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, 2003
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 check mark 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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). |_| Yes. |X| No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 2,031,847 as of March 31, 2003.
1
BADGER PAPER MILLS, INC. & SUBSIDIARY
INDEX
Page No.
--------
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Interim Statements of Operations
Three Months Ended March 31, 2003 and 2002 3
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002 4
Consolidated Interim Statements of Cash Flows
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated 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
Item 4. Controls and Procedures 10
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES
CERTIFICATIONS
EXHIBIT INDEX
2
PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share data) For Three Months Ended
March 31
---------------------------------------------
2003 2002
Net Sales $19,669 $18,250
Cost of Sales 19,663 16,176
------------------ -----------------
Gross Profit 6 2,074
Selling and Administrative Expenses 1,461 1,347
------------------ -----------------
Operating Income (Loss) (1,455) 727
Interest Expense (97) (104)
Interest Income 2 3
Gain on Sale of Non-Core Assets - 1,131
Other Income (Expense), Net 3 17
------------------ -----------------
Income Before Income Taxes (1,547) 1, 774
Income Tax (Benefit) Expense (526) 603
------------------ -----------------
Net Income ($1,021) $1,171
================== =================
Net Earnings Per Share - Basic ($0.50) $0.58
Average Shares Outstanding - Basic 2,030,480 2,023,874
Net Earnings Per Share - Diluted ($0.50) $0.57
Average Shares Outstanding - Diluted 2,030,480 2,059,702
See Notes to Consolidated Financial Statements
3
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, 2003 December 31,
(Unaudited) 2002
---------------------- ----------------------
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 523 $ 1,102
Accounts Receivable - Net 6,605 5,080
Inventories 6,018 6,615
Refundable Income Taxes 1,002 469
Deferred Income Taxes 1,367 1,367
Prepaid Expenses and Other 603 599
---------------------- ----------------------
Total Current Assets 16,118 15,232
PROPERTY, PLANT AND EQUIPMENT, NET 25,853 26,105
OTHER ASSETS 475 471
---------------------- ----------------------
TOTAL ASSETS $42,446 $41,808
====================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,472 $ 590
Accounts Payable 4,674 4,156
Accrued Liabilities 3,862 4,029
---------------------- ----------------------
Total Current Liabilities 11,008 8,775
LONG-TERM DEBT 6,792 7,377
DEFERRED INCOME TAXES 2,471 2,471
OTHER LONG-TERM LIABILITIES 793 793
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 60 59
Retained Earnings 20,090 21,112
Treasury Stock, At Cost, 128,153 and 129,815 Shares
in 2003 and 2002, Respectively (1,468) (1,479)
---------------------- ----------------------
Total Shareholders' Equity 21,382 22,392
---------------------- ----------------------
Total Liabilities and Shareholders' Equity $42,446 $41,808
====================== ======================
See Notes to Consolidated Financial Statements
4
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOW
(Unaudited)
(Dollars in thousands)
For Three Months Ended March 31
-----------------------------------
2003 2002
---------------- ----------------
Cash Flow from Operating Activities:
Net Income ($1,021) $ 1,171
Adjustments to Reconcile to Net Cash
Provided By (Used in) Operating Activities:
Depreciation 630 600
Directors' Fees Paid in Stock 12 12
Gain on Sale of Non-Core Assets - (1,131)
Changes in Assets and Liabilities:
Increase in Accounts Receivable, Net (1,525) (1,096)
(Increase) Decrease in Inventories 597 (562)
Increase in Accounts Payable 518 2,199
Decrease in Accrued Liabilities (167) (366)
Income Taxes (533) 182
Increase in Other (46) (11)
---------------- ----------------
Net Cash (Used in) Provided by Operating Activities (1,535) 998
---------------- ----------------
Cash Flow From Investing Activities:
Additions to Property, Plant and Equipment, Net (341) (408)
Proceeds From Sale of Non-Core Assets - 1,371
---------------- ----------------
Net Cash (Used in) Provided by Investing Activities (341) 963
---------------- ----------------
Cash Flow from Financing Activities:
Increase to (Payments on) Long-Term Debt 1,297 (2,141)
Increase to (Decrease in) Revolving Credit Borrowings - -
---------------- ----------------
Net Cash Provided by (Used in) Financing Activities 1,297 (2,141)
---------------- ----------------
Net Increase in Cash and Cash Equivalents (579) (180)
Cash and Cash Equivalents:
Beginning of Period 1,102 664
---------------- ----------------
End of Period $ 523 $ 484
================ ================
See Notes to Consolidated Financial Statements
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Basis of Presentation
The accompanying consolidated 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 Annual Report on Form 10-K for
the year ended December 31, 2002, for the accounting policies that are pertinent
to these statements.
Note 2. Income Taxes
The benefit or 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, 2003 and 2002.
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:
2003 2002
---- ----
Basic 2,030,480 2,023,874
Diluted 2,030,480 2,059,702
The effect of stock options have not been included in 2003 diluted loss per
share as their effect would have been anti-dilutive. Stock options to purchase
25,000 in 2002 were not dilutive and, therefore, have not been included in the
computations of diluted per share common share amounts.
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 the 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 shareholders' equity was not material as of
and for the quarter ended March 31, 2003.
Note 5. Inventories
The major components of inventories were as follows:
(In thousands of dollars) March 31, 2003 December 31, 2002
----------------------- -------------- -----------------
Raw Materials $ 2,271 $2,684
Finished Goods and Work in Process 7,656 8,109
-------------- -----------------
9,927 10,793
Less: LIFO Reserve (3,909) (4,178)
-------------- -----------------
Total Inventories $6,018 $6,615
============== =================
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, 2002.
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 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 and natural gas) that the Company needs in
its manufacturing operations. Political uncertainty in the Mideast could
result in higher energy costs. Future energy costs are uncertain.
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
7
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
Net sales for the for the first quarter were $19,669,000 compared to $18,250,000
for the same period last year, an increase of $1,419,000 and 7.8%. The increase
in sales is the result of increased shipment volume.
Gross Profit
Gross profit during the first quarter of 2003 was $6,000 and 0.0% of net sales
compared to $2,074,000 and 11.4% of net sales last year. During the first
quarter of 2003, the Company incurred significantly higher costs for pulp and
natural gas when compared for the same period last year. Pulp costs, the
Company's highest cost of manufacturing, increased 23.9% and the cost of natural
gas increased 105.9% during the first quarter of 2003 compared to 2002. The
increase in pulp and natural gas costs during the first quarter of 2003 were
disproportionately greater than the 8.4% increase in production volume in 2003
when compared to the same period last year.
Selling & Administrative Expense
During the first quarter of 2003, selling and administrative expenses were
$1,461,000 compared to $1,347,000 last year, an increase of $114,000 and 8.4 %.
The increase in selling and administrative expenses can be attributed to outside
consulting and higher selling costs relative to the first quarter of 2002.
Other Income and Expense
Interest expense during the first quarter was consistent with prior year costs
at $97,000 compared to $104,000 last year.
During the first quarter of 2002, the Company realized a gain on sale of
non-core assets of $1,131,000. This gain was associated with the sale of the
Company's wastewater treatment facility located in Peshtigo, Wisconsin. The
Company did not have a similar gain in 2003.
8
Net Income
During the first quarter of 2003, the Company incurred a net loss of $1,021,000
compared to net income of $1,171,000 for the same period in 2002. The decline in
profitability is a result of increased cost of manufacturing paper. During the
first quarter of 2003, the Company incurred significantly higher costs for pulp
and natural gas when compared to the same period last year. Pulp costs, the
Company's highest cost of manufacturing, increased 23.9% and the cost of natural
gas increased 105.9% during the first quarter of 2003 compared to 2002. The
increase in pulp and natural gas costs during the first quarter of 2003 were
disproportionately greater than the 8.4% increase in production volume in 2003
when compared to the same period last year.
Capital Resources and Liquidity
At March 31, 2003, the Company had cash resources of $523,000 and an unused
credit availability of $7,945,000 under its revolving credit facility to fund
ongoing operations. During the first quarter of 2003, the Company made scheduled
principal payments on long-term debt of $139,000. At March 31, 2003, the Company
was in compliance with all credit facility covenants.
Capital Expenditures
Capital expenditures during the first quarter of 2003 were $341,000 compared to
$408,000 during the first quarter last year. During 2002, the Company committed
to the purchase of a machine to apply wax coatings to paper products for sale
into certain specialty markets. The machine began production during the fourth
quarter of 2002 and has an anticipated total cost of $2,822,000. As of March 31,
2003, the Company anticipates that $540,000 remains to be spent on this project
during 2003. The remaining cost associated with this investment includes the
purchase of additional interchangeable components necessary to keep the
equipment operating on a continuous basis in the future.
During the first half of 2003, the Company anticipates taking delivery of a
laminating machine designed to laminate foil and paper products. The addition of
this equipment will allow the Company to expand its product offerings to
selected specialty markets. The total cost of this project is anticipated to be
$1,340,000. As of March 31, 2003, the Company had invested $330,000 in this
machine with the balance of $1,010,000 to be invested during 2003.
The Company anticipates that total capital expenditures in 2003 will not exceed
$5,000,000.
Cash Flow
During the first quarter of 2003 cash flow used in operations was $1,535,000
compared to cash flow generated from operations of $998,000 for the same period
last year. The primary reason for the change in cash flow is the net loss for
the first quarter in 2003. The decline in profitability is a result of increased
costs of paper manufacturing. During the first quarter of 2003, the Company
incurred significantly higher costs for pulp and natural gas when compared to
the same period last year.
The Company believes that current cash resources and availability of unused
credit under its revolving credit facility will provide adequate liquidity for
the Company to meet its future financial obligations.
9
Application of Critical Accounting Policies and Estimates
In accordance with the rules proposed by the Securities and Exchange Commission
in May 2002, we reviewed our critical accounting policies for new critical
accounting estimates and other significant changes. We found that the
disclosures made in our Annual Report on Form 10-K for the year ended December
31, 2002 are still current and that there have been no significant changes since
such Report was filed.
Off Balance Sheet Arrangements
As of March 31, 2003, the Company does not have any off balance sheet financing
arrangements.
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, 2003, the Company was paying interest at a 4.25% 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 $77,000.
The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
Item 4. Controls and Procedures
Evaluation of Disclosures Controls and Procedures
In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the
"Exchange Act"), within 90 days prior to the filing date of this report, the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's President and
Chief Executive Officer along with its Vice President and Chief Financial
Officer, of the effectiveness of the design and operation of the Company's
disclosure controls and procedures (as defined in Rule 13a-14(c) under the
Exchange Act). Based upon their evaluation of these disclosure controls and
procedures, the Company's President and Chief Executive Officer along with the
Vice President and Chief Financial Officer concluded that the Company's
disclosure controls and procedures were effective as of the date of such
evaluation in timely alerting them to material information relating to the
Company, including its consolidated subsidiary, required to be included in the
Company's periodic filings with the Securities and Exchange Commission.
Changes in Internal Controls
There have been no significant changes in the Company's internal controls or
other factors that could significantly affect internal controls subsequent to
the date the Company carried out this evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
10
PART II-OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10. Executive Employment Agreement effective May 1, 2003 between the
Company and Ronald E. Swanson
99.1 Written Statement of President and Chief Executive Officer, pursuant
to 18 U.S.C.ss.1350, dated May 14, 2003.
99.2 Written Statement of Vice President and Chief Financial Officer,
pursuant to 18 U.S.C.ss.1350, dated May 14, 2003.
(b) Reports on Form 8-K:
On March 20, 2003, the Company filed a Current Report on Form 8-K, dated
March 19, 2003, reporting pursuant to Items 5 and 7 an expected first
quarter loss due to rising operating expenses.
11
SIGNATURE
Pursuant to the requirements 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.
BADGER PAPER MILLS, INC.
(Registrant)
/s/ Ronald E. Swanson
--------------------------------------
DATE: May 14, 2003 By: Ronald E. Swanson
President and Chief Executive Officer
(Principal Executive Officer)
Ha
/s/ William H. Peters
--------------------------------------
DATE: May 14, 2003 By: William H. Peters
Vice President and Chief Financial Officer
(Principal Financial Officer)
12
CERTIFICATION
I, Ronald E. Swanson, President and Chief Executive Officer of Badger Paper
Mills, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Badger Paper Mills,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ Ronald E. Swanson
-----------------------------------
Ronald E. Swanson
President
Chief Executive Officer
13
CERTIFICATION
I, William H. Peters, Vice President and Chief Financial Officer of Badger Paper
Mills, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Badger Paper Mills,
Inc.
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /s/ William H. Peters
-----------------------------------
William H. Peters
Vice President and
Chief Financial Officer
14
BADGER PAPER MILLS, INC. & Subsidiary
EXHIBIT INDEX
Number Description
- ------ -----------
10. Executive Employment Agreement effective May 1, 2003 between the
Company and Ronald E. Swanson
99.1 Written Statement of President and Chief Executive Officer, pursuant
to 18 U.S.C.ss.1350, dated May 14, 2003.
99.2 Written Statement of Vice President and Chief Financial Officer,
pursuant to 18 U.S.C.ss.1350, dated May 14, 2003.
15