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, 2001
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 [ ]
Indicate 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. [X]
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.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS............................................................................. 3
ITEM 2. PROPERTIES........................................................................... 6
ITEM 3. LEGAL PROCEEDINGS. .................................................................. 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ................................ 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS. ........ 7
ITEM 6. SELECTED FINANCIAL DATA. ............................................................ 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS. ..................................................................... 8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................... 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.......................................... 14
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE............................................................. 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.................................. 14
ITEM 11. EXECUTIVE COMPENSATION.............................................................. 16
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...................... 16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................................... 16
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.................... 18
2
PART I
ITEM 1. BUSINESS.
GENERAL
Bear Island Paper Company, L.L.C. (the "Company"), a limited liability company
organized in 1997 and a wholly owned subsidiary of Brant-Allen Industries, Inc.
a subchapter S corporation, ("Brant-Allen") produces newsprint 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
2001, the Mill produced approximately 212,600 tonnes of newsprint, and had an
estimated operating efficiency rate of 89.10%.
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., Tribune Co. and New York Times Co. Approximately 88% of the
Company's newsprint production in 2001 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"), and de-inked 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").
The Company purchases all of its logs and pulp chips from outside suppliers at
market prices. 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 63% of the Company's fiber requirements are derived
from the Company's TMP process using wood and woodchips, and approximately 37%
of the Company's fiber requirements are de-inked pulp from the Mill's recycling
facility.
The Mill has a wood requirement of approximately 144,000 cords per year. All
wood is currently supplied from sources within a 200-mile radius of the Mill. In
2001, the Company's wood needs were supplied 44% from wood harvested by local
independent wood contractors and 56% in chip form, by independent sawmills.
The Mill's newsprint machine produces newsprint at an average speed of
approximately 4,250 feet per minute over a machine trim width of 300 inches. The
Mill produces approximately 635 tonnes per day of newsprint.
3
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 81:19, which is then fed into a pulper which mixes in additives
and prepares the stock for ink separation. During 1998, 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 up to approximately 635 tonnes per day of
newsprint containing a minimum of 20% 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 2001, approximately 29% 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 40,000 tonnes of newsprint per
year for The Washington Post and 32,000 tonnes for Dow Jones commencing in 2002,
at prices based on prevailing market prices paid by those customers to their
non-affiliated East Coast suppliers. The term of the Purchase Agreements has
been extended through December 31, 2004 and is 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. Other
than the agreements with Dow Jones and The Washington Post, customers purchase a
minimum volume amount for short periods of up to one year based on market prices
at the time of purchase.
In 2001 and 2000, the Company's ten largest customers represented an aggregate
of 88% and 93%, respectively, of the Company's total sales. The Company has had
five customers whose sales represent a significant portion of sales. Sales to
Dow Jones approximated 13%, 20% and 20% for the years ended December 31, 2001,
2000 and 1999, respectively. Sales to The Washington Post approximated 16%, 19%,
and 19% for the years ended December 31, 2001, 2000 and 1999, respectively.
Sales to Newhouse Group approximated 16%, 14%, and 15% for the years ended
December 31, 2001, 2000 and 1999, respectively. Sales to Gannett approximated
15%, 17%, and 12% for the years ended December 31, 2001, 2000 and 1999,
respectively. Sales to Knight-Ridder approximated 11% during the year ended
December 31, 2001.
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. 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 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.
4
Through Rappahannock Electrical Cooperative, which is the Company's local
utility, the Company purchases 100% of its electrical power indirectly from
Virginia Power and Old Dominion Electric Cooperative.
Because the Company's electricity usage has an impact on both electricity
generation requirements and costs of Virginia Power 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.
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 635 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.
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 incurred 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, solid waste 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.
The U.S. Environmental Protection Agency (the "EPA") has required that certain
pulp and paper mills meet stringent 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.
5
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.
EMPLOYEES
As of December 31, 2001, the Company had 218 employees, approximately 35% 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.
MANAGEMENT SERVICES AGREEMENT
Executive management of the Company is provided by Brant-Allen, pursuant to a
management contract (the "Management Services Agreement"). The Company's
newsprint is sold through Brant-Allen, which currently markets approximately
456,600 tonnes of newsprint (212,600 tonnes for the Company and 244,000 tonnes
for Soucy). Brant-Allen manages the Company 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 was
payable by the Company, of which, since December 1, 1997, as a result of the
Company's debt agreements, one third was payable in cash with the remainder
contributed to the Company's capital. Effective April 1, 2000, the Management
Services Agreement was amended to reduce the management fees payable to
Brant-Allen to 1% of the Company's annual net sales of which 100% is payable in
cash. During 2001, the Company was charged $1,120,000 by Brant-Allen under the
Management Services Agreement.
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.
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.
6
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.
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 2001.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Brant-Allen beneficially owns all the equity of the Company. Brant-Allen, in
turn, is owned by Mr. Peter Brant and Mr. Joseph Allen.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the audited financial
statements of the Predecessor for 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, 1999, 2000 and 2001,
for which the statements of operations are included elsewhere herein for the
years ended December 31, 1999, 2000 and 2001.
Predecessor Company
----------- -----------------------------------------------------------
Eleven
Months One Month
Ended Ended
November December
30, 31, Years Ended December 31,
----------- -------------------------------------------------------------------
1997 1997 1998 1999 2000 2001
(Dollars in Thousands, Except Tonnes Produced)
Income Statement Data:
Sales non-affiliates $65,446 $11,363 $128,112 $110,231 $118,629 $117,845
Affiliates (1) 46,040 -- -- -- -- --
------- ------- -------- -------- -------- --------
Total sales 111,486 11,363 128,112 110,231 118,629 $117,845
Cost of sales 101,302 9,625 100,570 101,621 103,961 108,509
------- ------- -------- -------- -------- --------
Gross profit 10,184 1,738 27,542 8,610 14,668 9,336
Selling, general & administrative:
Management fee to Brant-Allen 3,175 325 3,666 3,110 1,653 1,120
Other direct 573 45 536 394 182 965
------- ------- -------- -------- -------- --------
Income from operations 6,436 1,368 23,340 5,106 12,833 7,251
------- ------- -------- -------- -------- --------
Other income (expense):
Interest income 591 -- 201 149 144 103
Interest expense (4,332) (1,633) (18,892) (17,097) (14,192) (13,076)
Other income (expense) (41) 53 -- 863 84 --
------- ------- -------- -------- -------- --------
Total other expense (3,782) (1,580) (18,691) (16,085) (13,964) (12,973)
------- ------- -------- -------- -------- --------
Income (Loss) before $2,654 $(212) $4,649 $(10,979) (1,131) (5,722)
extraordinary item
Extraordinary item (4,367) -- -- (1,006) -- --
------- ------- -------- -------- -------- --------
Net income (loss) $(1,713) $ (212) $ 4,649 $(11,985) $ (1,131) $ (5,722)
======= ======= ======== ======== ======== ========
Other Data:
Operational EBITDA (2) $16,184 $2,190 $33,407 $15,752 $23,719 $18,611
Adjusted operational EBITDA(3) 2,406 36,068 17,825 24,246 18,611
7
Predecessor Company
----------- -----------------------------------------------------------
Eleven
Months One Month
Ended Ended
November December
30, 31, Years Ended December 31,
----------- -------------------------------------------------------------------
1997 1997 1998 1999 2000 2001
(Dollars in Thousands, Except Ratios and Tonnes Produced)
Summary cash flow information:
Net cash provided by (used in)
operating activities $12,546 $(4,024) $20,623 $2,547 $9.609 $16,691
Net cash used in investing
activities (4,702) (140,169) (7,394) (265) (2,704) (13,877)
Net cash provided by (used in)
financing activities (12,467) 145,545 (12,451) (3,431) (7,203) (2,610)
Depreciation 9,735 822 10,033 10,615 10,886 11,360
Depletion 13 -- 34 31 -- --
Capital expenditures 4,836 239 7,544 3,009 2,750 13,877
Saleable tonnes produced 206,058 18,802 222,668 226,249 219,161 212,575
Noncash portion of management fee 216 2,661 2,073 527 --
As of December 31,
------------------
1997 1998 1999 2000 2001
Balance Sheet Data:
Cash and short-term investments $1,353 $2,131 $981 $682 $886
Working capital (5) 18,176 17,375 15,449 17,386 (24,947)
Property, plant and equipment, net 194,262 190,777 181,059 172,718 175,033
Total indebtedness (4) 196,435 184,946 138,291 133,102 132,444
Total assets 232,485 229,251 214,587 206,801 203,409
Total partners' equity/member's interest 25,258 32,567 65,879 63,262 55,587
(1) Prior to November 30, 1997 Dow Jones and The Washington Post were
affiliates of the Company.
(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 were
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. In April 2000, the management fee
limitation was reduced to 1% of net sales, all of which may be paid in
cash.
(4) Total indebtedness is defined as long-term debt and long-term purchase
obligations and current portions thereof.
(5) The Company was not in compliance with certain financial covenants
under the Bank Credit Facilities at December 31, 2001. As a result $32.4
million of debt was reclassed to current liabilities.
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 Bear Island Timberlands Company, L.P., an affiliate of the
Company ("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.
8
The Company manufactures and is dependent on one product, newsprint, which is
used in general printing, 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 title and
risk of loss transfers to the customer, which generally occurs at the point 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.
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 and
ranged from high of $545 per tonne in the first quarter to low of $485 per tonne
in the fourth quarter. During 2000, newsprint prices averaged $538 per tonne and
ranged from a low of $492 per tonne in January 2000 to $585 per tonne in
December 2000. During 2001, newsprint prices averaged $559 per tonne and ranged
from a high of $592 per tonne in the second quarter to a low of $500 per tonne
in the fourth quarter. In February 2002 newsprint prices averaged $448 per
tonne.
The table below summarizes the annual volumes and selling prices of the
Predecessor and the Company's newsprint during the periods indicated below:
Predecessor Company
----------- -------
Eleven Months One Month
Ended Ended
November 30, December 31 Years Ended December 31,
------------ ------------------------------------------------------------------------
1997 1997 1998 1999 2,000 2001
---- ---- ---- ---- ----- ----
TONNES SOLD 206,400 19,900 221,700 222,574 220,389 210,795
AVERAGE SELLING PRICE $540 $571 $578 $495 $538 $559
The Company's primary cost components consist of raw materials (wood, ONP, OMG,
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, 2001, raw materials, which are subject to
significant price fluctuations based on supply and demand, represented 28.5% of
the total cost of manufacturing. Electrical energy represented 20.8% and direct
and indirect labor represented 19.9% of total cost of manufacturing. On an
average per tonne basis electricity costs increased 39.9% from 2000 to 2001. The
Company currently uses a raw material mix of 63% TMP, and 37% recycled fiber in
its production process.
9
RESULTS OF OPERATIONS
2001 COMPARED TO 2000
Net sales decreased by $0.8 million, or 0.7%, to $117.8 million in 2001 from
$118.6 million in 2000. The decrease was attributable to a 4.4% decrease in
sales volumes to approximately 210,800 tonnes in 2001, from approximately
220,400 tonnes in 2000 offset by a 3.9% increase in average net selling prices
for the Company's products. The Company's net selling price for newsprint
increased to an average of $559 per tonne in 2001 from an average net selling
price of $538 per tonne in 2000.
Cost of sales increased by $4.6 million, or 4.4%, to $108.5 million in 2001 from
$103.9 million in 2000. This increase was attributable primarily to a 9.6%
increase in unit manufacturing costs per tonne, offset in part by the 4.4%
decrease in sales volume, as mentioned above. The increase in unit manufacturing
cost per tonne was a result of a 39.9% increase in electrical costs and a
shutdown of manufacturing operations for major maintenance in late October and
early November for fourteen days, offset by a 20.4% decrease in fiber costs
primarily due to decreased prices for ONP and decreased use of kraft pulp. Cost
of sales as a percentage of net sales increased to 92.1% in 2001 from 87.6% in
2000, due to the increase in unit costs of manufacturing offset by the net
increase in newsprint selling prices as noted above.
The Company's selling, general and administrative expenses increased by $0.2
million, or 11.1%, to $2.0 million in 2001 from $1.8 million in 2000. This
increase was attributable to a bad debt write-off of $0.6 million offset by the
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 decreased by $5.6
million to $7.3 million in 2001 from $12.9 million in 2000.
The Company's interest expense decreased by $1.1 million, or 7.8%, to $13.1
million in 2001 from $14.2 million in 2000, due to reductions in interest rates
and repayments on the Company's Term Loan Facility.
The Company's other income including interest income decreased by $0.1 million,
to $0.1 million in 2001 from $0.2 million in 2000 due to a gain in 2000 from the
demutualization of an insurance company not repeated in 2001.
As a result of the above factors, the Company reported a net loss of $5.7
million in 2001 compared to a net loss of $1.1 million in 2000.
2000 COMPARED TO 1999
Net sales increased by $8.4 million, or 7.6%, to $118.6 million in 2000 from
$110.2 million in 1999. The increase was attributable to an 8.7% increase in
average net selling prices for the Company's products, offset by a 1.0% decrease
in sales volumes to approximately 220,400 tonnes in 2000, from approximately
222,600 tonnes in 1999. The Company's net selling price for newsprint increased
to an average of $538 per tonne in 2000 from an average net selling price of
$495 per tonne in 1999.
Cost of sales increased by $2.3 million, or 2.3%, to $104.0 million in 2000 from
$101.6 million in 1999. This increase was attributable primarily to a 3.3%
increase in unit manufacturing costs per tonne, offset in part by the 1.0%
decrease in sales volume. The increase in unit manufacturing cost per tonne was
a result of 3.9% increase in fiber costs primarily due to increased prices for
ONP, a 15.4% increase in electrical costs and an increase in major maintenance
expenditures of $0.6 million during the year. Cost of sales as a percentage of
net sales decreased to 87.6% in 2000 from 92.2% in 1999, due to a net increase
in newsprint selling prices and partially offset by the increase in unit costs
of manufacturing as noted above.
10
The Company's selling, general and administrative expenses decreased by $1.7
million, or 48.6%, to $1.8 million in 2000 from $3.5 million in 1999. This
decrease was attributable to the reduction in the management fee to Brant-Allen
for the period April 1, 2000 through December 31, 2000. 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 $7.7
million to $12.8 million in 2000 from $5.1 million in 1999.
The Company's interest expense decreased by $2.9 million, or 17.0%, to $14.2
million in 2000 from $17.1 million in 1999, due to scheduled amortization of the
Company's outstanding indebtedness, accelerated repayments on the Company's Term
Loan Facility as result of the liquidation of timberlands and lower outstanding
balances on the Company's Revolving Credit Facility.
The Company's other income including interest income decreased by $0.8 million,
to $0.2 million from $1.0 million in 1999 as a result of a gain on the sale of a
portion of the Company's timberlands in 1999.
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 reported a net loss of $1.1
million in 2000 compared to a net loss of $12.0 million in 1999.
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 December 31, 2001 were
approximately $0.9 million, representing an increase of approximately $0.2
million from $0.7 million at December 31, 2000. Net cash provided by operating
activities was $16.7 million for the year ended December 31, 2001. Net cash used
in financing activities was $2.6 million and cash used in investing activities
was $13.9 million for the year ended December 31, 2001. In total, $16.0 million,
was used to cover: capital expenditures of $13.9 million; a tax distribution of
$2.0 million; and a reduction in long-term debt including purchase obligations
of $0.1 million. While 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 current market conditions have
resulted in extreme financial constraints. As a result, at December 31, 2001 the
Company did not meet several Financial Covenants under the Bank Credit
Facilities. The Company is presently in discussion with the Lenders under the
Bank Credit Facilities to work out a solution to these deficiencies.
For the year ended December 31, 2001, the Company's cash provided by operating
activities increased by 74.0% to $16.7 million from $9.6 million for the year
ended December 31, 2000, primarily due to increased selling prices, changes in
working capital and offset by higher cost of sales resulting in a net loss for
the year ended December 31, 2001 of $5.7 million compared to net loss of $1.1
million for the year ended December 31, 2000.
The Company incurred capital expenditures of $13.9 million and $2.7 million
during the years ended December 31, 2001 and 2000, respectively. The large
increase in capital expenditures in 2001 reflects the replacement of machinery
and equipment as well as payments made in anticipation of installing new
equipment on the Company's paper machine. Management anticipates that the
Company's total capital expenditures for the years 2002 and 2003 will primarily
relate to existing capital projects in progress and maintenance of its newsprint
facilities.
11
At December 31, 2001, the Company had approximately $132.4 million of
indebtedness, consisting of borrowings of $15.0 million under the Revolving
Credit Facility, $17.4 million under the Term Loan Facility and $100.0 million
under the Notes. In addition, $7.3 million was available in unused borrowing
capacity under the Revolving Credit Facility.
As shown in the accompanying comparative financial statements the Company
incurred net losses of $5,722,211, $1,130,703 and $11,984,773 for the years
ended December 31, 2001, 2000 and 1999, respectively, and had an accumulated
deficit of $23,993,818 at December 31, 2001. Management also anticipates further
losses for the year ending December 31, 2002 due to the current and near-term
anticipated selling prices for newsprint. Because of these recurring losses the
Company is not currently in compliance with certain financial debt covenants
under the Bank Credit Facilities. Management believes that the Company will be
able to successfully manage through this debt covenant deficiency period,
although the Company's lenders could accelerate the debt at any time. As result,
$32.4 million of debt previously reported in the financial statements as
long-term has been reclassified as current. The Company has approximately $7.3
million available under its Revolving Credit Facility to fund cash requirements.
Based on current market conditions, management anticipates being able to meet
liquidity requirements for 2002; however there exists a range of reasonably
possible outcomes which could significantly impact the ability to achieve the
aforementioned.
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. 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.
RESTRICTIVE DEBT COVENANTS
The indenture dated December 1, 1997 between the Company, Bear Island Finance
Company II, Soucy Inc., Bear Island Timberlands Company, L.L.C. ("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 was
deficient under several Financial Covenants under the Bank Credit Facilities at
December 31, 2001. Failure to reach agreement with the Lenders under 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.
12
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
approximately $95,000 to modify the Mill air discharge permits to facilitate
future Mill upgrades and/or process changes (over and above routine operating
expenditures) over the next two years. Future process changes may also require
various permit modifications and may subject the Mill to additional capital
expenditures.
NEW ACCOUNTING STANDARDS
In July 2001, The Financial Accounting Standards Board ("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. 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, effective for fiscal
years beginning after December 15, 2001. SFAS 142 primarily addresses the
accounting for goodwill and intangible assets subsequent to their initial
recognition. 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, and 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 or fair value less cost to sell, whether
reported in continuing operations or in discontinued operations. SFAS 144 is
effective for financial statements with fiscal years beginning after December
15, 2001, and is not expected to have a material impact on the Company's
financial statements.
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.
13
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, 2001. 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 2001, the Company carried $132.4 million of outstanding debt on its
books, with $32.4 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
$61,000. 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 $61,000.
The Company is exposed to the risk of increasing raw material prices, which
could impact profit margins. When raw material costs increase, the Company
generally is unable to increase selling prices. Therefore, the Company expects
the impact of increasing raw material costs to result in reductions in the
results of its operations or cash flows. Major raw material components include
wood, ONP, OMG 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, ONP, OMG, wood and electricity; 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.
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:
NAME AGE POSITION
- ---- --- --------
Peter M. Brant 54 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 60 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 56 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.
14
Thomas E. Armstrong 64 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 62 Director
Robert Flug 54 Director
The following table sets forth certain information about the Company's key
employees:
NAME AGE POSITION
- ---- --- --------
Jacques Beauchesne 57 Mill Manager
Thomas Conte 47 Production Manager
Robert Jackson 62 Human Resources Manager
Seth Hobart 49 Financial Manager
David Crooks 43 Manager of Engineering, Maintenance
and Government Affairs of the Company
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 an
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 a 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 25 years.
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and Manufacturing
and a 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 over 30
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. Mr. Flug is also a director at
Take-Two Interactive Software, Inc.
JACQUES BEAUCHESNE. Mr. Beauchesne joined the Company in February 2001 as Mill
Manager. From 1993 to 2000 Mr. Beauchesne was with Weavexx Corporation as Vice
President Sales - North America.
15
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.
DAVID CROOKS. Mr. Crooks was named the Manager of Engineering, Mill Services and
Environmental Affairs of the Company in January 2002. Prior to his latest
promotion Mr. Crooks was Manager of Mill Services and Environmental Affairs of
the Company and has been with the Company since June 2000. From June 1996 to
June 2000 Mr. Crooks was with J W Fergusson & Sons as Plant Manager.
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Brant-Allen was paid any compensation by the Company
between 1999 and 2001. 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,
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.
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. Brant-Allen
contributes the amount of employer contributions due on behalf of its employees
under such plans.
Outside directors of the Company are paid $2,500 plus expenses per board meeting
attended.
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
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.
16
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. Effective April 1, 2000 the
Management Service Agreement was amended to reduce the management fees payable
to Brant-Allen to 1% of the Company's net sales less transportation costs of
which 100% is payable in cash. This fee amounted to $1,120,000, $1,653,000 and
$3,110,000 for the years ended December 31, 2001, 2000 and 1999, 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 terminated earlier by either party giving two
years written notice. The Management Services Agreement contains customary
indemnification provisions.
ARRANGEMENTS WITH TIMBERLANDS
The Company shares employees, facilities and recordkeeping systems with
Timberlands, and the Company charges Timberlands monthly for its share of these
costs. Accordingly, these shared employees receive benefits under the Company's
defined contribution retirement plan and are eligible to participate in the
Company's thrift plan. Costs associated with these plans are reimbursed monthly
by Timberlands. Amounts paid to the Company for shared costs, which are included
in selling, general and administrative expenses, approximated $16,000, $170,000
and $1,024,000, during the years ended December 31, 2001, 2000 and 1999,
respectively. See the accompanying financial statements of the Company.
17
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. on page 21.
(2) Financial Statement Schedule of Bear Island Paper Company, L.L.C.
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.*
18
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.*
* 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.
19
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: April 1, 2002
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.
Signature Title Date
- --------- ----- ----
Principal Executive Officer
/s/ Peter M. Brant Chairman of the Board of Directors and April 1, 2002
- --------------------------
Peter M. Brant Chief Executive Officer
Principal Financial and Accounting Officer
/s/ Joseph Allen President, Co-Chairman of the Board of April 1, 2002
- --------------------------
Joseph Allen Directors, Chief Operating Officer and
Secretary
/s/ Edward D. Sherrick Vice President of Finance and Director of April 1, 2002
- --------------------------
Edward D. Sherrick the Board of Directors
/s/ Thomas E. Armstrong Vice President of Sales and Manufacturing April 1, 2002
- --------------------------
Thomas E. Armstrong and Director of the Board of Directors
/s/ Michael Conroy Director of the Board of Directors April 1, 2002
- --------------------------
Michael Conroy
/s/ Robert Flug Director of the Board of Directors April 1, 2002
- --------------------------
Robert Flug
20
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND
PAPER COMPANY, L.L.C.
BEAR ISLAND PAPER COMPANY, L.L.C.
Balance Sheets--December 31, 2001 and 2000
Statements of Operations--Years ended December 31, 2001, 2000 and 1999
Statements of Changes in Member's Interest--Years ended December 31,
2001, 2000 and 1999
Statements of Cash Flows--Years ended December 31, 2001, 2000 and 1999
Schedule II Valuation and Qualifying Accounts
21
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited LIABILITY CORPORATION)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2001
AND 2000
Report of Independent Accountants
To the Board of Directors and Member of
Bear Island Paper Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in equity and of cash flows 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, 2001
and 2000, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations,
experienced liquidity issues and has failed to meet certain of its debt
covenants. These matters raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company is a member of a group of affiliated Companies, and, as discussed in
Note 4 to the financial statements, the Company had significant related-party
transactions with members of the group. Because of these related-party
transactions, it is possible that the terms are not the same as those that would
result from transactions among wholly unrelated parties.
PRICEWATERHOUSECOOPERS LLP
February 4, 2002
1
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEETS
December 31, 2001 and 2000
December 31,
----------------------------------------
ASSETS 2001 2000
Cash and short-term investments $ 886,300 $ 682,329
Accounts receivable:
Trade, less allowance for doubtful accounts of $734,399 and
$67,778 in 2001 and 2000, respectively 8,026,839 13,708,199
Affiliates 556,430 211,209
Other 79,563 172,477
Inventories, net 12,665,519 12,651,078
Other current assets 659,848 492,022
------------------- -------------------
Total current assets 22,874,499 27,917,314
------------------- -------------------
Property, plant and equipment, at cost 218,595,176 205,032,041
Less accumulated depreciation (43,562,514) (32,314,191)
------------------- -------------------
Net property, plant and equipment 175,032,662 172,717,850
------------------- -------------------
Deferred financing costs, net of accumulated amortization of
$2,516,442 and $1,852,840 in 2001 and 2000, respectively 5,502,064 6,165,666
------------------- -------------------
$203,409,225 $206,800,830
=================== ===================
LIABILITIES
Current portion of long-term purchase obligations - 93,494
Accounts payable and accrued expenses 13,573,664 9,026,377
Due to affiliates 870,179 377,028
Interest payable 934,005 1,034,044
Debt 32,444,121 -
------------------- -------------------
Total current liabilities 47,821,969 10,530,943
------------------- -------------------
Long-term debt 100,000,000 133,008,276
------------------- -------------------
147,821,969 143,539,219
------------------- -------------------
EQUITY
Member's interest 79,581,074 79,581,074
Accumulated deficit (23,993,818) (16,319,463)
------------------- -------------------
Total member's interest 55,587,256 63,261,611
------------------- -------------------
$203,409,225 $206,800,830
=================== ===================
The accompanying notes are an integral part of the financial statements.
2
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
for the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
Sales $117,845,511 $118,628,761 $ 110,231,202
Cost of sales 108,509,114 103,960,697 101,621,263
------------------ ------------------ -----------------
Gross profit 9,336,397 14,668,064 8,609,939
Selling, general and administrative expenses:
Management fees to affiliate 1,119,872 1,653,218 3,110,180
Other direct 965,325 181,974 393,693
------------------ ------------------ -----------------
Income from operations 7,251,200 12,832,872 5,106,066
------------------ ------------------ -----------------
Other income (expense):
Interest income 103,017 144,346 148,995
Interest expense (13,076,428) (14,192,258) (17,097,180)
Other income - 84,337 863,346
------------------ ------------------ -----------------
(12,973,411) (13,963,575) (16,084,839)
------------------ ------------------ -----------------
Loss before extraordinary item (5,722,211) (1,130,703) (10,978,773)
Extraordinary item:
Early extinguishment of debt - - (1,006,000)
------------------ ------------------ -----------------
Net loss $ (5,722,211) $ (1,130,703) $ (11,984,773)
================== ================== =================
The accompanying notes are an integral part of the financial statements.
3
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CHANGES IN EQUITY
for the years ended December 31, 2001, 2000 and 1999
Retained
Earnings
Member's (Accumulated
Interest Deficit) Total
Balance, December 31, 1998 $28,130,250 $ 4,436,479 $32,566,729
Management fee payable contributed to capital 2,073,455 2,073,455
Capital contributions 47,350,000 47,350,000
Tax distributions to parent (4,126,421) (4,126,421)
Net loss (11,984,773) (11,984,773)
----------------- ----------------- -----------------
Balance, December 31, 1999 77,553,705 (11,674,715) 65,878,990
Management fee payable contributed to capital
by parent 527,369 527,369
Capital contributions 1,500,000 1,500,000
Tax distributions to parent (3,514,045) (3,514,045)
Net loss (1,130,703) (1,130,703)
----------------- ----------------- -----------------
Balance, December 31, 2000 79,581,074 (16,319,463) 63,261,611
Tax distributions to parent (1,952,144) (1,952,144)
Net loss (5,722,211) (5,722,211)
----------------- ----------------- -----------------
Balance, December 31, 2001 $79,581,074 $ (23,993,818) $55,587,256
================= ================= =================
The accompanying notes are an integral part of the financial statements.
4
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 2001, 2000 and 1999
2001 2000 1999
Operating activities:
Net loss $ (5,722,211) $ (1,130,703) $(11,984,773)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation 11,359,628 10,885,622 10,615,303
Depletion - - 31,022
Amortization of deferred financing costs 663,602 665,228 438,887
Noncash portion of extraordinary item - - 1,006,000
Increase in allowance for obsolescence 180,000 116,500 63,000
(Gain) loss on disposal/writedown of property, plant
and equipment 202,797 160,400 (663,186)
Changes in operating assets and liabilities:
Accounts receivable 5,429,053 (1,731,068) 1,308,534
Inventories (194,441) 207,704 789,542
Other current assets (167,826) (112,587) 190,799
Accounts payable and accrued expenses 4,547,287 192,972 1,081,189
Due to affiliate 493,151 365,237 (66,401)
Interest payable (100,039) (10,318) (262,668)
--------------- ---------------- ----------------
Net cash provided by operating activities 16,691,001 9,608,987 2,547,248
--------------- ---------------- ----------------
Investing activities:
Purchases of property, plant and equipment (13,877,237) (2,749,942) (3,009,194)
Proceeds from disposition of property, plant and
equipment - 45,450 2,743,852
--------------- ---------------- ----------------
Net cash used in investing activities (13,877,237) (2,704,492) (265,342)
--------------- ---------------- ----------------
Financing activities:
Contributions from parent - 1,500,000 47,350,000
Tax distributions to parent (1,952,144) (3,514,045) (4,126,421)
Principal payments on long-term debt (6,064,155) (12,025,000) (70,266,724)
Principal payments on long-term purchase obligations (93,494) (164,320) (388,349)
Proceeds from issuance of long-term debt 5,500,000 7,000,000 24,000,000
--------------- ---------------- ----------------
Net cash used in financing activities (2,609,793) (7,203,365) (3,431,494)
--------------- ---------------- ----------------
Net increase (decrease) in cash and short-term
investments 203,971 (298,870) (1,149,588)
Cash and short-term investments, beginning of period 682,329 981,199 2,130,787
--------------- ---------------- ----------------
Cash and short-term investments, end of period $ 886,300 $ 682,329 $ 981,199
=============== ================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 12,512,865 $ 13,537,348 $ 16,920,961
=============== ================ ================
Management fee payable contributed to capital by parent $ - $ 527,369 $ 2,073,455
=============== ================ ================
The accompanying notes are an integral part of the financial statements.
5
NOTES TO FINANCIAL STATEMENTS
1. Description of Business:
Bear Island Paper Company, L.L.C., a Virginia limited liability
corporation (the "Company"), located in Doswell, Virginia, is a producer
of high quality newsprint suitable for four-color printing whose
customers include leading newspaper publishers in the United States of
America. The Company is a wholly owned subsidiary of Brant-Allen
Industries, Inc. ("Brant-Allen"), a Delaware corporation.
2. Business Conditions and Liquidity:
As shown in the accompanying comparative statements of operations and
balance sheets, the Company incurred net losses of $5,722,211, $1,130,703
and $11,984,773 for the years ended December 31, 2001, 2000 and 1999,
respectively, and had an accumulated deficit of $23,993,818 at December
31, 2001. Management also anticipates a loss for the year ending December
31, 2002. Because of these recurring losses the Company is not currently
in compliance with certain financial debt covenants. Management believes
that the Company will be able to successfully manage through the debt
covenant situation, although the Company's lenders could accelerate the
debt at any time during that period. As a result, some debts previously
reported as long-term have been reclassified as current. These matters
raise substantial doubt about the Company's ability to continue as a
going concern. The accompanying financial statements have been prepared
on a going concern basis that contemplates the realization of assets and
the satisfaction of liabilities in the normal course of business.
At December 31, 2001, the Company had approximately $7.3 million in
available borrowings under its Revolving Credit Facility (see Note 7) to
fund cash requirements. In addition, the Company has the ability to
access approximately $7 million of additional capital equipment financing
through the use of certain leasing options. The Company also had positive
cash flows from operations during the past three years. Based on current
market conditions, management anticipates being able to meet liquidity
requirements for 2002; however, there exists a range of reasonably
possible outcomes which could significantly impact their ability to
achieve the aforementioned.
6
NOTES TO FINANCIAL STATEMENTS, Continued
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, which approximates market value. For purposes of the
statements of cash flows, the Company considers all highly liquid
short-term investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories: Finished goods and raw materials inventories are valued at
the lower of cost or market, with cost determined on the first-in,
first-out ("FIFO") basis. Stores inventories are valued at the lower of
average cost or market and are shown net of an allowance for obsolescence
at December 31, 2001 and 2000 of approximately $1,105,254 and $925,254,
respectively.
Property, Plant and Equipment: The costs of major renewals and
betterments are capitalized while the costs of maintenance and repairs
are charged to income as incurred. When properties are sold or retired,
their cost and the related accumulated depreciation or depletion are
eliminated from the accounts and the gain or loss is reflected in income.
The Company capitalizes interest costs as part of the cost of
constructing significant assets. There were no capitalized interest costs
during the years ended December 31, 2001 or 2000.
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.
Repair and Maintenance: The Company accrues the annual estimated costs of
planned major maintenance activity over the course of the calendar year.
As actual major maintenance project costs are incurred they are charged
against the accrual. The Company reviews amounts accrued, actual costs
incurred to date and estimated costs to be incurred for major maintenance
items through year end on a monthly basis and adjusts the accrual and
accrual rates accordingly so that the costs of all major maintenance
projects are spread over the calendar year with no accrual balance
remaining at year-end. Routine repair and maintenance costs are expensed
as incurred.
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.
7
3. Summary of Significant Accounting Policies, continued:
Income Taxes: No provision for income taxes is required in the financial
statements since the member is liable for any income tax that may be
payable on the Company's taxable income.
Revenue Recognition: Sales are recognized by the Company at the time
title and risk of loss transfers to the customer, which generally 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: The Company records all derivative instruments on the
balance sheet as assets or liabilities, measured at fair market value.
Derivatives that are not hedges are adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company did not utilize any derivative
instruments during 2001 or 2000.
Fair Value of Financial Instruments: The fair value of the Company's
long-term debt is estimated using discounted cash flow analyses based on
the incremental borrowing rates currently available to 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.
Risks and Uncertainties: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash,
short-term investments and accounts receivable. The Company's cash
balance is maintained at a major financial institution. Short-term
investments, which consist of U.S. government securities, are with a
high-credit-quality financial institution. Accounts receivable consist
principally of trade accounts receivable resulting primarily from sales
to newspaper publishers. Credit is extended to customers after an
evaluation of creditworthiness. Generally, the Company does not require
collateral or other security from customers for trade accounts
receivable. Substantially all of the Company's 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. The Company's customers are primarily located in the eastern
United States.
The Company has had five customers whose sales represent a significant
portion of sales. Sales to one of these customers approximated 11%, 0%
and 0% for the years ended December 31, 2001, 2000 and 1999,
respectively. Sales to a second customer approximated 16%, 13% and 11%
for the years ended December 31, 2001, 2000 and 1999, respectively. Sales
to a third
8
3. Summary of Significant Accounting Policies, continued:
customer approximated 16%, 19% and 18% for the years ended December 31,
2001, 2000 and 1999, respectively. Sales to a fourth customer
approximated 14% and 20% for the years ended December 31, 2001 and 2000,
respectively. Sales to a fifth customer approximated 14%, 17% and 19% for
the years ended December 31, 2001, 2000 and 1999, respectively.
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: In July 2001, the Financial Accounting
Standards Board ("FASB") issued Statement of Financial Accounting
Standards No. 141 ("SFAS 41"), Business Combinations. SFAS 141 requires
that the purchase method of accounting be used for all business
combinations initiated after June 30, 2001. 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, is effective
for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to
their initial recognition. 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, and it 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 or fair value
less cost to sell, whether reported in continuing operations or in
discontinued operations. SFAS 144 is effective for fiscal years beginning
after December 15, 2001, and is not expected to have a material impact on
the Company's financial statements.
4. Related-Party Transactions:
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 Term
Loan and Revolving Loans (see Note 7), 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 be remitted to the Company within two days
of receipt.
9
4. Related-Party Transactions, continued:
The Company received payments of approximately $0, $186,200 and $234,100
from Brant-Allen as reimbursement for expenses incurred on behalf of
Brant-Allen during the years ended December 31, 2001, 2000 and 1999,
respectively. Additionally, the Company received payments of
approximately $101,900, $101,800 and $137,200 from Soucy, Inc. for
expenses incurred on behalf of Soucy, Inc. during the years ended
December 31, 2001, 2000 and 1999, respectively.
A component of selling, general and administrative expenses as shown on
the statements of operations includes aggregate management fees charged
to the Company by 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 7. The
level of these fees that would be incurred if the Company operated on a
stand-alone basis are not practicably determinable.
The Company charged Bear Island Timberlands Company L.L.C.
("Timberlands"), an affiliated company owned 100% by Brant-Allen, for
certain administrative and other expenses. These charges approximated
$16,000, $170,000 and $1,024,000 during the years ended December 31,
2001, 2000 and 1999, respectively.
The Company's receivables and payables with their affiliates were as
follows:
December 31,
----------------------------------
2001 2000
Due from (to) Brant-Allen $ (508,773) $ 36,986
Due from Newsprint Sales 530,039 157,379
Due from Soucy, Inc. and Partners 7,604 11,791
Due from Soucy, Inc. 18,787 5,053
Due to Timberlands (361,406) (377,028)
5. Inventories:
Inventories, net consisted of:
December 31,
----------------------------------
2001 2000
Raw materials $2,153,044 $2,427,336
Stores 7,686,207 8,148,930
Finished goods 2,826,268 2,074,812
---------------- ----------------
$ 12,665,519 $ 12,651,078
================ ================
10
6. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
December 31,
------------------------------------
2001 2000
Land $ 1,548,847 $ 1,548,847
Timberlands 1,568,972 1,568,972
Building 28,412,280 28,412,280
Machinery and equipment 183,281,817 172,055,862
Construction in progress 3,783,260 1,446,080
----------------- -----------------
218,595,176 205,032,041
Less accumulated depreciation and depletion (43,562,514) (32,314,191)
----------------- -----------------
Total $175,032,662 $172,717,850
================= =================
During the years ended December 31, 2000, the Company recorded charges for
net losses of $160,400 to record a write-down and disposal of certain
operating assets in connection with increasing the capacity of its
recycling facilities. 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.
11
7. Long-Term Debt:
Long-Term debt consisted of:
December 31,
------------------------------------
2001 2000
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 LIBOR plus
3% (5.02% and 9.62% at December 31, 2001 and 2000,
respectively) (interest payable quarterly);
quarterly principal payments of $175,000 commenced
March 31, 1998; effective November 6, 2000,
quarterly principal payments were no longer
required; remaining balance due December 31, 2005 17,444,121 18,508,276
$25 million Revolving Credit Facility bearing
interest at (i) LIBOR plus 2.75% (weighted average
rate of 7.02% and 9.29% for the years ended
December 31, 2001 and 2000, respectively) for
$15,000,000 and $13,000,000 of borrowings at
December 31, 2001 and 2000, respectively, with
interest due monthly; and (ii) prime plus 1.75%
(weighted average rate of 9.80% for the year ended
December 31, 2000, respectively) for $1,500,000 of
borrowings at December 31, 2000, with interest due
quarterly; due December 31, 2003 15,000,000 14,500,000
----------------- -----------------
132,444,121 133,008,276
Less amounts classified as current 32,444,121 -
----------------- -----------------
Total long-term debt $100,000,000 $133,008,276
================= =================
On December 1, 1997, the Company sold $100 million of Senior Secured Notes
(the "Notes") in a private placement. 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
Loan"). The proceeds from the Notes, Term Loan and Revolving Loan were
used by the Company to purchase the 70% interest of the Predecessor.
During 1999, Timberlands sold the majority of its timberlands and
distributed a portion of the proceeds to 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 amount available under the
Revolving Loan was reduced from $50 million to $25 million effective
November 23, 1999.
11
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 105.00%
2003 103.333
2004 101.667
2005 and thereafter 100.000
The Term Loan and Revolving Loan 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. Elective partial
prepayments on the Term Loan or Revolving Loan shall be in an aggregate
principal amount of $5,000,000 or a whole multiple thereof. Prepayment of
the Term Loan and Revolving Loan is required to the extent of any excess
cash flow ("ECF"), as computed on the ECF date.
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, and (ii) a second
priority security interest in 100% of the membership interests in
Timberlands. The Term Loan and Revolving Loan are partly collateralized by
(i) a first priority security interest in a substantial portion of the
assets of the Company and (ii) a first priority security interest in 100%
of Brant-Allen's membership interest in Timberlands.
The most restrictive covenants of the Notes, Term Loan and Revolving Loan
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 in excess
of 3% of the Company's net sales. Only one-third of this payment may be in
cash. Effective April 1, 2000 the Notes were amended to reduce the
management fees payable to Brant-Allen to 1% of the Company's net sales of
which 100% is payable in cash.
As discussed in Note 2, the Company failed to comply with certain loan
covenants at December 31, 2001.
The fair values of the Term Loan and Revolving Loan approximate carrying
values at December 31, 2001 and 2000. The fair value of the Notes was
$95,000,000 and $89,200,000 at December 31, 2001 and 2000, respectively.
Maturities on long-term debt for the four years after 2002 are
approximately as follows: 2003 - $15,000,000; 2004 - $0; 2005 -
$17,444,121; 2006 - $0; and thereafter - $100,000,000.
As disclosed above, the Company's $100 million Senior Notes become payable
in 2007. The Company does not anticipate being able to repay these notes
from operating cash flows and intends to refinance these Notes prior to
their maturity.
12
8. Long-Term Purchase Obligations:
Capitalized purchase obligations for purchases of machinery and equipment,
which approximate fair value, consisted of:
December 31,
-------------------------------
2001 2000
Long-term purchase obligations bearing interest
at various rates ranging from
approximately 7% to 8%; with
principal payments ending in 2001 $ - $ 93,494
Less current portion - 93,494
------------- ---------------
$ - $ -
============= ===============
9. Letters of Credit:
In accordance with requirements of the Virginia Department of
Environmental Quality, the Company has outstanding irrevocable standby
letters of credit of $614,000 and $73,000 to cover potential closure and
post-closure costs associated with the Company's landfills.
In addition, the Company has an outstanding letter of credit with one of
its contractors for $2,050,000.
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 which
is included in other income in the 1999 statement of operations.
11. Employee Benefit Plans:
The Company provides a defined contribution money purchase retirement plan
for substantially all employees. The annual cost of the Company's
contributions to the plan, which is currently funded, is based on a
percentage of the compensation of participants.
The Company provides a thrift plan for substantially all employees which
incorporates the provisions of Internal Revenue Code Subsection 401(k),
whereby employees can make voluntary, tax-deductible contributions within
specified limits. The Company matched employee contributions at 60% during
the years ended December 31, 2001, 2000 and 1999, up to a maximum of 6% of
an employee's base pay.
The Company's expense for both plans approximated $1,156,000, $1,097,000
and $1,242,000 for the years ended December 31, 2001, 2000 and 1999,
respectively.
11. Employee Benefit Plans, continued:
Prior to July 1, 2001, the Company was self-insured for employee medical,
dental and disability claims up to $50,000 per claim per year. The Company
provided an accrual of approximately $20,000 and $313,000 for claims
incurred but not reported at December 31, 2001 and 2000, respectively.
The Company became fully insured for employee medical, dental and
disability claims starting July 1, 2001.
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors and Member of
Bear Island Paper Company, L.L.C.:
Our audits of the financial statements referred to in our report dated February
4, 2002 appearing in the 2001 Annual Report on Form 10-K of Bear Island Paper
Company, L.L.C. also included an audit of the financial statement schedule
listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial
statement schedule presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related financial
statements.
PRICEWATERHOUSECOOPERS LLP
February 4, 2002
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEAR ISLAND PAPER COMPANY, L.L.C.
(IN THOUSANDS)
ADDITIONS
---------------------------------------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ------ -------- -------- ---------- -------------
YEAR ENDED DECEMBER 31, 2001
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $68 $666 - - $734
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $925 $180 - - $1,105
--------- --------- --------- --------- ----------
$993 $846 - - $1,839
========= ========= ========= ========= ==========
RESERVE FOR CAPPING OF LANDFILL $535 - - ($230)c $305
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
--------- --------- --------- --------- ----------
$555 - - ($230) $325
========= ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $68 - - - $68
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $809 $116 - - $925
--------- --------- --------- --------- ----------
$877 $116 - - $993
========= ========= ========= ========= ==========
RESERVE FOR CAPPING OF LANDFILL $555 - - ($20)b $535
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
--------- --------- --------- --------- ----------
$575 - - ($20) $555
========= ========= ========= ========= ==========
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) $746 $63 - - $809
--------- --------- --------- --------- ----------
$819 $63 - ($5) $877
========= ========= ========= ========= ==========
RESERVE FOR CAPPING OF LANDFILL $574 ($10) - ($9)b $555
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
--------- --------- --------- --------- ----------
$594 ($10) - ($9) $575
========= ========= ========= ========= ==========
a) WRITE OFF OF ACCOUNTS RECEIVABLE
b) PAYMENTS FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
c) REDUCTION TO RESERVE FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS