SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF
THE EXCHANGE ACT OF 1934
Commission file number: 333-42201
BEAR ISLAND PAPER COMPANY, L.L.C.
(Exact name of registrant as specified in its charter)
Virginia 06-0980835
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10026 Old Ridge Road
Ashland, VA
(Address of Principal Executive Offices)
23005
(Zip Code)
(804) 227-3394
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if
Changed Since Last Report: Not Applicable
Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: Not Applicable.
BEAR ISLAND PAPER COMPANY, L.L.C.
INDEX
Page(s)
Part I. Financial Information
Item 1
Condensed Balance Sheets 1
Condensed Statements of Operations 2
Condensed Statements of Cash Flows 3
Notes to Condensed Financial Statements 4
Item 2
Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 4
Controls and Procedures 8
Part II. Other Information
Item 5. Other Information 9
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
Certifications 11
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED BALANCE SHEETS
March 31, December 31,
ASSETS 2003 2002
---------------- -----------------
(Unaudited)
Current assets:
Cash and short-term investments $ 2,760,287 $ 562,173
Accounts receivable, net 10,863,928 12,201,324
Inventories, net 10,603,691 9,970,721
Other current assets 582,200 967,944
---------------- -----------------
Total current assets 24,810,106 23,702,162
Property, plant and equipment, at cost 221,539,480 220,840,724
Less accumulated depreciation (58,571,103) (55,498,754)
---------------- -----------------
Net property, plant and equipment 162,968,377 165,341,970
---------------- -----------------
Deferred financing costs, net 4,585,104 4,767,201
---------------- -----------------
Total assets $ 192,363,587 $ 193,811,333
================ =================
LIABILITIES AND MEMBER'S EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 11,899,836 $ 10,735,697
Accrued interest payable 3,477,915 947,115
Current maturity of long-term debt 23,000,000 -
---------------- -----------------
Total current liabilities 38,377,751 11,682,812
Long-term debt 122,444,121 145,444,121
---------------- -----------------
Total liabilities 160,821,872 157,126,933
---------------- -----------------
Member's equity:
Contributed capital 79,581,074 79,581,074
Accumulated deficit (48,039,359) (42,896,674)
---------------- -----------------
Total member's equity 31,541,715 36,684,400
---------------- -----------------
Total liabilities and member's equity $ 192,363,587 $ 193,811,333
================ =================
See accompanying notes to the condensed financial statements.
1
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended March 31,
-----------------------------------
2003 2002
Net sales $ 25,084,638 $ 24,896,117
Cost of sales (26,807,656) (26,931,811)
--------------- ----------------
Gross loss (1,723,018) (2,035,694)
Selling, general and administrative expenses:
Management fees to Brant-Allen (235,434) (234,231)
Other direct (40,072) (69,316)
--------------- ----------------
Loss from operations (1,998,524) (2,339,241)
Other income (expense):
Interest expense (3,147,649) (3,118,768)
Interest income 3,488 2,606
--------------- ----------------
Net loss $ (5,142,685) $ (5,455,403)
=============== ================
See accompanying notes to the condensed financial statements.
2
BEAR ISLAND PAPER COMPANY, L.L.C.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended March 31,
-----------------------------------
2003 2002
Operating activities:
Net loss $ (5,142,685) $ (5,455,403)
Adjustments to reconcile net loss
to net cash (used) provided by
operating activities:
Depreciation 3,072,349 2,967,720
Amortization of deferred financing
costs 182,097 168,402
Changes in current assets and liabilities:
Accounts receivable 1,337,396 (1,081,569)
Inventories (632,970) (118,098)
Other current assets 385,744 339,017
Accounts payable and accrued
liabilities 1,164,139 (3,534,098)
Accrued interest payable 2,530,800 2,527,485
---------------- ----------------
Net cash (used) provided by
operating activities 2,896,870 (4,186,544)
---------------- ----------------
Investing activities:
Purchases of property, plant and
equipment (698,756) (552,835)
---------------- ----------------
Net cash used in investing
activities (698,756) (552,835)
---------------- ----------------
Financing activities:
Proceeds from issuance of long-term
debt - 5,000,000
---------------- ----------------
Net cash provided by
financing activities - 5,000,000
---------------- ----------------
Net increase in cash 2,198,114 260,621
Cash and short-term investments, beginning
of period 562,173 886,300
----------------- -----------------
Cash and short-term
investments, end of
period $ 2,760,287 $ 1,146,921
================ ================
See accompanying notes to the condensed financial statements.
3
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. In the opinion of management, the accompanying condensed financial
statements of Bear Island Paper Company, L.L.C. (the "Company") contain all
adjustments necessary to present fairly, in all material respects, the
Company's financial position as of March 31, 2003 and December 31, 2002 and
the Company's condensed results of operations and cash flows for the
three-month periods ended March 31, 2003 and 2002. All adjustments are of a
normal and recurring nature. These condensed financial statements should be
read in conjunction with the financial statements and notes thereto
included in the Company's 2002 Form 10K filed on March 31, 2003. The
December 31, 2002 balance sheet data was derived from audited financial
statements, but does not include all disclosures required by generally
accepted accounting principles.
The results of operations for the three-month period ended March 31, 2003
should not be regarded as necessarily indicative of the results that may be
expected for the entire year.
2. The Company incurred net losses of $5,142,685 and $18,902,856 for the
quarter ended March 31, 2003 and year ended December 31, 2002,
respectively, and had an accumulated deficit of $48,039,359 at March 31,
2003. Management also anticipates a loss for the year ending December 31,
2003. While current market conditions have resulted in extreme financial
constraints the Company anticipates that cash provided from operations in
the future, combined with borrowings under the Company's 6-year Senior
Secured Reducing Revolving Credit Facility (the "Revolving Credit
Facility") and Brant-Allen Industries, Inc.'s ("Brant-Allen") guarantee to
provide up to an additional $10.0 million of subordinated loans (the
Brant-Allen Guarantee") as needed will be sufficient to pay its operating
expenses, satisfy debt-service obligations and fund capital expenditures.
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 March 31, 2003, the Company had the ability to access approximately $7.0
million of additional capital equipment financing through the use of
certain leasing options. At March 31, 2003 there was $1.3 million available
in unused borrowing capacity available under the Revolving Credit Facility
and up to $10.0 million was available under the Brant-Allen Guarantee. The
Revolving Credit Facility expires on January 4, 2004. The Company expects
to renegotiate this facility prior to its expiration. 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. The Company is a wholly owned subsidiary of Brant-Allen, a Delaware
corporation.
A component of selling, general and administrative expenses as shown on the
statements of operations includes aggregate management fees charged by
Brant-Allen. The management fees payable to Brant-Allen are calculated
pursuant to a management services agreement and constitute 1% of the
Company's net sales less freight, of which 100% is payable in cash.
There are also certain restrictions on distributions paid to Brant-Allen.
Distributions are allowed for a portion of profits in excess of certain
amounts.
4. In January 2003, the FASB issued Interpretation No. ("FIN") 46,
Consolidation of Variable Interest Entities. Fin 46 addresses when a
company should include in its financial statements the assets, liabilities
and activities of a variable interest entity. It defines variable interest
entities as those entities with a business purpose that either doesn't have
any equity investors with voting rights, or has equity investors that don't
provide sufficient financial resources for the entity to support its
activities. FIN 46 also requires disclosures about variable interest
entities that a company is not required to consolidate, but in which it has
a significant variable interest. FIN 46 consolidation requirements are
effective for all variable interest entities created after January 31, 2003
and to pre-existing entities in the first fiscal year or interim period
beginning after June 15, 2003. Certain disclosure requirements are
effective for financial statements after January 31, 2003. The Company
adopted FIN 46 as of the end of the first quarter of 2003, and it did not
have a material impact on the Company's financial statements.
4
BEAR ISLAND PAPER COMPANY, L.L.C.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
5. No provision for income taxes is required in the financial statements since
each owner of the parent Company is individually liable for any income tax
that may be payable on the Company's taxable income.
6. Finished goods and raw materials inventories are valued at the lower of
cost or market, with cost determined on the first-in, first-out ("FIFO")
basis. Stores inventories are valued at the lower of average cost or
market.
Inventories consisted of:
March 31, 2003 December 31, 2002
--------------- -----------------
Raw materials $ 1,729,990 $ 1,749,443
Stores 6,809,220 6,680,087
Finished goods 2,064,481 1,541,191
--------------- -----------------
$ 10,603,691 $ 9,970,721
=============== =================
7. The Company has a purchase commitment, made in the ordinary course of
business, to purchase $4.2 million of manufacturing equipment from a
vendor. Through March 31, 2003, the Company has paid $2.1 million of the
total due under the commitment, with the remainder due as follows: $1.5
million in 2003 and $0.6 million in 2004. The purchase commitment is
guaranteed by Brant-Allen.
8. Long-term debt consisted of:
March 31, 2003 December 31, 2002
---------------- -----------------
Senior Secured Notes $ 100,000,000 $ 100,000,000
Term Loan Facility 17,444,121 17,444,121
Revolving Credit Facility (a) 23,000,000 23,000,000
Subordinated Intercompany Note 5,000,000 5,000,000
---------------- -----------------
145,444,121 145,444,121
Less current portion 23,000,000 -
---------------- -----------------
Total long-term debt $ 122,444,121 $ 145,444,121
================ =================
(a) The Revolving Credit Facility expires on January 4, 2004. The Company
expects to renegotiate this facility prior to its expiration.
9. The Company's receivables and payables with their affiliates were as
follows:
March 31, 2003 December 31, 2002
---------------- -----------------
Due to Brant-Allen $ (1,699,417) $ (1,466,751)
Due from Newsprint Sales 514,694 370,266
Due from F.F. Soucy, Inc. and Partners 29,706 11,060
Due to F.F. Soucy, Inc. (280,639) (288,630)
Due to Timberlands (352,922) (353,202)
5
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors affecting the results of operations of the Company during the periods
included in the accompanying condensed statements of operations and the changes
in the Company's financial condition since December 31, 2002.
General:
The Company manufactures and is dependent on one product, newsprint, which is
used in general printing and the newspaper publishing industry and for
advertising circulars. Accordingly, demand for newsprint fluctuates with the
economy, newspaper circulation and purchases of advertising lineage which
significantly impact 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 generally recognized at the time
of shipment from the Company's mill. However, significant fluctuations in
revenue can and do occur as a result of the timing of shipments caused by
increases and decreases in mill inventory levels.
THREE MONTHS ENDED MARCH 31, 2003, COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net sales increased by $0.2 million, or 0.8%, to $25.1 million in the first
quarter of 2003, from $24.9 million in the first quarter of 2002. This increase
was attributable to a 0.9% increase in the average net selling price of the
Company's products on sales volumes that remained fairly constant. Sales volumes
for the first quarter of 2003 were approximately 55,780 metric tons ("tonnes")
compared to approximately 55,830 tonnes in the first quarter of 2002. The
Company's net selling price for newsprint increased to an average of $450 per
tonne in the first quarter of 2003 from an average of $446 per tonne in the
first quarter of 2002.
Cost of sales decreased by $0.1 million, or 0.4%, to $26.8 million in the first
quarter of 2003 from $26.9 million in the first quarter of 2002. Total unit
manufacturing costs for the first quarter of 2003 on a per ton basis were
comparable to the same period in 2002. On a per ton manufacturing cost basis,
the cost of ONP increased by 2.4% which was entirely offset by a 2.4% decrease
in the cost of power and chemicals during the first quarter of 2003 compared to
the first quarter of 2002. Cost of sales as a percentage of net sales decreased
to 106.8% in the first quarter of 2003, from 108.0% in the first quarter of
2002, due to the increase in newsprint selling prices in the first quarter of
2003 as noted above.
The Company's selling, general and administrative expenses remained constant at
$0.3 million in the first quarter of 2003 and in the first quarter of 2002.
As a result of the above factors, loss from operations decreased by $0.3 million
to a loss of $2.0 million in the first quarter of 2003 from a loss of $2.3
million in the first quarter of 2002.
The Company's interest expense remained constant at $3.1 million in the first
quarter of 2003 and the first quarter of 2002. The $3.0 million increase in the
Revolving Credit Facility was offset by decreases in interest rates.
As a result of the above factors, the Company reported a net loss of $5.1
million in the first quarter of 2003 compared to net loss of $5.4 million in the
first quarter of 2002.
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.
6
The Company's cash and short-term investments at March 31, 2003 were $2.8
million, representing an increase of $2.2 million from $0.6 million at December
31, 2002. Net cash provided by operating activities was $2.9 million for the
first quarter of 2003 compared to cash used by operating activities of $4.2
million in the first quarter of 2002. No cash was provided in financing
activities in the first quarter of 2003 compared to $5.0 million in the first
quarter of 2002 and cash used in investing activities in the first quarter of
2003 was $0.7 million compared to $0.6 million for the first quarter of 2002. In
total, $0.7 million was used to cover capital expenditures.
In the first quarter 2003, the Company's cash provided by (used in) operating
activities increased by $7.1 million to $2.9 million provided by operations,
from cash used by operations of ($4.2) million in the first quarter 2002,
primarily due to a increase in cash flow resulting from a decrease in the
Company's working capital.
The Company made capital expenditures of $0.7 million and $0.6 million in the
first quarter of 2003 and the first quarter of 2002, respectively, in connection
with upgrading and maintaining its manufacturing facility. Management
anticipates that the Company's total capital expenditures for the balance of
2003 and 2004 will primarily relate to existing capital projects in progress and
maintenance of its newsprint facilities including the forecasted third quarter
of 2003 installation of a new head box on the Company's paper machine at an
estimated cost of $5.6 million. In connection therewith, the Company has a
purchase commitment, made in the ordinary course of business, to purchase $4.2
million of manufacturing equipment from a vendor. Through March 31, 2003, the
Company has paid $2.1 million of the total due under the commitment, with the
remainder due as follows: $1.5 million in 2003 and $0.6 million in 2004. The
purchase commitment is guaranteed by Brant-Allen.
At March 31, 2003, 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
intercomany note and $100 million under the Notes. At March 31, 2003 there was
$1.3 million available under the Revolving Credit Facility and up to $10.0
million available under the Brant-Allen Guarantee. The Revolving Credit Facility
expires on January 4, 2004. The Company expects to renegotiate this facility
prior to its expiration.
7
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company's
Chief Executive Officer and Chief Financial Officer 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 quarterly 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.
(b) 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 significantly affect such controls.
8
PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
Effective April 25, 2003, Michael Conroy resigned from the Board of Directors
and he was replaced by Thomas M. Geiger.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 99-1 - Certificate Pursuant to 18 U.S.C. Section 1350
Exhibit 99-2 - Certificate Pursuant to 18 U.S.C. Section 1350
(b) No reports on Form 8-K have been filed during the quarter for which
this report is filed.
9
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, there unto duly authorized.
BEAR ISLAND PAPER COMPANY, L.L.C.
By: /s/ Peter M. Brant
Peter M. Brant
President, Chairman of the Board and
Chief Executive Officer
By: /s/ Edward D. Sherrick
Edward D. Sherrick
Vice President of Finance
(Principal Financial Officer and
Chief Accounting Officer)
Dated May 12, 2003
10
CERTIFICATIONS
In connection with the Quarterly Report of Bear Island Paper Company LLC (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), and
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, I, Peter M. Brant,
Chief Executive Officer of the Company, certify that:
(1) I have reviewed the Report;
(2) Based on my knowledge, this 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 Report;
(3) Based on my knowledge, the financial statements and other financial
information included in this Report fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this Report;
(4) The Company's other certifying officer 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 Company and we
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made known to us
by others within those entities, particularly during the period in
which this Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's Board of Directors (or persons performing
the equivalent function):
(a) all significant deficiencies in design or operation of
internal controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company'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 Company's
internal controls; and
(6) The Company's other certifying officer and I have indicated in this
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
Peter M. Brant
Chief Executive Officer
May 12, 2003
11
CERTIFICATIONS
In connection with the Quarterly Report of Bear Island Paper Company LLC (the
"Company") on Form 10-Q for the period ended March 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), and
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, I, Edward D.
Sherrick, Vice President of Finance (Chief Financial Officer of the Company),
certify that:
(1) I have reviewed the Report;
(2) Based on my knowledge, this 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 Report;
(3) Based on my knowledge, the financial statements and other financial
information included in this Report fairly present in all material
respects the financial condition, results of operations and cash flows
of the Company as of, and for, the periods presented in this Report;
(4) The Company's other certifying officer 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 Company and we
have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to the Company is made known to us
by others within those entities, particularly during the period in
which this Report is being prepared;
(b) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
(c) presented in this Report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
(5) The Company's other certifying officer and I have disclosed, based
on our most recent evaluation, to the Company's auditors and the audit
committee of the Company's Board of Directors (or persons performing
the equivalent function):
(a) all significant deficiencies in design or operation of
internal controls which could adversely affect the Company's ability to
record, process, summarize and report financial data and have
identified for the Company'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 Company's
internal controls; and
(6) The Company's other certifying officer and I have indicated in this
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
Edward D. Sherrick
Vice President of Finance
(Chief Financial Officer)
May 12, 2003
12