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 September 30, 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: 2,018,551 as of September 30,
2001.
BADGER PAPER MILLS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Interim Statement of Income
Three Months and Nine Months Ended
September 30, 2001 and 2000 3
Condensed Consolidated Balance Sheet
September 30, 2001 and December 31, 2000 4
Condensed Consolidated Statement of Cash Flow
Nine Months Ended September 30, 2001 and 2000 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 10
SIGNATURES
2
BADGER PAPER MILLS, INC.
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF INCOME
(UNAUDITED)
(Dollars in thousands, except per share data)
For Three Months Ended For Nine Months Ended
September 30 September 30
2001 2000 2001 2000
---- ---- ---- ----
Net Sales $ 17,641 $ 17,830 $ 56,537 $ 56,008
Cost of Sales 15,235 17,520 49,774 53,485
----------- ----------- ----------- -----------
Gross Margin 2,406 310 6,763 2,523
Selling and Administrative Expenses 1,164 1,105 3,847 3,689
----------- ----------- ----------- -----------
Operating Income (Loss) 1,242 (795) 2,916 (1,166)
Interest Expense (209) (307) (756) (898)
Interest Income 12 12 39 39
Gain on Sale of Property, Plant & Equipment -- -- 1,627 --
Other Income (Expense), Net 18 71 100 143
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes 1,063 (1,019) 3,926 (1,882)
Income Tax Expense (Benefit) 362 (346) 1,335 (640)
----------- ----------- ----------- -----------
Net Income (Loss) $ 701 ($ 673) $ 2,591 ($ 1,242)
=========== =========== =========== ===========
Net Earnings Per Share - Basic $ 0.35 $ (0.34) $ 1.28 $ (0.63)
Net Earnings Per Share - Diluted $ 0.35 $ (0.34) $ 1.28 $ (0.63)
Average Shares Outstanding - Basic 2,018,551 1,985,254 2,018,551 1,979,706
Average Shares Outstanding - Diluted 2,018,551 1,985,254 2,018,551 1,979,706
See Notes to Consolidated Financial Statements.
3
BADGER PAPER MILLS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) (Unaudited)
September 30 December 31,
2001 2000
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 2,974 $ 980
Certificates of Deposit -- 100
Accounts Receivable, Net 7,243 6,608
Inventories 4,270 6,519
Refundable Income Taxes 162 300
Other Current Assets 560 571
-------- --------
Total Current Assets 15,209 15,078
Total Property, Plant & Equipment - Net 24,894 26,417
Other Assets 1,879 1,862
-------- --------
TOTAL ASSETS $ 41,982 $ 43,357
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Portion of Long-Term Debt $ 13,432 $ 15,212
Accounts Payable 3,171 6,859
Accrued Liabilities 2,721 2,957
-------- --------
Total Current Liabilities 19,324 25,028
Deferred Income Taxes 1,933 --
Long-Term Debt 1,076 1,310
Other Liabilities 483 537
-------- --------
TOTAL LIABILITIES 22,816 26,875
-------- --------
Stockholders' Equity:
Common Stock, No Par Value
4,000,000 Shares Authorized
2,160,000 Shares Issued 2,700 2,700
Additional Paid-in Capital 65 170
Retained Earnings 17,957 15,367
Less Treasury Shares at Cost:
141,449 Shares at 9/30/01 and 181,626 Shares at 12/31/00 (1,556) (1,755)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 19,166 16,482
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 41,982 $ 43,357
======== ========
See Notes to Consolidated Financial Statements
4
BADGER PAPER MILLS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(Dollars in thousands)
For Nine Months Ended
September 30
-----------------------
2001 2000
--------- ---------
Cash Flows from Operating Activities:
Net Income $ 2,591 $(1,242)
Adjustments to Reconcile to Net Cash
Provided By (Used in) Operating Activities:
Depreciation 2,207 2,208
Directors' Fees Paid in Stock 93 64
Gain on Sale of Property, Plant and Equipment (1,627) --
Deferred income taxes 1,933 --
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable, Net (635) (1,367)
(Increase) Decrease in Inventories 2,249 (833)
Increase (Decrease) in Accounts Payable (3,688) 4,118
Increase (Decrease) in Accrued Liabilities (236) (253)
Income Taxes Refundable (Payable) 138 (534)
(Increase) Decrease in Other (60) (31)
------- -------
Net Cash Provided by (Used in) Operating Activities 2,965 2,130
======= =======
Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment, Net (817) (2,120)
Proceeds from Sale of Property, Plant and Equipment 1,760 --
Net Acquisition of Certificates of Deposit -- 400
Proceeds from Sales of Marketable Securities -- 28
------- -------
Net Cash (Used in) Provided by Investing Activities 943 (1,692)
======= =======
Cash Flows from Financing Activities:
Increase to (Payments on) Long-Term Debt (754) (74)
Increase to (Decrease in) Revolving Credit Borrowings (1,260) --
------- -------
Net Cash (Used in) Provided by Financing Activities (2,014) (74)
======= =======
Net Increase in Cash and Cash Equivalents 1,894 364
Cash and Cash Equivalents:
Beginning of Period 1,080 669
------- -------
End of Period $ 2,974 $ 1,033
======= =======
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 that 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 10K and Annual Report 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 and nine-month period
ended September 30, 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
dilutive stock options. As the current stock options outstanding are not
dilutive, basic and diluted per share amounts are the same.
Note 4. Stock Option Plan
Badger Paper Mills, Inc. 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 September 30, 2001.
Note 5. Inventories
The major components of inventories were as follows:
(In thousands of dollars) September 30, December 31,
2001 2000
----------------- -----------------
Raw Materials $ 2,389 $ 1,807
Finished Goods and Work in Process 6,807 9,401
----------------- -----------------
$ 9,196 $ 11,208
Less: LIFO Reserve (4,926) (4,689)
----------------- -----------------
Total Inventories $ 4,270 $ 6,519
================= =================
Note 6. Contingencies
The Company operates in an industry that is subject to laws and regulations at
both federal and state levels relating to the protection of the environment. The
Company undergoes continued environmental testing and analysis, and the precise
cost of compliance with environmental requirements has not been determined.
6
Note 7. Operating Segments
Badger Paper is involved in two business segments, paper products and printing
and converting. 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 following provides information on the Company's operating segments for the
three-month and nine-month periods ended September 30:
(Dollars in thousands)
PAPER PRODUCTS PRINTING & CONVERTING TOTAL
For Three Months For Three Months For Three Months
Ended September 30 Ended September 30 Ended September 30
--------------------------------- ----------------------------- ----------------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Net sales to external customers $14,834 $15,495 $2,807 $2,335 $17,641 $17,830
Intersegmental revenues 716 560 174 307 890 867
Segment income before tax 814 (1,414) 248 395 1,062 (1,019)
Segment assets 36,465 43,450 7,101 6,297 43,566 49,747
For Nine Months For Nine Months For Nine Months
Ended September 30 Ended September 30 Ended September 30
--------------------------------- ------------------------------ ---------------------------
2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ----
Net sales to external customers $47,868 $48,592 $8,669 $7,416 $56,537 $56,008
Intersegmental revenues 2,361 2,031 872 914 3,233 2,945
Segment income before tax 2,980 (3,221) 945 1,339 3,925 (1,882)
Segment assets 36,465 43,450 7,101 6,297 43,566 49,747
The following is a reconciliation of segment information to consolidated
information:
For Three Months For Nine Months
Ended September 30 Ended September 30
------------------------ ------------------------
2001 2000 2001 2000
Revenues:
Total net sales for segments $ 18,531 $ 18,697 $ 59,770 $ 58,953
Elimination of intersegment revenues (890) (867) (3,233) (2,945)
-------- -------- -------- --------
Total consolidated revenues $ 17,641 $ 17,830 $ 56,537 $ 56,008
======== ======== ======== ========
Assets:
Total assets for reporting segments $ 43,566 $ 49,747 $ 43,566 $ 49,747
Elimination of intersegment receivables (1,475) (170) (1,475) (170)
Elimination of intersegmental investments (750) (750) (750) (750)
-------- -------- -------- --------
Total consolidated assets $ 41,341 $ 48,827 $ 41,341 $ 48,827
======== ======== ======== ========
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. Revenues from foreign countries are primarily from Canada and
Mexico and are immaterial to total revenues.
7
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 that 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 or acceptance of the 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 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 Unforeseen operational problems at any of the Company's facilities
causing significant lost production and/or cost issues.
o Changes in laws or regulations that affect the Company.
Results of Operations
Net Sales
Third quarter 2001 sales were $17,641,000 compared to $17,830,000 for the same
period a year ago, a decrease of $189,000 and 1.1%. After three quarters in
2001, sales were $56,537,000 compared to $56,008,000 for the same period last
year, an increase of $529,000 or 0.9%. Market conditions remain soft as a result
of weakness in the economy. In spite of weak market conditions, the Company has
made every effort to maintain price increases implemented earlier in the year.
Further declines in pulp prices have caused downward pressure on prices in
certain markets.
The Company's paper products segment sales for the third quarter of 2001 were
$14,834,000, a decrease of 4.3% when compared to sales for the same period last
year. After three quarters in 2001, sales were $47,868,000 compared to
$48,592,000 last year. The paper products segment accounted for 84% and
8
85%, respectively, of sales for the third quarter and for the three quarters
ended September 30, 2001. The Company has implemented and remains committed to
the strategy to move toward more profitable product offerings.
Printing and converting sales for the third quarter of 2001 were $2,807,000
compared to $2,335,000 for the same period last year. After three quarters in
2001, sales were $8,669,000 compared to $7,416,000 last year. The printing and
converting segment generated 16% and 15%, respectively, of total sales for the
Company in the third quarter and for the three quarters ended September 30,
2001.
Gross Profit
Consolidated gross profit during the third quarter 2001 was $2,406,000 compared
to $310,000 last year. After three quarters in 2001, gross profits were
$6,763,000 compared to $2,523,000 last year. The price that the Company pays for
pulp has declined throughout the year. The reduction in pulp costs has
contributed to the improvement in gross profit this year. There are no
assurances that pulp price decreases will continue in the long term. The Company
is committed to passing pulp cost increases on to its customers if such
increases move beyond those currently planned.
Selling & Administrative Expense
Selling and administrative expenses for the third quarter 2001 were $1,164,000
compared to $1,105,000 for the same period last year. After nine months 2001,
selling and administrative expenses were $3,847,000 compared to $3,689,000 for
the same period last year.
Other Income & Expense
During the third quarter of 2001, interest expense was $209,000 compared to
$307,000 last year. After three quarters, the interest expense was $756,000
compared to $898,000 last year. The reduction in interest expense is the
combined effect of debt reduction in previous quarters and reduced interest
rates on the Company's revolving credit agreement as commercial banks responded
to reductions in the federal fund rates. There were no land sales recorded in
the third quarter. However, the Company realized $1,627,000 in gains from land
sales during the three quarters ended September 30, 2001.
Net Income
Net income for the third quarter of 2001 was $701,000 compared to a net loss
last year of $673,000. The improvement in quarterly earnings is a result of
improved profit from the Company's operations. After three quarters in 2001, net
income was $2,591,000 compared to a loss of $1,242,000 for the same period last
year. The improvement in net income for the first three quarters is a result of
improved profitability from operations combined with the sales of property,
plant and equipment, which generated an after-tax increase in income of
approximately $1,074,000.
Capital Resources and Liquidity
At September 30, 2001 the Company had cash resources of $2,974,000 and credit of
$660,000 available under the existing revolving credit facility to fund ongoing
operations. During the nine months ended September 30, 2001, the Company has
made principal payments of approximately $2,014,000 on long-term debt
facilities. The Company continues to make payments of fees and interest under
its credit agreements and is current with its lenders on all fees and interest.
Company performance during the first three quarters of the year have provided
for continued improvement in the financial ratios used as covenants in the
revolving credit agreement. However, the Company continues to remain in
non-compliance with certain of these measures throughout the first three
quarters of the year. Waivers of the covenant violations have been obtained
through September 30, 2001.
9
The Company believes that the cash provided from operations and available under
the revolving credit facility is adequate to meet its current and anticipated
working capital needs, as well as funding the Company's capital expenditures.
During the third quarter of 2001, the Company believes that it made progress
towards securing new financing to meet its short-term and long-term financing
needs. In reliance on such progress, the Company gave the required notice to
redeem its outstanding Industrial Development Revenue Bonds as of November 30,
2001. While the Company's improved operating performance during the first nine
months of 2001 provides encouragement to the Company that it will be able to
refinance its existing funded debt, there can be no assurance that the Company
will be able to secure such financing on acceptable terms.
Capital Expenditures
Capital expenditures for the first three quarters of 2001 were $817,000 compared
to $2,120,000 for the same period last year. There are no major capital projects
currently contemplated.
Cash Flows
Cash flow from operations during the nine months ended September 30, 2001 were
$2,965,000 compared to $2,130,000 for the same period last year. The improvement
in cash flow is the result of improved profitablity and management of working
capital needs. The Company's cash position also improved as a result of reduced
capital spending.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in the interest rates on its
long-term debt. The 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 the consolidated 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
10.1 Executive Employment Agreement effective July 9,
2001 between the Company and Robert A. Olah
(b) Reports on Form 8-K:
None.
10
SIGNATURES
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.
(Company)
DATE: November 14, 2001 /s/ Robert A. Olah
-----------------------------
Robert A. Olah
President & CEO
(Principal Executive Officer)
DATE: November 14, 2001 /s/ William H. Peters
-----------------------------
William H. Peters
Vice President & CFO
(Principal Financial Officer)
11