[X] QUARTERLY REPORT
UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[_] TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
| 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 latest practicable date: as of March 31, 2004, 2,041,789 shares of our common stock were outstanding.
Page No.
| Item 1. | Financial Statements | |
| Consolidated Interim Statements of Operations | ||
| Three Months Ended March 31, 2004 and 2003 | 3 | |
| Consolidated Balance Sheets | ||
| March 31, 2004 and December 31, 2003 | 4 | |
| Consolidated Interim Statements of Cash Flow | ||
| Three Months Ended March 31, 2004 and 2003 | 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 Disclosure About Market Risk | 10 |
Item 4. |
Controls and Procedures | 11 |
| Item 1. | Legal Proceedings | 11 |
Item 6. |
Exhibits and Reports on Form 8-K | 11 |
2
| (Dollars in thousands, except per share data) | For Three Months Ended March 31 | |||||||
| 2004 | 2003 | |||||||
Net Sales |
$ | 17,378 | $ | 19,669 | ||||
| Cost of Sales | 16,641 | 19,663 | ||||||
| Gross Profit | 737 | 6 | ||||||
Selling and Administrative Expenses | 1,193 | 1,461 | ||||||
| Restructuring Charge | 1,303 | -- | ||||||
| Operating Loss | (1,759 | ) | (1,455 | ) | ||||
Interest Expense | (123 | ) | (97 | ) | ||||
| Interest Income | 1 | 2 | ||||||
| Other Income (Expense), Net | 5 | 3 | ||||||
| Loss Before Income Taxes | (1,876 | ) | (1,547 | ) | ||||
Income Tax Benefit | -- | (526 | ) | |||||
Net Loss | ($ 1,876 | ) | ($ 1,021 | ) | ||||
Net Loss Per Share - Basic and Diluted | ($ 0.92 | ) | ($ 0.50 | ) | ||||
| Average Shares Outstanding - Basic and Diluted | 2,039,618 | 2,030,480 | ||||||
3
(Dollars in thousands)
| March 31, 2004 (Unaudited) |
December 31, 2003 | |||||||
|---|---|---|---|---|---|---|---|---|
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash & Cash Equivalents | $ | 632 | $ | 656 | ||||
| Accounts Receivable - Net | 6,429 | 4,991 | ||||||
| Inventories | 7,399 | 5,896 | ||||||
| Refundable Income Taxes | 414 | 414 | ||||||
| Prepaid Expenses and Other | 693 | 539 | ||||||
| Total Current Assets | 15,566 | 12,496 | ||||||
PROPERTY, PLANT AND EQUIPMENT, NET | 25,025 | 25,510 | ||||||
| OTHER ASSETS | 472 | 472 | ||||||
| TOTAL ASSETS | $ | 41,064 | $ | 38,478 | ||||
LIABILITIES AND SHAREHOLDERS' EQUITY: | ||||||||
| Current Liabilities: | ||||||||
| Current Portion of Long-Term Debt | $ | 884 | $ | 874 | ||||
| Accounts Payable | 4,493 | 2,608 | ||||||
| Accrued Liabilities | 3,949 | 3,882 | ||||||
| Total Current Liabilities | 9,326 | 7,364 | ||||||
LONG-TERM DEBT | 12,222 | 10,637 | ||||||
DEFERRED INCOME TAXES | 340 | 340 | ||||||
OTHER LONG-TERM LIABILITIES | 1,691 | 788 | ||||||
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 | 43 | 49 | ||||||
| Retained Earnings | 16,145 | 18,021 | ||||||
| Treasury Stock, At Cost, 118,211 and 120,845 Shares | ||||||||
| in 2004 and 2003, Respectively | (1,403 | ) | (1,421 | ) | ||||
Total Shareholders' Equity | 17,485 | 19,349 | ||||||
Total Liabilities and Shareholders' Equity | $ | 41,064 | $ | 38,478 | ||||
4
(Dollars in thousands)
| For Three Months Ended March 31 | ||||||||
| 2004 |
2003 | |||||||
| Cash Flow from Operating Activities: | ||||||||
| Net Loss | ($1,876 | ) | ($1,021 | ) | ||||
| Adjustments to Reconcile to Net Cash | ||||||||
| Provided By Operating Activities: | ||||||||
| Depreciation | 703 | 630 | ||||||
| Directors' Fees Paid in Stock | 12 | 12 | ||||||
Changes in Assets and Liabilities: | ||||||||
| Increase in Accounts Receivable, Net | (1,438 | ) | (1,525 | ) | ||||
| (Increase) Decrease in Inventories | (1,503 | ) | 597 | |||||
| Increase in Accounts Payable | 1,885 | 518 | ||||||
| Decrease (Increase) in Accrued Liabilities | 67 | (167 | ) | |||||
| Income Taxes | -- | (533 | ) | |||||
| Increase (Decrease) in Other | 749 | (46 | ) | |||||
| Net Cash Used in Operating Activities | (1,401 | ) | (1,535 | ) | ||||
Cash Flow From Investing Activities: | ||||||||
| Additions to Property, Plant and Equipment, Net | (218 | ) | (341 | ) | ||||
| Net Cash Used in Investing Activities | (218 | ) | (341 | ) | ||||
Cash Flow from Financing Activities: | ||||||||
| Increase to Long-Term Debt | 1,595 | 1,297 | ||||||
| Net Cash Provided by Financing Activities | 1,595 | 1,297 | ||||||
Net Decrease in Cash and Cash Equivalents | (24 | ) | (579 | ) | ||||
Cash and Cash Equivalents: | ||||||||
| Beginning of Period | 656 | 1,102 | ||||||
| End of Period | $ | 632 | $ | 523 | ||||
5
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, 2003 for the accounting policies that are pertinent to these statements.
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. As a result of valuation allowances for any tax benefit from a net operating loss carry forward, the Company did not reflect an income tax benefit for the quarter ended March 31, 2004.
Net loss per share is computed based on the weighted average number of shares of common stock outstanding during the quarter:
| 2004 |
2003 | |
|---|---|---|
| Basic and Diluted | 2,039,618 | 2,030,480 |
The effect of stock options has not been included in the 2004 and 2003 diluted loss per share amounts because their effect would have been anti-dilutive.
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, 2004.
The major components of inventories were as follows:
| (In thousands of dollars) |
March 31, 2004 |
December 31, 2003 | ||||||
|---|---|---|---|---|---|---|---|---|
| Raw Materials | $ | 2,406 | $ | 2,644 | ||||
| Finished Goods and Work in Process | 9,362 | 7,589 | ||||||
| 11,768 | 10,233 | |||||||
Less: LIFO Reserve | (4,369 | ) | (4,337 | ) | ||||
| Total Inventories | $ | 7,399 | $ | 5,896 | ||||
6
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 Annual Report on Form 10-K for the year ended December 31, 2003.
In the first quarter of 2004, the Company incurred a $1,303,000 non-cash restructuring charge associated with a voluntary early retirement benefit offered to union employees and certain costs associated with work force redesign. No payments have been made as of March 31, 2004 related to this restructuring provision.
This Quarterly Report on Form 10-Q may include one or more “forward-looking statements” that may state the Company’s or management’s intentions, hopes, beliefs, expectations or predictions for the future. In the following discussion and elsewhere in this Quarterly Report on Form 10-Q, statements containing words such as “expect,” “anticipate,” “believe,” “estimate,” “goal,” “objective” or similar words are intended to identify forward-looking statements.
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. In making such forward-looking statements, the Company undertakes no obligation to publicly update or revise any such statements. Forward looking statement are subject to risks and uncertainties that may cause actual results to differ materially from those projected, expressed or implied by such forward-looking statements. In addition to specific factors that may be described in connection with any of the Company’s forward-looking statements, factors that could cause actual results to differ materially include:
| • | Increased competition from 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. |
| • | Changes in the price of pulp, the Company’s main raw material. The Company purchases all of its pulp 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 that affect short-term demand, and pulp producer cost changes related to wood availability, environmental issues and other variables. During 2003 and the first quarter of 2004, the market price for pulp increased. The Company anticipates that the market price for pulp will continue to increase in 2004. |
7
| • | Interruptions in the supply of, or increases and/or changes in the price of energy (principally natural gas and electricity) that the Company needs to run manufacturing operations. During the latter part of 2002 and early in 2003, energy prices rose significantly. The current market price of natural gas has stabilized at historically high levels. Future energy costs are uncertain. |
| • | 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 and acceptance of the Company’s products by the markets it serves. |
| • | Unforeseen operational problems at any of the Company’s facilities causing significant lost production and/or higher operating costs. |
| • | Changes in laws or regulations affecting the Company, particularly environmental laws and regulations affecting air quality and wastewater discharges. |
| • | 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. |
During the first quarter of 2004 net sales were $17,378,000 compared to $19,669,000 for the same period last year. The decrease in sales is a result of lower shipment volume in the first quarter of 2004 as compared to the same period last year. Gross profit during the first quarter of 2004 was $737,000 and 4.2% compared to $6,000 and 0.0% for the same period last year.
During the first quarter the Company took a $1,303,000 one-time charge for restructuring costs associated with a voluntary early retirement benefit offered to union employees. After accounting for the restructuring charge, the Company generated a net loss of $1,876,000 in the first quarter of 2004 as compared to a net loss of $1,021,000 for the same period in 2003.
Net sales for the first quarter of 2004 were $17,378,000 compared to $19,669,000 for the same period last year, a decrease of $2,291,000 and 11.6%. The decrease in sales is a result of lower shipment volume of paper products in 2004 as compared to 2003.
Cost of sales in the first quarter of 2004 was $16,641,000 and 95.8% of net sales compared to $19,663,000 100% of net sales during the first quarter of 2003. The market price for pulp increased during the first quarter of 2004. Natural gas costs were stable at historically high levels.
Gross profit during the first quarter of 2004 was $737,000 and 4.2% of net sales compared to $6,000 and 0.0% for the same period last year. The improvement in gross profit in the first quarter of 2004 was a result of higher pricing on paper products shipped. The market price for pulp continued to increase during the first quarter and natural gas prices remain at historically high levels. Pulp and natural gas are integral to the manufacture of paper products.
8
During the first quarter of 2004 selling and administrative expenses were $1,193,000 compared to $1,461,000 during the same period in 2003. The reduction in selling and administrative expenses is a result of reductions in salaried employees in 2004 as compared to last year.
During the first quarter of 2004, the Company incurred a $1,303,000 restructuring charge associated with a voluntary early retirement benefit offered to union employees and certain costs associated with work force redesign. The Company anticipates a 20% reduction in work force during the second quarter of 2004 as a result of its restructuring efforts in the first quarter of 2004.
Interest expense during the first quarter of 2004 was consistent with prior year costs at $123,000 compared to $97,000 for the same period last year. The increase in interest expense is a result of higher debt level in 2004 as compared to 2003. Higher debt levels are a result of increased borrowing to meet working capital needs.
During the first quarter of 2004, the Company incurred a net loss of $1,876,000 as compared to a $1,021,000 net loss in the first quarter of 2003. The loss in the first quarter of 2004 includes a one time restructuring charge of $1,303,000. The Company did not have a similar charge in the first quarter of 2003. The Company improved gross profit through higher paper prices in the first quarter 2004 as compared to the first quarter of 2003. However, the cost for pulp continued to increase during the first quarter 2004 and the market price for natural gas remains at historically high levels. The Company’s gross profit could be adversely affected if these costs can not be passed through in higher prices for the Company’s products.
At March 31, 2004, the Company had cash resources of $632,000, borrowings of $4,574,000 and an unused credit availability of $5,160,000 under its revolving credit agreement to fund ongoing operations. During the first quarter of 2004, the Company made scheduled principal payments on long- term debt of $214,000.
The Company’s revolving credit facility contains certain covenants that require the Company, among other things, to maintain a specified level of earnings before interest, taxes, depreciation and amortization (EBITDA) as of March 31, 2004. As of March 31 2004, the Company was not in compliance with the required EBITDA covenant, but requested and received a waiver of that covenant. While the Company is attempting to reduce its costs and improve its gross profit in order to address this issue, there can be no assurance that the Company will be in compliance with the covenants contained in its revolving credit facility in the future. If the Company fails to comply with any of such covenants and is unable to obtain a waiver of such covenants in the future, then there could be a material adverse effect on the Company’s liquidity.
9
Capital expenditures during the first quarter of 2004 were $218,000 compared to $341,000 during the first quarter last year.
The Company anticipates that total capital expenditures in 2004 will not exceed $3,000,000.
During the first quarter of 2004, cash flow used in operations was $1,401,000 compared to cash used in operations of $1,535,000 for the same period last year. The primary reason for cash being used in operations is the net losses during the first quarter of 2004 and the first quarter of 2003.
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.
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, 2003 are still current and that there have been no significant changes since such Report was filed.
As of March 31, 2004, the Company did not have any off-balance sheet financing arrangements.
Information regarding the Company’s contractual obligations is contained in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. No material changes to such information have occurred during the first quarter of 2004.
The Company is exposed to market risk from changes in interest on its debt. The Company’s revolving credit facility extends to November 2006 and prior to April 2004 it provided for borrowings up to $15,000,000. During April 2004, the Company reduced the borrowing capacity under its revolving credit facility from $15,000,000 to $12,000,000. 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, 2004, the Company was paying interest at a 4.50% 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 $120,000.
The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives.
10
In accordance with Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management carried out an evaluation, with the participation of 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-15(e) 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, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.
There have been no significant changes in the Company’s internal controls over financial reporting or other factors that occurred during the quarter ended March 31, 2004 that have materially affected or are reasonably likely to materially affect such internal controls over financial reporting.
The Company does not have any material legal proceedings pending, and does not have any litigation or governmental proceedings with respect to environmental matters pending (except to the extent identified under the “Environmental Matters” caption in Item 1 of Part I of the Company’s Annual Report on Form 10-K for the year ended December 31, 2003).
| (a) | Exhibits: |
| (4.1) | Sixth Amendment to Revolving Credit Facility and Security Agreement, dated April 30, 2004, by and among the Company, PNC Bank, National Association, individually and as agent and other lenders from time to time party thereto. |
| (4.2) | Seventh Amendment to Revolving Credit Facility and Security Agreement, dated May 14 2004, by and among the Company, PNC Bank, National Association, individually and as agent and other lenders from time to time party thereto. |
| (31.1) | Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| (31.2) | Certification of the Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| (32.1) | Certification of the President and Chief Executive Officer pursuant to 18 U. S. C. §1350. |
| (32.2) | Certification of the Vice President and Chief Financial Officer pursuant to 18 U. S. C. §1350. |
11
| (b) | Reports on Form 8-K: |
On March 2, 2004, the Company filed a Current Report on Form 8-K reporting, pursuant to Items 7 and 12, its results for the fourth quarter of 2003.
12
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, 2004 | By: Ronald E. Swanson |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ William H. Peters | |
| DATE: May 14, 2004 | By: William H. Peters |
| Vice President, Chief Financial Officer, | |
| Secretary and Treasurer | |
| (Principal Financial Officer) |
| (4.1) | Sixth Amendment to Revolving Credit Facility and Security Agreement, dated April 30, 2004, by and among the Company, PNC Bank, National Association, individually and as agent and other lenders from time to time party thereto. |
| (4.2) | Seventh Amendment to Revolving Credit Facility and Security Agreement, dated May 14 2004, by and among the Company, PNC Bank, National Association, individually and as agent and other lenders from time to time party thereto. |
| (31.1) | Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| (31.2) | Certification of the Vice President and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934. |
| (32.1) | Certification of the President and Chief Executive Officer pursuant to 18 U. S. C. §1350. |
| (32.2) | Certification of the Vice President and Chief Financial Officer pursuant to 18 U. S. C. §1350. |