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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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. [ ]
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 wholly owned subsidiary of
Brant-Allen Industries, Inc. a subchapter S corporation, ("Brant-Allen")
produces newsprint paper at its mill, located near Richmond, Virginia (the
"Mill"). The Mill has an annual capacity of 229,700 metric tons ("tonnes") of
high quality newsprint suitable for four-color printing, which publishers are
increasingly using for general circulation. In 2000, the Mill produced
approximately 219,200 tonnes of newsprint, and had an estimated operating
efficiency rate of 91.50%.
The Company's customers include leading newspaper publishers in the United
States, such as Dow Jones & Company, Inc. (publisher of The Wall Street Journal)
("Dow Jones"), The Washington Post Company ("The Washington Post"), Advance
Publications ("Newhouse Group"), Gannett Co., Inc. (publisher of USA Today)
("Gannett"), MediaNews Group Inc., Knight-Ridder Inc. ("Knight-Ridder"), Media
General, Inc., Times Mirror Co. and New York Times Co. Approximately 93% of the
Company's newsprint production in 2000 was purchased by its top ten customers.
A combination of pulp material is used to feed the Company's newsprint machine.
In its manufacturing process, the Mill currently uses thermomechanical pulp
("TMP"), de-inked pulp and kraft pulp. The use of TMP provides high wood fiber
yields and higher quality newsprint than that produced by the traditional
mechanical groundwood process. The de-inked pulp is produced at the Company's
recycling facility, which is located adjacent to the Mill. The recycling
facility commenced operations in 1994 and features technology for de-inking,
cleaning and screening of old newspapers ("ONP") and old magazines ("OMG").
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 60% of the Company's fiber requirements are derived
from the Company's TMP process using wood and woodchips, approximately 37% of
the Company's fiber requirements are de-inked pulp from the Mill's recycling
facility and approximately 3% is purchased kraft pulp.
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
2000, the Company's wood needs were supplied 46% from wood harvested by local
independent wood contractors and 54% in chip form, by independent sawmills.
The Mill's newsprint machine produces newsprint at an average speed of
approximately 3,990 feet per minute over a machine trim width of 301.5 inches.
The Mill produces approximately 600 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 83:17, 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 625 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 2000, approximately 39% of
the production of the Mill was sold to Dow Jones and The Washington Post under
purchase agreements (the "Purchase Agreements") that obligate each of those
customers to purchase a minimum of approximately 45,000 tonnes of newsprint per
year at prices based on prevailing market prices paid by those customers to
their non-affiliated East Coast suppliers. The 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 2000 and 1999, the Company's ten largest customers represented an aggregate
of 93% and 89%, 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 20%, 20% and 22% for the years ended December 31, 2000,
1999 and 1998, respectively. Sales to The Washington Post approximated 19%, 19%,
and 22% for the years ended December 31, 2000, 1999 and 1998, respectively.
Sales to Newhouse Group approximated 14%, 15, and 11% for the years ended
December 31, 2000, 1999 and 1998, respectively. Sales to Gannett approximated
17%, 12%, and 11% for the years ended December 31, 2000, 1999 and 1998,
respectively. Sales to Knight-Ridder approximated 10% during the year ended
December 31, 1998.
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
4
and wood wastes as secondary fuels. In addition, a natural gas fired package
boiler, with a capacity of 190,000 pounds per hour, is used as a backup if the
main boiler malfunctions or is down for maintenance.
Through Rappahannock Electrical Cooperative, which is the Company's local
utility, the Company purchases 100% of its electrical power indirectly from
Virginia Power and Old Dominion Electric Cooperative. The Company believes it
is, indirectly, Virginia Power's third largest customer.
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 625 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 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 new air emissions and revised wastewater discharge
standards for toxic and hazardous pollutants. These proposed standards are
commonly known as the "Cluster Rules". Bear Island's operations are not subject
to further control as a result of the current "Cluster Rules" and therefore, no
related capital expenditures are anticipated.
On July 12, 1996, the Company entered into a Reasonably Available Control
Technology ("RACT") Agreement with the Virginia Department of Environmental
Quality. Under the RACT Agreement, the Company is not required to incur any
significant capital expenditures for the purchase and installation of pollution
control equipment.
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, 2000, the Company had 225 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
449,200 tonnes of newsprint (219,200 tonnes for the Company and 230,000 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 revenues of which 100% is payable in
cash. During 2000, the Company was charged $1,653,000 by Brant-Allen under the
Management Services Agreement of which $1,126,000 was paid in cash and $527,000
was contributed to capital of the Company by Brant-Allen.
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 2000.
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 are derived from the audited financial
statements of the Predecessor for the year ended December 31, 1996 and 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 and 2000, for which the statements of
operations are included elsewhere herein for the years ended December 31, 1998,
1999 and 2000.
Predecessor Company
-------------------------------- ----------------------------------------------
Eleven
Year Months One Month
Ended Ended Ended
December November December
31, 30, 31, Years Ended December 31,
-------------------------------- ---------- ----------------------------------
1996 1997 1997 1998 1999 2000
(Dollars in Thousands, Except Tonnes Produced)
Income Statement Data:
Sales non-affiliates $82,600 $ 65,446 $11,363 $128,112 $110,231 $118,629
Affiliates (1) 53,360 46,040 -- -- -- --
------- -------- ------- -------- -------- --------
Total sales 135,960 111,486 11,363 128,112 110,231 118,629
Cost of sales 107,731 101,302 9,625 100,570 101,621 103,961
------- -------- ------- -------- -------- --------
Gross profit 28,229 10,184 1,738 27,542 8,610 14,668
Selling, general & administrative:
Management fee to Brant-Allen 3,865 3,175 325 3,666 3,110 1,653
Other direct 153 573 45 536 394 182
------- -------- ------- -------- -------- --------
Income from operations 24,211 6,436 1,368 23,340 5,106 12,833
------- -------- ------- -------- -------- --------
Other income (expense):
Interest income 666 591 -- 201 149 144
Interest expense (5,398) (4,332) (1,633) (18,892) (17,097) (14,192)
Other income (expense) (56) (41) 53 -- 863 84
------- -------- ------ -------- ------- --------
Total other expense (4,788) (3,782) (1,580) (18,691) (16,085) (13,964)
------- -------- ------ -------- ------- --------
Income (Loss) before $19,423 $ 2,654 $ (212) $ 4,649 $(10,979) (1,131)
extraordinary item
Extraordinary item -- (4,367) -- -- (1,006) --
------- -------- ------- -------- -------- --------
Net income (loss) $19,423 $ (1,713) $ (212) $ 4,649 $(11,985) $ (1,131)
======= ======== ======= ======== ======== ========
Other Data:
Operational EBITDA (2) $34,245 $ 16,184 $ 2,190 $ 33,407 $ 15,752 $ 23,719
Adjusted operational EBITDA(3) 2,406 36,068 17,825 24,246
7
Predecessor Company
-------------------------------- -----------------------------------------------
Eleven
Year Months One Month
Ended Ended Ended
December November December
31, 30, 31, Years Ended December 31,
--------------------------------- ---------- ----------------------------------
1996 1997 1997 1998 1999 2000
(Dollars in Thousands, Except Tonnes Produced)
Summary cash flow information:
Net cash provided by (used in)
operating activities $ 30,368 $ 12,546 $ (4,024) $ 20,623 $ 2,547 $ 9,609
Net cash used in investing
activities (7,413) (4,702) (140,169) (7,394) (265) (2,704)
Net cash provided by (used in)
financing activities (21,801) (12,467) 145,545 (12,451) (3,431) (7,203)
Depreciation 9,976 9,735 822 10,033 10,615 10,886
Depletion 58 13 -- 34 31 --
Capital expenditures 7,483 4,836 239 7,544 3,009 2,750
Saleable tonnes produced 218,642 206,058 18,802 222,668 226,249 219,161
Noncash portion of management fee 216 2,661 2,073 527
As of December 31,
1996 1997 1998 1999 2000
Balance Sheet Data:
Cash and short-term investments $ 13,625 $ 1,353 $ 2,131 $ 981 $ 682
Working capital 22,037 18,176 17,375 15,449 17,386
Property, plant and equipment, net 116,953 194,262 190,777 181,059 172,718
Total indebtedness (4) 52,171 196,435 184,946 138,291 133,102
Total assets 160,460 232,485 229,251 214,587 206,801
Total partners' equity/member's interest 95,789 25,258 32,567 65,879 63,262
(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.
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 and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage and
significantly impacts the Company's selling price of newsprint and, therefore,
its revenues and profitability. In addition, variation in the balance between
supply and demand as a result of global capacity additions have an increasing
impact on both selling prices and inventory levels in the North American
markets. Capacity is typically added in large blocks because of the scale of new
newsprint machines.
As a result, the newsprint market is highly cyclical, depending on changes in
global supply, demand and inventory levels. These factors significantly impact
the Company's sales volume and newsprint prices and, therefore, the Company's
revenues and profitability. Given the commodity nature of newsprint, the
Company, like other suppliers to this market, has little influence over the
timing and extent of price changes. Sales are recognized at the time 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. After
hitting a high of $743 per tonne in the first quarter of 1996, newsprint prices
decreased to a low of $466 per tonne in the third quarter of 1999. Newsprint
prices in 1997 recovered from a level of $510 per tonne in the first quarter of
1997 to $560 per tonne in the fourth quarter. During 1998, newsprint prices
decreased from $582 per tonne in the first quarter to $573 per tonne in the
fourth quarter. During 1999, newsprint prices averaged $495 per tonne 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.
In February 2001 newsprint prices averaged $583 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
Year Eleven Months One Month
Ended Ended Ended
December 31, November 30, December 31 Years Ended December 31,
-------------------------- ----------- ------------------------------------
1996 1997 1997 1998 1999 2000
---- ---- ---- ---- ---- ----
TONNES SOLD 217,200 206,400 19,900 221,700 222,574 220,389
AVERAGE SELLING PRICE $626 $540 $571 $578 $495 $538
The Company's primary cost components consist of raw materials (wood, ONP, OMG,
kraft pulp and chemicals), electrical energy, direct labor and certain fixed
costs. Fixed costs consist of indirect labor and other plant related costs
including maintenance expenses and mill overhead.
For the year ended December 31, 2000, raw materials, which are subject to
significant price fluctuations based on supply and demand, represented 35.3% of
the total cost of manufacturing. Electrical energy represented 16.3% and direct
and indirect labor represented 20.6% of total cost of manufacturing. On an
average per tonne basis electricity costs increased 15.4% from 1999 to 2000. The
Company currently uses a raw material mix of 60% TMP, 37% recycled fiber and 3%
kraft pulp in its production process.
9
RESULTS OF OPERATIONS
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 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, as mentioned above. 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
net increase in newsprint selling prices and partially offset by the increase in
unit costs of manufacturing as noted above.
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.
1999 COMPARED TO 1998
Net sales decreased by $17.9 million, or 14.0%, to $110.2 million in 1999 from
$128.1 million in 1998. The decrease was attributable to a 14.4% decrease in
average net selling prices for the Company's product, offset by a 0.4% increase
in sales volume to approximately 222,600 tonnes in 1999 from approximately
221,700 tonnes in 1998. The Company's net selling price for newsprint decreased
to an average of $495 per tonne in 1999 from an average net selling price of
$578 per tonne in 1998.
Cost of sales increased by $1.0 million, or 1.0%, to $101.6 million in 1999 from
$100.6 million in 1998. This increase was attributable primarily to the 0.4%
increase in sales volume, as mentioned above. Cost of sales as a percentage of
net sales increased to 92.2% in 1999 from 78.5% in 1998, due to the net decrease
in newsprint selling prices.
The Company's selling, general and administrative expenses decreased by $0.7
million, or 16.7%, to $3.5 million in 1999 from $4.2 million in 1998. This
decrease was attributable to lower management fees incurred by the Company to
Brant-Allen in 1999, which resulted directly from decreased net sales.
As a result of the above factors, income from operations decreased by $18.2
million or 78.1% to $5.1 million in 1999 from $23.3 million in 1998.
10
The Company's interest expense decreased by $1.8 million, or 9.5%, to $17.1
million in 1999 from $18.9 million in 1998, due to scheduled payments of the
Company's outstanding indebtedness and repayment on the Company's outstanding
Term Loan Facility of $50.2 million offset by an increase the outstanding
revolving line of credit, which increased by $4.0 million during 1999.
The Company's other income including interest income increased by $0.8 million,
to $1.0 million in 1999 from $0.2 million in 1998 as a result of the sale of a
portion of the Company's timberlands.
The extraordinary loss of $1.0 million incurred in the fourth quarter of 1999
was a result of a write off of a portion of the Company's deferred financing
costs due to the early extinguishment of $49.6 million of debt on the Term Loan
Facility.
As a result of the above factors, the Company incurred a net loss in 1999 of
$12.0 million compared to net income of $4.6 million in 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements have been for working capital,
capital expenditures and debt service under the Company's loan agreements. These
requirements have been met through cash flows from operations and/or loans under
the Company's Revolving Credit Facility. In addition, the Company received a
capital contribution from Brant-Allen during the year ended December 31, 2000 of
$1.5 million as a result of further Timberland liquidations.
The Company's cash and short-term investments at December 31, 2000 were
approximately $0.7 million, representing a decrease of approximately $0.3
million from $1.0 million at December 31, 1999. Net cash provided by operating
activities was $9.6 million for the year ended December 31, 2000. Net cash used
in financing activities was $7.2 million and cash used in investing activities
was $2.7 million for the year ended December 31, 2000. In total, $18.4 million,
was used to cover: capital expenditures of $2.7 million; a tax distribution of
$3.5 million; and a reduction in long-term debt including purchase obligations
of $12.2 million. The Company anticipates that cash provided from operations in
the future, combined with borrowings under the Revolving Credit Facility will be
sufficient to pay its operating expenses, satisfy debt-service obligations and
fund capital expenditures.
For the year ended December 31, 2000, the Company's cash provided by operating
activities increased by 284.0% to $9.6 million from $2.5 million for the year
ended December 31, 1999, primarily due to increased selling prices and offset by
higher cost of sales resulting in a net loss for the year ended December 31,
2000 of $1.1 million compared to net loss of $12.0 million for the year ended
December 31, 1999.
The Company incurred capital expenditures of $2.7 million and $3.0 million
during the years ended December 31, 2000 and 1999, respectively, in connection
with upgrading and maintaining its manufacturing facility. Management
anticipates that the Company's total capital expenditures will increase for the
years 2001 and 2002 and will primarily relate to maintenance of its newsprint
facilities and cost reduction projects as well as the installation of a new
headbox on the Company's paper machine, allowing the Company to improve quality
and increase capacity, and therefore, enhance its competitive position.
At December 31, 2000, the Company had approximately $133.0 million of
indebtedness, consisting of borrowings of $14.5 million under the Revolving
Credit Facility, $18.5 million under the Term Loan Facility and $100.0 million
under the Notes. In addition, $10.5 million was available in unused borrowing
capacity under the Revolving Credit Facility.
As shown in the 2000 statement of operations and the December 31, 2000 balance
sheet, the Company incurred a net loss of $1,130,703 and had an accumulated
deficit of $16,319,463. Management anticipates a profit during 2001 and plans to
continue to improve cash flow through better product pricing and cost
improvements. The Company has approximately $10.5 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
2001; however there exists a range of reasonably possible outcomes which could
significantly impact their ability to achieve the aforementioned.
11
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's
ability to comply with such covenants, including such financial ratios and
tests, may be affected by events beyond its control. There can be no assurance
that the Company will be able to comply with such requirements. A breach of any
of the covenants contained in the Indenture or the Bank Credit Facilities could
result in an event of default under such instruments which could result in the
acceleration of the related debt and the acceleration of debt under other debt
instruments that may contain cross-default or cross-acceleration provisions. If
such an event of default occurs, then the lenders under the Bank Credit
Facilities would also be able to terminate all commitments under the Bank Credit
Facilities. If the Company were unable to repay all amounts declared due and
payable, then the lenders under the Bank Credit Facilities could proceed against
the collateral granted to them to satisfy such indebtedness and other
obligations due and payable under the Bank Credit Facilities. If Indebtedness
under the Bank Credit Facilities were to be accelerated, there can be no
assurance that the assets of the Company would be sufficient to repay in full
such indebtedness and the other Indebtedness of the Company, including the
Notes.
FOLLOWING THE ACQUISITION AND RELATED FINANCINGS
At the Completion of the Acquisition and the related financings on December 1,
1997, the Company had approximately $201.1 million of indebtedness, consisting
of borrowings of $31 million under the Revolving Credit Facility, $70.0 million
under the Term Loan Facility, $100 million under the Notes and approximately
$130,000 in long-term purchase obligations. Immediately following the closing of
the Acquisition, the Company used $5 million of cash on hand to reduce the
outstanding balance of the Revolving Credit Facility. The Company's interest
expense and indebtedness following the consummation of the Acquisition and
related financings were significantly greater than they had been historically.
Interest expense for the years ended December 31, 2000, 1999 and 1998 was
approximately $14.2 million, $17.1 million and $18.9 million, respectively. As
of December 31, 2000, the Company had $14.5 million outstanding under its
Revolving Credit Facility, leaving a balance of $10.5 million available for
future drawdowns.
Although there can be no assurances, the Company believes that cash generated
from operations together with cash on-hand and amounts available under the
Revolving Credit Facilities will be sufficient to meet its debt service
requirements, capital expenditures needs and working capital needs for the
foreseeable future. The Company's future operating performance and ability to
service the Bank Credit Facilities and the Notes and repay other indebtedness of
the Company will be subject to future economic conditions and the financial
success of the Company's business and other factors, many of which are not in
the Company's control, including changes in market prices for newsprint, fiber
costs, electrical rates and future government requirements as to environmental
discharges and recycling content in newsprint. The Company currently anticipates
that in order to pay the principal amount of the Notes at maturity, the Company
will be required to refinance such Notes or adopt one or more alternatives,
including reducing or delaying capital expenditures or seeking additional equity
capital or other additional financing. None of the affiliates of the Company
will be required to make any capital contributions or other payments to the
Company with respect to the Issuer's obligations on the Notes. Although the
Company currently has no reason to believe that it will not be able to refinance
the Notes at maturity, there can be no assurance that such refinancing or any
alternative strategy could be effected upon satisfactory terms, if at all, or
that any of the foregoing actions would enable the Company to make such
principal payments on the Notes or that any of such actions would be permitted
by the terms of any debt instruments of the Company or of any of the Company's
affiliates then in effect.
Historically, the Company has had relatively few foreign sales, all of which
have been denominated in U.S. dollars. On December 3, 1997, the Company entered
into an interest rate swap transaction in the amount of $70,000,000, decreasing
in increments of $10,000,000 annually, whereby the Company exchanged a floating
three month London Interbank Offered Rate ("LIBOR") interest rate for a fixed
rate of 6.13%. This swap arrangement was terminated in October 1999 and a gain
of $150,000 was recognized.
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 $200,000 for the closure of one landfill (over and above routine
operating expenditures) over the next two years.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued a new standard affecting the
accounting for derivative instruments and hedging activities. It requires the
Company to recognize all derivatives as either assets or liabilities on the
balance sheet and measure those instruments at fair value. Changes in the fair
value of the derivative instruments are either recognized periodically in income
or other comprehensive income. The Company will implement this standard
effective January 1, 2001. The implementation of this new standard will not have
an effect on the Company's results of operations or financial position as the
Company has no derivatives.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to various market risk factors such as fluctuations in
interest rates, as well as changes in the cost of raw materials. These risk
factors can impact results of operations, cash flows and financial position. The
Company manages these risks through regular operating and financing activities,
and when necessary, the use of derivative financial instruments, such as
interest rate swap contracts. These derivative instruments, when used, are with
major financial institutions and are not for speculative or trading purposes.
The following analysis presents the effect on the Company's earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 2000. 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 2000, the Company carried $133.1 million of outstanding debt on its
books, with $33.0 million of that total held at variable interest rates. Holding
all other variables constant, if interest rates hypothetically increased by 10%,
the impact on earnings and cash flow would be an increase to interest expense of
$224,000. 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 $224,000.
The Company is exposed to the risk of increasing raw material prices, which
could impact profit margins. When raw material cost increases, the Company
generally is unable to increase selling prices. Therefore, the Company expects
the impact of increasing raw material cost to result in reductions in the
results of its operations or cash flows. Major raw material components include
wood, kraft, ONP, ONG and chemicals.
13
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, 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 53 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 59 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 55 Vice President of Finance and Director of the
Company; Vice President of Finance of
Timberlands; Senior Vice President and Chief
Financial Officer of Brant-Allen; and Vice
President of Soucy Inc.
Thomas E. Armstrong 63 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 61 Director
Robert Flug 53 Director
14
The following table sets forth certain information about the Company's key
employees:
NAME AGE POSITION
- ---- --- --------
Jacques Beauchesne 56 Mill Manager
Thomas Conte 47 Production Manager
Robert Jackson 61 Human Resources Manager
Seth Hobart 48 Financial Manager
Robert Ellis 50 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 Director of
the Company, Vice President of Finance of Timberlands, Senior Vice President and
Chief Financial Officer of Brant-Allen and Vice President of Soucy Inc. He has
been with the Company and Brant-Allen for over 20 years.
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and Manufacturing
and Director of the Company, Vice President of Sales and Manufacturing of
Timberlands, Executive Vice President of Brant-Allen and Vice President of Soucy
Inc. He has been an executive officer of the Company and Brant-Allen for 27
years and has been involved in the sale and marketing of the Company's newsprint
as well as overseeing mill operations.
MICHAEL CONROY. Mr. Conroy was appointed a Director of the Company in November
1997. Mr. Conroy is an independent consultant. Mr. Conroy was the President of
the International Herald Tribune Company US, Inc. (the "Herald Tribune") up to
December 1998 . He had been with that company for 12 years. Before joining the
Herald Tribune, he was publisher at Newsweek Atlantic.
ROBERT FLUG. Mr. Flug was appointed a Director of the Company in November 1997.
Mr. Flug has been the President and Chief Executive Officer of S.I. Danielle,
Inc., a junior apparel manufacturer, since 1987.
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.
THOMAS CONTE. Mr. Conte joined the Company in January 2000 as Production
Manager. From July 1989 to January 2000 Mr. Conte was with Alabama River
Newsprint, Inc. as Assistant Papermachine Superintendent.
ROBERT JACKSON. Mr. Jackson has been the Human Resources Manager of the Company
since 1979.
SETH HOBART. Mr. Hobart has been the Financial Manager of the Company since
January 2000. From November 1979 to January 2000 Mr. Hobart was Controller of
the Company. He has been with the Company since 1976.
ROBERT ELLIS. Mr. Ellis was named the Manager of Engineering, Maintenance and
Governmental Affairs of the Company in February 2000. Prior to his latest
promotion Mr. Ellis was Manager of Engineering Services and Governmental Affairs
of the Company and has been with the Company since 1980.
15
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Brant-Allen was paid any compensation by the Company
between 1998 and 2000. All officers of the Company who also serve as officers of
Brant-Allen have received and will continue to receive compensation from and,
except as noted in the following paragraph, participate in employee benefit
plans and arrangements sponsored by Brant-Allen, including, but not limited to,
Brant-Allen's defined contribution retirement plan (known as the Brant-Allen
Industries, Inc. Incentive Profit-Sharing Plan), employee insurance, long term
disabilities, medical and other plans which are maintained by Brant-Allen or
which may be established by Brant-Allen in the future except as noted in the
following paragraph, these officers are not entitled to participate in the
Company's employee benefit plans and arrangements.
Effective as of March 15, 1999, the Brant-Allen Industries, Inc. Incentive
Profit-Sharing Plan was merged with and into the Bear Island Paper Company, L.P.
Thrift Plan. Brant-Allen also adopted both the Company's Thrift Plan effective
for employee 401(k) contributions and employer matching contributions as of
April 1, 1999 and for other contributions as of January 1, 1999 and the
Company's Retirement Plan effective as of January 1, 1999. It is anticipated
that Brant-Allen will contribute the amount of employer contributions due on
behalf of its employees under such plans.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Brant-Allen beneficially owns all the equity of each of the Company, Timberlands
and Soucy Inc. Brant-Allen, in turn, is jointly owned by Mr. Peter Brant and
Mr. Joseph Allen.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH BRANT-ALLEN
Brant-Allen owns all of the equity in the Company, Timberlands and Soucy Inc.
Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant and
Mr. Joseph Allen. Mr. Brant serves as Brant-Allen's Chairman of the Board and
Chief Executive Officer and also as Chairman of the Board of Directors and Chief
Executive Officer of the Company and Timberlands and Chief Executive Officer of
Soucy Inc. Mr. Allen serves as Brant-Allen's President and Chief Operating
Officer and also as President and Chief Operating Officer of the Company and
Timberlands and Chief Operating Officer of Soucy Inc. The other officers of
Brant-Allen, Mr. Edward Sherrick and Mr. Thomas Armstrong, are also directors of
the Company.
Brant-Allen may engage in a variety of transactions with the Company,
Timberlands and/or Soucy. These transactions are expected to include the sale
and marketing of the newsprint produced by the Company and Soucy and the
provision of management and other services described below to the Company and
Soucy.
MANAGEMENT SERVICES AGREEMENT
Concurrently with the closing of the Acquisition, the Company entered into the
Management Services Agreement with Brant-Allen. Pursuant to the Management
Services Agreement, Brant-Allen will continue to provide the Company with senior
management treasury, financial and administrative (including marketing and
sales) services. For these services, Brant-Allen will continue to be entitled to
a monthly fee, payable in advance, calculated at the rate of 3% of the Company's
net sales less transportation costs, of which since December 1, 1997, as a
result of the Company's debt agreements, one third is payable in cash with the
remainder contributed to the Company's capital. 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 $1,653,000, $3,110,000 and
$3,666,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
See the accompanying financial statements of the Company. The Management
Services Agreement has a term of five years and is automatically renewable for
successive five-year terms unless earlier terminated by either party giving two
years written notice. The Management Services Agreement contains customary
indemnification provisions.
16
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 $170,000,
$1,024,000 and $782,000, during the years ended December 31, 2000, 1999 and
1998, respectively. Timberlands also managed the Company's timberlands for which
the Company paid Timberlands fees of approximately $62,500, during the year
ended December 31, 1998. See the accompanying financial statements of the
Company.
In 1988, the Predecessor and BITCO entered into an agreement for certain
marketing and consulting services with The Elebash Company ("Elebash"), a real
estate broker, whereby BITCO, in the case of sales of BITCO-owned land, or the
Predecessor, in the case of sales of Predecessor-owned land, has agreed to pay
Elebash two percent of the gross sales price of any land purchased or sold
pursuant to the terms of the agreement. In this connection, Timberlands paid
Elebash approximately $3,000, for the year ended December 31, 1998. Amounts paid
to Elebash are included in selling, general and administrative expenses in the
accompanying statements of income. This agreement was canceled effective January
6, 1998.
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.*
4.1a Supplemental Indenture, dated as of April 1, 2000.
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.*
10.2a See Exhibit 4.1a, Supplemental Indenture dated as of April 1,
2000.
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: March 30, 2001
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 March 30, 2001
- ------------------
Peter M. Brant Chief Executive Officer
Principal Financial and Accounting Officer
/s/ Joseph Allen President, Co-Chairman of the Board of March 30, 2001
- ----------------
Joseph Allen Directors, Chief Operating Officer and
Secretary
/s/ Edward D. Sherrick Vice President of Finance and Director of March 30, 2001
- ----------------------
Edward D. Sherrick the Board of Directors
/s/ Thomas E. Armstrong Vice President of Sales and Manufacturing March 30, 2001
- -----------------------
Thomas E. Armstrong and Director of the Board of Directors
/s/ Michael Conroy Director of the Board of Directors March 30, 2001
- ------------------
Michael Conroy
/s/ Robert Flug Director of the Board of Directors March 30, 2001
- ---------------
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, 2000 and 1999
Statements of Operations--Years ended December 31, 2000, 1999 and 1998
Statements of Changes in Member's Interest--Years ended December 31,
2000, 1999 and 1998
Statements of Cash Flows--Years ended December 31, 2000, 1999 and 1998
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, 2000
AND 1999
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, 2000
and 1999, 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 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.
February 2, 2001
F-1
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEETS
December 31, 2000 and 1999
December 31,
---------------------------
2000 1999
ASSETS
Cash and short-term investments $ 682,329 $ 981,199
Accounts receivable:
Trade, less allowance for doubtful accounts
of $67,778 in 2000 and 1999 13,708,199 11,442,523
Affiliates 211,209 444,315
Other 172,477 473,979
Inventories 12,651,078 12,975,282
Other current assets 492,022 379,435
------------ ------------
Total current assets 27,917,314 26,696,733
------------ ------------
Property, plant and equipment, at cost 205,032,041 202,487,949
Less accumulated depreciation (32,314,191) (21,428,569
------------ ------------
Net property, plant and equipment 172,717,850 181,059,380
------------ ------------
Deferred financing costs, net of accumulated
amortization of $1,852,840 and $1,187,612
in 2000 and 1999, respectively 6,165,666 6,830,894
------------ ------------
$206,800,830 $214,587,007
============ ============
LIABILITIES
Current portion of long-term debt - 700,000
Current portion of long-term purchase
obligations 93,494 130,566
Accounts payable and accrued expenses 9,026,377 9,360,774
Due to affiliates 377,028 11,791
Interest payable 1,034,044 1,044,362
------------ ------------
Total current liabilities 10,530,943 11,247,493
------------ ------------
Long-term debt 133,008,276 137,333,276
Long-term purchase obligations - 127,248
------------ ------------
133,008,276 137,460,524
------------ ------------
EQUITY
Member's interest 79,581,074 77,553,705
Accumulated deficit (16,319,463) (11,674,715)
------------ ------------
$206,800,830 $214,587,007
============ ============
The accompanying notes are an integral part of the financial statements.
F-2
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Sales $118,628,761 $110,231,202 $128,111,569
Cost of sales 103,960,697 101,621,263 100,570,013
------------ ------------ ------------
Gross profit 14,668,064 8,609,939 27,541,556
Selling, general and administrative
expenses:
Management fees to affiliate 1,653,218 3,110,180 3,665,934
Other direct 181,974 393,693 535,999
------------ ------------ ------------
Income from operations 12,832,872 5,106,066 23,339,623
------------ ------------ ------------
Other income (expense):
Interest income 144,346 148,995 201,491
Interest expense (14,192,258) (17,097,180) (18,892,445)
Other income 84,337 863,346 -
------------ ------------ ------------
(13,963,575) (16,084,839) (18,690,954)
------------ ------------ ------------
Income (loss) before
extraordinary item (1,130,703) (10,978,773) 4,648,669
Extraordinary item:
Early extinguishment of debt - (1,006,000) -
------------ ------------ ------------
Net income (loss) $ (1,130,703) $(11,984,773) $ 4,648,669
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-3
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CHANGES IN EQUITY
for the years ended December 31, 2000, 1999 and 1998
Equity:
Member's interest:
Balance, December 31, 1997 $ 25,469,737
Management fee payable contributed to capital by
parent - year ended December 31, 1998 2,660,513
------------
Balance, December 31, 1998 28,130,250
Management fee payable contributed to capital by
parent - year ended December 31, 1999 2,073,455
Capital contributions from parent 47,350,000
------------
Balance, December 31, 1999 77,553,705
Management fee payable contributed to capital by
parent - year ended December 31, 2000 527,369
Capital contributions from parent 1,500,000
------------
Balance, December 31, 2000 $ 79,581,074
============
Retained earnings (accumulated deficit):
Balance, December 31, 1997 $ (212,190)
Net income - year ended December 31, 1998 4,648,669
------------
Balance, December 31, 1998 4,436,479
Net loss - year ended December 31, 1999 (11,984,773)
Tax distributions to parent - 1999 (4,126,421)
------------
Balance, December 31, 1999 (11,674,715)
Net loss - year ended December 31, 2000 (1,130,703)
Tax distributions to parent - 2000 (3,514,045)
------------
Balance, December 31, 2000 $(16,319,463)
============
The accompanying notes are an integral part of the financial statements.
F-4
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Operating activities:
Net income (loss) $ (1,130,703) $(11,984,773) $ 4,648,669
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation 10,885,622 10,615,303 10,033,191
Depletion - 31,022 33,605
Amortization of deferred
financing costs 665,228 438,887 669,339
Noncash portion of
extraordinary item - 1,006,000 -
Increase in allowance for
obsolescence 116,500 63,000 324,500
(Gain) loss on disposal/
writedown of property, plant
and equipment 160,400 (663,186) 1,204,076
Changes in operating assets and
liabilities:
Accounts receivable (1,731,068) 1,308,534 463,984
Inventories 207,704 789,542 60,989
Other current assets (112,587) 190,799 (422,323)
Accounts payable and accrued
expenses 192,972 1,081,189 3,718,698
Due to affiliate 365,237 (66,401) (73,738)
Interest payable (10,318) (262,668) (37,885)
------------ ------------ ------------
Net cash provided by
operating activities 9,608,987 2,547,248 20,623,105
------------ ------------ ------------
Investing activities:
Purchases of property, plant and
equipment (2,749,942) (3,009,194) (7,544,100)
Proceeds from disposition of
property, plant and equipment 45,450 2,743,852 150,000
------------ ------------ ------------
Net cash used in investing
activities (2,704,492) (265,342) (7,394,100)
------------ ------------ ------------
Financing activities:
Contributions from parent 1,500,000 47,350,000 -
Tax distributions to parent (3,514,045) (4,126,421) -
Principal payments on long-term
debt (12,025,000) (70,266,724) (11,700,000)
Principal payments on long-term
purchase obligations (164,320) (388,349) (181,346)
Proceeds from issuance of
long-term debt 7,000,000 24,000,000 -
Payment of deferred financing
costs - - (569,921)
------------ ------------ ------------
Net cash used in financing
activities (7,203,365) (3,431,494) (12,451,267)
------------ ------------ ------------
Net increase (decrease) in
cash and short-term
investments (298,870) (1,149,588) 777,738
Cash and short-term investments,
beginning of period 981,199 2,130,787 1,353,049
------------ ------------ ------------
Cash and short-term
investments, end of period $ 682,329 $ 981,199 $ 2,130,787
============ ============ ============
F-5
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF CASH FLOWS, Continued
for the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
Supplemental disclosures of cash
flow information:
Cash paid for interest $ 13,537,348 $ 16,920,961 $ 18,260,991
============ ============ ============
Noncash investing and financing
activities:
Increase in property, plant and
equipment and long-term
purchase obligations for
equipment acquisition $ - $ - $ 392,205
============ ============ ============
Management fee payable
contributed to capital by
parent $ 527,369 $ 2,073,455 $ 2,660,513
============ ============ ============
The accompanying notes are an integral part of the financial statements.
F-6
NOTES TO FINANCIAL STATEMENTS
1. Organization and Acquisition:
Effective December 1, 1997, Bear Island Paper Company, L.L.C., a newly formed
Virginia limited liability corporation (the "Company") completed the purchase
of the 70% partnership interest (the "Acquisition") in Bear Island Paper
Company, L.P. (the "Predecessor") previously owned by subsidiaries of Dow
Jones & Company, Inc. ("Dow Jones") and The Washington Post Company ("The
Washington Post"). The Company accounted for the Acquisition as a purchase.
The allocation of the purchase price resulted in purchase adjustments being
applied to certain assets and liabilities acquired. The Company is a wholly
owned subsidiary of Brant-Allen Industries, Inc. ("Brant-Allen"), a Delaware
corporation.
On January 30, 1998, the Company completed its initial registration process
which became effective pursuant to Section 8(A) of the Securities Act of
1933. Concurrent with becoming effective, the Company became subject to the
information requirements of the Securities Exchange Act of 1934, as amended,
and required to file reports and other information with the United States
Securities and Exchange Commission.
2. Liquidity:
As shown in the accompanying 2000 statement of operations and the December
31, 2000 balance sheet, the Company incurred a net loss of $1,130,703 and had
an accumulated deficit of $16,319,463. Management anticipates a profit
during 2001 and plans to continue to improve cash flow through better product
pricing and cost improvements. The Company has approximately $10.5 million
available under its Revolving Credit Facility (see Note 7) to fund cash
requirements. Based on current market conditions, management anticipates
being able to meet liquidity requirements for 2001; however, there exists a
range of reasonably possible outcomes which could significantly impact their
ability to achieve the aforementioned.
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,
2000 and 1999 of approximately $656,000 and $539,500, respectively.
F-7
NOTES TO FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies, continued:
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, 2000 or 1999.
The carrying value of property, plant and equipment is evaluated whenever
significant events or changes occur that might indicate an impairment through
comparison of the carrying value to total undiscounted cash flows.
Depreciation and Depletion: Depreciation of plant and equipment is computed
principally on the straight-line basis over the estimated useful lives of the
assets. Lives range from 10 to 50 years for buildings and improvements, 40
years for recycling facilities, 35 years for tanks, 30 years for specialized
building improvements, 25 years for newsprint manufacturing equipment, and
from three to 50 years for other machinery and equipment. The portion of the
cost of timberlands attributed to standing timber is charged against income
as timber is cut and utilized in the manufacturing process at rates
determined annually, based on the relationship of unamortized timber costs to
the estimated volume of recoverable timber.
Deferred Financing Costs: Costs directly associated with the issuance of
debt have been deferred and are being amortized using the interest method
over the life of the related debt. Unamortized balances written off in
connection with early retirements of long-term debt are recognized as
extraordinary items at the time of early retirement.
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 sometimes enters into interest rate swap agreements
to help manage interest rate exposure. Amounts to be paid or received under
the agreements are accrued as interest rates change and are recognized over
the life of the agreement as an adjustment to interest expense. The Company
is exposed to credit losses in the event of counterparty nonperformance, but
does not anticipate such losses.
F-8
NOTES TO FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies, continued:
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, cash
equivalents and receivables. The Company's cash balance is maintained at a
major financial institution. Cash equivalents, which consist of U.S.
government securities, are with a high-credit-quality financial institution.
Receivables consist principally of trade accounts receivable resulting
primarily from sales to newspaper publishers. Credit is extended to
customers after an evaluation of creditworthiness. Generally, the Company
does not require collateral or other security from customers for trade
accounts receivable. Substantially all of the Company's 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 19%, 20% and
22% for the years ended December 31, 2000, 1999 and 1998, respectively.
Sales to a second customer approximated 18%, 19% and 22% for the years ended
December 31, 2000, 1999 and 1998, respectively. Sales to a third customer
approximated 14%, 15% and 11% for the years ended December 31, 2000, 1999 and
1998, respectively. Sales to a fourth customer approximated 13%, 12% and 11%
for the years ended December 31, 2000, 1999 and 1998, respectively. Sales to
a fifth customer approximated 10% during the year ended December 31, 1998.
Newsprint Sales, the sales division of Brant-Allen, has entered into certain
supply contracts, as amended, (the "Supply Contracts") with two customers.
Under the terms of the Supply Contracts, as amended, Newsprint Sales is
required to provide to these customers certain fixed volumes of newsprint at
prices determined annually, through December 31, 2004.
New Accounting Standards: The Financial Accounting Standards Board has
issued a new standard affecting the accounting for derivative instruments and
hedging activities. It requires the Company to recognize all derivatives as
either assets or liabilities on the balance sheet and measure those
instruments at fair value. Changes in the fair value of the derivative
instruments are either recognized periodically in income or other
comprehensive income. The Company will adopt this standard effective January
1, 2001. The adoption will have no impact on their results of operations or
financial position.
Reclassification: Certain prior year amounts in the financial statements
have been reclassified to conform to the current year presentation.
F-9
NOTES TO FINANCIAL STATEMENTS, Continued
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.
The Company received payments of approximately $186,200, $234,100 and
$286,400 from Brant-Allen as reimbursement for expenses incurred on behalf of
Brant-Allen during the years ended December 31, 2000, 1999 and 1998,
respectively. Additionally, the Company received payments of approximately
$101,800, $137,200 and $21,800 from F. F. Soucy, Inc. for expenses incurred
on behalf of F. F. Soucy, Inc. during the years ended December 31, 2000,
1999 and 1998, respectively.
A component of selling, general and administrative expenses as shown on the
statements of operations includes aggregate management fees to Brant-Allen.
The management fee includes senior management, treasury, financial, marketing
and sales services. There are restrictions on payment of the management fee
as described in Note 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 $170,000, $1,024,000 and
$782,000 during the years ended December 31, 2000, 1999 and 1998,
respectively. The Company also paid Timberlands approximately $62,500
during the year ended December 31, 1998 for managing the Company's
timberlands.
The Company's receivables and payables with their affiliates were as follows:
December 31,
------------------------
2000 1999
Due from Brant-Allen $ 36,986 $ 91,309
Due from Newsprint Sales 157,379 339,545
Due from F. F. Soucy, Inc. and Partners 11,791 10,964
Due from F. F. Soucy, Inc. 5,053 2,497
Due to Timberlands 377,028 11,791
F-10
NOTES TO FINANCIAL STATEMENTS, Continued
5. Inventories:
Inventories consisted of:
December 31,
--------------------------------
2000 1999
Raw materials $ 2,427,336 $ 2,375,910
Stores 8,148,930 8,083,267
Finished goods 2,074,812 2,516,105
------------ ------------
$ 12,651,078 $ 12,975,282
============ ============
6. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
December 31,
-----------------------------------
2000 1999
Land $ 1,548,847 $ 1,548,847
Timberlands 1,568,972 1,568,972
Building 28,412,280 28,412,280
Machinery and equipment 172,055,862 169,217,500
Construction in progress 1,446,080 1,740,350
------------ ------------
205,032,041 202,487,949
Less accumulated depreciation and depletion (32,314,191) (21,428,569)
------------ ------------
Total $172,717,850 $181,059,380
============ ============
During the years ended December 31, 2000 and 1998, the Company recorded
charges for net losses of $160,400 and $1,204,076, respectively, 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.
F-11
NOTES TO FINANCIAL STATEMENTS, Continued
7. Long-Term Debt:
Long-term debt consisted of:
December 31,
-----------------------------
2000 1999
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% (9.62% and 9.09% at
December 31, 2000 and 1999, 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 18,508,276 19,033,276
$25 million Revolving Credit Facility bearing interest at (i) LIBOR
plus 2.75% (weighted average rate of 9.29% and 8.00% for the
years ended December 31, 2000 and 1999, respectively) for $13,000,000
and $19,000,000 of borrowings at December 31, 2000 and 1999, respectively,
with interest due monthly; and (ii) prime plus 1.75% (weighted average
rate of 11.21% and 9.55% for the years ended December 31, 2000 and 1999,
respectively) for $1,500,000 of borrowings at December 31, 2000, with
interest due quarterly; due December 31, 2003 14,500,000 19,000,000
------------ ------------
133,008,276 138,033,276
Less current portion - 700,000
------------ ------------
Total long-term debt $133,008,276 $137,333,276
============ ============
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 of Brant-Allen. In turn, Brant-Allen made capital
contributions to the Company of $47,350,000 which were used towards the
retirement of approximately $49,600,000 on the Term Loan. In connection with
this process, unamortized financing costs of $1,006,000 were written off and
recorded as an extraordinary item in the 1999 statement of operations. In
addition, the amount available under the Revolving Loan was reduced from $50
million to $25 million effective November 23, 1999.
F-12
NOTES TO FINANCIAL STATEMENTS, Continued
7. Long-Term Debt, continued:
The Notes are redeemable, together with accrued interest, at the option of
the Company, in whole or in part, at any time on or after December 1, 2002,
with sufficient notice at the redemption prices set forth below calculated
beginning on December 1 of the years indicated:
Redemption
Year Price
2002 103.333%
2003 101.667
2004 and thereafter 100.000
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. 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 Term Loan and Revolving Loan are
guaranteed by Brant-Allen.
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 annual
revenues. 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 annual revenues of which 100% is payable in
cash.
The fair values of the Term Loan and Revolving Loan approximate carrying
values at December 31, 2000 and 1999. The fair value of the Notes was
$89,200,000 and $97,750,000 at December 31, 2000 and 1999, respectively.
Maturities on long-term debt for the four years after 2001 are approximately
as follows: 2002 - $0; 2003 - $14,500,000; 2004 - $0; 2005 - $18,508,276; 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.
F-13
NOTES TO FINANCIAL STATEMENTS, Continued
8. Long-Term Purchase Obligations:
Capitalized purchase obligations for purchases of machinery and equipment,
which approximate fair value, consisted of:
December 31,
----------------------
2000 1999
Long-term purchase obligations bearing interest at various
rates ranging from approximately 7% to 8%; with principal
payments ending in 2001 $93,494 $257,814
Less current portion 93,494 130,566
------- --------
$ - $127,248
======= ========
9. Environmental Letters of Credit:
In accordance with requirements of the Virginia Department of Environmental
Quality, the Company has outstanding irrevocable standby letters of credit
of $430,000, $70,000 and $103,000 to cover potential closure and post-
closure costs associated with the Company's landfills.
10. Derivative Financial Instruments:
At December 31, 1998, the Company had outstanding a variable to fixed
interest rate swap with a notional value of $60 million, with a term of five
years maturing December 5, 2002. Under the terms of this agreement, the
Company paid a fixed interest rate of 6.13% and received a variable rate
based on 3-month London Interbank Offered Rates ("LIBOR") (5.25% at December
31, 1998). In October 1999, the interest rate swap was terminated and a gain
of $150,000 was recognized as a result of the termination 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, 2000, 1999 and 1998, up to a maximum of 6% of
an employee's base pay.
The Company's expense for both plans approximated $1,097,000, $1,242,000 and
$1,238,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
F-14
NOTES TO FINANCIAL STATEMENTS, Continued
11. Employee Benefit Plans, continued:
The Company is self-insured for employee medical, dental and disability
claims up to $50,000 per claim per year. The Company provided an accrual of
approximately $313,000 for claims incurred but not reported at December 31,
2000 and 1999.
F-15
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, 2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $68 - - - $68
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $540 $116 - - $656
--------- --------- --------- --------- ----------
$608 $116 - - $724
========= ========= ========= ========= ==========
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) $477 $63 - - $540
--------- --------- --------- --------- ----------
$550 $63 - - $608
========= ========= ========= ========= ==========
RESERVE FOR CAPPING OF LANDFILL $574 ($10) - ($9)b $555
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
--------- --------- --------- --------- ----------
$594 ($10) - ($9) $575
========= ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1998
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $73 - - - $73
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $152 $325 - - $477
--------- --------- --------- --------- ----------
$225 $325 - - $550
========= ========= ========= ========= ==========
RESERVE FOR CAPPING OF LANDFILL $536 $70 - ($32)b $574
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $160 - - ($140)c $20
--------- --------- --------- --------- ----------
$696 $70 - ($172) $594
========= ========= ========= ========= ==========
a) WRITE OFF OF ACCOUNTS RECEIVABLE
b) PAYMENTS FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
c) WRITE DOWN OF RESERVE FOR LACK OF POTENTIAL CLAIMS FROM PAST YEARS