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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
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)
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 [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [ ]
Documents Incorporated by Reference
Certain exhibits required for Part IV of this report are incorporated herein by
reference from Bear Island Paper Company, L.L.C.'s registration statement on
Form S-4 Registration No. 333-42201, as amended.
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TABLE OF CONTENTS
PAGE
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PART I
ITEM 1. BUSINESS........................................................... 3
ITEM 2. PROPERTIES......................................................... 7
ITEM 3. LEGAL PROCEEDINGS.................................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................ 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS...................................................... 8
ITEM 6. SELECTED FINANCIAL DATA............................................ 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS..................................................... 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......... 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA........................ 16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE...................................................... 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT................ 17
ITEM 11. EXECUTIVE COMPENSATION............................................ 18
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.... 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................... 19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.. 22
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PART I
ITEM 1. BUSINESS.
GENERAL
Bear Island Paper Company, L.L.C. (the "Company"), a wholly owned subsidiary of
Brant-Allen Industries, Inc. ("Brant-Allen") produces newsprint paper at its
mill, located near Richmond, Virginia (the "Mill"). The Mill has an annual
capacity of 229,700 metric tons ("tonnes") of high quality newsprint suitable
for four-color printing, which publishers are increasingly using for general
circulation. In 1999, the Mill produced approximately 226,249 tonnes of
newsprint, and had an estimated operating efficiency rate of 93.6%.
The Company's customers include leading newspaper publishers in the United
States, such as Dow Jones & Company, Inc. (publisher of The Wall Street Journal)
("Dow Jones"), The Washington Post Company ("The Washington Post"), Advance
Publications ("Newhouse Group"), Gannett Co., Inc. (publisher of USA Today)
("Gannett"), MediaNews Group Inc., Knight-Ridder Inc. ("Knight-Ridder"), Media
General, Inc., Times Mirror Co. and New York Times Co. Approximately 89% of the
Company's newsprint production in 1999 was purchased by its top ten customers.
A combination of pulp material is used to feed the Company's newsprint machine.
In its manufacturing process, the Mill currently uses thermomechanical pulp
("TMP"), de-inked pulp and 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 de-inked pulp is produced at the Company's
recycling facility, which is located adjacent to the Mill. The recycling
facility commenced operations in 1994 and features technology for de-inking,
cleaning and screening of old newspapers ("ONP") and old magazines ("OMG").
Prior to December 1997, all the Company's wood requirements were supplied by its
affiliate, Bear Island Timberlands Company, L.P. ("BITCO"), with approximately
30% coming from BITCO's own land and the remainder being procured by BITCO from
local independent wood contractors and independent sawmills. In December 1997,
BITCO was converted to Bear Island Timberlands Company, L.L.C. ("Timberlands").
In November 1998, Timberlands ceased all timber harvesting operations in
preparation for monetizing its timberland holdings. Substantially all of
Timberlands holdings were sold during 1999. ONP and OMG used in 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 300-mile radius of the Mill.
THE MILL AND THE PRODUCTION PROCESS
The Mill, which began operations in 1979, is located in Hanover County, Virginia
on an approximately 700-acre site, which is approximately 80 miles south of
Washington, D.C., and 25 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.
Currently, approximately 56% of the Company's pulp requirements are derived from
the Company's TMP process using wood and woodchips, approximately 38% of the
Company's fiber requirements are de-inked pulp from the Mill's recycling
facility and approximately 6% is purchased kraft pulp.
The Mill has a wood requirement of approximately 133,000 cords per year. All
wood is currently supplied from sources within a 200-mile radius of the Mill.
See "Item 13. Certain Relationships and Related Transactions." In 1999, the
Company's wood needs were supplied 55% from wood harvested by local independent
wood contractors, and 45% in chip form, by independent sawmills.
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The Mill's newsprint machine produces newsprint at an average speed of
approximately 3,980 feet per minute over a machine trim width of 302 inches. The
Mill produces approximately 627 tonnes per day of newsprint.
The Company's 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 de-inked pulp. ONP and OMG are 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 83:17, which is then fed into a pulper which mixes in additives
and prepares the stock for ink separation. During 1999, the Company undertook a
capital expansion of the recycling facility resulting in a capacity increase of
20,200 tonnes per year. At full capacity, the recycling facility processes
approximately 107,000 tonnes per year of ONP and OMG. The recycling facility has
the capacity to produce 246 tonnes of recycled fiber per day. The recycling mill
enables the Company to produce approximately 627 tonnes per day of newsprint
containing a minimum of 35% and a maximum of 40% recycled fiber. The recycling
facility also includes a 50,000 square foot warehouse that can hold a 10-day
supply of ONP and OMG.
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 1999, approximately 40% of
the production of the 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 have been
extended through December 31, 2004 and are subject to the parties agreeing to
pricing, which approximate market prices, on an annual basis. The Company has
sold newsprint to Dow Jones since 1980 and The Washington Post since 1979. In
1999 and 1998, the Company's ten largest customers represented an aggregate of
89% and 93%, respectively, of the Company's total sales. Other than the
agreements with Dow Jones and The Washington Post customers purchase a minimum
volume amount for short periods up to one year based on market prices at the
time of purchase.
Brant-Allen markets all of the Company's production and is able to offer its
customers newsprint from either the Mill or from F.F. Soucy Inc.'s ("Soucy
Inc.") mill or from F.F. Soucy, Inc. & Partners, Limited Partnership's ("Soucy
Partners" and, together with Soucy Inc., "Soucy") mill 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. Brant-Allen also performs all sales,
invoicing, accounts receivable maintenance, cash management and treasury
functions for the Company pursuant to the Management Services Agreement (as
defined below). 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.
ENERGY AND WATER REQUIREMENTS
The 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
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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 Rappahannock 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 believes it is, indirectly, VEPCO's third largest
customer.
Because the Company's electricity usage has an impact on both electricity
generation requirements and costs of VEPCO and Old Dominion Electric
Cooperative, 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 making adjustments to its production process.
The 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 627 tonnes of newsprint per day, water usage is approximately 3.8
million gallons per day. Mill effluent is approximately 3.6 million gallons per
day. The Mill's water is currently 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 is presently exploring
the feasibility of self supplying and treating all of its water requirements and
is in active discussions with Hanover Country over modifying its present water
contract.
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 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.
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.
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The U.S. Environmental Protection Agency (the "EPA") has required that certain
pulp and paper mills meet new air emissions and revised wastewater discharge
standards for toxic and hazardous pollutants. These proposed standards are
commonly known as the "Cluster Rules". Bear Island's operations are not subject
to further control as a result of the current "Cluster Rules" and therefore, no
related capital expenditures are anticipated.
On July 12, 1996, the Company entered into a Reasonably Available Control
Technology ("RACT") Agreement with the Virginia Department of Environmental
Quality. Under the RACT Agreement, the Company is not required to incur any
significant capital expenditures for the purchase and installation of pollution
control equipment.
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.
EMPLOYEES
As of December 31, 1999, the Company had 246 employees, approximately 30% of
which have been employed by the Company since its inception in 1979. The
workforce is non-unionized and has been very receptive to flexible working
conditions and requirements.
SALE OF TIMBERLANDS
During 1999, Timberlands sold substantially all of its properties. The net
proceeds from these sales were utilized to reduce (i) Timberlands debt and (ii)
debt incurred by the Company and Brant-Allen in connection with Brant-Allen's
purchase of the equity interests in Timberlands and the Company. The Company has
retained fiber supply arrangements which management believes will allow the
Company to maintain fiber sourcing flexibility.
MANAGEMENT SERVICES AGREEMENT
Executive management of the Company and Soucy is provided by Brant-Allen,
pursuant to a management contract (the "Management Services Agreement "). The
Company's and Soucy's newsprint is sold through Brant-Allen, which currently
markets approximately 452,800 tonnes of newsprint (222,500 tonnes for the
Company and 230,300 tonnes for Soucy). Brant-Allen manages 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 of the
Company less transportation costs is payable by the Company, of which, since
December 1, 1997, as a result of the Company's debt agreements, one third is
payable in cash with the remainder contributed to the Company's capital. During
1999, the Company was charged $3,110,000 by Brant-Allen under the Management
Services Agreement of which $1,037,000 was paid in cash and $2,073,000 was
contributed to capital of the Company by Brant-Allen.
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Brant-Allen is a subchapter 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, and Chief Executive Officer of Brant-Allen and Mr. Allen serves as
President and Chief Operating Officer of Brant-Allen. Mr. Brant also serves as
the Chairman of the Board, and Chief Executive Officer of the Company and Mr.
Allen also serves as President and Chief Operating Officer of the Company.
THE ACQUISITION
In December 1997, the Company purchased the 70% Limited Partnership interests of
Bear Island Paper Company, L.P. (the "Predecessor") owned equally by
subsidiaries of The Washington Post and Dow Jones (the "Acquisition"). The
Predecessor, 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 the Predecessor. Funding for the Acquisition was
provided through the issuance of $100 million principal amount of 10% Senior
Secured Notes due 2007 (the "Notes") and $120 million principal amount of bank
debt (the "Bank Credit Facilities") comprised of a $70 million 8-year senior
secured term loan facility (the "Term Loan Facility") and a $50 million 6-year
senior secured reducing revolving credit facility (the "Revolving Credit
Facility"). Following the Acquisition and related transactions (the
"Transactions") 100% of the Company was owned by Brant-Allen.
Brant-Allen was also the general partner of, and owned a 30% partnership
interest in BITCO. In conjunction with the Acquisition, Brant-Allen also
acquired 100% ownership of BITCO (the "Timberlands Acquisition") which was
converted to Timberlands immediately prior to the closing of the Timberlands
Acquisition. During 1999, Timberlands which owned and managed approximately
130,000 acres of timberland in Central Virginia, sold substantially all of its
acreage. Proceeds from the sale of these timberlands, net of expenses and taxes
were utilized to reduce (i) Timberlands Debt and (ii) debt incurred by the
Company and Brant-Allen in connection with Brant-Allen's purchase of the equity
interests in Timberlands and the Company.
In addition, Brant-Allen owns all the capital stock of Soucy Inc., a newsprint
manufacturer located in Riviere-du-Loup in the Province of Quebec, Canada, which
owns a newsprint machine that currently has an annual capacity of 67,300 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
158,300 tonnes. The two Soucy newsprint machines are located on Soucy Partners'
plant site.
ITEM 2. PROPERTIES.
The Mill is located on approximately 700 acres of land that is owned by the
Company, which is approximately 80 miles south of Washington, D.C., and 25 miles
north of Richmond, Virginia. In addition, the Company owns approximately 1,600
acres of land and timberland in Virginia.
ITEM 3. 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.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Brant-Allen beneficially owns all the equity of each of the Company, Timberlands
and Soucy Inc. Brant-Allen, in turn, is owned by Mr. Peter Brant and Mr. Joseph
Allen.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited financial
statements of the Predecessor for each of the years in the two year period ended
December 31, 1996 and the eleven months ended November 30, 1997, as well as the
audited financial statements of the Company for the one month ended December 31,
1997 and the years ended December 31, 1998 and 1999, for which the statements of
operations are included elsewhere herein for the (i) Predecessor for the eleven
months ended November 30, 1997 and (ii) Company for the one month ended December
31, 1997 and the years ended December 31, 1998 and 1999.
<TABLE>
<CAPTION>
Predecessor Company
----------- -------
Eleven
Months One Month
Ended Ended
November December
Years Ended December 31, 30, 31, Years Ended December 31,
------------------------------------ -----------------------------------
1995 1996 1997 1997 1998 1999
(Dollars in Thousands, Except Tonnes Produced)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales non-affiliates $ 70,960 $ 75,460 $ 59,548 $ 8,882 $ 95,870 $ 82,568
Affiliates (1) 61,243 53,360 46,040 1,925 26,328 21,105
-------- -------- -------- ------- -------- --------
Total sales 132,203 128,820 105,588 10,807 122,198 103,673
Cost of sales 100,399 100,591 95,404 9,069 94,656 95,063
-------- -------- -------- ------- -------- --------
Gross profit 31,804 28,229 10,184 1,738 27,542 8,610
Selling, general & administrative:
Management fee to Brant-Allen 3,961 3,865 3,175 325 3,666 3,110
Other direct 224 153 573 45 536 394
-------- -------- -------- ------- -------- --------
Income (loss) from operations 27,619 24,211 6,436 1,368 23,340 5,106
-------- -------- -------- ------- -------- --------
Other income (expense):
Interest income 603 666 591 -- 201 149
Interest expense (5,986) (5,398) (4,332) (1,633) (18,892) (17,097)
Other income (expense) 33 (56) (41) 53 -- 863
-------- -------- -------- ------- -------- --------
Total other expense (5,350) (4,788) (3,782) (1,580) (18,691) (16,085)
-------- -------- -------- ------- -------- --------
(Loss) income before $ 22,269 $ 19,423 $ 2,654 $ (212) $ 4,649 $(10,979)
extraordinary item
Extraordinary item -- -- (4,367) -- -- (1,006)
-------- -------- -------- ------- -------- --------
Net income (loss) $ 22,269 $ 19,423 $ (1,713) $ (212) $ 4,649 $(11,985)
======== ======== ======== ======= ======== ========
Other Data:
Operational EBITDA (2) $37,357 $34,245 $16,184 $2,190 $33,407 $15,752
Adjusted operational
EBITDA (3) 2,406 36,068 17,825
</TABLE>
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<TABLE>
<CAPTION>
Predecessor Company
------------------------------- ---------------------------------------
Eleven
Months One Month
Ended Ended
November December
Years Ended December 31, 30, 31, Years Ended December 31,
------------------------------- ---------------------------------------
1995 1996 1997 1997 1998 1999
(Dollars in Thousands, Except Ratios and Tonnes Produced)
<S> <C> <C> <C> <C> <C> <C>
Summary cash flow information:
Net cash provided by (used in)
operating activities $ 27,215 $ 30,368 $ 12,546 $ (4,024) $ 20,623 $ 2,547
Net cash used in investing
activities (6,502) (7,413) (4,702) (140,169) (7,394) (265)
Net cash provided by (used in)
financing activities (15,695) (21,801) (12,467) 145,545 (12,451) (3,431)
Depreciation 9,648 9,976 9,735 822 10,033 10,615
Depletion 90 58 13 -- 34 31
Capital expenditures 6,645 7,483 4,836 239 7,544 3,009
Saleable tonnes produced 208,870 218,642 206,058 18,802 222,668 226,249
As of December 31,
------------------
1995 1996 1997 1998 1999
Balance Sheet Data:
Cash and short-term investments $ 12,472 $ 13,625 $ 1,353 $ 2,131 $ 981
Working capital 23,901 22,037 18,176 17,375 15,449
Property, plant and equipment, net 115,941 116,953 194,262 190,777 181,059
Total indebtedness (4) 55,368 52,171 196,435 184,946 138,291
Total assets 160,523 160,460 232,485 229,251 214,587
Total partners' equity/member's interest 91,366 95,789 25,258 32,567 65,879
</TABLE>
(1) The sales are to Dow Jones and The Washington Post through November 30,
1997 and sales to Dow Jones after November 30, 1997.
(2) EBITDA is defined as income (loss) from operations plus depreciation,
depletion and amortization, if any. EBITDA is generally accepted as providing
useful information regarding a company's ability to service and/or incur
debt. EBITDA should not 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.
(3) Adjusted EBITDA is defined as EBITDA (as shown in note (2) above) plus
the noncash portion, or two-thirds, of the management fee to Brant-Allen
after November 30, 1997. 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.
(4) Total indebtedness is defined as long-term debt and long-term purchase
obligations and current portions thereof.
ITEM 7. 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 "Item 6. Selected Financial Data"
and the financial statements of the Company and related notes thereto included
elsewhere in this report. Historically, the Predecessor's cost of manufacturing
had also included an up charge (a margin in excess of the market price of the
fiber) paid to BITCO with respect to wood, and a procurement fee per tonne of
ONP and OMG, supplied or provided by BITCO to the Predecessor. This up charge
and procurement fee was eliminated on December 1, 1997. See "Item 13. Certain
Relationships and Related Transactions." Additionally, management has prepared
pro forma results of operations for 1997 to enable a meaningful comparison
between with 1998 results of operations. Accordingly, see "1998
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Compared to Pro Forma 1997" discussion below, which compare the year ended
December 31, 1997 on a pro forma basis assuming the transaction had occurred on
January 1, 1997 with 1998 actual for a more meaningful comparison of operations.
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 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 five years. After
hitting a high of $750 per tonne in the fourth quarter of 1995, newsprint prices
decreased to a low of $466 per tonne in the third quarter of 1999. Newsprint
prices in 1997 recovered from a level of $510 per tonne in the first quarter of
1997 to $560 per tonne in the fourth quarter. During 1998, Newsprint prices
decreased from $582 per tonne in the first quarter to $573 per tonne in the
fourth quarter. During 1999, newsprint prices averaged $495 per tonne. In
February 2000 newsprint prices averaged $494 per tonne.
The table below summarizes the annual volumes and net selling prices of the
Predecessor and the Company's newsprint during the periods indicated below:
<TABLE>
<CAPTION>
Predecessor Company
------------- -----------
Eleven Months One Month
Ended Ended
Years Ended December 31, November 30, December 31 Years Ended December 31,
--------------------------------------- -------------------------------------
1995 1996 1997 1997 1998 1999
-------- -------- -------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
TONNES SOLD 206,800 217,200 206,400 19,900 221,700 222,574
AVERAGE NET SELLING $639 $593 $512 $544 $551 $466
PRICE
</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 year ended December 31, 1999, raw materials, which are subject to
significant price fluctuations based on supply and demand, represented 33.9% of
the total cost of manufacturing. Electrical energy represented 15.4% and direct
and indirect labor represented 22.7%of total cost of manufacturing. The Company
currently uses a raw material mix of 50% TMP, 42% recycled fiber and 8% kraft
pulp in its production process.
10
<PAGE>
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Net sales decreased by $18.5 million, or 15.1%, to $103.7 million in 1999 from
$122.2 million in 1998. The net sales decrease was principally due to a 15.4%
decrease in average net selling prices for the Company's product, from an
average net selling price of $551 per tonne in 1998 to an average net selling
price of $466 per tonne in 1999, offset in part as a result of a 0.4% increase
in sales volume to approximately 222,600 tonnes in 1999 from approximately
221,700 tonnes in 1998.
Cost of sales increased by $0.4 million, or 0.4%, to $95.1 million in 1999 from
$94.7 million in 1998. This small increase was primarily attributable to the
0.4% increase in sales volume. Costs of sales as a percentage of net sales
increased from 77.5% in 1998 to 91.7% in 1999 as a result of the decrease in
average selling prices and a slight increase in cost per ton.
The Company's selling, general and administrative expenses decreased by $0.7
million, or 16.7%, to $3.5 million in 1999 from $4.2 million in 1998 primarily
because of lower management fees paid by the Company to Brant-Allen in 1999,
which resulted directly from decreased net sales.
As a result of the above factors, income from operations decreased by $18.2
million or 78.1% to $5.1 million in 1999 from $23.3 million in 1998.
The Company's interest expense decreased by $1.8 million, or 9.5%, to $17.1
million in 1999 from $18.9 million in 1998, due to scheduled payments of the
Company's outstanding indebtedness and retirement of the Company's outstanding
Term Loan Facility of $50.2 million offset by an increase of $4.0 million in the
outstanding revolving line of credit during 1999.
The Company's other income including interest income increased by $0.8 million,
or 400.0%, to $1.0 million in 1999 from $0.2 million in 1998 as a result of the
sale of a portion of the Company's timberlands.
The extraordinary loss of $1.0 million incurred in the fourth quarter of 1999
was a result of a write off of a portion of the Company's deferred financing
costs due to the early extinguishment of $49.6 million of debt on the Term Loan
Facility.
As a result of the above factors, the Company incurred a net loss in 1999 of
$12.0 million compared to net income of $4.6 million in 1998.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited pro forma condensed statement of operations has been
prepared by management from the historical financial statements of the
Predecessor for the eleven months ended November 30, 1997 and the historical
financial statements of the Company for the one-month ended December 31, 1997.
The Acquisition, and the incurrence of debt, are assumed to have occurred at
January 1, 1997. The pro forma condensed statement of operations for the year
ended December 31, 1997 is not necessarily indicative of the results of
operations that would have occurred for the year ended December 31, 1997, had
the Acquisition and debt incurrence occurred January 1, 1997. In preparation of
the pro forma condensed statement of operations, management has made certain
estimates and assumptions that affect the amounts reported in the unaudited pro
forma condensed statement of operations. The unaudited pro forma condensed
statement of operations should be read in conjunction with the historical
financial statements and related notes thereto of the Company which are included
in this Form 10-K.
11
<PAGE>
<TABLE>
<CAPTION>
Unaudited Pro Forma Condensed
Statement of Operations
for the Year Ended December 31, 1997
------------------------------------
Predecessor
Historical Pro Forma Company Company
Eleven Eleven Historical Pro Forma
Months Ended Months Ended One Month Year Ended
November 30, Pro Forma November 30, Ended December Pro Forma December
1997 Adjustments 1997 31, 1997 Adjustments 31, 1997
------------ ----------- ------- --------- ----------- ---------
(Dollars in Thousands, Except Notes)
<S> <C> <C> <C> <C> <C> <C>
Net sales $105,588 $105,588 $ 10,807 $ 116,395
Cost of sales 95,404 $(3,666)(a) 89,387 9,069 98,255
(753)(b)
201 (c)
(1,799)(d) $ (201)(c)
-------- ----------- ------- --------- ------- ---------
Gross profit 10,184 6,017 16,201 1,738 201 18,140
Selling, general &
administrative expenses:
Management fee to
Brant-Allen 3,175 3,175 325 3,500
Other 573 275(e) 848 45 893
-------- ------------ -------- ------- --------
Income from operations 6,436 5,742 12,178 1,368 201 13,747
Other income (deductions):
Interest income 591 591 -- 591
Interest expense (4,332) (13,282)(f) (18,205) (1,633) (19,838)
Other (41) (591)(g) (41) 53 12
-------- ---------------- -------- ------- --------
Income (loss) before
Extraordinary item $ 2,654 $ (8,131) $ (5,477) $ (212) $201 $(5,488)
======== ======== ======== ======= ========== ========
</TABLE>
(a) Adjustment to reflect the effect on cost of goods sold from reducing to an
open market price pulpwood sold by BITCO to the Predecessor during the eleven
months ended November 30, 1997 resulting from the elimination of an
arrangement for the up charge formerly paid by the Predecessor to BITCO
resulting from the amendment to the Company's and Timberland's supply
arrangement in connection with the Acquisition. The price per cord of timber
was reduced from $95.50 to $69.71 per cord for the eleven months ended
November 30, 1997 for 142,143 cords consumed during the eleven months ended
November 30, 1997.
(b) Adjustment to reflect pro forma depreciation expense resulting from the
Acquisition computed based on remaining useful lives of plant and equipment
ranging from 1 to 50 years.
(c) To reflect the impact on cost of sales for the eleven months ended
November 30, 1997 of a $201,043 write-up to inventory at January 1, 1997 in
connection with the allocation of the purchase price.
(d) Adjustment to reflect the effect on cost of sales resulting from the
termination of the recycled fiber procurement activities of BITCO charged to
the Predecessor. Amounts eliminated are an up charge for recycled fiber
acquired from BITCO less employee costs previously billed to BITCO which are
added for procuring recycled fiber. The procurement fees charged to the
Predecessor for the eleven months ended November 30, 1997 were $2,028,481 and
the actual costs of procurement provided were $229,465.
(e) Adjustment to reflect the incremental general and administrative expenses
of $300,000 annually associated with operating as a public company.
(f) Adjustment to reflect the incremental interest expense for the eleven
months ended November 30, 1997 related to the balances assumed outstanding on
$100 million principal amount of the Notes, $70 million Term Loan Facility and
$50 million Revolving Credit Facility for which $31 million was assumed
outstanding at January 1, 1997, upon consummation of the Acquisition. The
total amount assumed to be outstanding at January 1, 1997 also includes $6
million of existing debt which is not assumed to be repaid at January 1, 1997.
This amount represents the difference between the $42 million in debt repaid
at November 30, 1997 and the amount of $48 million outstanding at January 1,
1997. The remaining $6 million of existing debt is assumed to be repaid during
the period from January 1, 1997 to November 30, 1997. Interest is calculated
at the current rate as of December 1, 1997 for the eleven months ended
November 30, 1997 for the 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 $6 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 eleven months ended
November 30, 1997 of approximately $87,100.
12
<PAGE>
(g) Adjustment to reflect the net effect of increased amortization for the
$8.5 million in deferred financing costs incurred to fund the Acquisition,
amortized over the respective lives of the Term Loan Facility, the Revolving
Credit Facility and the Notes.
1998 COMPARED TO PRO FORMA 1997
The following comparison of 1998 to pro forma 1997 is presented to assist the
reader in understanding the change in operations from 1997 to 1998 assuming that
the Transactions had occurred as of January 1, 1997, for purposes of the 1997
pro forma results of operations ("Pro Forma 1997").
Net sales increased by $5.8 million, or 5.0%, to $122.2 million in 1998 from
$116.4 million in Pro Forma 1997. The net sales increase was principally due to
a 7.2% increase in average net selling prices for the Company's product, from an
average net selling price of $514 per tonne in Pro Forma 1997 to an average net
selling price of $551 per tonne in 1998, offset in part as a result of a 2.1%
decrease in sales volume to approximately 221,700 tonnes in 1998 from
approximately 226,300 tonnes in Pro Forma 1997.
Cost of sales decreased by $3.6 million, or 3.7%, to $94.7 million in 1998 from
$98.3 million in Pro Forma 1997. This decrease was primarily attributable to the
2.1% decrease in sales volume and an overall decrease in departmental production
costs. Costs of sales as a percentage of net sales decreased from 84.4% in Pro
Forma 1997 to 77.5% in 1998 as a result of the increase in average selling
prices and the decrease in per tonne cost of manufacture.
The Company's selling, general and administrative expenses decreased by $0.2
million, or 4.5%, to $4.2 million in 1998 from $4.4 million in Pro Forma 1997
primarily because of higher estimated legal and accounting expenses in Pro Forma
1997 offset partially by higher management fees paid by the Company to Brant-
Allen in 1998, which resulted directly from increased net sales.
As a result of the above factors, income from operations increased by $9.6
million or 70.1% to $23.3 million in 1998 from $13.7 million in Pro Forma in
1997.
The Company's interest expense decreased by $0.9 million, or 4.5%, to $18.9
million in 1998 from $19.8 million in Pro Forma 1997, due to scheduled
amortization of the Company's outstanding indebtedness and reductions in the
Company's outstanding revolving line of credit, which reduced by $11.0 million
during 1998.
The Company's other income including interest income decreased by $0.4 million,
or 66.7%, to $0.2 million in 1998 from $0.6 million in Pro Forma 1997 as a
result of utilizing all available cash balances to reduce outstanding balances
on the Company's revolving credit line in 1998 as opposed to investing these
balances in interest bearing securities in Pro Forma 1997.
As a result of the above factors, the Company's net income increased by $10.1
million to $4.6 million in 1998 from a net loss of $5.5 million in Pro Forma
1997.
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. In addition, the Company received four
capital contributions from Brant-Allen in the year ended December 31, 1999, in
May $7.5 million, in July $2.0 million, in September $1.7 million and in
November $36.2 million all representing the excess proceeds from the sale of
timberlands of the Bear Island Timberlands Company, L.L.C. In accordance with
security agreements the capital contribution proceeds were used to pay down bank
debt.
13
<PAGE>
The Company's cash and short-term investments at December 31, 1999 were
approximately $1.0 million, representing a decrease of approximately $1.1
million from $2.1 million at December 31, 1998. Net cash provided by operating
activities was $2.5 million for the year ended December 31, 1999. Cash used in
financing activities was $3.4 million and cash used in investing activities was
$0.3 million for the year ended December 31, 1999. In total $77.8 million, was
used to cover: capital expenditures of $3.0 million; a tax distribution of $4.1
million; and a reduction in long-term debt including purchase obligations of
$70.7 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.
For the year ended December 31, 1999, the Company's cash provided by operating
activities decreased by 87.9% to $2.5 million from $20.6 million for the year
ended December 31, 1998, primarily due to lower selling prices resulting in a
net loss for the year ended December 31, 1999 compared to net income for the
year ended December 31, 1998.
The Company made capital expenditures of $3.0 million and $7.5 million in the
year ended December 31, 1999 and 1998, respectively, in connection with
upgrading and maintaining its manufacturing facility. Management anticipates
that the Company's total capital expenditures will increase for the year 2000
and 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 December 31, 1999, the Company had approximately $138.0 million of
indebtedness, consisting of borrowings of $19.0 million under the Revolving
Credit Facility, $19.0 million under the Term Loan Facility and $100.0 million
under the Senior Secured Notes. In Addition, $6.0 million was available in
unused borrowing capacity under the Revolving Credit Facility.
RESTRICTIVE DEBT COVENANTS
The indenture dated December 1, 1997 between the Company, Bear Island Finance
Company II, Soucy Inc., Timberlands, Brant-Allen and Crestar Bank, as trustee
(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.
14
<PAGE>
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. 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 were significantly greater than they had been historically.
Interest expense for the years ended December 31, 1999 and 1998, for the one-
month ended December 31, 1997 and for the eleven months ended November 30, 1997
was approximately $17.1 million, $18.9 million, $1.6 million and $4.3 million,
respectively. As of December 31, 1999, the Company had $19.0 million outstanding
under its Revolving Credit Facility, leaving a balance of $6.0 million available
for future drawdowns.
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
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 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.
Historically, the Company has had relatively few foreign sales, all of which
have been denominated in U.S. dollars. On December 3, 1997, the Company entered
into an interest rate swap transaction in the amount of $70,000,000, decreasing
in increments of $10,000,000 annually, whereby the Company exchanged a floating
three month London Interbank Offered Rate ("LIBOR") interest rate for a fixed
rate of 6.13%. This swap arrangement was terminated in October 1999 and a gain
of $150,000 was recognized.
ENVIRONMENTAL EXPENDITURES
The operation of the 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) $200,000 for the closure of
one landfill for 2000 and 2001.
15
<PAGE>
YEAR 2000 COMPLIANCE
With the passage of the critical January 1, 2000, and February 29, 2000, dates,
the Company and, to management's knowledge, its suppliers and its customers,
have not experienced any significant business disruptions as a result of the
Year 2000 date change. The Company will continue to monitor its systems and
communicate with its suppliers for ongoing Year 2000 compliance until it is
reasonably assured that no significant business interruptions are likely to
occur. Based on the actions taken by the Company and its experience to date,
the Company does not believe that its operations will be materially impacted by
the Year 2000 issue.
The Company estimates its total Year 2000 costs to be approximately $275,000.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("FAS 133"). FAS 133 establishes standards for
accounting and disclosure of derivative instruments. This new standard is
effective for fiscal quarters of fiscal years beginning after June 15, 1999. In
June 1999, the FASB issued FAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," postponing FAS 133's effective date to fiscal quarters of fiscal years
beginning after June 15, 2000. The implementation of this new standard is not
expected to have a material effect on the Company's results of operations or
financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to various market risk factors such as fluctuations in
interest rates, as well as changes in the cost of raw materials. These risk
factors can impact results of operations, cash flows and financial position. The
Company manages these risks through regular operating and financing activities,
and when necessary, the use of derivative financial instruments, such as
interest rate swap contracts. These derivative instruments, when used, are with
major financial institutions and are not for speculative or trading purposes.
The following analysis presents the effect on the Company's earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 1999. Only the potential impacts of these hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact the Company's business.
At year-end 1999, the Company carried $138.3 million of outstanding debt on its
books, with $38.0 million of that total held at variable interest rates. Holding
all other variables constant, if interest rates hypothetically increased by 10%,
the impact on earnings and cash flow would be an increase to interest expense of
$232,000. Conversely, if interest rates hypothetically decreased by 10%, with
all other variables held constant, the change in interest expense would be a
decrease to interest expense of $238,000.
The Company is exposed to the risk of increasing raw material prices, which
could impact profit margins. When raw material cost increases, the Company
generally is unable to increase selling prices. Therefore, the Company expects
the impact of increasing raw material cost to result in reductions in the
results of its operations or cash flows. Major raw material components include
wood, kraft, ONP, ONG and chemicals.
ITEM 8. FINANCIAL STATEMENTS.
Certain statements in the financial statements and elsewhere in this report may
constitute forward-looking statements. Because these forward-looking statements
include risks and uncertainties, actual results may differ materially from those
expressed in or implied by the statements. Factors that could cause actual
results to differ include, among other things: increased domestic or foreign
competition; increases in capacity through construction of new mills or
conversion of older facilities to produce competitive products; variations in
demand for our products; changes in our cost for or the availability of raw
materials, particularly market pulp and wood; the cost of compliance with new
environmental laws and regulations; the pace of acquisitions; cost structure
improvements; the success of new initiatives; integration of systems; the
success of computer-based system enhancements; and general economic conditions.
16
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
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 52 Co-Chairman of the Board of Directors and
Chief Executive Officer of the Company and
Timberlands; Co-Chairman, and Chief Executive Officer
of Brant-Allen; and Chief Executive Officer of Soucy Inc.
Joseph Allen 58 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 54 Vice President of Finance and
Director of the Company; Vice President of Finance
of Timberlands; Senior Vice President and Chief
Financial Officer of Brant-Allen; and Vice President
of Soucy Inc.
Thomas E. Armstrong 62 Vice President of Sales and
Manufacturing and Director of the Company; Vice
President of Sales and Manufacturing of Timberlands;
Executive Vice President of Brant-Allen; and Vice
President of Soucy Inc.
Michael Conroy 60 Director
Robert Flug 52 Director
The following table sets forth certain information about the Company's key
employees:
NAME AGE POSITION
Emilio F. Rigato 52 Mill Manager
Thomas Conte 46 Production Manager
Robert Jackson 60 Human Resources Manager
Seth Hobart 48 Financial Manager
Robert Ellis 49 Manager of Engineering, Maintenance and Government Affairs of the Company
</TABLE>
17
<PAGE>
PETER M. BRANT. Mr. Brant is the Co-Chairman of the Board of Directors and Chief
Executive Officer of the Company and Timberlands, the Co-Chairman and Chief
Executive Officer of Brant-Allen and Chief Executive Officer of Soucy Inc. Mr.
Brant jointly owns Brant-Allen with Mr. Joseph 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 the President, and Chief Operating Officer and
Secretary of the Company and Timberlands, the President 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, Vice President of Finance of 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.
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and Manufacturing
and Director of the Company, Vice President of Sales and Manufacturing of
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 a Director of the Company in November
1997. Mr. Conroy is an independent consultant. Mr. Conroy was the President of
the International Herald Tribune Company US, Inc. (the "Herald Tribune") up to
December 1998 . He had been with that company for 12 years. Before joining the
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.
EMILIO F. RIGATO. Mr. Rigato joined the Company in January 1999 as Mill Manager.
From 1992 to 1998 Mr. Rigato was with Avenor, Inc. as Manager Thunder Bay Mill
Operations.
THOMAS CONTE. Mr. Conte joined the Company in January 2000 as Production
Manager. From July 1989 to January 2000 Mr. Conte was with Alabama River
Newsprint, Inc. as Assistant Papermachine Superintendent.
ROBERT JACKSON. Mr. Jackson has been the Human Resources Manager of the Company
since 1979.
SETH HOBART. Mr. Hobart has been the Financial Manager of the Company since
January 2000. From November 1979 to January 2000 Mr. Hobart was Controller of
the Company. He has been with the Company since 1976.
ROBERT ELLIS. Mr. Ellis was named the Manager of Engineering, Maintenance and
Governmental Affairs of the Company in February 2000. Prior to his latest
promotion Mr. Ellis was Manager of Engineering Services and Governmental Affairs
of the Company and has been with the Company since 1980.
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Brant-Allen was paid any compensation by the Company
between 1997 and 1999. All officers of the Company who also serve as officers of
Brant-Allen have received and will continue to receive compensation from and,
except as noted in the following paragraph, participate in employee benefit
plans and arrangements sponsored by Brant-Allen, including, but not limited to,
Brant-Allen's defined contribution retirement plan (known as the Brant-Allen
Industries, Inc. Incentive Profit-Sharing 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 except as noted in the
following paragraph, these officers are not entitled to participate in the
Company's employee benefit plans and arrangements.
18
<PAGE>
Effective as of March 15, 1999, the Brant-Allen Industries, Inc. Incentive
Profit-Sharing Plan was merged with and into the Bear Island Paper Company, L.P.
Thrift Plan. Brant-Allen also adopted both the Company's Thrift Plan effective
for employee 401(k) contributions and employer matching contributions as of
April 1, 1999 and for other contributions as of January 1, 1999 and the
Company's Retirement Plan effective as of January 1, 1999. It is anticipated
that Brant-Allen will contribute the amount of employer contributions due on
behalf of its employees under such plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Brant-Allen beneficially owns all the equity of each of the Company, Timberlands
and Soucy Inc. Brant-Allen, in turn, is jointly owned by Mr. Peter Brant and Mr.
Joseph Allen.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH BRANT-ALLEN, TIMBERLANDS AND SOUCY
Brant-Allen owns all of the equity in the Company, Timberlands and Soucy Inc.
Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant and
Mr. Joseph Allen. Mr. Brant serves as Brant-Allen's Chairman of the Board and
Chief Executive Officer and also as 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 President and Chief Operating
Officer and also as President 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. Thomas Armstrong, are also directors of
the Company.
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, of which since December 1, 1997, as a
result of the Company's debt agreements, one third is payable in cash with the
remainder contributed to the Company's capital. This fee amounted to $3,110,000,
$3,666,000, $324,000 and $3,168,000 for the years ended December 31,1999 and
1998, the one-month ended December 31, 1997, and the eleven months ended
November 30, 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.
For the years ended December 31, 1999, 1998, and 1997, Soucy Inc. paid Brant-
Allen approximately Cdn$16,056,000, Cdn$17,082,000, and Cdn$13,192,000,
respectively, for management and selling services.
19
<PAGE>
WOOD SUPPLY FROM BITCO AND ONP AND OMG PROCUREMENT
Prior to the consummation of the Transactions, BITCO supplied all the
Predecessor's wood requirements at prices, including an up charge (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 was no up charge and Timberlands supplied the
Company with 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. Timberlands' and BITCO's wood sales to the Company
and Predecessor were $2,930,000, $1,637,000, and $13,280,000 during the year
ended December 31, 1998, the one month ended December 31, 1997 and the eleven
months ended November 30, 1997, respectively. Effective December 1, 1998, the
Company is purchasing all of its logs and pulp chips from outside suppliers at
market prices. During 1999, Timberlands sold substantially all of its
properties. The net proceeds from these sales were utilized to reduce (i)
Timberlands debt and (ii) debt incurred by the Company and Brant-Allen in
connection with Brant-Allen's purchase of the equity interest in Timberlands and
the Company. See the accompanying financial statements of the Company.
Prior to the consummation of the Transactions, BITCO procured recycled paper for
the Predecessor in exchange for a procurement fee based on the ONP and OMG
tonnage procured. The Predecessor recognized costs of $2,029,000 for such fees
during the eleven months ended November 30, 1997. See the accompanying financial
statements of BITCO and Timberlands. The Company terminated this procurement
arrangement concurrently with consummation of the Transactions and now procures
ONP and OMG itself.
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 Predecessor and the Company for shared
costs, which are included in selling, general and administrative expenses,
approximated $1,024,000, $782,000, $60,000 and $1,319,000, during the years
ended December 31, 1999 and 1998, the one month ended December 31, 1997, the
eleven months ended November 30, 1997, respectively. Timberlands also managed
the Company's timberlands for which the Company and the Predecessor paid
Timberlands and BITCO fees of approximately $62,500, $5,300, and $55,000, during
the year ended December 31, 1998, the one month ended December 31, 1997 and the
eleven months ended November 30, 1997, respectively. See the accompanying
financial statements of the Company.
In 1988, the Predecessor and BITCO entered into an agreement for certain
marketing and consulting services with The Elebash Company ("Elebash"), a real
estate broker, whereby BITCO, in the case of sales of BITCO-owned land, or the
Predecessor, in the case of sales of Predecessor-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 and
Timberlands paid Elebash approximately $3,000, $6,000 and $32,000, for the year
ended December 31, 1998, the one-month ended December 31, 1997, and the eleven
months ended November 30, 1997, respectively. Amounts paid to Elebash are
included in selling, general and administrative expenses in the accompanying
statements of income. This agreement was canceled effective 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 have been
extended through December 31, 2004 and are subject to the parties agreeing to
pricing, which approximates market prices, on an annual basis. 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. In addition,
the parties to the Purchase Agreements have the option to purchase additional
quantities of newsprint as available.
20
<PAGE>
The Company and the Predecessor have had five customers whose sales represent a
significant portion of sales. Sales to Dow Jones approximated 20%, 22%, 18%, and
22% for the years ended December 31, 1999 and 1998, the one-month ended December
31, 1997, and the eleven months ended November 30, 1997, respectively. Sales to
The Washington Post approximated 19%, 22%, 20%, and 22% for the years ended
December 31, 1999 and 1998, the one-month ended December 31, 1997, and the
eleven months ended November 30, 1997, respectively. Sales to Newhouse Group
approximated 15%, 11%, 23%, and 10% for the years ended December 31, 1999 and
1998, the one-month ended December 31, 1997, and the eleven months ended
November 30, 1997, respectively. Sales to Gannett approximated 12%, 11%, 13%,
and 14% for the years ended December 31, 1999 and 1998, the one-month ended
December 31, 1997, and the eleven months ended November 30, 1997, respectively.
Sales to Knight-Ridder approximated 10% during the year ended December 31, 1998.
21
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits and Financial Statements
(1) See Index to Financial Statements and Schedule of Bear Island Paper
Company, L.L.C. and Bear Island Paper Company, L.P. at page 25.
(2) Financial Statement Schedule of Bear Island Paper Company, L.L.C. and Bear
Island Paper Company L.P.:
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable and therefore have been omitted.
(3) Exhibits
2.1 The Partnership Interest Sale Agreement, dated as of December 1, 1997,
by and among Dow Jones Virginia Company Inc., Newsprint, Inc. and
Brant-Allen.*
3.1 Articles of Organization of the Company.*
3.2 Operating Agreement of the Company.*
4.1 Indenture, dated as of December 1, 1997, among the Registrants,
Timberlands, Soucy Inc. and Crestar Bank, as Trustee, relating to the
Notes.*
4.2 Registration Rights Agreement, dated December 1, 1997, among the
Registrants and TD Securities (USA), Inc. and Salomon Brothers Inc, as
Initial Purchasers.*
4.3 Intercreditor Agreement, dated as of December 1, 1997, among the
Registrants, Brant-Allen, Toronto Dominion (Texas), Inc. and Crestar Bank.*
4.4 Deed of Trust dated as of December 1, 1997, by and between the Company
and Crestar Bank, as Trustee.*
4.5 Company Pledge and Security Agreement, dated as of December 1, 1997, by
and between the Company and Crestar Bank, as Trustee.*
4.6 Hypotech Agreement, dated as of December 1, 1997, by and between
Brant-Allen and Crestar Bank, as Trustee.*
22
<PAGE>
10.1 Bank Credit Agreement, dated as of December 1, 1997, by and among the
Company, TD Securities (USA), Inc., Toronto Dominion (Texas), Inc.,
Christiania Bank OG Kreditkass ASA, Keyport Life Insurance Company, Prime
Income Trust, Deeprock & Company, Merrill Lynch Senior Floating Rate Fund,
Inc. and Van Kampen American Capital Prime Rate Trust.*
10.2 The Management Services Agreement, dated as of December 1, 1997, by and
among the Company and Brant-Allen.*
10.3 The Wood Supply Agreement, dated as of December 1, 1997, by and among
the Company and Timberlands.*
10.4 The Newsprint Purchase Agreement, dated as of May 19, 1978, by and
between the Company and the Dow Jones & Co., Inc.*
10.4a Amendments to Newsprint Purchase Agreement, dated as of April 1, 1987,
December 10, 1991, August 10, 1993 and April 22, 1996.
10.5 The Newsprint Purchase Agreement, dated as of May 19, 1978, by and
between the Company and The Washington Post.*
10.5a Amendments to Newsprint Purchase Agreement, dated as of December 10,
1991, August 10, 1993 and April 22, 1996.
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule
* Previously filed as an exhibit to the Company's registration statement on
Form S-4 Registration No. 333-42201, as amended, and incorporated herein
by reference.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
------------------
Name: Peter M. Brant
Title: Chairman of the Board of Directors
and Chief Executive Officer of the Company
Date: March 30, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacity and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
Principal Executive Officer
/s/ Peter M. Brant Chairman of the Board of Directors and March 30, 2000
- --------------------------- Chief Executive Officer
Peter M. Brant
Principal Financial and Accounting Officer
/s/ Joseph Allen President, Co-Chairman of the Board of March 30, 2000
- --------------------------- Directors, Chief Operating Officer and
Joseph Allen Secretary
/s/ Edward D. Sherrick Vice President of Finance and Director of March 30, 2000
- --------------------------- the Board of Directors
Edward D. Sherrick
/s/ Thomas E. Armstrong Vice President of Sales and Manufacturing March 30, 2000
- --------------------------- and Director of the Board of Directors
Thomas E. Armstrong
/s/ Michael Conroy Director of the Board of Directors March 30, 2000
- ---------------------------
Michael Conroy
/s/ Robert Flug Director of the Board of Directors March 30, 2000
- ---------------------------
Robert Flug
</TABLE>
24
<PAGE>
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND
PAPER COMPANY, L.L.C. AND BEAR ISLAND PAPER COMPANY, L.P.
BEAR ISLAND PAPER COMPANY, L.L.C.
Balance Sheets--December 31, 1999 and 1998
Statements of Operations--Years ended December 31, 1999 and 1998 and one
month ended December 31, 1997
Statements of Changes in Member's Interest--Years ended December 31, 1999
and 1998 and one month ended December 31, 1997
Statements of Cash Flows--Years ended December 31, 1999 and 1998 and one
month ended December 31, 1997
BEAR ISLAND PAPER COMPANY, L.P.
Statements of Operations--Eleven months ended November 30, 1997
Statements of Changes in Partners' Equity--Eleven months ended November 30,
1997
Statements of Cash Flows--Eleven months ended November 30, 1997
Schedule II Valuation and Qualifying Accounts
25
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
<PAGE>
PricewaterhouseCoopers [LOGO]
PricewaterhouseCoopers LLP
Riverfront Plaza West
901 East Byrd Street
Suite 1200
Richmond VA 23219-4071
Telephone (804) 697 1900
Facsimile (804) 697 1999
Report of Independent Accountants
To the Board of Directors and Member of
Bear Island Paper Company, L.L.C.:
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 25 present fairly, in all material respects, the
financial position of Bear Island Paper Company, L.L.C. (a Virginia limited
liability corporation) (the "Company") at December 31, 1999 and 1998, and the
results of its operations and its cash flows for the years ended December 31,
1999 and 1998 and the one month ended December 31, 1997 and Bear Island Paper
Company, L.P.'s (collectively with the Company, the "Companies") results of
operations and cash flows for the eleven months ended November 30, 1997, in
conformity with accounting principles generally accepted in the United States.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under Item 14(a)(2) on page 25 presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related financial statements. These financial statements and financial statement
schedule are the responsibility of the Companies' management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
As discussed in Note 4 to the financial statements, the Companies had numerous
significant related-party transactions with affiliates for the years ended
December 31, 1999 and 1998, the one month ended December 31, 1997 and the eleven
months ended November 30, 1997, which significantly impacted the financial
statements of the Companies.
PricewaterhouseCoopers LLP
January 28, 2000
1
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31,
-----------------------------
ASSETS 1999 1998
<S> <C> <C>
Cash and short-term investments $ 981,199 $ 2,130,787
Accounts receivable:
Trade, less allowance for doubtful accounts of $67,778 in
1999 and $73,073 in 1998 9,269,554 9,711,800
Affiliates 2,617,284 3,760,594
Other 473,979 196,957
Inventories 12,975,282 13,827,824
Other current assets 379,435 570,234
------------ ------------
Total current assets 26,696,733 30,198,196
------------ ------------
Property, plant and equipment, at cost 202,487,949 201,618,960
Less accumulated depreciation (21,428,569) (10,841,783)
------------ ------------
Net property, plant and equipment 181,059,380 190,777,177
------------ ------------
Deferred financing costs, net of accumulated amortization of
$1,187,612 and $748,725 in 1999 and 1998, respectively 6,830,894 8,275,781
------------ ------------
$214,587,007 $229,251,154
============ ============
LIABILITIES
Current portion of long-term debt 700,000 700,000
Current portion of long-term purchase obligations 130,566 384,693
Accounts payable and accrued expenses 9,360,774 10,319,912
Due to affiliates 11,791 111,320
Interest payable 1,044,362 1,307,030
------------ ------------
Total current liabilities 11,247,493 12,822,955
------------ ------------
Long-term debt 137,333,276 183,600,000
Long-term purchase obligations 127,248 261,470
------------ ------------
137,460,524 183,861,470
------------ ------------
EQUITY
Member's interest 77,553,705 28,130,250
Retained earnings (accumulated deficit) (11,674,715) 4,436,479
------------ ------------
$214,587,007 $229,251,154
------------ ------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
2
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Company Predecessor
--------------------------------------------- -------------
For the year For the year One month Eleven months
ended ended ended ended
December 31, December 31, December 31, November 30,
------------ ------------ ------------ -------------
1999 1998 1997 1997
<S> <C> <C> <C> <C>
Net sales $ 82,567,715 $ 95,870,332 $ 8,881,972 $ 59,547,722
Net sales to affiliates 21,104,938 26,327,457 1,924,961 46,039,980
------------ ------------ ------------ -------------
Total net sales 103,672,653 122,197,789 10,806,933 105,587,702
Cost of sales 95,062,714 94,656,233 9,068,701 95,404,127
------------ ------------ ------------ -------------
Gross profit 8,609,939 27,541,556 1,738,232 10,183,575
Selling, general and administrative expenses:
Management fees to affiliate 3,110,180 3,665,934 324,835 3,174,722
Other direct 393,693 535,999 45,658 572,644
------------ ------------ ------------ -------------
Income from operations 5,106,066 23,339,623 1,367,739 6,436,209
------------ ------------ ------------ -------------
Other income (deductions):
Interest income 148,995 201,491 590,971
Interest expense (17,097,180) (18,892,445) (1,633,043) (4,331,563)
Other income (expense) 863,346 53,114 (41,231)
------------ ------------ ------------ -------------
(16,084,839) (18,690,954) (1,579,929) (3,781,823)
------------ ------------ ------------ -------------
Income (loss) before
extraordinary item (10,978,773) 4,648,669 (212,190) 2,654,386
Extraordinary item:
Early extinguishment of debt (1,006,000) (4,367,418)
------------ ------------ ------------ -------------
Net income (loss) $(11,984,773) $ 4,648,669 $ (212,190) $ (1,713,032)
------------ ------------ ------------ -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
3
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CHANGES IN EQUITY
<TABLE>
<CAPTION>
Brant-Allen Dow Jones
Industries, Virginia Newsprint,
Inc. Company, Inc. Inc. Total
<S> <C> <C> <C> <C>
Predecessor
Partners' equity:
Contributed capital:
Balances, December 31, 1996 and
November 30, 1997 $ 24,656,681 $ 31,882,500 $ 31,882,500 $ 88,421,681
============ ============ ============ =============
Retained earnings (accumulated deficit):
Balance, November 30, 1997 $ 813,056 $ 2,420,523 $ 2,420,523 $ 5,654,102
============ ============ ============ =============
===============================================================================================================
Company
Equity:
Member's interest:
Aggregate equity balances at
December 1, 1997 and conversion
to Bear Island Mergerco, L.L.C. 25,469,737 34,303,023 34,303,023 94,075,783
Acquisition of 70% limited partnership
interest by Bear Island Paper
Company, L.L.C. and merger with
Bear Island Mergerco, L.L.C. - (34,303,023) (34,303,023) (68,606,046)
------------ ------------ ------------ ------------
Balance, December 31, 1997 $ 25,469,737 - - 25,469,737
============ ============ ============
Management fee payable contributed
to capital by parent - year ended
December 31, 1998 2,660,513
-------------
Balance, December 31, 1998 28,130,250
Management fee payable contributed
to capital by parent - year ended
December 31, 1999 2,073,455
Capital contributions from parent 47,350,000
-------------
Balance, December 31, 1999 $ 77,553,705
=============
Retained earnings (accumulated deficit):
Net loss - one month ended
December 31, 1997 $ (212,190)
-------------
Balance, December 31, 1997 (212,190)
Net income - year ended
December 31, 1998 4,648,669
-------------
Balance, December 31, 1998 4,436,479
Net loss - year ended December 31,
1999 (11,984,773)
Tax distributions to parent - 1999 (4,126,421)
-------------
Balance, December 31, 1999 $ (11,674,715)
=============
</TABLE>
The accompanying notes are an integral part of the financial statements.
4
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Company Predecessor
-------------------------------------------- -------------
For the year For the year One month Eleven months
ended ended ended ended
December 31, December 31, December 31, November 30,
------------- ------------ ------------ -------------
1999 1998 1997 1997
<S> <C> <C> <C> <C>
Operating activities:
Net income (loss) $ (11,984,773) $ 4,648,669 $ (212,190) $ (1,713,032)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation 10,615,303 10,033,191 822,264 9,735,450
Depletion 31,022 33,605 12,501
Amortization of deferred financing costs 438,887 669,339 79,386 54,307
Noncash portion of extraordinary item 1,006,000 419,930
Increase in allowance for obsolescence 63,000 324,500 152,000
(Gain) loss on disposal of property, plant and equipment (663,186) 1,204,076 588,873
(Increase) decrease in:
Accounts receivable 1,308,534 463,984 207,797 868,132
Inventories, excluding effects of obsolescence allowance 789,542 60,989 (606,791) 378,964
Other current assets 190,799 (422,323) 7,008 106,781
Increase (decrease) in:
Accounts payable and accrued expenses for operating
activities 1,081,189 3,718,698 (3,856,796) 2,516,245
Due to affiliate (66,401) (73,738) (1,416,656) 70,600
Interest payable (262,668) (37,885) 800,228 (492,813)
------------- ------------ ------------ -------------
Net cash provided by (used in) operating activities 2,547,248 20,623,105 (4,023,750) 12,545,938
------------- ------------ ------------ -------------
Investing activities:
Purchases of property, plant and equipment (3,009,194) (7,544,100) (238,518) (4,835,971)
Proceeds from disposition of property, plant and equipment 2,743,852 150,000 134,300
Payment for purchase of partnership interest, net of cash
acquired - (139,930,098)
------------- ------------ ------------ -------------
Net cash used in investing activities (265,342) (7,394,100) (140,168,616) (4,701,671)
------------- ------------ ------------ -------------
</TABLE>
5
<PAGE>
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS, Continued)
<TABLE>
<CAPTION>
Company Predecessor
---------------------------------------------- -------------
For the year For the year One month Eleven months
ended ended ended ended
December 31, December 31, December 31, November 30,
1999 1998 1997 1997
------------ ------------- ------------ -------------
<S> <C> <C> <C> <C>
Financing activities:
Contributions from parent $ 47,350,000 $ 3,564,585
Tax distributions to parent (4,126,421) (3,564,585)
Principal payments on long-term debt (70,266,724) $ (11,700,000) (47,000,000) $ (6,000,000)
Principal payments on promissory notes - (3,917,764)
Principal payments on long-term purchase obligations (388,349) (181,346) (2,549,049)
Proceeds from issuance of long-term debt 24,000,000 201,000,000
Payment of deferred financing costs - (569,921) (8,454,585)
------------ ------------- ------------ -------------
Net cash provided by (used in) financing activities (3,431,494) (12,451,267) 145,545,415 (12,466,813)
------------ ------------- ------------ -------------
Net increase (decrease) in cash and short-term
investments (1,149,588) 777,738 1,353,049 (4,622,546)
Cash and short-term investments, beginning of period 2,130,787 1,353,049 13,625,322
------------ ------------- ------------ -------------
Cash and short-term investments, end of period $ 981,199 $ 2,130,787 $ 1,353,049 $ 9,002,776
============ ============= ============ =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 16,920,961 $ 18,260,991 $ 288,128 $ 4,824,376
============ ============= ============ =============
Noncash investing and financing activities:
Increase in property, plant and equipment and long-term
purchase obligations for equipment acquisition $ - $ 392,205 $ 305,000
============ ============= =============
Increase in promissory notes for equipment acquisition 2,425,856
=============
Management fee payable contributed to capital by parent $ 2,073,455 2,660,513
============ =============
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Organization and Acquisition:
Effective December 1, 1997, Bear Island Paper Company, L.L.C., a newly formed
Virginia limited liability corporation (the "Company") completed the purchase
of the 70% partnership interest (the "Acquisition") in Bear Island Paper
Company, L.P. (the "Predecessor") (collectively the "Companies") previously
owned by subsidiaries of Dow Jones & Company, Inc. ("Dow Jones") and The
Washington Post Company ("The Washington Post"). Immediately before the
Acquisition and certain related financings which were used to facilitate the
funding of the Acquisition (see Note 7), the Predecessor was converted into
Bear Island Mergerco, L.L.C. ("Mergerco") and Mergerco was then merged into
the Company with the Company being the surviving entity. The Company is a
wholly owned subsidiary of Brant-Allen Industries, Inc. ("Brant-Allen"), a
Delaware corporation.
The Company accounted for the Acquisition as a purchase. The allocation of
the purchase price resulted in purchase adjustments being applied to certain
assets and liabilities acquired. In this connection, since Brant-Allen was
the owner of 30% interests in the Predecessor prior to the Acquisition,
purchase adjustments have been applied to adjust 70% of the basis of the
assets and liabilities acquired to fair value. The total purchase price of
approximately $149.6 million was allocated to the acquired assets and
liabilities based on their respective fair values at December 1, 1997 as
follows:
Working capital $ 11,598,450
Property, plant and equipment 163,383,956
Other liabilities (25,378,500)
-------------
Total purchase cost $ 149,603,906
-------------
As a result of the Acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the Acquisition are not
comparable to the Predecessor's financial statements for the periods prior to
the Acquisition.
On January 30, 1998, the Company completed its initial registration process
which became effective pursuant to Section 8(A) of the Securities Act of
1933. Concurrent with becoming effective, the Company became subject to the
information requirements of the Securities Exchange Act of 1934, as amended,
and required to file reports and other information with the United States
Securities and Exchange Commission.
The Predecessor was constituted as a limited partnership on May 18, 1978,
under the Virginia Uniform Limited Partnership Act, pursuant to a Limited
Partnership Agreement, as amended (the "Partnership Agreement"), among:
. Brant-Allen;
. Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware corporation
and a wholly owned subsidiary of Dow Jones; and
7
<PAGE>
1. Organization and Acquisition, continued:
. Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post.
Brant-Allen was the general partner and D J Virginia and Newsprint were
limited partners. Under the terms of the Partnership Agreement, as amended, D
J Virginia's and Newsprint's equity interests were 35% each and Brant-Allen's
equity interest was 30%. The Partnership Agreement, as amended, contained the
following provisions:
. The purpose of the Predecessor was to engage in the business of
producing, selling and distributing newsprint by constructing, owning
and operating a paper mill (the "Mill") in Hanover County, Virginia.
. Brant-Allen, as general partner, had full and exclusive control of the
business of the Predecessor, had active control of its management and
provided marketing and certain administrative services for which it
received a monthly management fee calculated at three percent of the
newsprint sales after deducting related distribution costs. Brant-Allen
was authorized to incur on behalf of the Predecessor, without the
approval or consent of the partners, debt of up to $97,900,000.
. The limited partners were not liable for any net losses or other debt
or liability of the Predecessor to any extent, except for their
respective contributions to capital.
. Subject to the aforementioned provisions, the partners shared the net
profits and losses, computed in accordance with generally accepted
accounting principles consistently applied, based on their interests,
as defined by the Partnership Agreement.
. No partner was allowed to sell, assign or otherwise dispose of its
interest, or any part thereof, in the Predecessor, unless it first
offered such interest to the other partners as prescribed in the
Partnership Agreement.
2. Liquidity:
As shown in the accompanying 1999 statement of operations and the December
31, 1999 balance sheet, the Company incurred a net loss of $11,984,773 and
had an accumulated deficit of $11,674,715. Management anticipates a smaller
loss during 2000 and plans to improve cash flow through increases in the
price of newsprint. The Company has approximately $6 million available under
its Revolving Credit Facility (see Note 7) to fund cash requirements.
Depending upon the realization of the increase in newsprint prices,
management expects to be able to meet liquidity requirements for 2000;
however, there exists a range of reasonably possible outcomes which could be
significantly impacted by achieving the aforementioned.
8
<PAGE>
3. Summary of Significant Accounting Policies:
Cash and Short-Term Investments: Cash and short-term investments include all
cash balances and highly liquid investments. Short-term investments are
stated at cost plus accrued interest, which approximates market value. For
purposes of the statements of cash flows, the Companies consider all highly
liquid short-term investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories: Finished goods and raw materials inventories are valued at the
lower of cost or market, with cost determined on the first-in, first-out
("FIFO") basis. Stores inventories are valued at the lower of average cost or
market and are shown net of an allowance for obsolescence at December 31,
1999 and 1998 of approximately $539,500 and $476,500, 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 Companies
capitalize interest costs as part of the cost of constructing significant
assets. There were no capitalized interest costs during the years ended
December 31, 1999 or 1998, the month ended December 31, 1997 or the eleven
months ended November 30, 1997.
The carrying value of property, plant and equipment is evaluated whenever
significant events or changes occur that might indicate an impairment through
comparison of the carrying value to total undiscounted cash flows.
Depreciation and Depletion: Depreciation of plant and equipment is computed
principally on the straight-line basis over the estimated useful lives of the
assets. Lives range from 10 to 50 years for buildings and improvements, 40
years for recycling facilities, 35 years for tanks, 30 years for specialized
building improvements, 25 years for newsprint manufacturing equipment, and
from three to 50 years for other machinery and equipment. The portion of the
cost of timberlands attributed to standing timber is charged against income
as timber is cut and utilized in the manufacturing process at rates
determined annually, based on the relationship of unamortized timber costs to
the estimated volume of recoverable timber.
Deferred Financing Costs: Costs directly associated with the issuance of debt
have been deferred and are being amortized using the interest method over the
life of the related debt. Unamortized balances written off in connection with
early retirements of long-term debt are recognized as extraordinary items at
the time of early retirement. The Predecessor amortized deferred financing
costs using the straight-line method which approximated the interest method.
Income Taxes: No provision for income taxes is required in the financial
statements since each member or partner is individually liable for any income
tax that may be payable on its share of the Companies' taxable income.
9
<PAGE>
3. Summary of Significant Accounting Policies, continued:
Revenue Recognition: Net sales to affiliates and non-affiliates are
recognized by the Companies at the time title transfers to the customer,
which occurs at the point of shipment of the newsprint to the customer.
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.
Derivatives: An interest rate swap agreement is used to help manage interest
rate exposure. Amounts to be paid or received under the agreement are accrued
as interest rates change and are recognized over the life of the agreement as
an adjustment to interest expense. The Company is exposed to credit losses in
the event of counterparty nonperformance, but does not anticipate such
losses.
Fair Value of Financial Instruments: The fair value of the Companies' long-
term debt is estimated using discounted cash flow analyses based on the
incremental borrowing rates currently available to the Companies with loans
of similar terms and maturity. The fair value of trade receivables and
payables approximates the carrying amount because of the short maturity of
these instruments. The fair value of the interest rate swap agreement is the
estimated amount that the Company would receive or pay to terminate the
agreement as of the balance sheet date, taking into account current interest
rates and the current creditworthiness of the counterparty.
Risks and Uncertainties: Financial instruments which potentially subject the
Companies to concentrations of credit risk consist principally of cash, cash
equivalents and receivables. The Companies' cash balance is maintained at a
major financial institution. Cash equivalents, which consist of U.S.
government securities, are with a high-credit-quality financial institution.
Receivables consist principally of trade accounts receivable resulting
primarily from sales to newspaper publishers. Credit is extended to customers
after an evaluation of creditworthiness. Generally, the Companies do not
require collateral or other security from customers for trade accounts
receivable. Substantially all of the Companies' customers operate in the
printing sectors, consequently their ability to honor their obligations are
dependent upon the financial strength of the printing and publishing sectors.
10
<PAGE>
3. Summary of Significant Accounting Policies, continued:
The Companies have had five customers whose sales represent a significant
portion of sales. Sales to one of these customers approximated 20%, 22%, 18%
and 22% for the years ended December 31, 1999 and 1998, the one month ended
December 31, 1997 and the eleven months ended November 30, 1997,
respectively. Sales to a second customer approximated 19%, 22%, 20% and 22%
for the years ended December 31, 1999 and 1998 , the one month ended December
31, 1997 and the eleven months ended November 30, 1997, respectively. Sales
to a third customer approximated 15%, 11%, 23% and 10% for the years ended
December 31, 1999 and 1998, the one month ended December 31, 1997 and the
eleven months ended November 30, 1997, respectively. Sales to a fourth
customer approximated 12%, 11%, 13% and 14% for the years ended December 31,
1999 and 1998, the one month ended December 31, 1997 and the eleven months
ended November 30, 1997, respectively. Sales to a fifth customer
approximated 10% during the year ended December 31, 1998.
Newsprint Sales, the sales division of Brant-Allen, has entered into certain
supply contracts, as amended, (the "Supply Contracts") with two customers.
Under the terms of the Supply Contracts, as amended, Newsprint Sales is
required to provide to these customers certain fixed volumes of newsprint at
prices determined annually, through December 31, 2004.
New Accounting Standards: During 1998 the Company implemented Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The implementation of these new standards had no
effect on the Company's statements of operations or its financial position as
of or for the year ended December 31, 1998 since the Company (i) has no other
comprehensive income and (ii) operates only in one segment and all long-lived
assets are located in the U.S., the Company's country of domicile.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
standards for accounting and disclosure of derivative instruments. This new
standard was effective for fiscal quarters of fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued FAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133," postponing FAS 133's effective date to
fiscal quarters of fiscal years beginning after June 15, 2000. The
implementation of this new standard is not expected to have a material effect
on the Company's results of operations or financial position.
4. Related-Party Transactions:
The Company has contracted to sell newsprint to Dow Jones and The Washington
Post. The agreements have been extended through December 31, 2004 and are
subject to the parties agreeing to pricing, which approximate market prices,
on an annual basis. Each of Dow Jones and The Washington Post is obligated
to purchase a minimum of approximately 45,000 tons of newsprint per year
under these agreements. In addition, they have the option to purchase
additional quantities of newsprint as available.
11
<PAGE>
4. Related-Party Transactions, continued:
All sales and related collections are made through Newsprint Sales, a
division of Brant-Allen. Brant-Allen provides similar sales and collection
activities for F.F. Soucy, Inc. ("Soucy, Inc."), an affiliated Canadian
newsprint company 100% owned by Brant-Allen. As part of the $70 million Term
Loan Facility and the $50 million Revolving Credit Facility (see Note 6),
Brant-Allen entered into a cash collateral agreement on December 1, 1997 (the
"Collateral Agreement"). The Collateral Agreement requires that collections
of the Company's receivables, by Newsprint Sales, at the end of any business
day are not to exceed the sum of (i) the collected funds received by
Newsprint Sales for the Company for such business day and the immediately
preceding business day plus (ii) an additional amount not exceeding $100,000.
The Companies received payments of approximately $234,100, $286,400, $21,200
and $230,000 from Brant-Allen as reimbursement for expenses incurred on
behalf of Brant-Allen during the years ended December 31, 1999 and 1998, the
month ended December 31, 1997 and the eleven months ended November 30, 1997,
respectively. Additionally, the Company received payments of approximately
$137,200 and $21,800 from F. F. Soucy, Inc. for expenses incurred on behalf
of F. F. Soucy, Inc. during the years ended December 31, 1999 and 1998,
respectively.
A component of selling, general and administrative expenses as shown on the
statements of operations includes aggregate management fees to Brant-Allen.
The management fee includes senior management, treasury, financial, marketing
and sales services. There are restrictions on payment of the management fee
as described in Note 6. The level of these fees as if the Companies operated
on a stand-alone basis are not practicably determinable.
The Predecessor was a party to a wood supply contract with Bear Island
Timberlands Company, L.P. ("BITCO"), which was owned proportionately by the
same partners of the Predecessor, whereby BITCO had guaranteed to supply all
of the Predecessor's log and pulp chip requirements at prices negotiated
annually. Purchases under the wood supply contract approximated $13,280,000
during the eleven months ended November 30, 1997. Pricing during the periods
was as follows:
Eleven Months
Ended
November 30,
1997
Actual $95.50
Market $60.00 to $66.00
12
<PAGE>
4. Related-Party Transactions, continued:
Concurrent with the Acquisition, the Company modified certain terms of the
wood supply contract with Bear Island Timberlands Company L.L.C.
("Timberlands"), the successor to BITCO resulting from the purchase by Brant-
Allen of the 70% interest in BITCO not previously owned by Brant-Allen. The
modification occurred to be reflective of wood purchases at market prices.
Modified terms included changing the point of purchase of wood from the point
of production to delivery to the Company's plant site and changing the
purchase price from a negotiated price to market price. For the year ended
December 31, 1998 and the one month ended December 31, 1997, the Company
purchased approximately $2,929,500 and $1,637,000 from Timberlands under the
wood supply contract, respectively. Effective December 1, 1998, the Company
is purchasing all of its logs and pulp chips from outside suppliers at market
prices.
Prior to December 1, 1997, the Predecessor had contracted to pay BITCO a fee
on a per ton basis for procuring recycled paper, of $24.31 for the eleven
months ended November 30, 1997, respectively. The Predecessor recognized
costs of approximately $2,028,500 for such procurement fees during the eleven
months ended November 30, 1997, which are included in cost of sales in the
accompanying financial statements. The actual costs of the procurement
services provided to the Predecessor by BITCO for the same period was
$213,000.
The Companies charged Timberlands and BITCO for certain administrative and
other expenses. These charges approximated $1,024,000, $782,000, $60,000 and
$1,319,000 during the years ended December 31, 1999 and 1998, the one month
ended December 31, 1997 and the eleven months ended November 30, 1997,
respectively. The Companies also paid Timberlands approximately $62,500 and
$5,300 and BITCO $55,000 during the year ended December 31, 1998, the one
month ended December 31, 1997 and the eleven months ended November 30, 1997,
respectively, for managing their timberlands.
The Companies' receivables, payables and sales to partners and their
affiliates were as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------
1999 1998
<S> <C> <C>
Due from Brant-Allen $ 91,309 $ 20,010
Due from Newsprint Sales 339,545 1,205,553
Due from Dow Jones 2,172,968 2,369,136
Due from Timberlands - 80,586
Due from F. F. Soucy, Inc. and Partners 10,964 52,181
Due from F. F. Soucy, Inc. 2,497 -
Due to Timberlands 11,791 -
Due to F. F. Soucy, Inc. - 78,192
</TABLE>
13
<PAGE>
4. Related-Party Transactions, continued:
<TABLE>
<CAPTION>
Year Year One Month Eleven Months
Ended Ended Ended Ended
December 31, December 31, December 31, November 30,
1999 1998 1997 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Net sales to Dow Jones $ 21,104,938 $ 26,327,457 $ 1,924,961 $ 23,012,477
Net sales to The Washington
Post * * * 23,027,503
</TABLE>
*Effective December 1, 1997, not considered a related party.
Sales to Dow Jones represented approximately 20%, 22%, 18% and 22% of total
sales during the years ended December 31, 1999 and 1998, the one month ended
December 31, 1997 and the eleven months ended November 30, 1997,
respectively. Sales to The Washington Post represented approximately 22% of
total sales during the eleven months ended November 30, 1997. The remaining
sales were to other unaffiliated printing and publishing enterprises located
primarily in the eastern United States.
5. Inventories:
Inventories consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1999 1998
<S> <C> <C>
Raw materials $ 2,375,910 $ 3,908,772
Stores 8,083,267 8,759,809
Finished goods 2,516,105 1,159,243
------------ ------------
$ 12,975,282 $ 13,827,824
------------ ------------
</TABLE>
14
<PAGE>
6. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1999 1998
<S> <C> <C>
Land $ 1,548,847 $ 1,548,847
Timberlands 1,568,972 3,569,236
Building 28,412,280 28,412,280
Machinery and equipment 169,217,500 162,176,778
Construction in progress 1,740,350 5,911,819
------------- -------------
202,487,949 201,618,960
Less accumulated depreciation and depletion (21,428,569) (10,841,783)
------------- -------------
Total $ 181,059,380 $ 190,777,177
------------- -------------
</TABLE>
During the year ended December 31, 1998, the Company recorded charges for a
net loss of $1,204,076 and during the eleven month period ended November 30,
1997, the Predecessor recorded charges for a net loss of $723,173 to record a
write-down and disposal of certain operating assets in connection with
increasing the capacity of the recycling equipment. The charges are included
in cost of sales in the accompanying statements of operations.
During 1999, the Company sold a portion of its timberlands for approximately
$2.7 million and recognized a gain on the sale of $698,000 which is included
in other income in the 1999 statement of operations.
15
<PAGE>
7. Long-Term Debt:
Long-term debt consisted of:
<TABLE>
<CAPTION>
December 31,
-------------------------------
1999 1998
<S> <C> <C>
Senior Secured Notes bearing interest at 10% (interest payable
semi-annually commenced June 1, 1998); due 2007 $100,000,000 $100,000,000
Term Loan Facility bearing interest at 9.09% and 8.25% at December 31, 1999
and 1998, respectively (interest payable quarterly); principal of
$175,000 due in 31 quarterly payments commenced March 31, 1998;
remaining balance due December 31, 2005 19,033,276 69,300,000
$25 million Revolving Credit Facility bearing interest at LIBOR plus 2.75%
(8.84% and 8.31% at December 31, 1999 and 1998, respectively) for
$20,000,000 and interest due monthly; prime plus 1.75% (10.25% and 9.5%
at December 31, 1999 and 1998, respectively) for the remainder in excess
of $20,000,000 and interest due quarterly; due December 31, 2003 19,000,000 15,000,000
------------ ------------
138,033,276 184,300,000
Less current portion 700,000 700,000
------------ ------------
Total long-term debt $137,333,276 $183,600,000
------------ ------------
</TABLE>
On December 1, 1997, the Company sold in a private placement debt securities
of $100 million Senior Secured Notes (the "Notes"). On December 1, 1997 the
Company also entered into Indenture Agreements for a $70 million Term Loan
Facility ("Term Loan") and a $50 million Revolving Credit Facility
("Revolving Loans"). The proceeds from the Notes, Term Loan and Revolving
Loans were used by the Company to purchase the 70% interest of the
Predecessor which was previously owned by certain subsidiaries of Dow Jones
and The Washington Post.
During 1999, Timberlands sold the majority of its timberlands and distributed
a portion of the proceeds of Brant-Allen. In turn, Brant-Allen made capital
contributions to the Company of $47,350,000 which were used towards the
retirement of approximately $49,600,000 on the Term Loan. In connection with
this process, unamortized financing costs of $1,006,000 were written off and
recorded as an extraordinary item in the 1999 statement of operations. In
addition, the amounts available under the Revolving Loans were reduced from
$50 million to $25 million effective November 23, 1999.
The extraordinary item in the eleven month period ended November 30, 1997
represents the write-off of unamortized financing costs and prepayment
penalties paid related to Predecessor Notes that were extinguished at the
time of the Acquisition.
16
<PAGE>
7. Long-Term Debt, continued:
The Notes are redeemable, together with accrued interest, at the option of
the Company, in whole or in part, at any time on or after December 1, 2002,
with sufficient notice at the redemption prices set forth below calculated
beginning on December 1 of the years indicated:
Redemption
Year Price
2002 103.333%
2003 101.667
2004 and thereafter 100.000
Notwithstanding the foregoing, at any time prior to December 1, 2000, the
Company may redeem up to 20% of the aggregate principal amount of the Notes
within 60 days of one or more public equity offerings with the net proceeds
of such offering at a redemption price equal to 110% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
redemption; provided that immediately after giving effect to any such
redemption, at least $80 million aggregate principal amount of the Notes
originally issued remains outstanding.
The Term Loan and Revolving Loans are redeemable at the option of the
Company, in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent. Partial prepayments
on the Term Loan or Revolving Loans shall be in an aggregate principal amount
of $5,000,000 or a whole multiple thereof. Prepayment of the Term Loans and
Revolving Loans is required for any excess cash flow ("ECF"), as computed on
the ECF date. The Revolving Loans bear interest at prime plus 1.75% or LIBOR
plus 2.75%, at the option of the Company and mature on December 31, 2003.
The Notes are collateralized by (i) a second priority security interest in
all real property of the Company and all personal property of the Company, to
the extent such personal property is assignable, (ii) a third priority
security interest in 100% of the membership interests in Timberlands and
(iii) a second priority security interest in 65% of the issued and
outstanding capital stock of Soucy Inc. ("Soucy Collateral") behind a shared
first lien. The remaining 35% of the issued and outstanding capital stock of
Soucy Inc. cannot be assumed, pledged, hypothecated, transferred or otherwise
disposed by Brant-Allen without the consent of the required lenders. At any
time when either (a) the Company has reduced its total committed debt to an
amount that is not greater than $145 million as of the date of determination
or (b) the Notes are rated investment grade, the Soucy Collateral will be
released and all of the covenants and other provisions of the Notes with
respect to Soucy Inc. will terminate. Effective December 1, 1999, the
Company's total committed debt fell below the $145 million threshold and the
Soucy Collateral was released and all of the covenants and other provisions
of the Notes with respect to Soucy, Inc. were terminated.
17
<PAGE>
7. Long-Term Debt, continued:
The Term Loan and Revolving Loans are partly collateralized by (i) a first
priority security interest in a substantial portion of the assets of the
Company, (ii) a shared first priority security interest (pro rata along with
a $35 million senior secured two-year term loan to Brant-Allen from several
banks and other financial institutions) in 65% of the common stock of Soucy
Inc. and (iii) a second priority security interest in 100% of Brant-Allen's
membership interest in Timberlands. The Term Loan and Revolving Loan are
guaranteed by Brant-Allen. Effective December 1, 1999, the shared first
priority security interest in 65% of the common stock of Soucy Inc. was
released as collateral on the Term Loan and Revolving Loans.
The most restrictive covenants of the Notes, Term Loan and Revolving Loans
state that the Company has a limitation on incurring additional indebtedness,
making restricted payments, creating, incurring or assuming any liens, making
sales of capital stock of subsidiaries, transactions with affiliates, and
sale of assets. Furthermore under the Notes, the Company is not permitted to
pay management fees to Brant-Allen that exceed 3% of the Company's annual
revenues. Only one-third of this payment may be in cash.
The fair values of the Term Loan and Revolving Loan approximate carrying
values at December 31, 1999 and 1998. The fair value of the Notes was
$97,750,000 at December 31, 1999 and approximated carrying value at December
31, 1998.
Maturities on long-term debt for the four years after 2000 are approximately
as follows: 2001 - $700,000; 2002 - $700,000; 2003 -$19,700,000; 2004 -
$700,000; and thereafter - $115,500,000.
8. Long-Term Purchase Obligations:
Capitalized purchase obligations for purchases of machinery and equipment,
which approximate fair value, consisted of:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
<S> <C> <C>
Long-term purchase obligations bearing interest at various
rates ranging from approximately 7% to 8%; with
principal payments ending in 2001 $ 257,814 $ 646,163
Less current portion 130,566 384,693
--------- ---------
$ 127,248 $ 261,470
--------- ---------
</TABLE>
Payments on long-term purchase obligations for 2001 is approximately
$128,000.
18
<PAGE>
9. Environmental Letters of Credit:
In accordance with requirements of the Virginia Department of Environmental
Quality, the Company has outstanding irrevocable standby letters of credit
of $430,000, $70,000 and $103,000 to cover potential closure and post-
closure costs associated with the Company's landfills.
10. Derivative Financial Instruments:
At December 31, 1998, the Company had outstanding a variable to fixed
interest rate swap with a notional value of $60 million, with a term of five
years maturing December 5, 2002. Under the terms of this agreement, the
Company paid a fixed interest rate of 6.13% and received a variable rate
based on 3-month London Interbank Offered Rates ("LIBOR") (5.25% at December
31, 1998). In October 1999, the interest rate swap was terminated and a gain
of $150,000 was recognized as a result of the termination.
11. Employee Benefit Plans:
The Companies provide a defined contribution retirement plan for
substantially all employees. The annual cost of the plan, which is currently
funded, is based on the compensation of participants.
The Companies provide a thrift plan for substantially all employees which
incorporates the provisions of Internal Revenue Code Subsection 401(k),
whereby employees can make voluntary, tax-deductible contributions within
specified limits. The Companies matched employee contributions at 60% during
the years ended December 31, 1999 and 1998, the one month ended December 31,
1997 and the eleven months ended November 30, 1997, up to a maximum of 6% of
an employee's base pay.
The Companies' expense for both plans approximated $1,242,000, $1,238,000,
$95,000 and $1,138,000 for the years ended December 31, 1999 and 1998, the
one month ended December 31, 1997 and the eleven months ended November 30,
1997, respectively.
The Companies are self-insured for employee medical, dental and disability
claims up to $35,000 per claim per year. The Company provided an accrual of
approximately $313,000 for claims incurred but not reported at December 31,
1999 and 1998.
19
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
BEAR ISLAND PAPER COMPANY, L.L.C.&
BEAR ISLAND PAPER COMPANY, L.P.
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BEAR ISLAND PAPER COMPANY, L.L.C.:
YEAR ENDED DECEMBER 31, 1999
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $73 - - ($5)a $68
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $477 $63 - - $540
---- ---- ---- ---- ----
$550 $63 - - $608
==== ==== ==== ==== ====
RESERVE FOR CAPPING OF LANDFILL $574 ($10) - ($9)b $555
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
---- ---- ---- ---- ----
$594 ($10) - ($9) $575
==== ==== ==== ==== ====
YEAR ENDED DECEMBER 31, 1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $73 - - - $73
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $152 $325 - - $477
---- ---- ---- ---- ----
$225 $325 - - $550
==== ==== ==== ==== ====
RESERVE FOR CAPPING OF LANDFILL $536 $70 - ($32)b $574
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $160 - - ($140)c $20
---- ---- ---- ---- ----
$696 $70 - ($172) $594
==== ==== ==== ==== ====
ONE MONTH ENDED DECEMBER 31, 1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $73 - - - $73
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $269 $152 - ($269)d $152
ALLOWANCE FOR COAL INVENTORY
(DEDUCTED FROM RAW MATERIAL INVENTORY) $150 ($150) - - $0
---- ---- ---- ---- ----
$419 $2 - ($269) $225
==== ==== ==== ==== ====
RESERVE FOR CAPPING OF LANDFILL $532 $6 - ($2)b $536
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $160 - - - $160
---- ---- ---- ---- ----
$692 $6 - ($2) $696
==== ==== ==== ==== ====
BEAR ISLAND PAPER COMPANY, L.P.:
ELEVEN MONTHS ENDED NOVEMBER 30, 1997
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $73 - - - $73
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $228 $41 - - $269
ALLOWANCE FOR COAL INVENTORY
(DEDUCTED FROM RAW MATERIAL INVENTORY) $150 - - - $150
---- ---- ---- ---- ----
$451 $41 - - $492
==== ==== ==== ==== ====
RESERVE FOR CAPPING OF LANDFILL $237 $312 - ($17)b $532
RESERVE FOR SLUDGE LAND APPLICATION $10 - - ($10)e $0
RESERVE FOR OSHA CITATION $33 - - ($33)f $0
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $160 - - - $160
---- ---- ---- ---- ----
$440 $312 - ($60) $692
==== ==== ==== ==== ====
</TABLE>
a) WRITE OFF OF ACCOUNTS RECEIVABLE
b) PAYMENTS FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
c) WRITE DOWN OF RESERVE FOR LACK OF POTENTIAL CLAIMS FROM PAST YEARS
d) ELIMINATION OF STORES INVENTORY RESERVE UPON ALLOCATION OF PURCHASE PRICE
ADJUSTMENT TO PURCHASED ASSETS
e) PAYMENTS FOR THE APPLICATION OF SLUDGE FROM HOLDING TANKS
f) PERIODIC WRITE DOWN OF OHSA CITATION RESERVE PER AGREEMENT
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0
0
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