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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, 1998
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicated by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statement incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [ ]
Documents Incorporated by Reference
Certain exhibits required for Part IV of this report are incorporated
herein by reference from Bear Island Paper Company, L.L.C.'s registration
statement on Form S-4 Registration No. 333-42201, as amended.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS. .................................................................... 3
ITEM 2. PROPERTIES. .................................................................. 7
ITEM 3. LEGAL PROCEEDINGS ............................................................ 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ......................... 8
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS MATTERS .. 8
ITEM 6. SELECTED FINANCIAL DATA ..................................................... 8
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS .................................................................. 9
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK ................... 17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.................................. 17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE ........................................................ 17
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................... 18
ITEM 11. EXECUTIVE COMPENSATION....................................................... 19
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............... 19
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ............................. 20
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K............. 22
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. ("Brant-Allen") produces newsprint
paper at its mill, located near Richmond, Virginia (the "Mill"). The Mill has an
annual capacity of 226,300 metric tons ("tonnes") of high quality newsprint
suitable for four-color printing, which publishers are increasingly using for
general circulation. In 1998, the Mill produced approximately 222,668 tonnes of
newsprint, and had an estimated operating efficiency rate of 95.4%.
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 1998 was purchased by its top ten
customers.
A combination of pulp material is used to feed the Company's newsprint
machine. In its manufacturing process, the Mill currently uses thermomechanical
pulp ("TMP"), de-inked pulp and kraft pulp. The use of TMP provides high wood
fiber yields and higher quality newsprint than that produced by the traditional
mechanical groundwood process. The de-inked pulp is produced at the Company's
recycling facility, which is located adjacent to the Mill. The recycling
facility commenced operations in 1994 and features technology for de-inking,
cleaning and screening of old newspapers ("ONP") and old magazines ("OMG").
Prior to December 1997, all the Company's wood requirements were
supplied by its affiliate, Bear Island Timberlands Company, L.P. ("BITCO"), with
approximately 30% coming from BITCO's own land and the remainder being procured
by BITCO from local independent wood contractors and independent sawmills. In
December 1997, BITCO was converted to Bear Island Timberlands Company, L.L.C.
("Timberlands"). Timberlands currently owns approximately 130,000 acres of prime
timber in Virginia. In November 1998, Timberlands ceased all timber harvesting
operations in preparation for monetizing substantially all of its timberland
holdings. 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 200 mile radius of the
Mill.
THE MILL AND THE PRODUCTION PROCESS
The Mill, which began operations in 1979, is located 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 59% of the Company's pulp requirements are
derived from the Company's TMP process using wood and woodchips, approximately
35% of the Company's fiber requirements are de-inked pulp from the Mill's
recycling facility and approximately 6% is purchased kraft pulp.
The Mill has a wood requirement of approximately 139,000 cords per year.
All wood is currently supplied from sources within a 200 mile radius of the
Mill. See "Item 13. Certain Relationships and Related Transactions." In 1998,
the Company's wood needs were supplied 67% from wood harvested by local
independent wood contractors, and 33% from non-Timberlands owned acreage, in
chip form, by independent sawmills.
3
The Mill's newsprint machine produces newsprint at an average speed of
approximately 3,900 feet per minute over a machine trim width of 302 inches. The
Mill produces approximately 620 tonnes per day of newsprint.
The Company's recycling plant features advanced technologies for the
re-pulping, de-inking, cleaning and screening of ONP and OMG. The recycling
facility turns ONP and OMG into de-inked pulp. ONP and OMG are procured from a
combination of individual processors, municipal recovery facilities and brokers.
After delivery to the plant, the ONP and OMG are mixed by operators into a blend
with a ratio of ONP to OMG of 85:15, 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 10,800 tonnes per year. At full capacity, the recycling facility
processes approximately 79,200 tonnes per year of ONP and OMG. The recycling
facility has the capacity to produce 220 tonnes of recycled fiber per day. The
recycling mill enables the Company to produce approximately 620 tonnes per day
of newsprint containing a minimum of 35% and a maximum of 40% recycled fiber.
The recycling facility also includes a 50,000 square foot warehouse that can
hold a 10 day supply of ONP and OMG.
MARKETS AND CUSTOMERS
The Company's marketing objective is to become a preferred supplier to
each of its newsprint customers. To achieve this goal, the Company focuses on
service, product quality and long term relationships. Eight of the Company's top
ten customers have been customers for over 15 years. In 1998, approximately 44%
of the production of the Mill was sold to Dow Jones and The Washington Post
under purchase agreements (the "Purchase Agreements") that obligate each of
those customers to purchase a minimum of approximately 45,000 tonnes of
newsprint per year at prices based on prevailing market prices paid by those
customers to their non-affiliated East Coast suppliers. The Purchase Agreements
are currently scheduled to expire on December 31, 2000, but are extendable to
December 31, 2004, subject to agreement on a pricing formula. The Company has
sold newsprint to Dow Jones since 1980 and The Washington Post since 1979. In
1998 and 1997, the Company's ten largest customers represented an aggregate of
93% and 88%, respectively, of the Company's total sales. Other than the
agreements with Dow Jones and The Washington Post customers purchase a minimum
volume amount for short periods up to one year based on market prices at the
time of purchase.
Brant-Allen markets all of the Company's production and is able to offer
its customers newsprint from either the Mill or from F.F. Soucy Inc.'s ("Soucy
Inc.") mill or from F.F. Soucy, Inc. & Partners, Limited Partnership's ("Soucy
Partners" and, together with Soucy Inc., "Soucy") mill in order to satisfy
customer demand, which enables Brant-Allen to optimize shipping costs from each
of these mills. Brant-Allen employs three full-time salesmen and three customer
service representatives at the mills. Brant-Allen also performs all sales,
invoicing, accounts receivable maintenance, cash management and treasury
functions for the Company pursuant to the Management Services Agreement (as
defined below). Other than the management fee paid by the Company to Brant-Allen
under the Management Services Agreement, the Company does not pay Brant-Allen
any additional fees for its marketing services.
ENERGY AND WATER REQUIREMENTS
The Mill utilizes two forms of energy: steam, which is primarily used
within the paper machine's dryer section to dry the newsprint sheet as it is
being produced, and electricity, which is used to power the remaining processes,
particularly the refining of the woodchips.
All of the Mill's process steam (on average, 165,000 pounds per hour) is
generated by an on-site boiler rated at 243.0 million Btu per hour heat input.
The boiler is fired using pulverized coal, as a primary fuel, and bark
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 Electric and Power Company ("VEPCO") and Old Dominion Electric
Cooperative. The Company believes it is, indirectly, VEPCO's third largest
customer.
Because the Company's electricity usage has an impact on both
electricity generation requirements and costs of VEPCO and Old Dominion Electric
Cooperative, especially in periods of high demand (i.e., periods of high air
conditioning or heating loads), the Company has been able to negotiate favorable
electricity rates by demonstrating an ability to reduce demand during peak times
by adjustments to its production process.
The Mill was designed and is operated with one of the most stringent
water use and wastewater flow requirements of any paper mill in the U.S. At full
production of 620 tonnes of newsprint per day, water usage is approximately 3.8
million gallons per day. Mill effluent is approximately 3.6 million gallons per
day. The Mill's water is currently supplied by the Hanover County public utility
system and by the Mill's own river intake structure and pumping system on the
North Anna River. The Mill operates a wastewater treatment facility which
connects to the Hanover County wastewater treatment plant. The Mill has its own
on-site industrial landfill for solid waste. The Company is presently exploring
the feasibility of self supplying and treating all of its water requirements and
is in active discussions with Hanover Country over modifying its present water
contract.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive and changing
environmental regulation by federal, state, and local authorities in the United
States, including those requirements that regulate discharges into the
environment, waste management, and remediation of environmental contamination.
Environmental permits are required for the operation of the Company's
businesses, and are subject to revocation, modification and renewal.
Governmental authorities have the power to enforce compliance with environmental
requirements and violators are subject to injunctions, civil penalties and
criminal fines. Third parties may also have the right to sue to enforce
compliance with such regulations.
The Company has in the past made significant capital expenditures to
comply with current federal, state and local environmental laws and regulations.
The Company believes that it is in substantial compliance with such laws and
regulations, although no assurance can be given that it will not incur material
liabilities and costs with respect to such laws and regulations in the future.
Although the Company does not currently believe that it will be required to make
significant expenditures for pollution control in the near future, no assurances
can be given that future developments, such as the potential for more stringent
environmental standards or stricter enforcement of environmental laws, will not
cause the Company to incur such expenditures.
The wastewater treatment facility for the Mill discharges effluent
through the outfall line of the Hanover County wastewater treatment plant to the
North Anna River. The effluent limits that must be maintained in accordance with
the discharge permit require continuous monitoring and extensive reporting of
numerous tests. The treatment facility consists of primary and secondary
clarification, aerated equalization and activated sludge treatment.
The Company maintains valid and current air and water permits and
believes it is currently in substantial compliance with respect to all such
permits. The Company believes that it has good relations with the federal, state
and local regulatory authorities, and management is not aware of any material
problems or costs that might jeopardize the Company's scheduled permit renewals.
5
The U.S. Environmental Protection Agency (the "EPA") has proposed that
pulp and paper mills be required to meet currently proposed new air emissions
and revised wastewater discharge standards for toxic and hazardous pollutants by
early 2000. These proposed standards are commonly known as the "Cluster Rules"
since the EPA has proposed standards for a "cluster" of related air emission and
wastewater sources. The exact requirements of the EPA's proposed new air and
wastewater standards will not be known until the final regulations are adopted
and it is anticipated that compliance will not be required earlier than 2000.
While management does not expect the Cluster Rules to have an impact on the
Mill's TMP and recycling operations, the impact on other aspects of the
manufacturing process is still uncertain. In any event, management does not
anticipate that a material amount of capital expenditures will be required in
order to comply with such regulations.
On July 12, 1996, the Company entered into a Reasonably Available
Control Technology ("RACT") Agreement with the Virginia Department of
Environmental Quality. Under the RACT Agreement, the Company is not required to
incur any significant capital expenditures for the purchase and installation of
pollution control equipment.
COMPETITION
The newsprint industry is highly competitive and is comprised of many
participants. The Company competes directly with a number of newsprint
manufacturers, many of which have longer histories, larger customer bases,
closer geographical proximity to customers and significantly greater financial
and marketing resources than the Company. The Company faces significant
competition from both large, vertically integrated companies and numerous
smaller companies. The Company competes with several other newsprint
manufacturers in Canada, as well as regional manufacturers in the Southern
United States. Competition in the newsprint market is generally based on price,
quality and customer service. Newsprint price decreases announced by one or more
of the major newsprint producers in North America have effected and may continue
to effect material changes in the average price for newsprint and have the
potential to adversely effect the newsprint market in general.
EMPLOYEES
As of December 31, 1998, the Company had 249 employees, approximately
30% of which have been employed by the Company since its inception in 1979. The
workforce is non-unionized and has been very receptive to flexible working
conditions and requirements.
SALE OF TIMBERLANDS
Timberlands anticipates selling substantially all of its properties.
The net proceeds from these sales will be utilized to reduce (i) Timberlands
debt and (ii) debt incurred in Brant-Allen's purchase of the equity interests in
Timberlands and the Company. However, the Company intends to retain fiber supply
arrangements which management believes will allow the Company to maintain fiber
sourcing flexibility.
MANAGEMENT SERVICES AGREEMENT
Executive management of the Company and Soucy is provided by
Brant-Allen, pursuant to a management contract (the "Management Services
Agreement "). The Company's and Soucy's newsprint is sold through Brant-Allen,
which currently markets approximately 445,400 tonnes of newsprint (222,700
tonnes for the Company and 222,700 tonnes for Soucy). Brant-Allen manages the
Company and Soucy to maximize any available synergies. The Company benefits from
the centralization of marketing, financial, administrative and distribution
functions at Brant-Allen. These services are provided pursuant to the Management
Services Agreement for which a management fee of 3% of annual net sales of the
Company less transportation costs is payable by the Company, of which, since
December 1, 1997, one third is payable in cash. During 1998, the Company was
charged $3,666,000 by Brant-
6
Allen under the Management Services Agreement of which $1,005,000 was paid in
cash and $2,661,000 was deferred and recontributed as capital to 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.
Brant-Allen was also the general partner of, and owned a 30% partnership
interest in BITCO. In conjunction with the Acquisition, Brant-Allen also
acquired 100% ownership of BITCO (the "Timberlands Acquisition") which was
converted to Timberlands immediately prior to the closing of the Timberlands
Acquisition. Timberlands currently owns and manages approximately 130,000 acres
of timberland in Central Virginia, all within 200 miles of the Mill, and is in
the process of selling substantially all of this acreage.
In addition, Brant-Allen owns all the capital stock of Soucy Inc., a
newsprint manufacturer located in Riviere-du-Loup in the Province of Quebec,
Canada, which owns a newsprint machine that currently has an annual capacity of
67,000 tonnes. Soucy Inc. is also the general partner and owns a 50.1% interest
in Soucy Partners, a limited partnership formed in 1974 with Dow Jones (39.9%)
and Rexfor (a Quebec government-owned company) (10.0%). Soucy Partners owns and
operates a mill, including a newsprint machine, with an annual production
capacity of 157,000 tonnes. The two Soucy newsprint machines are located on
Soucy Partners' plant site.
ITEM 2. PROPERTIES.
The Mill is located on approximately 700 acres of land that is owned by
the Company, which is approximately 80 miles south of Washington, D.C., and 25
miles north of Richmond, Virginia. In addition, the Company owns approximately
3,300 acres of land and timberland in Virginia.
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is involved in legal proceedings relating
to claims arising out of its operations in the normal course of business. The
Company believes that there are no material legal proceedings pending or
threatened against the Company or any of its properties.
7
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 1998.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Brant-Allen beneficially owns all the equity of each of the Company,
Timberlands and Soucy Inc. Brant-Allen, in turn, is owned by Mr. Peter Brant and
Mr. Joseph Allen.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data are derived from the audited
financial statements of the Predecessor for each of the years in the three year
period ended December 31, 1996 and the eleven months ended November 30, 1997, as
well as the audited financial statements of the Company for the one month ended
December 31, 1997 and the year ended December 31, 1998, for which the statements
of operations are included elsewhere herein for the (i) Predecessor for the year
ended December 31, 1996 and the eleven months ended November 30, 1997 and (ii)
Company for the one month ended December 31, 1997 and the year ended December
31, 1998.
Predecessor Company
-------------------------------------------------- ------------------------
Eleven
Months One Month
Ended Ended
November December Year Ended
Years Ended December 31, 30, 31, December 31,
-------------------------------------------------- ------------------------
1994 1995 1996 1997 1997 1998
(Dollars in Thousands, Except Tonnes Produced)
Income Statement Data:
Net sales non-affiliates $ 51,297 $ 70,960 $ 75,460 $ 59,548 $ 8,882 $ 95,870
Affiliates (1) 42,543 61,243 53,360 46,040 1,925 26,328
--------- --------- --------- --------- --------- ---------
Total sales 93,840 132,203 128,820 105,588 10,807 122,198
Cost of sales 91,610 100,399 100,591 95,404 9,069 94,656
--------- --------- --------- --------- --------- ---------
Gross profit 2,230 31,804 28,229 10,184 1,738 27,542
Selling, general & administrative:
Management fee to Brant-Allen 2,820 3,961 3,865 3,175 325 3,666
Other direct 208 224 153 573 45 536
--------- --------- --------- --------- --------- ---------
Income (loss) from operations (798) 27,619 24,211 6,436 1,368 23,340
Other income (expense):
Interest income 309 603 666 591 -- 201
Interest expense (6,194) (5,986) (5,398) (4,332) (1,633) (18,892)
Other income (expense) 2,116 33 (56) (41) 53 --
--------- --------- --------- --------- --------- ---------
Total other expense (3,769) (5,350) (4,788) (3,782) (1,580) (18,691)
--------- --------- --------- --------- --------- ---------
(Loss)income before $ (4,567) $ 22,269 $ 19,423 2,654 (212) 4,649
extraordinary item
Extraordinary item -- -- -- (4,367) -- --
--------- --------- --------- ---------- ---------- -----------
Net income (loss) $ (4,567) $ 22,269 $ 19,423 $ (1,713) $ (212) $ 4,649
========= ========= ========= ======== ========== =========
Other Data:
Operational EBITDA (2) $ 8,971 $ 37,357 $ 34,245 $ 16,184 $ 2,190 $ 33,407
Adjusted operational
EBITDA (3) 2,406 36,068
8
Predecessor Company
------------------------------------------------- -------------------------
Eleven
Months One Month
Ended Ended
November December Year Ended
Years Ended December 31, 30, 31, December 31,
------------------------------------------------- -------------------------
1994 1995 1996 1997 1997 1998
(Dollars in Thousands, Except Ratios and Tonnes Produced)
Summary cash flow information:
Net cash provided by (used in)
operating activities $ 4,362 $ 27,215 $ 30,368 $ 12,546 $ (4,024) $ 20,623
Net cash used in investing
activities (3,999) (6,502) (7,413) (4,702) (140,169) (7,394)
Net cash provided by (used in)
financing activities 2,994 (15,695) (21,801) (12,467) 145,545 (12,451)
Depreciation 9,730 9,648 9,976 9,735 822 10,033
Depletion 39 90 58 13 -- 34
Capital expenditures 9,469 6,645 7,483 4,836 239 7,544
Saleable tonnes produced 203,159 208,870 218,642 206,058 18,802 222,668
As of December 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
Balance Sheet Data:
Cash and short-term investments $ 7,454 $ 12,472 $ 13,625 $ 1,353 $ 2,131
Working capital 14,400 23,901 22,037 18,176 17,375
Property, plant and equipment, net 117,581 115,941 116,953 194,262 190,777
Total indebtedness (4) 60,025 55,368 52,171 196,435 184,946
Total assets 150,269 160,523 160,460 232,485 229,251
Total partners' equity/member's interest 78,597 91,366 95,789 25,258 32,567
----------------------------
(1) The sales are to Dow Jones and The Washington Post through November 30,
1997 and sales to Dow Jones after November 30, 1997.
(2) EBITDA is defined as income (loss) from operations plus depreciation,
depletion and amortization, if any. EBITDA is generally accepted as
providing useful information regarding a company's ability to service and/or
incur debt. EBITDA should not be considered in isolation or as a substitute
for net income, cash flows from operations, or other income or cash flow
data prepared in accordance with generally accepted accounting principles or
as a measure of a company's profitability or liquidity.
(3) Adjusted EBITDA is defined as EBITDA (as shown in note (2) above) plus the
noncash portion, or two-thirds, of the management fee paid to Brant-Allen
after November 30, 1997. Pursuant to the limitation on restricted payments
covenant of the Notes, payments by the Company for management fees are
limited to Brant-Allen (or any of its Subsidiaries or Affiliates) to an
amount per annum not in excess of 3% of net sales of the Company, of which
no more than one third may be in cash.
(4) Total indebtedness is defined as long-term debt and long-term purchase
obligations and current portions thereof.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and
results of operations should be read in conjunction with "Item 6. Selected
Financial Data" and the financial statements of the Company and related notes
thereto included elsewhere in this report. Historically, the Predecessor's cost
of manufacturing had also included an up charge (a margin in excess of the
market price of the fiber) paid to BITCO with respect to wood, and a procurement
fee per tonne of ONP and OMG, supplied or provided by BITCO to the Predecessor.
This up charge and procurement fee was eliminated on December 1, 1997. See "Item
13. Certain Relationships and Related Transactions." Additionally, management
has prepared the following pro forma results of operations for 1997 to enable a
meaningful comparison between both 1996 and 1998 results of operations.
Accordingly, see "1998
9
Compared to Pro Forma 1997" and "Pro Forma 1997 compared to 1996" discussions
below, which compare the year ended December 31, 1997 on a pro forma basis
assuming the transaction had occurred on January 1, 1997 with 1998 and 1996
actuals for a more meaningful comparison of operations.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
The following unaudited pro forma condensed statement of operations has
been prepared by management from the historical financial statements of the
Predecessor for the eleven months ended November 30, 1997 and the historical
financial statements of the Company for the one month ended December 31, 1997.
The Acquisition, and the incurrence of debt, are assumed to have occurred at
January 1, 1997. The pro forma condensed statement of operations for the year
ended December 31, 1997 is not necessarily indicative of the results of
operations that would have occurred for the year ended December 31, 1997, had
the Acquisition and debt incurrence occurred January 1, 1997. In preparation of
the pro forma condensed statement of operations, management has made certain
estimates and assumptions that affect the amounts reported in the unaudited pro
forma condensed statement of operations. The unaudited pro forma condensed
statement of operations should be read in conjunction with the historical
financial statements and related notes thereto of the Company which are included
in this Form 10-K.
Unaudited Pro Forma Condensed
Statement of Operations
for the Year Ended December 31, 1997
-----------------------------------------------------------------------------------
Predecessor
Historical Pro Forma Company Company
Eleven Eleven Historical Pro Forma
Months Ended Months Ended One Month Year Ended
November 30, Pro Forma November 30, Ended Pro Forma December
1997 Adjustments 1997 December 31, 1997 Adjustments 31, 1997
-------------------------- ---------------------------------------------------------
(Dollars in Thousands, Except Notes)
Net sales $ 105,588 $ 105,588 $ 10,807 $ 116,395
Cost of sales 95,404 $ (3,666)(a) 89,387 9,069 98,255
(753)(b)
201 (c)
(1,799)(d) $ (201)(c)
------ --------- -------- -------- --------- --------
Gross profit 10,184 6,017 16,201 1,738 201 18,140
Selling, general & administrative expenses:
Management fee to
Brant-Allen 3,175 3,175 325 3,500
Other 573 275(e) 848 45 893
------ --------- -------- -------- --------- --------
Income from operations 6,436 5,742 12,178 1,368 201 13,747
Other income (deductions):
Interest income 591 591 -- 591
Interest expense (4,332) (13,282)(f) (18,205) (1,633) (19,838)
Other (41) (591)(g) (41) 53 12
------ --------- -------- -------- --------- --------
Income (loss) before
extraordinary item $ 2,654 $ (8,131) $ (5,477) $ (212) $ 201 $ (5,488)
========= ========= ========= ======= ========= =========
(a) Adjustment to reflect the effect on cost of goods sold from reducing to
an open market price pulpwood sold by BITCO to the Predecessor during
the eleven months ended November 30, 1997 resulting from the elimination
of an arrangement for the up charge formerly paid by the Predecessor to
BITCO resulting from the amendment to the Company's and Timberland's
supply arrangement in connection with the Acquisition. The price per
cord of timber was reduced from $95.50 to $69.71 per cord for the eleven
months ended November 30, 1997 for 142,143 cords consumed during the
eleven months ended November 30, 1997.
10
(b) Adjustment to reflect pro forma depreciation expense resulting from the
Acquisition computed based on remaining useful lives of plant and
equipment ranging from 1 to 50 years.
(c) To reflect the impact on cost of sales for the eleven months ended
November 30, 1997 of a $201,043 write-up to inventory at January 1, 1997
in connection with the allocation of the purchase price.
(d) Adjustment to reflect the effect on cost of sales resulting from the
termination of the recycled fiber procurement activities of BITCO
charged to the Predecessor. Amounts eliminated are an up charge for
recycled fiber acquired from BITCO less employee costs previously billed
to BITCO which are added for procuring recycled fiber. The procurement
fees charged to the Predecessor for the eleven months ended November 30,
1997 were $2,028,481 and the actual costs of procurement provided were
$229,465.
(e) Adjustment to reflect the incremental general and administrative
expenses of $300,000 annually associated with operating as a public
company.
(f) Adjustment to reflect the incremental interest expense for the eleven
months ended November 30, 1997 related to the balances assumed
outstanding on $100 million principal amount of the Notes, $70 million
Term Loan Facility and $50 million Revolving Credit Facility for which
$31 million was assumed outstanding at January 1, 1997, upon
consummation of the Acquisition. The total amount assumed to be
outstanding at January 1, 1997 also includes $6 million of existing debt
which is not assumed to be repaid at January 1, 1997. This amount
represents the difference between the $42 million in debt repaid at
November 30, 1997 and the amount of $48 million outstanding at January
1, 1997. The remaining $6 million of existing debt is assumed to be
repaid during the period from January 1, 1997 to November 30, 1997.
Interest is calculated at the current rate as of December 1, 1997 for
the eleven months ended November 30, 1997 for the borrowings under the
Revolving Credit Facility and $70 million Term Loan Facility, and 10%
for the $100 million principal amount of the Notes and 10.375% on the $6
million of existing debt. In addition, an annual commitment fee expense
of 0.5% of the unused portion of the $50 million Revolving Credit
Facility has been recorded for the eleven months ended November 30, 1997
of approximately $87,100.
(g) Adjustment to reflect the net effect of increased amortization for the
$8.5 million in deferred financing costs incurred to fund the
Acquisition, amortized over the respective lives of the Term Loan
Facility, the Revolving Credit Facility and the Notes.
The Company manufactures and is dependent on one product, newsprint,
which is used in general printing and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage and
significantly impacts the Company's selling price of newsprint and, therefore,
its revenues and profitability. In addition, variation in the balance between
supply and demand as a result of global capacity additions have an increasing
impact on both selling prices and inventory levels in the North American
markets. Capacity is typically added in large blocks because of the scale of new
newsprint machines.
As a result, the newsprint market is highly cyclical, depending on
changes in global supply, demand and inventory levels. These factors
significantly impact the Company's sales volume and newsprint prices and,
therefore, the Company's revenues and profitability. Given the commodity nature
of newsprint, the Company, like other suppliers to this market, has little
influence over the timing and extent of price changes. Sales are recognized at
the time of shipment from the Mill. However, significant fluctuations in revenue
can and do occur as a result of the timing of shipments caused by increases and
decreases in mill inventory levels.
Newsprint prices have been extremely volatile over the past five years.
After hitting a low of $420 per tonne in the first quarter of 1994, newsprint
prices increased to a high of $750 per tonne ($765 per tonne on the West Coast)
in the fourth quarter of 1995 and held at those levels through the first quarter
of 1996. 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 $580 per tonne in the first quarter to $575 per
tonne in the fourth quarter. In February 1999, newsprint prices averaged $550
per tonne.
11
The table below summarizes the annual volumes and net selling prices of
the Predecessor and the Company's newsprint during the periods indicated below:
Predecessor Company
--------------------------------------- ---------------------------
Eleven Months One Month
Year Ended December 31, Ended Ended Year Ended
----------------------- November 30, December 31 December 31,
------------- ----------- --------------
1994 1995 1996 1997 1997 1998
---- ---- ---- ---- ---- ----
TONNES SOLD 215,900 206,800 217,200 206,400 19,900 221,700
AVERAGE NET SELLING $435 $639 $593 $512 $544 $551
PRICE
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, 1998, raw materials, which are subject
to significant price fluctuations based on supply and demand, represented 33.4 %
of the total cost of manufacturing. Electrical energy represented 15.2%, and
direct and indirect labor represented 22.9% of total cost of manufacturing. The
Company currently uses a raw material mix of 59% TMP, 35% recycled fiber and 6%
kraft pulp in its production process.
RESULTS OF OPERATIONS
1998 COMPARED TO PRO FORMA 1997
The following comparison of 1998 to pro forma 1997 is presented to
assist the reader in understanding the change in operations from 1997 to 1998
assuming that the Transactions had occurred as of January 1, 1997, for purposes
of the 1997 pro forma results of operations ("Pro Forma 1997").
Net sales increased by $5.8 million, or 5.0%, to $122.2 million in 1998
from $116.4 million in Pro Forma 1997. The net sales increase was principally
due to a 7.2% increase in average net selling prices for the Company's product,
from an average net selling price of $514 per tonne in Pro Forma 1997 to an
average net selling price of $551 per tonne in 1998, offset in part as a result
of a 2.1% decrease in sales volume to approximately 221,700 tonnes in 1998 from
approximately 226,300 tonnes in Pro Forma 1997.
Cost of sales decreased by $3.6 million, or 3.7%, to $94.7 million in
1998 from $98.3 million in Pro Forma 1997. This decrease was primarily
attributable to the 2.1% decrease in sales volume and an overall decrease in
departmental production costs. Costs of sales as a percentage of net sales
decreased from 84.4% in Pro Forma 1997 to 77.5% in 1998 as a result of the
increase in average selling prices and the decrease in per tonne cost of
manufacture.
The Company's selling, general and administrative expenses decreased by
$0.2 million, or 4.5%, to $4.2 million in 1998 from $4.4 million in Pro Forma
1997 primarily because of higher estimated legal and accounting expenses in Pro
Forma 1997 offset partially by higher management fees paid by the Company to
Brant-Allen in 1998, which resulted directly from increased net sales.
As a result of the above factors, income from operations increased by
$9.6 million or 70.1% to $23.3 million in 1998 from $13.7 million in Pro Forma
in 1997.
12
The Company's interest expense decreased by $0.9 million, or 4.5%, to
$18.9 million in 1998 from $19.8 million in Pro Forma 1997, due to scheduled
amortization of the Company's outstanding indebtedness and reductions in the
Company's outstanding revolving line of credit, which reduced by $11.0 million
during 1998.
The Company's other income including interest income decreased by $0.4
million, or 66.7%, to $0.2 million in 1998 from $0.6 million in Pro Forma 1997
as a result of utilizing all available cash balances to reduce outstanding
balances on the Company's revolving credit line in 1998 as opposed to investing
these balances in interest bearing securities in Pro Forma 1997.
As a result of the above factors, the Company's net income increased by
$10.1 million to $4.6 million in 1998 from a net loss of $5.5 million in Pro
Forma 1997.
1996 COMPARED TO PRO FORMA 1997
The following comparison of 1996 results of operations to Pro Forma 1997
is presented to assist the reader in understanding the change in operations from
1996 to Pro Forma 1997.
Net sales decreased by $12.4 million, or 9.6%, to $116.4 million in Pro
Forma 1997 from $128.8 million in 1996. The net sales decrease was principally
due to a 13.3% decrease in average net selling prices for the Company's product,
to an average net selling price of $514 per tonne in Pro Forma 1997 from an
average net selling price of $593 per tonne in 1996, offset in part as a result
of a 4.2% increase in sales volume to approximately 226,300 tonnes in Pro Forma
1997 from approximately 217,200 tonnes in 1996.
Cost of sales decreased by $2.3 million, or 2.3%, to $98.3 million in
Pro Forma 1997 from $100.6 million in 1996. This decrease was attributable
primarily to the decrease in the cost of wood and ONP fiber, which was purchased
from BITCO and included an upcharge and procurement fee amounting to
approximately $5.5 million in excess of market prices. This was offset by the
4.2% increase in sales volume. Costs of sales as a percentage of net sales
increased from 78.1% in 1996 to 84.5% in Pro Forma 1997 as a result of a
decrease in average selling prices.
The Company's selling, general and administrative expenses increased by
$0.2 million, or 5%, to $4.4 million in Pro Forma 1997 from $4.2 million in 1996
primarily because of higher expenses incurred as a result of being a public
company offset by a decrease in management fees paid by the Company to
Brant-Allen, which resulted directly from decreased net sales.
As a result of the above factors, income from operations decreased by
$10.5 million, or 43.4%, to $13.7 million in Pro Forma 1997 from $24.2 million
in 1996.
The Company's interest expense increased by $14.4 million, or 267%, to
$19.8 million in Pro Forma 1997 from $5.4 million in 1996, due to the increase
in debt outstanding due to the Acquisition and Related Financings which
increased debt from $52.2 million at December 31, 1996 to $196.4 million at
December 31, 1997.
As a result of the above factors, the Company's net income decreased by
$24.9 million, or 128.4%, to a loss of $5.5 million in Pro Forma 1997 from a
profit of $19.4 million in 1996.
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company's principal liquidity requirements have been
for working capital, capital expenditures and debt service. These requirements
have been met through cash flows from operations and/or loans and equity
contributions. Following the Transactions, the Company's principal liquidity
requirements have been principally for working capital, debt service under the
Bank Credit Facilities and the Notes and the funding of
13
capital expenditures. These requirements are expected to be met through cash
flows from operations and borrowings under the Revolving Credit Facility.
The Company's cash provided by (used in) operating activities increased
to $20.6 million in the year ended December 31, 1998 from $(4.0 million) in the
one month ended December 31, 1997 and $12.5 million in the eleven months ended
November 30, 1997, primarily as a result of increased net income due primarily
to higher selling prices for the Company's product. Cash used in investing
activities decreased to $7.4 million in the year ended December 31, 1998, from
$140.2 million in the one month ended December 31, 1997 and $4.7 million in the
eleven months ended November 30, 1997, as a result of increased capital
expenditures of $2.5 million, and a decrease of $139.9 million as a result of
the Acquisition in 1997.
The Company and the Predecessor made capital expenditures of $7.5
million, $0.2 million, $4.8 million and $7.5 million in the year ended December
31, 1998, in the one month ended December 31, 1997, in the eleven months ended
November 30, 1997 and the year ended December 31, 1996, respectively, in
connection with upgrading and maintaining the manufacturing facility. Management
anticipates that the Company's total capital expenditures for 1999 and 2000 will
be relatively consistent with the 1998 capital expenditure level, and primarily
will relate to maintenance of its newsprint facilities and cost reduction
projects, allowing the Company to improve quality and reduce per unit costs and
therefore, enhance its competitive position.
RESTRICTIVE DEBT COVENANTS
The indenture dated December 1, 1997 between the Company, Bear Island
Finance Company II, Soucy Inc., Timberlands, Brant-Allen and Crestar Bank, as
trustee (the "Indenture"), restricts the ability of the Company and its
subsidiaries to, among other things, incur additional indebtedness, incur liens,
pay dividends or make certain other restricted payments or investments,
consummate certain asset sales, enter into certain transactions with affiliates,
impose restrictions on the ability of a subsidiary to pay dividends or make
certain payments to the Company, merge or consolidate with any other person or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of the assets of the Company. In addition, the Bank Credit
Facilities contain other and more restrictive covenants and prohibit the Company
from prepaying the Notes, except in certain circumstances. The Bank Credit
Facilities also require the Company to maintain specified financial ratios and
satisfy certain financial tests. The Company's ability to comply with such
covenants, including such financial ratios and tests, may be affected by events
beyond its control. There can be no assurance that the Company will be able to
comply with such requirements. A breach of any of the covenants contained in the
Indenture or the Bank Credit Facilities could result in an event of default
under such instruments which could result in the acceleration of the related
debt and the acceleration of debt under other debt instruments that may contain
cross-default or cross-acceleration provisions. If such an event of default
occurs, then the lenders under the Bank Credit Facilities would also be able to
terminate all commitments under the Bank Credit Facilities. If the Company were
unable to repay all amounts declared due and payable, then the lenders under the
Bank Credit Facilities could proceed against the collateral granted to them to
satisfy such indebtedness and other obligations due and payable under the Bank
Credit Facilities. If Indebtedness under the Bank Credit Facilities were to be
accelerated, there can be no assurance that the assets of the Company would be
sufficient to repay in full such indebtedness and the other Indebtedness of the
Company, including the Notes. In addition, the Indenture also contains covenants
that restrict certain activities of Timberlands, Soucy Inc. and their respective
subsidiaries, such as the incurrence of debt and asset sales.
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
14
expense and indebtedness following the consummation of the Acquisition and
related financings were significantly greater than they had been historically.
Interest expense for the year ended December 31, 1998, for the one month ended
December 31, 1997 and for the eleven months ended November 30, 1997 was
approximately $18.9 million, $1.6 million and $4.3 million, respectively. As of
December 31, 1998, the Company had $15.0 million outstanding under its Revolving
Credit Facility, leaving a balance of $30.0 million available for future
drawdowns.
Although there can be no assurances, the Company believes that cash
generated from operations together with cash on-hand and amounts available under
the Revolving Credit Facilities will be sufficient to meet its debt service
requirements, capital expenditures needs and working capital needs for the
foreseeable future. The Company's future operating performance and ability to
service the Bank Credit Facilities and the Notes and repay other indebtedness of
the Company will be subject to future economic conditions and the financial
success of the Company's business and other factors, many of which are not in
the Company's control, including changes in market prices for newsprint, fiber
costs, electrical rates and future government requirements as to environmental
discharges and recycling content in newsprint. The Company currently anticipates
that in order to pay the principal amount of the Notes at maturity, the Company
will be required to refinance such Notes or adopt one or more alternatives,
including reducing or delaying capital expenditures, selling assets or seeking
additional equity capital or other additional financing. None of the affiliates
of the Company will be required to make any capital contributions or other
payments to the Company with respect to the Issuer's obligations on the Notes
(except to the extent that Timberlands or Soucy are required under the Indenture
to make an Excess Proceeds Offer to the Holders of the Notes and the
consummation of any such Excess Proceeds Offer is deemed to be a payment to the
Company). Although the Company currently has no reason to believe that it will
not be able to refinance the Notes at maturity, there can be no assurance that
such refinancing or any alternative strategy could be effected upon satisfactory
terms, if at all, or that any of the foregoing actions would enable the Company
to make such principal payments on the Notes or that any of such actions would
be permitted by the terms of any debt instruments of the Company or of any of
the Company's affiliates then in effect.
Historically, the Company has had relatively few foreign sales, all of
which have been denominated in U.S. dollars. On December 3, 1997, the Company
entered into an interest rate swap transaction in the amount of $70,000,000,
decreasing in increments of $10,000,000 annually ($60,000,000 as of December 31,
1998), whereby the Company exchanged a floating three month London Interbank
Offered Rate ("LIBOR") interest rate for a fixed rate of 6.13%.
ENVIRONMENTAL EXPENDITURES
The operation of the Mill is subject to extensive and changing
environmental regulation by federal, state and local authorities, including
those requirements that regulate discharges into the environment, waste
management, and remediation of environmental contamination. Environmental
permits are required for the operation of the Company's businesses, and are
subject to revocation, modification and renewal. Governmental authorities have
the power to enforce compliance with environmental requirements and violators
are subject to fines, injunctions, civil penalties and criminal fines. Third
parties may also have the right to sue to enforce compliance with such
regulations.
The Company has in the past made significant capital expenditures to
comply with current federal, state and local environmental laws and regulations.
The Company believes that it is in substantial compliance with such laws and
regulations, although no assurance can be given that it will not incur material
liabilities and costs with respect to such laws and regulations in the future.
Although the Company does not currently believe that it will be required to make
significant expenditures for pollution control in the near future, no assurances
can be given that future developments, such as the potential for more stringent
environmental standards or stricter enforcement of environmental laws, will not
cause the Company to incur such expenditures. The Company anticipates incurring
the following environmental expenditures (over and above routine operating
expenditures) over the next two years, including (i) $550,000 (anticipated for
fiscal year 1999) for the opening of a new landfill cell (ii) $70,000
15
(budgeted for fiscal year 2000) for aerators and transporting equipment; and
(iii) $200,000 and $250,000 for the closure of two landfills for 1999 and 2000,
respectively.
YEAR 2000 COMPLIANCE
The Company, like most other companies, is continuing to address whether
its information technology systems and non-information technology devices with
embedded microprocessors (collectively "Business Systems") will recognize and
process dates starting with the Year 2000 and beyond (the "Year 2000"). The Year
2000 issues can arise at any point in the Company's business.
In order to address the Year 2000 issue, the Company is in the process
of modifying, upgrading or replacing its computer software applications and
systems which the Company expects will accommodate the "Year 2000" dating
changes necessary to permit correct recording of year dates for 2000 and later
years. With respect to the Company's Business Systems, the Company believes that
it will be able to achieve compliance by the end of 1999, and does not currently
anticipate any material disruption in its operations as the result of any
failure by the Company to be in compliance.
The Company does not expect that the cost of its Year 2000 compliance
program will be material to its financial condition or results of operations.
The Company's costs associated with Year 2000 compliance were $84,000 in 1998.
Estimated future costs to prepare the Company's Business Systems to become Year
2000 compliant are approximately $184,000 and will be covered by cash from
operations. This amount includes approximately $20,000 of capital expenditures
to be used for the purchase of certain equipment which is currently not Year
2000 compliant. The estimate also includes the cost of certain internal
resources fully dedicated to this product. The estimate does not include any
costs associated with the implementation of contingency plans, which have not
yet been developed.
The Company has initiated formal communications with all of its
significant suppliers and key customers to survey what steps those companies are
taking to address their Year 2000 issues. To the extent that supplier responses
to Year 2000 readiness are unsatisfactory, the Company will attempt to reduce
risks of interruptions, with such options including changes in suppliers to
those who have demonstrated Year 2000 readiness. The Company does not currently
have any specific information concerning the compliance status of its suppliers
and customers.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes standards
for accounting and disclosure of derivative instruments. This new standard is
effective for fiscal quarters of fiscal years beginning after June 15, 1999. The
implementation of this new standard is not expected to have a material effect on
the Company's results of operations or financial position.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to various market risk factors such as
fluctuations in interest rates, as well as changes in the cost of raw materials.
These risk factors can impact results of operations, cash flows and financial
position. The Company manages these risks through regular operating and
financing activities, and when necessary, the use of derivative financial
instruments such as interest rate swap contracts. These derivative instruments
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, 1998. 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.
16
At year-end 1998, the Company carried $184.9 million of outstanding
debt on its books, with $84.3 million of that total held at variable interest
rates. The Company was a party to a swap for the notional amount of $60 million,
decreasing at a rate of $10 million annually through December 5, 2002, when it
expires, where the Company assumed a fixed rate of interest of 6.13% in exchange
for the three months LIBOR, ranging from 5.25% to 5.56% during 1998. 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
$206,200. 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 $206,200.
The Company is exposed to the risk of increasing raw material prices,
which could impact profit margins. When raw material cost increases, the Company
generally is unable to increase selling prices. Therefore, the Company expects
the impact of increasing raw material cost to result in reductions in the
results of its operations or cash flows. Major raw material components include
wood, kraft, ONP, ONG and chemicals.
ITEM 8. FINANCIAL STATEMENTS.
Certain statements in the financial statements and elsewhere in this
report may constitute forward-looking statements. Because these forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed in or implied by the statements. Factors that could cause
actual results to differ include, among other things: increased domestic or
foreign competition; increases in capacity through construction of new mills or
conversion of older facilities to produce competitive products; variations in
demand for our products; changes in our cost for or the availability of raw
materials, particularly market pulp and wood; the cost of compliance with new
environmental laws and regulations; the pace of acquisitions; cost structure
improvements; the success of new initiatives; integration of systems; the
success of computer-based system enhancements; and general economic conditions.
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 51 Chairman of the Board of Directors and
Chief Executive Officer of the Company and
Timberlands; Chairman, and Chief Executive Officer
of Brant-Allen; and Chief Executive Officer of Soucy
Inc.
Joseph Allen 57 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.
17
Edward D. Sherrick 53 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 61 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 59 Director
Robert Flug 51 Director
The following table sets forth certain information about the Company's
key employees:
NAME AGE POSITION
Emilio F. Rigato 51 Mill Manager
Wilton Godwin 54 Production Manager
Robert Jackson 59 Human Resources Manager
David Jones 58 Financial Manager
Donald August 52 Woodlands Manager and Recycle Fiber Procurement Manager
Robert Ellis 47 Manager, Engineering Services and Government Affairs of the Company
PETER M. BRANT. Mr. Brant is the Chairman of the Board of Directors and
Chief Executive Officer of the Company and Timberlands, the Chairman and Chief
Executive Officer of Brant-Allen and Chief Executive Officer of Soucy Inc. Mr.
Brant jointly owns Brant-Allen with Mr. Joseph Allen. Mr. Brant has served as
executive officer of the Company since its inception and has served as executive
officer of Brant-Allen for over 30 years.
JOSEPH ALLEN. Mr. Allen is the President, and Chief Operating Officer
and Secretary of the Company and Timberlands, the President and Chief Operating
Officer of Brant-Allen and Chief Operating Officer of Soucy Inc. Mr. Allen
jointly owns Brant-Allen with Mr. Brant. Mr. Allen has served as an executive
officer of the Company since its inception and has served as executive officer
of Brant-Allen for over 30 years.
EDWARD D. SHERRICK. Mr. Sherrick is Vice President of Finance and
Director of the Company, Vice President of Finance of Timberlands, Senior Vice
President and Chief Financial Officer of Brant-Allen and Vice President of Soucy
Inc. He has been with the Company and Brant-Allen for over 20 years.
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and
Manufacturing and Director of the Company, Vice President of Sales and
Manufacturing of Timberlands, Executive Vice President of Brant-Allen and Vice
President of Soucy Inc. He has been an executive officer of the Company and
Brant-Allen for 27 years and has been involved in the sale and marketing of the
Company's newsprint as well as overseeing mill operations.
MICHAEL CONROY. Mr. Conroy was appointed a Director of the Company in
November 1997. Mr. Conroy is an independent consultant. Mr. Conroy was the
President of the International Herald Tribune Company US, Inc. (the "Herald
Tribune") up to December 1998 . He had been with that company for 12 years.
Before joining the Herald Tribune, he was publisher at Newsweek Atlantic.
ROBERT FLUG. Mr. Flug was appointed a Director of the Company in
November 1997. Mr. Flug has been the President and Chief Executive Officer of
S.I. Danielle, Inc., a junior apparel manufacturer, since 1987.
EMILIO F. RIGATO. Mr. Rigato joined the Company in January 1999 as Mill
Manager. From 1992 to 1998 Mr. Rigato was with Avenor, Inc. as Manager Thunder
Bay Mill Operations.
18
WILTON GODWIN. Mr. Godwin has been Production Manager of the Company
since 1992 and has been with the Company since 1979.
ROBERT JACKSON. Mr. Jackson has been the Human Resources Manager of the
Company since 1979.
DAVID JONES. Mr. Jones has been the Financial Manager of the Company
since 1979.
DONALD AUGUST. Mr. August has been the Woodlands Manager and Recycle
Fiber Procurement Manager of the Company since 1984.
ROBERT ELLIS. Mr. Ellis has been the Manager of Engineering Services and
Governmental Affairs of the Company since 1992 and has been with the Company
since 1980.
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Brant-Allen was paid any compensation by the
Company between 1995 and 1998. 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, TIMBERLANDS AND SOUCY
Brant-Allen owns all of the equity in the Company, Timberlands and Soucy
Inc. Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant
and Mr. Joseph Allen. Mr. Brant serves as Brant-Allen's Chairman of the Board
and Chief Executive Officer and also as Chairman of the Board of Directors and
Chief Executive Officer of the Company and Timberlands and Chief Executive
Officer of Soucy Inc. Mr. Allen serves as Brant-Allen's President and Chief
Operating Officer and also as President and Chief Operating Officer of the
Company and Timberlands and Chief Operating Officer of Soucy Inc. The other
officers of Brant-Allen, Mr. Edward Sherrick and Mr. Thomas Armstrong, are also
directors of the Company.
Brant-Allen may engage in a variety of transactions with the Company,
Timberlands and/or Soucy. These transactions are expected to include the sale
and marketing of the newsprint produced by the Company and Soucy and the
provision of management and other services described below to the Company and
Soucy.
19
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. This fee amounted to
$3,666,000, $324,000 $3,168,000 and $3,865,000 for the year ended December
31,1998, the one month ended December 31, 1997, the eleven months ended November
30, 1997 and the year ended December 31, 1996, respectively. See the
accompanying financial statements of the Company. The Management Services
Agreement has a term of five years and is automatically renewable for successive
five year terms unless earlier terminated by either party giving two years
written notice. The Management Services Agreement contains customary
indemnification provisions.
BRANT-ALLEN FEES FROM SOUCY
Brant-Allen also markets all of Soucy's newsprint and is, and will
continue to be, compensated for these services in the form of monthly management
service and royalty fees, payable in advance, calculated at a combined rate of
9.73% of Soucy Inc.'s consolidated net sales after transportation costs. Soucy
Partners pays Soucy Inc. approximately 3% of Soucy Partners' cumulative annual
net sales. For the years ended December 31, 1998, 1997, and 1996, Soucy Inc.
paid Brant-Allen approximately Cdn$17,082,000, Cdn$13,192,000, and
Cdn$14,951,000, respectively, for management and selling services. See the
accompanying consolidated financial statements of Soucy, Inc.
WOOD SUPPLY FROM BITCO AND ONP AND OMG PROCUREMENT
Prior to the consummation of the Transactions, BITCO supplied all the
Predecessor's wood requirements at prices, including an up charge (a margin in
excess of the market price of wood) that were negotiated annually. Concurrently
with the consummation of the Transactions, the Company and Timberlands
terminated these arrangements and entered into the Wood Supply Agreement. Under
the Wood Supply Agreement there is no up charge and Timberlands supplies the
Company with 40,000 cords of wood fiber annually at market prices determined by
reference to the prices paid by the Company for wood fiber purchased from
non-affiliated wood suppliers. Timberlands' and BITCO's wood sales to the
Company and Predecessor were $2,930,000, $1,637,000, $13,280,000 and $14,744,000
during the year ended December 31, 1998, the one month ended December 31, 1997,
the eleven months ended November 30, 1997 and the year ended December 31, 1996,
respectively. See the accompanying financial statements of the Company. On
February 1, 1999 the Company and Timberlands entered into a joint sale agreement
to sell approximately 83,000 acres of timberland to two unaffiliated parties.
The net proceeds from these sales will be utilized to reduce (i) Timberlands
debt and (ii) debt incurred in Brant-Allen's purchase of the equity interest in
Timberlands and the Company.
Prior to the consummation of the Transactions, BITCO procured recycled
paper for the Predecessor in exchange for a procurement fee based on the ONP and
OMG tonnage procured. The Predecessor recognized costs of $2,029,000, and
$2,071,000 for such fees during the eleven months ended November 30, 1997 and
year ended December 31, 1996, respectively. See the accompanying financial
statements of BITCO and Timberlands. The Company terminated this procurement
arrangement concurrently with consummation of the Transactions and now procures
ONP and OMG itself.
OTHER ARRANGEMENTS WITH TIMBERLANDS
The Company shares employees, facilities and recordkeeping systems with
Timberlands, and the Company charges Timberlands monthly for its share of these
costs. Accordingly, these shared employees receive benefits under the Company's
defined contribution retirement plan and are eligible to participate in the
Company's thrift
20
plan. Costs associated with these plans are reimbursed monthly
by Timberlands. Amounts paid to the Predecessor and the Company for shared
costs, which are included in selling, general and administrative expenses,
approximated $782,000, $60,000, $1,319,000, and $1,370,000 during the year ended
December 31, 1998, the one month ended December 31, 1997, the eleven months
ended November 30, 1997 and the year ended December 31, 1996, respectively.
Timberlands also manages the Company's timberlands for which the Company and the
Predecessor paid Timberlands and BITCO fees of approximately $62,500, $5,300,
$55,000 and $57,800, during the year ended December 31, 1998, the one month
ended December 31, 1997, the eleven months ended November 30, 1997 and the year
ended December 31, 1996, respectively. See the accompanying financial statements
of the Company.
In 1988, the Predecessor and BITCO entered into an agreement for certain
marketing and consulting services with The Elebash Company ("Elebash"), a real
estate broker, whereby BITCO, in the case of sales of BITCO-owned land, or the
Predecessor, in the case of sales of Predecessor-owned land, has agreed to pay
Elebash two percent of the gross sales price of any land purchased or sold
pursuant to the terms of the agreement. In this connection, BITCO and
Timberlands paid Elebash approximately $3,000, $6,000, $32,000, and $34,000, for
the year ended December 31, 1998, the one month ended December 31, 1997, the
eleven months ended November 30, 1997 and the year ended December 31, 1996,
respectively. Amounts paid to Elebash are included in selling, general and
administrative expenses in the accompanying statements of income. This agreement
was canceled effective January 6, 1998.
PURCHASE AGREEMENTS WITH DOW JONES AND THE WASHINGTON POST
The Company has contracted to sell newsprint to Dow Jones and The
Washington Post pursuant to the Purchase Agreements. The Purchase Agreements
will terminate on December 31, 2000; however, they will be extended for four
years if, prior to January 1, 2000, the parties agree to pricing formulas for
that four-year period. Each of Dow Jones and The Washington Post is obligated to
purchase a minimum of approximately 45,000 tonnes of newsprint per year under
the Purchase Agreements. The price payable under the Purchase Agreements is
defined in the Purchase Agreements, as amended, and during 1996 and 1995
represented the average price paid by Dow Jones and The Washington Post to East
Coast suppliers of those customers that are not affiliates of those customers.
In addition, the parties to the Purchase Agreements have the option to purchase
additional quantities of newsprint as available.
The Company and the Predecessor have five customers whose sales
represent a significant portion of sales. Sales to Dow Jones approximated 22%,
18%, 22% and 22% for the year ended December 31, 1998, the one month ended
December 31, 1997, the eleven months ended November 30, 1997, and the year ended
December 31, 1996, respectively. Sales to The Washington Post approximated 22%,
20%, 22% and 19% for the year ended December 31, 1998, the one month ended
December 31, 1997, the eleven months ended November 30, 1997, and the year ended
December 31, 1996, respectively. Sales to Newhouse Group approximated 11%, 23%,
10% and 12% for the year ended December 31, 1998, the one month ended December
31, 1997, the eleven months ended November 30, 1997, and the year ended December
31, 1996, respectively. Sales to Gannett approximated 11%, 13%, 14% and 11% for
the year ended December 31, 1998, the one month ended December 31, 1997, the
eleven months ended November 30, 1997, and the year ended December 31, 1996,
respectively. Sales to Knight-Ridder approximated 10% during the year ended
December 31, 1998.
Soucy also sells newsprint to Dow Jones and its subsidiaries. During the
years ended December 31, 1998, 1997, and 1996 these sales amounted to
Cdn$33,793,000, Cdn$29,580,000 and Cdn$35,004,000, net of discounts,
respectively.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits and Financial Statements
(1) See Index to Financial Statements and Schedule of Bear Island Paper
Company, L.L.C. and Bear Island Paper Company, L.P. at page 26.
(2) Financial Statement Schedule of Bear Island Paper
Company, L.L.C. and Bear Island Paper Company L.P.:
See Index to Financial Statements and Schedule of Bear Island Paper
Company, L.L.C. and Bear Island Paper Company, L.P.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable and therefore have been
omitted.
(3) Exhibits
2.1 The Partnership Interest Sale Agreement, dated as of December 1, 1997, by
and among Dow Jones Virginia Company Inc., Newsprint, Inc. and
Brant-Allen.*
3.1 Articles of Organization of the Company.*
3.2 Operating Agreement of the Company.*
4.1 Indenture, dated as of December 1, 1997, among the Registrants,
Timberlands, Soucy Inc. and Crestar Bank, as Trustee, relating to the
Notes.*
4.2 Registration Rights Agreement, dated December 1, 1997, among the
Registrants and TD Securities (USA), Inc. and Salomon Brothers Inc, as
Initial Purchasers.*
22
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 Timberlands Pledge Agreement, dated as of December 1, 1997, by and between
Brant-Allen and Crestar Bank, as Trustee.*
4.7 Soucy Pledge Agreement, dated as of December 1, 1997, by and between
Brant-Allen and Crestar Bank, as Trustee.*
4.8 Hypotech Agreement, dated as of December 1, 1997, by and between
Brant-Allen and Crestar Bank, as Trustee.*
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 Timberlands Credit Agreement, dated as of December 1, 1997, by and among
Brant-Allen, TD Securities (USA), Inc. and Toronto Dominion (Texas), Inc.*
10.3 Amended and Restated Timberlands Loan and Maintenance Agreement, dated as
of November 24, 1997, by and between Brant-Allen and John Hancock Mutual
Life Insurance Company.*
10.4 Timberlands Interest Sale Agreement, dated as of December 1, 1997, by and
among Dow Jones Virginia Company, Inc., Newsprint Inc. and Brant-Allen.*
10.5 The Management Services Agreement, dated as of December 1, 1997, by and
among the Company and Brant-Allen.*
10.6 The Wood Supply Agreement, dated as of December 1, 1997, by and among the
Company and Timberlands.*
10.7 The Newsprint Purchase Agreement, dated as of May 19, 1978, by and between
the Company and the Dow Jones & Co., Inc.*
10.7a Amendments to Newsprint Purchase Agreement, dated as of April 1, 1987,
December 10, 1991, August 10, 1993 and April 22, 1996.
10.8 The Newsprint Purchase Agreement, dated as of May 19, 1978, by and between
the Company and The Washington Post.*
10.8a Amendments to Newsprint Purchase Agreement, dated as of December 10, 1991,
August 10, 1993 and April 22, 1996.
21.1 Subsidiaries of the Company.*
27.1 Financial Data Schedule
- ------------------------------------------
* Previously filed as an exhibit to the Company's registration statement on
Form S-4 Registration No. 333-42201, as amended, and incorporated herein
by reference.
23
(d) See Index to Financial Statements of Bear Island Timberlands Company,
L.L.C., Bear Island Timberlands Company, L.P., and F.F. Soucy, Inc. at page 26.
24
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, 1999
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, 1999
- ------------------------------
Peter M. Brant Chief Executive Officer
Principal Financial and Accounting Officer
/s/ Joseph Allen President, Co-Chairman of the Board of March 30, 1999
- ------------------------------
Joseph Allen Directors, Chief Operating Officer and
Secretary
/s/ Edward D. Sherrick Vice President of Finance and Director of March 30, 1999
- ------------------------------
Edward D. Sherrick the Board of Directors
/s/ Thomas E. Armstrong Vice President of Sales and Manufacturing March 30, 1999
- ------------------------------
Thomas E. Armstrong and Director of the Board of Directors
/s/ Michael Conroy Director of the Board of Directors March 30, 1999
- ------------------------------
Michael Conroy
/s/ Robert Flug Director of the Board of Directors March 30, 1999
- ------------------------------
Robert Flug
25
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND
PAPER COMPANY, L.L.C. AND BEAR ISLAND PAPER COMPANY, L.P.
BEAR ISLAND PAPER COMPANY, L.L.C.
Balance Sheets--December 31, 1998 and 1997
Statements of Operations--Year ended December 31, 1998 and one month
ended December 31, 1997
Statements of Changes in Member's Interest--Year ended December 31, 1998
and one month ended December 31, 1997
Statements of Cash Flows--Year ended December 31, 1998 and one month
ended December 31, 1997
BEAR ISLAND PAPER COMPANY, L.P.
Statements of Operations--Eleven months ended November 30, 1997 and year
ended December 31, 1996
Statements of Changes in Partners' Equity--Eleven months ended November
30, 1997 and year ended December 31, 1996
Statements of Cash Flows--Eleven months ended November 30, 1997 and year
ended December 31, 1996
Schedule II Valuation and Qualifying Accounts
INDEX TO FINANCIAL STATEMENTS OF BEAR ISLAND TIMBERLANDS COMPANY,
L.L.C., BEAR ISLAND TIMBERLANDS COMPANY, L.P. AND F.F. SOUCY, INC.
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
Balance Sheets--December 31, 1998 and 1997
Statements of Operations--Year ended December 31, 1998 and one month
ended December 31, 1997
Statements of Changes in Member's Interest--Year ended December 31, 1998
and one month ended December 31, 1997
Statements of Cash Flows--Year ended December 31, 1998 and one month
ended December 31, 1997
BEAR ISLAND TIMBERLANDS COMPANY, L.P.
Statements of Operations--Eleven months ended November 30, 1997 and year
ended December 31, 1996
Statements of Changes in Partners' Equity--Eleven months ended November
30, 1997 and year ended December 31, 1996
Statements of Cash Flows--Eleven months ended November 30, 1997 and year
ended December 31, 1996
F.F. SOUCY, INC.
Consolidated Balance Sheets--December 31, 1998 and 1997
Consolidated Statements of Retained Earnings--Years ended December 31,
1998, 1997 and 1996
Consolidated Statements of Earnings--Years ended December 31, 1998, 1997
and 1996
Consolidated Statements of Cash Flows--Years ended December 31, 1998,
1997 and 1996
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
AND BEAR ISLAND PAPER COMPANY, L.P.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998, one month ended December 31, 1997, eleven
months ended November 30, 1997 and year ended December 31, 1996.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Bear Island Paper Company, L.L.C.:
In our opinion, the financial statements listed in the index appearing under
Item 14(a)(1) on page 26 present fairly, in all material respects, the
financial position of Bear Island Paper Company, L.L.C. (a Virginia limited
liability corporation) (the "Company") as of December 31, 1998 and 1997, and the
results of its operations and its cash flows for the year ended December 31,
1998 and the one month ended December 31, 1997 and Bear Island Paper Company,
L.P.'s (collectively the "Companies"), results of operations and cash flows for
the eleven months ended November 30, 1997 and the year ended December 31, 1996,
in conformity with generally accepted accounting principles. In addition, in our
opinion, the financial statement schedule listed in the index appearing under
Item 14(a)(2) on page 26 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
financial statements. These financial statements and financial statement
schedule are the responsibility of the Companies' management; our responsibility
is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 3 to the financial statements, the Companies had numerous
significant related-party transactions with affiliates for the year ended
December 31, 1998, the one month ended December 31, 1997, the eleven months
ended November 30, 1997 and the year ended December 31, 1996, which
significantly impacted the financial statements of the Companies.
PricewaterhouseCoopers LLP
Richmond, Virginia
February 2, 1999
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
DECEMBER 31,
-------------------------------
ASSETS 1998 1997
Cash and short-term investments $ 2,130,787 $ 1,353,049
Accounts receivable:
Trade, less allowance for doubtful accounts of $73,100 in
1998 and 1997 9,711,800 10,189,307
Affiliates 3,760,594 3,123,853
Other 196,957 820,175
Inventories 13,827,824 14,213,313
Other current assets 570,234 147,911
-------------- --------------
Total current assets 30,198,196 29,847,608
-------------- --------------
Property, plant and equipment, at cost 201,618,960 195,084,008
Less accumulated depreciation (10,841,783) (822,264)
-------------- --------------
Net property, plant and equipment 190,777,177 194,261,744
-------------- --------------
Deferred financing costs, net of accumulated amortization of
$748,725 and $79,386 in 1998 and 1997, respectively 8,275,781 8,375,199
--------------- ---------------
$ 229,251,154 $ 232,484,551
============== ==============
LIABILITIES
Current portion of long-term debt 700,000 700,000
Current portion of long-term purchase obligations 384,693 180,304
Accounts payable and accrued expenses 10,353,040 9,294,855
Due to affiliates 78,192 151,930
Interest payable 1,307,030 1,344,915
-------------- --------------
Total current liabilities 12,822,955 11,672,004
-------------- --------------
Long-term debt 183,600,000 195,300,000
Long-term purchase obligations 261,470 255,000
-------------- --------------
183,861,470 195,555,000
-------------- --------------
EQUITY
Member's:
Interest 28,130,250 25,469,737
Retained earnings (accumulated deficit) 4,436,479 (212,190)
-------------- --------------
$ 229,251,154 $ 232,484,551
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF OPERATIONS
COMPANY PREDECESSOR
----------------------------- ------------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
-------------- ------------- -------------- --------------
1998 1997 1997 1996
Net sales $ 95,870,332 $ 8,881,972 $ 59,547,722 $ 75,460,102
Net sales to affiliates 26,327,457 1,924,961 46,039,980 53,360,199
-------------- ------------- -------------- --------------
Total net sales 122,197,789 10,806,933 105,587,702 128,820,301
Cost of sales 94,656,233 9,068,701 95,404,127 100,590,600
-------------- ------------- -------------- --------------
Gross profit 27,541,556 1,738,232 10,183,575 28,229,701
Selling, general and administrative expenses:
Management fees to affiliate 3,665,934 324,835 3,174,722 3,865,000
Other direct 535,999 45,658 572,644 153,370
-------------- ------------- -------------- --------------
Income from operations 23,339,623 1,367,739 6,436,209 24,211,331
------------- -------------- -------------- -----------
Other income (deductions):
Interest income 201,491 590,971 665,709
Interest expense (18,892,445) (1,633,043) (4,331,563) (5,397,959)
Other income (expense) 53,114 (41,231) (55,859)
----------- ------------- -------------- -----------
(18,690,954) (1,579,929) (3,781,823) (4,788,109)
----------- ------------- -------------- -----------
Income (loss) before
extraordinary item
4,648,669 (212,190) 2,654,386 19,423,222
Extraordinary item:
Early extinguishment of debt (4,367,418)
----------- ---------- --------------- -----------
Net income (loss) $ 4,648,669 $ (212,190) $ (1,713,032) $19,423,222
=========== ========== =============== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF CHANGES IN MEMBER'S INTEREST AND PARTNERS' EQUITY
BRANT-ALLEN DOW JONES
INDUSTRIES, VIRGINIA NEWSPRINT,
INC. COMPANY, INC. INC. TOTAL
PREDECESSOR
Partners' equity:
Contributed capital:
Balances, December 31, 1995,
1996 and November 30, 1997
$ 24,656,681 $31,882,500 $31,882,500 $88,421,681
============= ========== ========== ==========
Retained earnings (accumulated deficit):
Balances, December 31, 1995 - 1,471,956 1,471,956 2,943,912
Net income - 1996 5,826,966 6,798,128 6,798,128 19,423,222
Partner distributions (4,500,000) (5,250,000) (5,250,000) (15,000,000)
------------- ---------- ---------- ----------
Balances, December 31, 1996 1,326,966 3,020,084 3,020,084 7,367,134
Net loss - eleven months ended
November 30, 1997 (513,910) (599,561) (599,561) (1,713,032)
------------- ---------- ---------- ----------
Balances, November 30, 1997 $ 813,056 $ 2,420,523 $ 2,420,523 $ 5,654,102
============= ========== ========== ==========
- ----------------------------------------------------------------------------------------------------
COMPANY
Equity:
Member's interest:
Aggregate equity balances at
December 1, 1997 and
conversion to Bear
Island Mergco, L.L.C. 25,469,737 34,303,023 34,303,023 $94,075,783
Acquisition of 70% limited
partnership interest by Bear
Island Paper Company, L.L.C.
and merger with Bear Island
Mergco L.L.C. (34,303,023) (34,303,023) (68,606,046)
---------- ---------- ---------- ----------
Balance, December 31, 1997 $ 25,469,737 - - 25,469,737
========== ========== ==========
Management fee payable
contributed to capital by
parent - year ended December
31, 1998 26,660,513
----------
Balance, December 31, 1998 $28,130,250
==========
Retained earnings (accumulated deficit):
Net loss - one month ended
December 31, 1997 $ (212,190)
----------
Balance, December 31, 1997 (212,190)
Net income - year ended
December 31, 1998 4,648,669
----------
Balance, December 31, 1998 $ 4,436,479
==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF CASH FLOWS
COMPANY PREDECESSOR
------------------------------ -----------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER DECEMBER 31, NOVEMBER 30, DECEMBER
31, 31,
------------- -------------- -------------- --------------
1998 1997 1997 1996
Operating activities:
Net income (loss) $ 4,648,669 $ (212,190) $ (1,713,032) $19,423,222
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Depreciation 10,033,191 822,264 9,735,450 9,975,923
Depletion 33,605 12,501 58,494
Amortization of deferred financing costs 669,339 79,386 54,307 59,244
Noncash portion of extraordinary item 419,930
Increase in allowance for obsolescence 324,500 152,000
(Gain) loss on disposal of property, plant and equipment 1,204,076 588,873 (28,391)
(Increase) decrease in:
Accounts receivable 463,984 207,797 868,132 3,266,923
Inventories, excluding effects of obsolescence allowance 60,989 (606,791) 378,964 (1,120,859)
Other current assets (422,323) 7,008 106,781 22,803
Increase (decrease) in:
Accounts payable and accrued expenses for operating 3,718,698 (3,856,796) 2,516,245 (1,388,839)
activities
Due to affiliate (73,738) (1,416,656) 70,600 229,029
Interest payable (37,885) 800,228 (492,813) (129,687)
---------- ----------- ----------- ----------
Net cash provided by (used in) operating activities 20,623,105 (4,023,750) 12,545,938 30,367,862
---------- ----------- ----------- -----------
Investing activities:
Purchases of property, plant and equipment (7,544,100) (238,518) (4,835,971) (7,482,573)
Proceeds from disposition of property, plant and equipment 150,000 134,300 69,244
Payment for purchase of partnership interest, net of cash (139,930,098)
acquired
---------- ----------- ----------- -----------
Net cash used in investing activities (7,394,100) (140,168,616) (4,701,671) (7,413,329)
---------- ----------- ----------- -----------
5
BEAR ISLAND PAPER COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF CASH FLOWS, CONTINUED
COMPANY PREDECESSOR
------------------------------ ----------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER DECEMBER 31, NOVEMBER 30, DECEMBER
31, 31,
------------- -------------- -------------- -------------
1998 1997 1997 1996
Financing activities:
Contributions from parent $ 3,564,585
Distributions to parent (3,564,585) $(15,000,000)
Principal payments on long-term debt $(11,700,000) (47,000,000) (6,000,000) (6,000,000)
Principal payments on promissory notes (3,917,764) (401,941)
Principal payments on long-term purchase obligations (181,346) (2,549,049) (399,186)
Proceeds from issuance of long-term debt 201,000,000
Payment of deferred financing costs (569,921) (8,454,585)
------------- -------------- -------------- -------------
Net cash provided by (used in) financing activities (12,451,267) 145,545,415 (12,466,813) (21,801,127)
------------- -------------- -------------- -------------
Net increase (decrease) in cash and short-term investments 777,738 1,353,049 (4,622,546) 1,153,406
Cash and short-term investments, beginning of period 1,353,049 13,625,322 12,471,916
------------- -------------- -------------- -------------
Cash and short-term investments, end of period $ 2,130,787 $ 1,353,049 $ 9,002,776 $ 13,625,322
============= ============== ============== =============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 18,260,991 $ 288,128 $ 4,824,376 $ 5,527,646
============= ============== ============== =============
Noncash investing and financing activities:
Increase in property, plant and equipment and long-term purchase
obligations for equipment acquisition $ 392,205 $ 305,000 $ 3,078,538
============= ============== =============
Increase in promissory notes for equipment acquisition $ 2,425,856 $ 525,700
============== =============
Management fee payable contributed to capital by parent $ 2,660,513
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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") (collectively the
"Companies") previously owned by subsidiaries of Dow Jones & Company, Inc.
("Dow Jones") and The Washington Post Company ("The Washington Post").
Immediately before the Acquisition and certain related financings which
were used to facilitate the funding of the Acquisition (see Note 6), the
Predecessor was converted into Bear Island Mergerco, L.L.C. ("Mergerco")
and Mergerco was then merged into the Company with the Company being the
surviving entity. The Company is a wholly owned subsidiary of Brant-Allen
Industries, Inc. ("Brant-Allen"), a Delaware corporation.
The Company accounted for the Acquisition as a purchase. The allocation of
the purchase price resulted in purchase adjustments being applied to
certain assets and liabilities acquired. In this connection, since
Brant-Allen was the owner of 30% interests in the Predecessor prior to the
Acquisition, purchase adjustments have been applied to adjust 70% of the
basis of the assets and liabilities acquired to fair value. The total
purchase price of approximately $149.6 million was allocated to the
acquired assets and liabilities based on their respective fair values at
December 1, 1997 as follows:
Working capital $ 11,598,450
Property, plant and equipment 163,383,956
Other liabilities (25,378,500)
-------------
Total purchase cost $ 149,603,906
=============
As a result of the Acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the Acquisition are not
comparable to the Predecessor's financial statements for the periods prior
to the Acquisition.
On January 30, 1998, the Company completed its initial registration
process which became effective pursuant to Section 8(A) of the Securities
Act of 1933. Concurrent with becoming effective, the Company is subject to
the information requirements of the Securities Exchange Act of 1934, as
amended, and required to file reports and other information with the
United States Securities and Exchange Commission.
The Predecessor was constituted as a limited partnership on May 18, 1978,
under the Virginia Uniform Limited Partnership Act, pursuant to a Limited
Partnership Agreement, as amended (the "Partnership Agreement"), among:
o Brant-Allen;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones; and
7
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACQUISITION, CONTINUED:
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly owned
subsidiary of The Washington Post.
Brant-Allen was the general partner and D J Virginia and Newsprint were
limited partners. Under the terms of the Partnership Agreement, as
amended, D J Virginia's and Newsprint's equity interests were 35% each and
Brant-Allen's equity interest was 30%. The Partnership Agreement, as
amended, contained the following provisions:
o The purpose of the Predecessor was to engage in the business of
producing, selling and distributing newsprint by constructing, owning
and operating a paper mill (the "Mill") in Hanover County, Virginia.
o Brant-Allen, as general partner, had full and exclusive control of the
business of the Predecessor, had active control of its management and
provided marketing and certain administrative services for which it
received a monthly management fee calculated at three percent of the
newsprint sales after deducting related distribution costs. Brant-Allen
was authorized to incur on behalf of the Predecessor, without the
approval or consent of the partners, debt of up to $97,900,000.
o The limited partners were not liable for any net losses or other debt or
liability of the Predecessor to any extent, except for their respective
contributions to capital.
o Subject to the aforementioned provisions, the partners shared the net
profits and losses, computed in accordance with generally accepted
accounting principles consistently applied, based on their interests, as
defined by the Partnership Agreement.
o No partner was allowed to sell, assign or otherwise dispose of its
interest, or any part thereof, in the Predecessor, unless it first
offered such interest to the other partners as prescribed in the
Partnership Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND SHORT-TERM INVESTMENTS: Cash and short-term investments include
all cash balances and highly liquid investments. Short-term investments
are stated at cost plus accrued interest, which approximates market value.
For purposes of the statements of cash flows, the Companies consider all
highly liquid short-term investments purchased with an original maturity
of three months or less to be cash equivalents.
INVENTORIES: Finished goods and raw materials inventories are valued at
the lower of cost or market, with cost determined on the first-in,
first-out ("FIFO") basis. Stores inventories are valued at the lower of
average cost or market and are shown net of an allowance for obsolescence
at December 31, 1998 and 1997 of approximately $476,500 and $152,000,
respectively.
8
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. 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 Companies
capitalize interest costs as part of the cost of constructing significant
assets. There were no capitalized interest costs during the year ended
December 31, 1998, the month ended December 31, 1997, the eleven months
ended November 30, 1997 or the year ended December 31, 1996.
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. The Predecessor amortized deferred
financing costs using the straight-line method which approximated the
interest method.
INCOME TAXES: No provision for income taxes is required in the financial
statements since each member or partner is individually liable for any
income tax that may be payable on its share of the Companies' taxable
income.
REVENUE RECOGNITION: Net sales to affiliates and non-affiliates are
recognized by the Companies at the time title transfers to the customer,
which occurs at the point of shipment of the newsprint to the customer.
EARNINGS PER SHARE: No earnings per share calculations have been provided
in the financial statements since such calculations are not required.
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.
9
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
DERIVATIVES: An interest rate swap agreement is used to help manage
interest rate exposure. Amounts to be paid or received under the agreement
are accrued as interest rates change and are recognized over the life of
the agreement as an adjustment to interest expense. The Company is exposed
to credit losses in the event of counterparty nonperformance, but does not
anticipate such losses.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the Companies'
long-term debt is estimated using discounted cash flow analyses based on
the incremental borrowing rates currently available to the Companies with
loans of similar terms and maturity. The fair value of trade receivables
and payables approximates the carrying amount because of the short
maturity of these instruments. The fair value of the interest rate swap
agreement is the estimated amount that the Company would receive or pay to
terminate the agreement as of the balance sheet date, taking into account
current interest rates and the current creditworthiness of the
counterparty.
RISKS AND UNCERTAINTIES: Financial instruments which potentially subject
the Companies to concentrations of credit risk consist principally of
cash, cash equivalents and receivables. The Companies' cash balance is
maintained at a major financial institution. Cash equivalents, which
consist of U.S. government securities, are with a high-credit-quality
financial institution. Receivables consist principally of trade accounts
receivable resulting primarily from sales to newspaper publishers. Credit
is extended to customers after an evaluation of creditworthiness.
Generally, the Companies do not require collateral or other security from
customers for trade accounts receivable. Substantially all of the
Companies' customers operate in the printing sectors, consequently their
ability to honor their obligations are dependent upon the financial
strength of the printing and publishing sectors.
The Companies have five customers whose sales represent a significant
portion of sales. Sales to one of these customers approximated 22%, 18%,
22% and 22% for the year ended December 31, 1998, the one month ended
December 31, 1997, the eleven months ended November 30, 1997, and the year
ended December 31, 1996, respectively. Sales to a second customer
approximated 22%, 20%, 22% and 19% for the year ended December 31, 1998,
the one month ended December 31, 1997, the eleven months ended November
30, 1997, and the year ended December 31, 1996, respectively. Sales to a
third customer approximated 11%, 23%, 10% and 12% for the year ended
December 31, 1998, the one month ended December 31, 1997, the eleven
months ended November 30, 1997, and the year ended December 31, 1996,
respectively. Sales to a fourth customer approximated 11%, 13%, 14% and
11% for the year ended December 31, 1998, the one month ended December 31,
1997, the eleven months ended November 30, 1997, and the year ended
December 31, 1996, respectively. Sales to a fifth customer approximated
10% during the year ended December 31, 1998.
10
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
On March 1, 1998, Newsprint Sales entered into certain supply contracts
(the "Supply Contracts") with two customers. Under the terms of the Supply
Contracts, Newsprint Sales is required to provide to these customers
certain fixed volumes of newsprint at fixed prices through December 31,
2000.
RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
conform to the current presentation.
NEW ACCOUNTING STANDARDS: During 1998 the Company implemented Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The implementation of these new standards had no
effect on the Company's statements of operations or its financial position
as of or for the year ended December 31, 1998 since the Company (i) has no
other comprehensive income and (ii) operates only in one segment and all
long-lived assets are located in the U.S., the Company's country of
domicile.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
standards for accounting and disclosure of derivative instruments. This
new standard is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. The implementation of this new standard is not
expected to have a material effect on the Company's results of operations
or financial position.
3. RELATED-PARTY TRANSACTIONS:
The Companies have contracted to sell newsprint to Dow Jones and The
Washington Post (the "Sales Contracts"). The Sales Contracts will
terminate on December 31, 2000; however, they will be extended for four
years if, prior to January 1, 2000, the parties agree to pricing
provisions for the four-year period. Both Dow Jones and The Washington
Post are subject to minimum purchase quantities under the Sales Contracts.
The prices payable under the Sales Contracts are defined in the Sales
Contracts, as amended, and during the periods presented represented the
average price paid by Dow Jones and The Washington Post to third-party
suppliers geographically located in the eastern United States.
Additionally, the parties to the Sales Contracts have the option to
purchase additional quantities of newsprint as available.
All sales and related collections are made through Newsprint Sales, a
division of Brant-Allen. Brant-Allen provides similar sales and collection
activities for F.F. Soucy, Inc. ("Soucy, Inc."), an affiliated Canadian
newsprint company 100% owned by Brant-Allen. As part of the $70 million
Term Loan Facility and the $50 million Revolving Credit Facility (see Note
6), Brant-Allen entered into a cash collateral agreement on December 1,
1997 (the "Collateral Agreement"). The Collateral Agreement requires
collections of the Company's receivables, by
11
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. RELATED-PARTY TRANSACTIONS, CONTINUED:
Newsprint Sales, at the end of any business day are not to exceed the sum
of (i) the collected funds received by Newsprint Sales for the Company for
such business day and the immediately preceding business day plus (ii) an
additional amount not exceeding $100,000.
The Company received payment of approximately $286,400 and $21,200 and the
Predecessor received payments of approximately $230,000 and $180,300 from
Brant-Allen as reimbursement for expenses incurred on behalf of
Brant-Allen during the year ended December 31, 1998, the month ended
December 31, 1997, the eleven months ended November 30, 1997 and the year
ended December 31, 1996, respectively. Additionally, the Company received
payment of approximately $21,800 from F. F. Soucy, Inc. for expenses
incurred on behalf of F. F. Soucy, Inc. during the year ended December 31,
1998.
A component of selling, general and administrative expenses as shown on
the statements of operations includes aggregate management fees to
Brant-Allen. The management fee includes senior management, treasury,
financial, marketing and sales services. There are restrictions on payment
of the management fee as described in Note 6. The level of these fees as
if the Companies operated on a stand-alone basis are not practicably
determinable.
The Predecessor was a party to a wood supply contract with Bear Island
Timberlands Company, L.P. ("Timberlands"), which was owned proportionately
by the same partners of the Predecessor, whereby Timberlands had
guaranteed to supply all of the Predecessor's log and pulp chip
requirements at prices negotiated annually. Purchases under the wood
supply contract approximated $13,280,000 and $14,744,000 during the eleven
months ended November 30, 1997 and for the year ended December 31, 1996,
respectively. Pricing during the periods was as follows:
ELEVEN MONTHS
ENDED YEAR ENDED
NOVEMBER 30, DECEMBER 31,
1997 1996
Actual $ 95.50 $ 95.50
Market $60.00 to $66.00 $60.00 to $61.00
Concurrent with the Acquisition, the Company modified certain terms of the
wood supply contract with Bear Island Timberlands Company L.L.C.
("BITCO"), the successor to Timberlands resulting from the purchase by
Brant-Allen of the 70% interest in Timberlands not previously owned by
Brant-Allen. The modification occurred to be reflective of wood purchases
at market prices. Modified terms included changing the point of purchase
of wood from the point of production to delivery to the Company's plant
site and changing the purchase price from a negotiated price to market
price. For the year ended December 31, 1998 and the one month ended
December 31, 1997, the Company purchased approximately $2,929,500 and
$1,637,000 from BITCO under the wood supply contract, respectively.
12
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. RELATED-PARTY TRANSACTIONS, CONTINUED:
Prior to December 1, 1997, the Predecessor had contracted to pay
Timberlands a fee on a per ton basis for procuring recycled paper, of
$24.31 and $24.15 for the eleven months ended November 30, 1997 and the
year ended December 31, 1996, respectively.
The Predecessor recognized costs of approximately $2,028,500 and
$2,070,500 for such procurement fees during the eleven months ended
November 30, 1997 and the year ended December 31, 1996, respectively,
which are included in cost of sales in the accompanying financial
statements. The actual costs of the procurement services provided to the
Predecessor by Timberlands for these same periods were $213,000 and
$238,000, respectively.
The Companies charged BITCO and Timberlands for certain administrative and
other expenses. These charges approximated $782,000, $60,000, $1,319,000
and $1,370,000 during the year ended December 31, 1998, the one month
ended December 31, 1997, the eleven months ended November 30, 1997 and the
year ended December 31, 1996, respectively. The Companies also paid BITCO
approximately $62,500 and $5,300 and Timberlands $55,000 and $57,800
during the year ended December 31, 1998, the one month ended December 31,
1997, the eleven months ended November 30, 1997 and the year ended
December 31, 1996, respectively, for managing their timberlands.
The Companies' receivables, payables, sales to partners and their
affiliates were as follows:
DECEMBER 31,
---------------------------
1998 1997
Due from Brant-Allen $ 53,138 $ 107,915
Due from Newsprint Sales 1,205,553 1,085,400
Due from Dow Jones 2,369,136 1,930,538
Due from BITCO 80,586
Due from F. F. Soucy, Inc. and Partners 52,181
Due to BITCO 42,029
Due to F. F. Soucy, Inc. 78,192 109,901
YEAR ONE MONTH ELEVEN MONTHS
ENDED ENDED ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
------------- ------------- --------------- --------------
1998 1997 1997 1996
Net sales to Dow Jones $ 26,327,457 $ 1,924,961 $ 23,012,477 $ 28,920,518
Net sales to The
Washington Post * * 23,027,503 24,439,681
*EFFECTIVE DECEMBER 1, 1997, NOT CONSIDERED A RELATED PARTY.
13
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. RELATED-PARTY TRANSACTIONS, CONTINUED:
Sales to Dow Jones represented approximately 22%, 18%, 22% and 22% of
total sales during the year ended December 31, 1998, the one month ended
December 31, 1997, the eleven months ended November 30, 1997 and the year
ended December 31, 1996, respectively. Sales to The Washington Post
represented approximately 22%, and 19% of total sales during the eleven
months ended November 30, 1997 and the year ended December 31, 1996,
respectively. The remaining sales were to other unaffiliated printing and
publishing enterprises located primarily in the eastern United States.
4. INVENTORIES:
Inventories consisted of:
DECEMBER 31,
-----------------------------
1998 1997
Raw materials $ 3,908,772 $ 4,085,044
Stores 8,759,809 9,105,893
Finished goods 1,159,243 1,022,376
-------------- -------------
$ 13,827,824 $ 14,213,313
============== =============
5. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
DECEMBER 31,
--------------------------------
1998 1997
Land $ 1,548,847 $ 1,492,007
Timberlands 3,569,236 3,526,259
Building 28,412,280 28,412,280
Machinery and equipment 162,176,778 160,887,599
Construction in progress 5,911,819 765,863
-------------- --------------
201,618,960 195,084,008
Less accumulated depreciation and depletion (10,841,783) (822,264)
-------------- --------------
Total $ 190,777,177 $ 194,261,744
============== ==============
During the twelve month period ended December 31, 1998, the Company
recorded charges for a net loss of $1,204,076 and during the eleven month
period ended November 30, 1997, the Predecessor recorded charges for a net
loss of $723,173 to record a write-down and disposal of certain operating
assets in connection with increasing the capacity of the recycling
equipment. The charges are included in cost of sales in the accompanying
statements of operations.
14
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT:
Long-term debt consisted of:
DECEMBER 31,
-----------------------------
1998 1997
Senior Secured Notes bearing interest at 10% (interest payable
semiannually commenced June 1, 1998); due 2007 $100,000,000 $100,000,000
Term Loan Facility bearing interest at 8.25% and 8.91% at December 31,
1998 and 1997, respectively (interest payable quarterly); principal
of $175,000 due in 31 quarterly payments commenced March 31, 1998;
balance due December 31, 2005 69,300,000 70,000,000
$50 million Revolving Credit Facility bearing interest at LIBOR plus
2.75% (8.31% and 8.72% at December 31, 1998 and 1997, respectively)
for $20,000,000 and interest due monthly; prime plus 1.75% (9.5%
and 10.25% at December 31, 1998 and 1997, respectively) for the
remainder in excess of $20,000,000 and interest due quarterly; due
December 31, 2003 15,000,000 26,000,000
------------- --------------
184,300,000 196,000,000
Less current portion 700,000 700,000
------------- --------------
Total long-term debt $183,600,000 $195,300,000
============= ==============
On December 1, 1997, the Company sold in a private placement debt
securities of $100 million Senior Secured Notes (the "Notes"). On December
1, 1997 the Company also entered into Indenture Agreements for a $70
million Term Loan Facility ("Term Loan") and a $50 million Revolving
Credit Facility ("Revolving Loans"). The proceeds from the Notes, Term
Loan and Revolving Loans were used by the Company to purchase the 70%
interest of the Predecessor which was previously owned by certain
subsidiaries of Dow Jones and The Washington Post.
The extraordinary item in the eleven month period ended November 30, 1997
represents the write-off of unamortized financing costs and prepayment
penalties paid related to Predecessor Notes that were extinguished at the
time of the Acquisition.
The Notes are redeemable, together with accrued interest, at the option of
the Company, in whole or in part, at any time on or after December 1,
2002, with sufficient notice at the redemption prices set forth below
calculated beginning on December 1 of the years indicated:
REDEMPTION
YEAR PRICE
2002 105.000%
2003 103.333
2004 101.667
2005 and thereafter 100.000
15
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT, CONTINUED:
Notwithstanding the foregoing, at any time prior to December 1, 2000, the
Company may redeem up to 20% of the aggregate principal amount of the
Notes within 60 days of one or more public equity offerings with the net
proceeds of such offering at a redemption price equal to 110% of the
principal amount thereof, together with accrued and unpaid interest, if
any, to the date of redemption; provided that immediately after giving
effect to any such redemption, at least $80 million aggregate principal
amount of the Notes originally issued remains outstanding.
The Term Loan and Revolving Loans are redeemable at the option of the
Company, in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent. Partial
prepayments on the Term Loan or Revolving Loans shall be in an aggregate
principal amount of $5,000,000 or a whole multiple thereof. Prepayment of
the Term Loans and Revolving Loans is required for any excess cash flow
("ECF"), as computed on the ECF date. The Revolving Loans bear interest at
prime plus 1.75% or LIBOR plus 2.75%, at the option of the Company and
mature on December 31, 2003.
The Notes are collateralized by (i) a second priority security interest in
all real property of the Company and all personal property of the Company,
to the extent such personal property is assignable, (ii) a third priority
security interest in 100% of the membership interests in BITCO and (iii) a
second priority security interest in 65% of the issued and outstanding
capital stock of Soucy Inc. ("Soucy Collateral") behind a shared first
lien. The remaining 35% of the issued and outstanding capital stock of
Soucy Inc. cannot be assumed, pledged, hypothecated, transferred or
otherwise disposed by Brant-Allen without the consent of the required
lenders. At any time when either (a) the Company has reduced its total
committed debt to an amount that is not greater than $145 million as of
the date of determination or (b) the Notes are rated investment grade, the
Soucy Collateral will be released and all of the covenants and other
provisions of the Notes with respect to Soucy Inc. will terminate.
The Term Loan and Revolving Loans are partly collateralized by (i) a first
priority security interest in a substantial portion of the assets of the
Company, (ii) a shared first priority security interest (pro rata along
with a $35 million senior secured two-year term loan to Brant-Allen from
several banks and other financial institutions) in 65% of the common stock
of Soucy Inc. and (iii) a second priority security interest in 100% of
Brant-Allen's membership interest in BITCO. The Term Loan and Revolving
Loan are guaranteed by Brant-Allen.
The most restrictive covenants of the Notes, Term Loan and Revolving Loans
state that the Company has a limitation on incurring additional
indebtedness, making restricted payments, creating, incurring or assuming
any liens, making sales of capital stock of subsidiaries, transactions
with affiliates, and sale of assets. Furthermore under the Notes, the
Company is not permitted to pay management fees to Brant-Allen that exceed
3% of the Company's annual revenues. Only one-third of this payment may be
in cash.
16
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. LONG-TERM DEBT, CONTINUED:
The fair values of the Company's Notes, Term Loan and Revolving Loan
approximate carrying values at December 31, 1998 and 1997.
Maturities on long-term debt for the four years after 1999 are
approximately as follows: 2000 - $700,000; 2001 - $700,000; 2002 -
$700,000; 2003 - $15,700,000; and thereafter - $165,800,000.
7. LONG-TERM PURCHASE OBLIGATIONS:
Capitalized purchase obligations for purchases of machinery and equipment,
which approximate fair value, consisted of:
DECEMBER 31,
--------------------------
1998 1997
Long-term purchase obligations bearing interest at various rates ranging
from approximately 7% to 8%; with principal payments ending in 2001 $ 646,163 $ 435,304
Less current portion 384,693 180,304
----------- -------------
$ 261,470 $ 255,000
=========== =============
Payments on long-term purchase obligations for the two years after 1999
are approximately $133,500 in 2000 and $128,000 in 2001.
8. ENVIRONMENTAL LETTERS OF CREDIT:
During 1998 in accordance with requirements of the Virginia Department of
Environmental Quality, the Company established two irrevocable standby
letters of credit of $430,000 and $70,000 to cover potential closure and
post-closure costs associated with the Company's landfills.
9. DERIVATIVE FINANCIAL INSTRUMENTS:
At December 31, 1998 and 1997, the Company had outstanding a variable to
fixed interest rate swap with a notional value of $60 million and $70
million, respectively, with a term of five years maturing December 5,
2002. Under the terms of this agreement, the Company is paying a fixed
interest rate of 6.13% and receiving a variable rate based on 3-month
London Interbank Offered Rates ("LIBOR") of 5.25% and 5.9375% at December
31, 1998 and 1997, respectively. The Company estimates it would have paid
$1.7 million and $675,000 at December 31, 1998 and 1997, respectively, to
terminate this agreement.
17
NOTES TO FINANCIAL STATEMENTS, CONTINUED
10. EMPLOYEE BENEFIT PLANS:
The Companies provide a defined contribution retirement plan for
substantially all employees. The annual cost of the plan, which is
currently funded, is based on the compensation of participants. The
Predecessor increased its contribution from 5% to 6% of employees' base
compensation effective July 1, 1996.
The Companies provide a thrift plan for substantially all employees which
incorporates the provisions of Internal Revenue Code Subsection 401(k),
whereby employees can make voluntary, tax-deductible contributions within
specified limits. The Companies matched employee contributions at 60%
during the year ended December 31, 1998, the one month ended December 31,
1997, the eleven months ended November 30, 1997, and the year ended
December 31, 1996, up to a maximum of 6% of an employee's base pay.
The Companies' expense for both plans approximated $1,238,000, $95,000,
$1,138,000 and $1,103,000 for the year ended December 31, 1998, the month
ended December 31, 1997, the eleven months ended November 30, 1997, and
the year ended December 31, 1996, respectively.
The Companies are self-insured for employee medical, dental and disability
claims up to $35,000 per claim per year. The Companies provided an accrual
of approximately $313,000 for claims incurred but not reported at December
31, 1998 and 1997.
11. SUBSEQUENT EVENT:
On January 28, 1999, BITCO and the Company entered into a non-binding
agreement to sell approximately 82,485 and 949 acres, respectively, to two
unrelated parties. The purchase price is currently being negotiated,
however, the Company anticipates realizing a gain on the sale. Under the
terms of the agreement, the purchase price may be adjusted for certain
acreage and timber volume differences and is expected to be settled on or
before May 15, 1999.
18
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEAR ISLAND PAPER COMPANY L.L.C. &
BEAR ISLAND PAPER COMPANY, L.P.
(IN THOUSANDS)
ADDITIONS
-----------------------
CHARGED
BALANCE AT TO COSTS CHARGED
BEGINNING AND TO OTHER BALANCE AT
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ------------------ ------------ ---------- ---------- ------------ --------------
BEAR ISLAND PAPER COMPANY
L.L.C:
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)(a) $574
Reserve for Workman's
Compensation Claims 160 - - (140)(b) 20
---- ---- ----- -------- ---
$696 $ 70 - $(172) $594
==== ==== ==== ===== ====
One Month Ended December 31, 1997
Allowance for Doubtful
Accounts
(Deducted from Accounts
Receivable) $73 - - - $73
Allowance for Stores
Obsolescence
(Deducted from Stores
Inventory) $269 $152 - $(269)(c) $152
Allowance for Coal Inventory
(Deducted from Raw Material
Inventory) $150 (150) - - -
---- ---- ---- ----- ----
$419 2 - $(269) $225
==== ==== ==== ===== ====
Reserve for Capping of
Landfill $532 6 (2)(a) $536
Reserve for Workman's
Compensation Claims $160 - - - $160
==== ==== ==== ===== ====
$692 6 - (2) $696
==== ==== ==== ===== ====
BEAR ISLAND PAPER COMPANY,
L.P.:
Eleven Months Ended November
30, 1997:
Allowance for Doubtful
Accounts
(Deducted from Accounts
Receivable) $73 - - - $73
Allowance for Stores
Obsolescence
(Deducted from Stores
Inventory) 228 41 - - 269
Allowance for Coal Inventory
(Deducted from Raw Material
Inventory) 150 - - - 150
---- ---- ----- ----- ---
$451 $ 41 - - $492
==== ==== ===== ===== ====
Reserve for Capping of Landfill $237 $312 $ (17)(a) $532
====
Reserve for Sludge Land
Application 10 - - $ (10)(d) -
Reserve for OSHA Citation
Reserve for Workman's 33 - - $ (33)(e) -
Compensation Claims $160 - - - $160
--- ---- ----- ------ ----
$440 $312 - (60) $692
=== ==== ===== ====== ====
Year Ended December 31, 1996:
Allowance for Doubtful Accounts
(Deducted from Accounts
Receivable) $73 - - $73
Allowance for Stores
Obsolescence
(Deducted from Stores
Inventory) 203 25 - 228
Allowance for Coal Inventory
(Deducted from Raw Material
Inventory) $ 46 104 - 150
---- --- ---- ---
$322 $129 - $451
==== ==== ==== ====
Reserve for Capping of Landfill $185 69 (17)(a) $237
Reserve for Sludge Land
Application 105 87 (182)(d) 10
Reserve for OSHA Citation 66 (33)(e) 33
Reserve for Workman's
Compensation Claims 81 79 - 160
---- ---- ----- ----
$437 $235 $(232) $440
==== ==== ===== ====
a) PAYMENTS FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
b) WRITE DOWN OF RESERVE FOR LACK OF POTENTIAL CLAIMS FROM PAST YEARS
c) ELIMINATION OF STORES INVENTORY RESERVE UPON ALLOCATION OF PURCHASE PRICE
ADJUSTMENT TO PURCHASED ASSETS
d) PAYMENTS FOR THE APPLICATION OF SLUDGE FROM HOLDING TANKS
e) PERIODIC WRITE DOWN OF OSHA CITATION RESERVE PER AGREEMENT
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
AND BEAR ISLAND TIMBERLANDS COMPANY, L.P.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1998, ONE MONTH ENDED DECEMBER 31, 1997, ELEVEN
MONTHS ENDED NOVEMBER 30, 1997 AND YEAR ENDED DECEMBER 31, 1996
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Bear Island Timberlands Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in partners' equity and member's interests, and of cash
flows present fairly, in all material respects, the financial position of Bear
Island Timberlands Company, L.L.C. (a Virginia limited liability corporation)
(the "Company") as of December 31, 1998 and 1997, and the results of its
operations and its cash flows for the year ended December 31, 1998 and the one
month ended December 31, 1997 and Bear Island Timberlands Company, L.P.'s
(collectively with the Company, the "Companies") results of operations and cash
flows for the eleven months ended November 30, 1997 and the year ended December
31, 1996, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Companies' 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
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 8 to the financial statements, the Companies had numerous
significant related-party transactions with affiliates for the year ended
December 31, 1998, the one month ended December 31, 1997, the eleven months
ended November 30, 1997 and the year ended December 31, 1996, which
significantly impacted the financial statements of the Companies.
/s/ PricewaterhouseCoopers LLP
Richmond, Virginia
February 2, 1999, except as to the information
entitled "Debt extensions" presented in Note
7, for which the date is March 1, 1999
1
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1998 1997
Cash and short-term investments $ 105,658 $ 1,530,996
Restricted cash and investments 3,167,833 2,899,076
Accounts and notes receivable 159,493 125,875
Due from affiliate 42,029
Inventory 405,561
Other current assets 204,853 57,308
-------------- --------------
Total current assets 3,637,837 5,060,845
-------------- --------------
Property and equipment 367,052 475,688
Less accumulated depreciation (73,809) (7,406)
-------------- --------------
Net property and equipment 293,243 468,282
Timberlands, net 58,845,506 60,598,527
-------------- --------------
59,138,749 61,066,809
-------------- --------------
Notes receivable 17,771 113,898
Deferred financing costs, net of accumulated amortization of
$276,833 and $30,217, respectively
567,197 813,813
--------------- ---------------
584,968 927,711
-------------- --------------
$ 63,361,554 $ 67,055,365
============== ==============
LIABILITIES
Current portion of long-term debt 80,601 264,485
Accounts payable and accrued expenses 127,707 64,866
Due to affiliate 430,389 298,956
Interest payable 315,813 365,938
-------------- --------------
Total current liabilities 954,510 994,245
-------------- --------------
Long-term debt 58,428,814 58,009,415
-------------- --------------
EQUITY
Member's interest 6,576,302 8,326,302
Accumulated deficit (2,598,072) (274,597)
-------------- --------------
3,978,230 8,051,705
-------------- --------------
$ 63,361,554 $ 67,055,365
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
2
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF OPERATIONS
COMPANY PREDECESSOR
---------------------------- ------------------------------
FOR THE YEAR ONE MONTH ELEVEN MONTHS FOR THE YEAR
ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
------------- ------------- --------------- -------------
1998 1997 1997 1996
Sales:
Timber - affiliated $ 2,929,533 $ 1,637,035 $ 13,280,395 $ 14,744,000
Timber - unaffiliated 4,533,959 470,744 4,300,796 2,407,122
Land 1,864,526 19,380 953,295 1,708,144
------------- ------------- --------------- -------------
Total sales 9,328,018 2,127,159 18,534,486 18,859,266
------------- ------------- --------------- -------------
Cost of sales:
Timber 5,332,993 1,839,241 10,746,095 10,220,154
Land 276,173 2,362 114,503 308,007
------------- ------------- --------------- -------------
Total cost of sales 5,609,166 1,841,603 10,860,598 10,528,161
------------- ------------- --------------- -------------
Gross profit 3,718,852 285,556 7,673,888 8,331,105
Fees for recycled fiber 2,028,481 2,070,469
Selling, general and
administrative expenses (1,794,196) (133,977) (2,556,594) (2,695,956)
-------------- -------------- ---------------- --------------
Income from operations 1,924,656 151,579 7,145,775 7,705,618
------------- ------------- --------------- -------------
Other income (deductions):
Interest income 246,186 22,193 479,266 533,286
Interest expense (4,931,325) (413,806) (2,671,766) (3,356,985)
Other 437,008 (34,563) 137,746 339,160
------------- ------------- --------------- -------------
(4,248,131) (426,176) (2,054,754) (2,484,539)
------------- ------------- --------------- -------------
Income (loss) before
extraordinary
item
(2,323,475) (274,597) 5,091,021 5,221,079
Extraordinary item:
Early extinguishment of debt (2,313,385)
------------- ------------- --------------- -------------
Net income (loss) $ (2,323,475) $ (274,597) $ 2,777,636 $ 5,221,079
============= ============= =============== =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
3
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF CHANGES IN PARTNERS' EQUITY AND MEMBER'S INTEREST
DOW JONES
BRANT-ALLEN VIRGINIA
INDUSTRIES, COMPANY, NEWSPRINT,
INC. INC. INC. TOTAL
PREDECESSOR
Partners' equity:
Contributed capital:
Balances, December 31, 1995,
1996 and November 30, 1997
$ 6,332,292 $ 6,264,102 $ 6,264,102 $ 18,860,496
============= ============ ============ =============
Retained earnings:
Balances, December 31, 1995 439,908 513,226 513,226 1,466,360
Net income - 1996 1,566,323 1,827,378 1,827,378 5,221,079
------------- ------------ ------------ -------------
Balances, December 31, 1996 2,006,231 2,340,604 2,340,604 6,687,439
Net income - eleven months
ended November 30, 1997 833,290 972,173 972,173 2,777,636
------------- ------------ ------------ -------------
Balances, November 30, 1997 $ 2,839,521 $ 3,312,777 $ 3,312,777 $ 9,465,075
============= ============ ============ =============
- --------------------------------------------------------------------------------------------------
COMPANY
Equity:
Members' interest:
Conversion of Bear Island
Timberlands, L.P. from a
limited partnership to a
limited liability
corporation $ 9,171,813 $ 9,576,879 $ 9,576,879 $ 28,325,571
Purchase by Brant-Allen of 70%
selling members' interests (9,576,879) (9,576,879) (19,153,758)
Distribution to parent (2,346,000) (2,346,000)
Contribution by parent 1,500,489 1,500,489
------------- ------------ ------------ -------------
Balance, December 31, 1997 8,326,302 - - 8,326,302
Distribution to parent - 1998 (1,750,000) (1,750,000)
------------- ------------ ------------ -------------
Balance, December 31, 1998 $ 6,576,302 - - $ 6,576,302
============= ============ ============ =============
Accumulated deficit:
Net loss - one month ended
December 31, 1997 (274,597)
-------------
Balance, December 31, 1997 (274,597)
Net loss - year ended December
31, 1998 (2,323,475)
-------------
Balance, December 31, 1998 $ (2,598,072)
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
4
BEAR ISLAND TIMBERLANDS COMPANY, L.L.C.
(A VIRGINIA LIMITED LIABILITY CORPORATION)
STATEMENTS OF CASH FLOWS
COMPANY PREDECESSOR
---------------------------- -----------------------------
FOR THE ONE MONTH ELEVEN FOR THE
YEAR ENDED ENDED MONTHS ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, NOVEMBER 30, DECEMBER 31,
------------- ------------- ------------- --------------
1998 1997 1997 1996
Operating activities:
Net income (loss) $(2,323,475) $ (274,597) $ 2,777,636 $ 5,221,079
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation 93,283 7,406 110,868 98,587
Depletion 1,849,232 129,686 1,077,290 1,099,762
Noncash portion of extraordinary item 189,295
Amortization of deferred financing costs 246,616 30,217 31,078 33,904
Net book value of land sold 276,173 2,363 184,616 308,007
(Gain) loss on disposal of machinery and 23,901 (31,297) (10,995)
equipment
(Increase) decrease in:
Accounts and notes receivable 62,509 715,992 19,083 287,209
Due from affiliate 42,029 1,416,656 (70,600) (229,029)
Inventory 405,561 1,017,215 (131,243) (35,139)
Other current assets (147,545) 43,262 (84,136) 2,295
Increase (decrease) in:
Accounts payable and accrued expenses 62,841 (2,132,381) 2,364,575 (72,412)
Due to affiliate 131,433 298,956
Interest payable (50,125) (802,358) (464,064) (209,013)
Deferred profit on land sales (49,960) (123,315)
------------- ------------- ------------- --------------
Net cash provided by operating activities 672,433 452,417 5,923,141 6,370,940
------------- ------------- ------------- --------------
Investing activities:
Purchases of machinery and equipment (142,257) (204,114)
Purchases of timberlands (372,384) (81,857) (654,733) (1,088,640)
Proceeds from disposal of machinery and equipment 57,855 45,288 17,402
Decrease in restricted cash and investments (268,757) (2,617,826) 2,884,192 4,204,271
Payment for purchase of partnership interest
(net of cash acquired) (25,232,197)
------------- ------------- ------------- --------------
Net cash provided by (used in) investing
activities (583,286) (27,931,880) 2,132,490 2,928,919
------------- ------------- ------------- --------------
Financing activities:
Distribution to Brant-Allen (1,750,000) (2,346,000)
Contribution from Brant-Allen 1,500,489
Proceeds from issuance of long-term debt 2,250,000 38,000,000
Payment of deferred financing costs (844,030)
Principal payments on long-term debt (2,014,485) (7,300,000) (4,844,866) (4,689,250)
------------- ------------- ------------- --------------
Net cash provided by (used in) financing
activities (1,514,485) 29,010,459 (4,844,866) (4,689,250)
------------- ------------- ------------- --------------
Net increase (decrease) in cash and
short-term investments (1,425,338) 1,530,996 3,210,765 4,610,609
Cash and short-term investments, beginning of period 1,530,996 7,535,254 2,924,645
------------- ------------- ------------- --------------
Cash and short-term investments, end of
period $ 105,658 $ 1,530,996 $10,746,019 $ 7,535,254
============= ============= ============= ==============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 4,734,834 $ 1,216,164 $ 3,135,830 $ 3,565,998
============= ============= ============= ==============
Noncash investing and financing activity:
Increase in long-term debt for purchase of
timberlands $ 384,650
=============
Increase in promissory notes for equipment
acquisition $ 155,616
=============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
5
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND ACQUISITION:
Effective December 1, 1997, Brant-Allen Industries, Inc. ("Brant-Allen"),
a Delaware corporation, completed the acquisition of the 70% partnership
interest (the "Acquisition") in Bear Island Timberlands Company, L.P. (the
"Predecessor") previously owned by subsidiaries of Dow Jones & Company,
Inc. ("Dow Jones") and The Washington Post Company ("The Washington
Post"). Funding for the Acquisition was provided from borrowings by
Brant-Allen and Bear Island Timberlands Company, L.L.C. (the "Company")
and cash from the Company. Immediately before the Acquisition and certain
related financings, the Predecessor was converted into the Company
(collectively the "Companies"). On December 1, 1997, the Company became a
wholly owned subsidiary of Brant-Allen.
The Company accounted for the Acquisition as a purchase. The allocation of
the purchase price resulted in purchase adjustments being applied to
assets and liabilities acquired. In this connection, since Brant-Allen was
the owner of 30% interests in the Predecessor prior to the Acquisition,
purchase adjustments were applied to adjust 70% of the basis of the assets
and liabilities acquired to fair value. The total purchase price of
approximately $36 million was allocated to the acquired assets and
liabilities based on their respective fair values at December 1, 1997 as
follows:
Working capital $ 8,079,904
Timberlands 46,803,415
Other noncurrent assets 396,025
Other liabilities (19,301,730)
-----------
Total purchase cost $ 35,977,614
===========
As a result of the Acquisition and new basis of accounting, the Company's
financial statements for the period subsequent to the Acquisition are not
comparable to the Predecessor's financial statements for the periods prior
to the Acquisition.
On January 30, 1998, Bear Island Paper Company, L.L.C. ("BIPCO"), also a
wholly owned subsidiary of Brant-Allen, completed its initial registration
process which became effective pursuant to Section 8(A) of the Securities
Act of 1933. Concurrent with becoming effective, BIPCO is subject to the
information requirements of the Securities Exchange Act of 1934, as
amended, and required to file reports and other information with the
United States Securities and Exchange Commission. The financial statements
of the Company are included in BIPCO's filings because certain of BIPCO's
debt is collateralized by a second and third priority security interest in
Brant-Allen's 100% interest in the Company.
6
NOTES TO FINANCIAL STATEMENTS, CONTINUED
1. ORGANIZATION AND ACQUISITION, CONTINUED:
The Predecessor was constituted as a limited partnership on August 14,
1985, under the Virginia Uniform Limited Partnership Act, pursuant to a
Limited Partnership Agreement, as amended (the "Partnership Agreement"),
among:
o Brant-Allen Timberlands Company, Inc., which was merged into
Brant-Allen on October 31, 1988;
o Dow Jones Virginia Company, Inc. ("D J Virginia"), a Delaware
corporation and a wholly owned subsidiary of Dow Jones; and
o Newsprint, Inc. ("Newsprint"), a Virginia corporation and a wholly
owned subsidiary of The Washington Post.
Brant-Allen was the general partner and D J Virginia and Newsprint were
limited partners. Under the terms of the Partnership Agreement, D J
Virginia's and Newsprint's equity interests in the Predecessor were 35%
each and Brant-Allen's equity interest was 30%.
The Partnership Agreement included the following provisions:
o The Predecessor was established for an initial term of 43 years and was
renewable for additional terms of 20 years.
o The purpose of the Predecessor was to engage in the business of
acquiring, or otherwise investing in, holding, managing, maintaining,
operating, harvesting and disposing of (i) real property containing
timberlands or to be planted for production of timber, (ii) timber
rights, (iii) logs, and (iv) pulp chips, and to engage in other
activities desirable or incidental to timber management, production and
sales.
o Brant-Allen, as general partner, had full and exclusive control of the
business of the Predecessor and had active control of its management.
Brant-Allen received no fees or other compensation for managing the
Predecessor.
o The limited partners were not liable for any net losses or other debt
or liability of the Predecessor to any extent, except for (i) their
respective contributions to capital and (ii) their guarantee of the
Predecessor's long-term debt up to $7,933,333 each.
o Subject to the aforementioned provisions, the partners shared the net
profits and losses based on their interests, as defined by the
Partnership Agreement, computed in accordance with generally accepted
accounting principles consistently applied.
o No partner could sell, assign or otherwise dispose of its interest, or
any part thereof, in the Predecessor, unless it first offered such
interest to the other partners as prescribed in the Partnership
Agreement.
o No partner could mortgage, pledge, hypothecate or otherwise encumber
its interest in the Predecessor without the prior written consent of
the other partners.
7
NOTES TO FINANCIAL STATEMENTS, CONTINUED
2. LIQUIDITY:
On November 30, 1998, the Company suspended operations in anticipation of
the planned sale of substantially all of the timberlands. It is the
intention of the Company and Brant-Allen to monetize the timberlands and
utilize the proceeds from the sale to retire the outstanding balances on
the senior notes, the term loan and revolver ($58,200,000 in the aggregate
at December 31, 1998). As the operations of the Company were suspended,
the Company expects to realize the cash flow needed to satisfy
obligations, which are budgeted to be approximately $6 million through
April 1, 2000, as they come due from the planned sales of the timberlands.
To the extent such sales do not occur, or until such date as the sales are
consummated, Brant-Allen has the ability and intends to provide funding in
the amount of the required cash needs to enable the Company to continue in
existence. Brant-Allen has provided the Company with a letter committing
to provide the budgeted funding required to continue operations. As
discussed in Note 9, the Company and BIPCO have entered into a non-binding
sales agreement for approximately 82,485 acres and 949 acres,
respectively. The purchase price is currently being negotiated, however,
the Company anticipates realizing a gain on the sale. The sale is expected
to be settled on or before May 15, 1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS: Cash equivalents including repurchase
agreements totaled $1,385,671 at December 31, 1997 and are stated at cost
plus accrued interest which approximates market value. There were no cash
equivalents at December 31, 1998. For purposes of the statements of cash
flows, the Companies consider all highly liquid short-term investments
purchased with an original maturity of three months or less to be cash
equivalents.
NOTES RECEIVABLE: As certain timberlands are sold, the Companies may
accept a note as part of the sales transaction. The current portion of
notes receivable approximated $25,537 and $82,421 at December 31, 1998 and
1997, respectively.
INVENTORY: Inventory for the Company consists primarily of wood stored at
wood yards; whereas, inventory for the Predecessor consisted primarily of
wood stored at the mill site of Bear Island Paper Company, L.P.
("PaperCo"), the predecessor to BIPCO (collectively the "Paper Companies")
which was created in connection with the acquisition by Brant-Allen of the
70% partnership interest in PaperCo previously owned by subsidiaries of
Dow Jones and The Washington Post. PaperCo was owned proportionately by
the same partners as the Predecessor. Concurrent with the Acquisition, the
Company modified certain terms of a wood supply contract with BIPCO to be
reflective of market prices. Modified terms included changing the point of
purchase for wood from the point of production to delivery on BIPCO's mill
site and changing the purchase price from a negotiated price to market
price. Inventory is valued at the lower of actual costs or market, with
cost determined on the first-in, first-out ("FIFO") basis. Due to the
suspension of operations on November 30, 1998, the Company had no
inventory at December 31, 1998.
8
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
PROPERTY, EQUIPMENT AND TIMBERLANDS: Land, machinery and equipment are
stated at cost. Timberlands are stated at cost net of accumulated
depletion. The cost of reforestation is capitalized. The cost of major
renewals and betterments to equipment 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 carrying value of property, plant and equipment, including
timberlands, is evaluated whenever significant events or changes occur
that might indicate an impairment through comparison of the carrying value
to total future undiscounted cash flows. To derive the data necessary to
determine expected future cash flows, management conducts annual cruises
(a detailed forestry evaluation of the tracts) of 20% of the timberlands,
such that in five years the entire timber holdings have been completely
cruised. Using the results of the cruises, the quantity of standing timber
is determined. From this information, management determines the future
undiscounted cash flows of the timber property.
DEPRECIATION: Depreciation of machinery and equipment is computed
principally on the straight-line basis over the estimated useful lives of
the assets which range from three to five years.
DEPLETION: The portion of the cost of timberlands attributed to standing
timber is charged against income as timber is cut, 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
long-term debt for the Company have been deferred and are being amortized
using the interest method over the life of the related debt, whereas the
Predecessor amortized such costs on a straight-line basis over the life of
the related debt, which approximated the interest method.
REVENUE RECOGNITION: Revenue is recognized at the point where title of the
product transfers. Affiliated sales are recognized by the Company upon
delivery of the wood to BIPCO; whereas affiliated sales of the Predecessor
were recognized when wood was placed into production by PaperCo.
INCOME TAXES: No provision for income taxes is required in the
accompanying financial statements since each member or partner is
individually liable for any income tax that may be payable on its share of
the Company's or the Predecessor's taxable income.
EARNINGS PER SHARE: No earnings per share calculations have been provided
in the financial statements since such calculations are not required.
9
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The fair value of the long-term debt
is estimated discounting the future cash flows using currently available
borrowing rates. The fair value of trade receivables and payables
approximates the carrying amounts because of the short maturity of these
instruments.
RISK AND UNCERTAINTIES: Financial instruments which potentially subject
the Companies to concentrations of credit risk consist principally of
cash, short term investments, U.S. Government securities and receivables.
The cash and restricted cash balances are maintained at a major financial
institution. Cash equivalents at December 31, 1997 consisted of repurchase
agreements with a high-credit-quality financial institution. The
repurchase agreements were collateralized by United States Government
agency obligations. The credit rating of the issuing institution for the
repurchase agreements indicates the issuing entity has a strong capacity
to repay short-term obligations.
Receivables consist principally of trade accounts receivable resulting
primarily from sales to the Paper Companies and sawmills and trade
accounts receivable and notes receivable resulting from land sales. Notes
receivable credit is extended after an evaluation of creditworthiness and
are collateralized by a first deed of trust on the land sold.
The Companies' sales of timber are made to the Paper Companies as well as
sawmills which process products other than pine pulpwood. Sales to BIPCO
represented approximately 32% and 77% of total sales during the year ended
December 31, 1998 and the one month ended December 31, 1997, and sales to
PaperCo represented 72% and 78% for the eleven months ended November 30,
1997 and for the year ended December 31, 1996, respectively.
NEW ACCOUNTING STANDARDS: During 1998 the Company implemented Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." The implementation of these new standards had no
effect on the Company's statements of operations or its financial position
as of or for the year ended December 31, 1998 because the Company (i) has
no other comprehensive income, and (ii) operates in one segment with all
of its long-lived assets in the U.S., the Company's country of domicile.
10
NOTES TO FINANCIAL STATEMENTS, CONTINUED
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, CONTINUED:
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133"). FAS 133 establishes
standards for accounting and disclosure of derivative instruments. This
new standard is effective for fiscal quarters of fiscal years beginning
after June 15, 1999. The implementation of this new standard is not
expected to have a material effect on our results of operations or
financial position.
RECLASSIFICATIONS: Certain prior period amounts have been reclassified to
conform to the current presentation.
4. RESTRICTED CASH AND INVESTMENTS:
Restricted cash and investments consist of U.S. Government securities
which are stated at amortized cost which approximates market value. Cash
and investments are restricted for the payment of principal under the
terms of escrow agreements entered into in connection with the Company's
and the Predecessor's long-term debt in addition to certain escrows held
for land sales.
5. TIMBERLANDS:
At December 31, 1998 and 1997, the Companies' timberlands consisted of the
cost of land and standing timber owned by the Companies ("Fee Lands") and
the cost of the right to cut timber from land owned by third parties
within a specified period of time ("Timber Deeds").
Timberlands consisted of:
DECEMBER 31,
----------------------------
1998 1997
Fee Lands $60,770,754 $60,674,543
Timber Deeds 53,670 53,670
---------- ----------
60,824,424 60,728,213
Less accumulated depletion (1,978,918) (129,686)
---------- ----------
Timberlands, net $58,845,506 $60,598,527
========== ==========
11
NOTES TO FINANCIAL STATEMENTS, CONTINUED
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following:
DECEMBER 31,
-----------------------------
1998 1997
Land $ 25,421 $ 25,421
Machinery and equipment 341,631 450,267
---------- ----------
367,052 475,688
Less accumulated depreciation (73,809) (7406)
---------- ----------
Total $ 293,243 $ 468,282
========== ==========
7. LONG-TERM DEBT:
Long-term debt consisted of:
DECEMBER 31,
----------------------------
1998 1997
Senior notes bearing annual interest at 8.91% (interest payable
quarterly); principal of $30,000,000 due at maturity on April 1,
2000 $ 30,000,000 $ 30,000,000
Term loan and revolving credit facility of Brant-Allen bearing interest
on the term loan at 8.91% and prime plus 1.75% on the revolving
loan (9.5% at December 31, 1998); outstanding principal due April
1, 2000 28,200,000 27,700,000
Promissory note bearing interest at 6%; principal and interest due in
three annual installments of $189,250, which commenced on January
1, 1996 and continued through January 1, 1998; collateralized by a
deed of trust on certain timberland with a book value of
approximately $259,000 189,250
Promissory note bearing interest at 7%; principal and interest due in
three annual installments; first installment of $67,980 paid on
January 31, 1998, second installment of $67,980 due on January 31,
1999, with the balance due in the third installment on January 31,
2000; collateralized by a deed of trust on certain timberland with
a book value of approximately $229,500 122,908 178,400
Promissory note bearing interest at 7.5%; principal and interest due in
eight annual installments of $17,994 commenced on November 13,
1998; collateralized by a deed of trust on certain timberland with
a book value of approximately $145,500 95,305 105,394
Promissory note bearing interest at 7.5%; principal and interest due in
eight annual installments of $17,219 commenced on November 13,
1998; collateralized by a deed of trust on certain timberland with
a book value of approximately $139,000 91,202 100,856
---------- ----------
58,509,415 58,273,900
80,601 264,485
Less current portion ---------- ----------
$ 58,428,814 $ 58,009,415
Total long-term debt ========== ==========
12
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
LONG-TERM DEBT DESCRIPTION: On December 1, 1997 and concurrent with the
Acquisition described in Note 1, Brant-Allen entered into Indenture
Agreements for a $32 million Term Loan Facility ("Timberlands Term Loan")
and a $3 million Revolving Credit Facility ("Timberlands Revolving Loans")
(collectively the "Timberlands Loans") that have been pushed down in the
Company's financial statements since the Timberlands Loans are
collateralized by Brant-Allen's 100% membership interest in the Company.
Additionally as part of the aforementioned Acquisition, the Company
renegotiated certain terms of the Predecessor's senior notes through an
amended Timberlands Loan and Maintenance Agreement (the "Amended
Agreement") and increased the existing $27 million principal balance to
$30 million through an additional $3 million issuance. This renegotiation
constituted an extinguishment of debt. The proceeds from the Timberlands
Loans and the Amended Agreement were used by Brant-Allen and the Company
to purchase the 70% interest of the Predecessor which was previously owned
by certain subsidiaries of Dow Jones and The Washington Post. The
extraordinary item in the eleven month period ended November 30, 1997
represents the write off of unamortized financing costs and prepayment
penalties paid related to the Predecessor's senior notes that were
renegotiated at the time of the Acquisition.
Under the terms of the Timberlands Revolving Loans, until the maturity
date, Brant-Allen may elect to convert prime amounts outstanding under the
revolving loans from prime plus 1.75% to the monthly LIBOR rate plus
2.75%. The Timberlands Loans are redeemable at the option of the Company,
in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent.
Amounts available under the Timberlands Revolving Loans at December 31,
1998 were $750,000. During 1998, the proceeds from a draw under the
Timberlands Revolving Loans in the amount of $1,750,000 were received by
Brant-Allen. This draw has been recorded as an increase in the amounts
outstanding under the Timberlands Revolving Loans and as a 1998
distribution to Brant-Allen since this debt has been pushed down in the
accompanying financial statements.
The Timberlands Loans are partially collateralized by (i) a first priority
security interest in 100% of Brant-Allen's membership interest in the
Company and (ii) a first priority security interest (pro rata along with
BIPCO's $120 million Bank Credit Facilities) in 65% of the common stock of
F. F. Soucy, Inc., a wholly owned subsidiary of Brant-Allen. The
Timberlands Loans are also guaranteed by the Company. The remaining 35% of
F. F. Soucy, Inc.'s common stock cannot be assumed, pledged, hypothecated,
transferred or otherwise disposed of by Brant-Allen without the consent of
the required lenders.
The most restrictive covenants under the Timberlands Loans are that the
Company has a limitation on incurring additional debt, making restricted
payments, creating, incurring or assuming any liens, sales of capital
stock of subsidiaries, and transactions with affiliates.
13
NOTES TO FINANCIAL STATEMENTS, CONTINUED
7. LONG-TERM DEBT, CONTINUED:
Certain debt of BIPCO is collateralized by a second and third priority
security interest in Brant-Allen's 100% membership interests in the
Company.
The Timberlands Loans also require that the Company make certain payments
to an escrow account. The balance in the escrow account was approximately
$2,815,400 and $2,666,700 at December 31, 1998 and 1997, respectively, and
is classified as restricted cash and investments in the accompanying
balance sheet.
Under the more financially significant covenants of the Amended Agreement,
the Company agreed to (i) limit distributions, (ii) restrict investments,
(iii) limit the incurrence of additional indebtedness, (iv) not pay
renumeration of any nature to the partners, (v) limit timberland sales,
(vi) restrict the cutting of timber, and (vii) maintain a ratio of
Administrative Value of timberland to Net Principal Balance (as defined in
the Agreement) of at least 1.33 to 1. The $30,000,000 senior notes are
collateralized by a deed of trust on approximately 130,000 acres of
timberland.
The Amended Agreement also requires that the Company make certain payments
to an escrow account (see Note 4) in the event (i) any of the timberland
property acquired with the proceeds of the loan is sold or (ii) the volume
of timber cut from the timberland property exceeds the volume permitted by
the lender. The balance in the escrow account was approximately $95,200
and $11,500 at December 31, 1998 and 1997, respectively, and is classified
as restricted cash and investments in the accompanying balance sheet.
The promissory note bearing interest at 6% was issued in December 1995 in
connection with the purchase of timberland at an aggregate price of
approximately $757,000. The Company was permitted to prepay outstanding
principal and interest balances with lender approval. The promissory note
was collateralized by a deed of trust on timberland which was not part of
the collateralized assets under the Amended Agreement.
The Company's long-term debt at December 31, 1998 and 1997 approximated
fair value.
Maturities on long-term debt for the four years after 1999 are
approximately as follows: 2000 - $58,286,348; 2001 - $24,527; 2002 -
$26,368; 2003 - $28,345 and thereafter - $63,226.
DEBT EXTENSIONS: Effective February 3, 1999 and March 1, 1999, Brant-Allen
and the Company amended the Timberlands Loans and Amended Agreement,
respectively, to extend the principal maturities to April 1, 2000 from
December 31, 1999.
14
NOTES TO FINANCIAL STATEMENTS, CONTINUED
8. RELATED-PARTY TRANSACTIONS:
The Predecessor was a party to a wood supply contract with PaperCo whereby
the Predecessor had guaranteed to supply all of PaperCo's log and pulp
chip requirements at a price determined annually.
Wood prices charged by the Predecessor to PaperCo are compared to market
services below:
ELEVEN MONTHS
ENDED YEAR ENDED
NOVEMBER 30, DECEMBER 31,
--------------- ---------------
1997 1996
Actual $ 95.50 $ 95.50
Market $60.00 to $66.00 $60.00 to $61.00
At December 31, 1997, BIPCO owed the Company approximately $42,000;
whereas at December 31, 1998 the Company owed BIPCO and Brant-Allen
approximately $81,000 and $350,000, respectively. All other sales of wood
were made to unaffiliated companies primarily located in Virginia.
The Predecessor had agreed to procure recycled paper for PaperCo on a fee
per ton basis. The procurement fee charged on a per ton basis for the
eleven months ended November 30, 1997 and the year ended December 31, 1996
were $24.31 and $24.15, respectively.
The actual costs of procurement services provided to PaperCo by the
Predecessor were approximately $213,000 and $238,000 for the eleven months
ended November 30, 1997 and year ended December 31, 1996, respectively.
The Company and Predecessor share employees, facilities and recordkeeping
systems with BIPCO and PaperCo, respectively, and reimbursed BIPCO and
PaperCo, respectively, monthly for their share of these costs.
Accordingly, these shared employees receive benefits under BIPCO's and
formerly PaperCo's defined contribution retirement plan and are eligible
to participate in BIPCO's thrift plan. Costs associated with these plans
are reimbursed monthly by the Company and formerly its Predecessor.
Amounts paid to BIPCO and PaperCo for shared costs, which are included in
general and administrative expenses, approximated $782,200, $60,000,
$1,319,000 and $1,370,000 for the year ended December 31, 1998, the month
ended December 31, 1997, the eleven months ended November 30, 1997, and
the year ended December 31, 1996, respectively. The Companies received
approximately $62,500, $5,300, $55,000 and $57,750 from the Paper
Companies for the year ended December 31, 1998, the month ended December
31, 1997, the eleven months ended November 30, 1997 and the year ended
December 31, 1996, respectively, for managing certain of its timberlands.
Such amounts are included in other income in the accompanying statements
of operations.
15
NOTES TO FINANCIAL STATEMENTS, CONTINUED
9. SUBSEQUENT EVENT:
On January 28, 1999, the Company and BIPCO entered into a non-binding
agreement to sell approximately 82,485 and 949 acres, respectively, to two
unrelated parties. The purchase price is currently being negotiated,
however, the Company anticipates realizing a gain on the sale. The
Company's share of the proceeds from the sale will be used to retire debt.
Under the terms of the agreement, the purchase price may be adjusted for
certain acreage and timber volume differences and is expected to be
settled on or before May 15, 1999.
16
F. F. Soucy, Inc.
Consolidated Financial Statements
For the three-year period ended December 31, 1998
(expressed in Canadian dollars)
Auditors' Report
To the Shareholder of
F. F. Soucy, Inc.
We have audited the consolidated balance sheets of F. F. Soucy, Inc. as at
December 31, 1998 and 1997 and the consolidated statements of earnings, retained
earnings and cash flows for each of the three years in the period ended December
31, 1998. 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 in accordance with Canadian generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1998
and 1997, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1998, in accordance
with generally accepted accounting principles in Canada.
/s/ PricewaterhouseCoopers LLP
Chartered Accountants
Montreal, Canada
January 15, 1999
F. F. Soucy, Inc.
Consolidated Balance Sheets as at December 31, 1998 and 1997
(expressed in Canadian dollars)
1998 1997
(restated)
Assets
Current assets
Cash and cash equivalents $11,989,734 $ 6,494,426
Accounts receivable -
Parent company 103,891 812,579
Other 26,220,223 24,861,178
Inventories 9,371,622 12,118,057
Prepaid expenses 931,906 53,060
------------- -------------
48,617,376 44,824,300
Property, plant and equipment 99,504,037 93,797,758
Deferred pension costs 1,020,112 1,139,719
Unamortized foreign exchange loss on
long-term debt 2,201,302 1,674,864
------------- -------------
151,342,827 141,436,641
------------- -------------
Liabilities
Current liabilities
Accounts payable and accrued liabilities 17,321,044 13,945,365
Income taxes 7,621,794 4,190,606
Current portion of long-term debt 7,073,320 4,957,173
------------- -------------
32,020,158 23,093,144
Long-term debt 17,904,972 21,426,483
Future income taxes 12,59,826 11,931,826
Non-controlling interest in F. F. Soucy, Inc.
& Partners, Limited Partnership 48,300,820 47,008,132
------------- -------------
110,822,776 103,459,585
------------- -------------
Shareholder's Equity
Capital stock 1,621,851 1,621,851
Contributed surplus 1,133,850 1,133,850
Retained earnings 37,764,350 35,221,355
------------- -------------
40,520,051 37,977,056
------------- -------------
151,342,827 141,436,641
------------- -------------
The accompanying notes are an integral part of the
consolidated financial statements.
F. F. Soucy, Inc.
Consolidated Statements of Retained Earnings as at December 31, 1998 and 1997
(expressed in Canadian dollars)
1998 1997 1996
(restated) (restated)
Balance - Beginning of year
As previously stated 34,487,355 43,138,862 30,699,557
Change in accounting policy (note 2) 734,000 1,021,000 1,013,000
------------- ------------- ------------
As restated 35,221,355 44,159,862 31,712,557
Net earnings for the year 20,673,941 6,141,752 12,447,305
------------- ------------- ------------
55,895,296 50,301,614 44,159,862
Dividends 18,130,946 6,000,000 -
Premium on redemption of
common shares - 9,080,259 -
------------- ------------- ------------
Balance - End of year 37,764,350 35,221,355 44,159,862
------------- ------------- ------------
Dividends per share 43.41 14.37 -
------------- ------------- ------------
The accompanying notes are an integral part of the
consolidated financial statements.
F. F. Soucy, Inc.
Consolidated Statements of Earnings
For the three-year period ended December 31,
1998
(expressed in Canadian dollars)
1998 1997 1996
(restated) (restated)
Sales 192,241,719 151,250,406 168,676,664
Freight 16,683,303 15,670,318 15,017,213
------------- ------------- -------------
Net sales 175,558,416 135,580,088 153,659,451
Cost of sales 106,148,775 104,480,103 102,188,319
------------- ------------- -------------
69,409,641 31,099,985 51,471,132
------------- ------------- -------------
Expenses
Selling, general and administrative -
To parent company 17,081,834 13,191,943 14,951,065
To other 833,190 389,722 905,185
Interest on long-term debt 2,380,594 2,717,758 3,214,000
Other interest 23,144 66,694 158,719
------------- ------------- -------------
20,318,762 16,366,117 19,228,969
------------- ------------- -------------
49,090,879 14,733,868 32,242,163
------------- ------------- -------------
Other income
Compensation for power interruption 2,436,038 2,436,040 2,420,875
Interest income 495,007 224,135 609,272
Loss on foreign exchange and
translation - net (295,380) (490,666) (348,534)
------------- ------------- -------------
2,635,665 2,169,509 2,681,613
------------- ------------- -------------
Non-controlling interest in earnings of
F. F. Soucy, Inc. & Partners, Limited
Partnership (20,887,603) (7,454,625) (14,784,471)
------------- ------------- -------------
Earnings before income taxes 30,838,941 9,448,752 20,139,305
Provision for income taxes 10,165,000 3,307,000 7,692,000
------------- ------------- -------------
Net earnings for the year 20,673,941 6,141,752 12,447,305
------------- ------------- -------------
Basic net earnings per share 49.50 14.63 24.89
------------- ------------- -------------
The accompanying notes are an integral part of the
consolidated financial statements.
F. F. Soucy, Inc.
Consolidated Statements of Cash Flows
For the three-year period ended December 31, 1998
(expressed in Canadian dollars)
1998 1997 1996
(restated) (restated)
Operating activities
Net earnings for the year 20,673,941 6,141,752 12,447,305
Adjustments for -
Depreciation of property, plant and
equipment 9,632,259 8,974,173 9,301,317
Non-controlling interest of a limited
partnership 20,887,603 7,454,625 14,784,471
Future income taxes 665,000 1,987,000 1,292,000
Foreign exchange loss on long-term debt 1,060,935 648,153 497,374
Deferred pension costs 119,607 105,732 99,163
Loss on disposal of properties, plant
and equipment 352,723 71,254 --
Decrease (increase) in -
Accounts receivable (650,357) (9,055,072) 10,192,951
Inventories 2,746,435 5,185,054 (3,837,327)
Prepaid expenses (393,846) 14,216 10,498
Increase (decrease) in -
Accounts payable and accrued liabilities 3,379,679 (1,647,325) 988,804
Income taxes 3,441,754 2,061,534 (13,365,041)
----------- ----------- -----------
Net cash provided by operating activities 61,915,733 21,941,096 32,411,515
----------- ----------- -----------
Financing activities
Increase (decrease) of bank indebtedness -- (2,200,000) 2,200,000
Repayment of long-term debt (5,077,053) (4,743,495) (4,728,160)
Repayment of obligation under capital leases -- (260,339) (689,000)
Redemption of common shares -- (9,400,000) --
Dividends paid (18,130,946) (6,000,000) --
Distribution to minority interest in
F. F. Soucy, Inc. & Partners, Limited
Partnership (19,594,915) (4,224,301) (15,011,651)
----------- ----------- -----------
Net cash used in financing activities (42,802,914) (26,828,135) (18,228,811)
----------- ----------- -----------
Investing activities
Additions to property, plant and equipment (14,179,582) (9,571,202) (18,690,559)
Investment tax credits resulting from the
purchase of property, plant and equipment 547,071 593,327 1,353,287
Proceeds from disposal of property, plant
and equipment 15,000 -- --
Advances to parent company -- 2,041,272 (87,681)
----------- ----------- -----------
Net cash used in investing activities (13,617,511) (6,936,603) (17,424,953)
----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents during the year 5,495,308 (11,823,642) (3,242,249)
Cash and cash equivalents - Beginning of year 6,494,426 18,318,068 21,560,317
----------- ----------- -----------
Cash and cash equivalents - End of year 11,989,734 6,494,426 18,318,068
----------- ----------- -----------
Supplemental disclosure of cash flow
information -
Interest paid 2,544,143 2,907,000 3,509,000
----------- ----------- -----------
Income taxes paid 5,649,000 645,000 19,203,000
----------- ----------- -----------
Non-cash investing and financing activity -
Increase in obligation under capital
leases for purchase of properties, plant and
equipment 2,084,316 -- --
----------- ----------- -----------
The accompanying notes are an integral part of the
consolidated financial statements.
F. F. Soucy, Inc.
Notes to Consolidated Financial Statements
For the three-year period ended December 31, 1998
(expressed in Canadian dollars)
1. Summary of significant accounting policies
Basis of consolidation
These consolidated financial statements have been prepared in conformity with
accounting principles generally accepted in Canada and include the accounts of
the wholly-owned subsidiary, Arrimage de Gros Cacouna Inc., and F.F. Soucy, Inc.
& Partners, Limited Partnership (the "Partnership"), a Quebec limited
partnership in which the Company is general partner and shares in 50.1% of the
profits and losses.
Use of estimates
The preparation of consolidated 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 revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
Fair value of financial instruments
The fair market values of the financial instruments included in the consolidated
financial statements approximate the carrying values of those instruments except
for long-term debt as disclosed in note 8.
Cash and cash equivalents
Cash and cash equivalents include all cash on hand and balances with banks as
well as all highly liquid short-term investments, exclusive of bank
indebtedness, where applicable. As at December 31, 1998 and 1997, the Company
held no short-term investments. The Company considers all highly liquid
short-term investments with an original maturity of three months or less to be
cash equivalents.
Credit and market risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and accounts receivable. The Company's
cash balance is maintained at a major 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
credit worthiness. Generally, the Company does not require collateral or other
security from customers for trade accounts receivable. Substantially all of the
Company's debtors' ability to honor their obligations are dependent upon the
printing and publishing sectors.
The Company operates solely to produce newsprint which is subject to
fluctuations in paper prices. The paper industry has experienced highly volatile
price changes over the past few years.
1. Summary of significant accounting policies (cont'd)
Inventories
Inventories are valued at the lower of cost (first in, first out) or market.
Cost as applied to finished goods includes cost of materials, direct labour and
overhead.
Property, plant and equipment
Cost of property, plant and equipment is recorded net of applicable government
grants, including investment tax credits, on capital expenditures. Depreciation
of property, plant and equipment is computed using the declining balance method
by the Company and the straight-line method by the Partnership as follows:
Buildings 2% - 10%
Machinery and equipment 4% - 20%
Furniture and fixtures 20%
The Company and the Partnership commence depreciating property, plant and
equipment at the time the assets are put into use. As at December 31, 1998, the
Company had capitalized costs of $4,518,695 (1997 - $2,718,903) with respect to
property, plant and equipment not yet ready for use.
For income tax purposes, depreciation is computed principally on an accelerated
basis.
The Company and Partnership capitalize interest costs, where material, as part
of the cost of constructing major facilities and equipment. No such interest
costs have been capitalized in years 1998, 1997 and 1996.
Expenditures incurred to render essential accounting, production and other
computer systems Year 2000 functional are expensed as incurred.
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.
Revenue recognition
Sales and related costs of goods sold are included in earnings when goods are
delivered to the customer in accordance with the delivery terms.
1. Summary of significant accounting policies (cont'd)
Pension costs
The pension costs include the cost of pension benefits related to employees'
services in the current year and the amortization of the difference between
pension fund assets and the actuarial present value of accrued pension benefits
for services rendered to date. This difference is being amortized over the
expected average remaining service life of the employee groups which extends for
periods of up to 15 years. The Company makes appropriate provision against
deferred pension costs where there is uncertainty regarding its ability to
realize the underlying benefit.
Compensation for power interruption
The compensation for power interruption (note 12) is comprised of a fixed
portion, which is recognized as earned by the Company in equal amounts over a
period of four months from December to March, and a variable portion which is
recognized as earned when the power interruptions occur. At such time as the
maximum amount of power consumption has been interrupted, any remaining balance
of the fixed portion is recognized as income.
Income taxes
The Company provides for income taxes using the liability method of tax
allocation. Under this method, future income tax assets and liabilities are
determined based on deductible or taxable temporary differences between the
financial statement values and tax values of assets and liabilities, using
enacted income tax rates expected to be in effect for the year in which the
differences are expected to reverse. The Company establishes a valuation
allowance against future income tax assets if, based upon available information,
it is not more likely than not that the future income tax assets will be
realized.
For income tax reporting purposes, the Company includes its proportionate share
of earnings and losses of the Partnership. In accordance with the Partnership
Agreement, maximum capital cost allowances are being claimed by the Partnership
including accelerated depreciation of production machinery and equipment.
Foreign currency translation
Transactions denominated in foreign currencies are recorded at the rate of
exchange prevailing at the transaction date. Monetary assets and liabilities in
foreign currencies are translated at year-end rates, and non-monetary assets and
liabilities at rates prevailing at the transaction dates. Gains or losses
arising on translation are included in earnings for the current year except
those relating to long-term debt (note 8) which are deferred and amortized over
the remaining life of the debt.
1. Summary of significant accounting policies (cont'd)
Forward exchange contracts
Forward exchange contracts are entered into to hedge contracted revenue streams
from foreign currency exchange rate fluctuations. As such, these non-speculative
forward exchange contracts are not recorded on the Company's balance sheets.
Also, unrealized gains and losses on these forward exchange contracts are
deferred and recognized upon settlement of the related transactions.
Accordingly, cash flows resulting from forward exchange contract settlements are
classified as cash provided by operations as are the corresponding cash flows
from the revenue streams being hedged (note 15).
Basic net earnings per share
Basic net earnings per share is determined using the weighted average number of
common shares outstanding during the period.
Dividends
Dividends on common shares, when declared, are paid to shareholders in United
States dollars.
2. Change in accounting policy and basis of presentation
The Company adopted the recently revised recommendations of the Canadian
Institute of Chartered Accountants regarding accounting for income taxes. Under
these revised recommendations, income taxes are now accounted for using the
liability method. These new recommendations are consistent with those of SFAS
109 in the United States.
This change, which has been applied retroactively with restatement of
comparative figures, resulted in a decrease in the future income taxes as at
December 31, 1998 and 1997 of $494,000 and $734,000, respectively. In addition,
this change resulted in an increase in the opening balance of retained earnings
of $734,000 and $1,021,000 and $1,013,000 for the years ended December 31, 1998,
1997 and 1996, respectively. This change also resulted in a decrease in net
earnings for the years ended December 31, 1998 and 1997 of $240,000 and
$287,000, respectively, and an increase in net earnings for the year ended
December 31, 1996 of $8,000.
The Company has also retroactively applied the new recommendations of the
Canadian Institute of Chartered Accountants regarding statements of cash flows.
This new basis of presentation did not have any effect on prior years results or
shareholders' equity. However certain comparative figures have been restated in
order to comply with the new basis of presentation.
3. F. F. Soucy, Inc. & Partners, Limited Partnership
F. F. Soucy, Inc. & Partners, Limited Partnership (the "Partnership") was
constituted as a limited partnership on May 31, 1974 under the Civil Code of the
Province of Quebec, Canada, pursuant to a limited partnership agreement (the
"Partnership Agreement") between the Company, Dow Jones Newsprint Company, Inc.
("DJ Newsprint"), a Delaware corporation and a wholly-owned subsidiary of Dow
Jones and Company, Inc. ("Dow Jones"), and Rexfor, a Crown corporation of the
Quebec Provincial Government. The Partnership Agreement, as amended, includes
the following provisions:
o The Partnership is for an initial term expiring December 31, 2004, renewable
for further terms of ten years and is subject to dissolution with the consent
of two or more partners and in certain other circumstances.
o The purpose of the Partnership is to engage in the business of producing,
selling and distributing newsprint by constructing, owning and operating a
paper mill (the "Partnership Mill") at Riviere du Loup, Quebec.
o The Company, as general partner, has full and exclusive control of the
business of the Partnership and has active control of its management. DJ
Newsprint and Rexfor, as limited partners, are not liable for any net losses
or other debt or liability of the Partnership to any extent, except for their
respective contributions to capital.
o Subject to the above, the partners shall share the net profits or losses of
the Partnership in the following proportions:
F.F. Soucy, Inc. 50.1%
DJ Newsprint 39.9%
Rexfor 10.0%
-------------
100.0%
-------------
o No partner may sell, assign or otherwise dispose of its interest, or any part
thereof, in the Partnership, unless it first offers such interest to the
other partners as prescribed in the Partnership Agreement.
Brant-Allen Industries, Inc. ("Brant-Allen"), the parent of the Company, along
with one of its subsidiaries, is party to a long-term financing agreement
whereby 65% of the common shares of the Company have been pledged as security.
The Company, Brant-Allen and the subsidiary are all subject to certain financial
and non-financial covenants. Should any of these parties not comply with their
respective covenants, a change in control of the Company may result, under
certain circumstances, which could trigger a dissolution of the Partnership. It
is not currently possible to determine if any of these events will occur in the
future, nor is it possible to determine the ultimate impact of these events on
the Company and the Partnership.
4. Accounts receivable and related party transactions
(a) All sales are made through Newsprint Sales, a division of Brant-Allen.
At December 31, 1998, accounts receivable include an amount of $103,891
(December 31, 1997 - $812,579) receivable from Newsprint Sales representing
amounts received by Newsprint Sales on collection of receivable balances
yet to be transferred to the Company.
(b) During the years ended December 31, 1998, 1997 and 1996, Brant-Allen
charged the Company approximately $17,082,000, $13,192,000 and $14,951,000,
respectively for management and selling services. At December 31, 1998, the
balance owing to the Company by Brant-Allen amounted to $161,649 (1997 -
$120,323).
5. Inventories
Inventories comprise:
1998 1997
Raw materials $ 3,417,433 $ 607,243
Finished goods 1,598,663 1,575,121
Stores 4,355,526 4,470,693
------------- -------------
9,371,622 12,118,057
------------- -------------
6. Property, plant and equipment
1998 1997
Land and buildings $ 31,835,732 $ 30,954,331
Machinery and equipment 196,431,771 183,185,005
Furniture and fixtures 343,351 343,351
------------ ------------
228,610,854 214,482,687
Less: Accumulated depreciation 129,106,817 120,684,929
------------ ------------
99,504,037 93,797,758
------------ ------------
Machinery and equipment include assets under capital leases with a cost of
$6,383,000 and accumulated depreciation of $2,426,000 as at December 31, 1998
(1997 - $4,299,000 and $2,198,000, respectively).
7. Bank indebtedness
The Company and the Partnership have available lines of credit from a bank
amounting to Cdn. $3,000,000 and Cdn. $5,000,000, respectively. As at December
31, 1998 and 1997, there were no advances drawn down under the lines of credit.
Outstanding balances under the lines of credit are payable on demand and
interest is payable at 1/4% and 1/2% above the bank's prime rate respectively
which was at 6.75% as at December 31, 1998. The Company and the Partnership have
assigned their accounts receivable and pledged their inventories to the bank as
security for any advances under the lines of credit. Also, Newsprint Sales has
assigned its accounts receivable and provided an unlimited guarantee and
postponement of claim against the Company and the Partnership.
8. Long-term debt
Long-term debt comprises:
1998 1997
Sinking fund bonds maturing 2004 (note 8(a)) $19,422,043 $21,175,018
Sinking fund bonds maturing 1999 (note 8(a)) 3,471,933 5,208,638
Obligation under capital leases (note 8(d)) 2,084,316 -
------------- ------------
24,978,292 26,383,656
Less: Current portion 7,073,320 4,957,173
------------- ------------
17,904,972 21,426,483
------------- ------------
(a) In 1979, the Partnership, through Riviere du Loup Finance Ltd., its
wholly-owned subsidiary, issued U.S. $20,000,000, 10 3/4% and Cdn.
$5,000,000, 10 7/8% bonds to several insurance companies maturing on April
1, 1999. In 1987, the Partnership, through Riviere du Loup Finance Ltd.,
issued U.S. $27,500,000, 9.65% bonds to an insurance company maturing on
July 1, 2004.
The trust indenture contains certain restrictive covenants including equity
and working capital requirements. The Partnership has assigned the sale
agreement (note 13(a)) and collateralized substantially all of its property,
plant and equipment having a net book value of $79,105,000 as at December 31,
1998 for the bonds.
8. Long-term debt (cont'd)
(b) The aggregate fair market value of the Company's long-term debt was
$26,894,000 as at December 31, 1998 (1997 - $29,037,000) based on
discounted future cash flows using interest rates available to the Company
for issues with similar terms and average conditions.
(c) Maturities of the bonds during the next five years are as follows:
U.S. $ Cdn. $
Year ending December 31, 1999 4,065,385 488,000
2000 2,115,385 -
2001 2,115,385 -
2002 2,115,385 -
2003 2,115,385 -
(d) During 1998, the Company entered into a number of credit facilities
with a major Canadian bank providing for leasing contracts up to a maximum
amount of $9,229,432. As at December 31, 1998, an amount of $2,084,316 had
been utilized under these facilities. Estimated future minimum payments
related to the amounts utilized under these facilities are as follows:
Year ending December 31, 1999 433,416
2000 687,544
2001 724,964
2002 291,548
2003 74,840
Thereafter 112,260
-------------
2324,572
Less: Amounts representing interest
(weighted average rate of 6.55%) 240,256
-------------
2,084,316
Less: Current portion 363,248
-------------
$ 1,721,068
-------------
9. Capital stock
The authorized capital stock of the Company is comprised of 500,000 common
shares without par value. As at December 31, 1998 and 1997, the number of issued
and paid shares was 417,660. On January 10, 1997, the Company redeemed 82,340 of
its common shares, with a book value of $319,741, for a cash consideration of
$9,400,000. The excess of $9,080,259 of the redemption price over book value has
been charged to retained earnings.
10. Income taxes
(a) The provision for income taxes is composed of the following:
1998 1997 1996
(restated) (restated)
Current $9,500,000 $1,320,000 $6,400,000
Future 665,000 1,987,000 1,292,000
------------- ------------ ---------------
10,165,000 3,307,000 7692,000
------------- ------------ ---------------
(b) The provision for income taxes and effective tax rates are detailed as
follows:
1998 1997 1996
(restated) (restated)
Provision for income taxes based on
combined basic Canadian and Quebec income
tax rate of 44.71% (1997 and 1996 - 44.25%)
13,788,000 4,181,000 8,912,000
Increase (decrease) in income taxes
arising from the following:
Active business income deduction (2,331,000) (694,000) (1,480,000)
Deduction for manufacturing and
processing (2,041,000) (556,000) (137,000)
Surtax 259,000 73,000 169,000
Unrecognized tax benefits on
capital losses 148,000 103,000 135,000
Other 342,000 200,000 1,331,000
----------- ----------- -----------
10,165,000 3,307,000 7,692,000
----------- ----------- -----------
(c). Future tax assets and liabilities of the Company were as follows:
1998 1997
Future income tax assets:
Net capital loss carryforwards $ 363,000 131,000
Valuation allowance (363,000) (131,000)
------------- -------------
- -
------------- -------------
Future income tax liabilities:
Depreciation (12,588,853) (1,151,611)
Pension costs (108,010) (229,029)
Other 100,037 (186,186)
------------- -------------
(12,596,826) (11,931,826)
------------- -------------
11. Wood chips and round wood supply agreements
The Company has entered into a number of agreements for the supply of its wood
chips and round wood requirements. The duration of these agreements varies
between one and five years. The estimated future purchase commitments, based on
current prices which are renewable annually, for the next five years are as
follows:
1999 $ 13,002,000
2000 10,090,000
2001 10,090,000
2002 6,646,000
2003 3,554,000
12. Power interruption agreement
Under an agreement with Hydro-Quebec, expiring on September 30, 2000, the
Company will be compensated by a fixed annual amount, plus a variable annual
amount based on the actual power usage and power interruptions requested by
Hydro-Quebec. The agreement establishes a maximum amount of power consumption
which may be interrupted at the request of Hydro-Quebec during the months of
December to March inclusively.
13. Sales
(a) The Partnership has contracted to sell Dow Jones the basis weight
equivalent of a minimum of 45,000 short tons of 32 lb. basis weight
newsprint per annum, through December 31, 2004. Dow Jones has the option to
purchase additional quantities of newsprint, as available. The price
payable is agreed to quarterly based upon market conditions. This sale
agreement has been assigned as partial collateral for the sinking fund
bonds (note 8(a)).
(b) The Company and the Partnership sold newsprint to Dow Jones and its
subsidiaries during the years ended December 31, 1998, 1997 and 1996
amounting to $33,793,000, $29,580,000 and $35,004,000, respectively. At
December 31, 1998, the balance owing to the Company and the Partnership by
Dow Jones and its subsidiaries amounted to $2,252,192 (December 31, 1997 -
$2,895,947).
(c) With the exclusion of Dow Jones and its subsidiaries, which is
disclosed above, two unrelated corporations represented approximately 16%
and 13%, respectively, of the Company's sales in 1998 (less than 10% in
1997 and 1996). In 1997, no corporations, other than Dow Jones and its
subsidiaries, represented 10% or more of the Company's sales. In 1996, one
other unrelated corporation, other than Dow Jones and its subsidiaries,
represented approximately 12% of the Company's sales.
13. Sales (cont'd)
(d) The Company operates two newsprint paper mills in Quebec, Canada, and
sells most of its production to the following regions as a percentage of
sales:
1998 1997 1996
United States 93% 68% 49%
South America 6 12 4
Europe 1 18 13
Asia - 2 26
14. Pension plans
The Company maintains separate defined benefit plans for its unionized plant
employees, its unionized office employees and its non-unionized employees and
charges the Partnership its share of the related pension costs (73% in 1998 and
72% in 1997). The status of the Company's plans as at December 31, 1998, based
on an actuarial report as at January 1, 1998, updated to give effect to events
since that date, is as follows:
Pension fund assets 38,393,823
Actuarial present value of accrued
pension benefits for services rendered to date 39,408,858
-------------
Excess of accrued pension benefit
obligations over plan assets $ 1,015,035
-------------
15. Forward exchange contracts
The Partnership entered into contracts which mature in less than twelve months
to sell forward U.S. dollars in exchange for Canadian dollars. As at December
31, 1998, the Partnership held forward exchange contracts of U.S. $8,000,000
(1997 - U.S. $10,000,000) with a contracted value of $11,712,400 (1997 -
$14,188,800) against a fair value of $12,241,600 (1997 - $14,291,000),
representing a deferred loss of $529,200 (1997 - $102,200).
16. Uncertainty due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the Year 2000 Issue may be experienced before, on, or after
January 1, 2000, and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which could
affect the Company's ability to conduct normal business operations. It is not
possible to be certain that all aspects of the Year 2000 Issue affecting the
Company, including those related to the efforts of customers, suppliers, or
other third parties, will be fully resolved.
17. United States accounting principles
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in Canada ("Canadian GAAP"). In certain
respects, Canadian GAAP differs from accounting principles generally accepted in
the United States ("U.S. GAAP").
Net earnings and shareholder's equity
(a) The following summary sets out the material adjustments to the Company's
reported net earnings and shareholder's equity which would be made in order
to conform to U.S. GAAP:
1998 1997 1996
(restated) (restated)
Net earnings for the
year under Canadian GAAP $ 20,673,941 $ 6,141,752 $ 12,447,305
U.S. GAAP adjustment -
Translation gains and losses
(note 17(b)) (526,438) (399,861) 353,133
------------ ------------ ------------
Net earnings for the year under
U.S. GAAP $ 20,147,503 5,741,891 12,800,438
============ ============ ============
1998 1997 1996
(restated) (restated)
Shareholder's equity under
Canadian GAAP $ 40,520,051 37,977,056 47,235,304
U.S. GAAP adjustment -
Translation gains and losses
(note 17(b)) (2,201,302) (1,674,864) (1,275,003)
----------- ----------- -----------
Shareholder's equity under
U.S. GAAP $ 38,318,749 36,302,192 45,960,301
=========== ========== ==========
17. United States accounting principles (cont'd)
(b) Under Canadian GAAP, translation gains and losses arising on the
translation, at exchange rates prevailing at the balance sheet date, of
long-term debt denominated in foreign currency are deferred and amortized
over the remaining life of the related debt. Under U.S. GAAP, such gains
and losses are included in the statement of earnings in the period in which
the exchange rate changes. No income taxes effect is considered since a
valuation allowance is recognized on the future income tax asset resulting
from the net loss position of these translation gains and losses.
(c) Under Canadian GAAP, costs of providing life insurance and health care
benefits to employees after retirement are recognized as incurred while
under U.S. GAAP, these costs are accrued during the employees' years of
active service. This difference in GAAP would not result in a material
change to the Company's consolidated financial statements because the
Company does not provide such benefits.
Other disclosures
(d) Comprehensive income
No statements of comprehensive income have been presented for the years ended
December 31, 1998, 1997 and 1996 since the net earnings equal comprehensive
income.
(e). Pension costs and obligations
The Company's net pension cost comprises:
1998 1997 1996
Current service costs $ 1,328,000 $ 666,000 $ 461,000
Interest cost on projected
benefit obligation 2,742,000 2,087,000 1,922,000
Return on plan assets (2,647,000) (2,314,000) (2,171,000)
Amortization of
unrecorded pension asset (80,000) (80,000) (80,000)
Amortization of
experience gains (459,000) (274,000) (171,000)
Amortization of cost
of amendments 743,000 185,000 169,000
Amortization of
change in assumptions 393,000 81,000 (33,000)
Provision against
deferred pension costs (1,122,000) 468,000 812,000
----------- ----------- -----------
Net pension cost $ 898,000 $ 819,000 $ 909,000
----------- ----------- -----------
In order to measure the projected benefit obligation, the weighted-average
discount rate used was 6.5% (1997 and 1996 - 7.5%); the weighted-average rate of
increase in future compensation levels used was 3.2% (1997 and 1996 - 5.5%); and
the expected long-term rate of return on assets of the plans was 7.5% (1997 and
1996 - 8%).
17. United States accounting principles (cont'd)
The funded status of the plans as at December 31 was:
1998 1997
Projected benefit obligation at beginning of year $ 29,722,000 $ 27,735,000
Service cost 2,007,000 1,351,000
Interest cost 2,742,000 2,088,000
Change in assumptions 4,283,000 1,598,000
Amendments 9,188,000 --
Experience gains (1,404,000) (2,641,000)
Benefits paid (538,000) (409,000)
------------ ------------
Projected benefit obligation at end of year 46,000,000 29,722,000
============ ============
Fair value of plan assets at 39,722,000 34,817,000
beginning of year
Actual return on plan assets 2,840,000 3,912,000
Employer contribution 778,000 717,000
Plan participants' contributions 680,000 685,000
Benefits paid (538,000) (409,000)
------------ ------------
Fair value of plan assets at end of year 43,482,000 39,722,000
============ ============
Funded status at end of year (2,518,000) 10,000,000
Unrecognized net actuarial gain (4,011,000) (8,817,000)
Unamortized prior service cost 10,347,000 3,951,000
Unrecognized net asset (875,000) (955,000)
Provision against pension assets (1,923,000) (3,039,000)
------------ ------------
Pension asset recognized as deferred
pension costs $ 1,020,000 $ 1,140,000
============ ============
The Company makes appropriate provision against deferred pension costs where
there is uncertainty regarding its ability to benefit from the underlying
pension surplus. The Company's contributions for the year ended December 31,
1998 were $778,000 (1997 - $717,000; 1996 - $807,000).
17. United States accounting principles (cont'd)
(f) The disclosure of the following amounts is required under U.S. GAAP:
Year ended December 31,
------------------------------------------
1998 1997 1996
Foreign exchange loss (gain):
Realized $ (766,000) $ (136,000) $ (149,000)
Unrealized 1,061,000 627,000 497,000
December 31,
-----------------------------
1998 1997
Trade accounts receivable $ 25,046,000 $ 23,395,000
Other accounts receivable 1,390,000 1,682,000
Allowance for doubtful accounts 216,000 216,000
Trade accounts payable 1,1922,000 9,635,000
Accrued employees costs 4,139,000 2,939,000
Interest payable 1,037,000 1,169,000
(g) Impact of accounting pronouncements not yet implemented
In 1998, new accounting standards concerning accounting for derivative
instruments and hedging activities were issued in the United States. These
new standards will be effective beginning with the year 2000. The Company has
not yet determined the impact of the applications of these standards.