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, 2002
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of registrant's knowledge, in definitive proxy or
information statement incorporated by reference in Part III of this Form 10-K or
any amendment to this Form 10-K. [X]
Documents Incorporated by Reference
Certain exhibits required for Part IV of this report are incorporated herein by
reference from Bear Island Paper Company, L.L.C.'s registration statement on
Form S-4, Registration No. 333-42201, as amended.
TABLE OF CONTENTS
PAGE
----
PART I
ITEM 1. BUSINESS.......................................................... 3
ITEM 2. PROPERTIES........................................................ 6
ITEM 3. LEGAL PROCEEDINGS. ............................................... 7
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. ............. 7
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDERS MATTERS. ....................................... 7
ITEM 6. SELECTED FINANCIAL DATA. ......................................... 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. ....................................... 8
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........ 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................... 13
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.......................................... 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT............... 14
ITEM 11. EXECUTIVE COMPENSATION........................................... 15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT... 15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS................... 16
ITEM 14. CONTROLS AND PROCEDURES.......................................... 16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. 17
2
PART I
ITEM 1. BUSINESS.
GENERAL
Bear Island Paper Company, L.L.C. (the "Company"), a limited liability company
organized in 1997 and a wholly owned subsidiary of Brant-Allen Industries, Inc.
a subchapter S corporation, ("Brant-Allen") produces newsprint at its mill,
located near Richmond, Virginia (the "Mill"). The Mill has an annual capacity of
237,250 metric tons ("tonnes") of high quality newsprint suitable for four-color
printing, which publishers are increasingly using for general circulation. In
2002, the Mill produced approximately 234,200 tonnes of newsprint, and had an
estimated operating efficiency rate of 92%.
The Company's customers include leading newspaper publishers in the United
States, such as Dow Jones & Company, Inc. (publisher of The Wall Street Journal)
("Dow Jones"), The Washington Post Company ("The Washington Post"), Advance
Publications ("Newhouse Group"), Gannett Co., Inc. (publisher of USA Today)
("Gannett"), MediaNews Group Inc., Knight-Ridder Inc. ("Knight-Ridder"), Media
General, Inc., Tribune Co. and New York Times Co. Approximately 93% of the
Company's newsprint production in 2002 was purchased by its top ten customers.
A combination of pulp material is used to feed the Company's newsprint machine.
In its manufacturing process, the Mill currently uses thermomechanical pulp
("TMP"), and de-inked pulp. The use of TMP provides high wood fiber yields and
higher quality newsprint than that produced by the traditional mechanical
groundwood process. The de-inked pulp is produced at the Company's recycling
facility, which is located adjacent to the Mill. The recycling facility
commenced operations in 1994 and features technology for de-inking, cleaning and
screening of old newspapers ("ONP") and old magazines ("OMG").
The Company purchases substantially all of its logs and pulp chips from outside
suppliers at market prices. ONP and OMG used in the Company's recycling facility
are provided by a combination of individual processors, municipal recovery
facilities and brokers. All fiber is currently supplied from sources within a
300-mile radius of the Mill.
THE MILL AND THE PRODUCTION PROCESS
The Mill, which began operations in 1979, is located in Hanover County,
Virginia, on an approximately 700-acre site, which is approximately 80 miles
south of Washington, D.C., and 25 miles north of Richmond, Virginia. The Mill's
operations consist of a woodyard, a pulping system, a paper machine and related
utility, recycling, storage and transportation facilities.
Currently, approximately 67% of the Company's fiber requirements are derived
from the Company's TMP process using wood and woodchips, and approximately 33%
of the Company's fiber requirements are de-inked pulp from the Mill's recycling
facility.
The Mill has a wood requirement of approximately 144,000 cords per year. All
wood is currently supplied from sources within a 200-mile radius of the Mill. In
2002, the Company's wood needs were supplied 42% from wood harvested by local
independent wood contractors and 58% in chip form, by independent sawmills.
The Mill's newsprint machine produces newsprint at an average speed of
approximately 4,250 feet per minute over a machine trim width of 300 inches. The
Mill produces approximately 643 tonnes per day of newsprint.
3
The Company's recycling plant features advanced technologies for the re-pulping,
de-inking, cleaning and screening of ONP and OMG. The recycling facility turns
ONP and OMG into de-inked pulp. ONP and OMG are procured from a combination of
individual processors, municipal recovery facilities and brokers. After delivery
to the plant, the ONP and OMG are mixed by operators into a blend with a ratio
of ONP to OMG of 81:19, which is then fed into a pulper which mixes in additives
and prepares the stock for ink separation. During 1998, the Company undertook a
capital expansion of the recycling facility resulting in a capacity increase of
20,200 tonnes per year. At full capacity, the recycling facility processes
approximately 112,200 tonnes per year of ONP and OMG. The recycling facility has
the capacity to produce 246 tonnes of recycled fiber per day. The recycling mill
enables the Company to produce up to approximately 643 tonnes per day of
newsprint containing a minimum of 20% and a maximum of 40% recycled fiber. The
recycling facility also includes a 50,000 square foot warehouse that can hold a
10-day supply of ONP and OMG.
MARKETS AND CUSTOMERS
The Company's marketing objective is to become a preferred supplier to each of
its newsprint customers. To achieve this goal, the Company focuses on service,
product quality and long term relationships. Eight of the Company's top ten
customers have been customers for over 15 years. In 2002, approximately 31% of
the production of the Mill was sold to Dow Jones and The Washington Post under
purchase agreements (the "Purchase Agreements") that obligate each of those
customers to purchase a minimum of approximately 40,000 tonnes of newsprint per
year for The Washington Post and 32,000 tonnes for Dow Jones commencing in 2002,
at prices based on prevailing market prices paid by those customers to their
non-affiliated East Coast suppliers. The term of the Purchase Agreements has
been extended through December 31, 2004 and is subject to the parties agreeing
to pricing, which approximate market prices, on an annual basis. The Company has
sold newsprint to Dow Jones since 1980 and The Washington Post since 1979. Other
than the agreements with Dow Jones and The Washington Post, customers purchase a
minimum volume amount for short periods of up to one year based on market prices
at the time of purchase.
In 2002 and 2001, the Company's ten largest customers represented an aggregate
of 93% and 88%, respectively, of the Company's total sales. The Company has had
five customers whose sales represent a significant portion of sales. Sales to
one of these customers approximated 9%, 13% and 20% for the years ended December
31, 2002, 2001 and 2000, respectively. Sales to a second customer approximated
22%, 16%, and 19% for the years ended December 31, 2002, 2001 and 2000,
respectively. Sales to a third customer approximated 10%, 16%, and 14% for the
years ended December 31, 2002, 2001 and 2000, respectively. Sales to a fourth
customer approximated 16%, 15%, and 17% for the years ended December 31, 2002,
2001 and 2000, respectively. Sales to a fifth customer approximated 21% and 11%
during the years ended December 31, 2002 and 2001, respectively.
Brant-Allen markets all of the Company's production and is able to offer its
customers newsprint from either the Mill or from F.F. Soucy Inc.'s ("Soucy
Inc.") mill or from F.F. Soucy, Inc. & Partners, Limited Partnership's ("Soucy
Partners" and, together with Soucy Inc., "Soucy") mill in order to satisfy
customer demand, which enables Brant-Allen to optimize shipping costs from each
of these mills. Brant-Allen employs three full-time salesmen and three customer
service representatives. Brant-Allen also performs all sales, invoicing,
accounts receivable maintenance, cash management and treasury functions for the
Company pursuant to the Management Services Agreement (as defined below). Other
than the management fee paid by the Company to Brant-Allen under the Management
Services Agreement, the Company does not pay Brant-Allen any additional fees for
its marketing services.
ENERGY AND WATER REQUIREMENTS
The Mill utilizes two forms of energy: steam, which is primarily used within the
paper machine's dryer section to dry the newsprint sheet as it is being
produced, and electricity, which is used to power the remaining processes,
particularly the refining of the woodchips.
All of the Mill's process steam (on average, 165,000 pounds per hour) is
generated by an on-site boiler rated at 243.0 million Btu per hour heat input.
The boiler is fired using pulverized coal, as a primary fuel, and bark and wood
wastes as secondary fuels. In addition, a natural gas fired package boiler, with
a capacity of 190,000 pounds per hour, is used as a backup if the main boiler
malfunctions or is down for maintenance.
4
Through Rappahannock Electrical Cooperative, which is the Company's local
utility, the Company purchases 100% of its electrical power indirectly from
Virginia Power and Old Dominion Electric Cooperative.
Because the Company's electricity usage has an impact on both electricity
generation requirements and costs of Virginia Power and Old Dominion Electric
Cooperative, especially in periods of high demand (i.e., periods of high air
conditioning or heating loads), the Company has been able to negotiate favorable
electricity rates by demonstrating an ability to reduce demand during peak
times.
The Mill was designed and is operated with one of the most stringent water use
and wastewater flow requirements of any paper mill in the U.S. At full
production of 643 tonnes of newsprint per day, water usage is approximately 3.8
million gallons per day. Mill effluent is approximately 3.6 million gallons per
day. The Mill's water is currently supplied by the Hanover County public utility
system and by the Mill's own river intake structure and pumping system on the
North Anna River. The Mill operates a wastewater treatment facility which
connects to the Hanover County wastewater treatment plant. The Mill has its own
on-site industrial landfill for solid waste.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive and changing environmental
regulation by federal, state, and local authorities in the United States,
including those requirements that regulate discharges into the environment,
waste management, and remediation of environmental contamination. Environmental
permits are required for the operation of the Company's businesses, and are
subject to revocation, modification and renewal. Governmental authorities have
the power to enforce compliance with environmental requirements and violators
are subject to injunctions, civil penalties and criminal fines. Third parties
may also have the right to sue to enforce compliance with such regulations.
The Company has in the past incurred significant capital expenditures to comply
with current federal, state and local environmental laws and regulations. The
Company believes that it is in substantial compliance with such laws and
regulations, although no assurance can be given that it will not incur material
liabilities and costs with respect to such laws and regulations in the future.
Although the Company does not currently believe that it will be required to make
significant expenditures for pollution control in the near future, no assurances
can be given that future developments, such as the potential for more stringent
environmental standards or stricter enforcement of environmental laws, will not
cause the Company to incur such expenditures.
The wastewater treatment facility for the Mill discharges effluent through the
outfall line of the Hanover County wastewater treatment plant to the North Anna
River. The effluent limits that must be maintained in accordance with the
discharge permit require continuous monitoring and extensive reporting of
numerous tests. The treatment facility consists of primary and secondary
clarification, aerated equalization and activated sludge treatment.
The Company maintains valid and current air, solid waste and water permits and
believes it is currently in substantial compliance with respect to all such
permits. The Company believes that it has good relations with the federal, state
and local regulatory authorities, and management is not aware of any material
problems or costs that might jeopardize the Company's scheduled permit renewals.
The U.S. Environmental Protection Agency (the "EPA") has required that certain
pulp and paper mills meet stringent air emissions and revised wastewater
discharge standards for toxic and hazardous pollutants. These proposed standards
are commonly known as the "Cluster Rules". Bear Island's operations are not
subject to further control as a result of the current "Cluster Rules" and
therefore, no related capital expenditures are anticipated.
On July 12, 1996, the Company entered into a Reasonably Available Control
Technology ("RACT") Agreement with the Virginia Department of Environmental
Quality. Under the RACT Agreement, the Company is not required to incur any
significant capital expenditures for the purchase and installation of pollution
control equipment.
5
COMPETITION
The newsprint industry is highly competitive and is comprised of many
participants. The Company competes directly with a number of newsprint
manufacturers, many of which have longer histories, larger customer bases,
closer geographical proximity to customers and significantly greater financial
and marketing resources than the Company. The Company faces significant
competition from both large, vertically integrated companies and numerous
smaller companies. The Company competes with several other newsprint
manufacturers in Canada, as well as regional manufacturers in the Southern
United States. Competition in the newsprint market is generally based on price,
quality and customer service.
EMPLOYEES
As of December 31, 2002, the Company had 218 employees, approximately 35% of
which have been employed by the Company since its inception in 1979. The
workforce is non-unionized and has been very receptive to flexible working
conditions and requirements.
MANAGEMENT SERVICES AGREEMENT
Executive management of the Company is provided by Brant-Allen, pursuant to a
management contract (the "Management Services Agreement"). The Company's
newsprint is sold through Brant-Allen, which currently markets approximately
485,000 tonnes of newsprint (237,000 tonnes for the Company and 250,800 tonnes
for Soucy). Brant-Allen manages the Company to maximize any available synergies.
The Company benefits from the centralization of marketing, financial,
administrative and distribution functions at Brant-Allen. These services are
provided pursuant to the Management Services Agreement for which a management
fee of 3% of annual net sales of the Company less transportation costs was
payable by the Company, of which, since December 1, 1997, as a result of the
Company's debt agreements, one third was payable in cash with the remainder
contributed to the Company's capital. Effective April 1, 2000, the Management
Services Agreement was amended to reduce the management fees payable to
Brant-Allen to 1% of the Company's annual net sales of which 100% is payable in
cash. During 2002, the Company was charged $984,000 by Brant-Allen under the
Management Services Agreement.
Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant and
Mr. Joseph Allen. Brant-Allen's predecessor was formed in the early 1940s when
the fathers of Messrs. Brant and Allen founded a paper conversion and newsprint
sales business. In the early 1970s, Brant-Allen entered into the newsprint
manufacturing business. Messrs. Brant and Allen have been involved in the
management of Brant-Allen for over 30 years: Mr. Brant serves as the Chairman of
the Board, and Chief Executive Officer of Brant-Allen and Mr. Allen serves as
President and Chief Operating Officer of Brant-Allen. Mr. Brant also serves as
the Chairman of the Board, and Chief Executive Officer of the Company and Mr.
Allen also serves as President and Chief Operating Officer of the Company.
THE ACQUISITION
In December 1997, the Company purchased the 70% Limited Partnership interests of
Bear Island Paper Company, L.P. (the "Predecessor") owned equally by
subsidiaries of The Washington Post and Dow Jones (the "Acquisition"). The
Predecessor, was formed in 1978 as a limited partnership, with Brant-Allen as
its general partner. Prior to the Acquisition, Brant-Allen owned a 30%
partnership interest in the Predecessor. Funding for the Acquisition was
provided through the issuance of $100 million principal amount of 10% Senior
Secured Notes due 2007 (the "Notes") and $120 million principal amount of bank
debt (the "Bank Credit Facilities") comprised of a $70 million 8-year senior
secured term loan facility (the "Term Loan Facility") and a $50 million 6-year
senior secured reducing revolving credit facility (the "Revolving Credit
Facility"). Following the Acquisition and related transactions (the
"Transactions") 100% of the Company was owned by Brant-Allen.
ITEM 2. PROPERTIES.
The Mill is located on approximately 700 acres of land that is owned by the
Company, which is approximately 80 miles south of Washington, D.C., and 25 miles
north of Richmond, Virginia. In addition, the Company owns approximately 1,600
acres of land and timberland in Virginia.
6
ITEM 3. LEGAL PROCEEDINGS.
From time to time the Company is involved in legal proceedings relating to
claims arising out of its operations in the normal course of business. The
Company believes that there are no material legal proceedings pending or
threatened against the Company or any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of 2002.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS
MATTERS.
Brant-Allen beneficially owns all the equity of the Company. Brant-Allen, in
turn, is owned by Mr. Peter Brant and Mr. Joseph Allen.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data is derived from the audited financial
statements of the Company for the years ended December 31, 1998, 1999, 2000,
2001 and 2002, for which the statements of operations are included elsewhere
herein for the years ended December 31, 2000, 2001 and 2002.
Years Ended December 31,
--------------------------------------------------------------
1998 1999 2000 2001 2002
(Dollars in Thousands, Except Tonnes Produced)
Income Statement Data:
Sales $128,112 $110,231 $118,629 $117,845 $104,491
------- ------- ------- ------- -------
Cost of sales 100,570 101,621 103,961 108,509 109,252
------- ------- ------- ------- -------
Gross profit (loss) 27,542 8,610 14,668 9,336 (4,761)
Selling, general & administrative:
Management fee to Brant-Allen 3,666 3,110 1,653 1,120 984
Other direct 536 394 182 965 209
------- ------- ------- ------- -------
Income (loss) from operations 23,340 5,106 12,833 7,251 (5,954)
------- ------- ------- ------- -------
Other income (expense):
Interest income 201 149 144 103 37
Interest expense (18,892) (17,097) (14,192) (13,076) (12,736)
Other income (expense) -- 863 84 -- (250)
------- ------- ------- ------- -------
Total other expense (18,691) (16,085) (13,964) (12,973) (12,949)
------- ------- ------- ------- -------
Income (Loss) before $4,649 $(10,979) $(1,131) (5,722) (18,903)
extraordinary item
Extraordinary item -- (1,006) -- -- --
------- ------- ------- ------- -------
Net income (loss) $4,649 $(11,985) $(1,131) $(5,722) $(18,903)
====== ======== ======= ======= ========
7
Years Ended December 31,
------------------------------------------------------------------
1998 1999 2000 2001 2002
(Dollars in Thousands, Except Ratios and Tonnes Produced)
Summary cash flow information:
Net cash provided by (used in)
operating activities $20,623 $2,547 $9,609 $16,691 $(10,921)
Net cash used in investing
Activities (7,394) (265) (2,704) (13,877) (2,403)
Net cash provided by (used in)
financing activities (12,451) (3,431) (7,203) (2,610) (13,324)
Depreciation 10,033 10,615 10,886 11,360 11,912
Depletion 34 31 -- -- 50
Capital expenditures 7,544 3,009 2,750 13,877 2,403
Saleable tonnes produced 222,668 226,249 219,161 212,575 234,243
Noncash portion of management fee 2,661 2,073 527 -- --
As of December 31,
------------------
1998 1999 2000 2001 2002
Balance Sheet Data:
Cash and short-term investments $2,131 $981 $682 $886 $562
Working capital (2) 17,375 15,449 17,386 (24,947) 12,019
Property, plant and equipment, net 190,777 181,059 172,718 175,033 165,342
Total indebtedness (1) 184,946 138,291 133,102 132,444 145,444
Total assets 229,251 214,587 206,801 203,409 193,811
Total partners' equity/member's interest 32,567 65,879 63,262 55,587 36,684
(1) Total indebtedness is defined as long-term debt and long-term purchase
obligations and current portions thereof.
(2) The Company was not in compliance with certain financial covenants under the
Bank Credit Facilities at December 31, 2001. As a result $32.4 million of debt
was reclassed to current liabilities.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with "Item 6. Selected Financial Data"
and the financial statements of the Company and related notes thereto included
elsewhere in this report.
The Company manufactures and is dependent on one product, newsprint, which is
used in general printing, the newspaper publishing industry and for advertising
circulars. Accordingly, demand for newsprint fluctuates with the economy,
newspaper circulation and purchases of advertising lineage which significantly
impacts the Company's selling price of newsprint and, therefore, its revenues
and profitability. In addition, variation in the balance between supply and
demand as a result of global capacity additions have an increasing impact on
both selling prices and inventory levels in the North American markets. Capacity
is typically added in large blocks because of the scale of new newsprint
machines.
As a result, the newsprint market is highly cyclical, depending on changes in
global supply, demand and inventory levels. These factors significantly impact
the Company's sales volume and newsprint prices and, therefore, the Company's
revenues and profitability. Given the commodity nature of newsprint, the
Company, like other suppliers to this market, has little influence over the
timing and extent of price changes. Sales are recognized at the time title and
risk of loss transfers to the customer, which generally occurs at the point of
shipment from the Mill. However, significant fluctuations in revenue can and do
occur as a result of the timing of shipments caused by increases and decreases
in Mill inventory levels.
8
Newsprint prices have been extremely volatile over the past five years. During
1998, newsprint prices decreased from $582 per tonne in the first quarter to
$573 per tonne in the fourth quarter. During 1999, newsprint prices averaged
$495 per tonne and ranged from high of $545 per tonne in the first quarter to
low of $485 per tonne in the fourth quarter. During 2000, newsprint prices
averaged $538 per tonne and ranged from a low of $492 per tonne in January 2000
to $585 per tonne in December 2000. During 2001, newsprint prices averaged $559
per tonne and ranged from a high of $592 per tonne in the second quarter to a
low of $500 per tonne in the fourth quarter. During 2002, newsprint prices
averaged $441 per tonne and ranged from a high of $463 per tonne in the fourth
quarter to a low of $426 per tonne in the second quarter. In February 2003
newsprint prices averaged $452 per tonne.
The table below summarizes the annual volumes and selling prices of the
Company's newsprint during the periods indicated below:
Years Ended December 31,
------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
TONNES SOLD 221,700 222,574 220,389 210,795 236,986
AVERAGE SELLING PRICE $578 $495 $538 $559 $441
The Company's primary cost components consist of raw materials (wood, ONP, OMG,
and chemicals), electrical energy, direct labor and certain fixed costs. Fixed
costs consist of indirect labor and other plant related costs including
maintenance expenses and mill overhead.
For the year ended December 31, 2002, raw materials, which are subject to
significant price fluctuations based on supply and demand, represented 29.9% of
the total cost of manufacturing. Electrical energy represented 21.5% and direct
and indirect labor represented 19.7% of total cost of manufacturing. On an
average per tonne basis electricity costs decreased 7.0% from 2001 to 2002. The
Company currently uses a raw material mix of 67% TMP, and 33% recycled fiber in
its production process.
RESULTS OF OPERATIONS
2002 COMPARED TO 2001
Net sales decreased by $13.3 million, or 11.3%, to $104.5 million in 2002 from
$117.8 million in 2001. The decrease was attributable to a 21.1% decrease in
average net selling price for the Company's products offset in part by a 12.4%
increase in sales volumes to approximately 236,900 tonnes in 2002, from
approximately 210,800 tonnes in 2001. The Company's net selling price for
newsprint decreased to an average of $441 per tonne in 2002 from an average net
selling price of $559 per tonne in 2001.
Cost of sales increased by $0.8 million, or 0.7%, to $109.3 million in 2002 from
$108.5 million in 2001. This small increase was attributable primarily to the
12.4% increase in sales volume, as mentioned above, offset entirely by a 9.9%
decrease in unit manufacturing costs per tonne. The unit manufacturing cost
decreased to $436 per metric tonne in 2002 from $484 per tonne in 2001. The $48
per metric tonne decrease was primarily due to a 25.2% decrease in total
chemical costs, a 9.9% decrease in total direct costs (primarily fuel and
electricity) and a 15.2 % decrease in total departmental costs (labor and
maintenance costs). Cost of sales as a percentage of net sales increased to
104.6% in 2002 from 92.1% in 2001, due to the decrease in newsprint selling
prices offset by the decrease in the unit costs of manufacturing as noted above.
The Company's selling, general and administrative expenses decreased by $0.8
million, or 40.0%, to $1.2 million in 2002 from $2.0 million in 2001. This
decrease was primarily attributable to the elimination of a non-recurring bad
debt write-off of $0.6 million in 2001.
As a result of the above factors, income from operations decreased by $13.3
million to a loss of $6.0 million in 2002 from income of $7.3 million in 2001.
9
The Company's interest expense decreased by $0.4 million, or 3.1%, to $12.7
million in 2002 from $13.1 million in 2001, due to reductions in interest rates
offset in part by additional borrowing on the Company's Revolving Credit
Facility.
The Company's other income including interest income decreased by $0.3 million,
to an expense of $0.2 million in 2002 from income of $0.1 million in 2001. Due
almost entirely to the insurance deductible cost resulting from a December 2002
fire in the Company's recycling facility.
As a result of the above factors, the Company reported a net loss of $18.9
million in 2002 compared to a net loss of $5.7 million in 2001.
2001 COMPARED TO 2000
Net sales decreased by $0.8 million, or 0.7%, to $117.8 million in 2001 from
$118.6 million in 2000. The decrease was attributable to a 4.4% decrease in
sales volumes to approximately 210,800 tonnes in 2001, from approximately
220,400 tonnes in 2000 offset by a 3.9% increase in average net selling prices
for the Company's products. The Company's net selling price for newsprint
increased to an average of $559 per tonne in 2001 from an average net selling
price of $538 per tonne in 2000.
Cost of sales increased by $4.6 million, or 4.4%, to $108.5 million in 2001 from
$103.9 million in 2000. This increase was attributable primarily to a 9.6%
increase in unit manufacturing costs per tonne, offset in part by the 4.4%
decrease in sales volume, as mentioned above. The increase in unit manufacturing
cost per tonne was a result of a 39.9% increase in electrical costs and a
shutdown of manufacturing operations for major maintenance in late October and
early November for fourteen days, offset by a 20.4% decrease in fiber costs
primarily due to decreased prices for ONP and decreased use of kraft pulp. Cost
of sales as a percentage of net sales increased to 92.1% in 2001 from 87.6% in
2000, due to the increase in unit costs of manufacturing offset by the net
increase in newsprint selling prices as noted above.
The Company's selling, general and administrative expenses increased by $0.2
million, or 11.1%, to $2.0 million in 2001 from $1.8 million in 2000. This
increase was attributable to a bad debt write-off of $0.6 million offset by the
reduction in the management fee to Brant-Allen. Effective April 1, 2000 the
management fee to Brant-Allen for administrative services was reduced from 3% to
1%.
As a result of the above factors, income from operations decreased by $5.6
million to $7.3 million in 2001 from $12.9 million in 2000.
The Company's interest expense decreased by $1.1 million, or 7.8%, to $13.1
million in 2001 from $14.2 million in 2000, due to reductions in interest rates
and repayments on the Company's Term Loan Facility.
The Company's other income including interest income decreased by $0.1 million,
to $0.1 million in 2001 from $0.2 million in 2000 due to a gain in 2000 from the
demutualization of an insurance company not repeated in 2001.
As a result of the above factors, the Company reported a net loss of $5.7
million in 2001 compared to a net loss of $1.1 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
The Company's principal liquidity requirements have been for working capital,
capital expenditures and debt service under the Company's loan agreements. These
requirements have been met through cash flows from operations and/or loans under
the Company's Revolving Credit Facility and through subordinated loans from
Brant-Allen.
10
The Company's cash and short-term investments at December 31, 2002 were
approximately $0.6 million, representing a decrease of approximately $0.3
million from $0.9 million at December 31, 2001. Net cash used by operating
activities was $10.9 million for the year ended December 31, 2002. Net cash
provided by financing activities (additional borrowings) was $13.0 million
consisting of $8.0 million drawn under the Revolving Credit Facility and $5.0
million provided as a Subordinated Loan by Brant-Allen. Cash used in investing
activities (capital expenditures) was $2.4 million for the year ended December
31, 2002. While the Company anticipates that cash provided from operations in
the future, combined with borrowings under the Revolving Credit Facility and
Brant-Allen's guarantee to provide up to an additional $10.0 million of
subordinated loans as needed will be sufficient to pay its operating expenses,
satisfy debt-service obligations and fund capital expenditures, current market
conditions have resulted in extreme financial constraints.
For the year ended December 31, 2002, the Company's cash provided (used) by
operating activities decreased by $27.6 million to ($10.9) million from $16.7
million for the year ended December 31, 2001, primarily due to decreased selling
prices, changes in working capital and offset in part by lower cost of sales
resulting in a net loss for the year ended December 31, 2002 of $18.9 million
compared to net loss of $5.7 million for the year ended December 31, 2001. As a
result, at December 31, 2001 the Company did not meet several Financial
Covenants under the Bank Credit Facilities. In December of 2002, in connection
with Brant-Allen's guarantee to provide the additional $10.0 million in
subordinated loans ($5.0 million of which has been placed in escrow for that
purpose) all past defaults were waived, access to availability under the
Revolving Credit Facility was reopened and financial covenants related to the
Term Loan Facility and the Revolving Credit Facility were modified
The Company incurred capital expenditures of $2.4 million and $13.9 million
during the years ended December 31, 2002 and 2001, respectively. The large
increase in capital expenditures in 2001 reflects the replacement of machinery
and equipment as well as payments made in anticipation of installing new
equipment on the Company's paper machine. Management anticipates that the
Company's total capital expenditures for the years 2003 and 2004 will primarily
relate to existing capital projects in progress and maintenance of its newsprint
facilities.
At December 31, 2002, the Company had approximately $145.4 million of
indebtedness, consisting of borrowings of $23.0 million under the Revolving
Credit Facility, $17.4 million under the Term Loan Facility, $5.0 million under
a Subordinated intercompany note and $100.0 million under the Notes. In
addition, $1.3 million was available in unused borrowing capacity under the
Revolving Credit Facility and up to $10.0 million was available under the
Brant-Allen Guarantee.
As shown in the accompanying comparative financial statements the Company
incurred net losses of $18,902,856, $5,722,211 and $1,130,703 for the years
ended December 31, 2002, 2001 and 2000, respectively, and had an accumulated
deficit of $42,896,674 at December 31, 2002. Management also anticipates further
losses for the year ending December 31, 2003 due to the current and near-term
anticipated selling prices for newsprint. The Company has approximately $1.3
million available under its Revolving Credit Facility to fund cash requirements
and up to $10.0 million was available under the Brant-Allen Guarantee. Based on
current market conditions, management anticipates being able to meet liquidity
requirements for 2003; however there exists a range of reasonably possible
outcomes which could significantly impact the ability to achieve the
aforementioned.
The Company's future operating performance and ability to service the Bank
Credit Facilities and the Notes and repay other indebtedness of the Company will
be subject to future economic conditions and the financial success of the
Company's business and other factors, many of which are not in the Company's
control, including changes in market prices for newsprint, fiber costs,
electrical rates and future government requirements as to environmental
discharges and recycling content in newsprint. The Company currently anticipates
that in order to pay the principal amount of the Notes at maturity, the Company
will be required to refinance such Notes or adopt one or more alternatives,
including reducing or delaying capital expenditures or seeking additional equity
capital or other additional financing. None of the affiliates of the Company
will be required to make any capital contributions or other payments to the
Company with respect to the Issuer's obligations on the Notes with the exception
of the Brant-Allen Guarantee. 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.
On March 27, 2003, the Company amended the Revolving Credit Facility to extend
the due date to January 4, 2004. As a result the debt was reclassified to
long-term as of December 31, 2002.
11
RESTRICTIVE DEBT COVENANTS
The indenture dated December 1, 1997 between the Company, Bear Island Finance
Company II, Soucy Inc., Bear Island Timberlands Company, L.L.C. ("Timberlands"),
Brant-Allen and Crestar Bank, as trustee (the "Indenture"), restricts the
ability of the Company and its subsidiaries to, among other things, incur
additional indebtedness, incur liens, pay dividends or make certain other
restricted payments or investments, consummate certain asset sales, enter into
certain transactions with affiliates, impose restrictions on the ability of a
subsidiary to pay dividends or make certain payments to the Company, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of the assets of the Company. In
addition, the Bank Credit Facilities contain other and more restrictive
covenants and prohibit the Company from prepaying the Notes, except in certain
circumstances. The Bank Credit Facilities also require the Company to maintain
specified financial ratios and satisfy certain financial tests. The Company was
deficient under several Financial Covenants under the Bank Credit Facilities at
December 31, 2001. These deficiencies were permanently waived in connection with
the aforementioned December 2002 Second Amendment to the Company's Bank Credit
Facilities.
ENVIRONMENTAL EXPENDITURES
The operation of the Mill is subject to extensive and changing environmental
regulation by federal, state and local authorities, including those requirements
that regulate discharges into the environment, waste management, and remediation
of environmental contamination. Environmental permits are required for the
operation of the Company's businesses, and are subject to revocation,
modification and renewal. Governmental authorities have the power to enforce
compliance with environmental requirements and violators are subject to fines,
injunctions, civil penalties and criminal fines. Third parties may also have the
right to sue to enforce compliance with such regulations.
The Company has in the past made significant capital expenditures to comply with
current federal, state and local environmental laws and regulations. The Company
believes that it is in substantial compliance with such laws and regulations,
although no assurance can be given that it will not incur material liabilities
and costs with respect to such laws and regulations in the future. Although the
Company does not currently believe that it will be required to make significant
expenditures for pollution control in the near future, no assurances can be
given that future developments, such as the potential for more stringent
environmental standards or stricter enforcement of environmental laws, will not
cause the Company to incur such expenditures. The Company anticipates incurring
approximately $95,000 to modify the Mill air discharge permits to facilitate
future Mill upgrades and/or process changes (over and above routine operating
expenditures) over the next two years. Future process changes may also require
various permit modifications and may subject the Mill to additional capital
expenditures.
NEW ACCOUNTING STANDARDS
In April 2002, the FASB issued Statement of Financial Accounting Standards No.
145 ("SFAS 145"), Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. Statement 4 required all gains
and losses from extinguishment of debt to be aggregated and, if material, be
classified as an extraordinary item, net of related income tax effect. Under
SFAS 145, the criteria in APB Opinion 30 will now be used to classify those
gains and losses. The Company will adopt SFAS 145 as of the beginning of fiscal
year 2003, and does not expect it to have a material impact on its financial
statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards No.
146 ("SFAS 146"), Accounting for Costs Associated with Exit or Disposal
Activities. SFAS 146 addresses financial accounting and reporting for costs
associated with exit or disposal activities and nullifies Emerging Issues Task
Force (EITF) Issue No. 94-3, Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring). Under EITF Issue 94-3, a liability for an
exit activity was recognized at the date of an entity's commitment to an exit
plan. SFAS 146 requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002, and is not expected to have a material impact on the Company's financial
statements.
12
In November 2002, the FASB approved FASB Interpretation No. ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN 45 elaborates on the existing
disclosure requirements for most guarantees, including loan guarantees such as
standby letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligations it assumes under that guarantee and must
disclose that information in its interim and annual financial statements. FIN 45
is effective on a prospective basis to guarantees issued or modified after
December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial statements of
interim or annual periods ending after December 15, 2002. We have adopted the
disclosures of this interpretation as of December 31, 2002, and it did not have
a material impact on the Company's financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to various market risk factors such as fluctuations in
interest rates, as well as changes in the cost of raw materials and the selling
price of newsprint. These risk factors can impact results of operations, cash
flows and financial position. The Company manages these risks through regular
operating and financing activities, and when necessary, the use of derivative
financial instruments, such as interest rate swap contracts. These derivative
instruments, when used, are with major financial institutions and are not for
speculative or trading purposes.
The following analysis presents the effect on the Company's earnings, cash flows
and financial position as if the hypothetical changes in market risk factors
occurred on December 31, 2002. Only the potential impacts of these hypothetical
assumptions are analyzed. The analysis does not consider other possible effects
that could impact the Company's business.
At year-end 2002, the Company carried $145.4 million of outstanding debt on its
books, with $40.4 million of that total held at variable interest rates. Holding
all other variables constant, if interest rates hypothetically increased by 10%,
the impact on earnings and cash flow would be an increase to interest expense of
$56,000. Conversely, if interest rates hypothetically decreased by 10%, with all
other variables held constant, the change in interest expense would be a
decrease to interest expense of $56,000.
The Company is exposed to the risk of increasing raw material prices, which
could impact profit margins. When raw material costs increase, the Company
generally is unable to increase selling prices. Therefore, the Company expects
the impact of increasing raw material costs to result in reductions in the
results of its operations or cash flows. Major raw material components include
wood, ONP, OMG and chemicals.
ITEM 8. FINANCIAL STATEMENTS.
Certain statements in the financial statements and elsewhere in this report may
constitute forward-looking statements. Because these forward-looking statements
include risks and uncertainties, actual results may differ materially from those
expressed in or implied by the statements. Factors that could cause actual
results to differ include, among other things: increased domestic or foreign
competition; increases in capacity through construction of new mills or
conversion of older facilities to produce competitive products; variations in
demand for the Company's products; changes in the cost for or the availability
of raw materials, particularly market pulp, ONP, OMG, wood and electricity; the
cost of compliance with new environmental laws and regulations; the pace of
acquisitions; cost structure improvements; the success of new initiatives;
integration of systems; the success of computer-based system enhancements; and
general economic conditions.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
13
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 55 Co-Chairman of the Board of Directors
and Chief Executive Officer of the
Company and Timberlands; Co-Chairman,
and Chief Executive Officer of
Brant-Allen; and Chief Executive
Officer of Soucy Inc.
Joseph Allen 61 President, Co-Chairman of the Board
of Directors, Chief Operating Officer
and Secretary of the Company and
Timberlands; Co-Chairman and Chief
Operating Officer of Brant-Allen; and
Chief Operating Officer of Soucy Inc.
Edward D. Sherrick 57 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 65 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 63 Director
Robert Flug 55 Director
The following table sets forth certain information about the Company's key
employees:
NAME AGE POSITION
- ---- --- --------
Jacques Beauchesne 58 Mill Manager
Robert Jackson 63 Human Resources Manager
Seth Hobart 50 Financial Manager
David Crooks 44 Manager of Engineering, Maintenance
and Government Affairs of the Company
PETER M. BRANT. Mr. Brant is the Co-Chairman of the Board of Directors and Chief
Executive Officer of the Company and Timberlands, the Co-Chairman and Chief
Executive Officer of Brant-Allen and Chief Executive Officer of Soucy Inc. Mr.
Brant jointly owns Brant-Allen with Mr. Joseph Allen. Mr. Brant has served as an
executive officer of the Company since its inception and has served as executive
officer of Brant-Allen for over 30 years.
JOSEPH ALLEN. Mr. Allen is the President, and Chief Operating Officer and
Secretary of the Company and Timberlands, the President and Chief Operating
Officer of Brant-Allen and Chief Operating Officer of Soucy Inc. Mr. Allen
jointly owns Brant-Allen with Mr. Brant. Mr. Allen has served as an executive
officer of the Company since its inception and has served as executive officer
of Brant-Allen for over 30 years.
14
EDWARD D. SHERRICK. Mr. Sherrick is Vice President of Finance and a Director of
the Company, Vice President of Finance of Timberlands, Senior Vice President and
Chief Financial Officer of Brant-Allen and Vice President of Soucy Inc. He has
been with the Company and Brant-Allen for over 25 years.
THOMAS E. ARMSTRONG. Mr. Armstrong is Vice President of Sales and Manufacturing
and a Director of the Company, Vice President of Sales and Manufacturing of
Timberlands, Executive Vice President of Brant-Allen and Vice President of Soucy
Inc. He has been an executive officer of the Company and Brant-Allen for over 30
years and has been involved in the sale and marketing of the Company's newsprint
as well as overseeing mill operations.
MICHAEL CONROY. Mr. Conroy was appointed a Director of the Company in November
1997. Mr. Conroy is an independent consultant. Mr. Conroy was the President of
the International Herald Tribune Company US, Inc. (the "Herald Tribune") up to
December 1998. He had been with that company for 12 years. Before joining the
Herald Tribune, he was publisher at Newsweek Atlantic.
ROBERT FLUG. Mr. Flug was appointed a Director of the Company in November 1997.
Mr. Flug has been the President and Chief Executive Officer of S.I. Danielle,
Inc., a junior apparel manufacturer, since 1987. Mr. Flug is also a director at
Take-Two Interactive Software, Inc.
JACQUES BEAUCHESNE. Mr. Beauchesne joined the Company in February 2001 as Mill
Manager. From 1993 to 2000 Mr. Beauchesne was with Weavexx Corporation as Vice
President Sales - North America.
ROBERT JACKSON. Mr. Jackson has been the Human Resources Manager of the Company
since 1979.
SETH HOBART. Mr. Hobart has been the Financial Manager of the Company since
January 2000. From November 1979 to January 2000 Mr. Hobart was Controller of
the Company. He has been with the Company since 1976.
DAVID CROOKS. Mr. Crooks was named the Manager of Engineering, Mill Services and
Environmental Affairs of the Company in January 2002. Prior to his latest
promotion Mr. Crooks was Manager of Mill Services and Environmental Affairs of
the Company and has been with the Company since June 2000. From June 1996 to
June 2000 Mr. Crooks was with J W Fergusson & Sons as Plant Manager.
ITEM 11. EXECUTIVE COMPENSATION.
No executive officer of Brant-Allen was paid any compensation by the Company
between 2000 and 2002. All officers of the Company who also serve as officers of
Brant-Allen have received and will continue to receive compensation from and,
except as noted in the following paragraph, participate in employee benefit
plans and arrangements sponsored by Brant-Allen, including, but not limited to,
employee insurance, long term disabilities, medical and other plans which are
maintained by Brant-Allen or which may be established by Brant-Allen in the
future except as noted in the following paragraph, these officers are not
entitled to participate in the Company's employee benefit plans and
arrangements.
Effective as of March 15, 1999, the Brant-Allen Industries, Inc. Incentive
Profit-Sharing Plan was merged with and into the Bear Island Paper Company, L.P.
Thrift Plan. Brant-Allen also adopted both the Company's Thrift Plan effective
for employee 401(k) contributions and employer matching contributions as of
April 1, 1999 and for other contributions as of January 1, 1999 and the
Company's Retirement Plan effective as of January 1, 1999. Brant-Allen
contributes the amount of employer contributions due on behalf of its employees
under such plans.
Outside directors of the Company are paid $2,500 plus expenses per board meeting
attended.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Brant-Allen beneficially owns all the equity of each of the Company, Timberlands
and Soucy Inc. Brant-Allen, in turn, is jointly owned by Mr. Peter Brant and Mr.
Joseph Allen.
15
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
RELATIONSHIP WITH BRANT-ALLEN
Brant-Allen owns all of the equity in the Company, Timberlands and Soucy Inc.
Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant and
Mr. Joseph Allen. Mr. Brant serves as Brant-Allen's Chairman of the Board and
Chief Executive Officer and also as Chairman of the Board of Directors and Chief
Executive Officer of the Company and Timberlands and Chief Executive Officer of
Soucy Inc. Mr. Allen serves as Brant-Allen's President and Chief Operating
Officer and also as President and Chief Operating Officer of the Company and
Timberlands and Chief Operating Officer of Soucy Inc. The other officers of
Brant-Allen, Mr. Edward Sherrick and Mr. Thomas Armstrong, are also directors of
the Company.
Brant-Allen in May of 2002 provided $5.0 million as a Subordinated Loan to the
Company and in addition has guaranteed to provide an additional $10.0 million of
subordinated loans as needed.
Brant-Allen may engage in a variety of transactions with the Company,
Timberlands and/or Soucy. These transactions are expected to include the sale
and marketing of the newsprint produced by the Company and Soucy and the
provision of management and other services described below to the Company and
Soucy.
MANAGEMENT SERVICES AGREEMENT
Concurrently with the closing of the Acquisition, the Company entered into the
Management Services Agreement with Brant-Allen. Pursuant to the Management
Services Agreement, Brant-Allen will continue to provide the Company with senior
management treasury, financial and administrative (including marketing and
sales) services. For these services, Brant-Allen will continue to be entitled to
a monthly fee, payable in advance, calculated at the rate of 3% of the Company's
net sales less transportation costs, of which since December 1, 1997, as a
result of the Company's debt agreements, one third is payable in cash with the
remainder contributed to the Company's capital. Effective April 1, 2000 the
Management Service Agreement was amended to reduce the management fees payable
to Brant-Allen to 1% of the Company's net sales less transportation costs of
which 100% is payable in cash. This fee amounted to $984,000, $1,120,000 and
$1,653,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
See the accompanying financial statements of the Company. The Management
Services Agreement has a term of five years and is automatically renewable for
successive five-year terms unless terminated earlier by either party giving two
years written notice. The Management Services Agreement contains customary
indemnification provisions.
ARRANGEMENTS WITH TIMBERLANDS
The Company shares employees, facilities and recordkeeping systems with
Timberlands, and the Company charges Timberlands monthly for its share of these
costs. Accordingly, these shared employees receive benefits under the Company's
defined contribution retirement plan and are eligible to participate in the
Company's thrift plan. Costs associated with these plans are reimbursed monthly
by Timberlands. Amounts paid to the Company for shared costs, which are included
in selling, general and administrative expenses, approximated $8,000, $16,000
and $170,000, during the years ended December 31, 2002, 2001 and 2000,
respectively. See the accompanying financial statements of the Company.
ITEM 14. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Chief Executive Officer
and Chief Financial Officer of Bear Island Paper Company, L.L.C. (the "Company")
have evaluated the effectiveness of the Company's disclosure controls and
procedures (as such term is defined in Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of a date
within 90 days prior to the filing date of this annual report (the Evaluation
Date"). Based on such evaluation, such officers have concluded that, as of the
Evaluation Date, the Company's disclosure controls and procedures are effective
in alerting them on a timely basis to material information relating to the
Company required to be included in the Company's reports filed or submitted
under the Exchange Act.
Changes in Internal Controls. Since the Evaluation Date, there have not been any
significant changes in the Company's internal controls or in other factors that
could significant affect such controls.
16
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) Exhibits and Financial Statements
(1) See Index to Financial Statements and Schedule of Bear Island Paper
Company, L.L.C. on page 21.
(2) Financial Statement Schedule of Bear Island Paper Company, L.L.C.
All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable and therefore
have been omitted.
(3) Exhibits
2.1 The Partnership Interest Sale Agreement, dated as of December 1,
1997, by and among Dow Jones Virginia Company Inc., Newsprint, Inc.
and Brant-Allen.*
3.1 Articles of Organization of the Company.*
3.2 Operating Agreement of the Company.*
4.1 Indenture, dated as of December 1, 1997, among the Registrants,
Timberlands, Soucy Inc. and Crestar Bank, as Trustee, relating to the
Notes.*
4.2 Registration Rights Agreement, dated December 1, 1997, among the
Registrants and TD Securities (USA), Inc. and Salomon Brothers Inc, as
Initial Purchasers.*
4.3 Intercreditor Agreement, dated as of December 1, 1997, among the
Registrants, Brant-Allen, Toronto Dominion (Texas), Inc. and Crestar
Bank.*
4.4 Deed of Trust dated as of December 1, 1997, by and between the
Company and Crestar Bank, as Trustee. *
4.5 Company Pledge and Security Agreement, dated as of December 1,
1997, by and between the Company and Crestar Bank, as Trustee.*
4.6 Hypotech Agreement, dated as of December 1, 1997, by and between
Brant-Allen and Crestar Bank, as Trustee.*
4.7 Subordinated Intercompany Note, dated as of May 31, 2002, by and
between Bear Island Paper Company, L.L.C. and Brant-Allen Industries,
Inc.
17
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.*
10.1a First Amendment to the Bank Credit Agreement, dated as of May
29, 2002.
10.1b Second Amendment to the Bank Credit Agreement, dated as of
December 13, 2002.
10.1c Third Amendment to the Bank Credit Agreement, dated as of March
27, 2003.
10.2 The Management Services Agreement, dated as of December 1, 1997,
by and among the Company and Brant-Allen.*
10.3 The Wood Supply Agreement, dated as of December 1, 1997, by and
among the Company and Timberlands.*
10.4 The Newsprint Purchase Agreement, dated as of May 19, 1978, by
and between the Company and the Dow Jones & Co., Inc.*
10.4a Amendments to Newsprint Purchase Agreement, dated as of April 1,
1987, December 10, 1991, August 10, 1993 and April 22, 1996.
10.5 The Newsprint Purchase Agreement, dated as of May 19, 1978, by
and between the Company and The Washington Post.*
10.5a Amendments to Newsprint Purchase Agreement, dated as of December
10, 1991, August 10, 1993 and April 22, 1996.
21.1 Subsidiaries of the Company.*
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
* 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.
18
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 31, 2003
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 31, 2003
- ----------------------- Chief Executive Officer
Peter M. Brant
Principal Financial and Accounting Officer
/s/ Joseph Allen President, Co-Chairman of the Board of March 31, 2003
- ----------------------- Directors, Chief Operating Officer and
Joseph Allen Secretary
/s/ Edward D. Sherrick Vice President of Finance and Director of March 31, 2003
- ----------------------- the Board of Directors
Edward D. Sherrick
/s/ Thomas E. Armstrong Vice President of Sales and Manufacturing March 31, 2003
- ----------------------- and Director of the Board of Directors
Thomas E. Armstrong
/s/ Michael Conroy Director of the Board of Directors March 31, 2003
- -----------------------
Michael Conroy
/s/ Robert Flug Director of the Board of Directors March 31, 2003
- -----------------------
Robert Flug
19
CERTIFICATIONS
I, Peter M. Brant, certify that:
1. I have reviewed this annual report on Form 10-K of Bear Island Paper
Company, L.L.C. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
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 31, 2003
20
I, Joseph Allen, certify that:
1. I have reviewed this annual report on Form 10-K of Bear Island Paper
Company, L.L.C. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4 The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5 The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Joseph Allen
---------------------------------------
Name: Joseph Allen
Title: President, Co-Chairman of the Board
of Directors and Chief Operating Officer
and Secretary
Date: March 31, 2003
21
I, Edward D. Sherrick, certify that:
1. I have reviewed this annual report on Form 10-K of Bear Island Paper
Company, L.L.C. (the "Registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects, the financial condition, results of operations and cash flows of
the Registrant as of, and for, the periods presented in this annual report;
4. The Registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the Registrant and have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the Registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of the Registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the Registrant's ability to
record, process, summarize and report financial data and have
identified for the Registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
6. The Registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Edward D. Sherrick
---------------------------------------
Name: Edward D. Sherrick
Title: Vice President of Finance
and Director of the Board of Directors
Date: March 31, 2003
22
INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND
PAPER COMPANY, L.L.C.
BEAR ISLAND PAPER COMPANY, L.L.C.
Balance Sheets--December 31, 2002 and 2001
Statements of Operations--Years ended December 31, 2002, 2001 and 2000
Statements of Changes in Member's Interest--Years ended December 31,
2002, 2001 and 2000
Statements of Cash Flows--Years ended December 31, 2002, 2001 and 2000
Schedule II Valuation and Qualifying Accounts
23
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited LIABILITY CORPORATION)
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2002
AND 2001
Report of Independent Accountants
To the Board of Directors and Member of
Bear Island Paper Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements of
operations, of changes in equity and of cash flows present fairly, in all
material respects, the financial position of Bear Island Paper Company, L.L.C.
(a Virginia limited liability corporation) (the "Company") at December 31, 2002
and 2001, and the results of its operations and its cash flows for the three
years ended December 31, 2002 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
The Company is a member of a group of affiliated Companies, and, as discussed in
Notes 4 and 7 to the financial statements, the Company had significant
related-party transactions with members of the group. Because of these
related-party transactions, it is possible that the terms are not the same as
those that would result from transactions among wholly unrelated parties.
PRICEWATERHOUSECOOPERS LLP
January 31, 2003, except for Note 11, as
to which the date is March 27, 2003
1
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
BALANCE SHEETS
December 31, 2002 and 2001
December 31,
----------------------------------------
ASSETS 2002 2001
Cash and short-term investments $ 562,173 $ 886,300
Accounts receivable:
Trade, less allowance for doubtful accounts of $67,778 and
$734,399 in 2002 and 2001, respectively 11,671,300 8,026,839
Affiliates 381,326 556,430
Other 148,698 79,563
Inventories, net 9,970,721 12,665,519
Other current assets 967,944 659,848
------------------- -------------------
Total current assets 23,702,162 22,874,499
------------------- -------------------
Property, plant and equipment, at cost 220,840,724 218,595,176
Less accumulated depreciation (55,498,754) (43,562,514)
------------------- -------------------
Net property, plant and equipment 165,341,970 175,032,662
------------------- -------------------
Deferred financing costs, net of accumulated amortization of
$3,251,305 and $2,516,442 in 2002 and 2001, respectively 4,767,201 5,502,064
------------------- -------------------
$193,811,333 $203,409,225
=================== ===================
LIABILITIES
Accounts payable and accrued expenses $ 8,627,114 $ 13,573,664
Due to affiliates 2,108,583 870,179
Interest payable 947,115 934,005
Debt - 32,444,121
------------------- -------------------
Total current liabilities 11,682,812 47,821,969
------------------- -------------------
Related party debt 5,000,000 -
Long-term debt 140,444,121 100,000,000
------------------- -------------------
145,444,121 100,000,000
------------------- -------------------
157,126,933 147,821,969
------------------- -------------------
EQUITY
Member's interest 79,581,074 79,581,074
Accumulated deficit (42,896,674) (23,993,818)
------------------- -------------------
Total member's interest 36,684,400 55,587,256
------------------- -------------------
$193,811,333 $203,409,225
=================== ===================
The accompanying notes are an integral part of the financial statements.
2
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation)
STATEMENTS OF OPERATIONS
for the years ended December 31, 2002, 2001 and 2000
2002 2001 2000
Sales $104,491,417 $117,845,511 $ 118,628,761
Cost of sales 109,251,932 108,509,114 103,960,697
------------------ ------------------ -----------------
Gross profit (loss) (4,760,515) 9,336,397 14,668,064
Selling, general and administrative expenses:
Management fees to affiliate 983,549 1,119,872 1,653,218
Other direct 209,594 965,325 181,974
------------------ ------------------ -----------------
Income (loss) from operations (5,953,658) 7,251,200 12,832,872
------------------ ------------------ -----------------
Other income (expense):
Interest income 36,943 103,017 144,346
Interest expense (12,736,141) (13,076,428) (14,192,258)
Other income (expense) (250,000) - 84,337
------------------ ------------------ -----------------
(12,949,198) (12,973,411) (13,963,575)
------------------ ------------------ -----------------
Net loss $(18,902,856) $ (5,722,211) $ (1,130,703)
================== ================== =================
The accompanying notes are an integral part of the financial statements.
3
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation) STATEMENTS OF CHANGES IN EQUITY for
the years ended December 31, 2002, 2001 and 2000
Retained
Earnings
Member's (Accumulated
Interest Deficit) Total
Balance, December 31, 1999 $77,553,705 $ (11,674,715) $65,878,990
Management fee payable contributed to capital
by parent 527,369 - 527,369
Capital contributions 1,500,000 - 1,500,000
Tax distributions to parent - (3,514,045) (3,514,045)
Net loss - (1,130,703) (1,130,703)
----------------- ----------------- -----------------
Balance, December 31, 2000 79,581,074 (16,319,463) 63,261,611
Tax distributions to parent - (1,952,144) (1,952,144)
Net loss - (5,722,211) (5,722,211)
----------------- ----------------- -----------------
Balance, December 31, 2001 79,581,074 (23,993,818) 55,587,256
Net loss - (18,902,856) (18,902,856)
----------------- ----------------- -----------------
Balance, December 31, 2002 $79,581,074 $ (42,896,674) $36,684,400
================= ================= =================
The accompanying notes are an integral part of the financial statements.
4
BEAR ISLAND PAPER COMPANY, L.L.C.
(A Virginia Limited Liability Corporation) STATEMENTS OF CASH FLOWS for the
years ended December 31, 2002, 2001 and 2000
2002 2001 2000
Operating activities:
Net loss $(18,902,856) $ (5,722,211) $ (1,130,703)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation 11,912,484 11,359,628 10,885,622
Depletion 49,726 - -
Amortization of deferred financing costs 734,863 663,602 665,228
Increase in allowance for obsolescence 120,425 180,000 116,500
Loss on disposal/writedown of property, plant and
equipment 131,584 202,797 160,400
Changes in operating assets and liabilities:
Accounts receivable (3,538,492) 5,429,053 (1,731,068)
Inventories 2,574,373 (194,441) 207,704
Other current assets (308,096) (167,826) (112,587)
Accounts payable and accrued expenses (4,946,550) 4,547,287 192,972
Due to affiliate 1,238,404 493,151 365,237
Interest payable 13,110 (100,039) (10,318)
---------------- ---------------- ----------------
Net cash (used in) provided by operating activities (10,921,025) 16,691,001 9,608,987
---------------- ---------------- ----------------
Investing activities:
Purchases of property, plant and equipment (2,403,102) (13,877,237) (2,749,942)
Proceeds from disposition of property, plant and
equipment - - 45,450
---------------- ---------------- ----------------
Net cash used in investing activities (2,403,102) (13,877,237) (2,704,492)
---------------- ---------------- ----------------
Financing activities:
Contributions from parent - - 1,500,000
Tax distributions to parent - (1,952,144) (3,514,045)
Principal payments on long-term debt - (6,064,155) (12,025,000)
Principal payments on long-term purchase obligations - (93,494) (164,320)
Proceeds from issuance of long-term debt 8,000,000 5,500,000 7,000,000
Proceeds from subordinated intercompany note 5,000,000 - -
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities 13,000,000 (2,609,793) (7,203,365)
---------------- ---------------- ----------------
Net increase (decrease) in cash and short-term
investments (324,127) 203,971 (298,870)
Cash and short-term investments, beginning of period 886,300 682,329 981,199
---------------- ---------------- ----------------
Cash and short-term investments, end of period $ 562,173 $ 886,300 $ 682,329
================ ================ ================
Supplemental disclosures of cash flow information:
Cash paid for interest $ 11,924,501 $ 12,512,865 $ 13,537,348
================ ================ ================
Management fee payable contributed to capital by parent $ - $ - $ 527,369
================ ================ ================
The accompanying notes are an integral part of the financial statements.
5
NOTES TO FINANCIAL STATEMENTS
1. Description of Business:
Bear Island Paper Company, L.L.C., a Virginia limited liability
corporation (the "Company"), located in Doswell, Virginia, is a producer
of high quality newsprint suitable for four-color printing whose
customers include leading newspaper publishers in the United States of
America. The Company is a wholly owned subsidiary of Brant-Allen
Industries, Inc. ("Brant-Allen"), a Delaware corporation.
2. Business Conditions and Liquidity:
As shown in the accompanying comparative statements of operations and
balance sheets, the Company incurred net losses of $18,902,856,
$5,722,211 and $1,130,703 for the years ended December 31, 2002, 2001 and
2000, respectively, and had an accumulated deficit of $42,896,674 at
December 31, 2002. The accompanying financial statements have been
prepared on a going concern basis that contemplates the realization of
assets and the satisfaction of liabilities in the normal course of
business.
At December 31, 2001, the Company was not in compliance with certain
financial debt covenants. As a result, some debts previously reported as
long-term were reclassified as current.
At December 31, 2002, the Company had approximately $1.3 million in
available borrowings under its Revolving Credit Facility (see Note 7) to
fund cash requirements. In addition, Brant-Allen has guaranteed to
provide up to $10 million of additional funding to the Company in the
form of additional subordinated noninterest bearing intercompany notes
should it be needed. In partial support of this commitment, Brant-Allen
has placed $5 million in an escrow account (see Note 7). The Company also
has the ability to access approximately $7 million of additional capital
equipment financing through the use of certain leasing options. Based on
current market conditions, management anticipates being able to meet
liquidity requirements for 2003; however, there exists a range of
reasonably possible outcomes which could significantly impact their
ability to achieve the aforementioned.
3. Summary of Significant Accounting Policies:
Cash and Short-Term Investments: Cash and short-term investments include
all cash balances and highly liquid investments. Short-term investments
are stated at cost, which approximates market value. For purposes of the
statements of cash flows, the Company considers all highly liquid
short-term investments purchased with an original maturity of three
months or less to be cash equivalents.
Inventories: Finished goods and raw materials inventories are valued at
the lower of cost or market, with cost determined on the first-in,
first-out ("FIFO") basis. Stores inventories are valued at the lower of
average cost or market and are shown net of an allowance for obsolescence
at December 31, 2002 and 2001 of approximately $1,225,679 and $1,105,254,
respectively.
6
NOTES TO FINANCIAL STATEMENTS, Continued
3. Summary of Significant Accounting Policies, continued:
Property, Plant and Equipment: The costs of major renewals and
betterments are capitalized while the costs of maintenance and repairs
are charged to income as incurred. When properties are sold or retired,
their cost and the related accumulated depreciation or depletion are
eliminated from the accounts and the gain or loss is reflected in income.
The Company capitalizes interest costs as part of the cost of
constructing significant assets. There were no capitalized interest costs
during the years ended December 31, 2002 or 2001.
The carrying value of property, plant and equipment is evaluated whenever
significant events or changes occur that might indicate an impairment
through comparison of the carrying value to total undiscounted cash
flows.
Repair and Maintenance: The Company accrues the annual estimated costs of
planned major maintenance activity over the course of the calendar year.
As actual major maintenance project costs are incurred they are charged
against the accrual. The Company reviews amounts accrued, actual costs
incurred to date and estimated costs to be incurred for major maintenance
items through year end on a monthly basis and adjusts the accrual and
accrual rates accordingly so that the costs of all major maintenance
projects are spread over the calendar year with no accrual balance
remaining at year-end. Routine repair and maintenance costs are expensed
as incurred.
Depreciation and Depletion: Depreciation of plant and equipment is
computed principally on the straight-line basis over the estimated useful
lives of the assets. Lives range from 10 to 50 years for buildings and
improvements, 40 years for recycling facilities, 35 years for tanks, 30
years for specialized building improvements, 25 years for newsprint
manufacturing equipment, and from three to 50 years for other machinery
and equipment. The portion of the cost of timberlands attributed to
standing timber is charged against income as timber is cut and utilized
in the manufacturing process at rates determined annually, based on the
relationship of unamortized timber costs to the estimated volume of
recoverable timber.
Deferred Financing Costs: Costs directly associated with the issuance of
debt have been deferred and are being amortized using the interest method
over the life of the related debt.
Income Taxes: No provision for income taxes is required in the financial
statements since the member is liable for any income tax that may be
payable on the Company's taxable income.
Revenue Recognition: Sales are recognized by the Company at the time
title and risk of loss transfers to the customer, which generally occurs
at the point of shipment of the newsprint to the customer.
Shipping and Handling Expenses: Costs incurred for shipping and handling
expenses for the year ended December 31, 2002, 2001 and 2000 of $6.1
million, $5.9 million and $6 million, respectively, are included in the
cost of sales in the Statement of Operations.
7
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.
Derivatives: The Company records all derivative instruments on the
balance sheet as assets or liabilities, measured at fair market value.
Derivatives that are not hedges are adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of the derivative will either be offset
against the change in fair value of the hedged assets, liabilities or
firm commitments through earnings or recognized in other comprehensive
income until the hedged item is recognized in earnings. The ineffective
portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company did not utilize any derivative
instruments during 2002 or 2001.
Fair Value of Financial Instruments: The fair value of the Company's
long-term debt is estimated using discounted cash flow analyses based on
the incremental borrowing rates currently available to companies with
loans of similar terms and maturity. The fair value of trade receivables
and payables approximates the carrying amount because of the short
maturity of these instruments.
Risks and Uncertainties: Financial instruments which potentially subject
the Company to concentrations of credit risk consist principally of cash,
short-term investments and accounts receivable. The Company's cash
balance is maintained at a major financial institution. Short-term
investments, which consist of U.S. government securities, are with a
high-credit-quality financial institution. Accounts receivable consist
principally of trade accounts receivable resulting primarily from sales
to newspaper publishers. Credit is extended to customers after an
evaluation of creditworthiness. Generally, the Company does not require
collateral or other security from customers for trade accounts
receivable. Substantially all of the Company's customers operate in the
printing sectors, consequently their ability to honor their obligations
are dependent upon the financial strength of the printing and publishing
sectors. The Company's customers are primarily located in the eastern
United States.
In 2001, the Company recorded a $0.6 million bad debt writeoff included
in other direct selling, general and administrative expenses on the
statements of operations.
The Company has five customers whose sales represent a significant
portion of sales. Sales to one of these customers approximated 21%, 11%
and 9% for the years ended December 31, 2002, 2001 and 2000,
respectively. Sales to a second customer approximated 10%, 16% and 13%
for the years ended December 31, 2002, 2001 and 2000, respectively.
Sales to a third customer approximated 22%, 16% and 19% for the years
ended December 31, 2002, 2001 and 2000, respectively. Sales to a fourth
customer approximated 9%, 14% and 20% for the years ended December 31,
2002, 2001 and 2000, respectively. Sales to a fifth customer approximated
16%, 14% and 17% for the years ended December 31, 2002, 2001 and 2000,
respectively.
8
3. Summary of Significant Accounting Policies, continued:
Newsprint Sales, the sales division of Brant-Allen, has entered into
certain supply contracts, as amended, (the "Supply Contracts") with two
customers. Under the terms of the Supply Contracts, as amended, Newsprint
Sales is required to provide to these customers certain fixed volumes of
newsprint at prices determined annually, through December 31, 2004.
New Accounting Standards: In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145 ("SFAS 145"), Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. Statement 4 required all gains and losses from
extinguishment of debt to be aggregated and, if material, be classified
as an extraordinary item, net of related income tax effect. Under SFAS
145, the criteria in APB Opinion 30 will now be used to classify those
gains and losses. The Company will adopt SFAS 145 as of the beginning of
fiscal year 2003, and does not expect it to have a material impact on its
financial statements.
In June 2002, the FASB issued Statement of Financial Accounting Standards
No. 146 ("SFAS 146"), Accounting for Costs Associated with Exit or
Disposal Activities. SFAS 146 addresses financial accounting and
reporting for costs associated with exit or disposal activities and
nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
Under EITF Issue 94-3, a liability for an exit activity was recognized at
the date of an entity's commitment to an exit plan. SFAS 146 requires
that a liability for a cost associated with an exit or disposal activity
be recognized when the liability is incurred. SFAS 146 is effective for
exit or disposal activities that are initiated after December 31, 2002,
and is not expected to have a material impact on the Company's financial
statements.
In November 2002, the FASB approved FASB Interpretation No. ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. FIN 45
elaborates on the existing disclosure requirements for most guarantees,
including loan guarantees such as standby letters of credit. It also
clarifies that at the time a company issues a guarantee, the company must
recognize an initial liability for the fair value, or market value, of
the obligations it assumes under that guarantee and must disclose that
information in its interim and annual financial statements. FIN 45 is
effective on a prospective basis to guarantees issued or modified after
December 31, 2002.
The disclosure requirements of FIN 45 are effective for financial
statements of interim or annual periods ending after December 15, 2002.
We have adopted the disclosures of this interpretation as of December 31,
2002, and it did not have a material impact on the Company's financial
statements.
9
4. Related-Party Transactions:
All sales and related collections are made by Newsprint Sales, a division
of Brant-Allen on behalf of the Company. Brant-Allen provides similar
sales and collection activities for F.F. Soucy, Inc. ("Soucy, Inc."), an
affiliated Canadian newsprint company 100% owned by Brant-Allen. As part
of the Term Loan and Revolving Loans (see Note 7), Brant-Allen entered
into a cash collateral agreement on December 1, 1997 (the "Collateral
Agreement"). The Collateral Agreement requires that collections of the
Company's receivables by Newsprint Sales be remitted to the Company
within two days of receipt.
The Company received payments of approximately $174,500, $0 and $186,200
from Brant-Allen as reimbursement for expenses incurred on behalf of
Brant-Allen during the years ended December 31, 2002, 2001 and 2000,
respectively. Additionally, the Company received payments of
approximately $82,900, $101,900 and $101,800 from Soucy, Inc. for
expenses incurred on behalf of Soucy, Inc. during the years ended
December 31, 2002, 2001 and 2000, respectively.
In 2002, the Company sold cull inventory to Soucy, Inc. for $316,000.
A component of selling, general and administrative expenses as shown on
the statements of operations includes aggregate management fees charged
to the Company by Brant-Allen. The management fee includes senior
management, treasury, financial, marketing and sales services. There are
restrictions on payment of the management fee as described in Note 7. The
level of these fees that would be incurred if the Company operated on a
stand-alone basis are not practicably determinable.
The Company charged Bear Island Timberlands Company L.L.C.
("Timberlands"), an affiliated company owned 100% by Brant-Allen, for
certain administrative and other expenses. These charges approximated
$8,000, $16,000 and $170,000 during the years ended December 31, 2002,
2001 and 2000, respectively.
The Company's receivables and payables with their affiliates were as
follows:
December 31,
-------------------------------
2002 2001
Due to Brant-Allen $ (1,466,751) $ (508,773)
Due from Newsprint Sales 370,266 530,039
Due from Soucy, Inc. and Partners 11,060 7,604
Due from (to) Soucy, Inc. (288,630) 18,787
Due to Timberlands (353,202) (361,406)
10
5. Inventories:
Inventories, net consisted of:
December 31,
----------------------------------
2002 2001
Raw materials $1,749,443 $ 2,153,044
Stores 6,680,087 7,686,207
Finished goods 1,541,191 2,826,268
---------------- ----------------
$9,970,721 $12,665,519
================ ================
6. Property, Plant and Equipment:
Property, plant and equipment is stated at cost and consists of the
following:
December 31,
------------------------------------
2002 2001
Land $ 1,548,847 $ 1,548,847
Timberlands 1,568,972 1,568,972
Building 28,412,280 28,412,280
Machinery and equipment 183,818,690 183,281,817
Construction in progress 5,491,935 3,783,260
---------------- -----------------
220,840,724 218,595,176
Less accumulated depreciation
and depletion (55,498,754) (43,562,514)
---------------- -----------------
Total $165,341,970 $175,032,662
================ =================
During the years ended December 31, 2000, the Company recorded charges for
net losses of $160,400 to record a write-down and disposal of certain
operating assets in connection with increasing the capacity of its
recycling facilities. The charges are included in cost of sales in the
accompanying statements of operations.
11
7. Long-Term Debt:
Long-term debt consisted of:
December 31,
-----------------------------------
2002 2001
Senior Secured Notes bearing interest at 10% (interest payable
semi-annually commenced June 1, 1998); due 2007 $100,000,000 $100,000,000
TermLoan Facility bearing interest at LIBOR plus 3.25% effective May 29,
2002. Prior to the increase, the interest rate was LIBOR plus 3%
(weighted average rate of 4.68% and 5.02% at December 31, 2002 and 2001,
respectively);
remaining balance due December 31, 2005 17,444,121 17,444,121
$25 million Revolving Credit Facility bearing interest at (i) LIBOR plus 3%
effective May 29, 2002. Prior to May 29, 2002, the interest rate was
LIBOR plus 2.75% (weighted average rate of 4.89% and 7.02% for the years
ended December 31, 2002 and 2001, respectively) for $20,000,000 and
$15,000,000 of borrowings at December 31, 2002 and 2001, respectively,
with interest due monthly; and (ii) prime plus 2.25% (weighted average
rate of 6.404% for the year ended December 31, 2002, respectively) for
$3,000,000 of borrowings at December 31, 2002, with interest due
quarterly; due December 31, 2003. As of December 31, 2001, interest was
prime plus 1.75% (weighted average rate of 9.8%, with interest due
quarterly);
due January 5, 2004 (see Note 11). 23,000,000 15,000,000
Subordinated intercompany note; non-interest bearing; due
December 2, 2007 5,000,000 -
---------------- -----------------
145,444,121 132,444,121
Less amounts classified as current - 32,444,121
---------------- -----------------
Total long-term debt $145,444,121 $100,000,000
================ =================
On December 1, 1997, the Company sold $100 million of Senior Secured Notes (the
"Notes") in a
private placement. On December 1, 1997 the Company also entered into
Indenture Agreements for a $70 million Term Loan Facility ("Term Loan")
and a $50 million Revolving Credit Facility ("Revolving Loan"). The
proceeds from the Notes, Term Loan and Revolving Loan were used by the
Company to purchase the 70% interest of the Predecessor.
During 1999, Timberlands sold the majority of its timberlands and
distributed a portion of the proceeds to Brant-Allen. In turn, Brant-Allen
made capital contributions to the Company of $47,350,000 which were used
towards the retirement of approximately $49,600,000 on the Term Loan. In
addition, the amount available under the Revolving Loan was reduced from
$50 million to $25 million effective November 23, 1999.
12
7. Long-Term Debt, continued:
The Notes are redeemable, together with accrued interest, at the option of
the Company, in whole or in part, at any time on or after December 1,
2003, with sufficient notice at the redemption prices set forth below
calculated beginning on December 1 of the years indicated:
Redemption
Year Price
2003 103.333%
2004 101.667
2005 and thereafter 100.000
The Term Loan and Revolving Loan are redeemable at the option of the
Company, in whole or in part, at any time without premium or penalty upon
irrevocable notice delivered to the administrative agent. Elective partial
prepayments on the Term Loan or Revolving Loan shall be in an aggregate
principal amount of $5,000,000 or a whole multiple thereof. Prepayment of
the Term Loan and Revolving Loan is required to the extent of any excess
cash flow ("ECF"), as computed on the ECF date.
The Notes are collateralized by (i) a second priority security interest in
all real property of the Company and all personal property of the Company,
to the extent such personal property is assignable, and (ii) a second
priority security interest in 100% of the membership interests in
Timberlands. The Term Loan and Revolving Loan are partly collateralized by
(i) a first priority security interest in a substantial portion of the
assets of the Company and (ii) a first priority security interest in 100%
of Brant-Allen's membership interest in Timberlands.
The most restrictive covenants of the Notes, Term Loan and Revolving Loan
state that the Company has a limitation on incurring additional
indebtedness, making restricted payments, creating, incurring or assuming
any liens, making sales of capital stock of subsidiaries, transactions
with affiliates, and sale of assets. Furthermore under the Notes, the
Company is not permitted to pay management fees to Brant-Allen in excess
of 3% of the Company's net sales. Only one-third of this payment may be in
cash. Effective April 1, 2000 the Notes were amended to reduce the
management fees payable to Brant-Allen to 1% of the Company's net sales of
which 100% is payable in cash.
In 2002 certain financial covenants were modified by the lenders in a
second amendment to the Indenture Agreements and past defaults were
permanently waived. In addition, Brant-Allen guaranteed to provide up to
$10 million of additional funding to the Company in the form of additional
subordinated noninterest bearing intercompany notes should it be needed.
In partial support of this commitment, Brant-Allen has placed $5 million
in an escrow account.
The fair values of the Term Loan and Revolving Loan approximate carrying
values at December 31, 2002 and 2001. The fair value of the Notes was
$85,000,000 and $95,000,000 at December 31, 2002 and 2001, respectively.
13
7. Long-Term Debt, continued:
Maturities on long-term debt for the three years after 2003 are
approximately as follows: 2004 - $23,000,000; 2005 - $17,444,121; 2006 -
$0; and thereafter - $105,000,000. As disclosed above, the Company's $100
million Senior Notes become payable in 2007. The Company does not
anticipate being able to repay these notes from operating cash flows and
intends to refinance these Notes prior to their maturity.
The Company obtained a $5 million subordinated note from Brant-Allen on
May 31, 2002. The note is non-interest bearing and is payable in 2007. No
prepayments are allowed unless approved by other creditors.
8. Letters of Credit:
In accordance with requirements of the Virginia Department of
Environmental Quality, the Company has outstanding irrevocable standby
letters of credit of $627,000 and $74,000 to cover potential closure and
post-closure costs associated with the Company's landfills. Refer to note
10 for further information regarding the environmental liabilities.
9. Employee Benefit Plans:
The Company provides a defined contribution money purchase retirement plan
for substantially all employees. The annual cost of the Company's
contributions to the plan, which is currently funded, is based on a
percentage of the compensation of participants.
The Company provides a thrift plan for substantially all employees which
incorporates the provisions of Internal Revenue Code Subsection 401(k),
whereby employees can make voluntary, tax-deductible contributions within
specified limits. The Company matched employee contributions at 60% during
the years ended December 31, 2001, 2000 and 1999, up to a maximum of 6% of
an employee's base pay.
The Company's expense for both plans approximated $992,000, $1,156,000 and
$1,097,000 for the years ended December 31, 2002, 2001 and 2000,
respectively.
Prior to July 1, 2001, the Company was self-insured for employee medical,
dental and disability claims up to $50,000 per claim per year. The Company
provided an accrual of approximately $0 and $20,000 for claims incurred
but not reported at December 31, 2002 and 2001, respectively. The Company
became fully insured for employee medical, dental and disability claims
starting July 1, 2001.
14
10. Contingencies and Commitments:
Environmental: The Company purchased a landfill in 1997, which is no
longer active. However, the Company is required to monitor groundwater to
ensure there is no leeching into the nearby water supply. The Company is
required to continue monitoring through the end of 2003 at which point if
there has been no leeching, the Company will not have any additional
expenses for the landfill. The Company had approximately $300,000 and
$305,000 accrued for landfill liabilities at December 31, 2002 and 2001,
respectively.
Other expenses: The Company had a fire in its recycling facility in
December 2002. As of December 31, 2002, the insurance deductible of
$250,000 was expensed under other expense on the Statement of Operations
and costs of $111,000 were deferred on the balance sheet to be offset
against insurance proceeds when received.
Guarantees and indemnifications: In the ordinary course of business, the
Company enters into agreements for the supply of goods or services to
customers that provide warranties to the customer on one or more of the
following: (i) the quality of the goods and services supplied by the
Company; (ii) the performance of the goods supplied by the Company; and
(iii) the Company's compliance with certain specifications and applicable
laws and regulations in supplying the goods and services. Liability under
such warranties often are limited to a maximum amount, by the extent of
the liability, or by the time period within which a claim must be
asserted. The Company's warranty obligations under such supply agreements
are immaterial.
In the ordinary course of business, the Company may enter into service
agreements with service providers in which it agrees to indemnify the
service provider against certain losses and liabilities arising from the
service provider's performance of the agreement. Generally, such
indemnification obligations do not apply in situations in which the
service provider is grossly negligent, engages in wilful misconduct, or
acts in bad faith. The Company's liability under such service agreements
is immaterial.
11. Subsequent Event:
On March 27, 2003, the Company amended the Revolving Credit Facility to
extend the due date to January 4, 2004. As a result, the debt was
reclassified to long-term as of December 31, 2002.
15
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
BEAR ISLAND PAPER COMPANY, L.L.C.
(IN THOUSANDS)
ADDITIONS
---------------------------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER BALANCE AT
DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS END OF PERIOD
- ----------- ------ -------- -------- ---------- -------------
YEAR ENDED DECEMBER 31, 2002
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $734 - - ($666)a $68
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $1,105 $121 - - $1,226
---------- ---------- ---------- --------- ---------
$1,839 $121 - ($666) $1,294
========== ========== ========== ========= =========
RESERVE FOR CAPPING OF LANDFILL $305 - - ($6)b $299
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - ($10)d $10
---------- ---------- ---------- --------- ---------
$325 - - ($16) $309
========== ========== ========== ========= =========
YEAR ENDED DECEMBER 31, 2001
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $68 $666 - - $734
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $925 $180 - - $1,105
---------- ---------- ---------- --------- ---------
$993 $846 - - $1,839
========== ========== ========== ========= =========
RESERVE FOR CAPPING OF LANDFILL $535 - - ($230)c $305
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
---------- ---------- ---------- --------- ---------
$555 - - ($230) $325
========== ========== ========== ========= =========
YEAR ENDED DECEMBER 31, 2000
ALLOWANCE FOR DOUBTFUL ACCOUNTS
(DEDUCTED FROM ACCOUNTS RECEIVABLE) $68 - - - $68
ALLOWANCE FOR STORES OBSOLESCENCE
(DEDUCTED FROM STORES INVENTORY) $809 $116 - - $925
---------- ---------- ---------- --------- ---------
$877 $116 - - $993
========== ========== ========== ========= =========
RESERVE FOR CAPPING OF LANDFILL $555 - - ($20)b $535
RESERVE FOR WORKMAN'S COMPENSATION CLAIMS $20 - - - $20
---------- ---------- ---------- --------- ---------
$575 - - ($20) $555
========== ========== ========== ========= =========
a) WRITE OFF OF ACCOUNTS RECEIVABLE
b) PAYMENTS FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
c) REDUCTION TO RESERVE FOR CAPPING AND MAINTENANCE OF LANDFILL CELLS
d) REDUCTION TO WORKMAN'S COMPENSATION CLAIMS