SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE EXCHANGE ACT OF 1934
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Not Applicable.
BEAR ISLAND PAPER COMPANY, L.L.C.
INDEX
Page(s)
Part I. Financial Information
Item 1 Financial Statements
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4
Item 2
Management's Discussion and Analysis of Financial Condition
and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 8
Signatures 9
PART I. FINANCIAL INFORMATION
ITEM I. FINANCIAL STATEMENTS
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
September 30, December 31,
ASSETS 2001 2000
---------------- -----------------
(Unaudited)
Current assets:
Cash and short-term investments $ 3,495,598 $ 682,329
Accounts receivable, net 11,126,229 14,091,885
Inventories 15,961,183 12,651,078
Other current assets 600,464 492,022
---------------- -----------------
Total current assets 31,183,474 27,917,314
Property, plant and equipment 211,412,081 205,032,041
Less accumulated depreciation (40,742,022) (32,314,191)
---------------- -----------------
Net property, plant and equipment 170,670,059 172,717,850
--------------- ----------------
Deferred financing costs 5,667,964 6,165,666
--------------- ----------------
Total assets $ 207,521,497 $ 206,800,830
================ =================
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Current portion of long-term debt $ - $ 93,494
Accounts payable and accrued liabilities 10,079,923 9,403,405
Accrued interest payable 3,450,841 1,034,044
---------------- -----------------
Total current liabilities 13,530,764 10,530,943
Long-term debt 130,444,121 133,008,276
---------------- -----------------
Total liabilities 143,974,885 143,539,219
---------------- -----------------
Member's equity:
Contributed capital 79,581,074 79,581,074
Accumulated deficit (16,034,462) (16,319,463)
---------------- -----------------
Total member's equity 63,546,612 63,261,611
---------------- -----------------
Total liabilities and member's equity $ 207,521,497 $ 206,800,830
================ =================
See accompanying notes to the condensed financial statements.
1
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended September 30, Nine months ended September 30,
----------------------------------- -----------------------------------
2001 2000 2001 2000
Net sales $ 30,043,564 $ 29,813,020 $ 91,930,626 $ 86,790,819
Cost of sales 26,131,261 24,710,474 78,761,052 77,880,954
--------------- ---------------- ---------------- ----------------
Gross profit 3,912,303 5,102,546 13,169,574 8,909,865
Selling, general and administrative expenses:
Management fees to Brant-Allen (285,979) (282,598) (874,592) (1,350,048)
Other (101,769) (16,845) (207,435) (91,616)
--------------- ---------------- ---------------- ----------------
Income from operations 3,524,555 4,803,103 12,087,547 7,468,201
Other income (deductions):
Interest expense (3,219,735) (3,594,957) (9,937,650) (10,671,742)
Other income 28,953 115,547 87,248 189,112
--------------- ---------------- ---------------- ----------------
Net income (loss) $ 333,773 $ 1,323,693 $ 2,237,145 $ (3,014,429)
=============== ================ ================ ================
See accompanying notes to the condensed financial statements.
2
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine months ended September 30,
-----------------------------------
2001 2000
Operating activities:
Net income (loss) $ 2,237,145 $ (3,014,429)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and depletion 8,427,831 8,329,454
Amortization of deferred financing
costs 497,702 503,238
Loss on disposal/write-down of
property, plant and equipment - 160,400
Changes in current assets and liabilities:
Accounts receivable 2,965,656 15,376
Inventory (3,310,105) 446,686
Other current assets (108,442) (208,669)
Accounts payable and accrued
liabilities 676,518 (416,771)
Accrued interest payable 2,416,797 2,551,198
---------------- ----------------
Cash provided by operating
activities 13,803,102 8,366,483
---------------- ----------------
Investment activities:
Purchases of property, plant and
equipment (6,380,040) (1,962,017)
---------------- ----------------
Cash used in investing
activities (6,380,040) (1,962,017)
---------------- ----------------
Financing activities:
Proceeds from issuance of long-term
debt 1,500,000 4,000,000
Principal payments on long-term debt (4,157,649) (7,654,860)
Tax distribution to parent (1,952,144) (3,514,045)
Contributions to capital from parent -- 1,500,000
---------------- ----------------
Net cash used in financing
activities (4,609,793) (5,668,905)
---------------- ----------------
Net increase in cash and
short term investments 2,813,269 735,561
Cash and short-term investments, beginning
of period 682,329 981,199
----------------- -----------------
Cash and short-term
investments, end of
period $ 3,495,598 $ 1,716,760
================ ================
Noncash financing activities:
Contributions from Brant-Allen $ - $ 527,369
================ ================
See accompanying notes to the condensed financial statements.
3
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying condensed financial
statements of Bear Island Paper Company, L.L.C. (the "Company") contain all
adjustments necessary to present fairly, in all material respects, the
Company's financial position as of September 30, 2001 and December 31, 2000
and the Company's condensed results of operations for the three- and
nine-month periods ended September 30, 2001 and 2000 as well as the
Company's condensed cash flows for the nine-month periods ended September
30, 2001 and 2000. All adjustments are of a normal and recurring nature.
These condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's 2000 Form
10K filed on March 30, 2001. The December 31, 2000 balance sheet data was
derived from audited financial statements, but does not include all
disclosures required by generally accepted accounting principles.
The results of operations for the nine-month period ended September 30,
2001 should not be regarded as necessarily indicative of the results that
may be expected for the entire year.
2. The Company is a wholly owned subsidiary of Brant-Allen Industries, Inc.
("Brant-Allen"), a Delaware corporation.
A component of selling, general and administrative expenses as shown on the
statements of operations includes aggregate management fees charged by
Brant-Allen. Prior to April 1, 2000 there were restrictions on payment of
the management fee. During the nine months ended September 30, 2000 the
Board of Directors of Brant-Allen contributed unpaid accrued portions of
the management fee totaling $527,369 to the Company's capital. This portion
of the management fee was limited as to payment in cash by the Company to
Brant-Allen under the restrictive covenants to the $100 million principal
amount of 10% Senior Secured Notes due 2007 (the "Notes"). The contribution
of this accrued liability had been reflected as an addition to contributed
capital in the accompanying condensed balance sheet at September 30, 2000.
Effective April 1, 2000, the Company amended this arrangement reducing the
management fee to 1% of net sales less freight from 3% of net sales less
freight and eliminating any restrictions on payment. This had the effect of
reducing selling, general and administrative expenses by $556,380 during
the quarter and nine-months ended September 30, 2001.
There are also certain restrictions on distributions paid to Brant-Allen.
Distributions are allowed for a portion of profits in excess of certain
amounts. In addition, distributions are allowed for amounts necessary to
pay for the tax liabilities of the members resulting from the Company's
operations. During the nine-months ended September 30, 2001 $1,952,144 was
paid to Brant-Allen to pay such tax liabilities. In the nine-months ended
September 30, 2000 $3,514,045 was paid to Brant-Allen for such tax
liabilities.
3. No provision for income taxes is required in the financial statements since
each member of the parent Company is individually liable for any income tax
that may be payable on the Company's taxable income.
4. Finished goods and raw materials inventories are valued at the lower of
cost or market, with cost determined on the first-in, first-out ("FIFO")
basis. Stores inventories are valued at the lower of average cost or
market.
Inventories consisted of:
September 30, 2001 December 31, 2000
------------------ -----------------
Raw materials $ 2,122,788 $ 2,427,336
Stores 7,571,386 8,148,930
Finished goods 6,267,009 2,074,812
--------------- -----------------
$ 15,961,183 $ 12,651,078
=============== =================
5. Long-term debt consisted of:
September 30, 2001 December 31, 2000
------------------ -----------------
Senior Secured Notes $ 100,000,000 $ 100,000,000
Term Loan Facility 17,444,121 18,508,276
Revolving Credit Facility 13,000,000 14,500,000
Long-term purchase obligations - 93,494
---------------- -----------------
130,444,121 133,101,770
Less current portion - 93,494
---------------- -----------------
Total long-term debt $ 130,444,121 $ 133,008,276
================ =================
4
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
6. The Company charges Bear Island Timberlands Company, L.L.C. ("Timberlands")
an affiliate and wholly owned subsidiary of Brant-Allen, for certain
administrative and other expenses. These charges approximated $15,000 and
$125,000 during the nine months ended September 30, 2001 and 2000,
respectively.
The Company's receivables and payables with their affiliates were as
follows:
September 30, 2001 December 31, 2000
------------------ -----------------
Due from Brant-Allen $ $ 36,986
Due to Brant-Allen 2,570
Due from Newsprint Sales 1,577,673 157,379
Due from F.F. Soucy, Inc. and Partners 72,043 11,791
Due from F.F. Soucy, Inc. 30,275 5,053
Due to Timberlands 361,654 377,028
7. The Financial Accounting Standards Board ("FASB") has issued a new standard
affecting the accounting for derivative instruments and hedging activities.
It requires the Company to recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair
value. Changes in the fair value of the derivative instruments are either
recognized periodically in income or other comprehensive income. The
Company has implemented this standard effective January 1, 2001. The
implementation of this new standard did not have an effect on the Company's
results of operations or financial position as the Company has no
derivatives.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 141 ("SFAS 141"), Business Combinations. SFAS 141 requires that the
purchase method of accounting be used for all business combinations
initiated after June 30, 2001; the use of the pooling-of-interests method
of accounting is prohibited after this time. SFAS 141 also establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and it requires unallocated negative goodwill to be written off
immediately as an extraordinary gain (instead of being deferred and
amortized). SFAS 141 is not expected to have a material impact on the
Company's financial statements.
In July 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 ("SFAS 142"), Goodwill and Other Intangible Assets. SFAS 142
eliminates the amortization of goodwill and instead requires a periodic
review of any goodwill balance for possible impairment. SFAS 142 also
requires that goodwill be allocated at the reporting unit level. SFAS 142
is effective for years beginning after December 15, 2001. SFAS 142 also
contains provisions related to intangible assets other than goodwill. SFAS
142 is not expected to have a material impact on the Company's financial
statements.
In August 2001, the FASB issued Statement of Financial Accounting Standards
No. 143 ("SFAS 143"), Accounting for Asset Retirement Obligations. SFAS 143
addresses financial accounting and reporting for obligations associated
with the retirement of tangible long-lived assets and related asset
retirement costs. SFAS 143 is effective for financial statements with
fiscal years beginning after June 15, 2002. SFAS 143 is not expected to
have a material impact on the Company's financial statements.
In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144 ("SFAS 144"), Accounting for the Impairment or Disposal
of Long-Lived Assets. SFAS 144 requires that long-lived assets to be
disposed of be measured at the lower of carrying amount of fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. Therefore, discontinued operations will no longer be measured
at net realizable value or include amounts for operating losses that have
not yet occurred. SFAS 144 is effective for fiscal years beginning after
December 15, 2001. SFAS 144 is not expected to have a material impact on
the Company's financial statements.
8. Certain prior year amounts in the financial statements have been
reclassified to conform to the current year presentation.
5
ITEM II.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors affecting the results of operations of the Company during the periods
included in the accompanying condensed statements of operations and the changes
in the Company's financial condition since December 31, 2000.
General:
The Company manufactures and is dependent on one product, newsprint, which is
used in general printing and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage which
significantly impacts the Company's selling price of newsprint and, therefore,
its revenues and profitability. In addition, variation in the balance between
supply and demand as a result of global capacity additions have an increasing
impact on both selling prices and inventory levels in the North American
markets. Capacity is typically added in large blocks because of the scale of new
newsprint machines.
As a result, the newsprint market is highly cyclical, depending on changes in
global supply, demand and inventory levels. These factors significantly impact
the Company's sales volume and newsprint prices and, therefore, the Company's
revenues and profitability. Given the commodity nature of newsprint, the
Company, like other suppliers to this market, has little influence over the
timing and extent of price changes. Sales are recognized at the time of shipment
from the Company's mill. However, significant fluctuations in revenue can and do
occur as a result of the timing of shipments caused by increases and decreases
in mill inventory levels.
THREE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Net sales increased by $0.2 million, or 0.7%, to $30.0 million in the third
quarter of 2001, from $29.8 million in the third quarter of 2000. This marginal
increase was attributable to a 0.5% increase in the average net selling price of
the Company's products. The volume of tonnage sold for the third quarter of 2001
was 54,050 metric tons ("tonnes") which was comparable to the third quarter of
2000 volume of 54,049 tonnes. The Company's net selling price for newsprint
increased to an average of $555 per tonne in the third quarter of 2001 from an
average of $552 per tonne in the third quarter of 2000.
Cost of sales increased by $1.4 million, or 5.7%, to $26.1 million in the third
quarter of 2001 from $24.7 million in the third quarter of 2000. This increase
was attributable primarily to an 8% increase in unit manufacturing costs per
tonne. The increase in unit manufacturing cost per tonne was the result of 41.4%
increase in energy costs offset in part by a 20.6% decrease in fiber costs. Cost
of sales as a percentage of net sales decreased to 87% in the third quarter of
2001, from 82.9% in the third quarter of 2000, due to a net increase in
newsprint selling prices in the third quarter of 2001 and offset by the increase
in unit costs of manufacturing as noted above.
The Company's selling, general and administrative expenses increased by $0.1
million or 33.3% to $0.4 million, in the third quarter of 2001 from $0.3 million
in the third quarter of 2000.
As a result of the above factors, income from operations decreased by $1.3
million to $3.5 million in the third quarter of 2001 from $4.8 million in the
third quarter of 2000.
The Company's interest expense decreased $0.4 million, or 11.1%, to $3.2 million
in the third quarter of 2001 compared to $3.6 million in the third quarter of
2000, primarily due to reductions in interest rates and decreases in the
Company's Term Loan Facility and the average outstanding balances on the
Revolving Credit Facility.
As a result of the above factors, the Company reported net income of $0.3
million in the third quarter of 2001 compared to a net income of $1.3 million in
the third quarter of 2000.
NINE MONTHS ENDED SEPTEMBER 30, 2001, COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 2000
Net sales increased by $5.1 million, or 5.9%, to $91.9 million in the first nine
months of 2001, from $86.8 million in the first nine months of 2000. This
increase was attributable to a 10.5% increase in the average net selling price
of the Company's products and was offset by a 4.3% decrease in sales volumes to
approximately 158,900 tonnes in the first nine months of 2001, from
approximately 166,000 tonnes in the first nine months of 2000. The Company's net
selling price for newsprint increased to an average of $578 per tonne in the
first nine months of 2001 from an average of $523 per tonne in the first nine
months of 2000.
Cost of sales increased by $0.9 million, or 1.2%, to $78.8 million in the first
nine months of 2001 from $77.9 million in the first nine months of 2000. This
increase was attributable primarily to a 6.0% increase in unit manufacturing
costs per ton and offset in part by the 4.3% decrease in sales volumes mentioned
above. The increase in unit manufacturing cost per tonne was a result of a 39.4%
increase in energy costs and offset in part by a 19.6% decrease in fiber costs.
Cost of sales as a percentage of net sales decreased to 85.7% in the first nine
months of 2001, from 89.7% in the first nine months of 2000, due to a net
increase in newsprint selling prices in the first nine months of 2001 and offset
in part by the increase in unit costs of manufacturing as noted above.
6
The Company's selling, general and administrative expenses decreased by $0.3
million, or 21.4%, to $1.1 million in the first nine months of 2001 from $1.4
million in the first nine months of 2000. This decrease was attributable to the
200 basis point reduction in the management fee to Brant-Allen. Effective April
1, 2000 the management fee to Brant-Allen for administrative services was
reduced from 3% to 1%.
As a result of the above factors, income from operations increased by $4.6
million to $12.1 million in the first nine months of 2001 from $7.5 million in
the first nine months of 2000.
The Company's interest expense decreased $0.8 million, or 7.5%, to $9.9 million
in the first nine months of 2001 compared to $10.7 million in the first nine
months of 2000, primarily due to reductions in interest rates and decreases in
the Company's Term Loan Facility and the average outstanding balances on the
Revolving Credit Facility.
As a result of the above factors, the Company reported net income of $2.2
million in the first nine months of 2001 compared to a net loss of $3.0 million
in the first nine months of 2000.
Liquidity and Capital Resources.
The Company's principal liquidity requirements have been for working capital,
capital expenditures and debt service under the Company's loan agreements. These
requirements have been met through cash flows from operations and/or loans under
the Company's Revolving Credit Facility.
The Company's cash and short-term investments at September 30, 2001 were $3.5
million, representing an increase of $2.8 million from $0.7 million at December
31, 2000. Net cash provided by operating activities was $13.8 million for the
first nine months ended September 30, 2001. Cash used in financing activities
was $4.6 million and cash used in investing activities was $6.4 million for the
nine months ended September 30, 2001. In total, $11.0 million was used to cover
capital expenditures of $6.4 million, a tax distribution of $2.0 million and a
net reduction in long-term debt including purchase obligations of $2.6 million.
The Company anticipates that cash provided from operations in the future,
combined with borrowings under the Revolving Credit Facility will be sufficient
to pay its operating expenses, satisfy debt-service obligations and fund capital
expenditures.
In the first nine months of 2001, the Company's cash provided by operating
activities increased by 64.3% to $13.8 million from $8.4 million in the first
nine months of 2000, primarily due to increased selling prices of the Company's
products and offset by higher per unit cost of sales resulting in net income in
the first nine months of 2001 of $2.2 million compared to a net loss of $3.0
million in the first nine months of 2000.
The Company made capital expenditures of $6.4 million and $1.9 million in the
first nine months of 2001 and the first nine months of 2000, respectively, in
connection with upgrading and maintaining its manufacturing facility. Management
anticipates that the Company's total capital expenditures for the balance of
2001 and 2002 will primarily relate to maintenance of its newsprint facilities.
At September 30, 2001, the Company had approximately $130.4 million of
indebtedness, consisting of borrowings of $13.0 million under the Revolving
Credit Facility, $17.4 million under the Term Loan Facility, $100 million under
the Notes. At September 30, 2001, $9.3 million was available as unused borrowing
capacity under the Revolving Credit Facility, which is net of $2.7 million of
borrowing capacity reserved for outstanding Letters of Credit.
7
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) No exhibits
(b) No reports on Form 8-K have been filed during the quarter for
which this report is filed.
8
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
Peter M. Brant
President, Chairman of the Board and
Chief Executive Officer
By: /s/ Edward D. Sherrick
Edward D. Sherrick
Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
9