlier than the Subordinated Indebtedness being purchased, redeemed,
defeased, acquired or retired;
(v) the payment by Timberlands of certain amounts on account of that
portion of the federal, state, local and foreign income tax liability of
the direct and indirect equityholders that is attributable to their
interests in Timberlands;
(vi) the payment by Timberlands of any dividend or distribution to
Brant-Allen (A) to enable Brant-Allen to repay or prepay all or a portion
of principal, premium or interest on the Indebtedness under the
Timberlands Loan or (B) from the proceeds of any Asset Sale by Timberlands
to enable Brant-Allen to repay or prepay all or a portion of the
principal, premium or interest on Indebtedness under the Timberlands Loan
or Indebtedness of the Company in accordance with paragraph (b) under the
"Limitation on Sale of Assets" covenant; and
(vii) the payment of a distribution by Timberlands on the Closing Date to
Brant-Allen (A) to cover or recover expenses incurred on behalf of the
Credit Parties and the escrow deposit by Brant-Allen in connection with
the Acquisition, the Timberlands Acquisition and the related financings
and (B) in an amount equal to the total federal, state, local and foreign
tax liabilities of Peter Brant and Joseph Allen arising as a result of
their indirect ownership of equity interests in Timberlands' predecessor
during 1997 through the Closing Date, as calculated by Timberlands' Vice
President of Finance and recalculated by Timberlands' independent
accountants; provided that such distribution shall not exceed an aggregate
of $5.3 million.
The actions described in clauses (i), (ii) and (iii) of this paragraph (b)
shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph (b) but shall reduce the amount that would
otherwise be
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available for Restricted Payments under clause (3) of paragraph (a) above and
the actions described in clauses (iv), (v), (vi) and (vii) of this paragraph
(b) shall be Restricted Payments that shall be permitted to be taken in
accordance with this paragraph (b) and shall not reduce the amount that would
otherwise be available for Restricted Payments under clause (3) of paragraph
(a).
(c) In computing Consolidated Adjusted Net Income of Timberlands under
paragraph (a) above, (1) Timberlands shall use audited financial statements
for the portions of the relevant period for which audited financial
statements are available on the date of determination and unaudited financial
statements and other current financial data based on the books and records of
Timberlands for the remaining portion of such period and (2) Timberlands
shall be permitted to rely in good faith on the financial statements and
other financial data derived from the books and records of Timberlands that
are available on the date of determination.
Limitation on Certain Restricted Payments by Soucy Inc. Soucy Inc. will
not make any Soucy Restricted Payment unless, immediately after giving effect
to such Soucy Restricted Payment, the Consolidated Tangible Net Worth of
Soucy Inc. will be equal to or greater than Cdn$32.0 million; provided that
this covenant shall not apply to (i) any dividends or distributions by Soucy
Inc. to Brant-Allen in order to repay Indebtedness of Brant-Allen in
accordance with the "Limitation on Sales of Collateral Stock and Certain
Other Transactions" covenant or the "Limitation on Sale of Assets" covenant
or (ii) the payment by Soucy Inc. of management, transportation, sales and
royalty fees to Brant-Allen in accordance with clause (b)(v) under the
"Limitation on Transactions with Affiliates" covenant.
Limitation on Liens. Each of the Security Parties will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien of any kind (other than Permitted
Liens) on or with respect to any of its property or assets, including any
shares of stock or indebtedness of any Restricted Subsidiary, whether owned
at the date of the Indenture or thereafter acquired, or any income, profits
or proceeds therefrom, or assign or otherwise convey any right to receive
income thereon.
Limitation on Guarantees of Company Indebtedness by the Security Parties
and Their Restricted Subsidiaries. (a) Each of the Security Parties will not,
and will not permit any of its Restricted Subsidiaries, directly or
indirectly, to guarantee, assume or in any other manner become liable for the
payment of any Indebtedness of the Company; provided that such Security Party
or such Restricted Subsidiary may do so if (i) (A) in any case when such
entity is not then already a Guarantor, such entity simultaneously executes
and delivers a supplemental indenture to the Indenture providing for a
Guarantee of payment of the Notes by such entity and (B) with respect to any
guarantee of Subordinated Indebtedness of the Company by any such entity, any
such guarantee shall be subordinated to such entity's Guarantee with respect
to the Notes at least to the same extent as such Subordinated Indebtedness of
the Company is subordinated to the Notes and (ii) such Restricted Subsidiary
waives and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary of the
Company as a result of any payment by such Restricted Subsidiary under its
Guarantee.
(b) Notwithstanding the foregoing, any Guarantee of the Notes created
pursuant to the provisions described in the foregoing paragraph (a) shall
provide by its terms that it shall be automatically and unconditionally
released and discharged upon the release by the holders of the Indebtedness
of the Company described in the preceding paragraph of their guarantee by
such Restricted Subsidiary (including any deemed release upon payment in full
of all obligations under such Indebtedness), at a time when (A) no other
Indebtedness of the Company has been guaranteed by such Restricted Subsidiary
or (B) the holders of all such other Indebtedness which is guaranteed by such
Restricted Subsidiary also release their guarantee by such Restricted
Subsidiary (including any deemed release upon payment in full of all
obligations under such Indebtedness).
CERTAIN COVENANTS OF BRANT-ALLEN
The Indenture contains, among others, the following covenants with respect
to Brant-Allen:
Limitation on Sales of Collateral Stock and Certain Other
Transactions. (a) Brant-Allen will not, and will not permit any of its
Subsidiaries or other Affiliates to, directly or indirectly, (i) sell, or
agree to sell, any of the shares of Capital Stock of Timberlands or Soucy
Inc., (ii) create, incur, assume, or suffer to exist any Lien of any kind
(other than Liens incurred in connection with the Bank Credit Agreement, the
Timberlands Loan or the Notes) on or with
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respect to the shares of Capital Stock of Timberlands or Soucy Inc. or (iii)
permit Timberlands or Soucy Inc., in a single transaction or through a series
of related transactions, to consolidate with or merge with or into any other
Person or sell, assign, convey, transfer, lease or otherwise dispose of all
or substantially all of its properties and assets to any other Person or
Persons.
(b) Notwithstanding the foregoing, Brant-Allen may allow the following:
(i) Brant-Allen may, directly or indirectly, sell, convey, transfer or
otherwise dispose of all of (but not less than all of) the shares of
Capital Stock of either of the Security Parties for cash;
(ii) Brant-Allen may, directly or indirectly, sell, convey, transfer or
otherwise dispose of all or any portion of its shares of Capital Stock in
Timberlands (and Brant-Allen may permit Timberlands to sell, convey,
transfer or otherwise dispose of all or substantially all of its assets)
in exchange for consideration consisting of the shares of Capital Stock of
another entity or of a combination of cash and the shares of Capital Stock
of another entity, but only if (A) such entity is required to file (and is
filing) reports pursuant to Section 12 or Section 15 of the Securities
Exchange Act of 1934, (B) such shares of Capital Stock are freely
tradeable on a national securities exchange (as such term is defined in
Section 6 of the Exchange Act) or automated quotation system, or can
become freely tradeable on such exchange or quotation system within 90
days of receipt by Brant-Allen of such Capital Stock, (C) such entity has
a Total Market Value of Equity of not less than $250 million and (D) the
Indebtedness, if any, of such entity is rated Investment Grade; and
(iii) Any transaction or transactions (other than those specified in (i)
and (ii) above) complying with the provisions of "Consolidation, Merger
and Sale of Assets" below; provided that the consideration to Brant-Allen
for such transaction is cash and/or shares of Capital Stock of the
Surviving Entity;
provided that (x) the Net Cash Proceeds, if any, of any such transaction
shall be utilized to repay Indebtedness of the Credit Parties in the same
order of priority as provided for the Net Cash Proceeds of the Asset Sales of
Timberlands or Soucy Inc., as the case may be, under paragraph (b) of the
"Limitations on Sale of Assets" covenant (and that any such Net Cash Proceeds
that are not so utilized shall be treated as Excess Proceeds of an Asset Sale
by the relevant Security Party under such covenant); (y) if the Surviving
Entity of such transaction is not one of the Security Parties, Brant-Allen
causes the shares of Capital Stock of the Surviving Entity that are
beneficially owned, directly or indirectly, by Brant-Allen or the Permitted
Holders to become subject to a Lien in favor of the Trustee on behalf of the
Noteholders that is at least of the same ranking as the Lien securing the
shares of Capital Stock of the applicable Security Party prior to such
transaction or series of transactions; provided that Brant-Allen may
subsequently sell, convey, transfer or otherwise dispose of all or a portion
of such shares of Capital Stock (and the Trustee shall release the Lien
secured by such shares of Capital Stock immediately prior to such sale,
conveyance, transfer or other disposal) if the Net Cash Proceeds of such
transactions are utilized in accordance with clause (x) of this proviso; and
(z) no transaction may be concluded in accordance with the foregoing if any
such transaction shall involve the two Security Parties and the Surviving
Entity shall be Soucy Inc.
Limitation on Proceeds of Asset Sales by Subsidiaries. Brant-Allen shall
utilize all dividends or distributions made to it from the Credit Parties
from the Net Cash Proceeds of Asset Sales by such Credit Parties, after
deducting the amount of any federal, state, local and foreign taxes owed by
Brant-Allen or its owners as a result of such Asset Sales, dividends or
distributions, to repay Indebtedness of the Credit Parties as provided in
clause (b) or (c) under the "Limitations on Sale of Assets" covenant.
CERTAIN COVENANTS OF ALL OF THE CREDIT PARTIES
Limitation on Issuances and Sales of Capital Stock of Subsidiaries. Each
of the Credit Parties (i) will not permit any of its Subsidiaries to issue
any Capital Stock (other than to such Credit Party or a wholly owned
Subsidiary) and (ii) will not permit any Person (other than such Credit Party
or a wholly owned Subsidiary) to own any Capital Stock of any of its
Subsidiaries; provided that this covenant shall not apply to the ownership by
the partners of Soucy Inc. of their partnership interests in Soucy Partners
or any joint venture established by Timberlands pursuant to paragraph (d) of
the "Limitation on Sale of Assets" covenant.
Limitation on Transactions with Affiliates. (a) Each of the Credit Parties
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, enter into or suffer to exist any transaction or series of
related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or services) with,
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or for the benefit of, any Affiliate of such Credit Party or any of its
Restricted Subsidiaries (other than such Credit Party or a wholly owned
Restricted Subsidiary of such Credit Party) unless (i) such transaction or
series of transactions is on terms that are no less favorable to such Credit
Party or such Restricted Subsidiary, as the case may be, than those that
could have been obtained in an arm's-length transaction with third parties
that are not Affiliates, (ii) with respect to any transaction or series of
related transactions involving aggregate consideration equal to or greater
than $1.0 million, such Credit Party delivers an officers certificate to the
Trustee certifying that such transaction or series of transactions complies
with clause (i) above and such transaction or series of related transactions
has been approved by a majority of the Disinterested Directors of such Credit
Party or, in the event no members of the Board of Directors of such Credit
Party are Disinterested Directors with respect to any transaction or series
of transactions included in this clause (ii), such Credit Party will obtain a
written opinion from a nationally recognized investment banking firm
certifying that such transaction or series of related transactions is fair to
such Credit Party or its Restricted Subsidiary, as the case may be, from a
financial point of view and (iii) with respect to any transaction or series
of related transactions including aggregate consideration in excess of $5.0
million, such Credit Party will obtain a written opinion from a nationally
recognized investment banking firm to the effect set forth in the preceding
clause (ii).
(b) The foregoing provisions in paragraph (a) will not restrict (i) any
Credit Party from paying reasonable and customary regular compensation and
fees, expense reimbursement and customary indemnification to directors of
such Credit Party or any of its Restricted Subsidiaries who are not employees
of such Credit Party or any such Restricted Subsidiary; (ii) transactions
pursuant to the Wood Supply Agreement and the Elebash Agreement, in each
case, as in effect on the date of the Indenture which (A) comply with clause
(i) of the foregoing paragraph (a) and (B) are in the ordinary course of
business; (iii) transactions pursuant to the Management Services Agreement
for aggregate payments by the Company to Brant-Allen (or any of its
Subsidiaries or Affiliates) in an amount per annum not in excess of 3% of the
revenues (net of transportation costs) of the Company in the applicable
fiscal year; provided that (A) at all times, up to 33 1/3% of such fees may
be paid by the Company to Brant-Allen in cash and (B) the remainder of such
fees may be paid by the Company to Brant-Allen in cash only at such times as
such payment is permitted under the "Limitation on Restricted Payments"
covenant relevant to the Company and, at all other times, only in the form of
Capital Stock of the Company or Indebtedness of the Company if such
Indebtedness shall (w) be subordinated in right of payment to the Notes, (x)
bear no interest, (y) not require principal payments of any kind on such
Indebtedness to be repaid prior to the Stated Maturity of the Notes, and (z)
contain no provisions for remedies (including, without limitation, any
defaults or any other provisions that would result in the acceleration of the
maturity of such Indebtedness); (iv) the payment by Soucy Inc. of management,
transportation, sales and royalty fees to Brant-Allen (or any of its
Subsidiaries or Affiliates) in an amount per annum not in excess of 9.73% of
the consolidated sales (net of transportation costs) of Soucy Inc. in the
applicable year; (v) the payment by Soucy Partners of management,
transportation, sales and royalty fees to Soucy Inc. in an amount per annum
not in excess of 3% of the cumulative annual sales (net of transportation
costs) of Soucy Partners; (vi) the sales and marketing of newsprint by
Brant-Allen for, or on behalf of, Soucy Inc. and its Subsidiaries consistent
with past practice or in the ordinary course of business; and (vii)
Restricted Payments that are permitted by the provisions of the Indenture
described above under the "Limitation on Restricted Payments" covenant
applicable to the Company or Timberlands, as the case may be.
Limitation on Sale of Assets. (a) Each of the Credit Parties will not, and
will not permit any of its Restricted Subsidiaries to, consummate any Asset
Sale unless (i) the consideration received by such Credit Party or such
Restricted Subsidiary for such Asset Sale is not less than the Fair Market
Value of the assets sold (as determined by the Board of Directors of such
Credit Party, whose determination shall be conclusive and evidenced by a
Board Resolution) and (ii) the consideration received by such Credit Party or
the relevant Restricted Subsidiary in respect of such Asset Sale consists of
at least 75% cash or Cash Equivalents; provided that the amount of (x) any
liabilities (as shown on the most recent balance sheet of such Credit Party)
of such Credit Party or any of its Restricted Subsidiaries (other than
contingent liabilities and liabilities that are by their terms subordinated
to the Notes or any guarantee thereof) that are assumed by the transferee of
any such assets pursuant to a customary novation agreement that releases such
Credit Party or such Restricted Subsidiary from further liability and (y) any
securities, notes or other obligations received by such Credit Party or any
such Restricted Subsidiary from such transferee that are promptly converted
by such Credit Party or such Restricted Subsidiary into cash or Cash
Equivalents (to the extent of the cash or Cash Equivalents received), shall
be deemed to be cash or Cash Equivalents, as the case may be, for purposes of
this provision; and provided further that (A) as Asset Sales reduce
Timberlands' timberlands below 40,000 acres, the
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Company shall obtain contract rights to purchase amounts of wood sufficient
to replace the wood supply which the Company anticipated receiving from the
timberlands subject to such further sales and (B) Timberlands may consummate
Asset Sales of timberlands in exchange for securities, notes or other
obligations of the transferee in such Asset Sales, so long as it does not
hold, at any one time, in excess of $1.0 million of such securities, notes or
obligations.
(b) If any Credit Party or any Restricted Subsidiary consummates an Asset
Sale, such Credit Party or such Restricted Subsidiary may use the Net Cash
Proceeds thereof, within 12 months after such Asset Sale, (i) to invest (or
enter into a legally binding agreement to invest) in properties and assets to
replace the properties and assets that were the subject of the Asset Sale or
in properties and assets (including Capital Stock or other securities
purchased in connection with the acquisition of Capital Stock or property of
another Person) that will be used in businesses of such Credit Party or such
Restricted Subsidiary and any of their respective Restricted Subsidiaries, as
the case may be, existing on the Closing Date, and that will be reflected as
non-current assets on the balance sheet of the relevant Credit Party or
Restricted Subsidiary, as the case may be, in accordance with GAAP; provided
that, in the case of the Company, such properties and assets shall become
subject to a Lien in favor of the Trustee on behalf of the Noteholders that
is of at least the same ranking as the Lien securing the assets that were
subject to such Asset Sale; or (ii) to repay certain Indebtedness, as
follows:
(A) in the case of the Company or its Restricted Subsidiaries, to
permanently repay or prepay any then outstanding unsubordinated
Indebtedness of the Company or any Indebtedness of its Restricted
Subsidiaries;
(B) in the case of Timberlands or its Restricted Subsidiaries, to make
payments in the following order of priority: (i) to repay or prepay all or
part of the principal, premium, if any, and interest on the Hancock Loan
or to make a dividend payment or a distribution to enable Brant-Allen to
repay or prepay all or part of the principal, premium, if any, and
interest on the Timberlands Loan; and (ii) if the Hancock Loan and the
Timberlands Loan shall have been repaid, to the extent permitted by
applicable law, to make a dividend payment or distribution to enable
Brant-Allen to make a capital contribution to the Company to enable the
Company to permanently reduce Total Committed Debt of the Company under
the Bank Credit Agreement; and
(C) in the case of Soucy Inc. or its Restricted Subsidiaries, to make
payments in the following order of priority: (i) to permanently reduce the
Total Committed Debt of Soucy Inc. or its Restricted Subsidiaries or (ii)
to the extent permitted by applicable law, to make a dividend payment or
distribution, directly or indirectly, to enable Brant-Allen (x) to make a
capital contribution to the Company to enable the Company to permanently
reduce the Total Committed Debt of the Company under the Bank Credit
Agreement, (y) to repay or prepay all or part of the Timberlands Loan, or
(z) to make a capital contribution to Timberlands to enable Timberlands to
repay or prepay all or part of the Hancock Loan.
With respect to clause (i) of this paragraph (b), if any such legally binding
agreement to invest such Net Cash Proceeds is terminated, then such Credit
Party or its Restricted Subsidiary, as the case may be, may, within 90 days
of such termination or within 12 months of such Asset Sale, whichever is
later, invest such Net Cash Proceeds as provided in clause (i) (without
regard to the parenthetical contained in such clause (i) above). The amount
of such Net Cash Proceeds or, in the case of any Asset Sale by Soucy Partners
or its Subsidiaries, Soucy Inc.'s pro rata share of such Net Cash Proceeds
not so used as set forth above in this paragraph (b) constitutes "Excess
Proceeds."
(c) When the aggregate amount of Excess Proceeds with respect to any of
the Credit Parties and its Restricted Subsidiaries exceeds $15.0 million, the
relevant Credit Party shall, within 15 business days, make an offer to
purchase (an "Excess Proceeds Offer") from all holders of Notes, on a pro
rata basis, in accordance with the procedures set forth below, but only if
the consummation of such offer is permitted by applicable law, the maximum
principal amount (expressed as a multiple of $1,000) of Notes that may be
purchased with the Excess Proceeds. The offer price as to each Note shall be
payable in cash in an amount equal to 101% of the principal amount of such
Note plus accrued interest, if any, to the date such Excess Proceeds Offer is
consummated. To the extent that the aggregate principal amount of Notes
tendered pursuant to an Excess Proceeds Offer is less than the Excess
Proceeds, the relevant Credit Party may use such deficiency for general
corporate purposes. If the aggregate principal amount of Notes validly
tendered and not withdrawn by holders thereof exceeds the Excess Proceeds,
Notes to be purchased will be selected on a pro rata basis. Upon completion
of such Exceeds Proceeds Offer, the amount of Excess Proceeds shall be reset
to zero.
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(d) Notwithstanding the foregoing provisions of this covenant, Timberlands
may contribute, sell, convey, transfer, lease or otherwise dispose of all or
a portion of its properties or assets into a joint venture with another
entity in exchange for Capital Stock of such joint venture, but only if (i)
the Indebtedness of the entity that is the joint venture partner of
Timberlands is rated Investment Grade; (ii) an Independent Valuation Agent
shall provide a valuation that, on a pro forma basis, the total amount of the
Indebtedness of such joint venture following the contributions by the joint
venture partners shall not exceed 50% of an amount equal to the sum of its
Equity Value and such total Indebtedness; (iii) dividends or distributions on
the Capital Stock of the joint venture held, directly or indirectly, by
Brant-Allen shall be utilized, after deducting the amount of any federal,
state and local taxes owed by Brant-Allen or its owners as a result of such
dividends or distributions, to repay Indebtedness of Timberlands and the
Company in the same order of priority as provided for the proceeds of Asset
Sales of Timberlands under clause (B) under paragraph (b) of this "Limitation
on Sale of Assets" covenant; (iv) if, following the establishment of the
joint venture it will not be a "Subsidiary" for purposes of the Indenture,
then the joint venture shall nonetheless be required to adhere to the
limitation on the incurrence of Indebtedness by joint ventures provided for
in clause (vii) of paragraph (b) under the definition of Permitted Security
Party Indebtedness; and (v) the Capital Stock in such joint venture owned by
Timberlands become subject to the security interest of the Timberlands
Collateral.
Limitation on Sale and Leaseback Transactions. Each of the Credit Parties
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, enter into any Sale and Leaseback Transaction with respect to
any property or assets (whether now owned or hereafter acquired), unless (i)
the sale or transfer of such property or assets to be leased is treated as an
Asset Sale and all of the relevant parties comply with the "Limitation on
Sale of Assets" covenant, (ii) such Credit Party or such Restricted
Subsidiary would be permitted to incur Indebtedness under the "Limitation on
Indebtedness" covenant relevant to the applicable Credit Party in the amount
of the Attributable Value of the Indebtedness incurred in respect of such
Sale and Leaseback Transaction and (iii) such Credit Party or such Restricted
Subsidiary would be permitted to grant a Lien under the "Limitation on Liens"
covenant relevant to the applicable Credit Party to secure the amount of the
Attributable Debt in respect of such Sale and Leaseback Transaction.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. Each of the Credit Parties other than Soucy Inc.
will not, and will not permit any of its Restricted Subsidiaries to, directly
or indirectly, create or otherwise cause or suffer to exist or become
effective any encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (a) pay dividends, in cash or otherwise, or make any
other distributions on or in respect of its Capital Stock, (b) pay any
Indebtedness owed to such Credit Party or any other Restricted Subsidiary of
such Credit Party, (c) make loans or advances to such Credit Party or any
other Restricted Subsidiary of such Credit Party, (d) transfer any of its
properties or assets to such Credit Party or any other Restricted Subsidiary
of such Credit Party (other than customary restrictions on transfers of
property subject to a Lien permitted under the Indenture that would not
materially adversely affect such Credit Party's ability to satisfy its
obligations under the Notes and the Indenture) or (e) guarantee any
Indebtedness of such Credit Party or any other Restricted Subsidiary of such
Credit Party, except for such encumbrances or restrictions existing under or
by reason of (i) the Indenture, the Bank Credit Agreement, as originally
executed, the Timberlands Loan, the Hancock Loan and any documents or
agreements entered into pursuant thereto or securing obligations thereunder
and any other agreement in effect on the date of the Indenture and listed on
a schedule attached to the Indenture, (ii) applicable law, (iii) customary
provisions restricting subletting or assignment of any lease or assignment of
any other contract to which such Credit Party or any Restricted Subsidiary of
such Credit Party is a party or to which any of their respective properties
or assets are subject, (iv) any agreement or other instrument of a Person
acquired by such Credit Party or any Restricted Subsidiary of such Credit
Party in existence at the time of such acquisition (but not created in
contemplation thereof), which encumbrance or restriction is not applicable to
any Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired, (v) any encumbrance or
restriction contained in contracts for sales of assets permitted by the
"Limitation on Sale of Assets" covenant with respect to the assets to be sold
pursuant to such contract and (vi) any encumbrance or restriction existing
under any agreement that extends, renews, refinances or replaces the
agreements containing the encumbrances or restrictions in the foregoing
clauses (i) and (iv); provided that the terms and conditions of any such
encumbrances or restrictions are not materially less favorable to the holders
of the Notes than those under or pursuant to the agreement so extended,
renewed, refinanced or replaced.
Limitation on Conduct of Business. Each of the Credit Parties will not,
and will not permit any of its Subsidiaries to, conduct any business other
than the business such Credit Party and its Subsidiaries was conducting on
the Closing Date or businesses reasonably similar or related thereto.
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Limitation on Unrestricted Subsidiaries. Each of the Credit Parties will
not make, and will not permit any of its Restricted Subsidiaries to make, any
Investments in any of its Unrestricted Subsidiaries if, at the time thereof,
the aggregate amount of such Investments would exceed the amount of
Restricted Payments then permitted to be made pursuant to the "Limitation on
Restricted Payments" covenant relevant to such Credit Party. Any Investments
in Unrestricted Subsidiaries permitted to be made pursuant to this covenant
(i) will be treated as the making of a Restricted Payment in calculating the
amount of Restricted Payments made by such Credit Party and (ii) may be made
in cash or property.
Reports. The Company will file on a timely basis with the Commission, to
the extent such filings are accepted by the Commission, and whether or not
the Company has a class of securities registered under the Exchange Act, the
annual reports, quarterly reports and other documents that the Company would
be required to file if it were subject to Section 13 or 15 of the Exchange
Act. The Company will also be required (a) to provide to the Trustee, and to
make available to each holder of Notes promptly upon request, without cost to
such holder, copies of such reports and documents within 15 days after the
date on which the Company files such reports and documents with the
Commission or the date on which the Company would be required to file such
reports and documents if the Company were so required, and (b) if filing such
reports and documents with the Commission is not accepted by the Commission
or is prohibited under the Exchange Act, to make available, at the Company's
cost, copies of such reports and documents to any prospective holder of Notes
promptly upon request.
In addition, the Company will be required to provide to the Trustee, and
to make available to each holder of the Notes promptly upon request, without
cost to such holder, as soon as possible, but in any event within 90 days
after the end of the relevant fiscal year, a copy of the audited financial
statements of each of the Security Parties.
CONSOLIDATION, MERGER AND SALE OF ASSETS
Each of the Credit Parties will not, in a single transaction or through a
series of related transactions, consolidate with or merge with or into any
other Person or sell, assign, convey, transfer, lease or otherwise dispose of
all or substantially all of its properties and assets to any other Person or
Persons or permit any of its Restricted Subsidiaries to enter into any such
transaction or series of related transactions if such transaction or series
of related transactions, in the aggregate, would result in the sale,
assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of such Credit Party and its
Restricted Subsidiaries on a consolidated basis to any other Person or
Persons, unless at the time and immediately after giving effect thereto (i)
either (A) such Credit Party will be the continuing corporation (or limited
liability company) or (B) the Person (if other than such Credit Party) formed
by such consolidation or into which such Credit Party or such Restricted
Subsidiary is merged or the Person that acquires by sale, assignment,
conveyance, transfer, lease or disposition all or substantially all the
properties and assets of such Credit Party and its Restricted Subsidiaries on
a consolidated basis (the "Surviving Entity") (1) will be a corporation,
partnership, limited liability company or trust duly organized and validly
existing under the laws of the United States of America, any state thereof or
the District of Columbia, and (2) will expressly assume, by a supplemental
indenture in form satisfactory to the Trustee, the performance and observance
of every covenant and other obligation of the Indenture on the part of such
Credit Party to be performed or observed; (ii) immediately after giving
effect to such transaction or series of transactions on a pro forma basis
(and treating any obligation of such Credit Party or any Subsidiary incurred
in connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing; (iii)
immediately after giving effect to such transaction or series of transactions
on a pro forma basis (and treating any obligation of such Credit Party or any
Subsidiary incurred in connection with or as a result of such transaction or
series of transactions as having been incurred at the time of such
transaction), the Consolidated Net Worth of such Credit Party (or of the
Surviving Entity if such Credit Party is not the continuing obligor under the
Indenture) is equal to or greater than the Consolidated Net Worth of such
Credit Party immediately prior to such transaction or series of transactions;
(iv) with respect to the Company and Soucy Inc., immediately after giving
effect to such transaction or series of transactions on a pro forma basis (on
the assumption that the transaction or series of transactions occurred on the
first day of the four-quarter period immediately prior to the consummation of
such transaction or series of transactions with the appropriate adjustments
with respect to the transaction or series of transactions being included in
such pro forma calculation), (I) in the case of the Company, the Company (or
the Surviving Entity, if as a result of such transaction or transactions, the
Company does not continue as an obligor under the Indenture) could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
under the provisions of the "Limitation on Indebtedness" covenant relevant to
the Company and (II) in the case of Soucy Inc.,
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Soucy Inc. (or the Surviving Entity, if as a result of such transaction or
transactions, Soucy Inc. does not continue as a party under the Indenture)
could incur $1.00 of additional Indebtedness under clause (c)(v) of the
definition of "Permitted Security Party Indebtedness"; (v) each Guarantor, if
any, unless it is the other party to the transactions described above, shall
have by supplemental indenture confirmed that its Guarantee will apply to
such Person's obligations under the Indenture and the Notes; and (vi) if any
of the property or assets of such Credit Party or any of its Subsidiaries
would thereupon become subject to any Lien, the provisions of the "Limitation
on Liens" covenant relevant to the applicable Credit Party are complied with;
provided that the provisions of this "Consolidation, Merger and Sale of
Assets" covenant will not apply to any transaction consummated under (x)
clause (i) or (ii) of paragraph (b) under the "Limitation on Sales of
Collateral Stock and Certain Other Transactions" covenant and (y) paragraph
(d) under the "Limitation on Sale of Assets" covenant.
In connection with any such consolidation, merger, sale, assignment,
conveyance, transfer, lease or other disposition, the relevant Credit Party
or the Surviving Entity shall have delivered to the Trustee, in form and
substance reasonably satisfactory to the Trustee, an officers' certificate
(attaching the authentic computations to demonstrate compliance with clauses
(iii) and (iv) above) and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or other
disposition, and if a supplemental indenture is required in connection with
such transaction, such supplemental indenture, complies with the requirements
of the Indenture and that all conditions precedent therein provided for
relating to such transaction have been complied with.
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of any interest on any Note when it becomes
due and payable and continuance of such default for a period of 30 days;
(ii) default in the payment of the principal of or premium, if any, on
any Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(iii) default in the performance, or breach, of the provisions described
in "Consolidation, Merger and Sale of Assets," the failure to make or
consummate a Change of Control Offer in accordance with the provisions of
the "Purchase of Notes upon a Change of Control" covenant or the failure
to make or consummate an Excess Proceeds Offer in accordance with the
provisions of the "Limitation on Disposition of Proceeds of Asset Sales"
covenant;
(iv) default in the performance, or breach, of any covenant or warranty
of the Company, any Security Party, Brant-Allen or any Guarantor contained
in the Indenture or any Guarantee (other than a default in the
performance, or breach, of a covenant or warranty which is specifically
dealt with in clauses (i), (ii) or (iii) above) and continuance of such
default or breach for a period of 30 days after written notice shall have
been given to the Company by the Trustee or to the Company and the Trustee
by the holders of at least 25% in aggregate principal amount of the Notes
then outstanding;
(v) (A) one or more defaults in the payment of principal of or premium,
if any, on Indebtedness of the Company, any Security Party, any Guarantor
or any of their respective Restricted Subsidiaries aggregating $5.0
million or more, when the same becomes due and payable at the stated
maturity thereof, and such default or defaults shall have continued after
any applicable grace period and shall not have been cured or waived or (B)
Indebtedness of the Company, any Security Party, any Guarantor or any of
their respective Restricted Subsidiaries aggregating $5.0 million or more
shall have been accelerated or otherwise declared due and payable, or
required to be prepaid or repurchased (other than by regularly scheduled
required prepayment prior to the stated maturity thereof);
(vi) any holder of any Indebtedness in excess of $5.0 million in the
aggregate of the Company, any Security Party, any Guarantor or any of
their respective Restricted Subsidiaries shall notify the Trustee of the
intended sale or disposition of any assets of any such party that have
been pledged to or for the benefit of such Person to secure such
Indebtedness or shall commence proceedings, or take action (including by
way of set-off) to retain in satisfaction of any such Indebtedness, or to
collect on, seize, dispose of or apply, any such assets of the Company,
any Security Party, any Guarantor or any of their respective Restricted
Subsidiaries pursuant to the terms of any agreement or instrument
evidencing any such Indebtedness or in accordance with applicable law;
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(vii) one or more final judgments or orders shall be rendered against the
Company, any Security Party, any Guarantor or any of their respective
Restricted Subsidiaries for the payment of money, either individually or
in an aggregate amount, in excess of $5.0 million and shall not be
discharged and either (A) an enforcement proceeding shall have been
commenced by any creditor upon such judgment or order or (B) there shall
have been a period of 30 consecutive days during which a stay of
enforcement of such judgment or order, by reason of a pending appeal or
otherwise, was not in effect;
(viii) any Guarantee ceases in any material respect to be in full force
and effect or is declared null and void or any Guarantor denies that it
has any further liability under any Guarantee, or gives notice to such
effect (other than by reason of the termination of the Indenture or the
release of any such Guarantee in accordance with the Indenture);
(ix) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to the Company, any Security Party, any
Guarantor or any of their respective Restricted Subsidiaries;
(x) any of the Collateral Documents shall cease in any material respect
to be in full force and effect or shall cease in any material respect to
give the Collateral Trustee the Liens, rights, powers and privileges
purported to be created thereby; or
(xi) default in the performance, or breach, of any covenant or warranty
of the Issuers, the Security Parties or Brant-Allen under the Collateral
Documents and continuance of such default for a period of 30 days after
written notice thereof shall have been given as provided in clause (iv)
above.
If an Event of Default (other than as specified in clause (ix) above)
shall occur and be continuing, the Trustee, by written notice to the Company,
or the holders of not less than 25% in aggregate principal amount of the
Notes then outstanding may, and the Trustee, upon the written request of such
holders, shall declare the principal of, premium, if any, and accrued
interest on all of the outstanding Notes immediately due and payable, and
upon any such declaration all such amounts payable in respect of the Notes
shall become immediately due and payable. Notwithstanding the foregoing, any
Holder shall have the right to institute suit to enforcement of any overdue
payment owing to such Holder pursuant to the Notes. If an Event of Default
specified in clause (ix) above occurs and is continuing, then the principal
of, premium, if any, and accrued interest on all of the outstanding Notes
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Notes.
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration and its consequences if (a) the Issuers have paid or
deposited with the Trustee a sum sufficient to pay (i) all overdue interest
on all Notes, (ii) all unpaid principal of and premium, if any, on any
outstanding Notes that has become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, (iii) to
the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate borne by the Notes and (iv) all
sums paid or advanced by the Trustee under the Indenture and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel; and (b) all Events of Default, other than the non-payment of
amounts of principal of, premium, if any, or interest on the Notes that has
become due solely by such declaration of acceleration, have been cured or
waived. No such rescission shall affect any subsequent default or impair any
right consequent thereon.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the holders of all the Notes, waive
any past or existing defaults under the Indenture, except a continuing
default in the payment of the principal of, premium, if any, or interest on
any Note, or in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each Note
outstanding.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of
the Default or Event of Default within five days after the occurrence
thereof. Except in the case of a Default or an Event of Default in payment of
principal of, premium, if any, or interest on any Notes, the Trustee may
withhold the notice to the holders of such Notes if a committee of its trust
officers in good faith determines that withholding the notice is in the
interests of the holders of the Notes.
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The Company is required to furnish to the Trustee annual statements as to
the performance by each of the Credit Parties of its obligations under the
Indenture and as to any default in such performance. The Company is also
required to notify the Trustee within five days of the occurrence of any
Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Issuers may, at their option and at any time, elect to have the
obligations of the Issuers, the Security Parties and any Guarantor upon the
Notes discharged with respect to the outstanding Notes ("defeasance"). Such
defeasance means that the Issuers and any such Guarantor will be deemed to
have paid and discharged the entire Indebtedness represented by the
outstanding Notes and that the Issuers, the Security Parties and any
Guarantor will be deemed to have satisfied all their other obligations under
such Notes and the Indenture insofar as such Notes are concerned except for
(i) the rights of holders of outstanding Notes to receive payments in respect
of the principal of, premium, if any, and interest on such Notes when such
payments are due from the trust referred to below, (ii) the Company's
obligations to issue temporary Notes, register the transfer or exchange of
any Notes, replace mutilated, destroyed, lost or stolen Notes, maintain an
office or agency for payments in respect of the Notes and segregate and hold
such payments in trust, (iii) the rights, powers, trusts, duties and
immunities of the Trustee and (iv) the defeasance provisions of the
Indenture. In addition, the Issuers may, at their option and at any time,
elect to have the obligations of the Issuers, the Security Parties and any
Guarantor released with respect to certain covenants set forth in the
Indenture, and any omission to comply with such obligations will not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance"). If covenant defeasance occurs, then certain events
described under "--Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either defeasance or covenant defeasance, (i) the
Issuers must irrevocably deposit or cause to be deposited with the Trustee,
as trust funds in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, or U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of
a nationally recognized firm of independent public accountants, to pay and
discharge the principal of, premium, if any, and interest on the outstanding
Notes on the Stated Maturity (or upon redemption, if applicable) of such
principal, premium, if any, or installment of interest; (ii) no Default or
Event of Default with respect to the Notes will have occurred and be
continuing on the date of such deposit or, insofar as an event of bankruptcy
under clause (ix) of "--Events of Default" above is concerned, at any time
during the period ending on the 91st day after the date of such deposit;
(iii) such defeasance or covenant defeasance will not result in a breach or
violation of, or constitute a default under, the Indenture or any material
agreement or instrument to which the Issuers, the Security Parties or any
Guarantor is a party or by which it is bound; (iv) in the case of defeasance,
the Company shall have delivered to the Trustee an opinion of counsel or a
copy of a private letter ruling to the Company from the Internal Revenue
Service, substantially to the effect that the holders of the outstanding
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred; (v) in the case of covenant
defeasance, the Company shall have delivered to the Trustee an opinion of
counsel or a copy of a private letter ruling to the Company from the Internal
Revenue Service substantially to the effect that the holders of the Notes
outstanding will not recognize income, gain or loss for federal income tax
purposes as a result of such covenant defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such covenant defeasance had not
occurred; and (vi) the Company shall have delivered to the Trustee an
officers certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to either the defeasance or the
covenant defeasance, as the case may be, have been complied with.
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture) and the Trustee, at the expense of the
Company, will execute proper instruments acknowledging satisfaction and
discharge of the Indenture when (a) either (i) all the Notes theretofore
authenticated and delivered (other than destroyed, lost or stolen Notes which
have been replaced or paid) and (ii) Notes for whose payment money has been
deposited in trust with the Trustee or any Paying Agent or segregated and
held in trust by the Company and thereafter repaid to the Company or
discharged from such trust
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as provided for in the Indenture have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation (x) have become due and payable, (y) will become due and payable
at Stated Maturity within one year or (z) are to be called for redemption
within one year under arrangements satisfactory to the Trustee for the giving
of notice of redemption by the Trustee in the name of the Issuers, at the
expense of the Company, and the Company, FinCo or any Guarantor has
irrevocably deposited or caused to be deposited with the Trustee as trust
funds in trust for such purpose an amount sufficient to pay and discharge the
entire Indebtedness on such Notes not theretofore delivered to the Trustee
for cancellation, for principal of, premium, if any, and interest on the
Notes to the date of such deposit (in the case of Notes which have become due
and payable) or to the Stated Maturity or Redemption Date, as the case may
be; (ii) the Company, FinCo or any Guarantor has paid or caused to be paid
all sums payable under the Indenture by the Issuers; and (iii) the Company
has delivered to the Trustee an Officers Certificate and an Opinion of
Counsel, each stating that all conditions precedent provided in the Indenture
relating to the satisfaction and discharge of the Indenture have been
complied with.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by a
supplemental indenture entered into by the Issuers, the Security Parties,
each Guarantor, if any, and the Trustee with the consent of the holders of a
majority in aggregate outstanding principal amount of the Notes then
outstanding; provided, however, that no such modification or amendment may,
without the consent of the holder of each outstanding Note affected thereby:
(i) change the Stated Maturity of the principal of, or any installment of
interest on, any Note, or reduce the principal amount thereof (or premium, if
any) or the rate of interest thereon or change the coin or currency in which
the principal of any Note or any premium or the interest thereon is payable,
or impair the right to institute suit for the enforcement of any such payment
after the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date); (ii) amend, change or modify the obligation of the
Issuers to make and consummate an Excess Proceeds Offer with respect to any
Asset Sale in accordance with the "Limitation on Sale of Assets" covenant or
the obligation of the Issuers to make and consummate a Change of Control
Offer in the event of a Change of Control in accordance with the "Purchase of
Notes upon a Change of Control" covenant, including, in each case, amending,
changing or modifying any definition relating thereto; (iii) reduce the
percentage in principal amount of outstanding Notes, the consent of whose
holders is required for any such supplemental indenture or the consent of
whose holders is required for any waiver of compliance with certain
provisions of the Indenture; (iv) modify any of the provisions relating to
supplemental indentures requiring the consent of holders or relating to the
waiver of past defaults or relating to the waiver of certain covenants,
except to increase the percentage of outstanding Notes required for such
actions or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the holder of each Note affected
thereby; (v) except as otherwise permitted under "Consolidation, Merger and
Sale of Assets", consent to the assignment or transfer by the Issuers, the
Security Parties or any Guarantor of any of their rights or obligations under
the Indenture; or (vi) amend or modify any of the provisions of the Indenture
or the Notes or any Guarantee of the Notes or any of the Collateral Documents
relating to the Collateral in any manner adverse to the holders of the Notes.
Notwithstanding the foregoing, without the consent of any holder of the
Notes, the Issuers, the Security Parties, Brant-Allen, any Guarantor and the
Trustee may modify or amend the Indenture: (a) to evidence the succession of
another Person to the Issuers, the Security Parties, a Guarantor or any other
obligor on the Notes, and the assumption by any such successor of the
covenants of the Issuers, the Security Parties, Brant-Allen or a Guarantor in
the Indenture and in the Notes and in any Guarantee in accordance with
"--Consolidation, Merger and Sale of Assets"; (b) to add to the covenants of
the Issuers, the Security Parties, Brant-Allen, any Guarantor or any other
obligor upon the Notes for the benefit of the holders of the Notes or to
surrender any right or power conferred upon the Issuers, the Securities
Parties, or any Guarantor or any other obligor upon the Notes, as applicable,
in the Indenture, in the Notes or in any Guarantee; (c) to cure any
ambiguity, or to correct or supplement any provision in the Indenture, the
Notes or any Guarantee which may be defective or inconsistent with any other
provision in the Indenture, the Notes or any Guarantee or make any other
provisions with respect to matters or questions arising under the Indenture,
the Notes or any Guarantee; provided that, in each case, such provisions
shall not adversely affect the interest of the holders of the Notes; (d) to
comply with the requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act; (e) to add
a Guarantor under the Indenture; (f) to evidence and provide the acceptance
of the appointment of a successor Trustee under the Indenture; or (g) to
mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the holders of the Notes as additional
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security for the payment and performance of obligations of the Issuers, the
Security Parties and any Guarantor under the Indenture, in any property, or
assets, including any of which are required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted to
the Trustee pursuant to the Indenture or otherwise.
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. If an Event of Default has occurred and is
continuing, the Trustee will exercise such rights and powers vested in it
under the Indenture and use the same degree of care and skill in its exercise
as a prudent Person would exercise under the circumstances in the conduct of
such Person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions; provided, however, that if it
acquires any conflicting interest (as defined) it must eliminate such
conflict or resign.
GOVERNING LAW
The Indenture, the Notes, the Collateral Documents (other than the Deed of
Trust and the Hypothec Agreement) are governed by, and will be construed in
accordance with, the laws of the State of New York. The Deed of Trust and the
Hypothec Agreement are governed by, and will be construed in accordance with,
the laws of the Commonwealth of Virginia and the Province of Quebec,
respectively.
ENFORCEABILITY OF JUDGMENTS
Since substantially all of the assets of Soucy Inc. are outside the United
States, any judgment obtained in the United States against Soucy Inc. may not
be collectible within the United States.
The Issuers have been advised by their Canadian counsel, McCarthy
Tetrault, that the laws of the Province of Quebec would permit an action to
be brought in the appropriate courts of the Province of Quebec on a final and
conclusive judgment in personam of any federal or state court located in the
Borough of Manhattan in the City of New York ("New York Court") which is not
impeachable as void or voidable under the internal laws of the State of New
York, for a definite sum of money provided that (i) the New York Court
rendering such judgment had jurisdiction according to Quebec conflicts of
laws rules over the judgment debtor, (ii) such judgment was not obtained by
fraud, was not rendered in contravention of the "fundamental principles of
procedure" and the outcome thereof would not be manifestly inconsistent with
"public order," as such terms are applied by the courts in Quebec or contrary
to any order made by the Attorney General of Canada under the Foreign
Extraterritorial Measures Act (Canada) or any order made by the Competition
Tribunal under the Competition Act (Canada) in respect of certain judgments
(as defined therein); (iii) the procedural rules of commencement and
maintenance of the enforcement proceedings in the Province of Quebec are
observed; (iv) the enforcement of such a judgment does not constitute,
directly or indirectly, the enforcement of foreign revenue, penal or public
laws; (v) there has been compliance with Article 2924 of the Civil Code of
Quebec which provides that a right arising from a judgment must be exercised
within ten years of the date of such judgment; (vi) the enforceability of
such judgment may be limited by applicable bankruptcy, insolvency,
reorganization, arrangement, winding-up, moratorium, or other laws generally
affecting the enforceability of creditors' rights; (vii) pursuant to the
provisions of the Currency Act (Canada), no court in Canada may make an order
expressed in any currency other than lawful money of Canada and a Quebec
court will convert a sum expressed in a foreign currency in a foreign
judgment into Canadian currency at the rate of exchange prevailing on the
date the judgment became enforceable at the place where it was rendered; and
(viii) a Quebec court would retain some residual equitable jurisdiction which
might limit the enforcement of remedies which may have been granted by the
New York Court.
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NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND MEMBERS
No director, officer, employee, incorporator or member of the Issuers, as
such, shall have any liability for any obligations of the Issuers under the
Notes or the Indenture or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each holder of the Notes by accepting
a Note waives and releases all such liability. The waiver and release are
part of the consideration for issuance of the Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
LIMITED RECOURSE
Each of the Soucy Pledge Agreement, the Hypothec Agreement and the
Timberlands Pledge Agreement provide that, anything therein to the contrary
notwithstanding, the Trustee shall have recourse in respect of the Secured
Obligations solely to, in the case of the Soucy Pledge Agreement and the
Hypothec Agreement, the Soucy Collateral (for the purposes of this paragraph
only, as defined in the Soucy Pledge Agreement) and, in the case of the
Timberlands Pledge Agreement, the Timberlands Collateral (for the purposes of
this paragraph only, as defined in the Timberlands Pledge Agreement) and, in
each case, not to Brant-Allen personally or to assets of Brant-Allen other
than the Soucy Collateral or the Timberlands Collateral, as the case may be.
"Secured Obligations" are defined in each such Pledge Agreement (and for the
purposes of this paragraph only) to mean (a) the obligations of the Issuers
under the Indenture and (b) all obligations and liabilities of Brant-Allen
that may arise under or in connection with any Collateral Document to which
Brant-Allen is a party, whether on account of fees, indemnities, cost,
expenses or otherwise that are required to be paid by Brant-Allen pursuant to
the terms thereof.
The Company Pledge and Security Agreement provides that, anything therein
to the contrary notwithstanding, the Trustee shall have recourse in respect
of the Secured Obligations (as defined in the Company Pledge and Security
Agreement) solely to the Collateral (for the purposes of this paragraph only,
as defined in the Company Pledge and Security Agreement) and not to the
Company and each Restricted Subsidiary that becomes a Guarantor
(collectively, the "Grantors" and, each, a "Grantor") personally or to assets
of the Grantors other than the Collateral. "Secured Obligations" are defined
in the Company Pledge and Security Agreement (and for the purposes of this
paragraph only) to mean (a) the obligations of the Issuers under the
Indenture and (b) all obligations and liabilities of the Grantors that may
arise under or in connection with any Collateral Document to which the
Grantors are a party, whether on account of fees, indemnities, cost, expenses
or otherwise that are required to be paid by the Grantor pursuant to the
terms thereof.
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Subsidiary or (b) assumed in connection with the
acquisition of assets from such Person. Acquired Indebtedness shall be deemed
to be incurred on the date of the related acquisition of assets from any
Person or the date the acquired Person becomes a Restricted Subsidiary.
"Affiliate" means, with respect to any specified Person, (a) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person or (b) any other Person
that owns, directly or indirectly, 5% or more of such specified Person's
Capital Stock or any executive officer or director of any such specified
Person or other Person or, with respect to any natural Person, any Person
having a relationship with such Person by blood, marriage or adoption not
more remote than first cousin. For the purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means, with respect to any Credit Party, any sale, issuance,
conveyance, transfer, lease or other disposition (including, without
limitation, by way of merger or consolidation) (collectively, a "transfer"),
directly or indirectly, in one or a series of related transactions, of (a)
any Capital Stock of any Restricted Subsidiary of such Credit Party; (b) all
or substantially all of the properties and assets of such Credit Party or its
Restricted Subsidiaries; or (c) any other properties or assets of any
division or line of business of such Credit Party or any Restricted
Subsidiary of such Credit Party, other than in the ordinary course of
business (including, without limitation, transfers of newsprint or other
inventory in the ordinary course of business). For the purposes of this
definition, the term "Asset
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Sale" shall not include any transfer of properties or assets or Capital Stock
of Restricted Subsidiaries (i) that is governed by the provisions of the
Indenture described under "Consolidation, Merger, Conveyance, Transfer or
Lease" and under "Limitation on Sales of Collateral Stock and Certain Other
Transactions," (ii) between or among any Credit Party and any of its
Restricted Subsidiaries in accordance with the terms of the Indenture or
(iii) to an Unrestricted Subsidiary, if permitted under the relevant
"Limitation on Restricted Payments" covenant.
"Attributable Value" means, with respect to any lease of any Person, at
the time of determination, the present value (discounted at the interest rate
implicit in the lease or, if not known, at the incremental borrowing rate of
such Person) of the obligations of the lessee of the property subject to such
lease for rental payments during the remaining term of the lease included in
such transaction, including any period for which such lease has been extended
or may, at the option of the lessor, be extended, or until the earliest date
on which the lessee may terminate such lease without penalty or upon payment
of penalty (in which case the rental payments shall include such penalty),
after excluding from such rental payments all amounts required to be paid on
account of maintenance and repairs, insurance, taxes, assessments, water,
utilities and similar charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products
of (i) the number of years from the date of determination to the date or
dates of each successive scheduled principal payment (including, without
limitation, any sinking fund requirements) of such Indebtedness multiplied by
(ii) the amount of each such principal payment by (b) the sum of all such
principal payments.
"Bank Credit Agreement" means the credit agreement dated as of the Closing
Date among the Company, the Banks and Toronto Dominion (Texas), Inc., as
agent, as such agreement may be amended, renewed, extended, substituted,
restated, refinanced, restructured, supplemented or otherwise modified from
time to time (including, without limitation, any successive amendments,
renewals, extensions, substitutions, restatements, refinancings,
restructurings, supplements or other modifications of the foregoing);
provided that with respect to any agreement providing for the refinancing of
Indebtedness under the Bank Credit Agreement, such agreement shall be the
Bank Credit Agreement for the purposes of this definition only if a notice to
that effect is delivered by the Company to the Trustee and there shall be at
any time only one instrument that is the Bank Credit Agreement under the
Indenture.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Banks" means the banks and other financial institutions from time to time
that are lenders under the Bank Credit Agreement.
"Brant-Allen" means Brant-Allen Industries, Inc.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, membership interests, participations,
rights in or other equivalents (however designated) of such Person's capital
stock, and any rights (other than debt securities convertible into capital
stock), warrants or options exchangeable for or convertible into such capital
stock, whether now outstanding or issued after the date of the Indenture.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person or a Subsidiary of such Person, under a lease of
(or other agreement conveying the right to use) any property (whether real,
personal or mixed) that is required to be classified and accounted for as a
capital lease obligation under GAAP, and, for the purpose of the Indenture,
the amount of such obligation at any date shall be the capitalized amount
thereof at such date, determined in accordance with GAAP.
"Cash Equivalents" means (a) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (b) certificates of deposit or acceptances or Eurodollar
time deposits with a maturity of 180 days or less of, and overnight bank
deposits with, any financial institution that is a member of the Federal
Reserve System having combined capital and surplus and undivided profits of
not less than $500 million; (c) commercial paper with a maturity of 180 days
or less issued by a corporation that is not an Affiliate of the Company and
is organized under the laws of any state of the United States or the District
of Columbia and rated at least A-1 by S&P or at least P-l by Moody's; and (d)
funds which invest in any of the foregoing.
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"Change of Control" means the occurrence of any of the following events:
(a) prior to the initial Public Equity Offering of the Company the gross
proceeds of which shall exceed $100 million, the Permitted Holders are or
become the "beneficial owners" (as defined in Rules 13d-3 and l3d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of less than 51% of the total outstanding
Voting Stock of the Company; or (b) after the initial Public Equity Offering
of the Company referred to in clause (a) above, (i) a "person" or a "group"
(as such terms are defined in Sections 13(d) and 14(c) of the Exchange Act)
other than the Permitted Holders are or become the "beneficial owners" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person
shall be deemed to have "beneficial ownership" of all securities that such
Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
35% or more of the total outstanding Voting Stock of the Company; or (ii)
during any consecutive two-year period, individuals who at the beginning of
such period constituted the Board of Directors of the Company (together with
any new directors whose election to such Board of Directors, or whose
nomination for election by the stockholders of the Company, was approved by a
vote of more than 50% of the directors then still in office who were either
directors at the beginning of such period or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the Board of Directors of the Company then in office; or (c) the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "Consolidation, Merger, and Sale of Assets."
"Closing Date" means December 1, 1997.
"Collateral" means the Company Collateral, the Timberlands Collateral and
the Soucy Collateral.
"Collateral Documents" means (i) the deed of trust dated as of December 1,
1997 among the Company, the Trustee and the collateral trustee thereunder
(the "Deed of Trust"), (ii) the pledge and security agreement dated as of
December 1, 1997 between the Company and the Trustee (the "Company Pledge and
Security Agreement"), (iii) the pledge agreement concerning the Capital Stock
of Soucy Inc. dated as of December 1, 1997 between Brant-Allen and the
Trustee governed by the law of the State of New York (the "Soucy Pledge
Agreement"), (iv) the hypothec agreement concerning the Capital Stock of
Soucy Inc. dated as of December 1, 1997 between Brant-Allen and the Trustee
governed by Quebec law (the "Hypothec Agreement") and (v) the pledge
agreement concerning the membership interests of Timberlands dated as of
December 1, 1997 between Brant-Allen and the Trustee (the "Timberlands Pledge
Agreement").
"Commodity Hedge Agreements" means any commodity futures contract,
commodity option or other similar agreement or arrangement entered into by
any Credit Party or any of its Subsidiaries designed to protect such Credit
Party or any of its Subsidiaries against fluctuations in the price of
commodities actually at that time used in the ordinary course of business of
such Credit Party or its Subsidiaries.
"Company Collateral" means (x) all of the real property of the Company and
(y) all of the personal property of the Company assigned to the Trustee, now
or in the future, under the Company Pledge and Security Agreement.
"Consolidated Adjusted Net Income" means, with respect to any Credit
Party, for any period, the consolidated net income (or loss) of such Credit
Party and all Restricted Subsidiaries of such Credit Party for such period as
determined in accordance with GAAP, adjusted by excluding, without
duplication, (a) any net after-tax extraordinary gains or losses (less all
fees and expenses relating thereto), (b) any net after-tax gains or losses
(less all fees and expenses relating thereto) attributable to asset
dispositions other than in the ordinary course of business, (c) the portion
of net income (or loss) of any Person (other than such Credit Party or a
Restricted Subsidiary of such Credit Party), including Unrestricted
Subsidiaries, in which such Credit Party or any Restricted Subsidiary of such
Credit Party has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to such Credit Party or any
Restricted Subsidiary of such Credit Party in cash dividends or distributions
during such period, (d) the net income (or loss) of any Person combined with
such Credit Party or any Restricted Subsidiary of such Credit Party on a
"pooling of interests" basis attributable to any period prior to the date of
combination, (e) the net income of any Restricted Subsidiary of such Credit
Party and to the extent that the declaration or payment of dividends or
similar distributions by such Restricted Subsidiary is not at the date of
determination permitted, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute,
rule or governmental regulation applicable to such Restricted Subsidiary or
its stockholders, and (f) for purposes of calculating Consolidated Adjusted
Net Income under the relevant "Limitation on Restricted Payments" covenant,
any
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net income (or loss) from any Restricted Subsidiary that was an Unrestricted
Subsidiary at any time during such period other than any amounts actually
received from such Restricted Subsidiary. The calculation of Consolidated
Adjusted Net Income for the Company or any other entity shall be adjusted by
imputing to the Company or such other entity as an expense all of the amounts
paid by the Company or such other entity to holders of direct or indirect
equity interests in the Company or such other entity in respect of their tax
liabilities and as income any amounts recontributed to the Company or such
other entity by direct or indirect holders of equity interests in the Company
or such other entity pursuant to clause (vi) of paragraph (b) under "Certain
Covenants of the Company--Limitation on Restricted Payments" and clause (vii)
of paragraph (b) under "Certain Covenants of the Security Parties--Limitation
on Restricted Payments by Timberlands."
"Consolidated Fixed Charge Coverage Ratio" means, with respect to any
Person, for any period, the ratio of (a) the sum of Consolidated Adjusted Net
Income, Consolidated Interest Expense, Consolidated Tax Expense and
Consolidated Non-cash Charges deducted in computing Consolidated Adjusted Net
Income, in each case, for such period to (b) the sum of (i) Consolidated
Interest Expense and (ii) cash and non-cash dividends for such Person due
(whether or not declared) on Preferred Stock by such Person and any
Restricted Subsidiary of such Person (to any Person other than the Person for
which such ratio is being determined and any wholly owned Restricted
Subsidiary of such Person), in each case for such period.
"Consolidated Income Tax Expense" means, with respect to any Person, for
any period, the provision for federal, state, local and foreign income taxes
of such Person and all Restricted Subsidiaries of such Person for such period
as determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to any Person, for any
period, without duplication, the sum of (a) the interest expense of such
Person and the Restricted Subsidiaries of such Person for such period,
including, without limitation, (i) amortization of debt discount, (ii) the
net cost of Interest Rate Agreements (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv)
amortization of debt issuance costs, plus (b) the interest component of
Capitalized Lease Obligations of such Person and its Restricted Subsidiaries
during such period, plus (c) cash and non-cash dividends due (whether or not
declared) on Redeemable Capital Stock by such Person and any Restricted
Subsidiary of such Person (to any Person other than the Person for which such
calculation is being determined and any wholly owned Restricted Subsidiary of
such Person), in each case as determined on a consolidated basis in
accordance with GAAP; provided that (x) the Consolidated Interest Expense
attributable to interest on any Indebtedness computed on a pro forma basis
and (A) bearing a floating interest rate shall be computed as if the rate in
effect on the date of computation had been the applicable rate for the entire
period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Person for
which such calculation is being determined, a fixed or floating rate of
interest, shall be computed by applying at the option of the Person for which
such calculation is being determined, either the fixed or floating rate, and
(y) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness under a revolving credit
facility computed on a pro forma basis shall be computed based upon the
average daily balance of such Indebtedness during the applicable period;
provided further that, notwithstanding the foregoing, the interest rate with
respect to any Indebtedness covered by any Interest Rate Agreements shall be
deemed to be the effective interest rate with respect to such Indebtedness
after taking into account such Interest Rate Agreements.
"Consolidated Net Worth" means, with respect to any Person, at any date,
the stockholders' equity of such Person less the amount of such stockholders'
equity attributable to Redeemable Capital Stock or treasury stock of such
Person and any Restricted Subsidiary of such Person, as determined on a
consolidated basis in accordance with GAAP.
"Consolidated Tangible Net Worth" means, with respect to any Person, as of
any date, Consolidated Net Worth less the sum of the net book amount of all
assets, after deducting any reserves applicable thereto, which would be
treated as intangible under GAAP, as presented on the consolidated financial
statements of such Person as of such date.
"Consolidated Non-cash Charges" means, with respect to any Person, for any
period, the aggregate depreciation, amortization and other non-cash expenses
of such Person and any Restricted Subsidiary of such Person reducing
Consolidated Adjusted Net Income for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such non-cash
charge that requires an accrual of or reserve for cash charges for any future
period).
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"Credit Parties" means the Company and the Security Parties.
"Currency Agreements" means, with respect to any Person, any spot or
forward foreign exchange agreements and currency swap, currency option or
other similar financial agreements or arrangements entered into by such
Person or any of its Restricted Subsidiaries in the ordinary course of
business and designed to protect against or manage exposure to fluctuations
in foreign currency exchange rates.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of any of the
Credit Parties is required to deliver a resolution of the Board of Directors
under the Indenture, a member of the Board of Directors of such Credit Party
who does not have any material direct or indirect financial interest in or
with respect to such transaction or series of transactions.
"Elebash Agreement" means the agreement for certain marketing and
consulting services dated as of October 11, 1988 and effective as of July 12,
1988 between the Company and Timberlands, as successors in interest, and The
Elebash Company.
"Equity Value" means, with respect to any Person, an amount which is equal
to (x) the market value of the assets of such Person, less (y) the
liabilities of such Person (including, without limitation, contingent
Indebtedness of such Person).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"FinCo" means Bear Island Finance Company II.
"Funded Debt" means, as to any Person, all Indebtedness of such Person
that matures more than one year from the date of its creation or matures
within one year from such date but is renewable or extendible, at the option
of such Person, to a date more than one year from such date or arises under a
revolving credit or similar agreement that obligates the lender or lenders to
extend credit during a period of more than one year from such date,
including, without limitation, all current maturities and current sinking
fund payments in respect of such Indebtedness whether or not required to be
paid within one year from the date of its creation and, in the case of the
Company, Indebtedness in respect of the Bank Credit Agreement.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied,
that are in effect on the date of the Indenture.
"guarantee" means, as applied to any obligation, (a) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (b) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all
or any part of such obligation, including, without limiting the foregoing,
the payment of amounts drawn down by letters of credit.
"Guarantee" means any guarantee of the obligations of the Issuers under
the Indenture and the Notes by any Restricted Subsidiary of the Company in
accordance with the provisions of the Indenture. When used as a verb,
"Guarantee" shall have a corresponding meaning.
"Guarantor" means any Restricted Subsidiary of the Company that incurs a
Guarantee.
"Hancock Loan" means the Timberlands Loan and Maintenance Agreement, dated
as of July 12, 1988, as amended on July 6, 1993, and as further amended as of
December 1, 1997, between Timberlands, as successor in interest, and John
Hancock Mutual Life Insurance Company.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money (including overdrafts),
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit and acceptances issued
under letter of credit facilities,
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acceptance facilities or other similar facilities, (b) all obligations of
such Person evidenced by bonds, notes, debentures or other similar
instruments, (c) all indebtedness of such Person created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the rights and remedies of the seller or
lender under such agreement in the event of default are limited to
repossession or sale of such property), but excluding trade payables arising
in the ordinary course of business, (d) all Capitalized Lease Obligations of
such Person, (e) all obligations of such Person under or in respect of
Interest Rate Agreements, Currency Agreements or Commodity Hedge Agreements,
(f) all Indebtedness referred to in (but not excluded from) the preceding
clauses of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon or
with respect to property (including, without limitation, accounts and
contract rights) owned by such Person, even though such Person has not
assumed or become liable for the payment of such Indebtedness (the amount of
such obligation being deemed to be the lesser of the value of such property
or asset or the amount of the obligation so secured), (g) all guarantees by
such Person of Indebtedness referred to in this definition of any other
Person and (h) all Redeemable Capital Stock of such Person valued at the
greater of its voluntary or involuntary maximum fixed repurchase price plus
accrued and unpaid dividends. For purposes hereof, the "maximum fixed
repurchase price" of any Redeemable Capital Stock which does not have a fixed
repurchase price shall be calculated in accordance with the terms of such
Redeemable Capital Stock as if such Redeemable Capital Stock were purchased
on any date on which Indebtedness shall be required to be determined pursuant
to the Indenture, and if such price is based upon, or measured by, the fair
market value of such Redeemable Capital Stock, such fair market value shall
be determined in good faith by the board of directors of the issuer of such
Redeemable Capital Stock.
"Independent Valuation Agent" means any nationally recognized investment
banking firm, auditing or accounting firm and, with respect to valuation of
timberlands, any entity nationally recognized for providing appraisals or
valuations of timberlands.
"Interest Rate Agreements" means any interest rate protection agreements
and other types of interest rate hedging agreements (including, without
limitation, interest rate swaps, caps, floors, collars and similar
agreements) and other related agreements entered into in the ordinary course
of business and designed to protect against or manage exposure to
fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by
means of any transfer of cash or other property to others or any payment for
property or services for the account or use of others), or any purchase,
acquisition or ownership by such Person of any Capital Stock, bonds, notes,
debentures or other securities or evidences of Indebtedness issued or owned
by, any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP. In addition,
the fair market value of the net assets of any Restricted Subsidiary at the
time that such Restricted Subsidiary is designated an Unrestricted Subsidiary
shall be deemed to be an "Investment" made by such Person in such
Unrestricted Subsidiary at such time. "Investments" shall exclude of trade
credit on commercially reasonable terms in accordance with normal trade
practices.
"Investment Grade" means a rating of the Notes by either S&P or Moody's,
each such rating being in one of such agency's four highest generic rating
categories that signifies investment grade (i.e., BBB-(or the equivalent) or
higher by S&P and Baa3 (or the equivalent) or higher by Moody's); provided,
in each case, such ratings are publicly available; provided further that in
the event Moody's or S&P is no longer in existence, for purposes of
determining whether the Notes are rated "Investment Grade", such organization
may be replaced by a nationally recognized statistical rating organization
(as defined in Rule 436 under the Securities Act) designated by the Company,
notice of which designation shall be given to the Trustee.
"Issuers" means the Company and FinCo.
"Lien" means any mortgage, deed of trust, charge, pledge, lien (statutory
or otherwise), privilege, security interest, hypothecation, assignment for
security, claim, or preference or priority or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired. A Person shall be deemed to own subject to a
Lien any property which such Person has acquired or holds subject to the
interest of a vendor or lessor under any conditional sale agreement, capital
lease or other title retention agreement.
"Maturity" means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as therein or herein provided,
whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
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"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale made by any
Credit Party or any of its Restricted Subsidiaries, the proceeds thereof in
the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of, or stock or other
assets when disposed for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to such Credit Party or
any of its Restricted Subsidiaries), net of (i) brokerage commissions and
other fees and expenses (including fees and expenses of legal counsel and
investment banks) related to such Asset Sale, (ii) provisions for all taxes
payable by such Credit Party, any Subsidiary of such Credit Party, or any
direct or indirect owner of such Credit Party or such Subsidiary as a result
of such Asset Sale, (iii) payments made to retire Indebtedness where payment
of such Indebtedness is secured by the assets or properties the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than
such Credit Party or any of its Restricted Subsidiaries) owning a beneficial
interest in the assets subject to the Asset Sale and (v) appropriate amounts
to be provided by such Credit Party or any of its Restricted Subsidiaries, as
the case may be, as a reserve required in accordance with GAAP against any
liabilities associated with such Asset Sale and retained by such Credit Party
or any of its Restricted Subsidiaries, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an Officers' Certificate delivered to the Trustee.
"Permitted Designee" means (i) a spouse or a lineal descendant by blood or
adoption of a Permitted Holder, (ii) trusts for the benefit of a Permitted
Holder or of any of the persons referred to in clause (i), (iii) in the event
of the death or incompetence of a Permitted Holder, his estate, heirs,
executor, administrator, committee or other personal representative or (iv)
any Person so long as a Permitted Holder owns at least 50% of the voting
power of all classes of the Voting Stock of such Person.
"Permitted Holders" means Peter M. Brant, Joseph Allen and their Permitted
Designees.
"Permitted Indebtedness" means any of the following:
(a) Indebtedness of the Company under the Bank Credit Agreement in an
aggregate principal amount at any one time outstanding not to exceed
$120.0 million less (x) the amount of any permanent reductions made by the
Company in respect of any term loans under the Bank Credit Agreement and
(y) the amount by which the aggregate commitment under any revolving
credit facility under the Bank Credit Agreement at any time has been
permanently reduced.
(b) Indebtedness of the Issuers pursuant to the Notes or of any Guarantor
pursuant to a Guarantee of the Notes;
(c) Indebtedness of the Company or any Restricted Subsidiary of the
Company outstanding on the date of the Indenture and listed on a schedule
thereto;
(d) Indebtedness of the Company owing to any wholly owned Restricted
Subsidiary; provided that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to
the Company or another wholly owned Restricted Subsidiary) shall be deemed
to be an incurrence of such Indebtedness by the Company not permitted by
this clause (d);
(e) Indebtedness of a Restricted Subsidiary owing to the Company or to a
wholly owned Restricted Subsidiary; provided that (a) any disposition,
pledge or transfer of any such Indebtedness to a Person (other than a
disposition, pledge or transfer to (i) the Company or a wholly owned
Restricted Subsidiary, or (ii) the Banks as security for obligations under
the Bank Credit Agreement by the Company or a wholly owned Restricted
Subsidiary that is a Guarantor) shall be deemed to be an incurrence of
such Indebtedness by such Restricted Subsidiary not permitted by this
clause (e);
(f) guarantees of any Restricted Subsidiary of the Company of
Indebtedness of the Company entered into in accordance with the provisions
of (i) the Bank Credit Agreement or (ii) the "Guarantees by Restricted
Subsidiaries of the Company" covenant;
(g) Indebtedness of the Company under Currency Agreements, Interest Rate
Agreements and Commodity Hedge Agreements entered into in the ordinary
course of business;
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(h) Indebtedness of the Company and its Restricted Subsidiaries
consisting of guarantees, indemnities or obligations in respect of
purchase price adjustments and the balance deferred and unpaid of any
purchase price in connection with the acquisition or disposition of
assets, including, without limitation, shares of Capital Stock;
(i) any renewals, extensions, substitutions, refinancings or replacements
(each, for purposes of this clause, a "refinancing") of any Indebtedness
incurred pursuant to clauses (b) and (c) of this definition, including any
successive refinancings, so long as (i) any such new Indebtedness shall be
in a principal amount that does not exceed the principal amount (or, if
such Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced, plus the lesser of the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined
as necessary to accomplish such refinancing, plus, in either case, the
amount of expenses incurred in connection with such refinancing, (ii) in
the case of any refinancing of Subordinated Indebtedness, such new
Indebtedness is made subordinate to the Notes at least to the same extent
as the Indebtedness being refinanced and (iii) such new Indebtedness (x)
has an Average Life either (A) longer than the Average Life of the Notes
or (B) equal to or greater than the Average Life of its Indebtedness being
refinanced and (y) a final Stated Maturity either (I) later than the final
Stated Maturity of the Notes or (II) no earlier than the final Stated
Maturity of its Indebtedness being refinanced;
(j) Indebtedness of the Company or its Restricted Subsidiaries (i)
incurred for the purpose of financing (A) all or any part of the purchase
price or cost of construction or improvement of property, plant, machines,
or equipment used in the business of the Company or such Restricted
Subsidiary or (B) construction of environmental-related capital projects
of the Company and its Restricted Subsidiaries, and (ii) representing
purchase money Indebtedness and Capitalized Lease Obligations; provided
that the aggregate amount of Indebtedness incurred or outstanding at any
given time pursuant to this clause (j) shall not exceed $7.0 million at
any one time outstanding;
(k) Indebtedness of the Company owed to Brant-Allen for cash borrowed
from Brant-Allen; provided that such Indebtedness shall (i) be
subordinated in right of payment to the Notes, (ii) bear no interest,
(iii) not require principal payments of any kind on such Indebtedness to
be repaid prior to the Stated Maturity of the Notes, and (iv) contain no
provisions for remedies (including, without limitation, any defaults or
any other provisions that would result in the acceleration of the maturity
of such Indebtedness); provided, however, that such Indebtedness may
contain provisions for an acceleration of the maturity of such
Indebtedness upon the acceleration of the Notes;
(l) Indebtedness of the Company owed to Brant-Allen in connection with
services provided by Brant-Allen to the Company under the Management
Services Agreement to the extent such Indebtedness represents fees in
excess of 1% of the revenues (net of transportation costs) of the Company;
provided that such Indebtedness shall (a) be subordinated in right of
payment to the Notes, (b) bear no interest, (c) not require principal
payments of any kind on such Indebtedness to be repaid prior to the Stated
Maturity of the Notes, and (d) shall contain no provisions for remedies
(including, without limitation, any defaults or any other provisions that
would result in the acceleration of the maturity of such Indebtedness);
(m) Indebtedness of the Company and any Restricted Subsidiary in respect
of (i) performance bonds of the Company or any Restricted Subsidiary or
surety bonds provided by the Company or any Restricted Subsidiary in the
ordinary course of business in connection with the operation of its
business (which Indebtedness shall be measured as the exposure of the
Company or such Restricted Subsidiary under such bonds) and (ii) letters
of credit; provided that the aggregate amount of Indebtedness pursuant to
this clause (m) shall not exceed $1.0 million at any one time outstanding;
and
(n) Indebtedness of the Company in an aggregate principal amount not in
excess of $7.0 million at any one time outstanding.
"Permitted Investments" means, with respect to any Credit Party, any of
the following:
(a) Investments in Cash Equivalents;
(b) Investments in such Credit Party or any wholly owned Restricted
Subsidiary of such Credit Party; provided that, in the case of Soucy Inc.,
Investments in Soucy Partners, Riviere du Loup Finance Ltd. and Arrimage
de Gros Cacouna Inc. shall also be Permitted Investments;
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(c) with respect to the Company, intercompany Indebtedness to the extent
permitted under clause (c) of the definition of "Permitted Indebtedness";
(d) Investments made by a Credit Party or a Restricted Subsidiary thereof
in the form of any stock, bonds, notes, debentures, partnership or joint
venture interests or other securities that are issued by a third party to
such Credit Party or Restricted Subsidiary solely as partial consideration
for the consummation of an Asset Sale that is otherwise permitted under
the covenant described under "Limitation on Sale of Assets";
(e) Investments consisting of loans and advances to officers and
employees of the Company for reasonable travel, relocation and business
expenses in the ordinary course of business;
(f) without duplication, Investments consisting of (i) with respect to
the Company, Indebtedness permitted pursuant to paragraphs (d), (e), (f),
(g), (k), (l) and (m) of the definition of Permitted Indebtedness and (ii)
with respect to the Security Parties, Indebtedness permitted pursuant to
paragraphs (a), (b)(v) and (c)(i), (ii) and (iii) of the definition of
"Permitted Security Party Indebtedness";
(g) Investments existing on the date of this Indenture;
(h) Investments by such Credit Party or any Restricted Subsidiary of such
Credit Party in another Person, if as a result of such Investment (i) such
other Person becomes a wholly owned Restricted Subsidiary of such Credit
Party; or (ii) such other Person is merged or consolidated with or into,
transfers or conveys all or substantially all of its assets to, or is
liquidated into, such Credit Party or a Restricted Subsidiary of such
Credit Party;
(i) Investments by Timberlands in (x) shares of Capital Stock of another
Person pursuant to clause (ii) of paragraph (b) under the "Limitation on
Sales of Collateral Stock and Certain Other Transactions" covenant and (y)
a joint venture pursuant to paragraph (d) under the "Limitation on Sale of
Assets" covenant;
(j) any Investment involved in, or resulting from, the receipt or
collection by Brant-Allen of payment for newsprint or other inventory for,
or on behalf of, any Credit Party for remittance to the beneficiary on the
Business Day following availability of funds for that payment; and
(k) Without duplication of any of the foregoing, Investments in an amount
not to exceed $1.0 million at any one time outstanding.
"Permitted Liens" means, with respect to any Credit Party, the following
types of Liens:
(a) Liens (other than Liens securing Indebtedness under the Bank Credit
Agreement) existing as of the date of the issuance of the Notes;
(b) Liens on property or assets of such Credit Party or any of its
Restricted Subsidiaries securing (i) Indebtedness and other obligations
under the Bank Credit Agreement in a principal amount not to exceed the
principal amount of the outstanding Indebtedness permitted by clause (i)
of the definition of "Permitted Indebtedness" and (ii) Indebtedness and
other obligations under the Timberlands Loan and the Hancock Loan;
(c) Liens on any property or assets of a Restricted Subsidiary of such
Credit Party granted in favor of such Credit Party or any wholly owned
Restricted Subsidiary of such Credit Party;
(d) Liens on any property or assets of such Credit Party or any
Restricted Subsidiary of such Credit Party securing the Notes;
(e) any interest or title of a lessor under any Capitalized Lease
Obligation or Sale and Leaseback Transaction that is permitted to be
incurred pursuant to the terms of the Indenture;
(f) statutory Liens of landlords and carriers, warehousemen, mechanics,
suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business of such Credit Party or any Restricted
Subsidiary of such Credit Party and with respect to amounts not yet
delinquent for more than 30 days or being contested in good faith by
appropriate proceeding, if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP, shall have been made
therefor;
(g) Liens for taxes, assessments, government charges or claims that are
being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
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(h) Liens incurred or deposits made to secure the performance of tenders,
bids, leases, statutory obligations, surety and appeal bonds, government
contracts, performance bonds and other obligations of a like nature
incurred in the ordinary course of business (other than contracts for the
payment of money);
(i) easements, rights-of-way, restrictions and other similar charges or
encumbrances not interfering in any material respect with the business of
such Credit Party or any Restricted Subsidiary of such Credit Party
incurred in the ordinary course of business;
(j) Liens arising by reason of any judgment, decree or order of any court
so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such
Indebtedness by such Credit Party or any Restricted Subsidiary of such
Credit Party); provided that such Lien does not extend to any property or
assets of such Credit Party or any Restricted Subsidiary of such Credit
Party other than the assets acquired in connection with the incurrence of
such Acquired Indebtedness;
(l) Liens securing obligations of such Credit Party under Interest Rate
Agreements, Commodity Hedge Agreements or Currency Agreements that are
permitted to be incurred pursuant to the terms of the Indenture, or any
collateral for the Indebtedness to which such Interest Rate Agreements,
Commodity Hedge Agreements or Currency Agreements relate;
(m) Liens incurred or deposits made in the ordinary course of business in
connection with workers' compensation, unemployment insurance and other
types of social security and government insurance;
(n) Liens securing reimbursement obligations of such Credit Party with
respect to letters of credit that encumber documents and other property
relating to such letters of credit and the products and proceeds thereof;
(o) Liens arising from purchase money mortgages and purchase money
security interests (including, where applicable, Liens securing
Indebtedness incurred in connection with purchases of timber deeds under
clause (b)(v) under "Permitted Security Party Indebtedness") incurred by
such Credit Party in the normal and ordinary course of the business of
such Credit Party; provided that (i) the related Indebtedness shall not be
secured by any property or assets of such Credit Party or any Restricted
Subsidiary of such Credit Party other than the property and assets so
acquired and (ii) the Lien securing such Indebtedness shall be created
within 60 days of such acquisition;
(p) Liens securing refinancing Indebtedness incurred under clause (i) of
the definition of "Permitted Indebtedness"; provided that such Liens only
extend to the property or assets securing the Indebtedness being
refinanced, such refinanced Indebtedness was previously secured by similar
Liens on such property or assets and the Indebtedness (or other
obligations) secured by such Liens is not increased;
(q) Liens securing Indebtedness incurred under paragraph (c) (v) of the
definition "Permitted Security Party Indebtedness"; and
(r) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (q); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets.
"Permitted Security Party Indebtedness" means, with respect to each of the
Security Parties, any of the following:
(a) Indebtedness of such Security Party; provided that the proceeds of
such Indebtedness are utilized by such Security Party, directly or
indirectly, to pay down Indebtedness of the Company;
(b) in addition, with respect to Timberlands, the incurrence of the
following:
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(i) Indebtedness or obligations of Timberlands under the Bank Credit
Agreement, the Hancock Loan, the Timberlands Loan, any agreements or
documents entered pursuant thereto or securing obligations thereunder
and other Indebtedness outstanding on the date of the Indenture and
listed on a schedule thereto;
(ii) Indebtedness of Timberlands and its Restricted Subsidiaries
under Currency Agreements or Commodity Agreements entered into in the
ordinary course of business;
(iii) Capitalized Lease Obligations of Timberlands and its Restricted
Subsidiaries and purchase money obligations of Timberlands and its
Restricted Subsidiaries; provided that the aggregate amount of such
Indebtedness does not exceed $750,000 at any one time outstanding;
(iv) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") of
any Indebtedness incurred pursuant to clause (i) of paragraph (b) of
this definition, including any successive refinancings, so long as (A)
any such new Indebtedness shall be in a principal amount that does not
exceed the principal amount (or, if such Indebtedness being refinanced
provides for an amount less than the principal amount thereof to be
due and payable upon a declaration of acceleration thereof, such
lesser amount as of the date of determination) so refinanced, plus the
lesser of the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Indebtedness
refinanced or the amount of any premium reasonably determined as
necessary to accomplish such refinancing, plus, in either case, the
amount of expenses of incurred in connection with such refinancing,
(B) in the case of any refinancing of Subordinated Indebtedness, such
new Indebtedness is made subordinate to the Notes at least to the same
extent as the Indebtedness being refinanced and (C) such new
Indebtedness (x) has an Average Life either (I) longer than the
Average Life of the Notes or (II) equal to or greater than the Average
Life of its Indebtedness being refinanced and (y) a final Stated
Maturity either (I) later than the final Stated Maturity of the Notes
or (II) no earlier than the final Stated Maturity of the Indebtedness
being refinanced;
(v) Indebtedness of Timberlands and its Restricted Subsidiaries (i)
for the purpose of financing all or any part of the purchase price of
timber deeds or (ii) in respect of performance bonds of Timberlands
and its Restricted Subsidiaries or surety bonds provided by
Timberlands and its Restricted Subsidiaries received in the ordinary
course of business in connection with the operation of its business
(which Indebtedness shall be measured as the exposure of Timberlands
and such Restricted Subsidiaries under such bonds); provided that the
aggregate amount of Indebtedness incurred pursuant to this sub-clause
(v) shall not exceed $1.5 million outstanding at any given time;
(vi) the incurrence of Indebtedness by Timberlands for the purchase
by it of timberlands acreage; provided that prior to each such
incurrence that individually, or together with other incurrences of
such Indebtedness since the Closing Date or the date of the most
recent valuation required by this clause (vi), as the case may be,
exceeds $3.0 million, Timberlands shall obtain a valuation of a
recognized Independent Valuation Agent certifying that, after the
consummation of such transaction, (x) Timberlands would have an Equity
Value equal to or greater than $28 million (less the aggregate amount
of all income taxes paid by Timberlands since the Closing Date in
connection with the sales of timberlands acreage) and (y) the total
amount of Timberlands' consolidated Indebtedness shall not exceed 70%
of an amount equal to the sum of its Equity Value and such total
Indebtedness; and provided further that all Indebtedness incurred
pursuant to this sub-clause (vi) shall not exceed $10.0 million
outstanding at any given time;
(vii) the incurrence of Indebtedness by a joint venture of
Timberlands created in accordance with paragraph (d) under the
"Limitation on Sales of Assets" covenant; provided that prior to each
such incurrence that, individually, or together with other incurrences
of such Indebtedness since the Closing Date or since the date of the
most recent valuation required by this clause (vii), as the case may
be, exceeds $3.0 million, Timberlands shall obtain a valuation of a
recognized Independent Valuation Agent certifying that, after the
consummation of such transaction, the total amount of such joint
venture's Indebtedness shall not exceed 50% of an amount equal to the
sum of its Equity Value and such total Indebtedness;
(viii) Indebtedness of Timberlands owing to any wholly owned
Restricted Subsidiary; provided that any disposition, pledge or
transfer of any such Indebtedness to a Person (other than a
disposition, pledge or transfer to Timberlands or another wholly owned
Restricted Subsidiary) shall be deemed to be an incurrence of such
Indebtedness by Timberlands not permitted by this clause (viii); and
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(ix) Indebtedness of a wholly owned Restricted Subsidiary owing to
Timberlands or to a wholly owned Restricted Subsidiary; provided that
any disposition, pledge or transfer of any such Indebtedness to a
Person (other than a disposition, pledge or transfer to Timberlands or
a wholly owned Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by such Restricted Subsidiary not
permitted by this clause (ix).
(c) in addition, with respect to Soucy Inc., the incurrence of the
following:
(i) the incurrence of Indebtedness by Soucy Partners owed to Soucy
Inc. and to the other partners of Soucy Partners for cash borrowed
from such entities; provided that such Indebtedness (A) shall bear no
interest, (B) shall not require principal payments of any kind on such
Indebtedness to be repaid prior to the Stated Maturity of the Notes,
and (C) shall contain no provisions for remedies (including, without
limitation, any defaults or any other provisions that would result in
the acceleration of the maturity of such Indebtedness); provided, that
such Indebtedness may contain provisions for an acceleration of the
maturity of such Indebtedness upon the acceleration of the Notes;
(ii) Indebtedness of Soucy Inc. owing to any Restricted Subsidiary;
provided that any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer
to Soucy Inc. or another Restricted Subsidiary) shall be deemed to be
an incurrence of such Indebtedness by Soucy Inc. not permitted by this
clause (ii);
(iii) Indebtedness of a Restricted Subsidiary owing to Soucy Inc. or
to a wholly owned Restricted Subsidiary; provided that any
disposition, pledge or transfer of any such Indebtedness to a Person
(other than a disposition, pledge or transfer to Soucy Inc. or a
wholly owned Restricted Subsidiary) shall be deemed to be an
incurrence of such Indebtedness by such Restricted Subsidiary not
permitted by this clause (iii);
(iv) Indebtedness of Soucy Inc. and its Restricted Subsidiaries under
Currency Agreements, Interest Agreements and Commodity Hedge
Agreements entered into in the ordinary course of business; and
(v) other Indebtedness of Soucy Inc. and its Restricted Subsidiaries
in an aggregate principal amount not in excess of $72.0 million at any
one time outstanding (including Indebtedness outstanding on the
Closing Date); provided that Soucy Inc. will not, and will not permit
any of its Restricted Subsidiaries to, incur any Indebtedness under
this clause (c)(v) for the purposes of financing any dividend or
distribution to its equityholders or to make any Investment in any
Person (other than its Restricted Subsidiaries and in the other Credit
Parties and their Restricted Subsidiaries).
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock whether now outstanding, or issued
after the Closing Date, and including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Public Equity Offering" means an offer and sale of common stock (which is
Qualified Capital Stock) of the Company pursuant to a registration statement
that has been declared effective by the Commission pursuant to the Securities
Act (other than a registration statement on Form S-8 or otherwise relating to
equity securities issuable under any employee benefit plan of the Company).
"Qualified Capital Stock" of any person means any and all Capital Stock of
such person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to the final Stated Maturity of the Notes or is redeemable at the
option of the holder thereof at any time prior to such final Stated Maturity,
or is convertible into or exchangeable for debt securities at any time prior
to such final Stated Maturity.
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"Restricted Payment" means, with respect to any Credit Party other than
Soucy Inc., any of the following:
(i) the declaration or payment of any dividend on, or the making of any
distribution to holders of, any shares of the Capital Stock of such Credit
Party (other than dividends or distributions payable solely in shares of
its Qualified Capital Stock or in options, warrants or other rights to
acquire such shares of Qualified Capital Stock);
(ii) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any shares of Capital Stock of such
Credit Party or any Capital Stock of any Affiliate of such Credit Party
(other than Capital Stock of any wholly owned Subsidiary) or any options,
warrants or other rights to acquire such shares of Capital Stock;
(iii) the making of any principal payment on, or the repurchase,
redemption, defeaseance or other acquisition or retirement for value of,
prior to any scheduled principal payment, sinking fund payment or
maturity, any Subordinated Indebtedness;
(iv) the making of any Investment (other than any Permitted Investment)
in any Person; or
(v) the making of any payments to any Affiliate of the Company (other
than the Company and its Subsidiaries) as compensation for management
services, except through the issuance of Qualified Capital Stock of the
Company.
"Restricted Subsidiary" means, with respect to any Credit Party, any
Subsidiary of such Credit Party other than an Unrestricted Subsidiary of such
Credit Party.
"Sale and Leaseback Transaction" means any transaction or series of
related transactions pursuant to which any Credit Party or a Subsidiary of
such Credit Party sells or transfers any property or asset in connection with
the leasing, or the resale against installment payments, of such property or
asset to the seller or transferor.
"S&P" means Standard and Poor's Ratings Group, a division of McGraw-Hill,
Inc. and its successors.
"Security Parties" means Timberlands and Soucy Inc.
"Soucy Inc." means F.F. Soucy, Inc.
"Soucy Collateral" means 65% of the issued and outstanding Capital Stock
of Soucy Inc.
"Soucy Partners" means F.F. Soucy, Inc. & Partners, Limited Partnership.
"Soucy Restricted Payment" means, with respect to Soucy Inc., any of the
following:
(i) the declaration or payment of any dividend on, or the making of any
distribution to holders of, any shares of the Capital Stock of Soucy Inc.
(other than dividends or distributions payable solely in shares of its
Qualified Capital Stock or in options, warrants or other rights to acquire
such shares of Qualified Capital Stock);
(ii) the purchase, redemption or other acquisition or retirement for
value, directly or indirectly, of any shares of Capital Stock of Soucy
Inc. or any Capital Stock of any Affiliate of Soucy Inc. (other than
Capital Stock of any wholly owned Subsidiary) or any options, warrants or
other rights to acquire such shares of Capital Stock; or
(iii) the making of any Investment in Brant-Allen, the Permitted Holders
or any of their Affiliates (other than the other Credit Parties and their
respective Subsidiaries); provided that any Investment involved in, or
resulting from, the receipt or collection by Brant-Allen of payment for
newsprint or other inventory for, or on behalf of, Soucy Inc. for
remittance to the beneficiary on the Business Day following availability
of funds for that payment shall not be an Investment prohibited by this
clause (iii).
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is
due and payable, and, when used with respect to any other Indebtedness, means
the date specified in the instrument governing such Indebtedness as the fixed
date on which the principal of such Indebtedness, or any installment of
interest thereon, is due and payable.
"Subordinated Indebtedness" means, with respect to Indebtedness of (i) the
Company, Indebtedness that is expressly subordinated in right of payment to
the Notes, (ii) Timberlands, Indebtedness that is expressly subordi-
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nated to the Hancock Loan (or other Indebtedness of Timberlands of the same
ranking) and (iii) Soucy Inc., Indebtedness that is expressly subordinated to
the Indebtedness of Soucy Inc. under a bank credit agreement with National
Bank of Canada, in effect as of the Closing Date (or other Indebtedness of
Soucy Inc. with the same ranking).
"Subsidiary" means, with respect to any Credit Party, any Person a
majority of the equity ownership or Voting Stock of which is at the time
owned, directly or indirectly, by such Credit Party or by one or more other
Subsidiaries of such Credit Party or by such Credit Party and one or more
other Subsidiaries of such Credit Party.
"Timberlands" means Bear Island Timberlands Company, L.L.C.
"Timberlands Collateral" means all of the issued and outstanding Capital
Stock of Timberlands owned by Brant-Allen.
"Timberlands Loan" means the $35 million senior secured two-year term loan
pursuant to the agreement dated as of the Closing Date among Brant-Allen, the
lenders from time to time parties thereto and Toronto Dominion (Texas), Inc.,
as administrative agent.
"Total Committed Debt" means, with respect to any Credit Party, at any
date, the total Funded Debt of such Credit Party (and its Restricted
Subsidiaries), including, with respect to the Company, without limitation,
the Notes and unused commitments under the Bank Credit Agreement.
"Total Market Value of Equity" of any Person means, as of any date of
determination, the sum of (1) the product of (i) the aggregate number of
outstanding primary shares of common stock of such Person (which shall not
include any options or warrants on, or securities convertible or exchangeable
into, shares of such common stock) and (ii) the average closing price of such
common stock over the 20 consecutive trading days immediately preceding such
date of determination, plus (2) the stated liquidation preference of any
outstanding shares of preferred stock of such Person outstanding as of such
date of determination.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means, with respect to any Credit Party other
than Soucy Inc., (a) any Subsidiary of such Credit Party that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board
of Directors of any such Credit Party, as provided below) and (b) any
Subsidiary of any such Unrestricted Subsidiary. The Board of Directors of any
Credit Party other than Soucy Inc. may designate any Subsidiary (including
any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (i) neither such Credit Party nor any Restricted
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such
Subsidiary would permit (upon notice, lapse of time or otherwise) any holder
of any other Indebtedness of such Credit Party or any Restricted Subsidiary
to declare a default on such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its stated maturity, (iii) any
Investment in such Subsidiary made as a result of designating such Subsidiary
an Unrestricted Subsidiary will not violate the provisions of the "Limitation
on Unrestricted Subsidiaries" covenant, (iv) neither such Credit Party nor
any Restricted Subsidiary has a contract, agreement or obligation of any
kind, whether written or oral, with such Subsidiary other than those that
might be obtained at the time from persons who are not Affiliates of such
Credit Party, and (v) neither such Credit Party nor any Restricted Subsidiary
has any obligation (1) to subscribe for additional shares of Capital Stock or
other equity interest in such Subsidiary, or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve
certain levels of operating results. Soucy Inc. will not designate any of its
Subsidiaries to be an Unrestricted Subsidiary. Any such designation by the
Board of Directors of such Credit Party shall be evidenced to the Trustee by
filing a board resolution with the Trustee giving effect to such designation.
The Board of Directors of such Credit Party may designate any Unrestricted
Subsidiary as a Restricted Subsidiary if immediately after giving effect to
such designation, there would be no Default or Event of Default under the
Indenture and the Company could incur $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to the "Limitation on Indebtedness"
covenant relevant to the Company.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors,
managers or trustees of any Person (irrespective of whether or not, at the
time, stock of any other class or classes shall have, or might have, voting
power by reason of the happening of any contingency).
"Wood Supply Agreement" means the agreement for the supply of wood dated
as of the Closing Date between Timberlands and the Company.
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BOOK-ENTRY; DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form. Except as described in the next paragraph, the New Notes
will initially be represented by a single, permanent global Note, in
definitive, fully registered form without interest coupons (the "Global
Note"). The Global Note will be registered in the name of a nominee of The
Depository Trust Company, New York, New York ("DTC") and deposited on behalf
of the purchasers of the Notes represented thereby with a custodian for DTC
for credit to the respective accounts of the purchasers (or to such other
accounts as they may direct).
Notes held by Holders who elect to take physical delivery of their
certificates instead of holding their interest through the Global Note (and
which are then unable to trade through DTC) (each, a "Non-Global Holder"),
will be in registered form without interest coupons ("Certificated Notes").
Upon the transfer of Certificated Notes initially issued to a Non-Global
Holder, such Certificated Notes will, unless the transferee requests
otherwise or the Global Notes have previously been exchanged in whole for
Certificated Notes, be exchanged for an interest in the Global Note.
DTC has advised the Issuers as follows: DTC is a limited purpose trust
company organized under the laws of the State of New York, a "banking
organization" within the meaning of the New York Banking law, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the
Uniform Commercial Code and a "Clearing Agency" registered pursuant to the
provision of Section 17A of the Exchange Act. DTC was created to hold
securities for its participants and facilitate the clearance and settlement
of securities transactions between participants through electronic book-entry
charges in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers
and dealers, banks, trust companies and clearing corporations and certain
other organizations. Indirect access to the DTC system is available to others
such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Upon the issuance of the Global Note, DTC or its custodian will credit, on
its internal system, the respective principal amounts of the individual
beneficial interests in the New Notes represented by the Global Note to the
accounts of persons who have accounts with such depositary. Ownership of
beneficial interests in the Global Note will be limited to persons who have
accounts with DTC ("participants") or persons who hold interests through
participants. Ownership of beneficial interests in the Global Note will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by DTC or its nominee (with respect to interests of
participants) and the records of participants (with respect to interests of
persons other than participants).
So long as DTC or its nominee is the registered owner or holder of the
Global Note, DTC or such nominee, as the case may be, will be considered the
sole record owner or holder of the Notes represented by such Global Note for
all purposes under the Indenture and the Notes. No beneficial owners of an
interest in the Global Note will be able to transfer that interest except in
accordance with the applicable procedures of DTC, in addition to those
provided for under the Indenture.
Payments of the principal of, premium, if any, and interest on the Global
Note will be made to DTC or its nominee, as the case may be, as the
registered owner thereof. Neither the Issuers, the Trustee, nor any paying
agent will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Note or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Issuers expect that DTC or its nominee, upon receipt of any payment of
principal, premium, if any, or interest in respect of the Global Note, will
credit participants' accounts with payments in amounts proportionate to their
respective beneficial ownership interests in the principal amount of such
Global Notes, as shown on the records of DTC or its nominee. The Issuers also
expect that payments by participants to owners of beneficial interests in
such Global Note held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in immediately available
funds. If a holder requires physical delivery of Certificated Notes for any
reason, including to sell Notes to persons in states which require such
delivery of such Notes or to pledge such Notes, such holder must transfer its
interest in the Global Note in accordance with the normal procedures of DTC
and the procedures set forth in the applicable Indenture.
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Neither the Issuers nor the Trustee will have any responsibility for the
performance by DTC or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
Subject to certain conditions, any person having a beneficial interest in
the Global Note may, upon request to the Trustee, exchange such beneficial
interest for Notes in the form of Certificated Notes. Upon any such issuance,
the Trustee is required to register such Certificated Notes in the name of,
and cause the same to be delivered to, such person or persons (or the nominee
of any thereof). In addition, if DTC is at any time unwilling or unable to
continue as a depositary for the Global Note and a successor depositary is
not appointed by the Company within 90 days, the Issuers will issue
Certificated Notes in exchange for the Global Note.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of
the Depository, it is under no obligation to perform or continue to perform
such procedures, and such procedures may be discontinued at any time. Neither
the Trustee nor the Issuers will have any responsibility for the performance
by the Depository or its participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
EXCHANGE OFFER; REGISTRATION RIGHTS
The following description of certain provisions of the Registration Rights
Agreement is a summary and is subject to, and is qualified in its entirety by
reference to, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus forms a part.
Pursuant to the Registration Rights Agreement, the Issuers agreed, for the
benefit of the holders of the Old Notes, at the Issuers' cost, (i) to use
their best efforts to file the Exchange Offer Registration Statement on or
prior to March 1, 1998 with the Commission with respect to the Exchange
Offer, (ii) to use their best efforts to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act on
or prior to May 30, 1998 and (iii) to use their best efforts to consummate
the Exchange Offer on or prior to June 29, 1998.
Under existing interpretations of the staff of the Commission contained in
several no-action letters to third parties, the New Notes would in general be
freely tradeable after the Exchange Offer without further registration under
the Securities Act. However, any purchaser of Old Notes who is an "affiliate"
of the Issuers or who intends to participate in the Exchange Offer for the
purpose of distributing the New Notes (i) will not be able to rely on the
interpretation of the staff of the Commission, (ii) will not be able to
tender its Old Notes in the Exchange Offer and (iii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any sale or transfer of the Old Notes unless such sale or
transfer is made pursuant to an exemption from such requirements.
If, after the date of this Prospectus, any changes in law or the
applicable interpretations of the staff of the Commission do not permit the
Issuers to effect the Exchange Offer, or if for any reason the Exchange Offer
is not consummated by June 29, 1998, or if any holder of the Old Notes (other
than the Initial Purchasers) notifies the Issuers by March 31, 1998 that it
is not eligible to participate in the Exchange Offer, or upon the request of
any Initial Purchaser under certain circumstances, then the Issuers will, at
their cost, (a) as promptly as practicable, file the Shelf Registration
Statement covering resales of the Old Notes, (b) use their best efforts to
cause the Shelf Registration Statement to be declared effective under the
Securities Act by June 29, 1998 and (c) use their best efforts to keep
effective the Shelf Registration Statement until two years after its
effective date (or until one year after such effective date if such Shelf
Registration Statement is filed at the request of any Initial Purchaser). The
Issuers will, if a Shelf Registration Statement is filed, use their
reasonable efforts to provide to each registered holder of the Old Notes
copies of the prospectus which is a part of the Shelf Registration Statement,
notify each such holder when the Shelf Registration Statement for the Notes
has become effective and take certain other actions as are required generally
to permit unrestricted resales of the Notes. A holder of Old Notes that sells
such Old Notes pursuant to the Shelf Registration Statement generally will be
required to be named as a selling securityholder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Rights
Agreement which are applicable to such a holder (including certain
indemnification obligations). In addition, each holder of the Old Notes will
be required to deliver information to be used in connection with the Shelf
Registration Statement and to provide comments on the Shelf Registration
Statement within the time periods set forth in the Registration Rights
Agreement in order to have its Old Notes included in the Shelf Registration
Statement and to benefit from the provisions regarding additional interest
set forth in the following paragraph.
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If either (i) the Exchange Offer is not consummated or, if required, a
Shelf Registration Statement with respect to the Notes is not declared
effective on or prior to June 29, 1998 or (ii) the Exchange Offer
Registration Statement is declared effective but thereafter ceases to be
effective or usable (each such event, a "Registration Default"), then the per
annum interest rate borne by the Old Notes shall be increased by 0.5% with
respect to the first 90-day period following such Registration Default. The
amount of such additional interest will increase by an additional 0.5% to a
maximum of 1.5% per annum for each subsequent 90-day period until such
Registration Default has been cured. Upon (x) the consummation of the
Exchange Offer or the effectiveness of a Shelf Registration Statement, as the
case may be, after June 29, 1998 or (y) the cure of any Registration Default
described in clause (ii) above, the interest rate borne by the Old Notes from
the date of such consummation or cure, as the case may be, will be reduced to
the original interest rate if the Issuers are otherwise in compliance with
such requirements; provided, however, that if, after any such reduction in
interest rate, a different event specified in clause (i) or (ii) above
occurs, the interest rate will again be increased pursuant to the foregoing
provisions.
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DESCRIPTION OF CERTAIN OTHER INDEBTEDNESS
The following description is a summary and will be qualified in its
entirety by reference to the final form of the particular agreement
summarized, copies of which have either been filed as an exhibit to the
Registration Statement of which this Prospectus forms a part or, if not so
filed, will be available upon request from the Company. Capitalized terms
used in the following summary but not otherwise defined in the Prospectus,
will have the meanings given to them in the final form of the agreement.
COMPANY INDEBTEDNESS
THE BANK CREDIT FACILITIES
Concurrently with the issuance of the Old Notes, the Company entered into
a Bank Credit Agreement, which provides for maximum borrowings by the Company
of an aggregate original principal amount of up to $120 million under the
Bank Credit Facilities to be provided by a group of lenders thereunder. The
Bank Credit Facilities consist of: (i) the Revolving Credit Facility,
providing for borrowings by the Company of revolving loans of up to an
aggregate principal amount of $50 million (the "Revolving Loans") and (ii)
the Term Loan Facility, providing for one borrowing by the Company of a term
loan in an original aggregate principal amount of up to $70 million (the
"Term Loan"). The Revolving Loans and the Term Loan are hereinafter
collectively referred to as the "Bank Loans."
Commitment Fees. A commitment fee of up to 0.50% per annum is payable on
the committed but unused portions of the Revolving Credit Facility. This
percentage is expected to be subject to adjustment, based upon the ratio of
the Company's Consolidated Total Debt to Consolidated EBITDA.
Interest. The interest rate for the Bank Loans is based upon, at the
election of the Company, the Eurodollar Rate or the Base Rate, in each case
plus the Applicable Margin. The Applicable Margin is subject to adjustment,
based upon the ratio of the Company's Consolidated Total Debt to Consolidated
EBITDA. The Applicable Margin for that portion of the Term Loan which bears
interest at the Eurodollar Rate is equal to a percentage of up to 3.0% per
annum. The Applicable Margin for Revolving Loans which bear interest at the
Eurodollar Rate is equal to a percentage of up to 2.75% per annum. The
Applicable Margin for that portion of the Term Loan which bears interest (i)
at the Eurodollar Rate is initially set at 3.0% until December 31, 1998 and
(ii) at the Base Rate is initially set at 2.0% until December 31, 1998. The
Applicable Margin for Revolving Loans which bear interest at the Base Rate is
equal to a percentage of up to 1.75% per annum and the Applicable Margin for
that portion of the Term Loan which bears interest at the Base Rate is equal
to a percentage of up to 2.0% per annum.
Repayment. Beginning March 31, 1998, the Revolving Credit Facility is
required to be reduced in 20 equal quarterly installments of $1.25 million
per quarter until the Revolving Credit Facility reaches $25 million.
Beginning March 31, 1998, the Term Loan is required to be repaid in 31 equal
quarterly installments of $175,000 per quarter with the balance due on
December 31, 2005. The Revolving Credit Facility terminates on December 31,
2003.
Prepayments. The Company may permanently terminate the unused portion of
the Revolving Credit Facility in accordance with the terms of the Bank Credit
Facilities. The Company may prepay the Bank Loans in accordance with the
terms of the Bank Credit Facilities. Subject to the provisions of the Bank
Credit Facilities, the Company will be able to, from time to time, borrow,
repay and reborrow under the Revolving Credit Facility.
The Bank Credit Agreement requires all net proceeds from asset sales of
the Company (with certain exceptions) to be applied to repay the Bank Loans
and 75% of Excess Cash Flow (as defined in the Bank Credit Facilities) to be
applied to repay the Bank Loans; provided that, at the end of any fiscal year
commencing with the fiscal year ending December 31, 1998 if the Total
Committed Debt of the Company outstanding is less than $145,000,000, the
percentage of Excess Cash Flow to be applied to repay the Bank Loans will be
reduced to 50%. In addition, the Bank Credit Agreement requires that, subject
to certain exceptions, all net proceeds from (i) the sale or issuance of debt
and the sale or issuance of equity by the Company, and any dividends or
distributions from Timberlands to Brant-Allen (other than permitted tax
distributions and only to the extent there are no amounts outstanding under
the Timberlands Loan), (ii) the sale of equity interests in Timberlands or
the sale of certain assets of Timberlands (less, in each case, certain
amounts required to repay debt of Timberlands and only to the extent there
are no amounts outstanding under the Timberlands Loan) and (iii) the sale or
issuance of equity interests in Soucy, Inc. and the sale of certain of Soucy
Inc. or any of its subsidiaries assets (but only prior to the time the
lenders release their security interest in the shares of Soucy Inc. and
provided such proceeds must be shared pro rata with the lenders
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under the Timberlands Loan) to be applied to prepay the Bank Loans. Any such
mandatory prepayments of the Bank Credit Facilities must be applied, subject
to certain rights of the Term Loan lenders, pro rata to prepay installments
of the Term Loan and prepay installments of the Revolving Loans and
permanently reduce the Revolving Credit Facility until such time as the
Revolving Credit Facility has been reduced to $25 million in accordance with
the terms of the Bank Credit Facilities. At such time as the Revolving Credit
Facility has been reduced to $25 million, any such mandatory prepayment shall
be applied to prepay installments of the Term Loan. Such prepayments and
reductions are to be applied in the forward order of remaining maturities.
Security; Guarantee. The obligations under the Bank Credit Facilities are
guaranteed by: (i) Brant-Allen until Total Committed Debt of the Company is
reduced to $145 million and the Timberlands Loan has been repaid and (ii)
each domestic subsidiary of the Company (other than FinCo). The obligations
under the Bank Credit Facilities are secured by (i) a first priority security
interest in all of the assets, tangible and intangible, of the Company and
its domestic subsidiaries (other than FinCo) (to the extent such assets are
assignable and subject to permitted liens); (ii) a second priority security
interest in 100% of the membership interests in Timberlands; (iii) a first
priority security interest in 65% of the issued and outstanding capital stock
of Soucy Inc. (such lien to be shared pro rata with the lenders under the
Timberlands Financing and to be released when the Timberlands Loan has been
repaid and Total Committed Debt of the Company is reduced to $145 million);
and (iv) a first priority security interest in all of the membership
interests in the Company.
Covenants. The Bank Credit Agreement contains affirmative and negative
covenants typical in facilities of this type, including, among others, the
following: (i) delivery of financial statements and other reports,
projections and compliance certificates; (ii) maintenance of existence and
continuation of business; (iii) compliance with laws; (iv) maintenance of
insurance; (v) notices of default, material litigation, material ERISA events
and other material events; (vi) environmental management; (vii) limitations
on indebtedness; (viii) limitation on liens; (ix) limitation on dividends and
distributions from the Company and its subsidiaries; (x) limitations on
mergers, consolidations and sales of assets; (xi) limitations on investments;
(xii) limitations on payment of the Notes; (xiii) limitations on capital
expenditures and leases; (xiv) limitations on changes in line of business;
and (xv) limitations on amendments to the Company's management contracts.
In addition to the covenants described above, the Bank Credit Agreement
contains financial covenants with respect to (i) Consolidated Total Debt to
Consolidated Total Capitalization; (ii) Current Ratio; (iii) Interest
Coverage and (iv) Fixed Charge Coverage. The Company is currently in material
compliance with all of the financial covenants contained in the Bank Credit
Agreement.
Events of Default. The Bank Credit Agreement provides for events of
default typical in facilities of its type, including, among others, the
following: (i) nonpayment of principal, interest, fees or other amounts; (ii)
violation of covenants; (iii) inaccuracy of representations and warranties;
(iv) cross-default of other indebtedness; (v) bankruptcy and other similar
events; (vi) material unsatisfied judgments; (vii) certain ERISA events;
(vii) invalidity of any loan documents or security interests; and (ix) change
in control.
TIMBERLANDS RELATED INDEBTEDNESS
THE TIMBERLANDS LOAN
Concurrent with the Timberlands Acquisition, Brant-Allen entered into a
credit agreement (the "Timberlands Credit Agreement"), which provides for
maximum borrowings by Brant-Allen from a group of lenders thereunder of an
aggregate principal amount of up to $35 million under two facilities: (i) a
term loan facility providing for one borrowing by Brant-Allen of up to $32
million and (ii) a revolving credit facility providing for revolving
borrowings by Brant-Allen of up to $3 million. The borrowings under these two
facilities are collectively referred to herein as the "Timberlands Loan."
Interest. The interest rate for the Timberlands Loan is based upon, at the
election of Brant-Allen, either the Eurodollar Rate or the Base Rate, in each
case, plus a margin. The margin for that portion of the Timberlands Loan
which bears interest at the Eurodollar Rate is 2.75% per annum. The margin
for that portion of the Timberlands Loan that bears interest at the Base Rate
is 1.75% per annum.
Repayment. The entire outstanding principal amount of the Timberlands Loan
will be due and payable on November 24, 1999.
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Prepayments. Brant-Allen may prepay the Timberlands Loan at any time in
accordance with the terms of the Timberlands Credit Agreement. All of the net
proceeds from the sale or issuance of debt by Timberlands or any of its
subsidiaries (subject to certain exceptions) will be required to be applied
to repay the term loan portion of the Timberlands Loan. In addition, all of
the net proceeds from (i) any dividends or distributions from Timberlands to
Brant-Allen (other than permitted tax distributions); (iii) the sale of
equity interests in Timberlands (subject to certain exceptions) and the sale
of certain assets of Timberlands (less certain amounts required to repay
other debt of Timberlands); and (iv) the sale of equity interests in Soucy
Inc. (subject to certain exceptions) and the sale (subject to certain
exceptions) of certain of the assets of Soucy Inc. and its subsidiaries (but
only prior to the date the lenders release their security interest in the
shares of Soucy Inc. and provided such proceeds in clause (iv) must be shared
pro rata with the lenders under the Bank Credit Facilities) must be applied
to repay the term loan portion of the Timberlands Loan. After the term loan
portion of the Timberlands Loan has been repaid in full, all required
prepayment amounts shall be applied towards the reduction of the revolving
portion of the Timberlands Loan.
Security; Guarantee. Brant-Allen's obligations under the Timberlands
Credit Agreement are guaranteed by Timberlands. The obligations under the
Timberlands Credit Agreement are secured by (i) a first priority security
interest in 100% of the issued and outstanding equity interests of
Timberlands; (ii) a first priority security interest in 65% of the issued and
outstanding capital stock of Soucy Inc. (such lien to be shared pro rata with
the lenders under the Bank Credit Facilities); and (iii) a security interest
in cash in an amount at all times equal to the amount of interest to be
payable on the Timberlands Loan for the next twelve months or through
maturity if less.
Covenants. The Timberlands Credit Agreement contains affirmative and
negative covenants typical in facilities of this type, including, among
others, the following: (i) delivery of financial statements and other
reports, projections and compliance certificates; (ii) maintenance of
existence and continuation of business; (iii) compliance with laws; (iv)
maintenance of insurance; (v) notices of default, material litigation,
material ERISA events and other material events; (vi) environmental
management; (vii) limitations or indebtedness; (viii) limitation on liens;
(ix) limitation on dividends and distributions from Timberlands, Brant-Allen
and Soucy Inc.; (x) limitations on mergers, consolidations and sales of
assets; (xi) limitations on investments; (xii) limitations on payment of
other indebtedness (other than certain permitted indebtedness); (xiii)
limitations on changes in line of business; and (xiv) limitations on
amendments to the Company's and Soucy Inc.'s management contracts. In
addition to the covenants described above, the Timberlands Credit Agreement
contains a financial covenant with respect to the ratio of the Administrative
Value (which is a calculation based upon value of land, pre-merchantable
timber and merchantable timber) to the sum of the outstanding principal
balance of the term loan and the outstanding principal balance of the Hancock
Loan. The Company believes that Brant-Allen is currently in material
compliance with all of the financial covenants contained in the Timberlands
Credit Agreement.
Events of Default. The Timberlands Credit Agreement contains events of
default typical in facilities of its type, including, among others, the
following: (i) nonpayment of principal, interest, fees or other amounts; (ii)
violation of covenants; (iii) inaccuracy of representations and warranties;
(iv) cross-default of other indebtedness; (v) bankruptcy and other similar
events; (vi) material unsatisfied judgments; (vii) certain ERISA events;
(viii) invalidity of any loan documents or security interests; and (ix)
change in control.
THE HANCOCK LOAN
Concurrent with the closing of the Timberlands Acquisition, Timberlands
renegotiated the terms of its existing $27 million secured term loan with
John Hancock Mutual Life Insurance Company (and paid a related modification
fee) and in connection with the modification received a $3 million advance
from John Hancock Mutual Life Insurance Company bringing the total
outstanding balance to $30 million. The term of the Hancock Loan is now two
years.
Interest. The interest rate for the Hancock Loan is 90 day LIBOR plus
1.75% fixed every 90 days. Interest will be paid quarterly in arrears on the
balance of the unpaid principal amount of the Hancock Loan.
Repayment. The entire principal amount of the Hancock Loan will be due and
payable on December 31, 1999.
Prepayments. Timberlands may prepay the Hancock Loan at any time in
accordance with the terms of the Hancock Credit Agreement, but may be
required to pay a prepayment penalty.
Security. Timberlands' obligations under the Hancock Credit Agreement
continue to be secured by a first priority security interest in 124,662 acres
of Timberlands' land.
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Administrative Requirements. The Hancock Loan requires payment into escrow
for (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 exceeds
the volume permitted by the lender. The principal balance of the escrow
account may be invested in only certain investments and may be used only to
make principal payments on long-term debt.
Covenants. The Hancock Credit Agreement contains several affirmative and
negative covenants, including, among others, the following: (i) delivery of
financial statements and other reports, projections and compliance
certificates; (ii) maintenance of existence and continuation of business;
(iii) compliance with laws; (iv) maintenance of insurance; (v) notices of
default, material litigation and other material events; (vi) environmental
management; (vii) limitations on indebtedness and contingent obligations;
(viii) limitation on liens; (ix) limitation on dividends and distributions
from Timberlands; (x) limitations on mergers, consolidations and sales of
assets; (xi) limitations on investments; (xii) limitation on transactions
with affiliates and officers; (xiii) limitations on payment and prepayment of
other indebtedness; (xiv) limitations on sale and leaseback arrangements;
(xv) limitations on holding partnership or limited liability interests and
entering into joint ventures; (xvi) requirements to maintain the ratio of the
administrative value of the timberlands to the net principal balance of the
Hancock Loan of at least 1.33 to 1.00; and (xvii) limitations on the cutting
or removal of timber. Timberlands is currently in material compliance with
all of the financial covenants contained in the Hancock Credit Agreement.
Events of Default. The Hancock Credit Agreement provides for events of
default typical in facilities of its type, including, among others, the
following: (i) nonpayment of principal, interest, fees or other amounts; (ii)
violation of covenants; (iii) inaccuracy of representations and warranties;
(iv) cross-default of other indebtedness; (v) bankruptcy and other similar
events; and (vi) material unsatisfied judgments.
TIMBERLANDS LAND FINANCING
BITCO is the maker of two purchase money notes, each secured by the
timberland acquired in connection with its issuance. One note is for
$178,400.00 due in three annual installments on January 31, 1998, 1999 and
2000, with interest at 7% per annum, and the other note will be fully paid by
an installment of $189,250.00, with 6% interest thereon, due on January 1,
1998.
SOUCY INDEBTEDNESS
THE SOUCY INC. BANK CREDIT FACILITIES
Soucy Inc. has entered into a bank credit agreement (the "Soucy Inc. Bank
Credit Agreement") with National Bank of Canada ("NBC"), to provide for
maximum borrowings by Soucy Inc. of revolving loans of up to an aggregate
principal amount of Cdn$3 million (the "Soucy Inc. Revolving Loans"). The
available operating commitment cannot exceed the lesser of Cdn$3 million and
an aggregate amount based on 75% of the net book value of Soucy Inc.'s
receivables plus 50% of the net book value of Soucy Inc.'s finished goods and
raw materials inventory.
Interest. The interest rate for the Soucy Inc. Revolving Loan is based on
(i) the lender's U.S. Prime Rate Basis or Canadian Prime Rate Basis plus 1/4%
or (ii) at LIBOR plus 1 1/4%, at the election of Soucy Inc., payable monthly
in arrears.
Conversion. Soucy Inc. may require that the Soucy Inc. Revolving Loan be
advanced, converted into or continued as banker's acceptances in whole or in
part. Such banker's acceptances will be liable for a stamping fee based on
the product of the face value of the banker's acceptance multiplied by a
fraction, the numerator of which is the product of the number of days of the
selected maturity period for the banker's acceptance times 0.0125 and the
denominator of which is 365.
Soucy Inc. may request the conversion of the whole or part of the Soucy
Inc. Revolving Loan into advances denominated in Canadian dollars or U.S.
dollars or that the applicable rate of interest be Canadian Prime Rate Basis
or U.S. Prime Rate Basis or LIBOR Basis.
Repayment. The Soucy Inc. Revolving Loan is repayable on demand. Where the
lender determines that the available operating commitment would be negative,
Soucy Inc. is required to repay the portion of the operating loan required to
bring such commitment to nil.
Prepayments. Soucy Inc. may prepay the Soucy Inc. Revolving Loan in
accordance with the terms of the Soucy Inc. Bank Credit Facilities without
penalty or premium, but on payment of losses, expenses and costs incurred by
the
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lender in connection with repayment of any advance by way of banker's
acceptances or any LIBOR based advance. Subject to the provisions of the
Soucy Inc. Bank Credit Facilities, the Company will be able to, from time to
time, borrow, repay and reborrow under the Soucy Inc. Bank Credit Facility.
Security; Guarantee. The obligations under the Soucy Inc. Bank Credit
Facilities are guaranteed by Brant-Allen and are intended to be secured by
(i) a first priority security interest in Soucy Inc.'s claims, book debts,
accounts receivable, inventory and insurance proceeds, and (ii) a first
priority security interest in Brant-Allen's claims, book debts, accounts
receivable, inventory, equipment and personal property.
Covenants. The Soucy Inc. Bank Credit Agreement contains affirmative and
negative covenants typical in facilities of this type, including, among
others, the following: (i) delivery of financial statements and other
reports, projections and compliance certificates; (ii) maintenance of
existence and continuation of business; (iii) compliance with laws; (iv)
maintenance of insurance; (v) notices of default, material litigation and
other material events; (vi) limitations on indebtedness; (vii) limitations on
mergers, consolidations and sales of assets; and (viii) limitations on
amendments to the Company's management contracts. The Company believes that
Soucy Inc. is currently in material compliance with all of the financial
covenants contained in the Soucy Inc. Bank Credit Agreement.
Events of Default. The Soucy Inc. Bank Credit Agreement provides for
events of default typical in facilities of its type, including, among others,
the following: (i) nonpayment of principal, interest, fees or other amounts;
(ii) violation of covenants; (iii) inaccuracy of representations and
warranties; (iv) cross-default of other indebtedness and material contracts;
(v) bankruptcy and other similar events; (vi) unsatisfied judgments; (vii)
cross-default under the security documents; and (viii) invalidity of any loan
documents or security interests.
THE SOUCY PARTNERS BANK CREDIT FACILITIES
Soucy Partners has entered into a bank credit agreement (the "Soucy
Partners Bank Credit Agreement") with NBC, to provide for maximum borrowings
by Soucy Partners of revolving loans of up to an aggregate principal amount
of Cdn$5 million (the "Soucy Partners Revolving Loans").
Stand-by Fees. A stand-by fee of 0.25% per annum is payable on the excess
of unused portions of the Soucy Partners Revolving Credit Facility over
Cdn$2,500,000.
Interest. The interest rate for the Soucy Partners Revolving Loan is, for
advances requested in Canadian Dollars, the greater of NBC's reference rate
for commercial loans made in Canada in Canadian Dollars plus 0.50% and the
average rate for 30 day banker's acceptances denominated in Canadian Dollars
which appears on Reuter's Screen's CDOR Page at 10:00 A.M. on the day that
the rate is determined, plus 0.50%. For advances in U.S. Dollars, at the
option of Soucy Partners, the rate is either NBC's reference rate for
commercial loans made in Canada in U.S. Dollars plus 0.50% or at LIBOR of NBC
plus 2.0%.
Repayment. The Soucy Partners Revolving Loans are repayable on demand. The
Soucy Partners Revolving Credit Facility is renewable annually upon payment
of a renewal fee of Cdn$15,625.
Prepayments. Soucy Partners may prepay the Soucy Partners Revolving Loan
without penalty. Subject to the provisions of the Soucy Partners Bank Credit
Facilities, Soucy Partners may from time to time, borrow, repay and reborrow
under the Soucy Partners Bank Credit Facility.
Soucy Partners must make a mandatory prepayment in the event the amount
advanced under the Soucy Partners Bank Credit Facilities, including the risk
associated with any Foreign Exchange Contracts entered into thereunder,
exceeds an amount calculated in accordance with the terms of the Soucy
Partners Bank Credit Facilities.
Security Guarantee. The obligations under the Soucy Partners Credit
Facilities are intended to be secured by a first priority security interest
in Soucy Partners' claims, book debts, accounts receivable, inventory and
insurance proceeds, as well as an assignment of the security interest in
favor of Soucy Partners granted by Brant-Allen as security for amounts owed
to Soucy Partners by Brant-Allen and a first ranking priority security
interest in the inventories of Soucy Partners sold by Brant-Allen and the
receivables from such sales.
Covenants. The Soucy Partners Bank Credit Agreement and the related
security documents contain affirmative and negative covenants typical in
facilities of this type, including, among others, the following: (i) delivery
of financial statements and other reports, projections and compliance
certificates with respect to Soucy Inc., Soucy Partners, Brant-Allen and
BIPCO; (ii) maintenance of existence and continuation of business; (iii)
maintenance of
109
<PAGE>
insurance; (iv) notices of default, material litigation and other material
events; (v) limitation on liens; and (vi) limitations on mergers,
consolidations and sales of assets. The Company believes that Soucy Partners
is currently in material compliance with all of the financial covenants
contained in the Soucy Partners Bank Credit Agreement.
Events of Default. The Soucy Partners Bank Credit Agreement provides for
events of default typical in facilities of its type, including, among others,
the following: (i) nonpayment of principal, interest, fees or other amounts;
(ii) violation of covenants; (iii) inaccuracy of representations and
warranties; (iv) cross-default of other indebtedness and material contracts;
(v) bankruptcy and other similar events.
THE SOUCY BOND CREDIT FACILITIES
Soucy Partners has unconditionally guaranteed the obligations of Riviere
du Loup Finance Ltd ("RDL"), a wholly owned subsidiary of Soucy Partners,
under a Trust Indenture with Montreal Trust Company ("Montreal Trust")
bearing formal date of March 30, 1979, as amended (the "RDL Trust
Indenture"). Under the RDL Trust Indenture there were Series A bonds (the
"RDL Series A Bonds") issued in an original amount of $20,000,000, Series B
bonds (the "RDL Series B Bonds") issued in an original amount of
Cdn$5,000,000 and Series C bonds (the "RDL Series C Bonds") issued in an
original amount of $27,500,000 (the RDL Series A Bonds, the RDL Series B
Bonds and the RDL Series C Bonds are collectively referred to as the "RDL
Bonds").
Interest. The RDL Series A Bonds bear interest at the rate of 10 3/4% per
annum, the RDL Series B Bonds at the rate of 10 7/8% and the RDL Series C
Bonds at the rate of 9.65% per annum.
Repayment. The RDL Series A Bonds and the RDL Series B Bonds are due April
1, 1999. The RDL Series C Bonds are due on July 1, 2004. The RDL Trust
Indenture provides for sinking fund payments on each series of RDL Bonds. The
next sinking fund payment for the RDL Series A Bonds is in the amount of
$1,150,000 due on April 1, 1998 and for the RDL Series B Bonds is in the
amount of Cdn$287,000 due also on April 1, 1998. Sinking fund payments on the
RDL Series C Bonds have been due annually on July 1 since 1992 in the fixed
yearly amount of $2,115,385.
Redemption. The RDL Bonds are redeemable at the option of RDL on the terms
and conditions set forth in the RDL Trust Indenture.
Security; Guarantee. The obligations of RDL under the RDL Bonds and the
RDL Trust Indenture are guaranteed by Soucy Partners and such guarantee is
secured by (i) the pledge of the RDL shares held by Soucy Partners, (ii) a
first priority security interest (hypothec) in the immovable property of
Soucy Partners, and (iii) the assignment of the rights of Soucy Partners
under certain immovable leases and newsprint sales contracts and under the
Conflicts of Interests Agreement between Soucy Partners and Soucy Inc. dated
May 31, 1974, as amended, and the Wood Supply Contract with Rexfor. The
guarantee by Soucy Partners is also secured by the issuance of a debenture in
the amount of Cdn$100,000,000 issued by Soucy Partners in favor of Montreal
Trust which debenture is itself guaranteed by a second trust indenture with
The Canada Trust Company charging the immovable property of Soucy Partners.
Covenants. The RDL Trust Indenture contains affirmative and negative
covenants of RDL and Soucy Partners typical in facilities of this type,
including, among others, the following: (i) delivery of financial statements
and other reports, projections and compliance certificates; (ii) maintenance
of existence and continuation of business; (iii) compliance with laws; (iv)
maintenance of insurance; (v) notices of default, material litigation and
other material events; (vi) limitations on indebtedness; (vii) limitation on
liens; (viii) limitation on dividends and distributions from RDL and Soucy
Partners; (ix) limitations on mergers, consolidations and sales of assets;
(x) limitations on investments; (xi) limitations on payment of other
indebtedness; (xii) limitations on capital expenditures and leases; (xiii)
limitations on changes in line of business; and (xiv) limitations on
amendments to Soucy Partners' material contracts. The Company believes that
Soucy Partners is currently in material compliance with all of the financial
covenants contained in the RDL Trust Indenture.
Events of Default. The RDL Trust Indenture provides for events of default
typical in facilities of its type, including, among others, the following:
(i) nonpayment of principal, interest, fees or other amounts; (ii) violation
of covenants; (iii) inaccuracy of representations and warranties; (iv)
cross-default of other indebtedness and material contracts; (v) bankruptcy
and other similar events; (vi) unsatisfied judgments; (vii) cross-defaults
with the security documents; and (viii) invalidity of any loan documents or
security interests.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the material United States
federal income tax consequences for original holders of the Old Notes who
exchange their Old Notes for New Notes in the Exchange Offer and who hold New
Notes subsequent to the Exchange Offer. This discussion is based on
provisions of the Internal Revenue Code of 1986, as amended (the "Code"),
Treasury regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all as in effect on the date hereof and all of which
are subject to change, possibly with retroactive effect. This discussion does
not address the tax consequences to subsequent purchasers of New Notes and is
limited to investors who hold the New Notes as capital assets. Furthermore,
this discussion does not address all aspects of United States federal income
taxation that may be applicable to investors in light of their particular
circumstances, or to investors subject to special treatment under United
States federal income tax law (including, without limitation, certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities, certain U.S. expatriates, persons who have acquired Notes as part
of a straddle, hedge, conversion transaction or other integrated investment
or U.S. persons whose functional currency is not the United States dollar).
EACH PROSPECTIVE INVESTOR SHOULD CONSULT ITS TAX ADVISOR AS TO THE
PARTICULAR TAX CONSEQUENCES TO SUCH PURCHASER OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL ESTATE
OR GIFT TAX LAWS OR ANY STATE, LOCAL OR FOREIGN TAX LAWS, ANY CHANGES IN
APPLICABLE TAX LAWS AND ANY PENDING OR PROPOSED LEGISLATION OR REGULATIONS.
UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, (A) the term "United States Holder" means a beneficial
owner of a New Note that is, for United States federal income tax purposes,
(i) a citizen or individual resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income
taxation regardless of its source, or (iv) a trust if a United States court
is able to exercise primary supervision over the administration of such trust
and one or more United States persons have the authority to control all
substantial decisions of such trust and (B) the term "Non-U.S. Holder" means
a beneficial owner of a New Note that is not a United States Holder.
Payments of Interest
Interest payable on the New Notes generally will be included in the gross
income of a United States Holder as ordinary interest income at the time
accrued or received, in accordance with such United States Holder's method of
tax accounting for United States federal income tax purposes.
Disposition of the Notes
Upon the sale, exchange, retirement at maturity, redemption or other
disposition of a Note (collectively, a "disposition"), a United States Holder
generally will recognize capital gain or loss equal to the difference between
the amount realized by such holder (except to the extent such amount is
attributable to accrued interest, which will be treated as ordinary interest
income) and such holder's adjusted tax basis in the Note. Such capital gain
or loss will be long-term capital gain or loss if the holding period for the
Note exceeds one year at the time of the disposition. In the case of
individuals, recently enacted United States tax legislation reduced the
maximum federal income tax rate applicable to long-term capital gains in
certain instances. Prospective investors should consult their tax advisors
regarding the possible effect on such investors of such legislation.
A United States Holder will not recognize any gain or loss on the exchange
of Old Notes for New Notes pursuant to the Exchange Offer. A United States
Holder's tax basis in the New Notes will equal its tax basis in the Old Notes
exchanged therefor, and a United States Holder's holding period in the New
Notes will include the holder's holding period for the Old Notes.
UNITED STATES TAXATION OF NON-U.S. HOLDERS
Payments of Interest
In general, payments of interest received by a Non-U.S. Holder will not be
subject to a United States federal income tax, provided that the interest
received on the Note is not effectively connected with a United States trade
or business conducted by the Non-U.S. Holder and:
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<PAGE>
(i)(a) the Non-U.S. Holder does not actually or constructively own 10% or
more of the total combined voting power of all classes of stock of the
Company entitled to vote, (b) the Non-U.S. Holder is not a controlled
foreign corporation that is related to the Company actually or
constructively through stock ownership, and (c) the beneficial owner of
the Note, under penalties of perjury, either directly or through a
financial institution which holds the Note on behalf of the Non-U.S.
Holder and holds customers' securities in the ordinary course of its trade
or business, provides the Company or its agent with the beneficial owner's
name and address and certifies, under penalties of perjury, that it is not
a United States Holder; or
(ii) the Non-U.S. Holder is entitled to the benefits of an income tax
treaty under which the interest is exempt from United States withholding
tax and the Non-U.S. Holder complies with certain reporting requirements.
Payments of interest not exempt from United States federal income tax as
described above will (i) in the case of interest that is effectively
connected with the conduct of a United States trade or business, be subject
to United States federal income tax in the same manner as a United States
Holder and, in the case of a corporate holder, may be subject to a branch
profits tax, or (ii) in any other case, will be subject to U.S. withholding
tax at the rate of 30% (subject to reduction under an applicable income tax
treaty).
Disposition of the New Notes
A Non-U.S. Holder generally will not be subject to United States federal
income tax (and generally no such tax will be withheld) with respect to gain
realized on the disposition of a New Note, unless (i) the gain is effectively
connected with a United States trade or business conducted by the Non-U.S.
Holder or (ii) the Non-U.S. Holder is an individual who is present in the
United States for 183 or more days during the taxable year of the disposition
(and certain other conditions are satisfied). In addition, an exchange of an
Old Note for a New Note pursuant to the Exchange Offer will not constitute a
taxable exchange of the Old Note for Non-U.S. Holders. See "United States
Federal Income Taxation of United States Holders--Disposition of the Notes."
INFORMATION REPORTING AND BACKUP WITHHOLDING
Payments of principal of, and interest on, a New Note to United States
Holders will generally be subject to information reporting to the Internal
Revenue Service. In addition, certain non-corporate United States Holders may
be subject to backup withholding at a rate of 31% on payments of principal
of, premium and interest on, and the proceeds of the disposition of, the
Notes. In general, backup withholding will be imposed only if the United
States Holder (i) fails to furnish its taxpayer identification number
("TIN"), which, for an individual, would be his or her Social Security
number, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS that it
has underreported payments of interest or dividends or (iv) under certain
circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is
subject to backup withholding. United States Holders should consult their tax
advisors regarding their qualification for exemption from backup withholding
and the procedure for obtaining such an exemption, if applicable.
Information reporting and backup withholding generally will not apply to
payments made to a Non-U.S. Holder of a Note who provides the certification
described under "United States Taxation of Non-U.S. Holders--Payments of
Interest" or otherwise establishes an exemption from information reporting
and backup withholding.
The amount of any backup withholding imposed on a payment to a holder of a
Note will be allowed as a credit against such holder's United States federal
income tax liability and may entitle such holder to a refund, provided that
certain required information is furnished to the IRS.
RECENTLY ISSUED TREASURY REGULATIONS
On October 7, 1997, the Department of Treasury issued new Treasury
regulations governing the certification procedures regarding withholding,
backup withholding and information reporting on certain amounts paid to
Non-U.S. Holders, which are effective for payments made after December 31,
1998. In general, the new Treasury regulations do not alter the treatment of
Non-U.S. Holders who satisfy current reporting requirements. The new Treasury
regulations alter the procedures for claiming the benefits of an income tax
treaty and may change certain procedures relating to intermediaries receiving
payments on behalf of a beneficial owner of a Note. Prospective investors
should consult their tax advisors concerning the effect, if any, of such new
Treasury regulations on an investment in the Notes.
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PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus (which
may be this Prospectus) in connection with any resale of such New Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of New Notes received in exchange
for Old Notes where such Old Notes were acquired as a result of market-making
activities or other trading activities. The Issuers have agreed that, for a
period of 90 days after the Expiration Date, they will make this Prospectus, as
amended or supplemented, available to any broker-dealer for use in connection
with any such resale. In addition, until April 30, 1998, all dealers effecting
transactions in the New Notes may be required to deliver a prospectus.
The Issuers will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the New Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any
such resale may be made directly to purchasers or to or through brokers or
dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such New
Notes. Any broker-dealer that resells New Notes that were received by it for
its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of New Notes and any commission or concessions received by any
such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that, by acknowledging that
it will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
For a period of 90 days after the Expiration Date, the Issuers will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such
documents in the Letter of Transmittal. The Issuers have agreed to pay all
expenses in connection with the Exchange Offer and reimburse the Initial
Purchasers for the reasonable fees and expenses of up to $20,000 of one
counsel for the Holders of the Notes. Each holder will pay all expenses of
its counsel other than as described in the preceding sentence, transfer
taxes, if any, and any commissions or concessions of any brokers or dealers.
The Issuers have agreed in the Registration Statement to indemnify the
Holders of the Notes (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act.
In addition, to comply with the securities laws of certain jurisdictions
(including any jurisdiction in Canada), the New Notes may not be offered or
sold unless they have been registered or qualified for offer and sale in such
jurisdiction or an exemption from registration or qualification is available
and is complied with. The Issuers have agreed, pursuant to the Registration
Rights Agreement, subject to certain limitations specified therein, to
register or qualify the New Notes for offer or sale under the applicable
state securities laws of such United States jurisdictions as the Majority
Holders of the Old Notes reasonably request by the time the Registration
Statement (of which this Prospectus forms a part) is declared effective by
the Commission. The Issuers do not intend to register or qualify the offer or
sale of the New Notes in any United States jurisdiction (unless they receive
such a request) or any other jurisdiction.
EXPERTS
The financial statements of Bear Island Paper Company, L.P. as of December
31, 1996 and 1995 and for the three years in the period ended December 31,
1996, included in this Prospectus, have been included herein in reliance on
the report, which includes an explanatory paragraph regarding significant
related-party transactions, of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The financial statements of Bear Island Timberlands Company, L.P. as of
December 31, 1996 and 1995 and for the three years in the period ended
December 31, 1996, included in this Prospectus, have been included herein in
reliance on the report, which includes an explanatory paragraph regarding
significant related-party transactions, of Coopers & Lybrand L.L.P.,
independent accountants, given on the authority of that firm as experts in
accounting and auditing.
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The consolidated financial statements of Soucy Inc., expressed in Canadian
dollars, as of December 31, 1996 and 1995 and for the three years in the
period ended December 31, 1996, included in this Prospectus, have been
included herein in reliance on the report of Coopers & Lybrand, Chartered
Accountants, General Partnership, given on the authority of that firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the New Notes being offered hereby will be passed upon for
the Issuers by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York
and Mays & Valentine, L.L.P., Richmond, Virginia.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
BEAR ISLAND PAPER COMPANY, L.P.
Report of Independent Accountants............................................................. F-2
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 and 1995 ........... F-3
Statements of Operations for the nine months ended September 30, 1997 (unaudited) and 1996
(unaudited) and for the years ended December 31, 1996, 1995 and 1994......................... F-4
Statements of Changes in Partners' Equity for the nine months ended September 30, 1997
(unaudited) and for the years ended December 31, 1996, 1995 and 1994......................... F-5
Statements of Cash Flows for the nine months ended September 30, 1997 (unaudited) and 1996
(unaudited) and for the years ended December 31, 1996, 1995, and 1994........................ F-6-F-7
Notes to Financial Statements................................................................. F-8-F-16
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
Report of Independent Accountants............................................................. F-17
Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 and 1995 ........... F-18
Statements of Income for the nine months ended September 30, 1997 (unaudited) and 1996
(unaudited) and for the years ended December 31, 1996, 1995 and 1994......................... F-19
Statements of Changes in Partners' Equity for the nine months ended September 30, 1997
(unaudited) and for the years ended December 31, 1996, 1995 and 1994......................... F-20
Statements of Cash Flows for the nine months ended September 30, 1997 (unaudited) and 1996
(unaudited) and for the years ended December 31, 1996, 1995, and 1994........................ F-21
Notes to Financial Statements................................................................. F-22-F-28
F.F. SOUCY INC.
Auditors' Report ............................................................................. F-29
Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996
and 1995..................................................................................... F-30
Consolidated Statements of Retained Earnings for the nine months ended September 30, 1997
(unaudited) and 1996 (unaudited) and for the years ended December 31, 1996, 1995
and 1994..................................................................................... F-31
Consolidated Statements of Earnings for the nine months ended September 30, 1997 (unaudited)
and 1996 (unaudited) and for the years ended December 31, 1996, 1995
and 1994..................................................................................... F-32
Consolidated Statements of Changes in Financial Position for the nine months ended September
30, 1997 (unaudited) and 1996 (unaudited) and for the years ended December 31, 1996, 1995,
and 1994..................................................................................... F-33
Notes to Consolidated Financial Statements.................................................... F-34-F-44
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Bear Island Paper Company, L.P.:
We have audited the accompanying balance sheets of Bear Island Paper
Company, L.P. (a Virginia limited partnership) (the "Company") as of December
31, 1996 and 1995, and the related statements of operations, changes in
partners' equity and cash flows for each of the three years in the period
ended December 31, 1996. 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 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 Company had
numerous significant related-party transactions with an affiliate, Bear
Island Timberlands Company, L.P., for each of the three years in the period
ended December 31, 1996, which significantly impacted the financial position
at December 31, 1996 and 1995 and the results of operations and cash flows of
the Company for each of the three years in the period ended December 31,
1996.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bear Island Paper
Company, L.P. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
Coopers & Lybrand L.L.P.
Richmond, Virginia
January 17, 1997
F-2
<PAGE>
BEAR ISLAND PAPER COMPANY, L.P.
(A Virginia Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------------
1997 1996 1995
--------------- -------------- --------------
UNAUDITED
<S> <C> <C> <C>
ASSETS
Cash and short-term investments ............................ $ 13,305,542 $ 13,625,322 $ 12,471,916
Accounts receivable:
Trade, less allowance for doubtful accounts of $73,100
(unaudited), $73,100 and $73,100, respectively .......... 8,045,540 7,881,685 10,035,702
Affiliates ................................................ 4,718,688 6,370,771 8,079,694
Other ..................................................... 436,936 943,260 347,243
Inventories ................................................ 13,853,125 13,936,443 12,815,584
Other current assets ....................................... 538,198 261,700 284,503
--------------- -------------- --------------
Total current assets ..................................... 40,898,029 43,019,181 44,034,642
--------------- -------------- --------------
Property, plant and equipment, at cost ..................... 241,415,773 235,616,026 224,602,558
Less accumulated depreciation ............................. 126,509,015 118,663,056 108,661,129
--------------- -------------- --------------
Net property, plant and equipment ........................ 114,906,758 116,952,970 115,941,429
--------------- -------------- --------------
Other assets:
Long-term notes receivable ................................ 13,548 13,548
Deferred financing costs, net of accumulated amortization
of $631,095 (unaudited), $586,662 and $527,418,
respectively ............................................. 429,804 474,237 533,481
--------------- -------------- --------------
429,804 487,785 547,029
--------------- -------------- --------------
$156,234,591 $160,459,936 $160,523,100
=============== ============== ==============
LIABILITIES
Current portion of long-term debt .......................... 6,591,936 6,449,498 6,344,358
Current portion of long-term purchase obligations ......... 720,064 2,032,548
Accounts payable and accrued expenses ...................... 7,072,165 10,074,275 11,463,114
Due to Bear Island Timberlands Company, L.P. ............... 1,672,705 1,388,085 1,159,056
Interest payable ........................................... 2,139,844 1,037,500 1,167,187
--------------- -------------- --------------
Total current liabilities ................................ 18,196,714 20,981,906 20,133,715
--------------- -------------- --------------
Long-term debt ............................................. 40,007,958 43,042,410 49,023,792
Long-term purchase obligations ............................. 437,381 646,805
--------------- -------------- --------------
40,445,339 43,689,215 49,023,792
--------------- -------------- --------------
PARTNERS' EQUITY
Contributed capital ........................................ 88,421,681 88,421,681 88,421,681
Retained earnings .......................................... 9,170,857 7,367,134 2,943,912
--------------- -------------- --------------
$156,234,591 $160,459,936 $160,523,100
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
BEAR ISLAND PAPER COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales ................. $47,196,754 $ 59,353,279 $ 75,460,102 $ 70,960,222 $51,297,003
Net sales to affiliates .. 38,175,822 40,793,736 53,360,199 61,243,026 42,543,147
------------- ------------- ------------- ------------- -------------
Total net sales ......... 85,372,576 100,147,015 128,820,301 132,203,248 93,840,150
Cost of sales ............. 77,224,807 73,747,855 100,590,600 100,399,666 91,610,238
------------- ------------- ------------- ------------- -------------
Gross profit ............ 8,147,769 26,399,160 28,229,701 31,803,582 2,229,912
Selling, general and
administrative expenses:
Management fees paid to
affiliate ............... 2,561,177 3,004,410 3,865,000 3,961,000 2,820,000
Other direct ............. 668,182 568,594 153,370 223,644 207,565
------------- ------------- ------------- ------------- -------------
Income (loss) from
operations ............. 4,918,410 22,826,156 24,211,331 27,618,938 (797,653)
------------- ------------- ------------- ------------- -------------
Other income (deductions):
Interest income .......... 485,242 486,706 665,709 602,839 309,360
Interest expense ......... (3,592,344) (4,059,219) (5,397,959) (5,985,687) (6,193,838)
Other income (expense) .. (7,585) 93,969 (55,859) 32,642 2,114,881
------------- ------------- ------------- ------------- -------------
(3,114,687) (3,478,544) (4,788,109) (5,350,206) (3,769,597)
------------- ------------- ------------- ------------- -------------
Net income (loss) ....... $ 1,803,723 $ 19,347,612 $ 19,423,222 $ 22,268,732 $(4,567,250)
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
BEAR ISLAND PAPER COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
DOW JONES
BRANT-ALLEN VIRGINIA
INDUSTRIES, COMPANY, NEWSPRINT,
INC. INC. INC. TOTAL
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Contributed capital:
Balances, December 31, 1993 ............. $24,848,959 $21,557,500 $21,557,500 $ 67,963,959
Partner contributions ................... 1,350,000 10,325,000 10,325,000 22,000,000
------------- ------------- ------------- --------------
Balances, December 31, 1994 ............. 26,198,959 31,882,500 31,882,500 89,963,959
Partner distributions ................... (1,542,278) (1,542,278)
------------- ------------- ------------- --------------
Balances, December 31, 1995, 1996 and
September 30, 1997 (unaudited) ......... $24,656,681 $31,882,500 $31,882,500 $ 88,421,681
============= ============= ============= ==============
Retained earnings (accumulated deficit):
Balances, December 31, 1993 ............. (4,002,724) (1,398,562) (1,398,562) (6,799,848)
Net loss -1994 .......................... (1,370,174) (1,598,538) (1,598,538) (4,567,250)
------------- ------------- ------------- --------------
Balances, December 31, 1994 ............. (5,372,898) (2,997,100) (2,997,100) (11,367,098)
Net income -1995 ........................ 6,680,620 7,794,056 7,794,056 22,268,732
Partner distributions ................... (1,307,722) (3,325,000) (3,325,000) (7,957,722)
------------- ------------- ------------- --------------
Balances, December 31, 1995 ............. - 1,471,956 1,471,956 2,943,912
Net income -1996......................... 5,826,966 6,798,128 6,798,128 19,423,222
Partner distributions ................... (4,500,000) (5,250,000) (5,250,000) (15,000,000)
------------- ------------- ------------- --------------
Balances, December 31, 1996 ............. 1,326,966 3,020,084 3,020,084 7,367,134
Net income -nine months ended September
30, 1997 (unaudited) ................... 541,117 631,303 631,303 1,803,723
------------- ------------- ------------- --------------
Balances, September 30, 1997 (unaudited) $ 1,868,083 $ 3,651,387 $ 3,651,387 $ 9,170,857
============= ============= ============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
BEAR ISLAND PAPER COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------- --------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss) .............. $ 1,803,723 $19,347,612 $19,423,222 $22,268,732 $(4,567,250)
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation .................. 8,291,428 7,629,336 9,975,923 9,648,325 9,730,346
Depletion ..................... 12,501 29,696 58,494 89,831 38,621
Amortization of deferred
financing costs .............. 44,433 44,433 59,244 59,244 81,055
Noncurrent portion of notes
received on sales of land,
net .......................... (41,889)
(Gain) on sale of property,
plant and equipment .......... (134,300) (15,350) (28,391) (57,546) (2,430,129)
(Increase) decrease in:
Accounts receivable .......... 1,994,552 1,074,316 3,266,923 (4,989,370) (3,221,988)
Notes receivable ............. 13,548 35,566 55,646
Inventories .................. 83,318 (727,814) (1,120,859) (1,965,023) 3,246,851
Other current assets ......... (276,498) (488,200) 22,803 (16,758) (17,793)
Increase (decrease) in:
Accounts payable and accrued
expenses for operating
activities .................. (3,002,110) (2,625,251) (1,388,839) 2,276,089 624,929
Due to affiliate ............. 284,620 103,102 229,029 22,796 982,446
Interest payable ............. 1,102,344 1,257,969 (129,687) (129,688) (145,312)
Deferred profit on land
sales........................ (26,788) 26,788
------------- ------------- ------------- ------------- --------------
Net cash provided by
operating activities ....... 10,217,559 25,629,849 30,367,862 27,215,410 4,362,321
------------- ------------- ------------- ------------- --------------
Investing activities:
Purchases of property, plant
and equipment ................. (5,724,037) (5,226,890) (7,482,573) (6,644,939) (9,469,106)
Proceeds from disposition of
property, plant and equipment . 134,300 56,006 69,244 142,632 5,469,873
------------- ------------- ------------- ------------- --------------
Net cash used in investing
activities ................. (5,589,737) (5,170,884) (7,413,329) (6,502,307) (3,999,233)
------------- ------------- ------------- ------------- --------------
</TABLE>
F-6
<PAGE>
BEAR ISLAND PAPER COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
------------------------------- -----------------------------------------------
1997 1996 1996 1995 1994
-------------- --------------- --------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Financing activities:
Distributions to partners ...... $(15,000,000) $(15,000,000) $ (9,500,000)
Contributions from partners .... $ 22,000,000
Principal payments on long-term
debt ........................... $(3,000,000) (3,000,000) (6,000,000) (6,170,256) (16,024,764)
Principal payments on promissory
notes .......................... (1,521,908) (243,558) (401,941) (24,764) (259,644)
Principal payments on long-term
purchase obligations ........... (425,694) (399,186)
Payments of construction payable (2,721,151)
-------------- --------------- --------------- -------------- --------------
Net cash provided (used) in
financing activities ......... (4,947,602) (18,243,558) (21,801,127) (15,695,020) 2,994,441
-------------- --------------- --------------- -------------- --------------
Net increase (decrease) in
cash and short-term
investments .................. (319,780) 2,215,407 1,153,406 5,018,083 3,357,529
Cash and short-term investments,
beginning of year ............... 13,625,322 12,471,916 12,471,916 7,453,833 4,096,304
-------------- --------------- --------------- -------------- --------------
Cash and short-term
investments, end of year .... $13,305,542 $ 14,687,323 $ 13,625,322 $ 12,471,916 $ 7,453,833
============== =============== =============== ============== ==============
Supplemental disclosures of cash
flow information:
Cash paid for interest .......... $ 2,490,000 $ 2,801,250 $ 5,527,646 $ 6,115,375 $ 6,339,150
============== =============== =============== ============== ==============
Noncash investing and financing
activities:
Increase in long-term purchase
obligations .................... $ 3,078,538
===============
Increase in promissory notes for
equipment acquisition .......... $ 533,680 $ 525,700 $ 525,700 $ 1,538,406
============== =============== =============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-7
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Bear Island Paper Company, L.P. (the "Company" or "BIPCO") 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 Industries, Inc. ("Brant-Allen"), a Delaware corporation;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones & Company, Inc. ("Dow
Jones"); and
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post Company ("The Washington Post").
Brant-Allen is the general partner and D J Virginia and Newsprint are
limited partners. The Partnership Agreement, as amended, contains the
following provisions:
o The Company is established for an initial term of 50 years, renewable
for additional terms of 20 years, and is subject to dissolution with the
consent of the partners and in certain other circumstances.
o The purpose of the Company is 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, has full and exclusive control of the
business of the Company, has active control of its management and provides
marketing and certain administrative services for which it receives a monthly
management fee of three percent of BIPCO's newsprint sales less related
distribution costs. Brant-Allen is authorized to incur on behalf of the
Company, without the approval or consent of the partners, debt of up to
$97,900,000.
o The limited partners are not liable for any net losses or other debt or
liability of the Company to any extent, except for their respective
contributions to capital.
o Subject to the aforementioned provisions, the partners share 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, as amended.
o No partner may sell, assign or otherwise dispose of its interest, or
any part thereof, in the Company, unless it first offers such interest to the
other partners as prescribed in the Partnership Agreement.
o Under the terms of the Partnership Agreement, D J Virginia's and
Newsprint's equity interests are 35% each and Brant-Allen's equity interest
is 30% for all periods shown.
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 of
$6,062,528 at December 31, 1995, consisted of U.S. government securities and
are included in cash and short-term investments. Short-term investments are
stated at cost plus accrued interest, which approximates market value. For
purposes of the statements of cash flows, the Company considers 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 at September 30,
1997, December 31, 1996, and December 31, 1995 of approximately $245,827
(unaudited), $227,800 and $203,500, respectively.
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 Company capitalizes
interest costs as part of the cost of constructing significant assets. There
were no capitalized interest costs in the years ended December 31, 1996 and
1995.
F-8
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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.
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 machinery and equipment. 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.
DEFERRED FINANCING COSTS: Costs directly associated with the issuance of
certain 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.
INCOME TAXES: No provision for income taxes is required in the financial
statements since each partner is individually liable for any income tax that
may be payable on its share of BIPCO's taxable income.
REVENUE RECOGNITION: Net sales to affiliates and non-affiliates are
recognized by the Company 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 meaningful under
the partnership structure.
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 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
approximate the carrying amount because of the short maturity of these
instruments.
RISKS AND UNCERTAINTIES: Financial instruments which potentially subject
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 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.
BIPCO derived 36% (unaudited), 41% (unaudited), 37%, 46% and 45% of net
sales from Dow Jones and The Washington Post in the nine-month periods ended
September 30, 1997 and 1996, and for the years ended December 31, 1996, 1995,
and 1994, respectively. Dow Jones and The Washington Post purchased newsprint
under prearranged pricing formula and volume contracts.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The unaudited balance sheet as of
September 30, 1997 and the unaudited statements of income and cash flows for
the nine-month periods ended September 30, 1997 and 1996 have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
F-9
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
conform to the current presentation.
3. RELATED-PARTY TRANSACTIONS:
BIPCO has 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 minimum purchase
quantities under the Sales Contracts. The price payable under the Sales
Contracts is 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.
The Company received payments of approximately $174,433 (unaudited),
$149,608 (unaudited), $180,300, $266,000 and $272,000 from Brant-Allen as
reimbursement for expenses incurred on behalf of Brant-Allen during the
nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, respectively. A component of selling,
general and administrative expenses as shown on the statements of operations
is management fees paid to an affiliate. The management fee includes senior
management, treasury, financial, marketing and sales services. These fees
cannot be practicably determinable as if the Company operated on a stand alone
basis.
The Company is a party to a wood supply contract with Bear Island
Timberlands Company, L.P. ("BITCO"), which is owned proportionately by the
same partners of BIPCO, whereby BITCO has guaranteed to supply all of the
Company's log and pulp chip requirements at a price to be negotiated
annually. Purchases under the wood supply contract approximated $10,982,000
(unaudited), $10,702,000 (unaudited), $14,744,000, $13,003,000 and
$11,896,000 during the nine-month periods ended September 30, 1997 and 1996,
and the years ended December 31, 1996, 1995 and 1994, respectively. The
actual purchase price per cord and the approximate range of market prices per
cord was as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Actual $95.50 $95.50 $95.50 $82.17 $75.00
$58.00 to
Market $60.00 to $66.00 $59.00 to $61.00 $60.00 to $61.00 $57.00 to $60.00 $61.00
</TABLE>
The Company has also contracted to pay BITCO a fee on a per ton basis for
procuring recycled paper. The procurement fee on a per ton basis was as
follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS
ENDED SEPTEMBER
30, FOR THE YEARS ENDED
(UNAUDITED) DECEMBER 31,
- ------------------ -------------------------
1997 1996 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$24.31 $24.15 $24.15 $2.30 $2.20
</TABLE>
The Company recognized costs of $1,640,695 (unaudited), $1,554,854
(unaudited), $2,070,469, $147,340 and $122,307 for such procurement fees
during the nine-month periods ended September 30, 1997 and 1996, and the
years ended December 31, 1996, 1995 and 1994, respectively, which is included
in cost of sales in the accompanying
F-10
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. RELATED-PARTY TRANSACTIONS: (Continued)
financial statements. The actual costs of the procurement services provided
to the Company by BITCO were approximately as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- ---------------------------------
1997 1996 1996 1995 1994
- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
$177,000 $186,000 $238,000 $249,000 $157,000
</TABLE>
The Company charges BITCO for certain administrative and other expenses.
These charges approximated $1,068,000 (unaudited), $1,039,000 (unaudited),
$1,370,000, $1,276,000 and $1,128,000 during the nine-month periods ended
September 30, 1997 and 1996, and the years ended December 31, 1996, 1995 and
1994, respectively. The Company also paid BITCO approximately $44,500
(unaudited), $43,000 (unaudited), $57,750, $56,000 and $133,000 during the
nine-month periods ended September 30, 1997 and 1996, and the years ended
December 31, 1996, 1995 and 1994, respectively, for managing its timberlands.
Company receivables, payables and sales to partners and their affiliates
were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------------------------
1997 1996 1995 1994
--------------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Due from Brant-Allen .... $ 37,012 $ 54,529 $ 175,271 $ 36,932
Due from Newsprint sales 36,712 1,551,775 430,968 118,547
Due from Dow Jones ....... 2,235,493 2,477,581 3,324,282 2,265,530
Due from The Post ........ 2,409,471 2,286,886 4,149,173 2,860,298
Due to BITCO ............. 1,672,705 1,388,085 1,159,056 1,136,260
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales to Dow Jones $18,632,950 $22,686,548 $28,920,518 $31,580,720 $21,851,761
Net sales to The Post . 19,542,872 18,107,188 24,439,681 29,662,306 20,691,386
</TABLE>
Sales to Dow Jones represented approximately 22% (unaudited), 23%
(unaudited), 22%, 24% and 23% of total sales during the nine-month periods
ended September 30, 1997 and 1996, and the years ended December 31, 1996,
1995 and 1994, respectively. Sales to The Washington Post represented
approximately 23% (unaudited), 18% (unaudited), 19%, 22% and 22% of total
sales during the nine-month periods ended September 30, 1997 and 1996, and
the years ended December 31, 1996, 1995 and 1994, respectively. The remaining
sales were to other unaffiliated printing and publishing enterprises located
primarily in the eastern United States.
4. INVENTORIES:
Inventories consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ---------------------------
1997 1996 1995
--------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials . $ 3,195,969 $ 3,076,391 $ 2,976,570
Stores ......... 8,889,490 8,908,263 8,440,210
Finished goods 1,767,666 1,951,789 1,398,804
--------------- ------------- ------------
$13,853,125 $13,936,443 $12,815,584
=============== ============= ============
</TABLE>
F-11
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -----------------------------
1997 1996 1995
--------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land ........................................ $ 1,889,591 $ 447,045 $ 447,045
Timberlands ................................. 4,159,823 4,158,991 4,196,408
Building .................................... 17,572,268 17,360,771 16,943,645
Machinery and equipment ..................... 209,977,152 207,168,997 200,024,595
Construction in progress .................... 7,816,939 6,480,222 2,990,865
--------------- -------------- -------------
241,415,773 235,616,026 224,602,558
Less accumulated depreciation and depletion 126,509,015 118,663,056 108,661,129
--------------- -------------- -------------
Total ..................................... $114,906,758 $116,952,970 $115,941,429
=============== ============== =============
</TABLE>
F-12
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consisted of:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ----------------------------
1997 1996 1995
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Senior Secured Notes bearing interest at 10.375%
(interest payable semiannually); principal of
$3,000,000 due semiannually which commenced in
October 1992 and will continue until maturity in
2004 ............................................... $45,000,000 $48,000,000 $54,000,000
Promissory note bearing interest at LIBOR plus 2%,
(7.66% at September 30, 1997); principal of
approximately $21,056 and interest due in 60
monthly installments which commenced in June 1995
and will continue through May 2000; collateralized
by certain fixed assets with an approximate net
book value of $2,445,200 at September 30, 1997 .... 694,833 884,389 1,116,000
Promissory note bearing interest at LIBOR plus 2%
(7.66% at September 30, 1997); principal of
approximately $7,641 and interest due in 36 monthly
installments which commenced in October 1995 and
continuing through September 1998; collateralized
by certain fixed assets with an approximate net
book value of $227,000 at September 30, 1997 ...... 91,689 160,458 252,150
Promissory note bearing interest at LIBOR plus 2%
(7.66% at September 30, 1997); principal of
approximately $8,762 and interest due in 60 monthly
installments which commenced in April 1996 and
continuing through March 2001; collateralized by
certain fixed assets with an approximate net book
value of $606,500 at September 30, 1997 ............ 367,990 447,061
Promissory note bearing interest at LIBOR plus 2%
(7.66% at September 30, 1997); with 36 monthly
installments of principal of approximately $9,652
and interest followed by 24 monthly installments of
principal of approximately $2,217 and interest
which commenced in March 1997 and continuing
through February 2002; collateralized by certain
fixed assets with an approximate net book value of
$465,000 at September 30, 1997 ..................... 323,444
Promissory note bearing interest at LIBOR plus 2%
(7.66% at September 30, 1997); principal of
approximately $2,217 and interest due in 60 monthly
installments which commenced in June 1997 and
continuing through May 2002 collateralized by
certain fixed assets with an approximate net book
value of $187,000 at September 30, 1997 ............ 121,938
--------------- ------------- -------------
46,599,894 49,491,908 55,368,150
Less current portion ................................ 6,591,936 6,449,498 6,344,358
--------------- ------------- -------------
$40,007,958 $43,042,410 $49,023,792
=============== ============= =============
</TABLE>
F-13
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT: (Continued)
In October 1987, the Company, through an intermediary, entered into an
Indenture of Mortgage and Deed of Trust with a consortium of institutional
investors which provided for the issuance of $75,000,000, 10.375% Senior
Secured Notes ("the 10.375% Notes"). The proceeds from the 10.375% Notes were
used to prepay previous debt and to repay partner capital loans. In
connection with the 10.375% Notes, the Company granted a first deed of trust
interest on the land and related facilities at the Mill and assigned its
interests in the Sales Contracts to a trustee. The Company is permitted to
prepay outstanding balances on the 10.375% Notes; however, in the event of
any prepayments, the Company may be required to pay a prepayment penalty, as
defined in the indenture agreement. The terms of the indenture agreement
provide that the Company may issue additional notes for permanent financing
for the cost of construction of certain major improvements to the Mill. In
the event such notes are issued, the noteholders have the option to redeem
their notes.
The indenture contains certain restrictive covenants. Two of the more
financially significant covenants limit the Company's ability to make
distributions to partners and incur additional debt.
During the periods presented, the Company entered into certain promissory
note agreements (the "Agreements") with a financial institution to finance
the purchase of certain equipment. These Agreements may be prepaid at the
option of the Company without incurring any prepayment penalties.
The fair value of the Company's senior secured notes was estimated by
discounting the future cash flows using a rate currently available for debt
with similar terms and maturities. The fair value of the Company's long-term
debt at December 31, 1996, and 1995 was estimated to be $51,060,285 and
$57,542,800, respectively.
Maturities on long-term debt for the four years after 1997 are
approximately as follows: 1998 -$6,427,000; 1999 -$6,358,000; 2000
- -$6,210,420; and 2001 -$6,026,000.
7. LONG-TERM PURCHASE OBLIGATIONS:
Capitalized purchase obligations for purchases of machinery and equipment
at December 31, 1996, which approximate fair value, consisted of:
<TABLE>
<CAPTION>
<S> <C>
Long-term purchase obligations bearing interest at various rates ranging
from approximately 7% to 8%; with principal payments ending in 1998 ....... $2,679,353
Less current portion ........................................................ 2,032,548
------------
$ 646,805
============
</TABLE>
8. EMPLOYEE BENEFIT PLANS:
The Company provides 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 Company increased
its contribution from 5% to 6% of employees' base compensation effective July
1, 1996.
The Company provides 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 Company matched employee contributions at 60% during
the nine months ended September 30, 1997 and during 1996 and at 50% during
1995 and 1994, up to a maximum of 6% of an employee's base pay.
The Company's expense for both plans approximated $928,606 (unaudited),
$806,405 (unaudited), $1,103,000, $935,000 and $883,000 for the nine-month
periods ended September 30, 1997 and 1996, and the years ended December 31,
1996, 1995 and 1994, respectively.
The Company is self-insured for medical, dental and disability claims up
to $35,000 per claim per year. The Company has provided an accrual of
approximately $313,000 for claims incurred but not reported at September 30,
1997 and December 31, 1996 and 1995.
F-14
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
Future minimum payments under noncancelable leases at December 31, 1996
were not material.
On September 30, 1994, the United States Environmental Protection Agency
("EPA") issued a Notice of Violation to the Company claiming violation of two
federally enforceable state air pollution requirements. Although the EPA has
not assessed any penalties for either alleged violation, the EPA may issue an
order requiring compliance with the requirements and administrative and civil
penalties. After consulting with counsel, the Company's management has
determined that it is not possible to estimate the amount of loss, if any,
that may ultimately be incurred related to the EPA matter.
On July 12, 1996, the Company entered into a Reasonably Available Control
Technology ("RACT") Agreement with the Virginia Department of Environmental
Quality (the "DEQ"). Under the RACT Agreement, the Company is not required to
incur any significant capital expenditures for the purchase and installation
of pollution control equipment.
No provision has been made in the financial statements with respect to
these contingencies and management believes that the probable resolution of
these matters will not materially affect the financial position and results
of operations of the Company.
10. SUBSEQUENT EVENT (UNAUDITED)
On December 1, 1997, Bear Island Paper Company, L.L.C., a newly formed
Virginia limited liability company ("Paper Company"), completed the purchase
of the 70% partnership interest in the Company previously owned by
subsidiaries of Dow Jones and The Washington Post for an aggregate purchase
price (subject to certain post-completion adjustments) of approximately
$149.8 million in cash. Immediately before the acquisition and certain
related financings facilitated to fund the acquisition, the Company was
converted into Bear Island Mergerco, L.L.C. ("Mergerco"), and Mergerco was
then merged into Paper Company, with Paper Company being the surviving
entity. Funding for the acquisition, including approximately $200,000 in
transaction costs, was provided from (i) borrowings under a $120 million
senior secured bank credit facility (the "Credit Facility"); (ii) the net
proceeds from an offering of $100 million aggregate principal amount 10%
senior secured notes due 2007 (the "Notes"); and (iii) $5.2 million of
existing cash on hand (of which $1.2 million was distributed to Brant-Allen
to reimburse certain deferred loan costs paid by Brant-Allen on behalf of
Paper Company in connection with the aforementioned borrowings.) The Credit
Facility consists of: (i) a $50 million 6-year senior secured reducing
revolving credit facility and (ii) a $70 million 8-year senior secured term
loan. The effects of the acquisition and related financings are not reflected
in the accompanying historical financial statements of the Company as of and
for the years ended December 31, 1996, 1995 and 1994 or in the interim
financial statements of the Company as of September 30, 1997 and for the nine
months ended September 30, 1997 and 1996. The Company will account for this
transaction as a purchase under Accounting Principles Board Opinion No.16
"Business Combinations" whereby the purchase price paid is allocated to the
assets and liabilities acquired. Purchase adjustments are applied to 70% of
the basis of the assets and liabilities acquired.
Upon completion of the acquisition and related financings the Paper
Company is highly leveraged with total indebtedness at December 1, 1997 of
approximately $201.1 million, consisting of borrowings of $31 million under
the revolving portion of the Credit Facility, $70 million under the term loan
portion of the Credit Facility, $100 million under the Notes and
approximately $130,000 in long-term purchase obligations. In addition,
following the completion of the acquisition, $19 million was available in
unused borrowing capacity under the revolving portion of the Credit Facility.
The Notes are collateralized by (i) a second priority interest in all real
property of Paper Company and all personal property to the extent such
personal property is assignable and except for certain other assets that are
not assignable, (ii) a third priority security interest in 100% of the
membership interests in Bear Island Timberlands Company, L.L.C. (a newly
formed wholly owned subsidiary of Brant-Allen and the successor to BITCO),
and (iii) a second priority security interest in 65% of the issued and
outstanding capital stock of F.F. Soucy, Inc. (a wholly owned subsidiary of
Brant-Allen). The Credit Facility is collateralized by: (i) a first priority
security interest in substantially all of the assets of Paper Company; (ii) a
shared first priority security interest (shared pro rata with a security
interest held on a $35 million loan to Brant-Allen) in the 65% of the common
stock of F.F. Soucy, Inc.; and (iii) a second priority security interest in
100% of the membership interests in Bear Island Timberlands Company, L.L.C.
F-15
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. SUBSEQUENT EVENT (UNAUDITED) (Continued)
In connection with the acquisition, certain purchase accounting
adjustments (which are preliminary until post-completion adjustments are
finalized and the purchase price allocation process is completed) were
required to record the impacts to Paper Company's financial statements from
the acquisition. These adjustments: (i) capitalized approximately $8.2
million of deferred loan costs (including the aforementioned $1.2 million of
deferred loan costs paid by Brant-Allen), (ii) write-off approximately
$425,000 in deferred loan costs associated with the previous long-term debt
of the Company, for which the then outstanding balance of $42 million was
repaid at the closing of the acquisition (along with a prepayment penalty of
approximately $4 million), and (iii) record the allocation of approximately
$82 million of excess purchase price over the book value of the interests
acquired to inventory and property, plant and equipment.
F-16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of Bear Island Timberlands Company, L. P.:
We have audited the accompanying balance sheets of Bear Island Timberlands
Company, L. P. (a Virginia limited partnership) ("BITCO") as of December 31,
1996 and 1995, and the related statements of income, changes in partners'
equity and cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
BITCO's 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, BITCO had numerous
significant related-party transactions with an affiliate, Bear Island Paper
Company, L.P., for each of the three years in the period ended December 31,
1996 which significantly impacted the financial position at December 31, 1996
and 1995 and the results of operations and cash flows of BITCO for each of
the three years in the period ended December 31, 1996.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BITCO as of December 31,
1996 and 1995, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
Coopers & Lybrand L.L.P.
Richmond, Virginia
January 17, 1997
F-17
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
(A Virginia Limited Partnership)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and short-term investments ............... $ 9,627,442 $ 7,535,254 $ 2,924,645
Restricted cash and investments ............... 341,856 3,165,442 4,797,791
Accounts and notes receivable ................. 410,165 592,163 541,101
Due from Bear Island Paper Company, L.P. ..... 1,672,705 1,388,085 1,159,056
Inventory ..................................... 1,039,910 1,560,991 1,536,823
Other current assets .......................... 63,388 16,434 18,729
--------------- ------------- -------------
Total current assets ........................ 13,155,466 14,258,369 10,978,145
--------------- ------------- -------------
Property and equipment ........................ 1,353,657 1,183,083 1,040,594
Less accumulated depreciation ................. (727,215) (734,661) (691,292)
--------------- ------------- -------------
Net property and equipment .................. 626,442 448,422 349,302
Timberlands, net .............................. 44,056,338 44,017,608 44,336,737
--------------- ------------- -------------
44,682,780 44,466,030 44,686,039
--------------- ------------- -------------
Other assets:
Restricted cash and investments .............. 2,571,922
Long-term notes receivable ................... 175,315 229,197 556,497
Deferred financing costs, net of accumulated
amortization of $313,607 (unaudited),
$288,180 and $254,275, respectively ........ 194,945 220,373 254,277
--------------- ------------- -------------
370,260 449,570 3,382,696
--------------- ------------- -------------
$58,208,506 $59,173,969 $59,046,880
=============== ============= =============
LIABILITIES
Current portion of long-term debt ............. 4,835,241 4,689,250 4,689,250
Accounts payable and accrued expenses ........ 403,042 65,214 137,626
Interest payable .............................. 700,864 1,632,360 1,841,373
--------------- ------------- -------------
Total current liabilities ................... 5,939,147 6,386,824 6,668,249
--------------- ------------- -------------
Deferred profit on land sales ................. 15,472 49,960 173,275
--------------- ------------- -------------
Long-term debt ................................ 22,667,276 27,189,250 31,878,500
--------------- ------------- -------------
PARTNERS' EQUITY
Contributed capital ........................... 18,860,496 18,860,496 18,860,496
Retained earnings ............................. 10,726,115 6,687,439 1,466,360
--------------- ------------- -------------
Total partners' equity ...................... 29,586,611 25,547,935 20,326,856
--------------- ------------- -------------
$58,208,506 $59,173,969 $59,046,880
=============== ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-18
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE-MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Sales:
Timber -affiliated ................ $10,982,178 $10,702,189 $14,744,000 $13,003,000 $11,896,000
Timber -unaffiliated 2,713,919 1,451,043 2,407,122 1,120,558 1,357,595
Land .............................. 811,257 1,235,103 1,708,144 3,301,155 11,218,763
------------- ------------- ------------- ------------- -------------
Total sales ...................... 14,507,354 13,388,335 18,859,266 17,424,713 24,472,358
------------- ------------- ------------- ------------- -------------
Cost of sales: .....................
Timber 8,269,368 7,305,842 10,220,154 9,496,291 9,916,054
Land .............................. 102,830 231,764 308,007 1,217,975 5,719,044
------------- ------------- ------------- ------------- -------------
Total cost of sales .............. 8,372,198 7,537,606 10,528,161 10,714,266 15,635,098
------------- ------------- ------------- ------------- -------------
Gross profit ..................... 6,135,156 5,850,729 8,331,105 6,710,447 8,837,260
Fees for recycled fiber ............ 1,640,695 1,554,854 2,070,469 147,340
Selling, general and administrative
expenses .......................... (2,086,800) (2,010,398) (2,695,956) (2,596,236) (2,482,010)
------------- ------------- ------------- ------------- -------------
Income from operations ........... 5,689,051 5,395,185 7,705,618 4,261,551 6,355,250
------------- ------------- ------------- ------------- -------------
Other income (deductions):
Interest income ................... 380,333 393,526 533,286 633,809 502,145
Interest expense .................. (2,203,106) (2,546,483) (3,356,985) (3,795,948) (4,254,075)
Other income ...................... 172,398 215,000 339,160 366,948 532,904
------------- ------------- ------------- ------------- -------------
(1,650,375) (1,937,957) (2,484,539) (2,795,191) (3,219,026)
------------- ------------- ------------- ------------- -------------
Net income ....................... $ 4,038,676 $ 3,457,228 $ 5,221,079 $ 1,466,360 $ 3,136,224
============= ============= ============= ============= =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-19
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY
<TABLE>
<CAPTION>
DOW JONES
BRANT-ALLEN VIRGINIA
INDUSTRIES COMPANY,
INC. INC. NEWSPRINT, INC. TOTAL
------------- ------------- --------------- -------------
<S> <C> <C> <C> <C>
Contributed capital:
Balances, December 31, 1993, 1994, 1995,
1996 and September 30, 1997
(unaudited)............................. $6,332,292 $ 6,264,102 $ 6,264,102 $18,860,496
============= ============= =============== =============
Retained earnings: .......................
Balances, December 31, 1993 ............. - - - -
Net income -1994 ........................ 940,868 1,097,678 1,097,678 3,136,224
------------- ------------- --------------- -------------
Distributions to partners ............... (940,868) (1,097,678) (1,097,678) (3,136,224)
Balances, December 31, 1994 ............. - - - -
Net income -1995 ........................ 439,908 513,226 513,226 1,466,360
------------- ------------- --------------- -------------
Balances, December 31, 1995 ............. 439,908 513,226 513,226 1,466,360
Net income -1996 ........................ 1,566,323 1,827,378 1,827,378 5,221,079
------------- ------------- --------------- -------------
Balances, December 31, 1996 ............. 2,006,231 2,340,604 2,340,604 6,687,439
Net income -nine-months ended September
30, 1997 (unaudited) ................... 1,211,604 1,413,536 1,413,536 4,038,676
------------- ------------- --------------- -------------
Balances, September 30, 1997 (unaudited) $3,217,835 $ 3,754,140 $ 3,754,140 $10,726,115
============= ============= =============== =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-20
<PAGE>
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
(A Virginia Limited Partnership)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30, FOR THE YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1997 1996 1996 1995 1994
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income ....................................... $ 4,038,676 $ 3,457,228 $ 5,221,079 $ 1,466,360 $ 3,136,224
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation .................................... 87,435 72,749 98,587 82,581 88,864
Depletion ....................................... 588,701 507,415 1,099,762 689,733 770,324
Amortization of deferred financing costs ....... 25,428 25,428 33,904 33,903 33,903
Net book value of land sold ..................... 133,873 302,728 308,007 1,340,027 5,775,067
Gain on disposal of machinery and equipment .... (32,537) (9,393) (10,995) (5,183)
(Increase) decrease in:
Accounts and notes receivable ................... 235,880 364,462 276,238 (235,830) 456,953
Due from Bear Island Paper Company, L.P. ....... (284,620) (103,102) (229,029) (22,796) (982,446)
Inventory ....................................... 521,081 263,845 (24,168) (177,408) (77,132)
Other current assets ............................ (46,954) (1,899) 2,295 (2,191) 1,082
Increase (decrease) in:
Accounts payable and accrued expenses .......... 337,828 162,814 (72,412) (7,036) (36,773)
Interest payable ................................ (931,496) (1,030,870) (209,013) (228,177) (229,950)
Deferred profit on land sales ................... (34,488) (97,925) (123,315) 8,617 (195,516)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities ..... 4,638,807 3,913,480 6,370,940 2,942,600 8,740,600
------------- ------------- ------------- ------------- -------------
Investing activities:
Purchases of machinery and equipment ............. (120,198) (301,870) (204,114) (144,066) (23,919)
Purchases of timberlands ......................... (582,904) (804,765) (1,088,640) (1,883,133) (558,952)
Proceeds from disposal of machinery and equipment 37,711 17,402 17,402 14,757
Decrease (increase) in restricted cash and
investments ..................................... 2,823,586 4,434,572 4,204,271 3,473,614 (1,313,594)
------------- ------------- ------------- ------------- -------------
Net cash provided by (used in) investing
activities .................................... 2,158,195 3,345,339 2,928,919 1,461,172 (1,896,465)
------------- ------------- ------------- ------------- -------------
Financing activities:
Distributions to partners......................... (4,500,000)
Principal payments on long-term debt ............. (4,704,814) (4,689,250) (4,689,250) (4,500,000) (4,500,000)
------------- ------------- ------------- ------------- -------------
Net cash used in financing activities ......... (4,704,814) (4,689,250) (4,689,250) (4,500,000) (9,000,000)
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and short-term
investments ................................... 2,092,188 2,569,569 4,610,609 (96,228) (2,155,865)
Cash and short-term investments, beginning
of year .......................................... 7,535,254 2,924,645 2,924,645 3,020,873 5,176,738
------------- ------------- ------------- ------------- -------------
Cash and short-term investments, end of period $ 9,627,442 $ 5,494,214 $ 7,535,254 $ 2,924,645 $ 3,020,873
============= ============= ============= ============= =============
Supplemental disclosures of cash flow information:
Cash paid for interest ............................ $ 3,134,604 $ 3,565,998 $ 3,565,998 $ 4,025,898 $ 4,484,025
============= ============= ============= ============= =============
Noncash investing and financing activity:
Increase in long-term debt for purchase of
timberlands ..................................... $ 178,400 $ 567,750
============= =============
Increase in promissory notes for equipment
acquisition ..................................... $ 150,431
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-21
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION:
Bear Island Timberlands Company, L.P. ("BITCO") 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 Industries, Inc. ("Brant-Allen"), a Delaware corporation, on
October 31, 1988;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones & Company, Inc. ("Dow
Jones"); and
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post Company ("The Washington Post").
Brant-Allen is both the general partner and a limited partner and D J
Virginia and Newsprint are limited partners. The Partnership Agreement was
most recently amended on September 1, 1992. The Partnership Agreement
includes the following provisions:
o BITCO is established for an initial term of 43 years and is renewable
for additional terms of 20 years. BITCO may be dissolved with the consent of
the partners and in certain other circumstances.
o The purpose of BITCO is 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, has full and exclusive control of the
business of BITCO and has active control of its management. Brant-Allen
receives no fees or other compensation for managing BITCO.
o The limited partners are not liable for any net losses or other debt or
liability of BITCO to any extent, except for (i) their respective
contributions to capital and (ii) their guarantee of BITCO's long-term debt
(see Note 6) up to $7,933,333 each.
o Subject to the aforementioned provisions, the partners share 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 may sell, assign or otherwise dispose of its interest, or
any part thereof, in BITCO, unless it first offers such interest to the other
partners as prescribed in the Partnership Agreement.
o No partner may mortgage, pledge, hypothecate or otherwise encumber its
interest in BITCO without the prior written consent of the other partners.
o BITCO may not borrow in excess of $5,000,000 for short-term working
capital needs without the prior consent of the partners.
Under the terms of the Partnership Agreement, D J Virginia's and
Newsprint's equity interests in BITCO are 35% each and Brant-Allen's equity
interest is 30% for all periods shown.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND SHORT-TERM INVESTMENTS: Short-term investments with a bank
balance of $6,056,045 (unaudited), $7,559,715 and $2,816,815 included in cash
and short-term investments at September 30, 1997, December 31, 1996 and 1995,
consist of repurchase agreements and are stated at cost plus accrued interest
which approximates market value. For purposes of the statements of cash
flows, BITCO considers all highly liquid short-term investments purchased
with an original maturity of three months or less to be cash equivalents.
F-22
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
ACCOUNTS AND NOTES RECEIVABLE: As certain timberlands are sold, BITCO may
accept a note as part of the sales transaction. The current portion of notes
receivable approximated $105,222 (unaudited), $154,000 and $100,000 at
September 30, 1997, December 31, 1996 and 1995, respectively. There is no
allowance for doubtful accounts receivable at September 30, 1997, December
31, 1996 and 1995.
INVENTORY: Inventory consists primarily of wood stored at the mill site of
Bear Island Paper Company, L.P. ("BIPCO") and off-site wood yards and is
valued at the lower of actual cost 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 costs 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.
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 fair market value or
total undiscounted cash flows. Timber property is evaluated for potential
impairment by considering expected future cash flows to be derived from the
timber property. 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 ascertains the cash value 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.
DEFERRED FINANCING COSTS: Costs directly associated with the issuance of
certain long-term debt have been deferred and are being amortized on a
straight-line basis over 15 years, 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 invested a sufficient amount of equity is recognized on the
installment method when cash is received from the buyer.
REVENUE RECOGNITION: Sales to BIPCO are recognized when wood is placed
into production by BIPCO rather than when wood is delivered to the BIPCO
plant site. All other sales are recorded based on delivery of product.
INCOME TAXES: No provision for income taxes is required in the
accompanying financial statements since each partner is individually liable
for any income tax that may be payable on its share of BITCO's taxable
income.
EARNINGS PER SHARE: No earnings per share calculations have been provided
in the financial statements since such calculations are not meaningful under
the partnership structure.
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 using discounted cash flow analysis based on the incremental
borrowing rates currently available to BITCO for loans with similar terms and
maturity. The fair value of trade receivables and payables approximates the
carrying amounts because of the short maturity of these instruments.
F-23
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
RISK AND UNCERTAINTIES: Financial instruments which potentially subject
BITCO to concentrations of credit risk consist principally of cash, short
term investments, U.S. Government securities and receivables. BITCO's cash
and restricted cash balances are maintained at a major financial institution.
Cash equivalents at December 31, 1996, 1995 and 1994 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.
Receivables consist principally of trade accounts receivable resulting
primarily from sales to BIPCO 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 Company's sales of timber are made almost entirely to BIPCO. Sales to
BIPCO represented approximately 76% (unaudited), 80% (unaudited), 78%, 75%
and 49% of total sales during the nine-month periods ended September 30, 1997
and 1996 and for the years ended December 31, 1996, 1995 and 1994,
respectively.
UNAUDITED INTERIM FINANCIAL STATEMENTS: The unaudited balance sheet as of
September 30, 1997 and the unaudited statements of income and cash flows for
the nine-months ended September 30, 1997 and 1996 have been prepared in
accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the nine months ended September 30, 1997 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1997.
RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
conform to the 1996 presentation.
3. RESTRICTED CASH AND INVESTMENTS:
Investments of $101,250 and $4,602,745 are included in restricted cash and
investments at December 31, 1996 and 1995, and 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 an escrow agreement entered into in connection with BITCO's
long-term debt agreement as described in Note 6.
During the nine months ended September 30, 1997 and years ended December
31, 1996 and 1995, BITCO sold certain timberlands whereby proceeds of
$332,109 (unaudited), $274,682 and $297,791, respectively, were placed into
an escrow account as part of tax deferred land exchanges. Of the amounts
placed in escrow, approximately $32,600 and $21,500, for the years ended
December 31, 1996 and 1995, are subject to taxation since these amounts were
not used to purchase additional timberlands within the prescribed periods.
There were no amounts (unaudited) placed in escrow for the nine months ended
September 30, 1997 that were subject to taxation, as previously described.
This escrow account is not part of the escrow agreement entered into in
connection with BITCO's long-term debt agreement as described in Note 6. The
amount escrowed is included in current restricted cash and investments in the
accompanying balance sheets.
4. TIMBERLANDS:
At September 30, 1997, December 31, 1996 and 1995, BITCO's timberlands
consisted of the cost of land and standing timber owned by BITCO ("Fee
Lands"), approximately 130,000 acres, and the cost of the right to cut timber
from land owned by third parties within a specified period of time ("Timber
Deeds").
F-24
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Timberlands consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Fee Lands .................. $57,200,634 $56,604,247 $55,891,945
Timber Deeds ............... 107,933 76,889 83,583
--------------- ------------- -------------
57,308,567 56,681,136 55,975,528
Less accumulated depletion 13,252,229 12,663,528 11,638,791
--------------- ------------- -------------
Timberlands, net ........ $44,056,338 $44,017,608 $44,336,737
=============== ============= =============
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ------------------------
1997 1996 1995
-------------------------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Land .......................... $ 33,492 $ 33,492 $ 33,492
Machinery and equipment ...... 1,320,165 1,149,591 1,007,102
--------------- ----------- -----------
1,353,657 1,183,083 1,040,594
Less accumulated depreciation 727,215 734,661 691,292
--------------- ----------- -----------
Total ....................... $ 626,442 $ 448,422 $ 349,302
=============== =========== ===========
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consisted of:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ----------------------------
1997 1996 1995
---------------------------- -------------
(UNAUDITED)
<S> <C>
Senior notes bearing interest at 10.22% (interest
payable semi-annually); principal of $2,250,000
due semiannually which commenced in July 1993 and
will continue until maturity in July 2003 ....... $27,000,000 $31,500,000 $36,000,000
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
$765,000 ......................................... 189,250 378,500 567,750
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
F-25
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31,
SEPTEMBER 30, ---------------------------
1997 1996 1995
-------------- ------------ -------------
(UNAUDITED)
Promissory note bearing interest at LIBOR plus 2%
(7.66% at September 30, 1997); principal of
approximately $2,594 and interest due in 60
monthly installments which commenced March 1,
1997 and will continue through February 2002;
collateralized by certain fixed assets with an
approximate net book value of $148,000 at
September 30, 1997 ............................... 134,867
--------------- ------------- -------------
27,502,517 31,878,500 36,567,750
Less current portion .............................. 4,835,241 4,689,250 4,689,250
--------------- ------------- -------------
$22,667,276 $27,189,250 $31,878,500
=============== ============= =============
</TABLE>
The senior notes were issued under a Timberlands Loan and Maintenance
Agreement (the "Agreement") with an insurance company which was used to
finance the purchase of approximately 157,000 acres of timberland at an
aggregate price of $46,877,000.
BITCO is permitted to prepay outstanding principal balances on the senior
notes; however, in the event of any prepayments, BITCO may be required to pay
a prepayment penalty, as defined in the Agreement. Borrowings under the
Agreement are collateralized by substantially all of BITCO's assets.
Under the more financially significant covenants of the Agreement, BITCO
has agreed to (i) limit distributions, (ii) restrict investments, (iii) limit
the incurrence of additional indebtedness, (iv) not pay remuneration of any
nature to the partners, (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 Agreement also requires that BITCO 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 exceeds the volume permitted by the lender. The
principal balance of the escrow account may be invested in only certain
investments and may be used only to make principal payments on long-term
debt. The balance in the escrow account was approximately $2,891,000 and
$7,072,000 at December 31, 1996 and 1995, and is classified as restricted
cash and investments in the accompanying balance sheets.
The Agreement allows BITCO to withdraw funds from the escrow account if
additional timberlands are added as collateral for the loan or D J Virginia
and Newsprint provide guarantees for the amount of funds withdrawn.
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. BITCO 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 Agreement.
The fair value of BITCO's long-term debt was calculated by discounting the
future cash flows using an estimated rate currently available for debt with
similar terms and maturities. The fair values of BITCO's long-term debt at
December 31, 1996 and 1995 were estimated to be $34,457,350 and $38,021,400.
Maturities on long-term debt for the four years after 1997 are
approximately as follows: 1998 -$4,775,858; 1999 -$4,590,492; 2000
- -$4,594,648; and 2001 -$4,531,116.
7. RELATED-PARTY TRANSACTIONS:
BITCO has entered into a wood supply contract with BIPCO whereby BITCO has
guaranteed to supply BIPCO's wood requirements at a price to be negotiated
annually (see Note 2).
F-26
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Wood sales to BIPCO approximated $10,982,178 (unaudited), $10,702,189
(unaudited), $14,744,000, $13,003,000 and $11,896,000 during the nine-month
periods ended September 30, 1997 and 1996 and the years ended December 31,
1996, 1995 and 1994, respectively. At September 30, 1997, December 31, 1996,
and 1995, BIPCO owed BITCO approximately $1,672,705 (unaudited), $1,388,000,
and $1,159,000, respectively. All other sales of wood were made to
unaffiliated companies primarily located in Virginia. The approximate range
of market prices per cord paid for wood acquired on the open market, and the
prices charged to BIPCO per cord for wood sold by BITCO to BIPCO is as
follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
---------------------------------- ---------------------------------------------------
1997 1996 1996 1995 1994
---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Actual... $95.50 $95.50 $95.50 $82.17 $75.00
Market... $60.00 to $66.00 $59.00 to $61.00 $60.00 to $61.00 $57.00 to $60.00 $58.00 to $61.00
</TABLE>
BITCO has agreed to procure recycled paper for BIPCO on a fee per tonnes
basis. The procurement fee on a per ton basis was as follows:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
SEPTEMBER 30, FOR THE YEARS ENDED
(UNAUDITED) DECEMBER 31,
- ------------------ -------------------------
1997 1996 1996 1995 1994
- -------- -------- -------- ------- ------
<S> <C> <C> <C> <C>
$24.31 $24.15 $24.15 $2.30 $2.20
</TABLE>
BITCO recognized revenue of $1,640,695 (unaudited), $1,554,854 (unaudited),
$2,070,469, $147,340 and $122,307 for the nine-month periods ended September
30, 1997 and 1996, and the years ended December 31, 1996, 1995 and 1994,
respectively. The actual costs of the procurement services provided to BIPCO
by BITCO were approximately as follows:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED
SEPTEMBER 30,
(UNAUDITED) FOR THE YEARS ENDED DECEMBER 31,
- ---------------------- ---------------------------------
1997 1996 1996 1995 1994
- ---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
$177,000 $186,000 $238,000 $249,000 $157,000
</TABLE>
BITCO shares employees, facilities and recordkeeping systems with BIPCO
and reimburses BIPCO monthly for its share of these costs. Accordingly, these
shared employees receive benefits under BIPCO'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 Partnership.
Amounts paid to BIPCO for shared costs, which are included in general and
administrative expenses, approximated $1,068,138 (unaudited), $1,039,076
(unaudited), $1,370,000, $1,276,000 and $1,128,000 for the nine-month periods
ended September 30, 1997 and 1996, and the years ended December 31, 1996,
1995 and 1994, respectively. BITCO received approximately $44,448
(unaudited), $42,919 (unaudited), $57,750, $56,000 and $133,000 from BIPCO
for the nine-month periods ended September 30, 1997 and 1996, and the years
ended December 31, 1996, 1995 and 1994, respectively, for managing certain of
its timberlands. Such amounts are included in other income in the
accompanying statements of income.
8. COMMITMENTS
BITCO and BIPCO have entered into an agreement for certain marketing and
consulting services with The Elebash Company ("Elebash") whereby BITCO, in
the case of sales of its land, or BIPCO, in the case of BIPCO-owned land, has
agreed to pay Elebash two percent of the gross sales price of any land
purchased or sold pursuant to the terms of the agreement. In this connection,
BITCO paid Elebash approximately $34,000, $71,000 and $229,000 for the years
ended December 31, 1996, 1995 and 1994. Amounts paid to Elebash are included
in selling, general and administrative expenses in the accompanying
statements of income. This agreement is cancelable by any party by providing
60 days written notice.
F-27
<PAGE>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. SUBSEQUENT EVENT--(UNAUDITED)
On December 1, 1997, Brant-Allen completed the purchase of the 70%
partnership interest in BITCO previously owned by subsidiaries of Dow Jones
and The Washington Post for an aggregate purchase price (subject to certain
post-completion adjustments) of approximately $36 million in cash.
Immediately prior to the acquisition, BITCO was converted into Bear Island
Timerlands Company, L.L.C., a Virginia limited liability company
("Timberlands"). Funding for the acquisition, including approximately $30,000
in transaction costs, was provided from (i) borrowings by Brant-Allen of $35
million under a senior secured two-year loan facility consisting of a $32
million term facility and a $3 million revolving facility borrowed by
Brant-Allen (collectively the "Timberlands Loan") and guaranteed by
Timberlands; and (ii) $1 million of Brant-Allen's cash on hand. The
Timberlands Loan is secured by (i) a first priority interest in 100% of the
membership interests in Timberlands; and (ii) a shared first priority
security interest in 65% of the common stock of F. F. Soucy, Inc. (a wholly
owned subsidiary of Brant-Allen). This security interest is shared pro rata
with a security interest held on the $120 million credit facility of Bear
Island Paper Company, L.L.C. (a wholly owned subsidiary of Brant-Allen and
the successor to BIPCO). The effects of the acquisition and related
financings are not reflected in the accompanying historical financial
statements as of and for the years ended December 31, 1996, 1995 and 1994 or
in the interim financial statements as of September 30, 1997 and for the nine
months ended September 30, 1997 and 1996.
Concurrent with the closing of the acquisition on December 1, 1997,
Timberlands substantially modified the terms of the existing $27 million loan
from John Hancock Mutual Life Insurance Company (and paid a related
modification fee of approximately $2.3 million). In connection with the
modification, an additional $3 million was drawn down from John Hancock
Mutual Life Insurance Company, bringing the total outstanding balance under
the loan to $30 million. As modified, this loan matures on December 31, 1999,
and is collateralized by approximately 125,000 acres of Timberlands' land.
In addition, in connection with the acquisition, Timberlands made an
approximate $5.3 million distribution to Brant-Allen to fund: (i) a one year
interest escrow requirement of the Timberlands Loan; (ii) the income tax
liability for Brant-Allen's proportionate share of BITCO's earnings for 1997
prior to closing; and (iii) certain other costs.
In connection with the acquisition, purchase accounting adjustments (which
are preliminary until post-completion adjustments are finalized and the
purchase price allocation process is completed) were required to record the
impact in the Timberlands financial statements of the acquisition. These
adjustments: (i) write-off approximately $195,000 of existing deferred loan
costs, (ii) push down the amount of the $35 million Timberlands Loan, (iii)
push down approximately $800,000 resulting from the payment by Brant-Allen of
associated deferred loan costs, and (iv) push down the excess of the
estimated purchase price of approximately $36 million over the $35 million
Timberland Loan. Under generally accepted accounting principles these amounts
were required to be pushed down into the financial statements of Timberlands
following the acquisition because the Timberlands Loan is collateralized by a
first priority security interest in 100% of the membership interests in
Timberlands and because of the guarantee by Timberlands of the Timberlands
Loan.
F-28
<PAGE>
AUDITORS' REPORT
To the Board of Directors of
F.F. Soucy, Inc.
We have audited the consolidated balance sheets of F.F. Soucy, Inc. as at
December 31, 1996 and 1995 and the consolidated statements of earnings,
retained earnings and changes in financial position for each of the three
years in the period ended December 31, 1996. These financial statements are
the responsibility of F.F. Soucy, Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits 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 F.F. Soucy, Inc. as at
December 31, 1996 and 1995, and the consolidated results of its operations
and the changes in its financial position for each of the three years in the
period ended December 31, 1996, in accordance with generally accepted
accounting principles in Canada.
Coopers & Lybrand
Chartered Accountants
General Partnership
Montreal, Canada
January 14, 1997
F-29
<PAGE>
F.F. SOUCY, INC.
CONSOLIDATED BALANCE SHEETS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, DECEMBER 31,
1997 1996 1995
$ $ $
--------------- -------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash.................................................... 5,388,855 18,318,068 21,560,317
Accounts receivable -
Affiliate.............................................. 361,916 268,407 1,543,979
Other.................................................. 22,072,763 16,350,278 25,267,657
Advances to an affiliate................................ 2,523,008 2,041,272 1,953,591
Inventories............................................. 14,234,964 17,303,111 13,465,784
Prepaid expenses........................................ 443,236 552,276 562,774
--------------- -------------- --------------
45,024,742 54,833,412 64,354,102
PROPERTY, PLANT AND EQUIPMENT .......................... 93,395,198 94,333,876 85,537,961
DEFERRED PENSION COSTS.................................. 1,245,451 1,245,451 1,344,614
UNAMORTIZED FOREIGN EXCHANGE LOSS ON LONG-TERM DEBT ... 1,160,775 1,275,003 1,628,136
--------------- -------------- --------------
140,826,166 151,687,742 152,864,813
=============== ============== ==============
LIABILITIES
CURRENT LIABILITIES
Bank indebtedness....................................... 1,800,000 2,200,000 --
Accounts payable and accrued liabilities................ 13,010,073 15,592,690 14,603,886
Income taxes............................................ 1,472,825 2,597,638 15,202,719
Current portion of long-term debt....................... 4,819,739 5,020,611 5,400,310
--------------- -------------- --------------
21,102,637 25,410,939 35,206,915
LONG-TERM DEBT.......................................... 20,686,224 25,318,865 30,212,085
DEFERRED INCOME TAXES................................... 13,450,826 10,965,826 9,665,826
NON-CONTROLLING INTEREST IN F.F. SOUCY, INC. &
PARTNERS, LIMITED PARTNERSHIP ......................... 47,175,143 43,777,808 44,004,988
--------------- -------------- --------------
102,414,830 105,473,438 119,089,814
--------------- -------------- --------------
SHAREHOLDERS' EQUITY
CAPITAL STOCK .......................................... 1,621,851 1,941,592 1,941,592
CONTRIBUTED SURPLUS..................................... 1,133,850 1,133,850 1,133,850
RETAINED EARNINGS....................................... 35,655,635 43,138,862 30,699,557
--------------- -------------- --------------
38,411,336 46,214,304 33,774,999
--------------- -------------- --------------
140,826,166 151,687,742 152,864,813
=============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-30
<PAGE>
F.F. SOUCY, INC.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ------------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
------------ ------------ ------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
RETAINED EARNINGS (DEFICIT)
-BEGINNING OF PERIOD ............... 43,138,862 30,699,557 30,699,557 (2,971,370) (7,188,100)
Net earnings for the period.......... 1,597,032 13,089,062 12,439,305 38,661,572 4,216,730
------------ ------------ ------------ ------------- -------------
44,735,894 43,788,619 43,138,862 35,690,202 (2,971,370)
Dividends............................ -- -- -- 4,990,645 --
Premium on redemption of common
shares ............................. 9,080,259 -- -- -- --
------------ ------------ ------------ ------------- -------------
RETAINED EARNINGS (DEFICIT) -END OF
PERIOD ............................. 35,655,635 43,788,619 43,138,862 30,699,557 (2,971,370)
============ ============ ============ ============= =============
Dividends per share.................. -- -- -- 9.98 --
============ ============ ============ ============= =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-31
<PAGE>
F.F. SOUCY INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- ---------------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
------------- -------------- -------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SALES................................. 106,407,146 136,468,881 168,676,664 216,987,549 122,379,524
FREIGHT............................... 11,287,740 12,644,097 15,017,213 11,475,943 13,339,149
------------- -------------- -------------- -------------- -------------
NET SALES............................. 95,119,406 123,824,784 153,659,451 205,511,606 109,040,375
COST OF SALES......................... 77,895,080 76,097,180 102,188,319 95,690,600 83,065,828
------------- -------------- -------------- -------------- -------------
17,224,326 47,727,604 51,471,132 109,821,006 25,974,547
------------- -------------- -------------- -------------- -------------
EXPENSES
Selling, general and administrative -
To an affiliate ..................... 9,255,202 12,048,152 14,951,065 19,934,626 10,576,916
To other............................. 850,939 752,311 905,185 877,556 829,162
Interest on long-term debt............ 2,090,975 2,481,595 3,219,064 4,435,895 4,687,498
Interest on demand loans.............. -- -- -- -- 671,075
Other interest........................ 43,962 31,095 153,655 26,601 124,737
------------- -------------- -------------- -------------- -------------
12,241,078 15,313,153 19,228,969 25,274,678 16,889,388
------------- -------------- -------------- -------------- -------------
4,983,248 32,414,451 32,242,163 84,546,328 9,085,159
------------- -------------- -------------- -------------- -------------
OTHER INCOME
Compensation for power interruption .. 1,837,028 1,909,880 2,420,875 2,501,212 2,443,534
Interest income....................... 180,488 495,210 609,272 382,261 8,940
Loss on foreign exchange and
translation -net .................... (1,101,397) (567,247) (348,534) (622,727) (654,758)
------------- -------------- -------------- -------------- -------------
916,119 1,837,843 2,681,613 2,260,746 1,797,716
------------- -------------- -------------- -------------- -------------
NON-CONTROLLING INTEREST IN EARNINGS
OF F.F. SOUCY, INC. & PARTNERS,
LIMITED PARTNERSHIP ................. (3,397,335) (13,763,232) (14,784,471) (30,567,502) (4,542,745)
------------- -------------- -------------- -------------- -------------
EARNINGS BEFORE INCOME TAXES.......... 2,502,032 20,489,062 20,139,305 56,239,572 6,340,130
PROVISION FOR INCOME TAXES............ 905,000 7,400,000 7,700,000 17,578,000 2,123,400
------------- -------------- -------------- -------------- -------------
NET EARNINGS FOR THE PERIOD........... 1,597,032 13,089,062 12,439,305 38,661,572 4,216,730
============= ============== ============== ============== =============
Net earning per share................. 3.80 26.18 24.88 77.32 8.43
============= ============== ============== ============== =============
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-32
<PAGE>
F.F. SOUCY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(expressed in Canadian dollars)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
-------------- -------------- -------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH PROVIDED BY (USED FOR)
OPERATIONS
Net earnings for the period...................... 1,597,032 13,089,062 12,439,305 38,661,572 4,216,730
Items not affecting cash -
Depreciation of property, plant and equipment . 6,524,844 6,393,583 9,301,317 8,162,565 7,840,341
Non-controlling interest of a limited
partnership................................... 3,397,335 13,763,232 14,784,471 30,567,502 4,542,745
Deferred income taxes.......................... 2,485,000 1,200,000 1,300,000 (1,050,000) (483,000)
Foreign exchange loss on long-term debt ....... 319,778 356,235 497,374 339,003 892,351
Loss on disposal of capital assets............. -- -- -- 180,793 (19,097)
-------------- -------------- -------------- -------------- -------------
Provided by operations........................... 14,323,989 34,802,112 38,322,467 76,861,435 16,990,070
Cash provided by (used for) non-cash working
capital......................................... (6,346,237) (11,000,092) (5,250,155) (5,372,127) 3,094,160
-------------- -------------- -------------- -------------- -------------
7,977,752 23,802,020 33,072,312 71,489,308 20,084,230
-------------- -------------- -------------- -------------- -------------
FINANCING
Increase in long-term debt....................... -- -- -- -- 8,975,000
Decrease in long-term debt....................... (5,039,063) (5,339,476) (5,417,160) (14,668,961) (5,572,946)
Repayment of demand loans........................ -- -- -- -- (9,800,000)
Redemption of common shares...................... (9,400,000) -- -- -- --
Dividends paid................................... -- -- -- (4,990,645) --
Distribution to minority interest in F.F. Soucy,
Inc. & Partners, Limited Partnership............ -- (10,939,289) (15,011,651) (13,893,126) --
-------------- -------------- -------------- -------------- -------------
(14,439,063) (16,278,765) (20,428,811) (33,552,732) (6,397,946)
-------------- -------------- -------------- -------------- -------------
INVESTMENT
Additions to property, plant and equipment ...... (6,374,025) (10,249,173) (18,690,559) (17,895,673) (8,930,271)
Investment tax credits resulting from the
purchase of capital assets...................... 787,859 588,000 593,327 1,217,361 655,714
Proceeds from disposal of capital assets ........ -- -- -- 117,500 22,000
Decrease in deferred pension costs............... -- -- 99,163 102,447 95,907
Advances to an affiliate......................... (481,736) (8,118,931) (87,681) (1,953,591) --
-------------- -------------- -------------- -------------- -------------
(6,067,902) (17,780,104) (18,085,750) (18,411,956) (8,156,650)
-------------- -------------- -------------- -------------- -------------
INCREASE (DECREASE) IN NET CASH DURING THE
PERIOD.......................................... (12,529,213) (10,256,849) (5,442,249) 19,524,620 5,529,634
NET CASH -BEGINNING OF PERIOD ................... 16,118,068 21,560,317 21,560,317 2,035,697 (3,493,937)
-------------- -------------- -------------- -------------- -------------
NET CASH -END OF PERIOD ......................... 3,588,855 11,303,468 16,118,068 21,560,317 2,035,697
============== ============== ============== ============== =============
Net cash includes cash less bank indebtedness.
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
F-33
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three-year period ended December 31, 1996
(expressed in Canadian dollars)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
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 ("Soucy Partners"), a Quebec
limited partnership in which F.F. Soucy, Inc. ("Soucy Inc." and, together
with Soucy Partners, "Soucy") 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 of December
31, 1996 and 1995, and September 30, 1997, Soucy held no short-term
investments. For purposes of the statement of changes in financial position,
Soucy considers all highly liquid short-term investments with an original
maturity of three months or less to be cash equivalents.
CREDIT RISK
Financial instruments which potentially subject Soucy to concentrations of
credit risk consist principally of cash and accounts receivable. Soucy'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
creditworthiness. Generally, Soucy does not require collateral or other
security from customers for trade accounts receivable. Substantially all of
Soucy's debtors' ability to honor their obligations are dependent upon the
printing and publishing sectors.
Soucy 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.
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 Soucy Inc. and the straight-line method by Soucy Partners
as follows:
F-34
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
<TABLE>
<CAPTION>
<S> <C>
Buildings................... 2% -10%
Machinery and equipment .... 4% -20%
Furniture and fixtures ..... 20%
</TABLE>
Soucy Inc. and Soucy Partners commence depreciating property, plant and
equipment at the time the assets are put into use. As at December 31, 1996,
there were capitalized costs of $9,025,751 (1995 -$1,656,000) with respect to
property, plant and equipment not yet in use.
For income tax purposes, depreciation is computed principally on an
accelerated basis.
Soucy Partners capitalizes interest costs, where material, as part of the
cost of constructing major facilities and equipment. No such interest costs
have been capitalized in years 1996, 1995 and 1994.
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 18 years. Soucy Inc. 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 Soucy 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.
INCOME TAXES
Soucy Inc. 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, Soucy
Inc. includes its proportionate share of earnings and losses of Soucy
Partners. In accordance with the Partnership Agreement, maximum capital cost
allowances are being claimed by Soucy Partners including accelerated
depreciation of production machinery and equipment.
FOREIGN CURRENCY TRANSLATION
Transactions denominated in foreign currencies are recorded at the rate of
exchange prevailing on 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.
F-35
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 Soucy's
balance sheets. 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.
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENT PRESENTATION
The unaudited interim consolidated balance sheet as of September 30, 1997
and the unaudited interim consolidated statements of income and changes in
financial position for the nine-month periods ended September 30, 1997 and
1996 have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring adjustments)
considered necessary for a fair presentation have been included. The
consolidated results for the nine months ended September 30, 1997 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1997.
2. F.F. SOUCY, INC. & PARTNERS, LIMITED PARTNERSHIP
Soucy Partners 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 Soucy Inc., 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 Rivi|f4re du Loup,
Quebec.
o Soucy Inc., as general partner, has full and exclusive control of the
business of Soucy Partners 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 Soucy Partners 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 Soucy Partners in the following proportions:
<TABLE>
<CAPTION>
<S> <C>
Soucy, Inc..... 50.1%
DJ Newsprint... 39.9%
Rexfor......... 10.0%
------
100.0%
======
</TABLE>
o No partner may sell, assign or otherwise dispose of its interest, or
any part thereof, in Soucy Partners, unless it first offers such
interest to the other partners as prescribed in the Partnership
Agreement.
F-36
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
3. ACCOUNTS RECEIVABLE AND RELATED PARTY TRANSACTIONS
(a) All sales are made through Newsprint Sales, a division of
Brant-Allen Industries, Inc. ("Brant-Allen"), an affiliated
company. At December 31, 1996, accounts receivable include an
amount of $268,407 (September 30, 1997 -$361,916; December 31, 1995
-$1,543,979) receivable from Newsprint Sales representing amounts
received by Newsprint Sales on collection of receivable balances
yet to be transferred to Soucy.
(b) During the years ended December 31, 1996, 1995 and 1994 and the
nine months ended September 30, 1997 and 1996, Brant-Allen charged
Soucy Inc. approximately $14,951,000, $19,935,000, $10,577,000,
$9,255,000 and $12,048,000, respectively, for management and
selling services. At December 31, 1996, the balance owing to Soucy
Inc. by Brant-Allen amounted to $2,041,272 (September 30, 1997
-$2,523,008; December 31, 1995 -$1,953,591).
4. INVENTORIES
Inventories comprise:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------
1997 1996 1995
$ $ $
--------------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Raw materials . 6,572,733 9,565,714 7,098,936
Finished
goods......... 2,955,686 3,329,981 2,020,857
Stores......... 4,706,545 4,407,416 4,345,991
--------------- ------------ -----------
14,234,964 17,303,111 13,465,784
=============== ============ ===========
</TABLE>
5. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ----------------------------
1997 1996 1995
$ $ $
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings....... 30,954,331 30,954,331 30,954,331
Machinery and equipment . 180,333,116 174,746,950 155,211,420
Furniture and fixtures .. 343,351 343,351 343,351
--------------- ------------- -------------
211,630,798 206,044,632 186,509,102
Less:
Accumulated depreciation 118,235,600 111,710,756 100,971,141
--------------- ------------- -------------
93,395,198 94,333,876 85,537,961
=============== ============= =============
</TABLE>
Machinery and equipment include assets under capital leases with a cost of
$4,299,000 and accumulated depreciation of $1,927,000 as at December 31, 1996
(1995 -$4,299,000 and $1,520,000 respectively).
6. BANK INDEBTEDNESS
Soucy Inc. and Soucy Partners have available lines of credit from a bank
amounting to Cdn. $3,000,000 and Cdn. $5,000,000 respectively. As at December
31, 1996, an advance of $2,200,000 was drawn down under Soucy Inc.'s line of
credit (December 31, 1995 -nil) and, as at December 31, 1996 and 1995, there
were no advances drawn down under Soucy Partners' 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 4.75% as at December 31,
F-37
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
6. BANK INDEBTEDNESS (Continued)
1996. Soucy Inc. and Soucy Partners 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 Soucy Inc. and Soucy Partners.
7. LONG-TERM DEBT
Long-term debt comprises:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- --------------------------
1997 1996 1995
$ $ $
--------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Sinking fund bonds maturing 2004 (note
7(a))....................................... 20,449,786 23,191,825 25,976,886
Sinking fund bonds maturing 1999 (note
7(a))....................................... 5,056,177 6,887,312 8,717,990
Obligation under capital leases (note 7(e)) . -- 260,339 917,519
--------------- ------------ ------------
25,505,963 30,339,476 35,612,395
Less: Current portion........................ 4,819,739 5,020,611 5,400,310
--------------- ------------ ------------
20,686,224 25,318,865 30,212,085
=============== ============ ============
</TABLE>
(a) In 1979, Soucy Partners, through Rivi|f4re 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, Soucy Partners, through Rivi|f4re du Loup
Finance Ltd., issued U.S. $27,500,000, 9.65% bonds to an insurance
company maturing on July 1, 2004.
The trust indenture contains certain restrictive covenants
including equity and working capital requirements. Soucy Partners
has assigned the sale agreement (note 11(a)) and collateralized
substantially all of its property, plant and equipment having a net
book value of $79,123,000 as at December 31, 1996 for the bonds.
(b) The aggregate fair market value of Soucy's long-term debt,
including the obligation under capital leases, was $33,463,000 as
at December 31, 1996 (1995 -$39,352,000) based on discounted future
cash flows using interest rates available to Soucy for issues with
similar terms and average conditions.
(c) Interest incurred on long-term debt in 1996 amounted to $3,214,000
(1995 -$4,415,000; 1994 -$5,115,000).
(d) Long-term debt maturities are as follows as at December 31, 1996
excluding the obligation under capital leases detailed in note
7(e):
<TABLE>
<CAPTION>
U.S. $ CDN. $
----------- ---------
<S> <C> <C>
Year ending December 31, 1997............... 3,265,385 288,000
1998 ....................................... 3,265,385 287,000
1999 ....................................... 4,065,385 488,000
2000 ....................................... 2,115,385 --
2001 ....................................... 2,115,385 --
</TABLE>
(e) Future minimum lease payments under capital leases are as follows
as at December 31, 1996:
<TABLE>
<CAPTION>
<S> <C>
Year ending December 31, 1997 ................... 271,871
Less: Interest (9.6%)........................... 11,532
--------
$260,339
========
</TABLE>
F-38
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
8. CAPITAL STOCK
The authorized capital stock of Soucy Inc. is comprised of 500,000 common
shares without par value. As at December 31, 1996 and 1995, the number of
issued and paid shares was 500,000. On January 10, 1997, Soucy Inc. 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. As at September 30,
1997, the number of issued and paid shares was 417,660.
9. WOOD CHIPS AND ROUND WOOD SUPPLY AGREEMENTS
Soucy 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:
<TABLE>
<CAPTION>
<S> <C>
1997 ............... $14,341,500
1998 ............... 10,969,800
1999 ............... 9,289,000
2000 ............... 4,512,100
2001 ............... 3,310,600
</TABLE>
10. POWER INTERRUPTION AGREEMENT
Under an agreement with Hydro-Quebec, expiring on September 30, 2000,
Soucy 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) Soucy Partners 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) Soucy Inc. and Soucy Partners sold newsprint to Dow Jones and its
subsidiaries during the years ended December 31, 1996, 1995 and
1994 and the nine months ended September 30, 1997 and 1996
amounting to $35,004,000, $35,646,000, $26,825,000, $20,804,000 and
$28,668,000, respectively. At December 31, 1996, the balances owing
to Soucy Inc. and Soucy Partners by Dow Jones and its subsidiaries
amounted to $3,080,974 (September 30, 1997 -$2,780,651; December
31, 1995 -$5,132,583).
(c) With the exclusion of Dow Jones and its subsidiaries, which is
disclosed above, two unrelated corporations represented
approximately 12% each of Soucy's sales in 1996 (1995 -16% and 12%;
1994 -less than 10%).
(d) Soucy operates two newsprint paper mills in Quebec, Canada, and
sells most of its production to the following regions as a
percentage of sales:
<TABLE>
<CAPTION>
1996 1995 1994
% % %
-------- -------- --------
<S> <C> <C> <C>
United States..... 49 46 77
South America.... 4 5 13
Europe............ 13 5 8
Asia.............. 26 41 --
</TABLE>
F-39
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
12. PENSION COSTS AND OBLIGATIONS
Soucy Inc. has defined benefit plans for its employees and charges Soucy
Partners its share of the related pension costs. Soucy Inc. 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. Soucy Inc.'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.
Soucy's net pension cost comprises:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1996 1995 1994
$ $ $
------------- ------------- -------------
<S> <C> <C> <C>
Current service costs......................... 461,000 437,000 346,000
Interest cost on projected benefit
obligation................................... 1,922,000 1,736,000 1,500,000
Return on plans' assets....................... (2,171,000) (1,923,000) (1,783,000)
Amortization of unrecorded pension asset ..... (80,000) (80,000) (80,000)
Amortization of experience gains.............. (171,000) (139,000) (157,000)
Amortization of cost of amendments............ 169,000 169,000 100,000
Amortization of change in assumptions ........ (33,000) (33,000) (33,000)
Provision against deferred pension costs ..... 812,000 212,000 273,000
------------- ------------- -------------
Net pension cost.............................. 909,000 379,000 166,000
============= ============= =============
</TABLE>
In order to measure the projected benefit obligation, the weighted-average
discount rate used was 7.5% (1995 and 1994 -8%); the rate of increase in
future compensation levels used for the non-unionized plan was 5% (1995 and
1994 -5.5%) and the rate used for the unionized office plan and the unionized
plant plan was 5.5% (1995 and 1994 -5.5%). The expected long-term rate of
return on assets of the plans was 8%.
The funded status of the plans was:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995
------------- -------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligations including
vested benefits of $21,901,000 (1995 -$19,521,000) ...................... $23,735,999 $20,424,000
-------------
Projected benefit obligation for services rendered to date................ 27,734,940 23,134,094
Plans' assets at fair value, primarily listed Canadian stocks and
Canadian bonds .......................................................... 34,816,547 28,270,763
------------- -------------
Plans' assets in excess of projected benefit obligation................... 7,081,607 5,136,669
Unrecognized gains........................................................ 5,001,196 2,162,976
Provision against pension assets.......................................... 834,960 1,629,079
------------- -------------
Pension asset recognized as deferred pension costs........................ $ 1,245,451 $ 1,344,614
============= =============
</TABLE>
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 18 years. Soucy Inc. makes appropriate provision against deferred
pension costs where there is uncertainty regarding its ability to benefit
from the underlying pension surplus. Soucy Inc.'s contributions for the year
ended December 31, 1996 were $807,000 (1995 -$277,000; 1994 -$70,000).
F-40
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
13. FORWARD EXCHANGE CONTRACTS
Soucy Partners 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, 1996, Soucy Partners held forward exchange contracts of U.S.
$13,000,000 (1995 -U.S. $11,000,000) with a contracted value of $17,403,100
(1995 -$15,214,200) against a fair value of $17,804,800 (1995 -$15,008,500),
representing a deferred loss of $401,700 (1995 -deferred gain $205,700). As
at September 30, 1997 Soucy Partners held no such contracts.
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 Soucy
Inc.'s reported net earnings and shareholders' equity which would
be made in order to conform to U.S. GAAP:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -----------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
----------- ------------ ------------ ------------ -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net earnings for the
period under Canadian
GAAP ................ 1,597,032 13,489,062 12,439,305 38,661,572 4,216,730
U.S. GAAP adjustments -
Translation gains and
losses (note 14(b)) 114,228 407,359 353,133 1,498,799 (1,243,305)
Income taxes (note
14(c))............... (233,000) 8,000 8,000 (100,000) 44,000
----------- ------------ ------------ ------------ -------------
Net earnings for the
period under U.S.
GAAP ................ 1,478,260 13,904,421 12,800,438 40,060,371 3,017,425
=========== ============ ============ ============ =============
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- -------------------------------------------
1997 1996 1995 1994
$ $ $ $
--------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Shareholders' equity under Canadian
GAAP................................ 38,411,336 46,214,304 33,774,999 104,072
U.S. GAAP adjustments -
Translation gains and losses (note
14(b)).............................. (1,160,775) (1,275,003) (1,628,136) (3,126,935)
Income taxes (note 14(c))............ 788,000 1,021,000 1,013,000 1,113,000
--------------- ------------- ------------- -------------
Shareholders' equity (deficiency)
under U.S. GAAP..................... 38,038,561 45,960,301 33,159,863 (1,909,863)
=============== ============= ============= =============
</TABLE>
(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 considered transaction
gains and losses and are included in the statement of earnings in
the period in which the exchange rate changes.
(c) Under Canadian GAAP, Soucy Inc. 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.
F-41
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
14. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(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 Soucy Inc.'s consolidated
financial statements.
CASH FLOWS
(e) Under U.S. GAAP, the following amounts would be reported:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------------ ---------------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
-------------- -------------- -------------- -------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net cash provided by (used
in):
Operating activities......... 7,977,752 23,802,020 33,072,312 71,489,308 20,084,230
Financing activities......... (14,839,063) (16,278,765) (18,228,811) (35,052,732) (8,391,883)
Investment activities........ (6,067,902) (17,780,104) (18,085,750) (18,411,956) (8,156,650)
-------------- -------------- -------------- -------------- -------------
Net increase (decrease) in
cash ....................... (12,929,213) (10,256,849) (3,242,249) 18,024,620 3,535,697
============== ============== ============== ============== =============
Cash -End of period.......... 5,388,855 11,303,468 18,318,068 21,560,317 3,535,697
============== ============== ============== ============== =============
</TABLE>
(f) Under U.S. GAAP, the definition of cash in the statement of cash
flows would exclude bank indebtedness which amounted to $2,200,000
as at December 31, 1996 (September 30, 1997 -$1,800,000; September
30, 1996 -nil; December 31, 1995 -nil; December 31, 1994
-$1,500,000). 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:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------- -------------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
------------- -------------- -------------- -------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Decrease (increase) in:
Accounts receivable ..... (5,815,994) 8,304,557 10,192,951 (10,865,391) 3,541,335
Inventories.............. 3,068,147 (2,104,522) (3,837,327) (6,113,293) 676,978
Prepaid expenses......... 109,040 (225,562) 10,498 62,401 104,919
Increase (decrease) in:
Accounts payable and
accrued liabilities .... (2,582,617) (5,027,793) 988,804 (1,842,133) (267,174)
Income taxes............. (1,124,813) (11,946,772) (12,605,081) 13,386,289 (961,898)
------------- -------------- -------------- -------------- -----------
(6,346,237) (11,000,092) (5,250,155) (5,372,127) 3,094,160
============= ============== ============== ============== ===========
</TABLE>
F-42
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
14. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
OTHER DISCLOSURE
(i) The disclosure of the following amounts is required under U.S.
GAAP:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
----------- ------------ ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Payments under capital
leases................... 272,000 517,000 689,000 1,253,000 1,248,000
Interest paid............. 2,674,000 2,709,000 3,509,000 4,763,000 5,476,000
Income taxes paid......... (909,000) 18,020,000 19,203,000 4,279,000 3,505,000
Foreign exchange loss
(gain):
Realized.................. 781,000 211,000 (149,000) 284,000 (238,000)
Unrealized................ 320,000 356,000 497,000 339,000 892,000
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- --------------------------
1997 1996 1995
$ $ $
--------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Trade accounts receivable .. 20,503,000 13,666,000 21,101,000
Other accounts receivable .. 1,570,000 2,684,000 4,166,000
Allowance for doubtful
accounts................... 216,000 216,000 216,000
Trade accounts payable ..... 9,419,000 11,269,000 9,906,000
Accrued employees costs .... 2,819,000 2,583,000 2,219,000
Interest payable............ 772,000 1,311,000 1,507,000
</TABLE>
(j) The provision for income taxes and effective tax rates are detailed
as follows:
<TABLE>
<CAPTION>
Nine Months edned
September 30, Year ended December 31,
------------------------- --------------------------------------
1997 1996 1996 1995 1994
$ $ $ $ $
----------- ------------- ------------- ------------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Provision for income taxes based on
combined basic Canadian and Quebec
income tax rate of 44.25%.............. 1,107,000 9,066,000 8,912,000 24,886,000 2,805,500
----------- ------------- ------------- ------------- -----------
Increase (decrease) in income taxes
arising from the following:
Active business income deduction ....... (184,000) (1,506,000) (1,480,000) (4,134,000) (466,000)
----------- ------------- ------------- ------------- -----------
Deduction for manufacturing and
processing............................. (169,000) (1,399,000) (1,375,000) (3,841,000) (433,000)
Surtax ................................. 28,000 172,000 169,000 472,000 53,000
Non-deductible expenses................. 33,000 101,000 135,000 144,000 171,000
----------- ------------- ------------- ------------- -----------
Other................................... 90,000 966,000 1,339,000 51,000 (7100)
----------- ------------- ------------- ------------- -----------
905,000 7,400,000 7,700,000 17,578,000 2,123,400
=========== ============= ============= ============= ===========
</TABLE>
F-43
<PAGE>
F.F. SOUCY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All information as at, and for the nine months ended, September 30, 1997 and
1996 is unaudited)
14. UNITED STATES ACCOUNTING PRINCIPLES (Continued)
(k) Deferred tax assets and liabilities of Soucy Inc. were as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
--------------- ----------------------------
1997 1996 1995
$ $ $
--------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Net capital loss carryforwards........... 131,000 131,000 93,000
Unrealized foreign exchange gain ........ -- -- 13,343
--------------- ------------- -------------
131,000 131,000 106,343
Valuation allowance....................... (131,000) (131,000) (93,000)
--------------- ------------- -------------
-- -- 13,343
Deferred tax liabilities:
Depreciation............................. (12,296,164) (9,585,931) (8,220,237)
Pension costs............................ (250,857) (239,963) (258,543)
Other.................................... (115,805) (118,932) (187,389)
--------------- ------------- -------------
(12,662,826) (9,944,826) (8,666,169)
--------------- ------------- -------------
Net deferred income taxes under U.S.
GAAP..................................... (12,662,826) (9,944,826) (8,652,826)
=============== ============= =============
</TABLE>
F-44
<PAGE>
GLOSSARY OF DEFINED TERMS AND ABBREVIATIONS
"Acquisition" means the acquisition by the Company on December 1, 1997, of
all the interests in BIPCO that the Company did not then own and the related
financings described in this Prospectus under "The Acquisition."
"Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility to and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility
has received an express acknowledgement from the tendering participant, which
acknowledgement states that such participant has received and agrees to be
bound by the Letter of Transmittal and that the Issuers may enforce such
Letter of Transmittal against such participant.
"ATOP" means Automated Tender Offer Program, the Book-Entry Transfer
Facility's procedure for book-entry transfer.
"Bank Credit Facilities" means the $120 million senior secured bank credit
facilities of the Company, which consist of (i) the Revolving Credit
Facility, providing for borrowings by the Company of revolving loans of up to
an aggregate principal amount of $50 million and (ii) the Term Loan Facility,
providing for one borrowing by the Company of a term loan in an original
aggregate amount of up to $70 million.
"BIPCO" means Bear Island Paper Company, L.P., a limited partnership
organized under Virginia law.
"BITCO" means Bear Island Timberlands Company, L.P., a limited partnership
organized under Virginia law.
"Book-Entry Confirmation" means a timely confirmation of a book-entry
transfer of the Old Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility.
"Book-Entry Transfer Facility" means The Depository Trust Company.
"Brant-Allen" means Brant-Allen Industries, Inc.
"CAGR" means compound annual growth rate.
"Cdn$" means Canadian dollars.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral" means the Company Collateral, the Timberlands Collateral and
the Soucy Collateral.
"Commission" means the Securities and Exchange Commission.
"Company" means the Bear Island Paper Company, L.L.C.
"Company Collateral" means all real property of the Company and all of the
personal property of the Company assigned to the Trustee, now or in the
future, under the Company Pledge and Security Agreement.
"CPPA" means the Canadian Pulp & Paper Association.
"Delaware Corporation Law" means the General Corporation Law of the State
of Delaware.
"delivered cash cost" means the manufacturing costs of newsprint less
depreciation, plus transportation costs and, in the case of the Company's
delivered cash costs prior to December 1, 1997, as further adjusted to
reflect the market price of fiber.
"disposition" means, collectively, the sale, exchange, retirement at
maturity, redemption or other disposition of a Note.
"Dow Jones" means Dow Jones & Company, Inc.
"DTC" means The Depository Trust Company.
"Elebash" means The Elebash Company.
"Eligible Institution" means a firm which is a member of a registered
national securities exchange or a member of the National Association of
Securities Dealers, Inc. or a commercial bank or trust company having an
office or correspondent in the United States.
G-1
<PAGE>
"EPA" means the U.S. Environmental Protection Agency.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Agent" means First Trust of New York, National Association.
"Exchange Offer" means the offer to exchange the New Notes for a like
principal amount of the Old Notes, pursuant to the terms and conditions set
forth in the Registration Rights Agreement.
"Expiration Date" means 5:00 p.m., New York City time, on March 4, 1998,
provided, however, that if the Issuers, in their sole discretion, have
extended the period of time for which the Exchange Offer is open, the term
"Expiration Date" means the latest time and date to which the Exchange Offer
is extended.
"FinCo" means Bear Island Finance Company II.
"First Priority Debt" means the Bank Credit Facilities or any debt of
Brant-Allen, Timberlands or Soucy Inc. that is senior to the Notes.
"First Trust of New York" means First Trust of New York, National
Association, the Exchange Agent for the Exchange Offer.
"Gannett" means Gannett Co., Inc.
"Hancock Loan" means the $27 million Timberlands Loan and Maintenance
Agreement, dated as of July 12, 1988, as amended on July 6, 1993, and as
further amended as of December 1, 1997, between Timberlands, as successor in
interest, and John Hancock Mutual Life Insurance Company.
"Holders" means holders of the Old Notes together with the New Notes.
"Indenture" means the indenture, dated as of December 1, 1997, among the
Issuers, as joint and several obligors, the Security Parties, Brant-Allen and
Crestar Bank, as trustee.
"Initial Purchasers" means TD Securities (USA) Inc. and Salomon Brothers
Inc.
"Issuers" means the Company and FinCo.
"Letter of Transmittal" means the letter of transmittal which Holders must
complete and execute in order to participate in the Exchange Offer.
"Knight-Ridder" means Knight-Ridder, Inc.
"LLC Act" means the Virginia Limited Liability Company Act.
"Management Services Agreement" means a management contract pursuant to
which executive management is provided by Brant-Allen to the Company.
"Media General" means Media General, Inc.
"MediaNews" means MediaNews Group Inc.
"Montreal Trust" means Montreal Trust Company.
"NBC" means National Bank of Canada.
"New Notes" means the $100,000,000 of 10% Series B Senior Secured Notes
Due 2007.
"Newhouse Group" means Advance Publications.
"New York Times" means New York Times Co.
"Non-U.S. Holder" means a beneficial owner of a New Note that is not a
United States Holder.
"Noon Buying Rate" means the noon buying rate in New York for cable
transfers in Canadian dollars, as certified for customs purposes by the
Federal Reserve Bank of New York.
"Notes" means the Old Notes together with the New Notes.
"Notice" means the Notice of Violation, issued by the EPA on September 30,
1994, to the Company alleging that the Company had violated two conditions of
its federally enforceable state air permit.
G-2
<PAGE>
"Old Notes" means the issued and outstanding 10% Senior Secured Notes due
2007.
"OMG" means old magazines.
"ONP" means old newspapers.
"Operating Agreement" means the operating agreement between the Company
and Brant-Allen.
"Purchase Agreements" means the agreements under which approximately 41%
of the production of the Company's mill was sold to Dow Jones and The
Washington Post.
"RACT" means Reasonably Available Control Technology.
"RDL" means Riviere du Loup Finance Ltd, a wholly owned subsidiary of
Soucy Partners.
"RDL Bonds" means, collectively, the RDL Series A Bonds, the RDL Series B
Bonds and the RDL Series C Bonds.
"RDL Series A Bonds" means the Series A bonds issued in an original amount
of $20 million under the RDL Trust Indenture.
"RDL Series B Bonds" means the Series B bonds issued in an original amount
of Cdn$5 million under the RDL Trust Indenture.
"RDL Series C Bonds" means the RDL Series C bonds issued in an original
amount of $27.5 million under the RDL Trust Indenture.
"RDL Trust Indenture" means the Trust Indenture among Soucy Partners and
Montreal Trust, dated as of March 30, 1979.
"Registration Rights Agreement" means the Registration Rights Agreement,
dated as of December 1, 1997, among the Issuers and the Initial Purchasers.
"Revolving Credit Facility" means the $50 million 6-year senior secured
reducing revolving credit facility of the Company.
"Revolving Loans" means the revolving loans of up to an aggregate
principal amount of $50 million under the Revolving Credit Facility.
"RISI" means Resource Information Systems, Inc.
"Securities Act" means the Securities Act of 1933, as amended.
"Soucy" means Soucy Partners and Soucy Inc.
"Soucy Collateral" means 65% of the issued and outstanding Capital Stock
of Soucy Inc.
"Soucy Inc." means F.F. Soucy, Inc.
"Soucy Inc. Bank Credit Agreement" means a bank credit agreement between
Soucy Inc. and NBC, providing for maximum borrowings by Soucy Inc. of
revolving loans of up to an aggregate principal amount of Cdn$3 million.
"Soucy Inc. Revolving Loans" means the maximum borrowings by Soucy Inc. of
revolving loans of up to an aggregate principal amount of Cdn$3 million under
the Soucy Inc. Bank Credit Agreement
"Soucy Partners" means F.F. Soucy, Inc. & Partners, Limited Partnership.
"Soucy Partners Bank Credit Agreement" means the bank credit agreement
between Soucy Partners and NBC, providing for maximum borrowings by Soucy
Partners of revolving loans of up to an aggregate principal amount of Cdn$5
million.
"Soucy Partners Revolving Loans" means the maximum borrowings by Soucy
Partners, provided under the Soucy Partners Bank Credit Agreement, of
revolving loans of up to an aggregate principal amount of Cdn$5 million.
"Term Loan" means a Company term loan in an original aggregate principal
amount of up to $70 million under the Term Loan Facility.
G-3
<PAGE>
"Term Loan Facility" means the $70 million 8-year senior secured term
loan facility of the Company.
"The Washington Post" means The Washington Post Company.
"Timberlands" means the Bear Island Timberlands Company, L.L.C.
"Timberlands Acquisition" means the acquisition by Brant-Allen on December
1, 1997, of all the interests in BITCO that Brant-Allen did not then own and
the related financings described in the Prospectus under "The Timberlands
Acquisition."
"Timberlands Collateral" means all of the issued and outstanding Capital
Stock of Timberlands owned by Brant-Allen.
"Timberlands Credit Agreement" means the $35 million credit agreement
among Brant-Allen, TD Securities (USA) Inc., and Toronto-Dominion (Texas),
Inc., dated as of December 1, 1997.
"Timberlands Loan" means the $35 million senior secured two-year term loan
facilities consisting of a $32 million term facility and a $3 million
revolving facility pursuant to the agreement dated as of December 1, 1997.
"Times Mirror" means The Times Mirror Co.
"TIN" means taxpayer identification number.
"tonnes" means metric tons, which equal 2,204.6 pounds.
"TMP" means thermomechanical pulp.
"Transactions" means the Acquisition and the Timberlands Acquisition,
collectively.
"Trustee" means Crestar Bank.
"United States Holder" means a beneficial owner of a New Note that is, for
United States federal income tax purposes, (i) a citizen or individual
resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or of
any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source, or
(iv) a trust if a United States court is able to exercise primary supervision
over the administration of such trust and one or more United States persons
have the authority to control all substantial decisions of such trust.
"VDEQ" means Virginia Department of Environmental Quality.
"VEPCO" means Virginia Electric and Power Company.
"Virginia L.L.C. Law" means the Limited Liability Company Act of the
Commonwealth of Virginia.
"Wood Supply Agreement" means the 10 year wood supply agreement between
the Company and Timberlands that provides for Timberlands to sell to the
Company 40,000 cords of wood fiber annually.
G-4
<PAGE>
No dealer, salesperson, or any other person has been authorized to give
any information or to make any representations not contained in this
Prospectus and, if given or made, such information or representations must
not be relied upon as having been authorized by the Issuers or any agent or
the Initial Purchasers. This Prospectus does not constitute an offer of any
securities other than those to which it relates or an offer to sell, or a
solicitation of an offer to buy, to any person in any jurisdiction where an
offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information herein is correct as of any time
subsequent to the date hereof.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information.......................... ii
Certain References ............................ ii
Prospectus Summary ............................ 1
Risk Factors .................................. 14
The Acquisition ............................... 22
The Timberlands Acquisition ................... 23
Use of Proceeds ............................... 23
Capitalization ................................ 23
Selected Historical Financial Data ............ 24
Unaudited Pro Forma Condensed Consolidated
Financial Statements ......................... 25
Management's Discussion and Analysis of
Financial Condition and Results of Operations 38
The Exchange Offer ............................ 43
Business of the Company........................ 49
Business of Soucy ............................. 61
Business of Timberlands ....................... 61
Management .................................... 63
Security Ownership ............................ 65
Certain Related Party Transactions ............ 65
Limited Liability Company Operating Agreement 67
Description of the Notes ...................... 68
Description of Certain Other Indebtedness .... 105
Certain Federal Income Tax Considerations .... 111
Plan of Distribution .......................... 113
Experts ....................................... 113
Legal Matters ................................. 114
Index to Financial Statements ................. F-1
Glossary ...................................... G-1
</TABLE>
UNTIL APRIL 30, 1998, (90 DAYS FOLLOWING THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE NEW NOTES WHETHER OR NOT PARTICIPATING
IN THE EXCHANGE OFFER MAY BE REQUIRED TO DELIVER A PROSPECTUS.
$100,000,000
BEAR ISLAND
PAPER COMPANY, L.L.C.
BEAR ISLAND FINANCE COMPANY II
10% SERIES B SENIOR SECURED NOTES
DUE 2007
[GRAPHIC OMITTED]
PROSPECTUS
JANUARY 30, 1998
