SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
R
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 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)
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: 1,963,764 as of March 31, 1999.
BADGER PAPER MILLS, INC.
INDEX
Pages
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FINANCIAL INFORMATION
Condensed Consolidated Interim Statements of
Operations and Retained Earnings -
Quarter Ended March 31, 1999 and 1998 3
Condensed Consolidated Balance Sheets -
a. March 31, 1999 and December 31, 1998 4
Condensed Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6-7
MANAGEMENT DISCUSSION AND ANALYSIS 7-8
QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK 11
OTHER INFORMATION
Exhibits and Reports on Form 8-K 12
SIGNATURES 13
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
For Three Months Ended
March 31, 1999
--------------------------------
1999 1998
--------------- ---------------
Net Sales $ 15,326 $ 18,261
Cost of Sales 13,425 16,426
--------------- ---------------
Gross Margin 1,901 1,835
Selling and Administrative Expenses 1,128 1,206
--------------- ---------------
Operating Income (Loss) 773 629
Interest Expense (272) (310)
Interest Income 36 59
Other Income (Expense), Net 30 154
--------------- ---------------
Income (Loss) Before Income Taxes 567 532
Income Tax Expense (Benefit) 193 180
--------------- ---------------
Net Income (Loss) $ 374 $ 352
--------------- ---------------
Retained Earnings, Beginning of Period 17,296 15,552
Cash Dividends - -
--------------- ---------------
Retained Earnings, End of Period $ 17,670 $ 15,904
=============== ===============
Net Earnings (Loss) Per Share $ 0.19 $ 0.18
Dividends Per Share 0 0
Average Shares Outstanding - Basic 1,961,736 1,951,855
See Notes to Consolidated Financial Statements.
3
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- ------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
March 31, December 31,
1999 1998
------------------ -----------------
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 1,123 $ 2,229
Certificates of Deposit 996 996
Marketable Securities 149 1,361
Accounts Receivable, Net 6,725 5,262
Deferred Income Taxes 1,170 1,220
Inventories 7,369 6,201
Refundable Income Taxes 27 27
Other Current Assets 583 558
----------------- -----------------
Total Current Assets 18,142 17,854
Property, Plant, Equipment & Timberlands 65,514 65,089
Less: Allowance for Depreciation & Depletion (38,510) (37,798)
------------------ -----------------
Total Property, Plant, Equipment & Timberlands, Net 27,004 27,291
Trade Credits 686 696
Other Assets 2,118 2,158
----------------- -----------------
TOTAL ASSETS $ 47,950 $ 49,999
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Portion of Long-Term Debt $ 1,283 $ 3,068
Accounts Payable 5,249 3,913
Accrued Liabilities 3,031 3,357
Income Taxes Payable 144 170
----------------- -----------------
Total Current Liabilities 9,707 10,508
Deferred Income Taxes 1,649 1,700
Long-Term Debt 16,711 16,126
Other Liabilities 1,228 1,408
----------------- --------------------
TOTAL LIABILITIES 29,295 29,742
----------------- --------------------
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 204 200
Retained Earnings 17,670 17,296
Less Treasury Shares at Cost:
201,618 Shares at 9/30/98 and 208,145 Shares at 12/31/97 (1,919) (1,939)
----------------- --------------------
TOTAL STOCKHOLDERS' EQUITY 18,655 18,257
----------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,950 $ 47,999
----------------- --------------------
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
-----------------------------------------
1999 1998
------------------- -------------------
Cash Flows from Operating Activities:
Net Income $ 374 $ 352
Adjustments to Reconcile to Net Cash
Provided By (Used in) Operating Activities:
Depreciation 713 699
Director's Fees Paid in Stock 24 15
Deferred Income Taxes (1) -
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts Receivable, Net (1,463) (1,221)
(Increase) Decrease in Inventories (1,168) (564)
Increase (Decrease) in Accounts Payable 1,336 939
Increase (Decrease) in Accrued Liabilities (326) (238)
Income Taxes Refundable (Payable) (26) -
(Increase) Decrease in Other (155) 148
------------------- -------------------
Net Cash Provided by (Used in) Operating Activities (692) 130
------------------- -------------------
Cash Flows From Investing Activities:
Additions to Property, Plant and Equipment, Net (426) (306)
Net Acquisition of Certificates of Deposit - (200)
Purchase of Marketable Securities - (63)
Proceeds from Sales of Marketable Securities 1,212 132
------------------- -------------------
Net Cash (Used in) Provided by Investing Activities 786 (437)
------------------- -------------------
Cash Flows from Financing Activities:
Increase to (Payments on) Long-Term Debt (1,800) (14)
Increase to (Decrease in) Revolving Credit Borrowings 600 (500
------------------- -------------------
Net Cash (Used in) Provided by Financing Activities
(1,200) (514
------------------- -------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,106) (821)
Cash and Cash Equivalents:
Beginning of Period 2,229 1,302
------------------- -------------------
End of Period 1,123 481
=================== ===================
See Note to Consolidated Financial Statements.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
A. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared by
Badger Paper Mills, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission ("SEC") and, in the opinion of the
Company, include all adjustments necessary for a fair statement of results for
each period shown. These adjustments are of a normal recurring nature. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such SEC rules and regulations. The Company
believes that the disclosures made are adequate to make the information
presented not misleading. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Company's latest annual report.
B. INCOME TAXES
The provision for income tax expense or benefit has been computed by
applying an estimated annual effective tax rate. This rate was a 34% expense for
the three months periods ended March 31, 1999 and 1998, resulting from the
Company's operating profits during such periods.
C. EARNINGS PER SHARE
Earnings per share of common stock are based on weighted average number
of shares of common stock outstanding.
D. INVENTORIES
The major classes of inventories are as follows (in thousands):
March 31, 1998 December 31, 1998
-------------- -----------------
Raw materials $2,164 $ 1,858
Work in process and finished stock 5,205 4,343
----- -----
$7,369 $6,201
====== ======
6
E. CONTINGENCIES
The Company operates in an industry which 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.
In addition, the Company is subject to various claims, the ultimate outcomes of
which management cannot predict. Management believes, however, that the outcomes
will not have a material adverse effect on the Company's consolidated financial
position or results of operations.
F. OPERATING SEGMENTS
The company adopted SFAS 131 in 1998. Prior years' information has been restated
to present segment information for the Company's two business segments, paper
products 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 s and twisting papers. The printing and converting
segments prints and converts flexible packaging materials for the paper products
segment as well as films and non-woven materials from other customers.
All operations of the Company are located in the United States. Revenue from
foreign countries is primarily from Canada and Mexico and is immaterial to total
revenues.
The following provides information on the Company's segments for the three
months ended March
-----------------------------------------------------------------------------------------------------------------------------
(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
------------------------------- -------------------------------- -------------------------
1999 1998 1999 1998 1999 1998
--------------- -------------- -------------- -------------- -------------- --------------
Revenues from external customers $ 14,316 $ 17,119 $ 2,317 $ 1,384 $ 16,633 $ 18,503
Intersegmental revenues 738 15 569 227 1,307 242
Segment income before tax 387 415 180 117 567 532
Segment assets 42,984 43,771 4,966 5,101 47,950 48,872
---------------------------------------------------------------------------
The following is a reconciliation of segment information to consolidated
information:
-------------------------------
For Three Months
Ended March 31
-------------------------------
1999 1998
-------------- --------------
Revenues:
Total revenues for segments $ 16,633 $ 18,503
Elimination of intersegment revenues (1,307) (242)
-------------- --------------
Total consolidated revenues $ 15,326 $ 18,261
============== ==============
7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Forward-Looking Statements
This report contains certain management expectations and other forward-looking
information regarding the Company. While the Company believes that these
forward-looking statements are based on reasonable assumptions, all such
statements involve risks and uncertainties that could cause actual results to
differ materially from those contemplated in this report. The assumptions, risks
and uncertainties relating to the forward-looking statements in this report
include those described under the caption "Forward-Looking Information" in the
Company's annual report on Form 10-K for the year ended December 31, 1998.
Results of Operations
The Company reported net sales of $15,326,000 for the quarter ended March 31,
1999, which is down 16 percent from the $18,261,000 reported for the same period
in 1998.
Net sales for the Company's paper products segment were $14,316,000, a 16
percent reduction from the first quarter of 1998. Weak market conditions
continued in the industry, especially in the commodity markets. This resulted in
a decline of 22 percent in the shipping volume of paper products. The average
selling price increased 8 percent despite the volume decreases because of an
increased percentage of higher margin specialty products sold in 1999. Specialty
product gross sales dollars increased to approximately 67 percent of paper
product segment sales, compared to 50 percent for the same period in 1998.
The printing and converting segment reported net sales of $2,317,000 for the
quarter ended March 31, 1999, a 67 percent increase over the $1,383,000 reported
for the first quarter of 1998. The increase is a direct result of products
produced on the Chadwick printing press that was installed in the second quarter
of 1998. The additional capacity resulted in tripling our printed paper business
in the first quarter of 1999 over the same period in 1998.
Cost of sales decreased $3,001,000 or 18 percent to $13,425,000 for the first
quarter of 1999 compared to $16,426,000 for the same period in 1998.
The paper products segment's cost of sales were $12,715,000 for the first
quarter of 1999, a decrease of 18 percent from the $15,515,000 reported for the
same period a year earlier. This reduction is a result of a 21 percent decrease
in paper production due to weak market conditions and mechanical problems on the
Fourdrinier paper machine. These problems were resolved in late February and we
are now operating at normal efficiencies. During weak market conditions, our
strategy is to take downtime versus producing low margin commodity paper
products.
Cost of sales for the printing and converting segment were $2,016,000 for the
quarter ended March 31, 1999, or 75 percent above the $1,153,000 reported in the
first quarter of 1998. The additional capacity provided by the new Chadwick
press increased our raw material expenses over the same period in 1998.
Selling and administration expenses were $1,128,000 for the first quarter of
1999, compared to $1,206,000 for the same period in 1998. The reduction in
expenses is primarily due to lower salary expense resulting from reductions in
the salaried workforce after the first quarter
8
in 1998, and reduced fringe benefit expenses. All of the reduced administration
expenses can be attributed to the paper products segment.
Other income of $30,000 for the first quarter of 1999 decreased from the
$124,000 reported for the same period in 1998. The first quarter of 1998 was
positively impacted by non-recurring gains on certain trade credits contracts
which expired in 1998. We have negotiated new contracts with several vendors and
will begin utilizing trade credits again in April of 1999.
Pretax income for the first quarter of 1999 was $567,000, an increase of $35,000
over the $532,000 reported for the first quarter of 1998. Our philosophy of
taking downtime versus producing low margin products and our emphasis on higher
margin specialty products is very encouraging. We reported a reduction in net
sales of $2,935,000 or 18 percent for the first quarter of 1999 and yet we
reported an increase of $35,000 or 6 percent in pretax income.
The paper products segment's pretax income of $387,000 for the first of 1999
compares to $415,000 for the same period in 1998. Substantial improvement was
reported for the printing and converting segment where the first quarter pretax
income was $180,000, a 54 percent improvement over the $117,000 reported for the
same period last year.
Liquidity and Capital Resources
Capital Resources
As of March 31, 1999, the Company's capital resources for funding ongoing
operations included $2,268,000 of cash and marketable securities and a
$12,000,000 revolving credit facility. Borrowing under the revolving credit
facility totaled $10,800,000 as of March 31, 1999. The Company believes it has
adequate capital resources to meet its near-term capital and operating needs.
On January 29, 1999 the Company refinanced its revolving credit facility with
its present lender. The refinanced facility extends through November 2001 and
continues to provide for borrowings of up to $12,000,000.
Capital Expenditures
Capital expenditures during the first quarter of 1999 were $426,000, compared to
$306,000 for the same period in 1998. Major projects during the first quarter of
1999 included the completion of a ramp and enclosure to our wax plant warehouse,
a Webco rewinder for the wax department, a spare couch roll for the Yankee paper
machine and improvements to the Chadwick press at the Oconto Falls facility.
Cash Flows
Cash used in operations was $692,000 for the first quarter of 1999, compared to
$130,000 cash provided for the same period in 1998. The increase of cash used is
primarily the increase of finished goods inventories in the paper products
segment and the reduction in post retirement benefits because of the reduced
workforce. Net cash provided by investing activities was $786,000 for the first
quarter of 1999, which was an improvement over the $437,000 cash used for the
first quarter of 1998. Proceeds from the sale of marketable securities were used
to make principal payments on Industrial Development Revenue Bond at the
Peshtigo and Oconto Falls facilities.
9
Year 2000
Badger Paper Mills has a Year 2000 Committee that has been assigned the task of
assuring Year 2000 (Y2K) compliance for all information technology (IT) and non
- -IT systems. The committee is committed to achieving full Y2K compliance by
September 1, 1999.
Information Technology
Our internal information technology staff has been assigned the responsibility
of assuring Year 2000 compliance for the Peshtigo and Oconto Falls facilities
for all information technology systems. This includes the main frame computer,
all personal computers, network servers, the telephone systems and all related
software. The staff has identified all hardware and software that must be tested
for Y2K compliance and is in the process of testing for compliance. The highest
priority will be assigned to hardware and software that have date sensitive
components and functions.
The main frame computer in Peshtigo is Y2K compliant for its hardware and
operating system. We have completed an estimated 10 to 15 percent of necessary
programming changes to the business systems to become Y2K compliant. We have had
discussions with two outside resources to review, test and complete required
programming changes on our business systems software. While we have not signed a
contract with either vendor, we intend to enter into a contract and commence
with programming changes during the second quarter of 1999.
The network server at Peshtigo has been replaced and the server at Oconto Falls
will be upgraded in May 1999. A majority of related network hardware and
software is Y2K compliant. Nine personal computers at the Peshtigo facility are
slated to be upgraded or replaced. The PCs at the Oconto Falls facility are
ninety percent Y2K compliant.
Non-Information Technology
Our internal engineering staff has assigned two employees the responsibility of
assuring Year 2000 compliance for all manufacturing aspects of the Peshtigo and
Oconto Falls facilities for all non-information technology systems. All
manufacturing equipment that have computerized process controllers or any date
sensitive data in computer chips must be reviewed. This includes the paper
machines, converting equipment, boilers, waste treatment facilities, printing
presses, lab equipment, and all related software. The staff has identified all
hardware and software that must be tested for Y2K compliance and are in the
process of testing them.
The most critical manufacturing equipment is the two paper machines and the
boilers. In 1998 we replaced the process computer on the Yankee paper machine
and will be installing a new process computer on the Fourdrinier paper machine
in July 1999. Both process computers are Y2K compliant. The boilers are capable
of operating on natural gas or fuel oil. We normally operate with natural gas
and testing during the first quarter confirm the efficient operations utilizing
fuel oil.
The engineering staff is reviewing all programmable logic controllers (PLCs) and
upgrading the software or the PLCs as necessary. We estimate we have
approximately thirty percent of the PLCs upgraded to be Y2K compliant. The
highest priority is being assigned to manufacturing equipment that is critical
to our operations or has time sensitive components.
All non-technology systems at the Oconto Falls facility have been tested for Y2K
compliance and is considered compliant.
10
Costs
The costs of achieving Y2K readiness have not been material to date, and we do
not expect the total costs to exceed $200,000. A majority of the costs incurred
to date has been normal wages and benefits of our IT and engineering staffs.
Additional costs will be incurred for contract programming and system upgrades
and/or replacement. Cost estimates for contract programming of our business
systems have not been received, but we feel the above estimate is adequate.
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 are disclosed in the Company's annual report on Form 10-K
for the year-ended December 31, 1998, have not materially changed.
Even though a majority of the Company's debt is at variable interest rates, it
is felt the Company's exposure to interest rate fluctuations is immaterial to
the consolidated financial statements.
The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
(27) Financial Data Schedules
(b) Reports on Form 8-K:
None.
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.
(Company)
DATE: May 13, 1999 By /s/Thomas W. Cosgrove
Thomas W. Cosgrove
President
(Chief Executive Officer)
DATE: May 13, 1999 By /s/George J. Zimmerman
George J. Zimmerman
Treasurer
(Principal Financial Officer)