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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 June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ______________
COMMISSION FILE NO. 0-795
BADGER PAPER MILLS, INC.
(Exact name of registrant as specified in its charter)
WISCONSIN 39-0143840
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
200 WEST FRONT STREET
PESHTIGO, WISCONSIN 54157
(Address of principal executive office) (Zip Code)
Registrant's telephone number, including area code: (715) 582-4551
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such report(s), and (2) has been subject to such filing
requirements for the past 90 days. |X| Yes. |_| No.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date: 2,026,711 as of June 30, 2002.
1
BADGER PAPER MILLS, INC.
INDEX
PAGE NO.
--------
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Interim Statement of Operations
Three Months and Six Months Ended June 30, 2002 and 2001 3
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 4
Consolidated Interim Statements of Cash Flows
Six Months Ended June 30, 2002 and 2001 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
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 11
SIGNATURES
EXHIBIT INDEX
2
PART I-FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENT OF OPERATIONS
(UNAUDITED)
FOR THREE MONTHS ENDED FOR SIX MONTHS ENDED
(Dollars in thousands, except per share data) JUNE 30 JUNE 30
--------------------------------------------------------
2002 2001 2002 2001
NET SALES $ 19,570 $ 18,886 $ 37,820 $ 40,290
Cost of Sales 17,222 16,016 33,398 35,933
----------- ----------- ----------- -----------
GROSS PROFIT 2,348 2,870 4,422 4,357
Management Severance Costs 138 0 138 0
Selling and Administrative Expenses 1,406 1,523 2,753 2,683
----------- ----------- ----------- -----------
OPERATING INCOME 804 1,347 1,531 1,674
Interest Expense (100) (228) (204) (547)
Interest Income 12 20 15 27
Gain on Sale of Non-Core Assets 0 316 1,131 1,627
Other Income, Net 15 55 32 82
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 731 1,510 2,505 2,863
Income Tax Expense 249 513 852 973
----------- ----------- ----------- -----------
NET INCOME $ 482 $ 997 $ 1,653 $ 1,890
=========== =========== =========== ===========
NET EARNINGS PER SHARE - BASIC $ 0.24 $ 0.49 $ 0.82 $ 0.94
Average Shares Outstanding - Basic 2,025,458 2,012,383 2,025,458 2,012,383
NET EARNINGS PER SHARE - DILUTED $ 0.23 $ 0.49 $ 0.80 $ 0.94
Average Shares Outstanding - Diluted 2,071,244 2,012,383 2,071,244 2,012,383
SEE NOTES TO FINANCIAL STATEMENTS
3
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) June 30, 2002 December 31,
(Unaudited) 2001
-------------- ---------------
ASSETS:
CURRENT ASSETS:
Cash & Cash Equivalents $ 529 $ 664
Certificates of Deposit 164 164
Accounts Receivable - Net 7,578 6,107
Inventories 5,523 4,983
Refundable Income Taxes 0 170
Deferred Income Taxes 1,150 1,150
Property Held for Resale 258
Prepaid Expenses and Other 1,003 748
-------- --------
TOTAL CURRENT ASSETS 15,947 14,244
PROPERTY, PLANT AND EQUIPMENT, NET 25,879 25,445
OTHER ASSETS 448 591
-------- --------
TOTAL ASSETS $ 42,274 $ 40,280
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY:
CURRENT LIABILITIES:
Current portion of Long-term Debt $ 632 $ 414
Accounts Payable 4,121 2,921
Accrued Liabilities 3,868 3,792
Income Taxes Payable 80 400
-------- --------
TOTAL CURRENT LIABILITIES 8,701 7,527
LONG-TERM DEBT 8,960 9,794
DEFERRED INCOME TAXES 1,839 1,839
OTHER LIABILITIES 652 675
SHAREHOLDERS' EQUITY
Common Stock, No Par Value; 4,000,000 shares
authorized 2,160,000 issued 2,700 2,700
Additional paid-in capital 57 54
Retained Earnings 20,866 19,213
Treasury Stock, at cost, 134,789 and 136,415 shares
In 2002 and 2001, respectively (1,501) (1,522)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 22,122 20,445
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 42,274 $ 40,280
======== ========
SEE NOTES TO FINANCIAL STATEMENTS
4
BADGER PAPER MILLS, INC. & SUBSIDIARY
CONSOLIDATED INTERIM STATEMENTS OF CASH FLOWS
(UNAUDITED)
For Six Months Ended June 30
----------------------------
(Dollars in thousands) 2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 1,653 $ 1,890
Adjustments to Reconcile to Net Cash
Provided By (Used in) Operating Activities:
Depreciation 1,219 1,472
Director's Fees Paid in Stock 24 72
Gain on Sale of Non-Core Assets (1,131) (1,627)
Deferred Income Taxes
Changes in Assets and Liabilities:
Increase in Accounts Receivable, Net (1,471) (238)
(Increase) Decrease in Inventories (540) 1,407
Increase (Decrease) in Accounts Payable 1,200 (2,641)
Increase in Accrued Liabilities 76 473
Income Taxes (Payable) Refundable (145) 138
Increase in Other (150) (73)
------- -------
Net Cash Provided by Operating Activities 735 873
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to Property, Plant and Equipment, Net (1,625) (617)
Proceeds From Sale of Non-Core Assets 1,371 1,760
------- -------
Net Cash (Used in) Provided by Investing Activities (254) 1,143
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Long-Term Debt (616) (480)
Increase to (Decrease in) Revolving Credit Borrowings 0 (1,260)
------- -------
Net Cash Used in Financing Activities (616) (1,740)
------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS (135) 276
CASH AND CASH EQUIVALENTS:
Beginning of Period 664 1,080
------- -------
End of Period $ 529 $ 1,356
======= =======
SEE NOTES TO FINANCIAL STATEMENTS
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
The accompanying condensed financial statements, in the opinion of management,
include all adjustments, 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, 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 and six-month periods
ended June 30, 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 2,025,458 2,012,383
Diluted 2,071,244 2,012,383
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. 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 stockholders' equity was not material as of
and for the quarter ended June 30, 2002.
NOTE 5. INVENTORIES
The major components of inventories were as follows:
(IN THOUSANDS OF DOLLARS) JUNE 30, 2002 DECEMBER 31, 2001
------------------------- ------------- -----------------
Raw Materials $ 2,509 $ 2,333
Finished Goods and Work in Process 7,601 7,216
-------- --------
10,110 9,549
Less: LIFO Reserve (4,587) (4,566)
-------- --------
Total Inventories $ 5,523 $ 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 and six-month periods ended June 30:
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
PAPER PRODUCTS FLEXIBLE PACKAGING TOTAL
---------------------- ---------------------- ----------------------
For Three Months For Three Months For Three Months
Ended June 30 Ended June 30 Ended June 30
---------------------- ---------------------- ----------------------
2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- -------
Net sales $17,617 $16,127 $ 1,953 $ 2,759 $19,570 $18,886
Segment income before tax 588 1,260 143 250 731 1,510
Segment assets 38,170 35,943 4,104 5,428 42,274 41,371
PAPER PRODUCTS FLEXIBLE PACKAGING TOTAL
---------------------- ---------------------- ----------------------
For Six Months For Six Months For Six Months
Ended June 30 Ended June 30 Ended June 30
---------------------- ---------------------- ----------------------
2002 2001 2002 2001 2002 2001
------- ------- ------- ------- ------- -------
Net sales $33,619 $34,425 $ 4,201 $ 5,865 $37,820 $40,290
Segment income before tax 2,440 2,166 65 697 2,505 2,863
Segment assets 38,170 35,943 4,104 5,428 42,274 41,371
All operations of the Company are located in the United States. Revenues from
foreign countries are primarily from Canada and Mexico and are immaterial to
total revenues.
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.
7
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:
- - 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.
- - 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.
- - 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.
- - 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.
- - 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.
RESULTS OF OPERATIONS
NET SALES
Net sales in the second quarter of 2002 were $19,570,000, compared to
$18,886,000 for the same period last year, an increase of $684,000 and 3.6%.
After two quarters, net sales were $37,820,000 compared to $40,290,000 for the
same period last year, a decrease of $2,470,000 and 6.1%. While net sales were
higher during the second quarter of 2002 when compared to last year, market
conditions continue to be soft because of a sluggish economy.
8
The Company's paper products segment recorded net sales of $17,617,000 during
the second quarter, a 14.25% increase over the same period last year. The
increase in sales is attributed to a 16.3% increase in shipment volume, while
the average price decreased 1.8%. Net sales for the first six months in the
paper products segment of the business were $33,619,000 compared to $34,425,000
last year, a decrease of $806,000 and 2.3%. Production volume in the first six
months of 2002 was 3.9% higher than in 2001, while the average price was 4.0%
less than in the prior year.
Flexible packaging net sales for the second quarter of 2002 were $1,953,000
compared to $2,759,000 for the same period last year. After six months, net
sales were $4,201,000 compared to $5,865,000 last year. The decrease in net
sales can be attributed to loss of business related to certain printing projects
that the Company did not have contracts for in 2002.
GROSS PROFIT
Gross profit during the second quarter of 2002 was $2,348,000 compared to
$2,870,000 during the second quarter last year. During the second quarter of
2002, the Company experienced increases in the cost of pulp due to increases in
the market price for pulp. The Company has announced price increases as a result
of increasing cost for fiber. After six months 2002 gross profit was $4,422,000
compared to $4,357,000 for the same period last year.
SELLING & ADMINISTRATIVE EXPENSE
Selling and administrative expenses during the second quarter were $1,406,000
compared to $1,523,000 last year, a decrease of $117,000 and 7.7%. After six
months, selling and administrative expenses were $2,753,000 compared to
$2,683,000 last year.
The Company also incurred $138,000 for management severance costs during the
second quarter of 2002. The Company did not incur similar costs last year.
OTHER INCOME & EXPENSE
Interest expense during the second quarter was $100,000 compared to $228,000 for
the same period last year. After six months, interest expense was $204,000
compared to $547,000 for the same period last year. The reduction in interest
expense is the combined effect of the reduction in debt and lower interest rates
as a result of refinancing the Company's debt during the fourth quarter of last
year.
During the second quarter 2001, the Company realized a gain of $316,000 from the
sale of non-core assets. The Company did not have a similar transaction in 2002.
During the first six months of 2002, the Company recognized a gain on the sale
of non-core assets of $1,131,000 compared to $1,627,000 for the same period last
year. The gains recognized by the Company are a result of selling the Waste
Water Treatment Facility in the first quarter of 2002 and the sale of timberland
property last year. With the sale of the Waste Water Treatment Facility, the
Company has completed the strategic initiative to liquidate non-core assets that
began in 2001. The proceeds from the sale of non-core assets were used to reduce
debt.
NET INCOME
Net income for the second quarter 2002 was $482,000 compared to $997,000 last
year. Net income last year included a pre-tax gain on the sale of non-core
assets of $316,000. Current year results do not include a similar gain. In the
second quarter of 2002, the Company also incurred $138,000 in costs from
management severance, which were not included in prior year results. The
combined effect of
9
these transactions accounts for a significant portion of the reduction in net
earnings in 2002 when compared to 2001.
For the six months ended June 30, 2002, net income was $1,653,000 compared to
$1,890,000 for the same period last year. Differences in gain on sale of
non-core assets, $1,131,000 in 2002 and $1,627,000 in 2001, account for a
significant portion of the change in net income for the first six months of 2002
compared to 2001.
CAPITAL RESOURCES AND LIQUIDITY
At June 30, 2002, the Company had cash resources of $529,000 and an unused
credit availability of $6,638,000 under the revolving credit facility to fund
on-going operations. During the first six months of 2002, the Company made
scheduled principal payments on long-term debt of $253,000. At June 30, 2002,
the Company was in compliance with all credit facility covenants.
CAPITAL EXPENDITURES
Capital expenditures during the second quarter of 2002 were $1,225,000 compared
to $544,000 last year. After six months, capital expenditures were $1,625,000
compared to $617,000 last year. During the first quarter of 2002, the Company
approved a purchase of new machinery to increase the production of certain paper
grades. The total cost of the project is estimated to be $2,800,000. During the
six-month period ending June 30, 2002, the Company has invested $1,245,000 in
the project. The Company anticipates the remaining balance of approximately
$1,555,000 to be invested during the second half of 2002. The Company
anticipates financing the purchase of this equipment with long-term debt.
CASH FLOW
Cash flow from operations for the six months of 2002 was $735,000 compared to
$873,000 for the same period last year. The Company believes that with cash
provided from operations, availability of unused credit under the revolving
credit facility and the availability of long-term debt to fund capital
expenditures, there is adequate liquidity for the Company to meet its future
financial obligations.
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 June 30, 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 $96,000.
The Company does not use financial instruments for trading purposes and is not a
party to any leveraged derivatives.
10
PART II-OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its annual meeting of shareholders on Tuesday, May 14, 2002, at
the Best Western Riverfront Inn, 1821 Riverside Avenue, Marinette, Wisconsin. At
such meeting, board nominees Mark D. Burish and James L. Kemerling were elected
for terms to expire at the 2005 annual meeting of shareholders and until their
successors are duly elected and qualified, pursuant to the following votes: Mark
D. Burish - 1,427,742 voted "for", 446,888 withholding authority and 0 broker
nonvotes; James L. Kemerling - 1,525,810 voted "for", 348,820 withholding
authority and 0 broker nonvotes. Other members of the Board include L. Harvey
Buek, Robert A. Olah and William A. Raaths, whose terms expire at the 2003
annual meeting, and Harold J. Bergman and John T. Paprocki, whose terms expire
at the 2004 annual meeting.
At such meeting, the shareholders also voted to amend the 1998 Directors Stock
Grant Plan. The Plan was approved pursuant to the following votes: 1,134,697
shares "for", 414,253 shares voted "against", 21,660 withholding authority, and
304,020 broker nonvotes.
The shareholders also approved the 2002 Stock Option Plan at the annual meeting,
pursuant to the following votes: 1,035,831 shares "for", 521,774 shares
"against", 13,005 withholding authority, and 304,020 broker nonvotes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
10.1 Amendment of 1998 Directors Stock Grant Plan (incorporated by
reference to the Company's definitive proxy statement on Schedule
14A filed on April 10, 2002).
10.2 2002 Stock Option Plan (incorporated by reference to Appendix A
to the Company's definitive proxy statement on Schedule 14 A
filed on April 10, 2002).
99.1 Written Statement of President, Chairman, and Chief Executive
Officer, pursuant to 18 U.S.C.ss.1350, dated August 14, 2002.
99.2 Written Statement of Vice President and Chief Financial Officer,
pursuant to 18 U.S.C.ss.1350, dated August 14, 2002.
(b) REPORTS ON FORM 8-K:
None.
11
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)
/s/ Robert A. Olah
--------------------------------
DATE: August 14, 2002 By: Robert A. Olah
President, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
/s/ William H. Peters
----------------------------------
DATE: August 14, 2002 By: William H. Peters
Vice President and Chief Financial Officer
(Principal Financial Officer)
12
EXHIBIT INDEX
BADGER PAPER MILLS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2002
NUMBER DESCRIPTION
- ------ -----------
10.1 Amendment of 1998 Directors Stock Grant Plan (incorporated by reference to the
Company's definitive proxy statement on Schedule 14A filed on April 10, 2002).
10.2 2002 Stock Option Plan (incorporated by reference to Appendix A to the Company's
definitive proxy statement on Schedule 14 A filed on April 10, 2002).
99.1 Written Statement of President, Chairman, and Chief Executive Officer, pursuant to
18U.S.C.ss.1350, dated August 14, 2002.
99.2 Written Statement of Vice President and Chief Financial Officer, pursuant to 18U.S.C.
ss.1350, dated August 14, 2002.
13