SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE EXCHANGE ACT OF 1934
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Not Applicable.
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
INDEX
Page(s)
Part I. Financial Information
Item 1
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
<CAPTION>
March 31, December 31,
ASSETS 1999 1998
---------------- -----------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and short-term investments $ 2,417,918 $ 2,130,787
Accounts receivable 12,269,098 13,669,351
Inventories 14,822,057 13,827,824
Other current assets 102,914 570,234
---------------- -----------------
Total current assets 29,611,987 30,198,196
Property, plant and equipment 202,432,929 201,618,960
Less accumulated depreciation 13,386,159 10,841,783
---------------- -----------------
Net property, plant and equipment 189,046,770 190,777,177
---------------- -----------------
Deferred financing costs 8,016,420 8,275,781
---------------- -----------------
Total assets $ 226,675,177 $ 229,251,154
================ =================
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Current portion of long-term debt 793,863 1,084,693
Accounts payable and accrued liabilities 8,806,598 10,431,232
Accrued interest payable 3,830,195 1,307,030
---------------- -----------------
Total current liabilities 13,430,656 12,822,955
Long-term debt 181,656,213 183,861,470
---------------- -----------------
Total liabilities 195,086,869 207,115,657
---------------- -----------------
Member's equity:
Contributed capital 28,649,807 28,130,250
Retained earnings 2,938,501 4,436,479
---------------- -----------------
Total member's equity 31,588,308 32,566,729
---------------- -----------------
Total liabilities and member's equity $ 226,675,177 $ 229,251,154
================ =================
See accompanying notes to the condensed financial statements.
</TABLE>
1
<PAGE>
<TABLE>
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<CAPTION>
Three months ended March 31,
-----------------------------------
1999 1998
<S> <C> <C>
Net sales $ 25,977,791 $ 30,380,468
Cost of sales (22,024,366) (22,675,137)
--------------- ----------------
Gross profit 3,953,425 7,705,331
Selling, general and administrative expenses:
Management fees to Brant-Allen (779,334) (911,414)
Other (79,469) (276,067)
--------------- ----------------
Income from operations 3,094,622 6,517,850
Other income (deductions):
Interest expense (4,637,322) (4,881,360)
Other income 44,722 35,423
--------------- ----------------
Net income (loss) $ (1,497,978) $ 1,671,913
=============== ================
See accompanying notes to the condensed financial statements.
</TABLE>
2
<PAGE>
<TABLE>
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three months ended March 31,
-----------------------------------
1999 1998
<S> <C> <C>
Operating activities:
Net income (loss) $ (1,497,978) $ 1,671,913
Adjustments to reconcile net income(loss)
to net cash provided by
operating activities:
Depreciation and depletion 2,570,311 2,498,754
Amortization of deferred financing
costs 259,361 238,158
Loss on disposal of property, plant
and equipment 52,103
Changes in current assets and liabilities:
Accounts receivable 1,400,253 171,919
Inventory (994,233) 983,207
Other current assets 467,320 (1,696)
Accounts payable and accrued
liabilities (1,105,077) (854,586)
Accrued interest payable 2,523,165 2,543,733
---------------- ----------------
Cash provided by operating
activities 3,675,225 7,251,402
---------------- ----------------
Investment activities:
Purchases of property, plant and
equipment (898,911) (1,011,877)
Proceeds from disposal of property, plant
and equipment 6,904
---------------- ----------------
Net cash used in investing
activities (892,007) (1,011,877)
---------------- ----------------
Financing activities:
Principal payments on long-term debt (2,496,087) (3,725,000)
Payment of deferred financing costs (140,471)
---------------- ----------------
Net cash used in financing
activities (2,496,087) (3,865,471)
---------------- ----------------
Net increase in cash 287,131 2,374,054
Cash and short-term investments, beginning
of period 2,130,787 1,353,049
----------------- -----------------
Cash and short-term
investments, end of
period $ 2,417,918 $ 3,727,103
================ ================
Noncash financing activities:
Contributions from Brant-Allen $ 519,557
================
</TABLE>
See accompanying notes to the condensed financial statements.
3
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying condensed financial
statements of Bear Island Paper Company, L.L.C. (the "Company") contain all
adjustments necessary to present fairly, in all material respects, the
Company's financial position as of March 31, 1999 and December 31, 1998 and
the Company's condensed results of operations and cash flows for the
three-month periods ended March 31, 1999 and 1998. All adjustments are of a
normal and recurring nature. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's 1998 Form 10K filed on March 31, 1999. The
December 31, 1998 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the three-month period ended March 31, 1999
should not be regarded as necessarily indicative of the results that may be
expected for the entire year.
2. The Company is a wholly owned subsidiary of Brant-Allen Industries, Inc.
("Brant-Allen"), a Delaware corporation.
A component of selling, general and administrative expenses as shown on the
statements of operations includes aggregate management fees charged by
Brant-Allen. There are restrictions on payment of the management fee.
During the three months ended March 31, 1999 the Board of Directors of
Brant-Allen contributed the unpaid accrued portion of the management fee
totaling $519,557 through March 31, 1999 to the Company's capital. The
corresponding management fee for the period ended March 31, 1998 was
$824,167. This portion of the management fee is limited as to payment in
cash by the Company to Brant-Allen under the restrictive covenants to the
$100 million principal amount of 10% Senior Secured Notes due 2007 (the
"Notes"). The contribution of this accrued liability has been reflected as
an addition to contributed capital in the accompanying condensed balance
sheet at March 31, 1999. Brant-Allen's Board also agreed that until further
action is taken by the Board, future accrued fees (which are not payable in
cash because of the Notes' restrictive covenants) should be contributed to
the Company's capital.
4
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
3. No provision for income taxes is required in the financial statements since
each member is individually liable for any income tax that may be payable
on its share of the Company's taxable income.
4. Finished goods and raw materials inventories are valued at the lower of
cost or market, with cost determined on the first-in, first-out ("FIFO")
basis. Stores inventories are valued at the lower of average cost or
market.
Inventories consisted of:
March 31, 1999 December 31, 1998
--------------- -----------------
Raw materials $ 2,921,235 $ 3,908,772
Stores 8,659,837 8,759,809
Finished goods 3,240,985 1,159,243
--------------- -----------------
$ 14,822,057 $ 13,827,824
=============== =================
5. Long-term debt consisted of:
March 31, 1999 December 31, 1998
---------------- -----------------
10% Senior Secured Notes $ 100,000,000 $ 100,000,000
Term Loan Facility 69,125,000 69,300,000
Revolving Credit Facility 13,000,000 15,000,000
Long-term purchase obligations 325,076 646,163
---------------- -----------------
182,450,076 184,946,163
Less current portion 793,863 1,084,693
---------------- -----------------
Total long-term debt $ 181,656,213 $ 183,861,470
================ =================
5
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. The Company is a party to a wood supply contract with Bear Island
Timberlands Company, L.L.C. ("Timberlands") an affiliate and wholly owned
subsidiary of Brant-Allen, whereby Timberlands guaranteed to supply all of
the Company's log and pulp chip requirements at market prices. Purchases
under the wood supply contract approximated $740,000 for the three months
March 31, 1998. During the three months ended March 31, 1999 all log and
pulp chips were purchased from outside vendors due to the suspension of
Timberlands operations in 1998. The Company has negotiated a number of
fiber supply contracts covering approximately 183,000 cords of chips and
roundwood for periods ranging from three months to one year. Management
anticipates liquidating all Company and Timberlands owned timberlands and
that future fiber supplies will be effectuated with independent wood
suppliers.
The Company charged Timberlands for certain administrative and other
expenses. These charges approximated $379,000 and $160,000 during the three
months ended March 31, 1999 and 1998, respectively.
The Company's receivables and payables and the Company's sales to an
affiliate were as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
---------------- -----------------
<S> <C> <C>
Due from Brant-Allen $ 36,683 $ 53,138
Due from Newsprint Sales 154,914 1,205,553
Due from Dow Jones & Company, Inc. 2,225,542 2,369,136
Due from Timberlands 459,684 80,586
Due from F.F. Soucy, Inc. and Partners 75,071 52,181
Due to F.F. Soucy, Inc. 70,975 78,192
Three Months Ended March 31,
----------------------------------
1999 1998
Net sales to Dow Jones & Company, Inc. $ 5,561,199 $ 6,098,144
</TABLE>
Sales to Dow Jones & Company, Inc. represented approximately 21% and 20% of
total sales during the three months ended March 31, 1999 and 1998,
respectively. The remaining sales were to other unaffiliated printing and
publishing enterprises located primarily in the eastern United States.
6
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
7. Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"),
"Accounting for Derivative Instruments and Hedging Activities," was issued
by the Financial Accounting Standards Board in June 1998, which is
effective for all fiscal quarters of all fiscal years beginning after June
15, 1999. This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded
in other contracts, and for hedging activities. At the time of adoption of
SFAS No. 133, this standard is not expected to have a material impact on
the financial position or results of operations of the Company.
8. The Company and Timberlands have entered into a joint sales agreement to
sell approximately 83,000 acres of timberland to two independent investors.
This transaction is expected to close during the second quarter of 1999.
The net proceeds, after distributions for income taxes, will be used to
repay Timberlands debt and debt incurred by Brant-Allen to fund its equity
investment in Timberlands. Any remaining funds will be used to retire debt
outstanding under the Company's $70 million 8-year senior secured term loan
facility ("Term Loan Facility") and the Company's $50 million 6-year senior
secured reducing revolving credit facility ("Revolving Credit Facility").
In a separate transaction Timberlands is presently negotiating with the
same investors for the sale of its remaining 46,000 acres. The net
proceeds, after distributions for income taxes, from this transaction would
be used to reduce the Term Loan Facility and the Revolving Credit Facility.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors affecting the results of operations of the Company during the periods
included in the accompanying condensed statements of operations and the changes
in the Company's financial condition since December 31, 1998.
General
The Company manufactures and is dependent on one product, newsprint, which is
used in general printing and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage which
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.
THREE MONTHS ENDED MARCH 31, 1999, COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
Net sales decreased by $4.4 million, or 14.5%, to $26.0 million in the first
quarter of 1999, from $30.4 million in the first quarter of 1998. This decrease
was attributable to a 7.2% decrease in the average net selling price of the
Company's products and by a 7.7% decrease in sales volumes to approximately
50,400 metric tons ("tonnes") in the first quarter of 1999, from approximately
54,600 tonnes in the first quarter of 1998. The Company's net selling price for
newsprint decreased to an average of $516 per tonne in the first quarter of 1999
from an average of $556 per tonne in the first quarter of 1998. The decrease in
average net selling price per tonne and volumes of tonnes sold were primarily
caused by the continued competitive conditions in the industry resulting from
excess capacity.
Cost of sales decreased by $0.7 million, or 3.1%, to $22.0 million in the first
quarter of 1999 from $22.7 million in the first quarter of 1998. This decrease
was attributable primarily to a 5.3% increase in unit manufacturing costs per
tonne and was offset by the decrease in sales volumes. The increase in unit
manufacturing cost per tonne was a result of an overall cost increase in the
manufacturing process and a nonrecurring charge for severance benefits incurred
during the first quarter of 1999. Cost of sales as a percentage of net sales
increased to 84.8% in the first quarter of 1999, from 74.6% in the first quarter
of 1998, due to depressed newsprint selling prices in the first quarter of 1999
and increased unit costs of manufacturing as noted above.
Selling, general and administrative expenses decreased by $0.3 million, or
27.7%, to $0.9 million in the first quarter of 1999 from $1.2 million in the
first quarter of 1998. This decrease was primarily attributable to a decrease in
management fee to Brant-Allen that resulted from lower net sales and a reduction
of administrative and regulatory expenses.
As a result of the above factors, income from operations decreased by $3.4
million to $3.1 million in the first quarter of 1999 from $6.5 million in the
first quarter of 1998.
Interest expense was $4.6 million in the first quarter of 1999 compared to $4.9
million in the first quarter of 1998, due to the payments made on the Revolving
Credit Facility.
As a result of the above factors, the Company reported a net loss of $1.5
million in the first quarter of 1999 compared to net income of $ 1.7 million in
the first quarter of 1998.
Liquidity and Capital Resources
The Company's principal liquidity requirements have been for working capital,
capital expenditures and debt service under the Company's loan agreements. These
requirements have been met through cash flows from operations and/or loans under
the Company's Revolving Credit Facility.
The Company's cash and short-term investments at March 31, 1999 were $2.4
million, representing an increase of $0.3 million from $2.1 million at December
31, 1998. Cash flows from operating activities during the three months ended
March 31, 1999 of $3.7 million were used to cover capital expenditures and a
reduction in long-term debt, together aggregating $3.4 million. The Company
anticipates that cash provided from operations in the future, combined with
borrowings under the Revolving Credit Facility will be sufficient to pay its
operating expenses, satisfy debt-service obligations and fund capital
expenditures.
In the first quarter of 1999, the Company's cash provided by operating
activities decreased by 49.3% to $3.7 million from $7.3 million in the first
quarter of 1998, primarily due to lower selling prices and higher costs of sales
resulting in a net loss in first quarter 1999 compared to net income in first
quarter 1998.
8
<PAGE>
The Company made capital expenditures of $0.9 million and $1.0 million in the
first quarter of 1999 and the first quarter of 1998, respectively, in connection
with upgrading and maintaining its manufacturing facility. Management
anticipates that the Company's total capital expenditures for the balance of
1999 and 2000 will primarily 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.
At March 31, 1999, the Company had approximately $182.4 million of indebtedness,
consisting of borrowings of $13.0 million under the Revolving Credit Facility,
$69.1 million under the Term Loan Facility, $100 million under the Notes and
approximately $0.3 million in long-term purchase obligations. In addition, $30.8
million was available in unused borrowing capacity under the Revolving Credit
Facility.
Year 2000 Compliance
The Company is in the process of modifying, upgrading or replacing its computer
software applications and systems which management 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 has had formal communications with its major suppliers and customers
concerning their Year 2000 readiness. At the present time the Company has
received no negative responses from any of the suppliers or customers contacted.
9
<PAGE>
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27, Financial Data Schedule
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
10
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
Peter M. Brant
President, Chairman of the Board and
Chief Executive Officer
By: /s/ Edward D. Sherrick
Edward D. Sherrick
Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,418
<SECURITIES> 0
<RECEIVABLES> 12,337
<ALLOWANCES> 68
<INVENTORY> 14,822
<CURRENT-ASSETS> 29,612
<PP&E> 202,433
<DEPRECIATION> 13,386
<TOTAL-ASSETS> 226,675
<CURRENT-LIABILITIES> 13,431
<BONDS> 181,656
0
0
<COMMON> 0
<OTHER-SE> 31,588
<TOTAL-LIABILITY-AND-EQUITY> 226,675
<SALES> 25,978
<TOTAL-REVENUES> 25,978
<CGS> 22,024
<TOTAL-COSTS> 859
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,637
<INCOME-PRETAX> (1,498)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,498)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,498)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
