SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File No. 0-795
BADGER PAPER MILLS, INC.
(Exact name of registrant as specified in its charter)
200 West Front Street WISCONSIN
P.O. Box 149 (State of incorporation)
Peshtigo, Wisconsin 54157-0149 39-0143840
(Address of principal executive office) (I.R.S. Employer Identification Number)
Registrant's telephone number, including area code: (715) 582-4551
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, Without Nominal or Par Value
Indicate by checkmark 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 checkmark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of the registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K. [ ]
As of March 13, 2000, 1,974,168 shares of common stock were outstanding, and the
aggregate market value of the common stock (based upon the closing sale price of
the shares on the Nasdaq National Market) held by non-affiliates was
approximately $11,598,237. Determination of stock ownership by affiliates was
made solely for the purpose of responding to this requirement, and registrant is
not bound by this determination for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
The Company's Proxy Statement for its 2000 Annual Meeting of Shareholders to be
filed with the Commission under Regulation 14A is herein incorporated by
reference into Part III of this Form 10-K to the extent indicated in Part III
hereof.
1
Statement Regarding Forward-Looking Information
This Form 10-K, each of the Company's annual report to shareholders, Forms 8-K
and 10-Q, proxy statements, and any other written or oral statement made by or
on behalf of the Company subsequent to the filing of this Form 10-K may include
one or more "forward-looking statements" within the meaning of Sections 27A of
the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934 as
enacted in the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). In making forward-looking statements within the meaning of the Reform
Act, the Company undertakes no obligation to publicly update or revise any such
statement.
Forward-looking statements of the Company are based on information available to
the Company as of the date of such statements and reflect the Company's
expectations as of such date, but are subject to risks and uncertainties that
may cause actual results to vary materially. In addition to specific factors
which may be described in connection with any of the Company's forward-looking
statements, factors which could cause actual results to differ materially
include, but are not limited to the following:
o Increased competition from either domestic or foreign paper producers or
providers of alternatives to the Company's products, including increases
in competitive production capacity, resulting in sales declines from
reduced shipment volume and/or lower net selling prices in order to
maintain shipment volume.
o Changes in demand for the Company's products due to overall economic
activity affecting the rate of consumption of the Company's paper
products, growth rates of the end markets for the Company's products,
technological or consumer preference changes and acceptance of the
Company's products by the markets served by the Company.
o Changes in the price of pulp, the Company's main raw material. All of the
Company's pulp needs are purchased on the open market and price changes
for pulp have a significant impact on the Company's costs. Pulp price
changes can occur due to changes in worldwide consumption levels of pulp,
pulp capacity additions, expansions or curtailments affecting the supply
of pulp, inventory building or depletion at pulp consumer levels which
affect short-term demand, and pulp producer cost changes related to wood
availability, environmental issues and other variables.
o Unforeseen operational problems at any of the Company's facilities causing
significant lost production and/or cost issues.
o Changes in laws or regulations which affect the Company.
2
Five-Year Comparison of Selected Financial Data
Year ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Earnings (in thousands):
Net sales $67,024 $65,727 $70,427 $76,276 $92,648
Cost of sales 60,336 58,505 67,600 72,411 83,890
Gross profit 6,688 7,222 2,827 3,865 8,758
Selling and administrative expenses 4,825 4,331 4,085 4,136 3,852
Restructuring provision - - 850 7,430 504
Pulp mill impairment charge - - 783 - -
Profit (loss) from operations 1,863 2,891 (2,891) (7,701) 4,402
Other income 617 946 650 4,842 414
Interest expense 1,064 1,196 1,354 894 1,305
Unrealized holding gain or (loss)
on trading securities - - - 307 549
Earnings (loss) before income taxes 1,416 2,641 (3,595) (3,446) 4,060
Income tax expense (benefit) 279 897 (1,153) (1,234) 1,312
Net earnings (loss) 1,137 1,744 (2,442) (2,212) 2,748
Common stock:
Number of shareholders of record 434 470 515 518 568
Weighted average shares outstanding 1,966,111 1,955,772 1,947,128 1,944,699 1,953,868
Earnings (loss) per share $.58 $0.89 $(1.25) $(1.14) $1.41
Cash dividends declared per share - - $ - $ 0.22 $0.10
Book value per share $9.91 $9.33 $8.42 $9.68 $11.04
Financial position (in thousands)
Working capital $8,259 $7,346 $7,196 $9,923 $10,459
Capital expenditures 2,815 3,004 4,686 6,856 2,705
Total assets 46,894 47,999 48,356 51,952 52,578
Long-term debt 15,705 16,126 20,394 18,617 17,236
Shareholders' equity 19,484 18,257 16,444 18,832 21,443
3
PART I
Item 1. Business
Badger Paper Mills, Inc. ("Badger" or the "Company") was incorporated under the
laws of the State of Wisconsin in 1929. It has been producing paper for over 70
years. Badger operates in two industry segments: the production of paper
products segment, and the printing and converting segment.
Products and Distribution
Badger's ISO 9001 certified paper mill, consisting of two paper machines, is
located in Peshtigo, Wisconsin. Converting facilities contiguous to the
papermaking facilities include punching equipment, sheeters, trimmers, sealers,
perforators, rewinders, waxers, paper drilling and die-cutting equipment.
Badger's flexographic printing and converting operation is located in Oconto
Falls, Wisconsin.
Products produced on Badger's Fourdrinier machine represented 78 percent of the
paper products manufactured by the Company in 1999, and sale of paper products
produced on this machine contributed more than 69 percent of 1999 revenue. Fine
paper grades are produced utilizing fiber purchased on the open market,
including pre- and post-consumer recycled fibers. These paper grades include
multi-purpose business papers, offset, opaque, endleaf, ledger, reply card,
watermarked, water-oil-grease resistant papers (WOGR), electrostatic copier,
text and cover, and technical and specialty papers. Badger offers a wide range
of colored papers and specializes in color matching. Badger sells a portion of
these products under certain trademarks and trade names, including Ta-Non-Ka(R),
Copyrite(R), ENVIROGRAPHIC(R), Northern Brights(R), Artopaque(R), Marks of
Distinction(R) and DuraEdge(R). These products are sold through paper merchants,
brokers and value-added converters who in turn sell to other value-adding
entities or direct to the consumer.
The Company's Yankee machine produced 22 percent of the paper products
manufactured by Badger in 1999, representing 31 percent of the 1999 revenue from
the sale of paper products. These products consist of converted plain or printed
waxed papers, laminating grades, machine-glazed, colors, specialty-coated base
papers, twisting papers and various other specialty papers. These products are
sold nationally and internationally to manufacturers, consumers and converters
by Badger's own sales personnel and commissioned brokers.
Consumers of Badger's paper products can be found in population centers
throughout North America.
The Company's Oconto Falls, Wisconsin facility has a printing and converting
operation that compliments Badger's packaging paper products. This facility
processes various substrates of film and paper and enhances the capabilities of
the Peshtigo packaging paper operations, resulting in opportunities to expand
business growth for both. The facility also has rewinding and polyethylene bag
making equipment. Oconto Falls contributed 13 percent of the Company's
consolidated revenues in 1999.
4
Competition
Badger's manufactured paper products are highly sensitive to competition from
numerous sources, including other paper products and products of other
composition. Product quality, price, volume and service are all competitive
factors. Badger's production of fine papers from the Fourdrinier paper machine
represents less than one percent of the production capacity in the United States
for these products. Competition for these papers comes primarily from large
mills in North America and imports from other countries. Competition for
flexible packaging and specialty papers produced from the Yankee paper machine
comes from other specialty mills; some of the mills are similarly constituted as
Badger, others have greater capacity. Many of our larger competitors have
greater financial, technical, marketing and public relation resources, larger
client bases and greater brand or name recognition than Badger. Backlogs are
maintained by offering quality products, prompt service and technical
assistance, including a research and development program to develop new products
to meet customer product design specifications.
Raw Materials; Inventories
Badger's principal raw material used for papermaking operations is purchased
pulp. Badger utilizes a variety of fibers to meet the formulation requirements
of the papers it produces. Pre-consumer and post-consumer recycled pulp,
northern and southern softwood and hardwood pulps, and hard white rolls make up
the total fiber requirements. Badger purchases all its fiber requirements on the
open market.
Other raw materials are purchased directly from manufacturers and distributors.
Badger has at least two sources of supply for major items. Shortages of
purchased pulp or certain chemicals (including petrochemicals) could have an
adverse effect on Badger's ability to manufacture its products, and could
adversely affect product mix.
The printing and converting operations' primary raw materials are paper,
polyethylene and printing inks. They are purchased directly from manufacturers,
including paper purchases from the Peshtigo mill.
In-process and finished goods inventory at the end of 1999 was equivalent to
approximately 44 days of production, compared to 38 days in 1998.
Energy
Badger is a large consumer of electricity and natural gas. Electrical
requirements are purchased from local public utilities, and natural gas is
purchased from various sources in the United States and Canada. The Peshtigo
facility's heat requirements are supplied by two dual-fueled boilers capable of
burning natural gas or fuel oil, and one natural gas boiler. Management believes
current sources of natural gas, fuel oil and electricity are adequate to meet
Badger's needs, although temporary interruptions of electrical service were
experienced in the summer of 1999 due to regional shortages of electricity
during peak demand periods. Badger could experience similar interruptions in the
future.
Patents
Badger owns certain patents and licenses used in connection with its business,
none of which are individually considered material to its business.
5
Research and Development
Badger maintains a dedicated technical staff to research and develop new
products, although outside consultants are utilized from time to time. The
technical staff also refines and improves existing products in response to
customer requirements and market demands. The amounts spent on product research
and development activities were $2,089,000 in 1999, $2,971,000 in 1998, and
$5,287,000 in 1997. The significant increase in research and development
expenditures in 1997 was related to new product introductions and development of
specialty products associated with the 1997 strategic initiative to refocus
Badger as a producer of specialty paper products rather than commodity paper
products.
Backlog
As of December 31, 1999, Badger's backlog of orders was approximately
$2,566,000, as compared to $2,106,000 and $3,550,000 at December 31, 1998 and
1997, respectively. The backlogs for 1999 and 1998 were reduced from prior years
because soft market conditions that existed at the end of each of these years
allowed customers to reduce inventories and order closer to their actual needs.
Customers
In 1999, 1998 and 1997, no customers represented over 10 percent of Badger's net
sales.
Environmental Matters
In 1999, the Wisconsin Department of Natural Resources ("WDNR") met with Badger
several times to determine the finalization of the Title V Air Operating Permit
at Badger's Peshtigo, Wisconsin facility. The final draft of the permit is
complete and is submitted to the WDNR for final approval. Badger expects to be
able to fully comply with the requirements of the permit as currently drafted.
Effluent flow from Badger's Peshtigo operations is directed into a joint
municipal waste water treatment plant, which Badger operates under contract with
the City of Peshtigo, Wisconsin. Management believes this water treatment plant
continues to meet or exceed all currently applicable environmental requirements.
Construction requirements necessary for the closure of the Company's former
landfill, known as the Harbor Road Landfill, were completed in December, 1999.
The final closure report was submitted to the WDNR in January, 2000. As part of
the closure agreement, the Company is required to provide proof of
responsibility for any future remediation efforts if environmental problems are
detected at this site. This amount increases over a five-year period from
$53,000 as of July 31, 1999 to $297,000 as of July 31, 2003. The Company met
this requirement as of December 31, 1999 with an irrevocable letter of credit
granted to the benefit of WDNR in the amount of $53,000.
Management believes the Oconto Falls, Wisconsin facility currently complies with
its air operating permit.
Badger believes it has in force all of the necessary environmental permits from
federal, state and local authorities, and does not anticipate any problem with
reissuance of any permits.
6
Employees
As of December 31, 1999, the Company had 325 employees. Of the 268 employees at
the Peshtigo facility, 171 were covered by six-year collective bargaining
contracts running through May 2001. The Oconto Falls facility employs 57
personnel, none of whom are covered by a collective bargaining contract.
Item 2. Properties
The Company's approximately 3,750 square foot headquarters and approximately
88,500 square foot paper manufacturing facility are located in Peshtigo,
Wisconsin. The Company's approximately 40,000 square foot printing and
converting facility is located in Oconto Falls, Wisconsin. The Company considers
its facilities to be adequate and in good repair.
Item 3. Legal Proceedings
The Company has no pending material legal proceedings.
Item 4. Submission of matters to a vote of security holders
No matters were submitted to a vote of security holders in the fourth quarter of
1999.
PART II
Item 5. Market for the registrant's common stock and related security holder
matters.
Badger Paper Mills, Inc. common shares are traded on the Nasdaq National Market
under the symbol BPMI. There were 431 registered shareholders of record as of
March 13, 2000. Stock price and dividend information is found on page 35 of this
report.
Item 6. Selected financial data
Information regarding selected financial data of the Company is presented on
page 3 of this report.
Item 7. Management's discussion and analysis of financial condition and results
of operations
Results of Operations
Overview
The printing and converting segment achieved record sales and earnings, while
the paper products segment had flat sales and a 70 percent reduction in earnings
in 1999 when compared to 1998.
7
Printing and converting segment sales improved primarily from the increased
volume of our tissue wrap business. Improved operating efficiencies on the
printing presses also contributed significantly to gross profit in this segment.
Weak market conditions throughout 1999 resulted in a slight reduction in
shipping volume and relatively flat selling prices in the paper products
segment. Market pressures prevented the Company from increasing its sales prices
sufficiently to fully recover the costs associated with increased pulp prices.
Therefore, margins were negatively impacted by a 37 percent increase in pulp
prices during 1999. Additionally, the operating efficiency of our Fourdrinier
paper machine was adversely affected during the second half of the year by the
start-up and fine tuning of a new process control system. The start-up issues
associated with the new process control system were resolved in December, and
the Fourdrinier paper machine is now operating at anticipated efficiency.
On August 31, 1999, Badger Paper Mills Flexible Packaging Division, Inc., our
former wholly-owned subsidiary that operated our Oconto Falls operations, was
merged with and into the Company.
1999 vs. 1998
Net Sales
- ---------
Net sales for 1999 increased $1,297,000, or 2 percent, to $67,024,000 from
$65,727,000 in 1998.
Paper products' net sales were flat as weak market conditions continued during
1999. Paper products' volume was down 3 percent, while selling prices remained
relatively flat. Printing and converting net sales increased 70 percent over
1998 due to growth in the printing business in 1999.
Specialty products were approximately 53 percent of gross sales dollars in both
1999 and 1998.
Cost of Sales
- -------------
Cost of sales for 1999 of $60,336,000 increased $1,831,000 or 3 percent over the
$58,505,000 reported in 1998.
During the second quarter of 1999, market prices for pulp, the primary raw
material in the Company's paper manufacturing, began to escalate. This trend
continued throughout the remainder of the year, with average year-end 1999
prices increasing 37 percent over the average price of pulp at the end of 1998.
This pulp increase contributed over $2,800,000 to the cost of sales for paper
manufacturing in 1999.
Production rates on the Fourdrinier paper machine were down 9 percent in 1999
compared to 1998 because of first quarter mechanical problems and difficulties
associated with the installation of a new process control computer in July 1999.
The Yankee paper machine and all converting operations had improved production
rates over 1998.
The printing and converting operations at Oconto Falls improved operating rates
through longer production runs, reduced change time between production runs,
improved waste rates and the elimination of mechanical problems previously
experienced on the Chadwick press.
8
Gross Profit
- ------------
Gross profit margins decreased to 10 percent of net sales for 1999, compared to
11 percent in 1998. The overall decrease was due to a 22 percent gross margin
drop in our paper products segment caused by our inability to pass rapidly
escalating pulp prices through to our customers because of soft market
conditions.
The printing and converting segments' gross profit margin increased 29 percent
due to improved operating efficiencies.
Selling and Administration
- --------------------------
Selling and administration expenses of $4,825,000 increased $494,000 over the
$4,331,000 reported in 1998.
The increase resulted primarily from expenses associated with the reorganization
of sales staffing in the paper products segment to provide for a product
development function within the sales department, and an addition to the sales
staff. Non-capitalizable expenses associated with upgrading computers and
software in addressing Year 2000 concerns were included in administration
expenses.
Other Income and Expense
- ------------------------
In the second quarter of 1999, Badger Paper received $622,000 of life insurance
proceeds upon the death of a former president of the Company in March 1999. The
proceeds included $231,000 of cash surrender value carried as other assets on
our balance sheet, and $391,000 of non-recurring income.
In the second quarter of 1998, the Company recorded a non-recurring capital gain
of $611,000 on the sale of the Company's offsite training facility.
Non-recurring executive termination expenses of $286,000 associated with a
former president and vice president were also booked in the second quarter of
1998.
Other income (expense) for 1998 included $308,000 of realized gains on trade
credit contracts. In 1999, the realized gain on trade credit contracts was $0.
Income Taxes
- ------------
Badger Paper Mills effective tax rate was 19.8 percent for 1999, compared to 34
percent for the same period in 1998. The decreased effective rate was due to the
non-taxability of the life insurance proceeds we received in 1999, and the
utilization of net operating loss and tax credit carryovers in connection with
the merger of our former Badger Paper Mills Flexible Packaging Division, Inc.
subsidiary into the Company.
1998 vs. 1997
Net Sales
- ---------
In 1998 sales decreased $4,700,000, or 7 percent, to $65,727,000 from
$70,427,000 during 1997. Weak market conditions continued in the industry in
1998, especially in the commodity market. This resulted in a decline of 11
percent in the volume of shipments. The Company's average selling price
increased slightly despite the volume decrease, primarily due to an increased
percentage of higher margin products sold in 1998. Specialty products increased
to approximately 53 percent of our gross sales dollars in 1998 from 37 percent
in 1997.
9
Cost of Sales
- -------------
Cost of sales of $58,505,000 for 1998 decreased by $9,095,000 or 13 percent from
$67,600,000 in 1997. This reduction was primarily the result of a 12 percent
decrease in production due to the weak market conditions in 1998. Our strategy
was to take downtime when market conditions warranted, versus running low margin
commodity products. Cost reductions were also achieved by the reduction of our
administrative and production workforce by approximately 71 employees. We also
experienced declining prices for the cost of purchased fiber during 1998.
Production rates at the Peshtigo facility were at record levels, while the
start-up of the new Chadwick printing press at the Oconto Falls plant
experienced some difficulties. These problems were resolved with the efforts of
engineering staffs at both facilities during the fourth quarter of 1998.
Gross Profit
- ------------
Gross profit in 1998 improved to $7,222,000 from $2,827,000 reported in 1997.
The increased percentage of higher margin specialty paper products in our sales
mix was the primary reason for the increase in gross profit in 1998. Workforce
reductions and cost saving initiatives that were implemented on the
manufacturing floor also contributed to the higher gross profit.
Selling and Administration
- --------------------------
Selling and administration expenses increased $246,000 to $4,331,000 in 1998.
The increase resulted primarily from sales and marketing expenses and the cost
of consultants incurred in 1998 associated with Badger's ongoing product
restructuring to specialty paper products from commodity paper products begun in
1997.
Other Income and Expense
- ------------------------
The Company recorded a second quarter non-recurring capital gain of $611,000 on
the sale of its offsite training facility. Additionally, non-recurring executive
termination expenses of $286,000 associated with the resignations of the
Company's former president and vice president were also recorded in the second
quarter of 1998.
Interest expense during 1998 decreased 12 percent to $1,196,000 compared to
$1,354,000 in 1997. The decrease in interest expense was primarily attributable
to lower average borrowings under the Company's revolving credit facility.
Income Taxes
- ------------
Badger's effective tax rate was a 34 percent provision in 1998, compared to a
32.1 percent benefit for the year 1997. The benefit in 1997 was associated with
the net loss for that year.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
- --------------------
Capital expenditures for 1999 totaled $2,815,000 compared to $3,004,000 in 1998
and $4,686,000 in 1997. Depreciation was $2,853,000 in 1999 compared to
$2,752,000 and $2,790,000 in 1998 and 1997, respectively.
Major projects in 1999 for the Peshtigo facility included the completion of a
ramp and enclosure to our wax plant warehouse, a rewinder for the Wax
Department, a spare couch roll for the Yankee paper
10
machine, a motor control center for the paper mill, and a landfill water
collection system. The Oconto Falls facility's capital expenditures included a
rewinder and improvements to the Chadwick press.
In 2000, we plan to continue our investments in upgrading our facilities,
including improvements and upgrades to the paper machines and converting
equipment.
Capital Resources
- -----------------
In January 1999, Badger refinanced its revolving credit facility with its
existing lender. The refinanced facility provides for borrowing up to
$12,000,000. The revolving credit facility contains certain covenants that
require the Company to maintain a specified fixed charge ratio, debt leverage
ratio, minimum tangible net worth, and also provide for limitations on capital
expenditures and require the Company to make minimum specified principal
payments on the Company's outstanding Industrial Development Revenue Bonds
("IDRBs"). Pursuant to the terms of the revolving credit facility, the debt
leverage ratio covenant became more restrictive effective December 31, 1999 and
the Company did not comply with the more restrictive ratio. The lender under the
revolving credit facility waived such non-compliance, and in March, 2000, the
Company and the lender amended the revolving credit facility to adjust the fixed
charge ratio and the debt leverage ratio. The amendment also tightened the
limitation on capital expenditures and extended the facility through November,
2003. Further detail is presented in Note F to the Company's Consolidated
Financial Statements.
At December 31, 1999, $10,700,000 was outstanding under the revolving credit
facility, a $500,000 increase from the balance outstanding at December 31, 1998.
The increase is primarily the result of borrowings under the revolving credit
facility used to partially fund an aggregate of $2,800,000 of principal payments
made during 1999 on certain of the Company's IDRBs.
In February 2000, the City of Peshtigo agreed to refinance an Urban Development
Action Grant ("UDAG") which was scheduled to mature in April, 2000. The terms of
the refinancing provide for a ten-year amortization with interest at 5 percent.
Cash Flows
- ----------
Cash provided from operations was $1,329,000 in 1999 and $2,079,000 in 1998. The
decrease relates primarily to reduced net income after excluding the one-time
non-operating gain from life insurance proceeds in 1999.
Net cash used in investing activities was $460,000 in 1999 compared to $171,000
of cash provided by investing activities in 1998. The change is primarily due to
the inclusion of non-recurring gains in 1998 involving the sale of the Company's
training facility and the maturity of certificates of deposit. The Company also
received $622,000 of life insurance proceeds in 1999 upon the death of a former
president of the Company.
Cash used in financing activities was $2,429,000 in 1999, compared to $1,323,000
in 1998. The increase was primarily the result of principal payments on the
Company's IDRBs required to be made pursuant to the terms of our refinanced
revolving credit facility.
11
Year 2000
Badger formed a Year 2000 Committee that was assigned the task of assuring Year
2000 ("Y2K") compliance for all information technology and non-IT systems. The
Committee was on site at the change of the millennium and determined all Y2K
compliance issues have been resolved. There have been virtually no issues
related to the Y2K issue during 2000.
Other potential Y2K issues may occur on February 29, 2000 (Leap Year), October
10, 2000 (first ten-digit date) and December 31, 2000 (366th day). Our systems
have been tested and we believe they are in compliance with all of the above
future date issues.
We have had no Y2K issues from our key vendors in 2000. While we do not
anticipate any future Y2K related issues with our vendors, we cannot guarantee
their compliance.
The Company incurred approximately $50,000 of additional expenses associated
with contract programming and system upgrades and/or replacement to address Y2K
issues. This figure does not include normal wages and benefits of the
information technology and engineering staffs while working on Y2K issues. We
also replaced process computers on the two paper machines at a cost of
$1,935,000 during 1998 and 1999. While the costs were significant, they have not
been included in the above Y2K costs because the old process controllers were
obsolete, and there was no acceleration of the timing of these projects due to
Y2K-related issues.
Item 7a. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest on its long-term
debt. The Company's revolving credit facility provides for borrowings up to $12
million and extends to November 2003. An annual commitment fee of 1/2 percent is
payable for unused amounts. Interest on borrowings is at various rates equal to
the Prime rate (totaling 8.5 percent at December 31, 1999) and the LIBOR rate
plus 2.0 percent (totaling 7.83 percent at December 31, 1999).
Certain of the Company's IDRBs require varying quarterly principal installments
of $140,000 plus interest quarterly through October 1, 2006, with payment of the
remaining balance due December 1, 2006, and the Company's revolving credit
facility requires it to make additional principal payments on its IDRBs. These
required payments included principal payments of $1,885,000 made in March 1999,
and $495,000 made in June, 1999. The remaining required payments under the
revolving credit facility are principal installments of $400,000 and $100,000
due July 1, 2000 and February 1, 2001, respectively. Interest on the IDRBs is
payable at floating rates determined by remarketing agents (5.65 percent at
December 31, 1999).
A majority of the Company's debt is at variable interest rates, and a
hypothetical 1 percent change in interest rates would cause an estimated
$168,000 increase in annual interest expense.
The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
12
Item 8. Financial statements and supplementary data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
Badger Paper Mills, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Badger Paper
Mills, Inc. (a Wisconsin corporation) and Subsidiary as of December 31, 1999 and
1998 and the related consolidated statements of operations, shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1999. 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 audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of Badger Paper
Mills, Inc. and Subsidiary as of December 31, 1999 and 1998 and the consolidated
results of their operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Appleton, Wisconsin
February 1, 2000
(except for Note F, as
to which the date is
March 9, 2000)
13
Badger Paper Mills, Inc. And Subsidiary
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(dollars in thousands)
ASSETS 1999 1998
---- ----
Current Assets
Cash and cash equivalents $ 669 $ 2,229
Certificates of deposit 500 996
Marketable securities 137 1,361
Accounts receivable, net 6,080 5,262
Inventories 7,819 6,201
Refundable income taxes 220 27
Deferred income taxes 1,160 1,220
Prepaid expenses and other 606 558
------------------------------
Total current assets 17,191 17,854
PROPERTY, PLANT AND EQUIPMENT, NET 27,240 27,291
OTHER ASSETS
Trade credits 609 696
Other 1,854 2,158
------------------------------
2,463 2,854
------------------------------
Total assets $ 46,894 $ 47,999
==============================
LIABILITIES
CURRENT LIABILITIES
Current portion of long-term debt $ 1,060 $ 3,068
Accounts payable 4,746 3,913
Accrued liabilities 3,126 3,357
Income taxes payable - 170
------------------------------
Total current liabilities 8,932 10,508
------------------------------
LONG-TERM DEBT 15,705 16,126
DEFERRED INCOME TAXES 1,840 1,700
OTHER LIABILITIES 933 1,408
COMMITMENTS AND CONTINGENCIES - -
SHAREHOLDERS' EQUITY
Common stock, no par value; 4,000,000 shares authorized,
2,160,000 shares issued 2,700 2,700
Additional paid in capital 201 200
Retained earnings 18,433 17,296
Treasury stock, at cost, 185,832 and 199,278 shares
in 1999 and 1998, respectively (1,850) (1,939)
------------------------------
Total shareholders' equity 19,484 18,257
------------------------------
Total liabilities and shareholders' equity $ 46,894 $ 47,999
==============================
The accompanying notes are an integral part of these statements.
14
Badger Paper Mills, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF OPERATIONS
For Years Ended December 31, 1999, 1998 and 1997
(dollars in thousands, except per share data)
1999 1998 1997
---- ---- ----
Net sales $67,024 $65,727 $70,427
Cost of sales 60,336 58,505 67,600
-----------------------------
Gross profit 6,688 7,222 2,827
Selling and administrative expenses 4,825 4,331 4,085
Restructuring provision - - 850
Pulp mill asset impairment charge - - 783
-----------------------------
4,825 4,331 5,718
-----------------------------
Operating income (loss) 1,863 2,891 (2,891)
Other income (expense):
Interest and dividend income 85 237 236
Interest expense (1,064) (1,196) (1,354)
Executive termination costs - (286) -
Gain from life insurance proceeds 391 - -
Gain (loss) on disposal of property, plant
and equipment - 632 (14)
Miscellaneous, net 141 363 428
-----------------------------
(447) (250) (704)
-----------------------------
Income (loss) before income taxes 1,416 2,641 (3,595)
Provision (benefit) for income taxes 279 897 (1,153)
-----------------------------
Net income (loss) $1,137 $1,744 $(2,442)
=============================
Net earnings (loss) per share (basic and diluted) $0.58 $0.89 $(1.25)
=============================
The accompanying notes are an integral part of these statements.
15
Badger Paper Mills, Inc. and Subsidiary
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
For Years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
1999 1998 1997
---- ---- ----
Common stock
Balance, December 31 2,700 $2,700 $2,700
--------------------------------------
Additional paid-in capital
Balance, January 1 200 190 178
Treasury stock issued 1 10 12
--------------------------------------
Balance, December 31 201 200 190
--------------------------------------
Retained earnings
Balance, January 1 17,296 15,552 17,994
Net income (loss) 1,137 1,744 (2,442)
--------------------------------------
Balance, December 31 18,433 17,296 15,552
--------------------------------------
Treasury stock
Balance, January 1 (1,939) (1,998) (2,040)
Shares acquired (920 shares in 1997) - - (8)
Shares issued (13,446, 8,867, and 7,645 shares
in 1999, 1998 and 1997, respectively) 89 59 50
--------------------------------------
Balance, December 31 (1,850) (1,939) (1,998)
--------------------------------------
Shareholders' equity
Balance, December 31 $19,484 $18,257 $16,444
======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
16
Badger Paper Mills, Inc. and Subsidiary
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Years ended December 31, 1999, 1998 and 1997
(dollars in thousands)
1999 1998 1997
------ ------ ------
Cash flows from operating activities:
Net income (loss) $1,137 $1,744 $(2,442)
Adjustments to reconcile to net cash provided
by operating activities:
Depreciation 2,853 2,752 2,790
Pulp mill impairment charge - - 783
Directors' fees paid in stock 90 69 60
Deferred income taxes 200 586 (746)
Realized (gain) loss on sale of marketable securities - 48 (8)
Gain from life insurance benefits (391) - -
(Gain) loss on disposal of property, plant and equipment - (632) 14
Changes in assets and liabilities
Accounts receivable, net (818) (142) (564)
Inventories (1,618) (1,357) 1,993
Accounts payable and accrued liabilities 602 (1,351) (2,250)
Income taxes refundable (payable) (363) 528 1,081
Other (363) (166) (312)
-----------------------------------------
Net cash provided by operating activities 1,329 2,079 399
-----------------------------------------
Cash flows from investing activities:
Additions to property, plant, and equipment (2,815) (3,004) (4,686)
Proceeds from sale of property, plant and equipment 13 2,880 627
Net sales (acquisitions) of certificates of deposit 496 386 (1,382)
Life insurance proceeds 622 - -
Purchases of marketable securities (36) (1,927) (1,192)
Proceeds from sale of marketable securities 1,260 1,836 1,682
-----------------------------------------
Net cash provided by (used in) investing activities (460) 171 (4,951)
-----------------------------------------
Cash flows from financing activities:
Payments on long-term debt (4,029) (2,323) (119)
Increase in revolving notes payable 1,600 1,000 1,900
Acquisition of treasury stock - net - - (6)
-----------------------------------------
Net cash provided by (used in) financing activities (2,429) (1,323) 1,775
-----------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS (1,560) 927 (2,777)
Cash and cash equivalents:
Beginning of year 2,229 1,302 4,079
-----------------------------------------
End of year
$ 669 $2,229 $1,302
=========================================
The accompanying notes are an integral part of these statements.
17
Badger Paper Mills, Inc. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Badger Paper Mills, Inc. and Subsidiary ("Company") manufactures paper and paper
products and provides converting and printing services to customers throughout
North America. In August of 1999, the wholly owned subsidiary involved in
printing and converting was merged into Badger Paper Mills, Inc. In February
1998, Peshtigo Power, LLC ("Peshtigo") was incorporated to produce steam for
Badger Paper Mills, Inc. Peshtigo is wholly owned by the Company.
A summary of the significant accounting policies applied in the preparation of
the accompanying consolidated financial statements follows.
1. Consolidation Principles
The consolidated financial statements include the accounts of Badger Paper
Mills, Inc. and its wholly-owned Subsidiary. All significant intercompany
accounts and transactions have been eliminated.
2. Operating Segments
The Company has adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and
Related Information". SFAS 131 requires public companies to use a "management
approach" to defining and reporting the activities of operating segments. The
management approach defines operating segments along the lines used by
management to assess performance and make operating and capital decisions.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. The Company places its cash and cash equivalents with high quality
financial institutions. The Company provides credit in the normal course of
business to its customers. These customers are located throughout North America.
The Company performs ongoing credit evaluations of its customers and maintains
allowances for potential credit losses and generally does not require collateral
to support the accounts receivable balances.
4. Financial Instruments
For cash and certificates of deposit, the carrying amount approximates fair
value because of the short maturity of these instruments. For long-term debt,
the carrying amount approximates fair value based on comparison with current
rates offered to the Company for debt with similar remaining maturities.
5. Estimates
Preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reported period. Actual
results could differ from those estimates.
6. Cash Equivalents and Certificates of Deposit
For financial reporting purposes, the Company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
18
7. Marketable Securities
The investment portfolio at December 31, 1999 and 1998, which consists of
taxable United States Agency Bonds, corporate bonds, tax-exempt bonds and equity
securities, are classified as available for sale. The difference between cost
and fair value is insignificant. The specific identification method is used to
compute realized gains and losses. The entire balance of marketable securities
at December 31, 1999 consists of bonds maturing at various dates after 10 years.
At December 31, 1998, marketable securities consisted of bonds of $1,201,374 and
equity securities of $160,000.
8. Receivables
Accounts receivable are stated net of an allowance for sales returns, cash
discounts and doubtful accounts.
9. Inventories
Substantially all inventories are valued at the lower of cost or market with
cost being determined on the last-in, first-out (LIFO) basis.
10. Property, Plant and Equipment
These assets are stated at cost, less depreciation. Depreciation of plant and
equipment is provided on the straight-line basis over the estimated useful lives
of the assets. Buildings useful lives range from 30 to 33 years and machinery
and equipment from three to 17 years. Accelerated depreciation is used for
income tax purposes.
11. Trade Credits
Trade credits represent credits issued by an international barter firm in
exchange for surplus inventory. Trade credits are recorded at the lower of cost
or market of the inventory exchanged. Previously, gain was recognized upon
utilization of the trade credits with the Company's suppliers and vendors. In
1999 and thereafter, gain will be recognized upon the recovery of the cost of
these trade credits.
12. Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable for the period and the change during the period in deferred tax
assets and liabilities.
13. Stock Options
The Company has elected to follow Accounting Principles Board Opinion (APB) No.
25, "Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock options. Under APB 25, because the exercise price of
the stock options exceeds the market price of the underlying stock on the date
of grant, no compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation."
14. Revenue Recognition
Revenue is recognized by the Company when goods are shipped.
19
15. Net Earnings (Loss) Per Share
Net earnings (loss) per share are computed based on the weighted average number
of shares of common stock outstanding during the year (1,966,111 shares,
1,955,772 shares and 1,947,128 shares in 1999, 1998 and 1997, respectively). In
1999, for purposes of computing diluted net earnings per share, the 115,000
stock options granted in 1999 under the stock option plan were considered
antidilutive because their exercise prices were greater than the average market
price of the common shares.
16. Research and Product Development Costs
Research and product development costs related to potential new products and
applications are expensed when incurred. These costs totaled $2,089,000,
$2,971,000 and $5,287,000 for 1999, 1998 and 1997, respectively, and are
included in cost of sales.
17. Environmental Expenditures
Accruals for remediation costs are recorded when it is probable that a liability
has been incurred and the amount of the costs can be reasonably estimated.
NOTE B - RECEIVABLE ALLOWANCES
The receivable allowances at December 31, 1999 and 1998 are as follows (in
thousands):
1999 1998
------- -------
Sales returns and allowances $205 $154
Cash discounts 43 31
Doubtful accounts 48 59
---- ----
$296 $244
=== ===
NOTE C - INVENTORIES
The major classes of inventories, valued on the LIFO cost method, at December
31, 1999 and 1998 are as follows (in thousands):
1999 1998
------- -------
Raw Materials $1,559 $1,858
Work-in-process and finished stock 6,260 4,343
----- -----
$7,819 $6,201
===== =====
The FIFO cost of raw materials, work-in-process and finished stock inventories
approximated $11,890,000 and $10,150,000 at December 31, 1999 and 1998,
respectively. It is not practical to separate finished stock and work-in-process
inventories.
20
NOTE D - PROPERTY, PLANT AND EQUIPMENT
The major classes of property, plant and equipment at December 31 are as follows
(in thousands):
1999 1998
------- -------
Land $ 199 $ 199
Buildings 8,698 8,297
Machinery and equipment 58,392 56,044
Construction-in-progress - equipment 567 549
------- -------
67,856 65,089
Accumulated depreciation 40,616 37,798
------- -------
$27,240 $27,291
======= =======
At December 31, 1999 and 1998, $17,302,000 and $15,911,000, respectively, of
fully depreciated assets were still in use. In December 1997, the Company
evaluated the remaining fixed assets held for resale relating to the closure of
the pulp mill by comparing the asset's carrying amount with its fair value less
cost to sell. As a result, the Company recorded an impairment charge of
$783,000.
During 1998, the Company sold its training facility for $725,000 resulting in a
gain of $611,000.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 are as follows (in thousands):
1999 1998
------- -------
Compensation and related taxes $1,530 $1,539
Profit sharing 522 496
Restructuring - 15
Environmental remediation - 121
Other 1,074 1,186
------- -------
$3,126 $3,357
======= =======
NOTE F - LONG-TERM DEBT
Long-term debt at December 31, 1999 and 1998
consists of the following (in thousands):
1999 1998
------- -------
Revolving Credit Agreement $10,700 $10,200
Industrial Development Revenue Bonds (IDRB's) 4,550 7,417
Urban Development Action Grant 1,515 1,577
------- -------
16,765 19,194
Current portion 1,060 3,068
------- -------
$15,705 $16,126
======= ======
The Company's revolving credit facility provides for borrowings up to
$12,000,000 and, as amended on March 9, 2000 extends to November 2003. A
commitment fee of 1/2 percent is payable for unused amounts. Interest on
borrowings is at various rates equal to the Prime rate (totaling 8.5 percent at
December 31, 1999) and the LIBOR rate plus 2.0 percent (totaling 7.83 percent at
December 31, 1999). Borrowings are collateralized by cash and cash
21
equivalents, certificates of deposit, marketable securities, accounts
receivable, inventory and certain property, plant and equipment. In 1999, the
Company issued a letter of credit under the revolving credit facility to the
Wisconsin Department of Natural Resources (WDNR) for approximately $53,000 (note
N).
Certain of the IDRBs require varying quarterly installments of $140,000 plus
interest quarterly through October 1, 2006, with payment of the remaining
balance due December 1, 2006. Principal installments of $400,000 are due July 1,
2000, and $100,000 due February 1, 2001. These installments are in addition to
the quarterly installments. Interest on the IDRBs is payable at floating rates
determined by remarketing agents (5.65 percent at December 31, 1999). The IDRBs
are collateralized by bank letters of credit expiring in 2006. The Company pays
annual fees at one-half of one percent of the amount available under the letters
of credit.
At December 31, 1999, covenants related to the revolving credit facility
include, among other items, the Company to maintain a fixed charge coverage
ratio, a debt coverage ratio, and a limitation on capital expenditures. The
Company was not in compliance with the debt leverage ratio at December 31, 1999,
and obtained a waiver related to this non-compliance. As amended on March 9,
2000, the revolving credit facility and certain IDRBs require, among other
items, the Company to maintain a fixed charge coverage ratio of 2.15 for the
period ending September 29, 2000, and 1.15 for periods thereafter, and a debt
leverage ratio of 3.75 through September 29, 2000 and 3.5 for periods
thereafter. Capital expenditures are limited to $3,700,000 in 2000 and
$4,800,000 in 2001 and periods thereafter.
In February, 2000, the Company refinanced the Urban Development Action Grant.
This grant is due in monthly installments of $15,437, including interest at an
effective rate of approximately 5.0 percent, through maturity in April 2010.
This grant is collateralized by certain machinery and equipment.
Future maturities of all long-term debt are as follows (in thousands):
Year ended December 31,
2000 $ 1,060
2001 777
2002 683
2003 11,389
2004 696
2005 and thereafter 2,160
-------
$16,765
=======
NOTE G - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in
thousands):
1999 1998 1997
---- ---- ----
Currently payable (refundable)
Federal $62 $179 $(438)
State 17 132 31
-- --- -----
79 311 (407)
Deferred:
Federal $ 222 $336 $(746)
State (22) 250 -
---- --- -----
200 586 (746)
--- --- -----
$279 $897 $(1,153)
=== === ======
22
The significant differences between the effective tax rate and the statutory
federal tax rates are as follows:
1999 1998 1997
---- ---- ----
Statutory Federal tax rate 34.0% 34.0% (34.0)%
Tax-exempt income - life insurance proceeds (9.4) - -
State taxes (5.7) - -
Other 0.9 - 1.9
---- ---- -----
Effective tax rate 19.8% 34.0% (32.1)%
==== ==== ====
The components of the deferred tax assets and liabilities as of December 31 are
as follows (in thousands):
1999 1998
------- --------
Deferred tax assets:
Accounts receivable $ 101 $ 143
Inventories 217 311
Accrued expenses 570 766
Deferred compensation 69 95
Postretirement benefits 222 290
Tax credit carryforwards 3,019 2,938
State net operating loss carryforwards 315 362
State credit carryforwards 1,460 2,099
Valuation allowance (1,835) (2,692)
------- --------
4,138 4,312
Deferred tax liabilities:
Fixed assets (4,818) (4,792)
------- --------
Net liability $ (680) $ (480)
======= ========
For Federal income tax purposes, the Company has research and development credit
carryovers and alternative minimum tax credit carryovers of $1,179,000 and
$1,840,000, respectively. For state income tax purposes, the Company has net
operating loss and tax credit carryovers of $11,735,000 and $1,460,000,
respectively. Certain carryforwards expire at various times over the next 15
years. For financial reporting purposes, a valuation allowance has been
established to the extent that state carryforwards, absent future taxable
income, will expire unused. The valuation allowance decreased $857,000 due
primarily to the expiration of $790,000 of state tax credits in 1999. The
remaining decrease of $67,000 is based on management's reevaluation of the
likelihood of realization.
NOTE H - EMPLOYEE BENEFITS
The Company has profit sharing plans covering substantially all employees.
Contribution expenses associated with these plans were $522,000, $496,000 and
$587,000 in 1999, 1998 and 1997, respectively.
23
NOTE I - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes was as follows (in thousands):
1999 1998 1997
------ ------ ------
Interest $1,080 $1,235 $1,345
Income taxes 438 57 5
Noncash investing and financing activity:
At December 31, 1999, 1998 and 1997, accounts payable included $97,000, $22,000
and $134,000 respectively, for property and equipment additions.
NOTE J - OPERATING SEGMENTS
The Company adopted SFAS 131 in 1998. 1997 information has been restated to
present segment information for the Company's two business segments, paper
products and printing and converting services. The paper products segment
produces a variety of paper products including fine paper, business paper,
colored paper, waxed paper, specialty coated base papers and twisting papers.
The printing and converting segment prints and converts flexible packaging
materials for the paper products segment, as well as films and non-woven
materials from other customers.
The accounting policies of the segments are the same as those described in Note
A, Summary of Significant Accounting Policies. Intersegment revenue relates to
the transfer of material or provision of services between the two segments. The
Company evaluates the performance of its segments and allocates resources to
them based on net earnings. There are no jointly used or allocated assets
between the segments.
24
The following provides information on the Company's segments (in thousands):
Paper Products Printing and Converting Total
-------------- ----------------------- -----
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
Revenues from
external customers $58,379 $60,648 $66,222 $ 8,645 $ 5,079 $ 4,205 $67,024 $65,727 $70,427
Intersegment revenues 2,858 588 38 1,506 1,630 972 4,364 2,218 1,010
Depreciation 2,634 2,560 2,617 219 192 173 2,853 2,752 2,790
Restructuring provision - - 850 - - - - - 850
Pulp mill asset
impairment charge - - 783 - - - - - 783
Interest and dividend income 69 214 218 16 23 18 85 237 236
Interest expense 997 1,097 1,250 67 99 104 1,064 1,196 1,354
Executive termination costs - 286 - - - - - 286 -
Gain from life
insurance proceeds 391 - - - - - 391 - -
Gain (loss) from disposal of
long-lived assets - 632 (14) - - - - 632 (14)
Income tax (benefit)
provision (69) 862 (1,325) 348 35 172 279 897 (1,153)
Segment income (loss) 448 1,490 (2,771) 689 254 329 1,137 1,744 (2,442)
Segment assets 44,188 43,605 44,382 5,857 5,397 5,222 50,045 49,002 49,604
Expenditures for
long-lived assets 2,490 2,498 3,502 325 506 1,184 2,815 3,004 4,686
The following is a reconciliation of segment information to consolidated
information (in thousands):
1999 1998 1997
---- ---- ----
Revenues:
Total revenues for reportable segments $71,388 $67,945 $71,437
Elimination of intersegment revenues (4,364) (2,218) (1,010)
-------- ------- -------
Total consolidated revenues $67,024 $65,727 $70,427
======= ======= =======
Assets:
25
Total assets for reportable segments $50,045 $49,002 $49,604
Elimination of intersegment receivables (2,401) (253) (498)
Elimination of intersegment investment (750) (750) (750)
-------- -------- -------
Total consolidated assets $46,894 $47,999 $48,356
======= ======= ======
Total segment income and other significant items are the same as the
consolidated information.
All operations of the Company are located in the United States. Revenues from
foreign countries are primarily from Canada and Mexico are immaterial to total
revenues.
NOTE K - DIRECTOR STOCK GRANT PLANS
In 1999 and 1997, in order to attract and retain competent directors to serve as
Directors of the Company, the Company established Director Stock Grant Plans. An
aggregate of 50,000 shares of Common Stock was reserved for issuance under the
1999 and 1997 Plans. Each Director of the Company is to receive a grant of
Common Stock in partial payment of his or her retainer fee. During 1999, 1998
and 1997, 13,446, 8,867 and 7,345 shares, respectively, were issued from
treasury stock, at a value of $90,000, $69,000 and $60,000, respectively.
NOTE L - STOCK OPTION PLAN
On May 11, 1999, the Company established an incentive stock option plan (Plan)
as a mechanism to attract and retain its officers and key employees by providing
additional performance incentives and the opportunity to share ownership in the
Company. The Plan allows the Company to grant options for 130,000 common shares.
Options awarded under the Plan vest over a three or five year period and expire
in five to nine years.
In 1999, the Company granted 115,000 options at an average exercise price of
$8.42 per common share. At the date of grant, the market value of the stock was
less than the exercise price of the options. As the plan is accounted for under
APB Opinion 25, no compensation cost has been recognized for the plan. As of
December 31, 1999, 64,000 options are vested.
Had compensation cost for the plan been determined based on the fair value of
the options at the grant dates consistent with the method prescribed by SFAS
123, the Company's net income and net earnings per share for 1999 would have
been $774,000 and $0.39, respectively. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted average assumptions used for grants in 1999:
expected volatility of 58 percent, risk-free interest rates ranging from 5.5
percent to 5.8 percent, and expected lives of 4 to 8 years.
NOTE M - RESTRUCTURING PROVISIONS
In December 1997, the Company recorded a charge of $850,000 in connection with a
plan to discontinue manufacturing certain products and eliminate certain
converting operations. The charge includes employee termination benefits
($297,000), write down of equipment ($313,000), write down of inventory
($152,000), and a provision for other miscellaneous costs ($88,000).
26
NOTE N - COMMITMENTS AND CONTINGENCIES
Rental Agreements
- -----------------
The Company leases certain equipment under various agreements, classified as
operating leases, expiring through April 2007. Total rent expense amounted to
approximately $516,000, $222,200 and $123,000 for the years ended December 31,
1999, 1998 and 1997, respectively.
Future minimum rental payments are as follows (in thousands):
Year ended December 31,
----------------------
2000 $ 552
2001 513
2002 475
2003 471
2004 381
2005 and thereafter 549
------
$2,941
======
Environmental Matters
- ---------------------
In May 1999, the Company entered into an agreement with the WDNR related to the
closure of a solid waste landfill. All costs associated with the initial closure
of this landfill have been completed as of December 31, 1999. As part of the
closure agreement, the Company is required to provide proof of responsibility
for any future remediation efforts if environmental problems are detected at
this site. This amount increases over a five-year period from $53,000 as of July
31, 1999 to $297,000 as of July 31, 2003. The Company has met this requirement
as of December 31, 1999 by having an irrevocable letter of credit granted to the
benefit of WDNR in the amount of $53,000.
27
PART III
Item 9. Changes in and disagreements with accountants on accounting and
financial disclosure
No such disagreements have occurred.
Item 10. Directors and executive officers of the registrant
(a) Directors of the registrant
The information required by this item is incorporated by reference from the
information included under the captions, "Election of Directors" and "Compliance
with Section 16(a) of the Securities Exchange Act of 1934" set forth in the
Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders.
(b) Executive officers of registrant
Period Served
Name Age Office In This Office
---- --- ------ --------------
Michael J. Bekes 42 Vice President/COO of the Company 4 years
Vice President/COO, Fletcher Paper Co. 1-1/2 years
Mill Manager, Fletcher Paper Co. 1/2 year
Manager of Operations, Fletcher Paper Co. 5-1/2 years
Thomas W. Cosgrove 59 President and CEO of the Company 1-3/4 year
General Manager, Kimberly Clark
Corporation (Scott Paper Co.),
Marinette Division 8 years
Thomas J. Kuber 59 Chairman of the Board of the Company 2-1/2 years
President, K&K Warehousing 27 years
Chief Executive Officer, Great Lakes Pulp
& Fibre, Inc. 4 years
Clifton A. Martin 48 Vice President, Badger Paper Flexible Pkg. 3-3/4 years
General Manager, Badger Paper Flexible
Packaging 3-3/4 years
Sales Representative of the Company 6-1/2 years
Mark C. Neumann 40 Vice President/Sales of the Company 4-3/4 years
Director of Marketing of the Company 2-3/4 years
Sales Representative of the Company 7-1/2 years
George J. Zimmerman 53 Treasurer of the Company 1-3/4 year
Controller of the Company 3 years
Division Accounting Manager, Pope & Talbot 7 years
Officers are elected to hold office until the next annual meeting of
shareholders following the annual meeting of shareholders or until their
successors are elected and qualified. There is no arrangement or understanding
between any of the above officers or any other person pursuant to which such
officer was selected for the office held. No family relationship of any kind
exists between the officers.
28
ITEM 11. Executive compensation
The information required by this item is incorporated by reference from the
information included under the captions "Executive Compensation", "Report of
Compensation Committee on Annual Executive Management Compensation" and
"Compensation Committee Interlocks and Insider Participation" set forth in the
Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders.
Item 12. Security ownership of certain beneficial owners and management
(a) Security ownership of certain beneficial owners
The information required by this item is incorporated by reference from the
information included under the caption "Stock Ownership of Certain Beneficial
Owners and Management," set forth in the Company's definitive proxy statement
for its 2000 Annual Meeting of Shareholders.
(b) Security ownership of management
The information required by this item is incorporated by reference from the
information included under the captions, "Stock Ownership of Certain Beneficial
Owners and Management," and "Election of Directors", set forth in the Company's
definitive proxy statement for its 2000 Annual Meeting of Shareholders.
Item 13. Certain relationships and related transactions
The information required by this item is incorporated by reference from the
information included under the caption, "Certain Transactions," set forth in the
Company's definitive proxy statement for its 2000 Annual Meeting of
Shareholders.
PART IV
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
(a) (1) List of financial statements:
The following is a list of the financial statements of Badger Paper Mills, Inc.,
together with the report of independent accountant, included in this report:
Pages
-----
Reports of Independent Accountant
Consolidated balance sheets, December 31, 1999 and 1998....................14
Consolidated statements of operations for the years ended
December 31, 1999, 1998 and 1997....................................15
Consolidated statements of changes in shareholders' equity for
the years ended December 31, 1999, 1998 and 1997....................16
Consolidated statements of cash flows for the years ended
December 31, 1999 1998 and 1997..........................................17
Notes to financial statements..............................................18
(a)(2) List of financial schedules:
The following is a listing of data submitted herewith:
Reports of independent accountant on financial statement schedule
Schedule for the years ended December 31, 1999 1998 and 1997
II Valuation and qualifying accounts and reserves........................33
Financial statement schedules other than that listed above are omitted for the
reason that they are either not applicable, not required, or that equivalent
information has been included in the financial statements, the notes thereto or
elsewhere herein.
29
(a)(3) Exhibits
Number Registration
- ------ ------------
(3) (i)Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3(i) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
(ii) By-laws as amended through August 12, 1999.
(4) (i) U.S. $12,000,000 Credit Agreement dated January 29, 1999, by and
among the Company, Badger Paper Mills Flexible Packaging Division,
Inc. (formerly known as Plas-Techs, Inc.) and Harris Trust and
Savings Bank, individually and as agent, and the lenders from time
to time party thereto (Incorporated by reference to Exhibit 4(i) to
the Company's Annual Report on Form 10-K for the year ended December
31, 1998).
(ii)Paper Mills, Inc., Badger Paper Mills Flexible Packaging Division,
Inc., the Lenders, and Harris Trust and Savings Bank, as Agent
(Incorporated by reference to Exhibit 4(ii) to the Company's
Quarterly Report on Form First Agreement to Amended and Restated
Credit Agreement dated as of August 31, 1999 by and among Badger
10-Q for the quarter ended September 30, 1999).
(iii) Second Amendment to Amended and Restated Credit Agreement dated as
of March 9, 2000, by and between Badger Paper Mills, Inc.
(individually and as successor by merger to Badger Paper Mills
Flexible Packaging Division, Inc.), the Lenders, and Harris Trust
and Savings Bank, as Agent.
(10) Material Contracts:**
(i) Supplemental Executive Retirement Plan dated December 18, 1992
(Incorporated by reference to Exhibit 10 (ii) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
(ii)Executive Employment Agreement dated March 1, 1995, between the
Company and Claude L. Van Hefty (Incorporated by reference to
Exhibit 10(vii) to the Company's Annual Report on Form 10-K for the
year ended December 31, 1994).
(iii) Health Insurance Retirement Benefit Agreement dated January 1,
1996 between the Company and Claude L. Van Hefty (Incorporated by
reference to Exhibit 10(v) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
(iv)Director Stock Grant Plan dated July 23, 1997 (Incorporated by
reference to Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997).
(v) Employee Resignation and Release Agreement dated as of March 12,
1998 between Badger Paper Mills, Inc. and Claude L. Van Hefty
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
(vi)Employee Resignation and Release Agreement dated as of March 12,
1998 between Badger Paper Mills, Inc. and Miles L. Kresl, Jr.
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1998).
(vii)Badger Paper Mills, Inc. 1998 Stock Option Plan (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
(vii) Form of Badger Paper Mills, Inc. 1998 Stock Option Agreement
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999).
30
(viii) Badger Paper Mills, Inc. 1999 Directors Stock Grant Plan
(Incorporated by reference to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999)
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (EDGAR version only)
(99) Definitive Proxy Statement for 2000 Annual Meeting of Shareholders (to
be filed with the Commission under Regulation 14A and incorporated by
reference herein to the extent indicated in this Form 10-K).
**Each of the "material contracts" represents a management compensatory
agreement or arrangement.
(b) Reports on Form 8-K:
(i) No reports on Form 8-K were filed during the fourth quarter of 1999.
31
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.
DATE: March 21, 2000
BADGER PAPER MILLS, INC.
/s/ Thomas W. Cosgrove
By: Thomas W. Cosgrove
President & Chief Executive Officer
(Principal Executive Officer)
/s/ George J. Zimmerman
By: George J. Zimmerman
Treasurer
(Principal Executive Officer)
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 capacities and on the dates indicated:
/s/ L. Harvey Buek, Director March 21, 2000
L. Harvey Buek
/s/ Mark D. Burish, Director March 21, 2000
Mark D. Burish
/s/ Thomas W. Cosgrove, Director March 21, 2000
Thomas W. Cosgrove
/s/ James L. Kemerling, Director March 21, 2000
James L. Kemerling
/s/ Thomas J. Kuber, Director March 21, 2000
Thomas J. Kuber
/s/ John R. Peterson, Director March 21, 2000
John R. Peterson
32
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Shareholders and
Board of Directors
Badger Paper Mills, Inc.
and Subsidiary
Peshtigo, Wisconsin
Our report on the 1999, 1998 and 1997 financial statements of Badger Paper
Mills, Inc. and Subsidiary is included on page 14 of this Form 10-K. In
connection with our audit of such financial statements, we have also audited the
related financial statement schedule listed in the index on page 29 of this Form
10-K.
In our opinion, the 1999, 1998 and 1997 financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information required to be included therein.
/s/ Grant Thornton LLP
Appleton, Wisconsin
February 1, 2000
(Except for Note F, as to
which the date is March 9, 2000)
33
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended
December 31, 1999, 1998 and 1997 (in thousands)
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Additions
Balance at charged to Balance
beginning costs and Deduc- at end of
Description of year expenses tions year
----------- ------- -------- ----- ----
Deducted in the balance sheet from
the assets to which they apply:
Allowance for discounts,
doubtful accounts and claims/allowances:
Year ended December 31, 1999:
Doubtful accounts and
claims/allowances $213 $ 574 $534 (A) $253
Discounts 31 679 667 (B) 43
---- ---- ---- ----
$244 $1,253 $1,201 $296
==== ====== ====== ====
Year ended December 31, 1998:
Doubtful accounts and
claims/allowances $283 $780 $850 (A) $213
Discounts 35 661 665 (B) 31
---- ---- ----- ----
$318 $1,441 $1,515 $244
==== ====== ====== ====
Year ended December 31, 1997:
Doubtful accounts and
claims/allowances $127 $791 $635 (A) $283
Discounts 38 814 817 (B) 35
---- --- ---- ----
$165 $1,605 $1,452 $318
==== ====== ====== ====
(A) Write-off of uncollectable accounts and claims for products
(B) Discounts taken and allowed
Column C(2) has been omitted as the answer would be "None."
34
Shareholders' information
Market makers: Stock transfer agent:
Robert W. Baird & Co., Inc. (BARD) Harris Trust & Savings Bank
Herzog, Heine, Geduld, Inc. (HRZG) 111 West Monroe Street
Spear, Leeds & Kellogg (SLKC) Chicago, Illinois 60690
Stock price and dividend information:
The following table presents high and low sales prices of the Company's Common
Stock in the indicated calendar quarters, as reported on the Nasdaq National
Market System.
Quarterly Price Ranges of Stock:
1999 1998
---- ----
Quarter High Low High Low
------- ---- --- ---- ---
First $9.000 $6.500 $8.875 $6.750
Second $7.500 $6.375 $10.750 $6.875
Third $8.625 $6.750 $9.750 $7.250
Fourth $6.938 $4.000 $8.500 $6.500
Quarterly Dividends Per Share:
Dividend rates are established by the Board of Directors. During the first
quarter 1997, the Board suspended payment of quarterly dividends. The Company's
line of credit maintains certain covenants which limit the Company's ability to
pay dividends. See "Management's Discussion and Analysis -- Liquidity and
Capital Resources -- Capital Resources."
Annual meeting of shareholders:
The Annual Meeting of Shareholders of Badger Paper Mills, Inc. will be held at
The Best Western Riverfront Inn, 1821 Riverside Avenue, Marinette, Wisconsin, on
Tuesday, May 9, 2000, at 10:00 a.m.
35
DIRECTORS AND OFFICERS
Board of Directors: Corporate Officers:
Thomas J. Kuber - Chairman Thomas J. Kuber
President Chairman of the Board
K&K Warehousing
Thomas W. Cosgrove
L. Harvey Buek President and CEO
LHB - O & M Consulting
Michael J. Bekes
Mark D. Burish Vice President and COO
President
Hurley, Burish & Milliken, SC Clifton A. Martin
Vice President
Thomas W. Cosgrove Badger Paper Flexible Packaging Div.
President and CEO
Badger Paper Mills, Inc. Mark C. Neumann
Vice President/Sales
James L. Kemerling
Consultant George J. Zimmerman
Treasurer
John R. Peterson
Managing Director Mark D. Burish
Tucker Anthony Inc. Secretary
Susan A. Rudolph
Assistant Secretary
36
EXHIBIT INDEX
BADGER PAPER MILLS, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
Numbers Description
- ------- -----------
(3) (i) Restated Articles of Incorporation, as amended (Incorporated by
reference to Exhibit 3(i) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
(ii) By-laws as amended through August 12, 1999.
(4) (i) U. S. $12,000,000 Credit Agreement dated January 29, 1999, by and
among the Company, Badger Paper Mills Flexible Packaging
Division, Inc. (formerly known as Plas-Techs, Inc.) and Harris
Trust and Savings Bank, individually and as agent, and the
lenders from time to time party thereto (Incorporated by
reference to Exhibit 4(i) to the Company's Annual Report on Form
10-K for the year ended December 31, 1998).
(ii) First Agreement to Amended and Restated Credit Agreement dated as
of August 31, 1999 by and among Badger Paper Mills, Inc., Badger
Paper Mills Flexible Packaging Division, Inc., the Lenders, and
Harris Trust and Savings Bank, as Agent (Incorporated by
reference to Exhibit 4(ii) to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999).
(iii) Second Amendment to Amended and Restated Credit Agreement dated
as of March 9, 2000, by and between Badger Paper Mills, Inc.
(individually and as successor by merger to Badger Paper Mills
Flexible Packaging Division, Inc.), the Lenders, and Harris Trust
and Savings Bank, as Agent.
(10) Material Contracts:**
(i) Supplemental Executive Retirement Plan dated December 18, 1992
(Incorporated by reference to Exhibit 10 (ii) to the Company's
Annual Report on Form 10-K for the year ended December 31, 1992).
(ii) Executive Employment Agreement dated March 1, 1995, between the
Company and Claude L. Van Hefty (Incorporated by reference to
Exhibit 10(vii) to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994).
(iii)Health Insurance Retirement Benefit Agreement dated January 1,
1996 between the Company and Claude L. Van Hefty (Incorporated by
reference to Exhibit 10(v) to the Company's Annual Report on Form
10-K for the year ended December 31, 1996).
(iv) Director Stock Grant Plan dated July 23, 1997 (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
(v) Employee Resignation and Release Agreement dated as of March 12,
1998 between Badger Paper Mills, Inc. and Claude L. Van Hefty
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
(vi) Employee Resignation and Release Agreement dated as of March 12,
1998 between Badger Paper Mills, Inc. and Miles L. Kresl, Jr.
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1998).
(vii)Badger Paper Mills, Inc. 1998 Stock Option Plan (Incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999)
37
(viii)Form of Badger Paper Mills, Inc. 1998 Stock Option Agreement
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1999).
(ix) Badger Paper Mills, Inc. 1999 Directors Stock Grant Plan
(Incorporated by reference to the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1999)
(23) Consent of Independent Public Accountants
(27) Financial Data Schedule (EDGAR version only)
(99) Definitive Proxy Statement for 2000 Annual Meeting of Shareholders (to be
filed with the Commission under Regulation 14A and incorporated by
reference herein to the extent indicated in this Form 10-K).
**Each of the "material contracts" represents a management compensatory
agreement or arrangement.
38