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