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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2003

Commission file number: 333-42201

BEAR ISLAND PAPER COMPANY, L.L.C.

(Exact name of registrant as specified in its charter)

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.

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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 237,000 metric tons (“tonnes”) of high quality newsprint suitable for four-color printing, which publishers are increasingly using for general circulation. In 2003, the Mill produced approximately 220,500 tonnes of newsprint in 350 days of operations, and had an estimated operating efficiency rate of 91%.

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 95% of the Company’s newsprint production in 2003 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 65% of the Company’s fiber requirements are derived from the Company’s TMP process using wood and woodchips, and approximately 35% 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 40% from wood harvested by local independent wood contractors and 60% in chip form, by independent sawmills.

The Mill’s newsprint machine produces newsprint at an average speed of approximately 4,240 feet per minute over a machine trim width of 300 inches. The Mill produces approximately 630 tonnes per day of newsprint.

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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 112,000 tonnes per year of ONP and OMG. The recycling facility has the capacity to produce 246 tonnes of recycled fiber per day. The recycling mill enables the Company to produce up to approximately 640 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 2003, approximately 27% 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 approximately 40,000 tonnes of newsprint per year for The Washington Post and 32,000 tonnes for Dow Jones, 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 2003 and 2002, the Company’s ten largest customers represented an aggregate of 95% and 93%, respectively, of the Company’s total sales. The Company has had five customers whose sales represent a significant portion of sales. Sales to one of these customers approximated 8%, 9% and 13% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a second customer approximated 19%, 22%, and 16% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a third customer approximated 13%, 10%, and 16% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a fourth customer approximated 18%, 16%, and 15% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a fifth customer approximated 19%, 21% and 11% during the years ended December 31, 2003, 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.

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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 640 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 disposal.

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.

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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, 2003, the Company had 208 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 465,000 tonnes of newsprint (218,000 tonnes for the Company and 247,800 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 2003, the Company was charged $972,000 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.

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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 2003.

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, 1999, 2000, 2001, 2002 and 2003, for which the statements of operations are included elsewhere herein for the years ended December 31, 2001, 2002 and 2003.

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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.

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Newsprint prices have been extremely volatile over the past five years. 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. During 2003, newsprint prices averaged $472 per tonne and ranged from a high of $490 per tonne in the fourth quarter to a low of $450 per tonne in the first quarter. In February 2004 newsprint prices averaged $501 per tonne.

The table below summarizes the annual volumes and selling prices of the Company’s newsprint during the periods indicated below:

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, 2003, 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 21.1% and direct and indirect labor represented 19.1% of total cost of manufacturing. On an average per tonne basis, electricity costs increased 3.9% from 2002 to 2003. The Company currently uses a raw material mix of 65% TMP, and 35% recycled fiber in its production process.

RESULTS OF OPERATIONS

2003 COMPARED TO 2002

Net sales decreased by $1.4 million, or 1%, to $103.1 million in 2003 from $104.5 million in 2002. The decrease was attributable to an 8% decrease in sales volume to approximately 218,500 tonnes in 2003, from approximately 236,900 tonnes in 2002 offset by a 7% increase in average net selling price for the Company’s products. The Company’s net selling price for newsprint increased to an average of $472 per tonne in 2003 from an average net selling price of $441 per tonne in 2002.

Cost of sales decreased by $2.5 million, or 2%, to $106.8 million in 2003 from $109.3 million in 2002. This decrease was attributable to the 8% decrease in sales volume, as mentioned above, offset in part by a 5% increase in unit manufacturing costs per tonne. The unit manufacturing cost increased to $461 per metric tonne in 2003 from $436 per tonne in 2002. The increase in unit manufacturing cost per tonne was a result of a 7% increase in fiber costs, a 5% increase in fuel and electric costs and a 14 day shutdown of manufacturing operations for a headbox replacement which created a 4% shortfall in total tonnes produced. Cost of sales as a percentage of net sales decreased to 104% in 2003 from 105% in 2002, due to the increase in newsprint selling prices offset by the increase in the unit costs of manufacturing as noted above.

The Company’s selling, general and administrative expenses increased by $0.2 million, or 17%, to $1.4 million in 2003 from $1.2 million in 2002. This increase was primarily attributable to additional legal fees paid in 2003.

As a result of the above factors, income from operations increased by $0.9 million to a loss of $5.1 million in 2003 from a loss of $6.0 million in 2002.

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The Company’s interest expense increased by $0.9 million, or 7%, to $13.6 million in 2003 from $12.7 million in 2002, due to higher effective interest rates caused by changes to the Bank Credit Facility agreement in which interest rates are calculated and additional borrowing on the Company’s Revolving Credit Facility.

The Company’s other income including interest income increased by $0.9 million, to $0.7 million in 2003 from an expense of $0.2 million in 2002, mostly due to an asset conversion gain and related insurance payment in connection with a fire in the Company’s recycling facility.

As a result of the above factors, the Company reported a net loss of $18.0 million in 2003 compared to a net loss of $18.9 million in 2002.

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.

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.

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.

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The Company’s cash and short-term investments at December 31, 2003 were approximately $2.5 million, representing an increase of approximately $1.9 million from $0.6 million at December 31, 2002. Net cash used by operating activities was $1.8 million for the year ended December 31, 2003. Net cash provided by financing activities (additional borrowings) was $11.0 million consisting of $1.0 million drawn under the Revolving Credit Facility and $10.0 million provided as a Subordinated Loan by Brant-Allen, which was later contributed to equity as part of an overall $15.0 million Brant-Allen Subordinated Loan to equity conversion. Cash used in investing activities (capital expenditures) was $7.2 million for the year ended December 31, 2003. While the Company anticipates that cash provided from operations in the future and borrowings under the Revolving Credit Facility will be sufficient to pay its operating expenses, satisfy debt-service obligations and fund capital expenditures, current market conditions have resulted in extreme financial constraints.

For the year ended December 31, 2003, the Company’s cash (used) by operating activities decreased by $9.1 million to ($1.8) million from ($10.9) million for the year ended December 31, 2002, primarily due to changes in working capital, increased selling prices and offset in part by higher cost of sales resulting in a net loss for the year ended December 31, 2003 of $18.0 million compared to net loss of $18.9 million for the year ended December 31, 2002.

The Company incurred capital expenditures of $7.2 million and $2.4 million during the years ended December 31, 2003 and 2002, respectively. The large increase in capital expenditures in 2003 was the result of installing a new headbox on the Company’s paper machine. Management anticipates that the Company’s total capital expenditures for the years 2004 and 2005 will primarily relate to existing capital projects in progress and maintenance of its newsprint facilities.

At December 31, 2003, the Company had approximately $141.7 million of indebtedness, consisting of borrowings of $0.3 million under long term purchase obligations, $24.0 million under the Revolving Credit Facility, $17.4 million under the Term Loan Facility, and $100.0 million under the Notes. In addition, $0.3 million was available in unused borrowing capacity under the Revolving Credit Facility.

As shown in the accompanying comparative financial statements the Company incurred net losses of $18.0 million, $18.9 million and $5.7 million for the years ended December 31, 2003, 2002 and 2001, respectively, and had an accumulated deficit of $60.9 million at December 31, 2003. As of December 31, 2003, the Company had approximately $0.3 million available under its Revolving Credit Facility to fund cash requirements. After January 5, 2004, the Company has fully drawn its available borrowings under the Revolving Credit Facility in connection with the refinancing of the Facility. As of January 5, 2004, the Company had no additional borrowing capacity under the Revolving Credit Facility. However, the Company has the ability to access approximately $6.7 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 2004; however there exists a range of reasonably possible outcomes which could significantly impact their 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 are required to make any capital contributions or other payments to the Company with respect to the Issuer’s obligations on the Notes. Although the Company currently has no reason to believe that it will not be able to refinance the Notes at maturity, there can be no assurance that such refinancing or any alternative strategy could be effected upon satisfactory terms, if at all, or that any of the foregoing actions would enable the Company to make such principal payments on the Notes or that any of such actions would be permitted by the terms of any debt instruments of the Company or of any of the Company’s affiliates then in effect.

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. On January 5, 2004, the Bank Credit Facility was refinanced with a financial lending institution at a rate of Libor plus a margin of 5.0%, this margin is adjustable downward upon the achievement in the future of certain financial operating results. See Fourth Amendment to the Bank Credit Agreement dated January 5, 2004, filed as Exhibit 10.1d to this annual report (the “Amendment”). According to the Amendment, the Revolver and Term loans mature on September 30, 2007.

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CONTRACTUAL OBLIGATIONS

The table below summarizes future payments required under various contractual obligations as indicated below:

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.

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CRITICAL ACCOUNTING POLICIES

SEC Financial Reporting Release No. 60 requires all companies to include a discussion of critical accounting policies or methods used in the preparation of their financial statements. 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 at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates, and the differences could be material. The Company considers the following accounting policies to be critical policies which involve various estimation processes:

Allowance for Doubtful Accounts

The Company’s policy with respect to trade and notes receivable is to maintain an adequate allowance or reserve for doubtful accounts for estimated losses from the inability of the Company’s customers to make required payments. The process to estimate the collectibility of the Company’s trade accounts receivable consists of two steps. First the Company evaluates specific accounts for which we have information that the customer may have an inability to meet its financial obligations (e.g., bankruptcy). In these cases, using the Company’s judgment based on available facts and circumstances, the Company records a specific allowance for that customer against the receivable to reflect the amount we expect to ultimately collect. Second, the Company will then establish an additional reserve for all customers based on a range of percentages applied to aging categories, based on the Company’s best estimate. If the financial condition of the Company’s customers were to deteriorate and result in an impairment of their ability to make payments, additional allowances may be required.

Excess and Obsolete Inventory

The Company records allowances for excess and obsolete inventory based on historical and estimated future demand and market conditions. Additional inventory allowances may be required if future demand or market conditions are less favorable than the Company has estimated.

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 Company does not have any derivative financial instruments.

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 impacted the Company’s December 31, 2003 financial statements. 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 2003, the Company carried $141.7 million of outstanding debt on its books, with $41.4 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 $166,000. 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 $166,000.

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.

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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.

ITEM 9A. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures. The Company’s management, with the participation of the Company’s Chief Executive Officer and Vice President of Finance (the Company’s Principal Financial Officer) have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(c) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Report. Based on such evaluation, the Company’s Chief Executive Officer and Vice President of Finance (the Company’s Principal Financial Officer) have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis information required to be disclosed by the Company in reports that it files or submits under the Exchange Act.

(b) Internal Control over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rules 13a-15 (f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2003 that have materially affected, or are reasonably likely to materially affect the Company’s internal control over financial reporting.

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:

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The following table sets forth certain information about the Company’s key employees:

PETER M. BRANT. Mr. Brant is the Co-Chairman of the Board of Directors and Chief Executive Officer of the Company and Timberlands, the Co-Chairman and Chief Executive Officer of Brant-Allen and Chief Executive Officer of Soucy Inc. Mr. Brant jointly owns Brant-Allen with Mr. Joseph Allen. Mr. Brant has served as an executive officer of the Company since its inception and has served as executive officer of Brant-Allen for over 30 years.

JOSEPH ALLEN. Mr. Allen is the President, and Chief Operating Officer and Secretary of the Company and Timberlands, the President and Chief Operating Officer of Brant-Allen and Chief Operating Officer of Soucy Inc. Mr. Allen jointly owns Brant-Allen with Mr. Brant. Mr. Allen has served as an executive officer of the Company since its inception and has served as executive officer of Brant-Allen for over 30 years.

EDWARD D. SHERRICK. Mr. Sherrick is Vice President of Finance (Principal Financial Officer) 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.

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.

THOMAS M. GEIGER. Mr. Geiger was appointed a Director of the Company in April 2003. Mr. Geiger has been a Partner in the law firm of Oxman Tulis Kirkpatrick Whayatt & Geiger LLP or by firms that were predecessors thereto, since 1991.

IRA YOHALEM. Mr. Yohalem was appointed a Director of the Company in March 2004. Mr. Yohalem has been a Partner in the accounting firm of Yohalem Gillman & Company LLP since 1973.

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.

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JEANNINE PAUL. Mrs. Paul joined the Company in August 2003 and was named Human Resources Manager of the Company in January 2004. From 1986 to 2003 Mrs. Paul was with Weavexx Corporation with last position held being Director Human Resources.

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.

CODE OF ETHICS

In 2004, a Code of Ethics was adopted by the Company in order to promote honest and ethical conduct and compliance with the laws and governmental rules and regulations to which it is subject. The Chief Executive Officer and senior financial officers of the Company are expected to be familiar with the Code of Ethics and to adhere to its principles and procedures. The Company will provide to any person without charge, upon request, a copy of such Code of Ethics. Persons interested in receiving a copy of the Company’s Code of Ethics should contact Eric Goebel at (203) 661-3344.

AUDIT COMMITTEE FINANCIAL EXPERT

The Company has an audit committee of the board of directors consisting of Robert Flug, Thomas M. Geiger and Ira Yohalem. Ira Yohalem is a “financial expert” as such term is defined under the Exchange Act.

AUDIT COMMITTEE PRE-APPROVAL POLICIES DISCLOSURE

The Company’s Audit Committee is responsible for appointing the Company’s independent auditor and approving the terms of the independent auditor’s services. The Audit Committee has established a policy for the pre-approval of all audit and permissible non-audit services to be provided by the independent auditor. This policy describes the permitted audit, audit-related, tax and other services (collectively, the “Disclosure Categories”) that the independent auditor may perform. The policy requires that prior to the beginning of each fiscal year, a description of the services (the “Service List”) anticipated to be performed by the independent auditor in each of the Disclosure Categories in the ensuing fiscal year be presented to the Audit Committee for approval. Any requests for audit, audit-related, tax and other services not contemplated by the Service List must be submitted to the Audit Committee for specific pre-approval, irrespective of the amount, and cannot commence until such approval has been granted. Normally, pre-approval is provided at regularly scheduled meetings of the Audit Committee. However, the authority to grant specific pre-approval between meetings, as necessary, has been delegated to the Chairman of the Audit Committee. The Chairman updates the full Audit Committee at the next scheduled meeting for any interim approvals granted. The policy contains a de minimis provision that operates to provide retroactive approval for permissible non-audit services under certain circumstances.

The Audit Committee considered the non-audit services provided by PricewaterhouseCoopers and determined that the provision of all such services was compatible with maintaining PricewaterhouseCoopers’ independence.

ITEM 11. EXECUTIVE COMPENSATION.

No executive officer of Brant-Allen was paid any compensation by the Company between 2001 and 2003. 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.

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Effective as of March 15, 1999, the Brant-Allen Industries, Inc. Incentive Profit-Sharing Plan was merged with and into the Bear Island Paper Company, L.P. Thrift Plan. Brant-Allen also adopted both the Company’s Thrift Plan effective for employee 401(k) contributions and employer matching contributions as of April 1, 1999 and for other contributions as of January 1, 1999 and the Company’s Retirement Plan effective as of January 1, 1999. Brant-Allen contributes the amount of employer contributions due on behalf of its employees under such plans.

Outside directors of the Company are paid $2,500 plus expenses per board meeting attended.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

Brant-Allen beneficially owns all the equity of each of the Company, Timberlands and Soucy Inc. Brant-Allen, in turn, is jointly owned by Mr. Peter Brant and Mr. Joseph Allen.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

RELATIONSHIP WITH BRANT-ALLEN

Brant-Allen owns all of the equity in the Company, Timberlands and Soucy Inc. Brant-Allen is a subchapter S corporation jointly owned by Mr. Peter Brant and Mr. Joseph Allen. Mr. Brant serves as Brant-Allen’s Chairman of the Board and Chief Executive Officer and also as Chairman of the Board of Directors and Chief Executive Officer of the Company and Timberlands and Chief Executive Officer of Soucy Inc. Mr. Allen serves as Brant-Allen’s President and Chief Operating Officer and also as President and Chief Operating Officer of the Company and Timberlands and Chief Operating Officer of Soucy Inc. The other officers of Brant-Allen, Mr. Edward Sherrick and Mr. Thomas Armstrong, are also directors of the Company.

In May 2002, Brant-Allen provided $5.0 million as a subordinated loan to the Company and during the year ended 2003 Brant-Allen provided an additional $10.0 million of subordinated loans. These subordinated loans were transferred to the Company’s capital as of December 31, 2003.

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 $972,000, $984,000 and $1,120,000 for the years ended December 31, 2003, 2002 and 2001, 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 record keeping systems with Timberlands, and the Company charges Timberlands monthly for its share of these costs. Accordingly, these shared employees receive benefits under the Company’s defined contribution retirement plan and are eligible to participate in the Company’s thrift plan. Costs associated with these plans are reimbursed monthly by Timberlands. Amounts paid to the Company for shared costs, which are included in selling, general and administrative expenses, approximated $16,000, $8,000 and $16,000, during the years ended December 31, 2003, 2002 and 2001, respectively. See the accompanying financial statements of the Company.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The following fees were billed by and paid to the Company’s independent auditors, PricewaterhouseCoopers LLP.

Audit related fees consist mainly of benefit plans audits and related expenses incurred. Tax fees are for work done in connection with filing tax returns for the Company.

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Exhibits and Financial Statements

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.

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INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND

PAPER COMPANY, L.L.C.

BEAR ISLAND PAPER COMPANY, L.L.C.

Report of Independent Auditors

Balance Sheets—December 31, 2003 and 2002

Statements of Operations—Years ended December 31, 2003, 2002 and 2001

Statements of Changes in Member’s Interest—Years ended December 31, 2003, 2002 and 2001

Statements of Cash Flows—Years ended December 31, 2003, 2002 and 2001

Valuation and Qualifying Accounts

Table of Contents

Bear Island Paper

Company, L.L.C.

(A Virginia Limited Liability Corporation)

Financial Statements

December 31, 2003 and 2002

Table of Contents

INDEX TO FINANCIAL STATEMENTS AND SCHEDULE OF BEAR ISLAND

PAPER COMPANY, L.L.C.

BEAR ISLAND PAPER COMPANY, L.L.C.

Report of Independent Auditors

Balance Sheets—December 31, 2003 and 2002

Statements of Operations—Years ended December 31, 2003, 2002 and 2001

Statements of Changes in Member’s Interest—Years ended December 31, 2003, 2002 and 2001

Statements of Cash Flows—Years ended December 31, 2003, 2002 and 2001

Valuation and Qualifying Accounts

Table of Contents

Bear Island Paper Company, L.L.C.

(A Virginia Limited Liability Corporation)

Balance Sheets

December 31, 2003 and 2002

The accompanying notes are an integral part of the financial statements.

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Bear Island Paper Company, L.L.C.

(A Virginia Limited Liability Corporation)

Statements of Operations

Years Ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of the financial statements.

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Bear Island Paper Company, L.L.C.

(A Virginia Limited Liability Corporation)

Statements of Changes in Equity

Years Ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of the financial statements.

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Bear Island Paper Company, L.L.C.

(A Virginia Limited Liability Corporation)

Statements of Cash Flows

Years Ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of the financial statements.

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Bear Island Paper Company, L.L.C.

(A Virginia Limited Liability Corporation)

Statements of Cash Flows

Years Ended December 31, 2003, 2002 and 2001

The accompanying notes are an integral part of the financial statements.

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Bear Island Paper Company, L.L.C.

Notes to Financial Statements

December 31, 2003 and 2002

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.

As shown in the accompanying comparative statements of operations and balance sheets, the Company incurred net losses of $17,975,219, $18,902,856 and $5,722,211 for the years ended December 31, 2003, 2002 and 2001, respectively, and had an accumulated deficit of $60,871,893 at December 31, 2003. 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.

In the past Brant-Allen has made subordinated loans to the Company aggregating $15 million. In December 2003 recognizing the Company’s need for additional Equity Capital, Brant-Allen converted these loans to Equity. Although not legally committed, Brant-Allen has indicated its willingness to continue to support the Company. As of December 31, 2003, the Company had approximately $0.3 million in available borrowings under its Revolving Credit Facility (see Note 7) to fund cash requirements. After January 5, 2004, the Company has fully drawn its available borrowings under the Revolving Credit Facility in connection with the refinancing of the Facility (see Note 12). As of January 5, 2004, the Company had no additional borrowing capacity under the Revolving Credit Facility. However, the Company has the ability to access approximately $6.7 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 2004; however, there exists a range of reasonably possible outcomes which could significantly impact their ability to achieve the aforementioned.

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, 2003 and 2002 of approximately $915,735 and $1,225,679, respectively.

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Bear Island Paper Company, L.L.C.

Notes to Financial Statements

December 31, 2003 and 2002

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 three years ended December 31, 2003.

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. No impairment charges were recorded in the three years ended December 31, 2003.

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. The tax bases of the Company’s net assets was $107.8 million and $106 million lower than the reported amounts for those same net assets at December 31, 2003 and 2002, respectively. The substantial majority of this difference is comprised of basis differences in property, plant and equipment.

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, 2003, 2002 and 2001 of $5.9 million, $6.1 million and $5.9 million, respectively, are included in cost of sales in the Statement of Operations.

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Bear Island Paper Company, L.L.C.

Notes to Financial Statements

December 31, 2003 and 2002

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 the three years ended December 31, 2003.

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 write-off directly to selling, general and administrative expenses in the statements of operations.

The Company has five customers whose sales represent a significant portion of sales. Sales to one of these customers approximated 19%, 21% and 11% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a second customer approximated 13%, 10% and 16% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a third customer approximated 19%, 22% and 16% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a fourth customer approximated 8%, 9% and 14% for the years ended December 31, 2003, 2002 and 2001, respectively. Sales to a fifth customer approximated 18%, 16% and 14% for the years ended December 31, 2003, 2002 and 2001, respectively.

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