SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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: 1,955,994 as of September 30,
1998.
<PAGE>
BADGER PAPER MILLS, INC.
INDEX
Pages
-----
FINANCIAL INFORMATION
Condensed Consolidated Interim Statements of
Operations and Retained Earnings -
Quarter and Nine Months Ended
September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets -
September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6-7
MANAGEMENT DISCUSSION AND ANALYSIS 7-8
OTHER INFORMATION
Exhibits and Reports on Form 8-K 9
SIGNATURES 10
<PAGE>
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED INTERIM STATEMENTS OF
OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
For Three Months Ended For Nine Months Ended
September 30 September 30
-----------------------------------------------------
1998 1997 1998 1997
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 16,121 $ 19,002 $ 51,844 $ 53,034
Cost of Sales 14,207 17,589 46,353 50,321
----------- ----------- ----------- ----------
Gross Margin 1,914 1,413 5,491 2,713
Selling and Administrative Expenses 1,151 1,006 3,397 3,075
----------- ----------- ----------- ----------
Operating Income (Loss) 763 407 2,094 (362)
Other Income, Net 140 213 505 440
Interest Expense (283) (358) (898) (1,000)
Non Recurring Gain on Lodge Sale - - 611 -
Non Recurring Executive Termination Expense - - (286) -
----------- ----------- ----------- ----------
Income (Loss) Before Income Taxes 620 262 2,026 (922)
Income Tax Expense (Benefit) 212 89 689 (314)
----------- ----------- ----------- ----------
Net Income (Loss) $ 408 $ 173 $ 1,337 $ (608)
----------- ----------- ----------- ----------
Retained Earnings, Beginning of Period 16,481 17,213 15,552 17,994
Cash Dividends - - - -
----------- ----------- ----------- ----------
Retained Earnings, End of Period 16,889 17,386 16,889 17,386
=========== =========== =========== ==========
Net Earnings (Loss) Per Share $ 0.21 $ 0.09 $ 0.68 $ (0.31)
Dividends Per Share 0 0 0 0
Average Shares Outstanding - Basic 1,955,944 1,947,268 1,953,323 1,945,892
</TABLE>
See Notes to Consolidated Financial Statements.
3
<PAGE>
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands)
September 30, December 31,
1998 1997
------------ ----------
ASSETS:
Current Assets:
Cash & Cash Equivalents $ 1,058 $ 1,302
Certificates of Deposit 996 1,382
Marketable Securities 1,758 1,318
Accounts Receivable, Net 5,692 5,120
Deferred Income Taxes 1,291 1,291
Inventories 5,747 4,844
Refundable Income Taxes 111 385
Trade Credits 784 996
Other Current Assets 516 298
------------ -----------
Total Current Assets 17,953 16,936
Property, Plant, Equipment & Timberlands 64,386 66,329
Less: Allowance for Depreciation & Depletion (37,144) (37,042)
------------ -----------
Total Property, Plant, Equipment &
Timberlands, Net 27,242 29,287
Other Assets 2,069 2,133
------------ -----------
TOTAL ASSETS $ 47,264 $ 48,356
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current Liabilities:
Current Portion of Long-Term Debt $ 2,923 $ 123
Accounts Payable 4,346 4,313
Accrued Liabilities 4,262 4,308
------------ -----------
Total Current Liabilities 11,531 8,744
------------ -----------
Deferred Income Taxes 1,185 1,185
Long-Term Debt 15,285 20,394
Other Liabilities 1,448 1,589
------------ -----------
TOTAL LIABILITIES 29,449 31,912
------------ -----------
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 196 190
Retained Earnings 16,889 15,552
Less Treasury Shares at Cost:
201,618 Shares at 9/30/98 and
208,145 Shares at 12/31/97 (1,970) (1,998)
------------ -----------
TOTAL STOCKHOLDERS' EQUITY 17,815 16,444
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 47,264 $ 48,356
============ ===========
(1) See Notes to Consolidated Financial Statements
4
<PAGE>
BADGER PAPER MILLS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- --------------------------------------------------------------------------------
(Dollars in thousands)
For Nine Months Ended
September 30
------------------------
1998 1997
----- -----
Cash Flows from Operating Activities:
Net Income (Loss) $ 1,337 $ (608)
Adjustments to Reconcile to Net Cash
Provided By Operating Activities:
Depreciation 2,098 2,180
Gain on Sale of Lodge (611) -
Changes in Assets and Liabilities:
(Increase) Decrease in Accounts
Receivable, Net (572) (1,278)
(Increase) Decrease in Inventories (903) 998
Increase (Decrease) in Accounts Payable 33 (3,002)
Increase (Decrease) in Accrued
Liabilities (46) (823)
(Increase) Decrease in Other 191 609
-------- ---------
Net Cash Provided by (Used in)
Operating Activities 1,527 (1,924)
-------- ---------
Cash Flows From Investing Activities:
Additions to Property, Plant and
Equipment, Net (1,739) (3,708)
Purchase of Certificates of Deposit (200) -
Proceeds from Sales of Certificates
of Deposit 586 -
Purchase of Marketable Securities (1,745) -
Proceeds from Sales of Marketable
Securities 1,305 491
Proceeds from Sales of Fixed Assets
Held for Sale 672 -
Proceeds from Refund of Prepaid
Leased Assets 1,572 -
Proceeds on Sale of Lodge 725 -
Unrealized (Loss) Gain On
Marketable Securities - 10
---------- --------
Net Cash (Used in) Provided by
Investing Activities 504 (2,535)
---------- --------
Cash Flows from Financing Activities:
Increase to (Payments on) Long-
Term Debt (109) (106)
Increase to (Decrease in)
Revolving Credit Borrowings (2,200) 3,400
Acquisition of Treasury Stock, Net 34 -
Net Cash (Used in) Provided
by Financing Activities (2,275) 3,294
-------- --------
Net (Decrease) Increase in Cash and
Cash Equivalents (244) (1,165)
Cash and Cash Equivalents:
Beginning of Period 1,302 4,079
-------- -------
End of Period 1,058 2,914
======= =======
See Notes to Consolidated Financial Statements.
5
<PAGE>
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. Certain reclassifications have been made to
the 1997 financial statements to conform to the 1998 presentation.
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
both the three and nine months periods ended September 30, 1998, resulting from
the Company's operating profits during such periods. For the three months ended
September 30, 1997, the Company provided for a 34% tax expense, resulting from
the Company's operating profit. For the nine months ended September 30, 1997,
the Company provided for a 34% tax benefit, resulting from the Company's
operating loss during such period.
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):
Sept. 30, 1998 Dec. 31, 1997
-------------- -------------
Raw materials $1,729 $ 1,281
Work in process and finished stock 4,018 3,563
----- -----
$5,747 $4,844
====== ======
6
<PAGE>
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. DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
-------------------------------------------------------------------
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS No. 131"). This statement, which
establishes standards for the reporting of information about operating segments
and requires the reporting of selected information about operating segments in
interim financial statements, was adopted by the Company on January 1, 1998.
Disclosure of segment and other related information is not required in interim
periods of the first year of the Company's adoption. The Company will provide
appropriate SFAS 131 disclosures for the year ended December 31, 1998.
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Results of Operations
The Company reported net sales of $16,121,000 for the third quarter ended
September 30, 1998, which is down $2,881,000 or 15% from the $19,002,000
reported for the same period in 1997. Total pounds of paper shipped for the
third quarter of 1998 decreased 21.9% compared to the same period in 1997 due to
extremely soft market conditions. The average selling price of the paper sold
increased approximately 6.0% due to a higher mix of specialty products.
Sales for the nine months ended September 30, 1998, were $51,844,000 compared to
$53,034,000 for the same period a year ago. The decreased revenue in 1998 is
reflective of a 5.4% decrease in shipping volume which was partially offset by
an increase of 2.4% in average selling prices.
Cost of sales decreased $3,382,000 or 19.2% to $14,207,000 for the third quarter
of 1998 compared to $17,589,000 for the same period a year earlier. Year to date
cost of sales was $46,353,000 for the nine months ended September 30, 1998,
compared to $50,321,000 for the first nine months of 1997. The decreased costs
were the result of the restructuring of our business in the first quarter of
1998 that reduced the Company's workforce by approximately 71 employees and
reduced operating levels due to soft market conditions.
Selling and administrative expenses increased $145,000 to $1,151,000 for the
third quarter of 1998 compared to $1,006,000 reported for the same period in
1997. Year to date expenses increased $322,000 to $3,397,000 for 1998 from
$3,075,000 for the first nine months of 1997. The increase in 1998 expenses was
in part due to costs associated with market development and consultants
providing professional services relative to our restructuring.
7
<PAGE>
Interest expense decreased 21% for the third quarter of 1998 and 10% for the
nine months ended September 30, 1998, compared to the same period during 1997.
The reduced interest expense is due to repayment of $2,200,000 on the revolving
credit facility.
The Company recorded in the second quarter a non-recurring capital gain of
$611,000 on the sale of the Company's offsite training facility. Non-recurring
executive termination expenses of $286,000 associated with Claude L. Van Hefty
(former president) and Miles L. Kresl, Jr. (former vice president) were also
booked in the second quarter of 1998.
Liquidity and Capital Resources
As of September 30, 1998, the Company's capital resources for funding ongoing
operations and capital expenditures include $3,812,000 of cash and marketable
securities and a $12,000,000 Revolving Credit Facility. Borrowing totaled
$9,200,000 as of September 30, 1998. The Company believes it has adequate
capital resources to meet it's near-term capital and operating needs.
The Company has reached an agreement with its existing lender to refinance its
Revolving Credit Facility with a new facility with a three year term. The
Company and the lender are in the process of entering into a formal agreement
with respect to the new facility, which management believes will be executed in
the fourth quarter of 1998.
Capital expenditures during the third quarter and the first nine months of 1998
were $678,000 and $1,830,000, respectively, compared to $646,000 and $3,227,000,
respectively, during the same period in 1997. Major capital projects in progress
in 1998 include an air spray unit on the number one paper machine, the
resurfacing of the Yankee dryer on the number one paper machine and helper
drives on the number one and two paper machines. A major portion of the 1997
capital expenditures was the new stock preparation addition and a process
computer on the number one paper machine.
Year 2000
The Company continues to make progress in achieving Year 2000 compliance.
Internal information technology personnel are in the process of assessing IT
systems for Year 2000 compliance and have started making necessary revisions. It
is anticipated our internal IT staff, along with external consultants, will
complete the Year 2000 project. The Company has not incurred any additional
expenses to address the Year 2000 issues other than normal wage, benefits and
related costs of the internal IT staff. Additional cost will be incurred for
contract programming by an external consultant for our business systems, as well
as hardware and software upgrades. By using the Company's limited information
system personnel to address Year 2000 issues, there will be delays in the
development and implementation of other information system projects that would
benefit the Company; however, the Company does believe it will be at a
competitive disadvantage as a result of these delays.
The Company is in the process of creating a Year 2000 project team to assist the
internal IT staff in assessing computer process control equipment. There will be
additional costs for hardware and software upgrades, but these costs have not
been determined at this time. The Company anticipates that it will need to hire
outside consultants to remediate potential Year 2000 noncompliance issues in its
the process control equipment.
The Company is in the process of making inquiries of its vendors, professional
advisors and other constituents whose Year 2000 compliance is important to its
ongoing business. The limited preliminary information received by the Company to
date, has not revealed any significant issues with respect to such third party
Year 2000 compliance. In the event that any of the Company's significant
suppliers or customers do not
8
<PAGE>
successfully achieve Year 2000 compliance on a timely basis, the Company's
business and operations could be materially adversely affected.
9
<PAGE>
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.
10
<PAGE>
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: November 13, 1998 By /S/Thomas W. Cosgrove
Thomas W. Cosgrove
President
(Chief Executive Officer)
DATE: November 13, 1998 By /S/George J. Zimmerman
George J. Zimmerman
Treasurer
(Principal Financial Officer)
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF BADGER
PAPER MILLS, INC. AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,054
<SECURITIES> 1,758
<RECEIVABLES> 5,692
<ALLOWANCES> 0
<INVENTORY> 5,747
<CURRENT-ASSETS> 17,953
<PP&E> 64,386
<DEPRECIATION> 37,144
<TOTAL-ASSETS> 47,264
<CURRENT-LIABILITIES> 11,531
<BONDS> 15,285
0
0
<COMMON> 2,700
<OTHER-SE> 196
<TOTAL-LIABILITY-AND-EQUITY> 47,264
<SALES> 51,844
<TOTAL-REVENUES> 51,844
<CGS> 46,353
<TOTAL-COSTS> 49,750
<OTHER-EXPENSES> (830)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 898
<INCOME-PRETAX> 2026
<INCOME-TAX> 689
<INCOME-CONTINUING> 1,337
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,337
<EPS-PRIMARY> .68
<EPS-DILUTED> 0
</TABLE>
