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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF1934
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: 2,025,211 as of March 31, 2002.
BADGER PAPER MILLS, INC.
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Statement of Operations,
Three Months Ended March 31, 2002 and 2001 3
Consolidated Balance Sheet,
March 31, 2002 and December 31, 2001 4
Consolidated Interim Statement of Cash Flow,
Three Months Ended March 31, 2002 and 2001 5
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 7
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. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data) For Three Months Ended
March 31
-----------------------------------------------
2002 2001
Net Sales $18,250 $21,404
Cost of Sales 16,176 19,917
------------------ -----------------
Gross Profit 2,074 1,487
Selling and Administrative Expenses 1,347 1,160
------------------ -----------------
Operating Income 727 327
Interest Expense (104) (319)
Interest Income 3 7
Gain on Sale of Non Core Assets 1,131 1,304
Other Income (Expense), Net 17 34
------------------ -----------------
Income Before Income Taxes 1,774 1,353
Income Tax Expense 603 460
------------------ -----------------
Net Income $1,171 $ 893
================== =================
Net Earnings Per Share - Basic $0.58 $0.45
Average Shares Outstanding - Basic 2,023,874 1,988,417
Net Earnings Per Share - Diluted $0.57 $0.45
Average Shares Outstanding - Diluted 2,059,702 1,988,417
See Notes to Financial Statements
3
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 2002 December 31,
(Unaudited) 2001
------------------- -------------------
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 484 $ 664
Certificates of Deposit 164 164
Accounts Receivable - Net 7,203 6,107
Inventories 5,545 4,983
Refundable Income Taxes 170 170
Deferred Income Taxes 1,150 1,150
Property Held for Resale 258
Prepaid Expenses and Other 859 748
------------------- -------------------
Total Current Assets 15,575 14,244
PROPERTY, PLANT AND EQUIPMENT, NET 25,238 25,445
OTHER ASSETS 512 591
------------------- -------------------
TOTAL ASSETS $41,325 $40,280
=================== ===================
LIABILITIES AND STOCKHOLDER'S EQUITY:
Current Liabilities:
Current Portion of Long-term Debt $ 566 $ 414
Accounts Payable 5,120 2,921
Accrued Liabilities 3,426 3,792
Income Taxes Payable 582 400
------------------- -------------------
Total Current Liabilities 9,694 7,527
LONG-TERM DEBT 7,501 9,794
DEFERRED INCOME TAXES 1,839 1,839
OTHER LIABILITIES 664 675
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 55 54
Retained Earnings 20,383 19,213
Treasury Stock, at cost, 134,789 and 136,415 shares
In 2002 and 2001, Respectively (1,511) (1,522)
------------------- -------------------
Total Shareholders' Equity 21,627 20,445
------------------- -------------------
Total Liabilities and Shareholders' Equity $41,325 $40,280
=================== ===================
See Notes to Financial Statements
4
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENT OF CASH FLOW
(Unaudited)
(Dollars in thousands)
For Three Months Ended March 31
-----------------------------------
2002 2001
--------------- ---------------
Cash Flow from Operating Activities:
Net Income $1,171 $ 893
Adjustments to Reconcile to Net Cash
Provided By (Used in) Operating Activities:
Depreciation 600 736
Director's Fees Paid in Stock 12 -
Gain on Sale of Non Core Assets (1,131) (1,304)
Deferred Income Taxes - 458
Changes in Assets and Liabilities:
Increase in Accounts Receivable, Net (1,096) (2,151)
(Increase) Decrease in Inventories (562) 2,077
Increase in Accounts Payable 2,199 284
Decrease in Accrued Liabilities (366) (590)
Income Taxes Payable 182 138
Increase in Other (11) (5)
---------------- ----------------
Net Cash Provided by (Used in) Operating Activities 998 536
---------------- ----------------
Cash Flow From Investing Activities:
Additions to Property, Plant and Equipment, Net (408) (80)
Proceeds From Sale of Non Core Assets 1,371 1,415
---------------- ----------------
Net Cash Provided by Investing Activities 963 1,335
---------------- ----------------
Cash Flow from Financing Activities:
Increase to (Payments on) Long-Term Debt (2,141) (311)
Increase to (Decrease in) Revolving Credit Borrowings - (1,260)
---------------- ----------------
Net Cash Used in Financing Activities (2,141) (1,571)
---------------- ----------------
Net (Decrease) Increase in Cash and Cash Equivalents (180) 300
Cash and Cash Equivalents:
Beginning of Period 664 1,080
---------------- ----------------
End of Period $ 484 $1,380
================ ================
See Notes to Financial Statements
5
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
The accompanying 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 10-K and Annual Report for the year ended December 31,
2001, 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 period ended
March 31, 2002 and 2001.
Note 3. Earnings per Share
Net earnings per share are computed based on the weighted average number of
shares of common stock outstanding during the quarter:
2002 2001
---- ----
Basic 2,023,874 1,988,417
Diluted 2,059,702 1,988,417
Stock options to purchase 25,000 common shares in 2002 and 115,000 common shares
in 2001 were not dilutive and, therefore, have not been included in the
computations of diluted per common share amounts.
Note 4. Stock Option Plan
Badger Paper Mills, Inc. (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. The Company 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, 2002.
Note 5. Inventories
The major components of inventories were as follows:
(In thousands of dollars) March 31, 2002 December 31,
2001
------------------- ----------------
Raw Materials $ 3,422 $ 2,333
Finished Goods and Work in Process 6,978 7,216
------------------- ----------------
$ 10,400 $ 9,549
Less: LIFO Reserve (4,855) (4,566)
------------------- ----------------
Total Inventories $ 5,545 $ 4,983
=================== ================
6
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.
Please refer to the more complete discussion of legal matters in the Company's
Form 10-K for the year ended December 31, 2001.
Note 7. Operating Segments
The Company is involved in two business segments, paper products and flexible
packaging. The paper products business produces a variety of paper products
including fine paper, business paper, colored paper, waxed paper, specialty
coated base papers and twisting papers. The flexible packaging business prints
and converts flexible packaging materials for the paper products business, 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 period ended March 31:
PAPER PRODUCTS FLEXIBLE PACKAGING TOTAL
For Three Months For Three Months For Three Months
(Dollars in Thousands) Ended March 31 Ended March 31 Ended March 31
------------------------------ ----------------------------- -----------------------------
2002 2001 2002 2001 2002 2001
---- ---- ---- ---- ---- ----
Net sales $16,002 $18,298 $2,248 $3,106 $18,250 $21,404
Segment income before tax 1,852 906 (78) 447 1,774 1,353
Segment assets 37,154 37,054 4,171 5,752 41,325 42,806
All operations of the Company are located in the United States.
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 and/or weakness in demand for paper
products. As a paper manufacturer, the Company, if it wants to achieve
acceptable production costs, must operate its paper mill at a relatively
high percentage of its available
7
production capacity. The Company's competitors face the same or similar
situations. Therefore, when the overall market for paper products
softens, the Company (and other paper manufacturers) will generally
accept lower selling prices for its products in order to maintain
acceptable production efficiencies and costs.
o Changes in the price of pulp, the Company's main raw material. The Company
purchases all of its pulp needs 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 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 increases and/or changes in the price
of energy (principally electricity, natural gas, and fuel oil) that the
Company needs in its manufacturing operations.
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
Company's products by the markets it serves.
o Unforeseen operational problems at any of the Company's facilities causing
significant lost production and/or higher operating costs.
o Changes in laws or regulations affecting the Company, particularly
environmental laws and regulations affecting air quality and wastewater
discharges.
o The Company's profitability may be adversely affected by increases in
interest rates because a significant portion of the Company's debt bears
interest at variable interest rates.
Results of Operations
Net Sales
First quarter 2002 net sales were $18,250,000, compared to $21,404,000 for the
same period last year, a decrease of $3,154,000 and 14.7%. Market conditions
remained soft because of a weak economy. Given weaker market conditions, the
Company continues to make every effort to maintain pricing.
The Company's paper products segment sales for the first quarter were
$16,002,000, a decrease of $2,296,000 and 12.5% when compared to the first
quarter 2001 sales of $18,298,000. The decrease in sales is due in large part to
shipment volume. During the first quarter of 2002, paper shipments were 10.3%
less than last year, while average prices were 4.7% less than last year. The
decrease in shipment volume is the combined effect of soft market conditions,
and unscheduled maintenance down time on both paper machines. The decrease in
sales price is a result of market conditions and pricing pressure from reduced
pulp costs. The Company's average cost for pulp in the first quarter of 2002 was
23.7% less than during the same period last year.
Flexible packaging sales for the first quarter of 2002 were $2,248,000, compared
to $3,106,000 last year, a decrease of $858,000 and 27.6%. The most significant
reason for the decrease in sales is because volume in the first quarter of 2001
included sales from a customer that is no longer doing business with the
Company. The Company lost this business during the second quarter of 2001 as a
result of a bid situation. Also, the Company's largest flexible packaging
customer began implementing a package re-design, causing delayed order activity.
8
Gross Profit
Gross profit during the first quarter of 2002 was $2,074,000 compared to
$1,487,000 last year. As a percentage of sales, gross profit during the first
quarter was 11.3% compared to 6.9% last year. The improvement in gross profit is
attributed to the Company's ability to maintain pricing during a period when
pulp costs had declined.
Selling & Administrative Expense
During the first quarter of 2002, selling and administrative expenses were
$1,347,000 compared to $1,160,000 for the same period last year.
Other Income & Expense
Interest expense for the first quarter 2002 was $104,000 compared to $319,000
last year. The interest expense reduction is the combined effect of lower
interest rates and reduced debt.
In the first quarter 2002, the Company completed the sale of a Company-owned
wastewater treatment facility. The Company also sold timberland property under
options granted as a part of the timberland sales in 2001. Total gain from sales
of these non-core assets was $1,131,000 during the first quarter of 2002.
During the first quarter of 2001, the Company realized a $1,304,000 gain on sale
of Company-owned timberland.
Net Income
Net income for the first quarter of 2002 was $1,171,000 compared to $893,000 for
the same period last year. The improvement in net income is a result of improved
profitability from operations.
Capital Resources and Liquidity
At March 31, 2002, the Company had cash resources of $484,000 and unused credit
availability of $6,857,000 under the revolving credit facility to fund on-going
operations. During the first quarter of 2002, the Company made scheduled
principal payments on long-term debt of $125,000. At March 31, 2002, the Company
is in compliance with all credit facility covenants.
Capital Expenditures
Capital expenditures for the first quarter of 2002 were $408,000 compared to
$80,000 last year. During the first quarter 2002, the Company approved the
purchase of new machinery to increase the production capacity of certain paper
grades. The total cost of this project is estimated to be approximately
$2,800,000. The Company anticipates financing the purchase of this equipment
with long-term debt financing.
Cash Flows
Cash flow from operations was $998,000 during the first quarter 2002, compared
to $536,000 for the same period last year. The Company experienced increases in
accounts receivable and inventory, as well as an increase in accounts payables
during the quarter. The Company believes that, with cash provided from
operations, availability of unused credit under the revolving credit facility,
and availability of long-term debt to fund capital expenditures, there is
adequate liquidity for the Company to meet its future financial obligations.
9
Item 3. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest on its debt. The
revolving credit facility provides for borrowings up to $15,000,000 and extends
to November 2004. An annual commitment fee of 1/4% is payable for unused
amounts. The Company's interest rate floats based on the lender's prime rate. As
of March 31, 2002, the Company was paying 4.75% annual rate on amounts borrowed
against this line.
A majority of the Company's debt is at variable interest rates, and a
hypothetical 1% (100 basis point) change in interest rates would cause an
estimated increase in annual interest expense of $63,000.
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
4.4 First Amendment to the Revolving Credit and Security
Agreement dated November 30, 2001 by and among the
Company, PNC Bank, National Association, individually
and as agent, and other lenders from time to time
party thereto.
4.5 First Amendment to the Business Loan Agreement dated
November 30, 2001, by and between the Company and
Wisconsin Community Bank, Wisconsin Business
Bank-Branch.
(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: May 13, 2002 /s/ Robert A. Olah
---------------------------------
Robert A. Olah
President & CEO
(Principal Executive Officer)
DATE: May 13, 2002 /s/ William H. Peters
---------------------------------
William H. Peters
Vice President & CFO
(Principal Financial Officer)
11