UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
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)
Wisconsin 39-0143840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 West Front Street
Peshtigo, Wisconsin 54157
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (715) 582-4551
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 report(s), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes. |_| No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 1,988,417 as of March 31, 2001.
BADGER PAPER MILLS, INC. AND SUBSIDIARY
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Interim Statements of Income
Three Months Ended March 31, 2001 and 2000...................... 3
Condensed Consolidated Balance Sheets
March 31, 2001 and December 31, 2000............................ 4
Condensed Consolidated Statements of Cash Flows
Three Months Ended March 31, 2001 and 2000...................... 5
Notes to Consolidated Financial Statements...................... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................8-10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 11
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K................................ 11
SIGNATURES
2
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME
(UNAUDITED)
- -------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
For Three Months Ended March 31
------------------------------
2001 2000
----------- ------------
Net Sales $ 20,720 $ 18,384
Cost of Sales 19,233 16,730
----------- -----------
Gross Margin 1,487 1,654
Selling and Administrative Expenses 1,160 1,285
----------- -----------
Operating Income 327 369
Interest Expense (319) (281)
Interest Income 7 11
Gain on Sale of Property, Plant & Equipment 1,304 --
Other Income 34 36
----------- -----------
Income Before Income Taxes 1,353 135
Income Tax Expense 460 46
----------- -----------
Net Income $ 893 $ 89
----------- -----------
Net Earnings Per Share - Basic $ 0.45 $ 0.04
Net Earnings Per Share - Diluted $ 0.45 $ 0.04
Average Shares Outstanding - Basic 1,988,417 1,975,570
Average Shares Outstanding - Diluted 1,988,417 1,975,570
See Notes to Consolidated Financial Statements.
3
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands)
March 31, December 31,
2001 2000
--------- -----------
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 1,380 $ 980
Certificates of Deposit -- 100
Accounts Receivable, Net 8,759 6,608
Inventories 4,442 6,519
Refundable Income Taxes 162 300
Other Current Assets 680 571
-------- --------
Total Current Assets 15,423 15,078
Property, Plant, & Equipment 69,827 69,921
Less: Allowance for Depreciation & Depletion (44,177) (43,504)
-------- --------
Total Property, Plant & Equipment, Net 25,650 26,417
Other Assets 1,733 1,862
-------- --------
TOTAL ASSETS $ 42,806 $ 43,357
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Portion of Long-Term Debt $ 13,712 $ 15,212
Accounts Payable 7,143 6,859
Accrued Liabilities 2,367 2,957
-------- --------
Total Current Liabilities 23,222 25,028
Deferred Income Taxes Payable 458 --
Long-Term Debt 1,239 1,310
Other Liabilities 512 537
-------- --------
TOTAL LIABILITIES 25,431 26,875
-------- --------
Stockholders' Equity:
Common Stock, No Par Value 2,700 2,700
4,000,000 Shares Authorized
2,160,000 Shares Issued
Additional Paid-in Capital 170 170
Retained Earnings 16,260 15,367
Less Treasury Shares at Cost: (1,755) (1,755)
171,583 Shares at 3/31/01 and 181,626
Shares at 12/31/00
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,375 16,482
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 42,806 $ 43,357
-------- --------
See Notes to Consolidated Financial Statements.
4
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands)
For Three Months Ended
March 31
---------------------
2001 2000
-------- -------
Cash Flows from Operating Activities:
Net Income $ 893 $ 89
Adjustments to Reconcile to Net Cash
Provided by (Used in) Operating Activities:
Depreciation 736 770
Deferred Income Taxes 458 --
Director's Fees Paid in Stock -- 22
Gain on Sale of Land (1,304) --
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable, Net (2,151) (1,571)
(Increase) Decrease in Inventories 2,077 (792)
Increase (Decrease) in Accounts Payable 284 1,407
Increase (Decrease) in Accrued Liabilities (590) (396)
Deferred Income Taxes Refundable (Payable) 138 46
(Increase) Decrease in Other (5) 74
------- -------
Net Cash Provided by (Used in) Operating Activities 536 (351)
------- -------
Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment, Net (80) (395)
Proceeds from Sale of Land 1,415 --
Net Acquisition of Certificates of Deposit -- 100
Proceeds from Sales of Marketable Securities -- 9
------- -------
Net Cash (Used in) Provided by Investing Activities 1,335 (286)
------- -------
Cash Flows from Financing Activities:
Increase to (Payments on) Long-Term Debt (311) (256)
Increase to (Decrease in) Revolving Credit Borrowings (1,260) 900
------- -------
Net Cash (Used in) Provided by Financing Activities (1,571) 644
------- -------
Net (Decrease) Increase in Cash and Cash Equivalents 300 7
Cash and Cash Equivalents:
Beginning of Period 1,080 669
------- -------
End of Period $ 1,380 $ 676
------- -------
See Notes to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying condensed financial statements, in the opinion of management,
include all adjustments which are normal and recurring in nature and are
necessary for a fair statement of results for each period shown. Some
adjustments involve estimates, which may require revision in subsequent interim
periods or at year-end. In all regards, the financial statements have been
presented in accordance with generally accepted accounting principles. Refer to
the financial statement notes in the Company's Form 10-K for the year ended
December 31, 2000, for the accounting policies which are pertinent to these
statements.
Note 2. Income Taxes
The provision for income tax expense has been computed by applying an estimated
annual effective tax rate. This rate was 34% for the three-month periods ended
March 31, 2001 and 2000.
Note 3. Earnings per Share
Basic earnings per share amounts are computed based on the weighted average
number of shares outstanding during each period. Diluted per share amounts
equals net earnings divided by common shares outstanding after giving effect to
stock options granted under the incentive stock option plan approved at the
annual meeting on May 12, 1999. The stock options became outstanding in the
second quarter of 1999 and had an immaterial effect on the weighted average
number of shares outstanding and therefore basic and diluted per share amounts
are the same.
Note 4. Stock Option Plan
The Company has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock issued to Employees (APB 25), and related interpretations
in accounting for its employee stock option plan. Under APB 25, because the
exercise price of employee stock options equals the market price of the
underlying stock on the date of grant, no compensation expense is recorded.
Badger Paper is subject to the disclosure rules of SFAS 123, Accounting for
Stock Based Compensation. Management has determined that the impact of SFAS 123
on net income and stockholders' equity was not material as of and for the
quarter ended March 31, 2001.
Note 5. Inventories
The major components of inventories were as follows:
6
- --------------------------------------------------------------------------------
(In thousands of dollars) March 31, December 31,
2001 2000
------------- ----------------
Raw Materials $ 2,638 $ 1,807
Finished Goods and Work in Process 6,551 9,401
------------- ----------------
$ 9,189 $ 11,208
Less: LIFO Reserve (4,747) (4,689)
------------- ----------------
Total Inventories $ 4,442 $ 6,519
============= ================
Note 6. Operating Segments
Badger Paper adopted SFAS 131 (Disclosures about Segments of an Enterprise and
Related Information) in 1998. 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.
7
- ---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
PAPER PRODUCTS PRINTING & CONVERTING TOTAL
----------------------------- -------------------------------- -----------------------------
For Three Months For Three Months For Three Months
Ended March 31 Ended March 31 Ended March 31
----------------------------- -------------------------------- -----------------------------
2001 2000 2001 2000 2001 2000
------------- -------------- --------------- --------------- -------------- -------------
Net sales $ 17,616 $ 15,811 $ 3,104 $ 2,573 $ 20,720 $ 18,384
Intersegment revenues 705 900 321 308 1,025 1,208
Segment income before tax 906 (411) 447 546 1,353 135
Segment assets 37,804 44,307 6,451 6,101 44,255 50,408
The following is a reconciliation of segment information to consolidated
information:
-------------------------------
For Three Months
Ended March 31
2001 2000
-------------- ---------------
Revenues:
Total net sales for segment $21,745 $ 19,592
Elimination of intersegment receivables (1,025) (1,208)
-------------- ---------------
Total consolidated revenues $20,720 $ 18,384
============== ===============
Assets:
Total assets for reporting segments $44,255 $ 50,408
Elimination of intersegment receivables (699) (705)
Elimination of intersegment investments (750) (750)
-------------- ---------------
Total consolidated assets $42,806 $ 48,953
============== ===============
Total segment income, assets and other significant items are the same as the
consolidated information. All operations of the Company are located in the
United States. Net sales from foreign countries are immaterial to total
revenues.
Note 7. Financial Results and Liquidity
As discussed in detail in the Company's 2000 Annual Report on Form 10-K, the
Company was in violation of certain of its financial covenants under its
revolving credit agreement and industrial development revenue bonds. The
Company's fiscal 2000 loss and these continuing covenant violations led to the
issuance of a "going concern" opinion at December 31, 2000. While waivers for
these covenant violations have been obtained through the quarter ended March 31,
2001, the Company continues to be in violation of these covenants and therefore
the debt associated with these agreements has been classified as short-term in
the accompanying unaudited financial statements.
The financial statements, as presented, do not include any estimates relating to
the recoverability and classification of recorded asset amounts or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue operating. Recoverability of a major portion of the recorded
asset amounts is dependent upon the continued operations of the Company and its
ability to maintain its present financing or obtain alternative debt financing,
as well as succeed in future operations.
8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
Statement Regarding Forward-Looking Information
This Form 10-Q 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 the price of pulp, the Company's principal 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 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, or other variables.
o Interruptions in the supply of, or changes in the price the Company pays
for, the electricity and natural gas that the Company uses in the
manufacture, printing and converting of its paper products.
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 or acceptance of the products
by the markets served by the Company.
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.
9
Results of Operations
Net Sales
First Quarter 2001 net sales of $20,720,000 represented an increase of 12.7%
from the same period a year ago. Price increases implemented during the quarter
and the changing nature of the Company's product mix toward higher priced-higher
margin products contributed to the overall increase.
Paper products segment net sales for the First Quarter 2001 were $17,616,000, an
increase of 11.5% over the prior year. Shipped volumes increased approximately
2% in the same period, while average selling prices increased 6.6%, despite
continuing weak market conditions. Paper products sales represented 85% of total
Company net sales.
Paper and converting segment net sales of $3,104,000 for the First Quarter 2001
represented an increase of 20.6% over last year. Net sales for this segment
represented 15% of total Company net sales.
Gross Profit
Gross profit in the First Quarter 2001 was $1,487,000, or 7.2% of net sales, and
compares to $1,654,000, or 9% of net sales a year ago. The period-to-period
gross profit reduction resulted from the impact of higher pulp and energy costs
that rose in the second half of 2000 and continued through the First Quarter
2001.
Pulp prices declined in the latter part of the First Quarter 2001. While the
Company has experienced some reduced pricing on this critical raw material,
there is no guarantee that the price trend will continue long term. The benefits
of this decline are expected to favorably impact the Second Quarter 2001
results.
Selling and Administration
Selling and administrative expenses of $1,160,000 in the First Quarter 2001
compared favorably to the $1,285,000 reported in the First Quarter of 2000. This
9.7% decrease is the result of staff reductions experienced in the latter part
of 2000, as well as several vacancies within the Company's key managerial staff.
It is expected that these vacant key positions will be filled in the near
future.
Other Income and Expense
Other income and expenses in the First Quarter 2001 included the sale of several
timberland tracts held as assets of the Company that were acquired a number of
years ago. These sales provided approximately $1.3 million in pretax gains
during the quarter, and a similar amount of cash proceeds were used to reduce
outstanding bank debt during the latter part of the First Quarter 2001. This
sale represents the largest of the Company's land holdings and future sales, if
any, cannot be expected to bring as significant a return to the Company.
Net Income
Net income resulting from the First Quarter 2001 activities amounted to
$893,000, up from the $89,000 reported for the First Quarter 2000. While the
majority of the First Quarter 2001 net income is attributable to the sale of
timberlands, the Company would have been profitable without this transaction.
During the First Quarter 2001, the Company asked for, and its union and salaried
employees agreed to, certain concessions to assist in the recovery of
profitability for the Company. These concessions included a wage freeze,
employee participation in the cost of insurance benefits, certain work rule and
vacation changes, and an extension of the union contracts through May 2002.
While the Company began to
10
implement some of these concessions in March 2001, the impact to the Company's
profitability is not expected to be visible until the Second Quarter 2001.
Capital Resources and Liquidity
Cash flow from operations produced cash of $536,000 during the First Quarter
2001, a significant improvement over operational cash flows in the same period a
year ago. Reductions in on-hand inventories were offset by increases in working
capital needed to fund trade receivables as business improved from the Fourth
Quarter 2000 and sales increased.
As of March 31, 2001, the Company had available capital resources to fund its
ongoing operations of $1,380,000 in cash and approximately $600,000 of its
$10,900,000 revolving credit facility. The aforementioned land sale proceeds of
roughly $1.1 million were used to reduce the outstanding revolving debt and,
through an agreement with the Company's commercial lender, the total credit
facility was also reduced by the same $1.1 million. During the First Quarter
2001, The Company also paid down approximately $311,000 on its industrial
revenue bonds and other long-term debt facilities. The Company is current with
its lenders on all fees and interest.
While the First Quarter 2001 results provided improvement in the financial
ratios used as covenants in its revolving credit agreement, the Company remained
in violation of certain of these measures. Waivers have been obtained from the
covenants through March 31, 2001. While management has been successful in
obtaining waivers of these financial covenants in the past, there are no
assurances of the Company's ability to do so in the future.
During the Fourth Quarter of 2000, the Company engaged an outside consultant to
assist it in its efforts to review financing alternatives to its present
revolving and long-term credit facilities. While this process has begun, no
concrete plan to refinance the Company's revolving and long-term debt has yet
been developed. There can be no assurance that this refinancing effort will be
successful.
Capital Expenditures
Capital expenditures during the First Quarter 2001 amounted to $80,000, compared
to the $395,000 expended in the same period in 2000. No major capital
expenditures are currently contemplated.
Cash Flows
The Company believes that cash, as provided from operations and under its
revolving credit facility, is adequate to meet its current and anticipated
working capital needs, as well as fund the Company's capital expenditures.
11
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest on its long-term
debt. Interest rates disclosed in the Company's annual report on Form 10-K for
the year-ended December 31, 2000 have not materially changed.
Although a majority of the Company's debt is at variable interest rates,
management believes the Company's exposure to interest rate fluctuations is
immaterial to its consolidated financial statements.
The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Number Description
(b) Reports on Form 8-K:
None.
12
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BADGER PAPER MILLS, INC.
DATE: May 8, 2001 By: /s/ Harold J. Bergman
----------------------------
Harold J. Bergman
Executive Committee Member
DATE: May 8, 2001 By: /s/ James L. Kemerling
----------------------------
James L. Kemerling
Executive Committee Member
DATE: May 8, 2001 By: /s/ William A. Raaths
----------------------------
William A. Raaths
Executive Committee Member