Item 1. Business
Badger Paper Mills, Inc. ("Badger" or the "Company") was incorporated under the laws of the State of Wisconsin in 1929. It has been producing paper for over 69 years. The industry segment in which the Peshtigo, Wisconsin paper mill operates is in the production of paper products. The Oconto Falls, Wisconsin facility is operated by the Company's Badger Paper Flexible Packaging Division subsidiary in the printing and converting industry segment.
Products and Distribution
Badger operates an ISO 9001 certified paper mill, consisting of two paper machines located in Peshtigo, Wisconsin. Converting facilities contiguous to the papermaking facilities include punching equipment, sheeters, trimmers, sealers, perforators, rewinders, waxers, paper drilling and die-cutting equipment. Badger also has a wholly-owned flexographic printing and converting operation in Oconto Falls, Wisconsin.
The products produced on Badger's Fourdrinier machine represented 78 percent of the paper products manufactured by the Company in 1998, and contributed more than 68 percent of 1998 revenue from the sale of paper products. Fine paper grades are produced utilizing fiber purchased on the open market, including pre and post consumer recycled fibers. These paper grades include multi-purpose business papers, offset, opaque, endleaf, ledger, reply card, watermarked, water-oil-grease resistant papers (WOGR), electrostatic copier, text and cover, and technical and specialty papers. Badger offers a wide range of colored papers and specializes in color matching. Badger sells a portion of these products under certain trademarks and trade names, including Ta-Non-Ka(R), Copyrite(R), ENVIROGRAPHIC(R), Northern Brights(R), Artopaque(R) and Marks of Distinction(R). These products are sold through paper merchants, brokers and value-added converters who in turn sell to other value-adding entities or direct to the consumer. Consumers of Badger fine paper products can be found in principal cities throughout North America.
The Company's Yankee machine produced 22 percent of the paper products manufactured by Badger in 1998, representing 32 percent of the 1998 revenue from the sale of paper products. These products consist of converted plain or printed waxed papers, laminating grades, machine-glazed, colors, specialty-coated base papers, twisting papers and various other specialty papers. These products are sold nationally and internationally to manufacturers, consumers and converters by Badger's own sales personnel and commissioned brokers.
Badger Paper Flexible Packaging Division operates a printing and converting facility that compliments Badger's packaging paper products. The Oconto Falls facility is capable of processing various substrates of film and paper and enhances the capabilities of the Peshtigo packaging paper operations, resulting in opportunities to expand business growth for both. The facility also has rewinding and polyethylene bag making equipment. Oconto Falls contributed 10 percent of the consolidated revenues in 1998.
Competition
Badger's manufactured paper products are highly sensitive to competition from numerous sources, including other paper products and products of other composition. Product quality, price, volume and service are all competitive factors.
Badger's production of fine papers from the Fourdrinier paper machine represents less than one percent of the production capacity in the United States. Competition for these papers comes from other specialty mills in North America and imports from other countries. Competition for flexible packaging and specialty papers produced from the Yankee paper machine comes from other specialty mills; some of the mills are similarly constituted as Badger, others have greater capacity. Backlogs are maintained by offering quality products, prompt service and technical assistance, including a research and development program to develop new products to meet customer product design specifications.
Inventories; Raw Materials
Badger's principal raw material used for papermaking operations is purchased pulp. Badger utilizes a variety of fibers to meet the formulation requirements of the papers it produces. Pre-consumer and post-consumer recycled pulp, northern and southern softwood and hardwood pulps, and hard white rolls make up the total fiber requirements. Since the closure of it's sulphite mill in 1996, Badger has purchased all its fiber requirements on the open market.
Other raw materials are purchased directly from manufacturers and distributors. Badger has at least two sources of supply for major items. Shortages of purchased pulp or certain chemicals (including petrochemicals) could have an adverse effect on Badger's ability to manufacture its products, and could adversely affect product mix.
The Flexible Packaging Division's primary raw materials are paper, polyethylene and printing inks. They are purchased directly from manufacturers, including paper purchases from the Peshtigo mill.
In-process and finished goods inventory at the end of 1998 was equivalent to approximately 38 days of production.
Energy
Badger is a large consumer of electricity and natural gas. Prior to 1997, Badger utilized an on-site 2,000 kilowatt electrical co-generation system. However, as a result of Badger's restructuring during 1996 and 1997, production steam requirements declined to a point where it has become more cost effective to purchase its entire electrical requirements. Badger's current electrical requirements are purchased from local public utilities. Badger's heat requirements are supplied by two dual-fueled boilers capable of burning natural gas or fuel oil, and one natural gas boiler. Natural gas is purchased from various sources in the United States and Canada. Management believes current sources of natural gas, fuel oil and electricity are adequate to meet Badger's needs.
Patents
Badger owns certain patents and licenses used in connection with its business, none of which are individually considered material to its business.
Research and Development
Badger's technical staff researches and develops new products, although outside consultants are utilized from time to time. The amounts spent on product research and development activities were $2,971,000 in 1998, $5,287,00 in 1997, and $862,000 in 1996. The significant increase in research and development expenditures in 1997 was directed to new product introductions and the development of specialty products designed to meet the needs of our customers and the industry.
Backlog
As of December 31, 1998, Badger's backlog of orders was approximately $2,106,000, as compared to $3,550,000 and $875,000 at December 31, 1997 and 1996 respectively. Soft market conditions that existed at the end of each of these years allowed our customers to order closer to their actual needs.
Customers
In 1998 and 1997, no customers represented over 10 percent of Badger's net sales. Sales to a paper products operating segment customer were $12,030,000, or 15.8 percent of Badger's net sales, in 1996.
Environmental Matters
In August, 1997, the Wisconsin Department of Natural Resources (WDNR) met with Badger to discuss finalization of the Title V Air Operating Permit at Badger's Peshtigo, Wisconsin facility. Since that date, substantial changes have been made to Peshtigo's operation. A joint meeting with the WDNR and Dames & Moore (contracted environmental engineering firm) to discuss the modifications at Badger is scheduled in the second quarter of 1999. Compliance with the new requirements is expected.
All effluent flow from Badger's Peshtigo operations is directed into the joint municipal waste water treatment plant, which Badger operates under contract with the City of Peshtigo. The water treatment plant continues to meet or exceed all applicable environmental requirements.
Negotiations continue with the WDNR regarding final closure cover of the Harbor Road landfill. Badger and the WDNR have discussed various proposals and expect final resolution to the closure proposal in 1999. The costs related to such closure are expected to be within the amount reserved for such closure.
Badger Paper Flexible Packaging Division in Oconto Falls, Wisconsin, currently complies with its air operating permit.
Badger has in force all of the necessary environmental permits from federal, state and local authorities, and does not anticipate any problem with reissuance of any permits.
Employees
As of December 31, 1998, the Company had 295 employees. Of the 248 employees at the Peshtigo facility, 184 were covered by six-year collective bargaining contracts running through May 2001. The Oconto Falls facility employs 47 personnel, none of whom are covered by a collective bargaining contract.
Item 2.
Item 2. Properties
The Company considers its manufacturing facilities to be in good repair and suitable for the purpose intended.
The Company's approximately 3,750 square foot headquarters and approximately 88,500 square foot paper manufacturing facility are located in Peshtigo, Wisconsin. Badger Paper Flexible Packaging Division's approximately 40,000 square foot facility is located in Oconto Falls, Wisconsin.
Item 3.
Item 3. Legal Proceedings
The Company has no pending material legal proceedings.
Item 4.
Item 4. Submission of matters to a vote of security holders
No matters were submitted to a vote of security holders in the fourth quarter of 1998.
PART II
Item 5.
Item 5. Market for the registrant's common stock and related security holder matters.
Badger Paper Mills, Inc. common shares are traded on the Nasdaq National Market under the symbol BPMI. There were 455 registered shareholders of record as of March 23, 1999. Stock price and dividend information is found on page 37 of this report.
Item 6.
Item 6. Selected financial data
Information regarding selected financial data of the Company is presented on page 3 of this report.
Item 7.
Item 7. Management's discussion and analysis of financial condition and results of operations
Result of Operations
Review of Operations
1998 began with the layoff of 71 employees, or 23.5 percent of the workforce, as the Company implemented the restructuring of its operations. The underlying strategy of the restructuring was to continue to accept orders at profitable margins, and to incur downtime when profit margins did not allow full operation. New product development was a focal point in 1998 as part of the long-term strategy of trending away from commodity type grades and moving sales and products toward specialty, niche grades.
Significant success in new product development contributed to attaining an average of 53 percent specialty grades sales dollars in 1998 compared to 37 percent in 1997. Development of oil and grease resistant papers, lighter weight printing papers, high-end laser papers and coated packaging papers also contributed to the increased level of specialty business in 1998.
The year was difficult for employees because of the speed and magnitude of change introduced in Badger's operations as the business was revamped. The required changes were completed successfully based, to a large extent, on the hard work and skill levels of the entire production staff. Throughout this period, accident rates were at all time lows; rejections from customers were at all time lows, and most production equipment operated at higher production rates compared to previous years. Investments were made to contribute to these accomplishments, but the underlying strength of our business is directly tied to the character and integrity of our employees.
The operations group continues to concentrate on safety and quality in 1999. As the business grows and more specialty grades are developed, the operations group will focus on quicker grade changes, reducing waste, improving the flexibility of the paper machines and the capabilities of the converting equipment.
1998 vs. 1997
In 1998 sales decreased $4,700,000 or 7 percent to $65,727,000 from $70,427,000 during 1997. Weak market conditions continued in the industry, especially in the commodity market. This resulted in a decline of 11 percent in the volume of shipments. The average selling price increased slightly despite the volume decrease, primarily due to increased percentage of higher margin products sold in 1998. Specialty products increased to approximately 53 percent of our gross sales dollars in 1998 from 37 percent in 1997.
Cost of sales of $58,505,000 for 1998 decreased by $9,095,000 or 13 percent from $67,600,000 in 1997. This reduction was the result of a 12% decrease in production due to the weak market conditions in 1998. Our strategy was to take downtime when market conditions warranted, versus running low margin commodity products. Cost reductions were also achieved by the reduction of our administrative and production workforce by approximately 71 employees. We also experienced declining prices for the cost of purchased fiber during 1998. Production rates at the Peshtigo facility were at record levels, while the start-up of the new Chadwick printing press at the Oconto Falls plant experienced some difficulties. These problems were resolved with the efforts of engineering staffs at both facilities during the fourth quarter of 1998.
Gross profit in 1998 improved to $7,222,000 from $2,827,000 reported in 1997. This primarily is a result of concentrating on higher profit margin specialty products. Workforce reductions and cost saving initiatives that were implemented on the manufacturing floor also contributed to the higher gross profit.
Selling and administration expenses increased $246,000 to $4,331,000 in 1998. The additional expenses were in part associated with development costs in the specialty market and consultants providing professional services relative to our product restructuring during 1998.
The Company recorded a second quarter non-recurring capital gain of $611,000 on the sale of its offsite training facility. Additionally, non-recurring executive termination expenses of $286,000 associated with the
resignations of the Company's former President and Vice President were also recorded in the second quarter of 1998.
Interest expense during 1998 decreased 12 percent to $1,196,000 compared to $1,354,000 in 1997. The decrease in interest expense was attributable to lower average borrowings under the Company's revolving credit facility. Badger's effective tax rate was a 34 percent provision in 1998, compared to a 32.1 percent benefit for the year 1997.
The Flexible Packaging Division, which contributed approximately 10 percent to the consolidated revenue of Badger, was profitable.
1997 vs. 1996
Net sales for 1997 of $70,427,000 compared to $76,276,000 reported in 1996, or an 8 percent decrease. Weak market conditions have existed in the industry since the third quarter of 1995. This resulted in a decline of 4 percent in the volume of shipments, 10 percent higher production downtime and a decrease in average selling price of 5 percent for 1997 when compared to a year earlier.
Cost of sales for 1997 decreased 7 percent to $67,600,000 from $72,411,000 for 1996. Production from operations decreased 5 percent in 1997 when compared to a year earlier due to machine downtime scheduled because of soft market conditions. The cost of purchased fiber remained relatively stable throughout 1997 and equaled the cost incurred during 1996. Energy, operating and maintenance supplies, and environmental expenses decreased 19 percent from a year earlier due to the closure of Badger's pulp mill in May 1996, and lower energy costs and cost reduction initiatives realized during 1997. Costs were impacted in 1997 by $5,287,000 of research and product development costs compared with $862,000 for 1996. The increased spending related to development of new manufacturing techniques, new products and new applications that management believed were necessary to implement the Company's strategy to transition from a producer of commodity products and reposition itself in the marketplace as a specialty products manufacturer.
Gross margins for 1997 of $2,827,000 compared to $3,865,000 a year earlier, reflecting impact of the soft market conditions which existed throughout the year. Selling and administrative expenses totaled $4,085,000 and $4,136,000 in 1997 and 1996, respectively.
Badger recorded a charge of $850,000 in 1997 in recognition of the discontinuance of manufacturing certain products and elimination of certain converting operations. Badger also recorded a 1997 charge of $783,000 primarily related to the remaining unsold assets from the May 1996 pulp mill closure.
Plas-Techs (now known as Badger Paper Flexible Packaging Division) contributed approximately 7 percent to the consolidated revenue of Badger and was profitable for each of the years 1997 and 1996.
Interest expense for 1997 totaled $1,354,000 compared to $894,000 for 1996. The increase in interest expense was attributable to higher average borrowings under the Company's revolving credit facility. Badger's effective tax rate was a 32.1 percent benefit for 1997 compared to a 35.8 percent benefit for the year 1996.
Liquidity and Capital Resources
Capital Expenditures
Capital expenditures for 1998 totaled $3,004,000 compared to $4,686,000 in 1997 and $6,856,000 in 1996. Depreciation totaled $2,752,000 in 1998 compared to $2,790,000 and $2,743,000 in 1997 and 1996, respectively.
Major capital projects during 1998 included the metalizing of the Yankee dryer surface, installation of helper drives on both paper machines, installation of a cross direction moisture control system on the Yankee paper machine, and a wax plant ramp and enclosure at Peshtigo. A Chadwick eight-color central impression flexographic press was also installed at Badger Paper Flexible Packaging Division's Oconto Falls facility. The 1997 and 1996 capital spending included the new $7,500,000 stock preparation project at Peshtigo, which was completed in early 1997.
In 1999, Badger plans to continue investment in upgrading its facilities, including improvements and upgrades to both paper machines. The planned capital expenditures are primarily geared toward product development support in our drive toward specialty products.
Capital Resources
In January 1999, Badger refinanced its revolving credit facility with its existing lender. The refinanced facility extends through November 2001, and provides for borrowings up to $12,000,000.
Certain covenants require Badger to maintain a fixed charge ratio, a debt leverage ratio, minimum tangible net worth, provide for limitations on capital expenditures, and require the Company to make principal payments on its outstanding Industrial Development Revenue Bonds. Further detail is presented in Note F to the Company's Consolidated Financial Statements.
At December 31, 1998, $10,200,000 was outstanding under the revolving credit agreement referenced above, a $1,200,000 decrease from the balance outstanding at December 31, 1997.
Cash Flows
Cash provided from operations was $2,079,000 in 1998 and $399,000 in 1997. The improved cash flow is attributed to the increased income generated in 1998.
Net cash provided by investing activities was $171,000 in 1998, which is a substantial improvement over the $4,951,000 of cash used in 1997. The increase relates to the proceeds from the sale of the Company's training facility and the maturity of certificates of deposit. The Company also received the reimbursement from General Electric Capital Corporation (GE Capital) of $1,572,000 advanced by Badger in connection with the installation of the Chadwick press at the Flexible Packaging Division's Oconto Falls facility. The Flexible Packaging Division entered into a nine-year operating lease with GE Capital for the Chadwick press on May 1, 1998.
Cash used in financing activities in 1998 was $1,323,000, compared to $1,775,000 provided in 1997. The primary use of these funds was the reduction of long-term debt by $2,323,000 in 1998.
Year 2000
Badger has a Year 2000 Committee that has been assigned the task of assuring Year 2000 ("Y2K") compliance for all information technology and non -IT systems. The Committee is committed to ensuring Badger is Y2K compliant by September 1, 1999.
The Company's State of Readiness - Information Technology
Our internal information technology staff has been assigned the responsibility of assuring Year 2000 compliance for the Peshtigo and Oconto Falls facilities for all information technology systems. This includes the main frame computer, personal computers, network servers, telephone system and related software. The staff has identified and is testing all hardware and software for Y2K compliance. The highest priority will be assigned to hardware and software that have date sensitive components.
Our main frame computer is Y2K compliant for its hardware and operating system. It is estimated we have completed 10 to 15 percent of necessary programming changes to the business systems to become Y2K compliant. We will be utilizing outside resources to review, test and complete the required programming changes on the software for our business systems.
We will be using specially purchased software to test compliance on all personal computers. It is estimated that 10 percent, or 12 of our personal computers will have to be upgraded or replaced. All other hardware and software will be tested individually by our staff with support from the manufacturer and local service companies. As the systems are being reviewed, consideration will be made for upgrading and/or replacement.
Our network servers are relatively new and we do not anticipate any hardware or software problems during the Y2K review process. The phone system was upgraded to be Y2K compliant in 1998.
The Company's State of Readiness - Non-information Technology
Our engineering staff has assigned two employees the responsibility of assuring Year 2000 compliance for all manufacturing aspects of the Peshtigo and Oconto Falls facilities for all non-information technology systems. All equipment that has computerized process controllers or any date sensitive data in computer chips will be reviewed. This includes the paper machines, converting equipment, boilers, waste treatment facilities, printing presses, lab equipment, and all related software. The staff has identified and is testing all hardware and software for Y2K compliance.
The most critical manufacturing equipment for a paper mill are the paper machines themselves. Each paper machine is controlled by an independent process control computer. In 1998 we replaced the process computer on the Yankee Paper Machine and it was made Y2K compliant by the manufacturer. The Fourdrinier Paper machine has a replacement process computer ordered for installation in July 1999 and it will be Y2K compliant.
The new Chadwick press at our Oconto Falls facility is also Y2K compliant.
All hardware and software will be tested individually by our staff with support from the manufacturer and local service companies. The highest priority will be assigned to manufacturing equipment that is the most critical to our operations and to any hardware and software that have date sensitive components. The Company is surveying our key suppliers on the status of their Y2K compliance to assure our continued source of raw materials and other critical components for our manufacturing process. Their response to the survey will be used to determine readiness of key suppliers.
The Costs to Address the Company's Year 2000 Issues
The Company has not incurred any additional expenses to address Y2K issues other than normal wages and benefits of our IT and engineering staffs. Additional costs will be incurred for contract programming and system upgrades and/or replacement. We anticipate this total cost to be less than $200,000.
As mentioned previously, we replaced the process control computer on the Yankee paper machine for $741,000, and have ordered a replacement computer for the Fourdrinier paper machine. The Fourdrinier process computer has a cost of $1,194,000, and will be leased. While the costs are significant, they have not been included in the above cost estimates. In both cases , the process computers were obsolete and had to be replaced. There was no acceleration of the project due to Y2K issues.
The telephone system was replaced in 1998 in order to upgrade our telephone capabilities. We have not included the costs in the above estimate because the replacement was not accelerated due to Y2K issues.
The Risks of the Company's Year 2000 Issues
Risks of the Company must be divided by information technology and non-information technology systems.
The primary risk for information technology is the main frame computer and our business system software. As stated previously, the IBM RS-6000 computer is compliant and we have upgraded to the latest operating system. The risk to the Company is that the outside programming resources we intend to use to upgrade other business software may not have adequate staff to program in the COBOL language used in the Company's business systems. There is also the risk they may not complete their task per our schedule. Their priorities will be date sensitive software that processes data. Current discussions with these contractors have indicated that the required programming will be completed on time.
The primary risk for non-information technology relates to our boilers and paper machines. Both paper machines use steam produced by the boilers. There are two risks associated with the boilers -- the Y2K status of all process controls and the availability of natural gas. We have begun to review the process controls on the boilers to determine to what extent upgrades or replacements will be needed. If natural gas is not available, the boilers will be able to burn fuel oil to meet all steam requirements. As stated previously, the process computers on the paper machines have been or are scheduled to be replaced.
At the Flexible Packaging Division the primary risk is the Y2K status of the printing presses. The manufacturer of the newly-installed Chadwick press has informed the Company that it is Y2K compliant. The Company is testing the other two presses used at this facility.
The Company's Contingency Plan
Contingency plans will be developed in the second quarter of 1999 as testing proceeds and results are reviewed.
Risks described above for information technology can be temporarily handled manually. One example would be hand typing customer invoices, purchase orders, payroll checks and vendor checks. The other option would be to use less sophisticated personal computer software on a short term basis.
Non-information technology risks were described above. The primary concern is the control of specification of our manufacturing process. This would be handled with additional staffing to manually control the manufacturing process in the absence of computerized process controls.
In Oconto Falls we have three printing presses and would divert production to the Chadwick press, which is Y2K compliant.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The Company is exposed to market risk from changes in interest on its long-term debt. The Company's revolving credit facility provides for borrowings up to $12 million and extends to November 2001. A commitment fee of 1/2 percent is payable for unused amounts. Interest on borrowings is at the LIBOR rate plus 2.0 percent (totaling 7.54 percent at December 31, 1998).
Certain of the IDRBs require aggregate quarterly installments of $140,000 plus interest beginning March 31, 1999 through March 31, 2002. The Company is required to make a principal payment of not less than $1,885,000 in March 1999. Principal installments of $495,000, $400,000 and $35,000 are due June 30, 1999, 2000 and 2001, respectively, and $65,000 due January 31, 2001. These installments are in addition to the quarterly installments. Interest on the IDRBs is payable at floating rates determined by remarketing agents (4.1 percent at December 31, 1998). The remaining IDRBs are due in monthly installments of $5,555 plus interest through maturity in 1999.
Even though a majority of the Company's debt is at variable interest rates, it is felt the Company's exposure to interest rate fluctuations is immaterial to the consolidated financial statements. A hypothetical 1 percent increase in interest rates would cause an estimated $175,000 increase in annual interest expense.
The Company does not use financial instruments for trading purposes and is not a party to any leveraged derivatives.
Item 8.
Item 8. Financial statements and supplementary data
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Board of Directors and Shareholders of Badger Paper Mills, Inc. and Subsidiary
We have audited the accompanying consolidated balance sheets of Badger Paper Mills, Inc. (a Wisconsin corporation) and Subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. The consolidated statement of operations, shareholders' equity and cash flows of Badger Paper Mills, Inc. and Subsidiaries for the year ended December 31, 1996, were audited by other auditors whose report dated February 4, 1997 expressed an unqualified opinion on those statements.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 financial statements referred to above, present fairly, in all material respects, the consolidated financial position of Badger Paper Mills, Inc. and Subsidiaries as of December 31, 1998 and 1997 and the consolidated results of their operations and their consolidated cash flows for the years then ended in conformity with generally accepted accounting principles.
/s/ GRANT THORNTON LLP
Appleton, Wisconsin January 29, 1999
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors Badger Paper Mills, Inc. Peshtigo, Wisconsin
We have audited the accompanying consolidated statements of operations, of changes in shareholders' equity, and of cash flows and the financial statement schedule listed in the index of this Form 10-K of Badger Paper Mills, Inc. and Subsidiaries for the year ended December 31, 1996, prior to the adoption and application of Financial Accounting Standards Board Statement No. 131, as discussed in Note H. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We have not audited the consolidated financial statements of the Company for any period subsequent to December 31, 1996, nor have we examined any adjustments or disclosures related to the 1996 information contained in Note H.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above, prior to the adoption and application of Financial Accounting Standards Board Statement No. 131, as discussed in Note H, present fairly, in all material respects, the consolidated results of operations of Badger Paper Mills, Inc. and Subsidiaries and their cash flows for the year ended December 31, 1996, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information to be included therein.
/s/ PRICEWATERHOUSE COOPERS LLP Milwaukee, Wisconsin February 4, 1997
Badger Paper Mills, Inc. And Subsidiaries
CONSOLIDATED BALANCE SHEETS December 31, 1998 and 1997 (dollars in thousands)
ASSETS 1998 1997 Current Assets Cash and cash equivalents $2,229 $1,302 Certificates of deposit 996 1,382 Marketable securities 1,361 1,318 Accounts receivable, net 5,262 5,120 Inventories 6,201 4,844 Refundable income taxes 27 385 Deferred income taxes 1,220 1,291 Prepaid expenses and other 558 298 ------- ------- Total current assets 17,854 15,940
PROPERTY, PLANT, EQUIPMENT AND TIMBERLANDS, NET 27,291 29,287
OTHER ASSETS Trade credits 696 996 Other 2,158 2,133 ------- ------- 2,854 3,129 Total assets $47,999 $48,356 ======= =======
LIABILITIES
CURRENT LIABILITIES Current portion of long-term debt $3,068 $123 Accounts payable 3,913 4,313 Accrued liabilities 3,357 4,308 Income taxes payable 170 - ------- ------- Total current liabilities 10,508 8,744
LONG-TERM DEBT 16,126 20,394
DEFERRED INCOME TAXES 1,700 1,185
OTHER LIABILITIES 1,408 1,589
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 200 190 Retained earnings 17,296 15,552 Treasury stock, at cost, 199,278 and 208,145 shares in 1998 and 1997, respectively (1,939) (1,998) ------- ------- Total shareholders' equity 18,257 16,444 ------- ------- Total liabilities and shareholders' equity $47,999 $48,356 ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
Badger Paper Mills, Inc. and Subsidiaries
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY For Years ended December 31, 1998, 1997 and 1996 (dollars in thousands)
1998 1997 1996
Common stock Balance, December 31 $ 2,700 $ 2,700 $ 2,700 ------- ------- ------- Additional paid-in capital Balance, January 1 190 178 168 Treasury stock issued 10 12 10 ------- ------- ------- Balance, December 31 200 190 178 ------- ------- ------- Retained earnings Balance, January 1 15,552 17,994 20,633 Net income (loss) 1,744 (2,442) (2,212) Cash dividend of $.22 in 1996 -- -- (427) ------- ------- ------- Balance, December 31 17,296 15,552 17,994 ------- ------- ------- Treasury stock Balance, January 1 (1,998) (2,040) (2,058) Shares acquired (920 shares in 1997) -- (8) --
Shares issued (8,867, 7,645 and 2,800 shares in 1998, 1997 and 1996, respectively) 59 50 18 ------- ------- ------- Balance, December 31 (1,939) (1,998) (2,040) ------- ------- ------- Shareholders' equity Balance, December 31 $ 18,257 $ 16,444 $ 18,832 ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
Badger Paper Mills, Inc. and Subsidiaries NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1998 and 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
Badger Paper Mills, Inc. and Subsidiaries ("Company") manufactures paper and paper products and provides converting and printing services to customers throughout North America. In February 1998, Peshtigo Power, LLC ("Peshtigo") was incorporated to produce steam for Badger Paper Mills, Inc. Peshtigo Power is wholly owned by the Company.
A summary of the significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.
1. Consolidation Principles
The consolidated financial statements include the accounts of Badger Paper Mills, Inc. and its wholly-owned Subsidiaries. All significant intercompany accounts and transactions have been eliminated.
2. Operating Segments
The Company has adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of an Enterprise and Related Information". SFAS 131 requires public companies to use a "management approach" to defining and reporting the activities of operating segments. The management approach defines operating segments along the lines used by management to assess performance and make operating and capital decisions. The adoption of SFAS 131 did not affect the Company's results of operations or financial position, but did affect the disclosure of segment information. See Note H.
3. Concentration of Credit Risk
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. The Company places its cash and cash equivalents with high quality financial institutions. The Company provides credit in the normal course of business to its customers. These customers are located throughout North America. The Company performs ongoing credit evaluations of its customers and maintains allowances for potential credit losses and generally does not require collateral to support the accounts receivable balances.
4. Estimates
Preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported period. Actual results could differ from those estimates.
The valuation of trade credits involves a significant estimate. The Company regularly evaluates the recoverability of its trade credits. The Company has looked at several factors in determining the recoverability. These factors included: 1) prior experience in utilizing trade credits; 2) current negotiations with vendors which would involve the utilization of trade credits; 3) existing contractual agreements with vendors which utilize trade credits; and 4) the likelihood of renewing and extending existing agreements which utilize trade credits. It is reasonably possible that the Company's estimate of the recoverability of these trade credits will change significantly, with the result that the carrying value may have to be reduced.
5. Cash Equivalents and Certificates of Deposit
For financial reporting purposes, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.
6. Marketable Securities
The investment portfolio at December 31, 1998 and 1997, which consists of taxable United States agency bonds, corporate bonds, tax-exempt bonds and equity securities are classified as available for sale. The difference between cost and fair value is insignificant. The specific identification method is used to compute realized gains and losses. The bonds mature at various dates as follows: 1 year to 5 years, $58,843, and after 10 years, $1,142,531. The balance of marketable securities consists of equity securities of $160,000.
7. Receivables
Accounts receivable are stated net of an allowance for sales returns, discounts and doubtful accounts.
8. Trade Credits
Trade credits represent credits issued by an international barter firm in exchange for surplus inventory. Trade credits are recorded at the lower of cost or market of the inventory exchanged. Gain is recognized upon utilization of the trade credits with the Company's suppliers and vendors.
9. Inventories
Substantially all inventories are valued at the lower of cost or market with cost being determined on the last-in, first-out (LIFO) basis.
10. Property, Plant, Equipment and Timberlands
These assets are stated at cost, less depreciation and depletion. Depreciation of plant and equipment is provided on the straight-line basis over the estimated useful lives of the assets. Accelerated depreciation is used for income tax purposes. Depletion on timberlands is determined on the cost method.
11. Income Taxes
Deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in deferred tax assets and liabilities.
12. Research and Product Development Costs
Research and product development costs related to potential new products and applications are expensed when incurred. These costs totaled $2,971,000, $5,287,000 and $862,000 for 1998, 1997 and 1996, respectively, and are included in cost of sales.
13. Net Earnings Per Share
Net earnings per share are computed based on the weighted average number of shares of common stock outstanding during the year (1,955,772 shares, 1,947,128 shares and 1,944,699 shares in 1998, 1997 and 1996, respectively). The contingently issued stock options discussed in Note M have not been considered in this calculation.
14. Revenue Recognition
Revenue is recognized by the Company when goods are shipped.
15. Environmental Expenditures
Accruals for remediation costs are recorded when it is probable that a liability has been incurred and the amount of the costs can be reasonable estimated.
16. Financial Instruments
For cash and certificates of deposit, the carrying amount approximates fair value because of the short maturity of these instruments. For long-term debt, the carrying amount approximates fair value based on comparison with current rates offered to the Company for debt with similar remaining maturities.
17. Reclassifications
Certain reclassifications have been made to the 1997 and 1996 consolidated financial statements to conform to the 1998 presentation.
NOTE B - RECEIVABLE ALLOWANCES
The receivable allowances at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ------ ------ Sales returns and allowances $154 $208 Cash discounts 31 35 Doubtful accounts 59 75 ----- ----- $244 $318 ===== =====
NOTE C - INVENTORIES
The major classes of inventories, valued on the LIFO cost method, at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997 ---- ----
Raw materials $1,858 $1,281 Work-in-process and finished stock 4,343 3,563 ----- ----- $6,201 $4,844 ===== =====
The FIFO cost of raw materials, work-in-process and finished stock inventories approximated $10,150,000 and $9,050,000 at December 31, 1998 and 1997, respectively. It is not practical to separate finished stock and work-in-process inventories.
NOTE D - PROPERTY, PLANT, EQUIPMENT AND TIMBERLANDS
The major classes of property, plant, equipment and timberlands at December 31, are as follows (in thousands):
1998 1997
Land $ 120 $ 120 Buildings 8,297 8,268 Machinery, equipment and railroad siding 56,044 56,105 Timberlands 79 79 Construction-in-progress - equipment 549 1,757 ------ ------ 65,089 66,329
Accumulated depreciation and depletion 37,798 37,042 ------ ------ $27,291 $29,287 ====== ======
At December 31, 1998 and 1997, $18,184,000 and $17,650,000, respectively, of fully depreciated assets were still in use. In December 1997, the Company evaluated the remaining fixed assets held for resale relating to the closure of the pulp mill by comparing the asset's carrying amount with its fair value less cost to sell. As a result, the Company recorded an impairment charge of $783,000.
During 1998, the Company sold its off-site training facility for $725,000 resulting in a gain of $611,000.
During 1996, the Company sold timberlands for $5,051,000 resulting in a gain of $4,873,000.
NOTE E - ACCRUED LIABILITIES
Accrued liabilities at December 31, 1998 and 1997 are as follows (in thousands):
1998 1997
Compensation and related taxes $1,539 $1,975 Profit sharing 496 587 Restructuring 15 810 Environmental remediation 121 200 Other 1,186 736 ------ ----- $3,357 $4,308 ===== =====
NOTE F - LONG-TERM DEBT
Long-term debt at December 31, 1998 and 1997 consisted of the following (in thousands):
1998 1997 ---- ---- Revolving Credit Agreement $10,200 $11,400 Industrial Development Revenue Bonds (IDRBs) 7,417 7,483 Urban Development Action Grant 1,577 1,634 ------ ------ 19,194 20,517 Less: current portion 3,068 123 ------ ------ $16,126 $20,394 ====== =======
In January 1999, the Company refinanced its revolving credit facility. The Company's refinanced revolving credit facility provides for borrowings up to $12 million and extends to November, 2001. A commitment fee of 1/2 percent is payable for unused amounts. Interest on borrowings is at the LIBOR rate plus 2.0 percent (totaling 7.54 percent at December 31, 1998). Borrowings are collateralized by cash and cash equivalents, certificates of deposit, marketable securities, accounts receivable, inventory and certain property, plant and equipment.
Certain of the IDRBs require varying quarterly installments of $140,000 plus interest beginning March 31, 1999 through March 31, 2006. The Company is required to make a principal payment of not less than $1,885,000 in March 1999. Principal installments of $495,000, $400,000 and $35,000 are due June 30, 1999, 2000 and 2001, respectively, and $65,000 is due January 31, 2001. These installments are in addition to the quarterly installments. Interest on the IDRBs is payable at floating rates determined by remarketing agents (4.1 percent at December 31, 1998). The remaining IDRBs are due in monthly installments of $5,555 plus interest through maturity in 1999.
The revolving credit facility and certain IDRBs require, among other items, the Company to maintain a fixed charge coverage ratio of 1.15 and 1.50 for periods ending June 29, 2000 and 2001, respectively and 2.0 for periods subsequent to June 29, 2001; a debt leverage ratio of 3.50 for 1999 and 2.75 for periods after 1999. Capital expenditures are limited to not more than $3,700,000, $6,000,000 and $4,800,000 in 1999, 2000 and 2001, respectively.
The Urban Development Action Grant is due in monthly installments of $15,437, including interest at an effective rate of approximately 8.0 percent, through maturity in April, 2000, at which time a final payment of $1,499,490 is due. This grant is collateralized by certain machinery and equipment.
Future maturities of all long-term debt are as follows:
Year ended December 31,
1999 $ 3,068 2000 2,476 2001 10,860 2002 560 2003 560 2004 and thereafter 1,670 ------ $19,194 ======
NOTE G - INCOME TAXES
The provision (benefit) for income taxes consists of the following (in thousands):
1998 1997 1996 ---- ---- ----
Currently payable (refundable): Federal $179 $ (438) $ (359) State 132 31 30 ---- ---- ---- 311 (407) (329)
Deferred: Federal 336 (746) (915) State 250 - 10 ---- ---- ---- 586 (746) (905) ---- ---- ---- $897 $(1,153) $(1,234) ==== ====== ======
The significant differences between the effective tax rate and the statutory federal tax rates are as follows:
1998 1997 1996
Statutory Federal tax rate 34.0% (34.0)% (34.0)% Tax-exempt interest - - (0.4) State taxes - - 0.8 Other - 1.9 (2.2) ---- ----- ----- Effective tax rate 34.0% (32.1)% (35.8)% ==== ===== =====
The components of the deferred tax assets and liabilities as of December 31 are as follows (in thousands):
1998 1997
Deferred tax assets: Accounts receivable $ 143 $ 108 Inventories 311 436 Accrued expenses 766 763 Deferred compensation 95 118 Postretirement benefits 290 344 Tax credit carryforwards 2,938 2,710 State net operating loss carryforwards 362 550 State credit carryforwards 2,099 1,766 Valuation allowance (2,692) (2,075) ------- ------- 4,312 4,720 Deferred tax liabilities: Fixed assets (4,792) (4,614) ------- ------- Net asset (liability) $ (480) $ 106 ======= =======
For Federal income tax purposes, the Company has research and development credit carryovers and alternative minimum tax credit carryovers of $1,099,000 and $1,840,000, respectively. For state income tax purposes, the Company has net operating loss and tax credit carryovers of $11,796,000 and $2,098,000, respectively. Certain carryforwards expire at various times over the next 10-15 year period. For financial reporting purposes, a valuation allowance has been established to the extent that state carryforwards, absent future taxable income, will expire unused. The valuation allowance increased $617,000 based on management's reevaluation of the likelihood of realization.
NOTE H - OPERATING SEGMENTS
The Company adopted SFAS 131 in 1998. Prior years' information has been restated to present segment information for the Company's two business segments, paper products and printing and converting services. The paper products segment produces a variety of paper products including fine paper, business paper, colored paper, waxed paper, specialty coated base papers and twisting papers. The printing and converting segment prints and converts flexible packaging materials for the paper products segment as well as films and non-woven materials from other customers.
The accounting policies of the segments are the same as those described in Note A, Summary of Significant Accounting Policies. Intersegment revenue relates to the transfer of material or provision of services between the two segments. The Company evaluates the performance of its segments and allocates resources to them based on net earnings. There are no jointly used or allocated assets between the segments.
Total segment income, assets and other significant items are the same as the consolidated information.
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.
The following provides information on the Company's segments (in thousands):
The following is a reconciliation of segment information to consolidated information:
Revenues: 1998 1997 1996
Total revenues for segments $67,945 $71,437 $77,524
Elimination of intersegment revenues (2,218) (1,010) (1,248) ------- ------- -------
$65,727 $70,427 $76,276 ======= ======= =======
NOTE I - EMPLOYEE BENEFITS
The Company has profit sharing plans covering substantially all employees. Contribution expenses associated with these plans were $496,000, $587,000 and $723,000 in 1998, 1997 and 1996, respectively.
NOTE J - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes was as follows (in thousands):
1998 1997 1996
Interest $1,235 $1,345 $876 Income taxes 57 5 937
Noncash investing and financing activity:
At December 31, 1998, 1997 and 1996, accounts payable included $22,000, $134,000 and $732,000, respectively, for property and equipment additions.
NOTE K - MAJOR CUSTOMERS
In 1998 and 1997, no customers represented over 10 percent of the Company's net sales. Sales to a customer, which represents over 10 percent of the Company's net sales, were $12,030,000 in 1996. These sales were from the Paper Products operating segment.
NOTE L - DIRECTOR STOCK GRANT PLAN
In 1997, in order to attract and retain competent directors to serve as Directors of the Company, the Company established a Director Stock Grant Plan (the "Director Plan"). An aggregate of 25,000 shares of Common Stock was reserved for issuance under the Director Plan. Under the Director Plan, each Director of the Company receives a grant of Common Stock in partial payment of his or her annual retainer. During 1998 and 1997, 8,867 and 7,345 shares, respectively, were issued from treasury stock, at a value of $69,000 and $60,000, respectively.
NOTE M B STOCK OPTION PLAN SUBJECT TO SHAREHOLDER APPROVAL
On May 12, 1998, the Board of Directors approved an incentive stock option plan (the Plan) as a mechanism to attract and retain its officers and key employees by providing additional performance incentives and the opportunity to share ownership in the Company. The Plan allows the Company to grant options or shares of restricted stock not to exceed more than an aggregate of 130,000 common shares. The exercise price for any stock option is equal to the fair market value of a share of common stock on the date of grant. The term of any option may not exceed ten years. The Plan is subject to approval by the Company's stockholders at their next annual meeting in May 1999. As of December 31, 1998, the Board of Directors had conditionally granted 115,000 options to officers and key employees at an exercise price of $8.09 per common share, subject to the approval of the Company's stockholders.
If the Company stockholders approve this plan, the Company will account for the stock-based compensation using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
NOTE N - RESTRUCTURING PROVISIONS
In December 1997, the Company recorded a charge of $850,000 in connection with a plan to discontinue manufacturing certain products and eliminate certain converting operations. The charge includes employee termination benefits ($297,000), write down of equipment ($313,000), write down of inventory ($152,000), and a provision for other miscellaneous costs ($88,000).
During 1996, the Company recorded a charge of $7,430,000 resulting from the closure of the pulp mill. The charge includes the write down of pulp mill assets and inventories ($5,294,000), costs associated with the early retirement or severance of certain workers ($1,672,000) and provision for other miscellaneous costs ($464,000).
NOTE O - COMMITMENTS AND CONTINGENCIES
Rental Agreements
The Company leases certain equipment under various agreements, classified as operating leases, expiring through April 2007. Total rent expense amounted to approximately $222,200, $123,000 and $85,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
Future minimum rental payments are as follows (in thousands):
Year ended December 31,
1999 $ 235 2000 235 2001 235 2002 235 2003 235 2004 and thereafter 786 ------ $1,961 ======
Environmental Matters
The Company has accrued for certain remediation costs associated with the closure of a solid waste landfill. The Company's estimated potential exposure ranges from $121,000 to $471,000, based on the remediation methods and material used to close the site. At December 31, 1998, the Company accrued $121,000 based on its selected remediation method and materials. Currently, the Wisconsin Department of Natural Resources (WDNR) and the Company are negotiating the requirements for appropriate site monitoring and further remediation efforts if additional environmental problems are detected at the site. Also, WDNR may require the Company to escrow approximately $250,000 over a five-year period for additional remediation costs if environmental problems are detected. The Company does not expect that the outcome of this matter will have a material adverse effect on its consolidated financial position or results of operations in any one year.
PART III
Item 9.
Item 9. Changes in and disagreements with accountants on accounting and financial disclosure
On July 10, 1997, Badger changed its certifying accountant. Badger's Board of Directors approved the dismissal of the accounting firm Coopers and Lybrand LLP, and concurrently resolved to engage Grant Thornton LLP in their place.
Grant Thornton, who currently serves as Badger's principal accountant, audited the Company's financial statements for the fiscal years ended December 31, 1998 and 1997.
The reports made by Coopers and Lybrand on Badger's financial statements for 1996 contained no adverse opinion or disclaimer of opinion, nor were such reports qualified or modified as to uncertainty, audit scope, or accounting principles. During the fiscal year 1996, and for the interim period ended July 10, 1997, Badger had no disagreement with Coopers and Lybrand on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to the satisfaction of Coopers and Lybrand, would have caused them to make reference to the matter in their report. No other reportable events occurred within Badger's two most recent fiscal years.
Item 10.
Item 10. Directors and executive officers of the registrant
(a) Directors of the registrant
The information required by this item is incorporated by reference from the information included under the captions, "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" set forth in the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders.
(b) Executive officers of registrant
Period Served Name Age Office In This Office
Michael J. Bekes 41 Vice President/COO of the Company 3 years Vice President/COO, Fletcher Paper Co. 1 1/2 years Mill Manager, Fletcher Paper Co. 1/2 year Manager of Operations, Fletcher Paper Co. 5 1/2 years
Thomas W. Cosgrove 58 President of the Company 3/4 year General Manager, Kimberly Clark Corporation (Scott Paper Co.), Marinette Division 8 years
Thomas J. Kuber 58 Chairman of the Board of the Company 12 years President, K&K Warehousing 26 years Chief Executive Officer, Great Lakes Pulp & Fibre, Inc. 4 years
Clifton A. Martin 47 Vice President, General Manager, Badger Paper Flexible Pkg. 2 3/4 years General Manager, Badger Paper Flexible Packaging 3 3/4 years Sales Representative of the Company 6 1/2 years
Mark C. Neumann 39 Vice President/Sales of the Company 3 3/4 years Director of Marketing of the Company 2 3/4 years Sales Representative of the Company 7 1/2 years
George J. Zimmerman 52 Treasurer of the Company 3/4 year Controller of the Company 3 years Division Accounting Manager, Pope & Talbot 7 years
Officers are elected to hold office until the next annual meeting of shareholders following the annual meeting of shareholders or until their successors are elected and qualified. There is no arrangement or understanding between any
of the above officers or any other person pursuant to which such officer was selected for the office held. No family relationship of any kind exists between the officers.
Item 11.
Item 11. Executive compensation
The information required by this item is incorporated by reference from the information included under the captions "Executive Compensation", "Report of Compensation Committee on Annual Executive Management Compensation" and "Compensation Committee Interlocks and Insider Participation" set forth in the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders.
Item 12.
Item 12. Security ownership of certain beneficial owners and management
(a) Security ownership of certain beneficial owners
The information required by this item is incorporated by reference from the information included under the caption, "Stock Ownership of Certain Beneficial Owners and Management," set forth in the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders.
(b) Security ownership of management
The information required by this item is incorporated by reference from the information included under the captions, "Stock Ownership of Certain Beneficial Owners and Management," and "Election of Directors", set forth in the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders.
Item 13.
Item 13. Certain relationships and related transactions
The information required by this item is incorporated by reference from the information included under the caption, "Certain Transactions," set forth in the Company's definitive proxy statement for its 1999 Annual Meeting of Shareholders.
PART IV
Item 14.
Item 14. Exhibits, financial statement schedules and reports on Form 8-K
(a) (1) List of financial statements:
The following is a list of the financial statements of Badger Paper Mills, Inc., together with the report of independent accountant, included in this report:
Pages Reports of Independent Accountant Consolidated balance sheets, December 31, 1998 and 1997............16 Consolidated statements of operations for the years ended December 31, 1998, 1997 and 1996.................................17 Consolidated statements of changes in shareholders' equity for the years ended December 31, 1998, 1997 and 1996.................................18 Consolidated statements of cash flows for the years ended December 31, 1998, 1997 and 1996...........................19 Notes to financial statements......................................20
(a) (2) List of financial schedules:
The following is a listing of data submitted herewith:
Reports of independent accountant on financial statement schedule Schedule for the years ended December 31, 1998, 1997 and 1996: II Valuation and qualifying accounts and reserves...............36
Financial statement schedules other than that listed above are omitted for the reason that they are either not applicable, not required, or that equivalent information has been included in the financial statements, the notes thereto or elsewhere herein.
(a) (3) Exhibits
(3) (i) Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(ii) By-laws as amended through March 13, 1997 (Incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(4) (i) U. S. $12,000,000 Credit Agreement dated January 29, 1999, by and among the Company, Badger Paper Mills Flexible Packaging Division, Inc.(formerly known as Plas-Techs, Inc.) and Harris Trust and Savings Bank, individually and as agent, and the lenders from time to time party thereto.
(10) Material Contracts:**
(i) Supplemental Executive Retirement Plan dated December 18, 1992 (Incorporated by reference to Exhibit 10 (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
(ii) Executive Employment Agreement dated March 1, 1995, between the Company and Claude L. Van Hefty (Incorporated by reference to Exhibit 10(vii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
(iii)Health Insurance Retirement Benefit Agreement dated January 1, 1996 between the Company and Claude L. Van Hefty (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(iv) Director Stock Grant Plan dated July 23, 1997 (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
(v) Employee Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills, Inc. and Claude L. Van Hefty (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
(vi) Employee Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills, Inc. and Miles L. Kresl, Jr. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
(23) (i) Consent of Current Independent Public Accountant
(ii) Consent of Former Independent Public Accountant
(27) Financial Data Schedule (EDGAR version only)
(99) Definitive Proxy Statement for 1999 Annual Meeting of ShareholderS (to be filed with the Commission under Regulation 14A and incorporated by reference herein to the extent indicated in this Form 10-K).
**Each of the "material contracts" represents a management compensatory agreement or arrangement.
(b) Reports on Form 8-K:
(i) No reports on Form 8-K were filed during the fourth quarter of 1998.
Pursuant to the requirements of Section 13 or 15(d) 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.
DATE: March 31, 1999
BADGER PAPER MILLS, INC.
By: /s/ Thomas W. Cosgrove Thomas W. Cosgrove President (Chief Operating Officer)
By: /s/ George J. Zimmerman George J. Zimmerman Treasurer (Chief Accounting Officer)
Pursuant to the Requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ L. Harvey Buek Director March 31, 1999 L. Harvey Buek
/s/ Mark D. Burish Director March 31, 1999 Mark D. Burish
/s/ Thomas W. Cosgrove Director March 31, 1999 Thomas W. Cosgrove
/s/ James L. Kemerling Director March 31, 1999 James L. Kemerling
/s/ Thomas J. Kuber Director March 31, 1999 Thomas J. Kuber
/s/ John R. Peterson Director March 31, 1999 John R. Peterson
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANT
To the Shareholders and Board of Directors Badger Paper Mills, Inc. and Subsidiaries Peshtigo, Wisconsin
Our report on the 1998 and 1997 financial statements of Badger Paper Mills, Inc. and Subsidiaries is included on page 14 of this Form 10-K. In connection with our audit of such financial statements, we have also audited the related financial statement schedule listed in the index on page 31 of this Form 10-K. The 1996 financial statements and schedules of Badger Paper Mills, Inc. and Subsidiaries were audited by other auditors.
In our opinion, the 1998 and 1997 financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.
/s/ Grant Thornton LLP
Appleton, Wisconsin January 29, 1999
Schedule II - Valuation and Qualifying Accounts and Reserves for the years ended December 31, 1998, 1997 and 1996 (in thousands)
Shareholders' Information
Market makers: Stock transfer agent: Robert W. Baird & Co., Inc. (BARD) Harris Trust & Savings Bank Herzog, Heine, Geduld, Inc. (HRZG) 111 West Monroe Street Chicago, Illinois 60690
Stock Price and Dividend Information:
The following table presents high and low sales prices of the Company's Common Stock in the indicated calendar quarters, as reported on the Nasdaq National Market System.
Quarterly Price Ranges of Stock:
1998 1997
Quarter High Low High Low First $8.875 $6.750 $10.250 $7.750 Second $10.750 $6.875 $9.250 $7.250 Third $9.750 $7.250 $11.250 $7.750 Fourth $8.500 $6.500 $11.000 $6.630
Quarterly Dividends Per Share:
Dividend rates are established by the Board of Directors. During the first quarter 1997, the Board suspended payment of quarterly dividends. The Company's line of credit maintains certain covenants which limit the Company's ability to pay dividends. See "Management's Discussion and Analysis -- Liquidity and Capital Resources -- Capital Resources."
Annual Meeting of Shareholders:
The Annual Meeting of Shareholders of Badger Paper Mills, Inc. will be held at The Best Western Riverfront Inn, 1821 Riverside Avenue, Marinette, Wisconsin, on Tuesday, May 11, 1999, at 10:00 a.m.
DIRECTORS AND OFFICERS
Board of Directors:
Thomas J. Kuber - Chairman President K&K Warehousing
L. Harvey Buek LHB - O & M Consulting
Mark D. Burish President Hurley, Burish & Milliken, SC
Thomas W. Cosgrove President Badger Paper Mills, Inc.
James L. Kemerling Consultant
John R. Peterson Managing Director Cleary Gull Reiland & McDevitt, Inc.
Corporate Officers:
Thomas J. Kuber Chairman of the Board
Thomas W. Cosgrove President
Michael J. Bekes Vice President and COO
Clifton A. Martin Vice President Badger Paper Flexible Packaging Div.
Mark C. Neumann Vice President/Sales
George J. Zimmerman Treasurer
Mark D. Burish Secretary
Susan A. Rudolph Assistant Secretary
EXHIBIT INDEX
BADGER PAPER MILLS, INC. ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
Exhibit No. Description
(3) (i) Restated Articles of Incorporation, as amended (Incorporated by reference to Exhibit 3(i) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(ii) By-laws as amended through March 13, 1997 (Incorporated by reference to Exhibit 3(ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(4) (i) U. S. $12,000,000 Credit Agreement dated January 29, 1999, by and among the Company, Badger Paper Mills Flexible Packaging Division, Inc.(formerly known as Plas-Techs, Inc.) and Harris Trust and Savings Bank, individually and as agent, and the lenders from time to time party thereto.
(10) Material Contracts:**
(i) Supplemental Executive Retirement Plan dated December 18, 1992 (Incorporated by reference to Exhibit 10 (ii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992).
(ii) Executive Employment Agreement dated March 1, 1995, between the Company and Claude L. Van Hefty (Incorporated by reference to Exhibit 10(vii) to the Company's Annual Report on Form 10-K for the year ended December 31, 1994).
(iii)Health Insurance Retirement Benefit Agreement dated January 1, 1996 between the Company and Claude L. Van Hefty (Incorporated by reference to Exhibit 10(v) to the Company's Annual Report on Form 10-K for the year ended December 31, 1996).
(iv) Director Stock Grant Plan dated July 23, 1997 (Incorporated by reference to Exhibit 10 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997).
(v) Employee Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills, Inc. and Claude L. Van Hefty (Incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
(vi) Employee Resignation and Release Agreement dated as of March 12, 1998 between Badger Paper Mills, Inc. and Miles L. Kresl, Jr. (Incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
(23) (i) Consent of Current Independent Public Accountant
(ii) Consent of Former Independent Public Accountant
(27) Financial Data Schedule (EDGAR version only)
(99) Definitive Proxy Statement for 1999 Annual Meeting of ShareholderS (to be filed with the Commission under Regulation 14A and incorporated by reference herein to the extent indicated in this Form 10-K).
**Each of the "material contracts" represents a management compensatory agreement or arrangement.