BADGER PAPER MILLS INC (BPMI) - Description of business

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Company Description
        Badger Paper Mills, Inc. (“Badger” or the “Company”) has been producing paper and paper products in Wisconsin since it was incorporated under the laws of the State of Wisconsin in 1929.        The Company has two operating facilities. In Peshtigo, Wisconsin and adjacent to the Company’s principal executive offices, the Company manufactures paper on two paper machines (a “Yankee” paper machine and a “Fourdrinier” paper machine). The Company also performs certain converting operations in Peshtigo. The Company’s wholly owned subsidiary, Peshtigo Power, LLC, produces steam for the Company’s operations in Peshtigo. The Company’s physical facilities in Peshtigo are sometimes collectively referred to in this Annual Report as the “Peshtigo Facilities.”        The Company also has production facilities in Oconto Falls, Wisconsin (approximately 30 miles from Peshtigo, Wisconsin), which consist of a Company-owned manufacturing facility and certain leased warehouse space. The Company’s owned and leased facilities in Oconto Falls are sometimes collectively referred to in this Annual Report as the “Oconto Falls Facilities.” Products and Distribution        At the Peshtigo Facilities, the Company manufactures paper on its Yankee paper machine and its Fourdrinier paper machine, and converts paper in accordance with customer specifications. Converting operations include punching, sheeting, trimming, sealing, perforating, rewinding, waxing and drilling of paper for uses in several applications.        Products produced on the Yankee paper machine include converted printed and unprinted waxed papers for quick service restaurants, grades used in laminating applications, colored papers, specialty-coated papers and papers used in applications where twisting is required to seal product. The Company’s sales personnel and commissioned brokers sell these products to manufacturers and converters.        The Fourdrinier paper machine produces fine paper grades utilizing fiber purchased on the open market, including pre- and post-consumer recycled fibers. Papers produced on the Fourdrinier paper machine are used in several applications including business papers, printing, high quality writing papers, book publishing stock, reply card, industrial and consumer papers that require water-oil-grease resistant attributes, copier papers and specialty papers. The Company offers a wide range of colored papers and specializes in color matching. A portion of the products produced by the Company are sold under certain trademarks and trade names, including Ta-Non-Ka®, Copyrite®, ENVIROGRAPHIC®, Northern Brights®, and Artopaque. Other 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.        The Company’s two paper machines produce papers that have different characteristics. Paper produced on the Yankee paper machine has a very smooth surface on one side of the paper, which is referred to as machine glazed, or “MG”. The smooth finish on MG paper allows the paper to work well in certain coating and printing applications.        Paper produced on the Fourdrinier paper machine does not have a glazed finish, rather it is machine finished, or “MF”. MF paper works well in a broad range of applications including publishing, writing paper and certain printing applications.        Products produced at Badger’s Oconto Falls manufacturing facility complement the Company’s overall product offerings by adding value to certain paper grades through printing and converting of paper and plastic substrates. At this facility, the Company produces a variety of printed products on paper and plastic substrates and laminates substrates to foil.        Badger sells its products to a wide range of converting companies throughout the United States. These sales are conducted through the Company’s sales personnel. The largest concentration of the Company’s customers can be found in the Midwestern states including Wisconsin, Illinois, Michigan and Ohio. However, as a result of expanded national sales efforts, the Company has made significant progress toward expanding its customer base into other regions of the United States.        The Company’s foreign net sales are immaterial to its operations. Competition        Badger’s products are 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 paper production represents less than 1% of the production capacity in the United States for these products. Badger’s competition for all grades of paper that it manufactures includes International Paper Company, Georgia-Pacific Corporation, Domtar, Inc., Wausau Paper and smaller, non-integrated paper companies. Many of the Company’s larger competitors have greater financial, technical, marketing and public relation resources, larger client bases and greater brand or name recognition than Badger. Raw Materials; Inventory        The main raw material used by the Company is pulp. Badger utilizes a variety of fibers to meet the formulation requirements of the papers it produces. Northern and southern softwood and hardwood pulps, pre-consumer and post-consumer recycled pulps, and hard white rolls make up the total fiber requirements. Badger purchases all of its fiber requirements on the open market. Other raw materials used in the manufacturing process include inks, chemicals, and waxes. Other raw materials are purchased directly from manufacturers and distributors.        Badger has at least two sources of supply for major items. Shortages of 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. Badger does not anticipate shortages of raw materials, and believes that the market price for pulp will increase during the first half of 2005 and stabilize or decrease during the latter half of the year. Energy        Badger is a large consumer of energy, including electricity and natural gas. In 2004, 10.7% of Badger’s cost of sales, excluding the asset impairment charge, represented energy costs compared to 9.7% of Badger’s cost of sales in 2003. Badger purchases electricity from local public utilities, and it purchases natural gas from various sources in the United States and Canada. Two dual-fueled boilers capable of burning natural gas or fuel oil supply the Peshtigo Facilities’ heating and manufacturing requirements. Although Badger experienced temporary interruptions of electrical service in the summer of 2002 due to regional shortages of electricity during peak demand periods, the Company believes that current sources of electricity and natural gas are adequate to meet its needs. Such interruptions generally cause the Company to temporarily suspend the manufacture of paper. There is no damage to equipment during these temporary power interruptions. Badger could experience similar interruptions in the future. Badger’s agreements with its providers of electricity and natural gas allow for temporary interruptions of supply or service during peak demand periods.        The market price for natural gas reached historically high levels during the second half of 2004. In order to reduce the risk of fluctuating market prices for natural gas, the Company has purchased a significant portion of its natural gas requirements for the first quarter of 2005 at a fixed price. Patents        The Company possesses certain patents and licenses used in connection with its business, none of which individually, or in the aggregate, are material. Research and Development        The Company maintains a dedicated technical staff of employees charged with the responsibility of researching and developing new products. The Company also relies on outside consultants from time to time for special research and development projects. The Company’s technical staff also refines and improves existing products in response to customer requirements and market demands. The Company spent $732,000 in 2004, $673,000 in 2003 and $769,000 in 2002 on product research and development activities.        A significant percentage of the Company’s research and development costs are spent working on concepts and designs for new and/or improved paper products for customers. Since many of the Company’s customers for paper products are converters, these customers need trial production runs of paper products to evaluate how the Company’s new or modified paper products perform in actual use on the customers’ paper converting machinery and equipment. If such trial production runs are unsuccessful, the Company charges the associated costs to research and development. If such trial production runs are successful, the Company sells the product to the customers. Revenues from successful trial production runs are included in sales and the associated costs are accounted for in cost of sales. Backlog        As of December 31, 2004, the value of the Company’s order backlog was approximately $1,700,000 as compared to $2,221,000 and $1,270,000 at December 31, 2003 and 2002, respectively. Customers        In 2004, 2003 and 2002, no sales to any single customer represented 10% or more of Badger’s consolidated net sales. Environmental Matters        In 2000, the Company received final regulatory approval from the Wisconsin Department of Natural Resources (“WDNR”) of its Title V air operating permit for its Peshtigo Facilities. The permit does not require the Company to install new or additional pollution control equipment, and as such, the Company is responsible for the costs associated with routine monitoring, record keeping and reporting requirements. These costs are minimal.        Prior to January 30, 2002, effluent flow from Badger’s Peshtigo Facilities was directed into a joint municipal wastewater treatment plant, which Badger operated under contract with the City of Peshtigo, Wisconsin. Effective January 30, 2002, Badger sold this wastewater treatment plant to the City of Peshtigo for approximately $1,250,000; however, Badger continues to operate this wastewater treatment plant under contract with the City of Peshtigo. Management believes that this wastewater treatment plant continues to meet or exceed all currently applicable environmental requirements and that Badger’s use of the treatment plant is in compliance with all regulatory requirements. In 2000, Badger renewed its wastewater discharge permit for this wastewater treatment plant.        In January 2000, the WDNR approved a final closure report filed by the Company with respect to its former Harbor Road Landfill. The WDNR will continue to review the effectiveness of this closure. If the WDNR subsequently determines that the closure was ineffective, then the WDNR may require the Company to undertake further remedial actions. Based on a consultant’s report dated April 1999, the Company estimated that the potential future cost of environmental remedial efforts (assuming that the WDNR determines that the closure was ineffective) to be approximately $300,000. The Company has not subsequently updated this consultant’s report.        Under Section 289.41 of the Wisconsin Statutes, the Company is required to annually demonstrate financial responsibility for future closure related activities it must undertake under the Wisconsin Solid Waste Facilities law. In demonstrating financial responsibility, the Company previously relied on the “Net Worth Method.” As of December 31, 2004, the Company did not satisfy four of the seven specified financial “tests” and was not able to use the Net Worth Method. In such an event, the Company is required to demonstrate financial responsibility using one of the following alternative methods – a bond, a deposit, an escrow account or an irrevocable letter of credit. The Company contacted the WDNR in March 2005 and is in the process of arranging for an alternate method for demonstrating financial responsibility.        Based on a January 2005 report from the Company’s environmental consultant, the Company’s future solid waste facility closure activities, which are subject to the financial responsibility requirements, are recommended to consist of maintenance of the current landfill cap and groundwater monitoring for the next five years. The annual cost of the recommended work is less than $10,000 per year. The WDNR has not yet responded to the January 2005 closure assessment report.        Soil contamination was identified at the Company’s Peshtigo Facilities (French Street) during the removal of four above ground storage tanks. The Company performed site investigation work and in October 2003, requested that the case be transferred from the WDNR to the Wisconsin Department of Commerce (“Commerce”) for case closure with a soil Geographic Information System Registry and a Wisconsin Administrative Code Chapter NR 140 Preventative Action Limit exemption. On June 1, 2004, Commerce issued a final closure letter regarding this matter.        The Company’s Peshtigo Facilities are located near the Lower Fox River/Green Bay Area of Concern (“AOC”). Pursuant to the Great Lakes Water Quality Agreement, 43 AOC’s have been identified and re-located throughout the Great Lakes Basin. The Company has not been identified by WDNR or the United States Environmental Protection Agency (“EPA”) as responsible for the environmental problems within the Lower Fox/Green Bay AOC.        The Company does not anticipate any material capital expenditures for pollution control equipment during the next two fiscal years.        The Company holds an air-operating permit issued by the WDNR for its Oconto Falls Facilities. The permit expires on January 29, 2006. The permit limits emissions so that the facility is considered a “synthetic minor” under the EPA’s Title V air permit program. The permit authorizes the operation of the flexographic printing process at the Oconto Falls Facilities.        The Company began production on new foil laminating equipment in late 2003, which requires a permit for additional volatile organic compounds emissions. On June 21, 2004, the WDNR issued a letter authorizing the operation of the laminator, subject to the general conditions set forth in the permit. The authorization expires January 29, 2006.        Badger believes it has in force all of the necessary environmental permits from Federal, state and local authorities to continue production of current business activities. Employees        As of December 31, 2004, the Company had 246 employees, including 146 employees at its Peshtigo Facilities covered by three-year collective bargaining agreements, which expire in May 2005. The Company intends to commence formal contract negotiations with its covered employees during April 2005. There can be no assurance that the labor contract negotiations will be successful.        The workplace redesign process to improve manufacturing efficiency and quality, begun in 2003, was completed during 2004, resulting in an approximate 20% permanent workforce reduction at the Peshtigo Facilities. The financial effect of the workforce reduction is reported as a restructuring provision for 2004. Available Information        The Company maintains a website with the address www.badgerpaper.com. Additional information regarding the Company can be found on this website. The Company is not including the information contained in the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. I

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