UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended August 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from __________ to __________
Commission File Number 0-7475
WAUSAU PAPER MILLS COMPANY
(Exact name of registrant as specified in charter)
One Clark's Island WISCONSIN
P.O. Box 1408 (State of incorporation)
Wausau, Wisconsin 54402-1408 39-0690900
(Address of principal executive office) (I.R.S. Employer
Identification Number)
Registrant's telephone number, including area code: 715-845-5266
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, No Par Value
(Title of each class)
Indicate by check 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), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No ______
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
As of October 1, 1997, the aggregate market value of the common stock
shares held by non-affiliates was approximately $597,422,000.
The number of common shares outstanding at October 1, 1997 was 36,514,972.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement for use in connection
with 1997 annual meeting of shareholders
(to the extent noted herein); Part III
TABLE OF CONTENTS
Page
PART I
Item 1. Business 1
Item 2. Properties 7
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for the Registrant's Common Stock and Related
Stockholder Matters 8
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 40
PART III
Item 10. Directors and Executive Officers of the Registrant 40
Item 11. Executive Compensation 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management 40
Item 13. Certain Relationships and Related Transactions 40
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 41
Schedule II - Valuation and Qualifying Accounts 43
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PART I
Item 1. BUSINESS.
NATURE OF THE BUSINESS
The company, incorporated in 1899 under the laws of the State of
Wisconsin, manufactures and sells paper. The company is organized into a
small corporate staff consisting of principal executive officers and two
operating divisions: the Printing and Writing Division, consisting of a
paper and pulp mill in Brokaw, Wisconsin and Wausau Papers of New
Hampshire, Inc., a wholly-owned subsidiary which operates a paper mill in
Groveton, New Hampshire; and the Technical Specialty Division, which
consists of Rhinelander Paper Company, Inc., a wholly-owned subsidiary
operating a paper mill in Rhinelander, Wisconsin, and Wausau Papers Otis
Mill, Inc., a wholly-owned subsidiary which operates a paper mill in Jay,
Maine. Unless stated otherwise, the terms "company" and "Wausau Papers"
mean Wausau Paper Mills Company. The company's executive offices are
located in Wausau, Wisconsin.
The company's export sales are administered through Wausau Papers
International, Inc., a wholly-owned subsidiary which acts as a foreign
sales corporation (FSC).
On August 24, 1997, Wausau Paper Mills Company, Mosinee Paper Corporation
("Mosinee") and WPM Holdings, Inc., a wholly-owned subsidiary of the
company ("Merger Sub"), entered into an Agreement and Plan of Merger
(the "Merger Agreement") pursuant to which Merger Sub will be merged
with and into Mosinee (the "Merger") with Mosinee being the surviving
corporation. Under the terms of the Merger Agreement, which was
unanimously approved by the Boards of Directors of the company and
Mosinee, each outstanding share of Mosinee common stock will be converted
into the right to receive 1.4 shares of Wausau common stock, with cash
paid in lieu of fractional shares. The Merger, which is subject to
approval by the shareholders of both the company and Mosinee, regulatory
approval and other customary conditions, will be accounted for as a
pooling of interests and is expected to close by the end of calendar
1997.
Mosinee manufactures, converts and sells paper products. Mosinee, one of
the nation's largest producers of masking tape base, manufactures a broad
range of highly engineered paper products. These include high-performance
industrial papers chemically treated for wet strength, flame retardancy,
anti-static, corrosion or grease resistance for various industries, such
as automotive, housing, and food processing, as well as other specialty
grades of paper, including decorative laminate papers, deep color tissue
used in napkin and tablecloth stock and colored school construction paper.
Other major products and processes include wax-laminate roll wrap, custom
coating, laminating and converting. In addition, Mosinee produces
"away-from-home" towel and tissue products from recycled material under
Bay West's EcoSoft(tm) brand which are used in the washrooms of theme
parks, hospitals, hotels, office buildings, factories, schools and
restaurants nationwide. Mosinee had revenues of $314.5 million and net
income of $26.9 million in 1996 and revenues of $163.5 million and net
income of $16.2 million for the six months ended June 30, 1997.
This report on Form 10-K does not reflect any effect the proposed merger
with Mosinee may have on the company.
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SEGMENT INFORMATION
Paper manufacturing is the company's only line of business.
PRINTING AND WRITING DIVISION
The Printing and Writing Division manufactures fine printing, writing and
specialty papers at the Brokaw, Wisconsin and Groveton, New Hampshire
mills. The division's product lines include recycled products made with
20% of the total fiber content from post-consumer waste. The printing and
writing papers are sold to paper distributors and converters throughout
the United States, Canada and Mexico. Typical end uses for these fine
papers include printed advertising, corporate external reports, office
papers and converted products such as announcements and greeting card
envelopes.
The Printing and Writing Division was formed in 1993 by combining the
operations of the company's Brokaw Division and the manufacturing facility
at Groveton, New Hampshire. The Groveton facility was purchased in April
1993, by the company's wholly-owned subsidiary Wausau Papers of New
Hampshire, Inc.
TECHNICAL SPECIALTY DIVISION
The Technical Specialty Division manufactures lightweight, dense,
technical specialty papers, which are primarily sold directly to
converters and end users throughout the United States. International
markets for the division's products include Canada, the Pacific Rim,
Europe, Mexico and Central and South America. Typical end uses for these
papers are pressure sensitive products, silicone coated products, medical
packaging, food packaging, multiple laminated products, electrographics
and imaging papers. Small volumes of yeast and lignosulfonates are also
manufactured. These products are sold for use as food additives, pet food
ingredients and for other end uses.
The Technical Specialty Division was created in 1997 by combining the
operations of the company's Rhinelander Division and the company's mill at
Jay, Maine (the "Otis mill"). The assets and business of the Otis mill
were acquired on May 12, 1997 by the company's newly formed wholly-owned
subsidiary, Wausau Papers Otis Mill, Inc. This purchase expanded the
company's technical specialty manufacturing capacity by 70,000 tons per
year.
EXPORT SALES
Wausau Papers International, Inc. has been the commissioned sales agent
for the export sales of the company since September 1, 1992. Wausau
Papers International, Inc. has elected to be treated as a FSC for federal
income tax purposes.
On June 9, 1997, the company opened a regional sales office in Singapore.
The Singapore office is used to service existing business in the Far East,
as well as to pursue new business opportunities and relationships for both
the Technical Specialty and Printing and Writing divisions.
RAW MATERIALS
Pulp is the basic raw material for paper production. Approximately 60% of
the pulp consumed by the Brokaw mill is manufactured internally from
aspen, which is in abundant supply. The
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remaining 40% of required pulp at Brokaw and all of the required pulp at
the Rhinelander, Groveton and Otis mills is purchased from pulp mills
throughout the United States and Canada. Market pulp is in adequate
supply and readily obtained from both domestic and foreign sources. The
company may purchase small quantities of its pulp using futures contracts
as a hedge against anticipated pulp price increases.
Recycled, de-inked fiber with a high content of post-consumer waste is
purchased from domestic suppliers as part of the fiber requirements for
the Printing and Writing Division's recycled products. Recycled fiber is
also in adequate supply and readily obtained.
Various chemicals are used in the pulping and papermaking processes.
These industrial chemicals are all available from a number of suppliers
and are purchased at current market prices.
ENERGY
The company's paper mills require large amounts of electrical and steam
energy which are adequately supplied by public utilities or generated at
company operated facilities. The Brokaw mill operates a power plant which
provides all of its steam requirements. The power plant is fueled by
natural gas, which is in adequate supply, with fuel oil as an alternate
energy source. The Brokaw mill purchases 100% of its electrical
requirements from a public utility company. The Groveton and Otis mills
operate power plants which provide 100% of the mills' steam requirements
and a portion of their electrical needs. The power plants at both the
Groveton and Otis mills operate on fuel oil which is in adequate supply.
The Rhinelander mill maintains a power plant, fueled by coal and natural
gas, capable of generating the mill's steam needs and nearly half of its
electrical needs. The Rhinelander, Groveton and Otis mills purchase
approximately 65%, 70% and 91% of their electrical needs, respectively,
from public utility companies. The company generally purchases natural
gas and fuel oil on a contract basis at prevailing market prices. Some
natural gas and fuel oil purchase contracts may provide for variable
prices or contain caps on prices of natural gas to be delivered at future
dates.
In July 1996, the company signed a natural gas transportation agreement
with the Portland Natural Gas Transmission System (PNGTS). Under the
terms of the long-term agreement, PNGTS will construct necessary gas
supply and delivery equipment to the company's Groveton, New Hampshire
mill thereby assuring natural gas delivery at market rates. The Groveton
mill will be responsible for specified delivery charges under the terms of
the contract. The company is progressing on schedule to begin
transportation of natural gas to the Groveton mill in fiscal 1999. Capital
improvements to the Groveton mill's power plant will be required to take
advantage of this agreement. A reduction in the mill's energy costs is
expected from the use of natural gas as an energy source instead of fuel
oil.
PATENTS AND TRADEMARKS
The company develops and files trademarks and patents, as appropriate.
The company does not own or hold material licenses, franchises or
concessions.
SEASONAL NATURE OF BUSINESS
The markets for some of the grades of paper produced by the company tend
to be somewhat seasonal. However, the marketing seasons for these grades
are not necessarily the same. Overall, the company generally experiences
lower sales in the second fiscal quarter, in
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comparison to the rest of the year, primarily due to downtime typically
taken by its converting customers during the holiday season and a general
slowing of business activity at that time of year.
WORKING CAPITAL
As is customary in the paper industry, the company carries adequate
amounts of raw materials and finished goods inventory to facilitate the
manufacture and rapid delivery of paper products to its customers. The
company will occasionally carry higher than normal quantities of pulp in
anticipation of rising pulp prices.
MAJOR CUSTOMERS
Avery Dennison Corporation and ResourceNet International, a division of
International Paper Company, accounted for 13.9% and 10.9% of consolidated
net sales, respectively, in fiscal 1997. The loss of either customer
would have an initial material adverse effect on the company; however, the
company believes that, in the long-term, satisfactory alternative
marketing arrangements could be made.
BACKLOG
The company's order backlog at August 31, 1997 amounted to $32,969,000, or
over 2 weeks of operation. This is 29% higher on a tonnage basis than the
backlog of orders of $26,749,000 or just over 2 weeks of operation at
August 31, 1996. The backlog increase is due primarily to additional
volume associated with the addition of the Otis mill.
Backlog totals do not accurately represent the strength of the company's
business activity as a significant volume of orders are shipped out of
inventory promptly upon order receipt. This portion of the business is
not reflected in the company's backlog totals. The entire backlog at
August 31, 1997 is expected to be shipped during fiscal 1998.
COMPETITIVE CONDITIONS
The company competes in different markets within the paper industry. Each
of its two divisions serves distinct market niches. The Printing and
Writing Division produces fine printing and writing papers, of which over
60% are colored papers. Fine printing and writing sales are estimated to
be less than 3% of the total market. The division's competitors range
from small to large paper manufacturers and represent many different
product lines. The division distributes its products primarily through
paper wholesalers. The Technical Specialty Division produces technical
specialty papers and is a leader in its markets. Market position varies
by product segment and, thus, competition also includes small to large
paper manufacturers. The Technical Specialty Division sells most of its
products directly to converters and end users. The various markets for
the products of the company are highly competitive, with competition based
on service, quality and price.
RESEARCH AND DEVELOPMENT
Expenditures for product development were approximately $1,503,000 in
1997, $1,381,000 in 1996 and $1,219,000 in 1995.
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ENVIRONMENT
Wausau Papers has a strong commitment to protecting the environment. Like
its competitors in the paper industry, the company faces increasing
capital investments and operating costs to comply with expanding and more
stringent environmental regulations. For example, the $14 million rebuild
and expansion of the wastewater treatment plant at the Brokaw mill was
completed in fiscal 1997. The company estimates that its capital
expenditures for environmental purposes will be less than $2 million in
fiscal 1998.
The company has not been identified as a potentially responsible party at
any site designated for remedial action under the federal Superfund law.
The company is required to monitor conditions relative to its past waste
disposal activities and may be required to take remedial action if
conditions are discovered which warrant such action.
The United States Environmental Protection Agency (EPA) has published
draft rules under the Clean Water Act and the Clean Air Act which would
impose new air and water quality standards for pulp and paper mills (the
"Cluster Rules"). The definitive Cluster Rules, when finally promulgated,
are expected to require compliance within three years after the date of
adoption. Final promulgation of the rules for "paper grade sulfite" mills
(which would include the Brokaw mill) is currently projected for late
1997. One major aspect of the proposed new regulations may require the
company to adopt Total Chlorine Free (TCF) technology for the pulp
bleaching operations at the Brokaw mill. In 1988, the company installed
an oxygen delignification system which eliminated the use of elemental
chlorine; however, chlorine compounds are used in other stages of the
bleaching process at the Brokaw mill. Based on the company's preliminary
estimates, if the Cluster Rules were adopted in substantially their
present form, compliance with a TCF requirement for the Brokaw mill would
require a capital expenditure of $3 to $5 million. The company believes
that the costs for compliance with the proposed Cluster Rules and other
environmental regulations will not have a material adverse effect on its
liquidity, operations or consolidated financial condition.
EMPLOYEES
The company had 2,071 employees at August 31, 1997. The company has
collective bargaining contracts with the United Paperworkers International
Union and the National Conference of Firemen and Oiler Service Employees
International Union covering approximately 1,617 employees. These
contracts expire in May 2000, December 2000, May 2001 and March 2002 at
the Otis, Rhinelander, Brokaw and Groveton mills, respectively. The
company considers its relationship with its employees to be excellent.
Eligible employees participate in retirement plans and group life,
disability and medical insurance programs.
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EXECUTIVE OFFICERS
The executive officers of the company as of October 1, 1997, their ages,
their positions and offices with the company and their principal
occupations during the past five years are as follows:
SAN W. ORR, JR., 56
Chairman of the Board of Directors since December, 1989, Chief
Executive Officer from July, 1994 to December, 1995, and a director
since April, 1970; also, Attorney, Estates of A.P. Woodson and
Family; also, a director of Mosinee Paper Corporation, MDU Resources
Group, Inc. and Marshall & Ilsley Corporation.
DANIEL D. KING, 50
Director, President and Chief Executive Officer since December, 1995;
Director, President and Chief Operating Officer July, 1994 to
December, 1995; Senior Vice President, Printing and Writing Division,
December, 1993 to July, 1994; Vice President and General Manager,
Brokaw Division, September, 1990 to December, 1993.
LARRY A. BAKER, 58
Senior Vice President, Administration since December, 1990; prior
thereto, Vice President, Administration.
STEVEN A. SCHMIDT, 43
Vice President, Finance, Secretary and Treasurer since June, 1993;
Corporate Controller, August, 1992 to June, 1993; prior thereto,
Plant Controller, Georgia Pacific Corporation, formerly Nekoosa
Papers, Inc., March, 1989 to August, 1992.
D. MICHAEL WILSON*, 35
Vice President and General Manager, Technical Specialty Division since
April, 1996; prior thereto, Vice President of Marketing and Sales,
Rexam Release, August, 1993 to April, 1996; General Manager, Laminex,
Inc., April, 1991 to August, 1993.
THOMAS J. HOWATT, 48
Vice President and General Manager, Printing and Writing Division
since December, 1994; Vice President and General Manager, Groveton,
April, 1993 to December, 1994; Vice President Operations, Brokaw
Division, September, 1990 to April, 1993; prior thereto, Vice
President, Administration, Brokaw Division.
* Mr. Wilson resigned from the company effective October 24, 1997.
All executive officers of the company are elected annually by the
Board of Directors.
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CAUTIONARY STATEMENT
This Form 10-K, each of the company's annual reports to shareholders,
Forms 10-K, 8-K and 10-Q, proxy statements, prospectuses and any other
written or oral statement made by or on behalf of the company subsequent
to the filing of this Form 10-K may include one or more "forward-looking
statements" within the meaning of Sections 27A of the Securities Act of
1933 and 21E of the Securities Exchange Act of 1934 as enacted in the
Private Securities Litigation Reform Act of 1995 (the "Reform Act"). In
making forward-looking statements within the meaning of the Reform Act,
the company undertakes no obligation to publicly update or revise any such
statement.
Forward-looking statements of the company are based on information
available to the company as of the date of such statements and reflect the
company's expectations as of such date, but are subject to risks and
uncertainties that may cause actual results to vary materially. In
addition to specific factors which may be described in connection with any
of the company's forward-looking statements, factors which could cause
actual results to differ materially include, but are not limited to the
following:
<bullet> Increased competition from either domestic or foreign paper
producers or providers of alternatives to the company's
products, including increases in competitive production
capacity, resulting in sales declines from reduced shipment
volume and/or lower net selling prices in order to maintain
shipment volume.
<bullet> Changes in demand for the company's products due to overall
economic activity affecting the rate of consumption of the
company's paper products, growth rates of the end markets for
the company's products, technological or consumer preference
changes or acceptance of the products by the markets served by
the company.
<bullet> Changes in the price of pulp, the company's main raw material.
Approximately 80% of the company's pulp needs are purchased on
the open market and price changes for pulp have a significant
impact on the company's costs. Pulp price changes can occur
due to worldwide consumption levels of pulp, pulp capacity
additions, expansions or curtailments affecting the supply of
pulp, inventory building or depletion at pulp consumer levels
which affect short-term demand, and pulp producer cost changes
related to wood availability, environmental issues, or other
variables.
<bullet> Unforeseen operational problems at any of the company's
facilities causing significant lost production and/or
cost issues.
<bullet> Significant changes to the company's strategic plans such
as a major acquisition or expansion, or failure to
successfully execute major capital projects or other
strategic plans.
<bullet> Changes in laws or regulations which affect the company.
-7-
Item 2. PROPERTIES.
The company's executive offices are located in Wausau, Wisconsin on
property leased to the company under a lease which expires on December 31,
2005. There are renewal options for another 25 years.
The company's Brokaw, Wisconsin mill operated at capacity during fiscal
1997, producing approximately 490 tons of finished paper per day. The
mill facility provides approximately 60% of its pulp requirements from its
own hardwood sulphite pulp mill. Brokaw mill facilities are situated on
approximately 270 acres of land, all owned by the company.
The Groveton, New Hampshire mill operated at capacity in fiscal 1997,
producing approximately 290 tons of finished paper per day. The company's
facilities occupy 124 acres of land all owned by the company's
wholly-owned subsidiary, Wausau Papers of New Hampshire, Inc.
The company's mill in Rhinelander, Wisconsin operated at capacity in
fiscal 1997, producing approximately 440 tons of finished paper per day.
Its facilities, which include a yeast and lignosulfonate processing plant
capable of producing 21,000 pounds of torula yeast per day, occupy 72
acres of land, all owned by Rhinelander Paper Company, Inc.
The company's Otis mill, located in Jay, Maine, was acquired from Rexam
Inc. on May 12, 1997. The mill has operated at capacity since May 12,
1997, producing approximately 200 tons of finished paper per day. The
Otis facility is located on 28 acres of land, all owned by Wausau Papers
Otis Mill, Inc.
The company owns approximately 43,500 acres of timberland in Wisconsin.
The company believes the market value of these lands exceeds the August
31, 1997 book value of $1,405,000.
Item 3. LEGAL PROCEEDINGS.
Legal proceedings are discussed in Note 12 to the Consolidated Financial
Statements.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of shareholders during the fourth
quarter of fiscal 1997.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The company's common stock trades on The Nasdaq National Market under the
symbol "WSAU". The number of shareholders of record as of October 1, 1997
was 1,904. The company believes that there are approximately 8,200
additional beneficial owners whose shares are held in street name accounts
or in other fiduciary capacities. The total estimated number of
shareholders as of October 1, 1997 is 10,104. Information related to high
and low closing prices and dividends is explained in detail in Item 8,
Financial Statements and Supplementary Data. Dividend restrictions under
certain loan covenants are explained in Note 4 to the Consolidated
Financial Statements.
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Item 6. SELECTED FINANCIAL DATA.
For the years ended August 31,
(all dollar amounts in thousands,
except per share data) 1997 1996 1995 1994 1993
FINANCIAL RESULTS
Net sales $570,258 $542,669 $515,743 $426,504 $381,816
Depreciation, depletion &
amortization 26,586 23,140 19,940 17,635 15,445
Operating profit 81,520 69,523 52,754 69,990 62,910
Interest expense 3,520 2,786 1,688 1,958 1,272
Earnings before provision for
income taxes 78,399 66,829 50,851 68,052 61,771
Earnings before cumulative effect
of accounting change 48,899 41,229 31,251 42,052 38,371
Net earnings 48,899 41,229 31,251 43,052 22,621
Average number of shares
outstanding 36,514,000 36,821,000 36,829,000 37,026,000 37,052,000
Cash dividends declared 9,129 8,104 7,385 6,487 5,686
Cash dividends paid 8,855 7,938 7,156 6,291 5,559
Capital expenditures 34,255 63,174 66,104 43,800 51,297
Tons of paper shipped 459,700 409,700 399,300 355,100 310,600
FINANCIAL CONDITION
Working capital $ 87,114 $ 60,187 $ 67,266 $ 59,878 $57,007
Long-term debt 83,510 53,119 68,623 30,270 42,712
Shareholders' equity 303,554 264,711 236,689 214,818 183,139
Total assets 555,615 467,028 434,686 361,389 329,583
PER SHARE
Earnings before cumulative effect
of accounting change $ 1.34 $ 1.12 $ .85 $ 1.14 $ 1.04
Net earnings 1.34 1.12 .85 1.16 .61
Cash dividends declared .250 .220 .200 .174 .153
Shareholders' equity 8.31 7.19 6.43 5.80 4.94
Price range (low and high closing) 17.25-22.38 16.25-24.13 16.20-20.00 16.18-24.73 12.99-21.55
RATIOS/RETURNS
Return on sales before cumulative
effect of accounting change 8.6% 7.6% 6.1% 9.9% 10.0%
Net return on sales 8.6% 7.6% 6.1% 10.1% 5.9%
Return on average shareholders'
equity before cumulative effect
of accounting change 17.2% 16.4% 13.8% 21.2% 21.0%
Net return on average
shareholders' equity 17.2% 16.4% 13.8% 21.6% 13.0%
Current assets to current
liabilities 2.4 to 1 2.0 to 1 2.3 to 1 2.3 to 1 2.4 to 1
% of long-term debt to total
capital 16.9% 13.0% 18.0% 9.6% 14.8%
Tons of paper shipped per employee 243 233 231 210 206
EMPLOYMENT
Average number of employees 1,890 1,756 1,727 1,692 1,510
<FN>
All shares and per share data have been restated to reflect the
five-for-four stock split in 1996, the 10% stock dividend in 1995 and the
four-for-three stock splits in 1994 and 1993. This summary should be read
in conjunction with the consolidated financial statements which follow.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
Wausau Papers posted record shipments, sales and earnings in fiscal 1997.
The company set new production records and maintained full operations
during a year of less than robust market conditions. Selling prices for
the company's paper products came under pressure in fiscal 1997 due to
competitive market conditions, resulting in lower average paper prices
compared to the previous year. Despite downward pressure on selling
prices, the company's overall margin improved as a result of lower pulp
costs, mix enhancement, productivity gains from its paper mill operations
and continued focus on cost reduction.
Pulp prices remained relatively stable throughout most of fiscal 1997.
This was a marked contrast to the major pulp cost swings experienced in
recent years. In the fourth quarter of fiscal 1997, pulp prices did rise
slightly due to increased demand for pulp. An additional price increase
has been announced by some suppliers for November 1997, although it is
uncertain whether there is sufficient strength in the pulp market to
support an increase at this time.
Fiscal 1997 was also a year of significant events for Wausau Papers. On
May 12th, the company acquired the business and assets of Otis Specialty
Papers, located in Jay, Maine, from Rexam Inc. for $55.1 million. Wausau
Papers has combined the operations of its Rhinelander and Otis mills to
create its newly formed Technical Specialty Division. The purchase
included two paper machines producing high quality supercalendered kraft
release paper, thermal paper and other technical specialty papers. This
acquisition expanded the company's technical specialty capacity by 70,000
tons per year. Another major event occurred on August 25th when the
company, in a joint news release with Mosinee Paper Corporation, announced
plans to merge the two companies in an all-stock transaction. (For further
information regarding the proposed merger refer to Item 1.) The merged
companies, to be called Wausau-Mosinee Paper Corporation, will create an
even stronger specialty paper producer, with combined revenues of
approximately $1 billion and a strong balance sheet from which to pursue
growth internally and through complementary niche acquisitions. Subject
to the terms of the merger agreement, the company expects the merger will
be completed before the end of calendar year 1997.
Management's discussion and analysis of financial condition and results of
operations does not reflect any effect on the company's operations or its
capital resources and liquidity which may result from the proposed merger
with Mosinee Paper Corporation.
NET SALES
Fiscal 1997 net sales were a record $570.2 million, 5% higher than fiscal
1996 net sales of $542.7 million. Net sales were $515.7 million in fiscal
1995. Shipments were also at a record level 459,700 tons in fiscal 1997,
an increase of 12% from 409,700 tons shipped a year ago. Fiscal 1995
shipments were 399,300 tons. Fiscal 1997 net sales and shipments include
nearly four months of contribution from the May 12, 1997 acquisition of
Otis Specialty Papers.
At the company's Technical Specialty Division, shipments increased 26% in
fiscal 1997, with the Rhinelander mill realizing 10% growth in its
shipments compared to a year ago. Shipments of the company's pressure
sensitive products were strong despite very competitive market conditions,
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increasing 24% at the Rhinelander mill and 42% division-wide. Fiscal 1997
average paper prices at the Technical Specialty Division were lower than a
year ago, on average, as a result of competitive pressures from both
domestic and foreign paper producers. The Technical Specialty Division has
experienced some market softening in early fiscal 1998, however, continued
growth in its pressure sensitive grades is expected in fiscal 1998.
At the company's Printing and Writing Division, shipments increased 5%,
compared to fiscal 1996 results. Healthy increases in the division's
premium paper sales were realized in fiscal 1997, while reducing its mix
of lower priced commodity grades. Mix enhancement will continue to be a
major focus in fiscal 1998. Despite the mix improvement, downward
pressure on paper prices, as a result of soft market conditions in fiscal
1997, resulted in significantly lower average prices for the company's
printing and writing grades, compared to a year ago.
Order backlog at the end of fiscal 1997 was $33.0 million, compared to
order backlogs of $26.7 million and $25.0 million at August 31, 1996 and
1995, respectively. Order backlog at August 31, 1997, on a tonnage basis,
was 29% higher than a year ago and 55% better than at the end of fiscal
1995. The increase in the company's order backlog at the end of fiscal
1997, compared to the prior year, is due primarily to the additional
volume from the Otis mill which was not in last year's backlog. The
company believes backlog totals do not indicate correctly the entire
strength of its business, given that a high percentage of orders are
shipped out of inventory promptly upon order receipt.
In the fourth quarter of fiscal 1997, the company opened a regional sales
office in Singapore. The Singapore office is used to service existing
business in the Far East, as well as to pursue new business opportunities
for the company's Printing and Writing and Technical Specialty divisions.
GROSS PROFIT
Gross profit increased to $114.0 million or 20.0% of net sales in fiscal
1997, compared to a fiscal 1996 gross profit of $99.3 million or 18.3% of
net sales. Fiscal 1995 gross profit was $80.7 million or 15.7% of net
sales. Gross profit margin improved in fiscal 1997 primarily as a result
of higher sales volume, lower pulp costs, improved mix, productivity gains
from paper mill operations and cost reduction efforts including
improvements generated from the Total Quality Improvement Process.
Market prices for pulp, the company's primary raw material used in
manufacturing paper, were relatively stable throughout most of fiscal
1997. In fiscal 1997, the average list price of northern bleached softwood
kraft, a frequently used benchmark pulp grade, decreased 18% from the
fiscal 1996 average, compared to an 8% decrease in fiscal 1996 and a 55%
increase in fiscal 1995. Pulp prices did increase slightly at the end of
fiscal 1997 and an additional price increase has been announced by some
suppliers for November 1997. Paper industry publications have expressed
some doubt, however, as to whether there is sufficient strength in the
pulp market to support the November price increase.
The company's paper mills at its Printing and Writing Division operated at
capacity in fiscal 1997. Paper production increased 5% over fiscal 1996
results due to productivity gains from capital and operational
improvements. Paper production increased 3% in fiscal 1996 as a result of
capital improvements and full operations, compared to fiscal 1995 when the
Brokaw and Groveton paper mills operated at 98% and 96% of capacity,
respectively. In November 1996, an operational problem occurred at the
Brokaw pulp mill when, during start-up after a normal planned maintenance
shutdown, cracks developed in two of the mill's four high-pressure cooking
-11-
vessels known as digesters. The digesters were out of operation until
April 1997 for repairs, however, no reduction in paper production was
incurred. The digester incident reduced the company's fiscal 1997 net
earnings by $.06 per share as a result of curtailed pulp production and
increased maintenance costs. Printing and Writing Division paper inventory
levels rose slightly in fiscal 1997, primarily as a result of new product
additions, increased production and less than robust market conditions.
The Rhinelander and Otis mills at the company's Technical Specialty
Division operated at capacity in fiscal 1997. Production increased 12% at
the Rhinelander mill, compared to the previous year, primarily due to
capital improvements and a strong mix of pressure sensitive products.
Including operations from the Otis mill acquired on May 12, 1997,
production at the Technical Specialty Division increased 27%, compared to
fiscal 1996 results. Rhinelander's silicone coaters operated approximately
83% of available machine time in fiscal 1997, compared to 66% a year ago.
Although shipments of silicone-coated products increased 14%, compared to
fiscal 1996, the additional volume was not sufficient to sustain full
operation on the coaters. Paper inventory levels at the Technical
Specialty Division rose in fiscal 1997, primarily due to the addition of
the Otis mill and strong operations at the Rhinelander mill.
Maintenance and repair costs were $35.7 million in fiscal 1997, an
increase of $4.1 million over fiscal 1996 maintenance costs of $31.6
million. Higher maintenance costs in fiscal 1997 are mainly due to the
addition of the Otis mill in May 1997 and costs associated with the
repairs to two pulp mill digesters at the Brokaw mill. Maintenance and
repair costs were $30.2 million in fiscal 1995.
LABOR
A new five-year labor agreement with the United Paperworkers International
Union at the Groveton mill was successfully negotiated in fiscal 1997. The
new agreement became effective April 1, 1997 and includes a general wage
increase of 3.5% in 1997, 3.0% in both 1998 and 1999, 3.5% in 2000 and
3.0% in 2001.
SELLING, ADMINISTRATIVE AND RESEARCH EXPENSES
Fiscal 1997 selling, administrative and research expenses were $32.5
million, compared to $29.8 million in fiscal 1996 and $28.0 million in
fiscal 1995. Higher stock appreciation rights, dividend equivalent and
stock option discount expense and the addition of the Otis mill are the
primary reasons for the increased expenses in fiscal 1997, compared to the
prior year. In fiscal 1997, $1.1 million in expense was recorded for stock
appreciation rights, dividend equivalent and option discount expense,
compared to $.1 million in fiscal 1996 and fiscal 1995.
Wausau Paper Mills Company, like most companies today, is heavily
dependent upon computer technology to effectively carry out its day to day
operations. Until recently, most purchased and custom designed software
was not year 2000 compliant, meaning, the software wasn't designed to
properly handle dates beyond the year 1999. To ensure its computer
systems will be ready to handle dates of the year 2000 and beyond, the
company is well along in its overall plan to upgrade its software to
become year 2000 compliant. This process is expected to be completed by
the end of 1998. No material costs or effects on operations are expected
from the upgrade process.
-12-
INTEREST INCOME AND EXPENSE
Interest income in fiscal 1997 totaled $.2 million, compared to $.6
million in fiscal 1996 and $.2 million in fiscal 1995. The decrease in
interest income in fiscal 1997 is due to more interest income in 1996 than
in 1997 from a declining balance of undistributed proceeds from a $19
million industrial development bond issuance in August 1995. Bond proceeds
were fully disbursed as of January 1997.
Fiscal 1997 interest expense amounted to $3.5 million, compared to $2.8
million in fiscal 1996 and $1.7 million in fiscal 1995. Interest expense
increased in fiscal 1997 due to higher average debt levels as a result of
the acquisition of Otis Specialty Papers on May 12, 1997, which was
entirely debt financed. Capitalized interest totaled $.2 million in fiscal
1997, $.9 million in fiscal 1996 and $.7 million in fiscal 1995.
Capitalized interest decreased in fiscal 1997 due to several major capital
projects which were at or nearing completion by the end of fiscal 1996,
including a capacity expansion at the Rhinelander mill, installation of a
fiber handling and processing system at the Brokaw mill and upgrades to
the wastewater treatment plant at both Wisconsin mills.
Other income of $.2 million was recorded in fiscal 1997, compared to
expense of $.5 million in fiscal 1996 and fiscal 1995.
INCOME TAXES
The tax provision for fiscal 1997 was $29.5 million, for an effective tax
rate of 37.6%. The effective rates for fiscal years 1996 and 1995 were
38.3% and 38.5%, respectively. The reduction in the fiscal 1997 effective
tax rate, compared to the prior year, is due primarily to state
apportionment changes and a decrease in the ratio of non-deductible items
to income as a result of increased earnings.
NET EARNINGS
Net earnings were a record $48.9 million or $1.34 per share in fiscal
1997, an increase of 19% compared to net earnings of $41.2 million or
$1.12 per share recorded in fiscal 1996. Fiscal 1995 net earnings were
$31.3 million or $.85 per share. Fiscal 1997 net earnings were negatively
impacted by $.06 per share due to several months of curtailed pulp
production and increased maintenance costs associated with repairs to two
digesters at the Brokaw mill.
CAPITAL RESOURCES AND LIQUIDITY
LONG-TERM DEBT
Long-term debt increased $30.4 million in fiscal 1997 to $83.5 million at
August 31, 1997. Long-term debt at the end of fiscal 1996 and fiscal 1995
was $53.1 million and $68.6 million, respectively. Long-term debt
increased in fiscal 1997 as a result of the May 12, 1997 acquisition of
Otis Specialty Papers for $55.1 million, which was entirely debt financed.
The decrease in long-term debt in fiscal 1996 was the result of improved
cash flow from operations. Long-term debt as a percent of capital was
16.9% at the end of fiscal 1997, compared to 13.0% in fiscal 1996 and
18.0% in fiscal 1995.
At August 31, 1997, the company had $39.0 million outstanding under its
revolving credit facility. Long-term debt at the end of fiscal 1997 also
included $12.0 million in senior promissory
-13-
notes to Prudential Insurance Company of America and its subsidiaries,
$19.0 million in industrial development bonds and $13.0 million in
commercial paper. Long-term debt at the end of fiscal 1996 consisted
primarily of $19.0 million in industrial development bonds, $18.0 million
in senior promissory notes and $13.5 million outstanding under the
revolving credit facility.
CASH PROVIDED BY OPERATIONS
Cash provided by operations was $67.6 million in fiscal 1997, down 15%
from fiscal 1996 operating cash flow of $80.0 million. Fiscal 1995 cash
provided by operations was $47.5 million. The reduced operating cash flow
in fiscal 1997, compared to the previous year, is due mainly to an
increase in accounts receivable, higher pulp inventories, and increased
paper inventories at the Printing and Writing Division due to new product
additions as well as a combination of strong production and moderate
market conditions. The increase in cash provided by operations in fiscal
1996 was primarily the result of higher selling prices, a reduction in
accounts receivable and smaller increases in inventory, compared to fiscal
1995.
CAPITAL EXPENDITURES
Fiscal 1997 capital expenditures totaled $34.3 million, compared to $63.2
million in fiscal 1996 and $66.1 million in fiscal 1995. Fiscal 1997
capital expenditures exclude $55.1 million for the acquisition of Otis
Specialty Papers on May 12, 1997. The decrease in capital spending in
fiscal 1997, compared to a year ago, is due to a $42 million capacity
expansion at the Rhinelander mill which was implemented in the second and
third quarters of fiscal 1996.
Several major capital improvements were completed in fiscal 1997. A new
saveall and broke metering system was installed at the Groveton mill,
reducing operating costs and improving fiber yield. An upgrade to
Groveton's turbine generator was also completed, lowering the mill's
electrical costs. At the Rhinelander mill, a new rewinder was brought into
service to support the mill's silicone coating operation. At Brokaw, a
$14 million upgrade of its wastewater treatment facility was completed.
In addition, a $6 million upgrade to the mill's wood processing facility
was finished, resulting in improved wood yield, increased process
efficiencies and reduced operating costs.
The company's Board of Directors approved a number of major capital
improvements in fiscal 1997, spending on which will continue into fiscal
1998. A $9 million pulp mill digester and process upgrade project was
approved for the Brokaw mill. This project will increase pulp production
capacity by approximately 15%, improve pulp quality and reduce operating
costs. The new digester and process upgrade are expected to be completed
in the fourth quarter of fiscal 1998. Over $8 million in capital
improvements at the Groveton mill will be completed over the next two
years to expand the mill's paper production capacity by 5%. The capital
improvements include replacing the electric drive on No. 6 paper machine
and upgrades to the wet end and dryer systems on No. 5 paper machine.
These projects will allow both paper machines to operate at faster speeds
while improving reliability and overall operating efficiency. In addition,
a new fiber blending system will be installed at the Groveton mill to
improve production efficiencies and flexibility while lowering overall
material costs. At the Rhinelander mill, No. 7 and No. 9 paper machines,
along with two rewinders, will be equipped with state-of-the-art web
inspection and cleaning equipment, which will further enhance the quality
of Rhinelander's pressure sensitive products. At the end of fiscal 1997,
the company was committed to spend $34.0 million to complete these capital
projects and others currently under construction.
Capital expenditures are expected to be approximately $150 million over
the next three years,
-14-
including about $50 million in fiscal 1998.
FINANCING
In fiscal 1997, the company amended its revolving credit facility with its
four banks, increasing the credit line from $40 million to $105 million.
The revolving credit line was increased to finance the acquisition of Otis
Specialty Papers in May 1997. The amended agreement extends through March
29, 2001 at which time, or earlier at the company's option, the agreement
converts to a one-year term loan. Interest rates on these borrowings are
based on domestic rate loans, eurodollar loans, adjusted CD rate loans,
offered loans or treasury rate loans. The company also maintains a
commercial paper placement agreement, with one of its four major banks,
which provides for the issuance of up to $40 million of unsecured debt
obligations. The commercial paper placement agreement requires unused
credit availability under the company's revolving credit agreement equal
to the amount of outstanding commercial paper. On August 31, 1997, the
company had a combined total of $53 million available for borrowing under
its revolving credit and commercial paper placement agreements. In a
separate agreement, one of the four banks participating in the revolving
credit facility provides a $5 million uncommitted line of credit to the
company. In addition, the company also has a $2 million short-term line
of credit available. There were no borrowings against these lines at
August 31, 1997.
In June 1993, the company borrowed $30 million through the issuance of
notes to Prudential Insurance Company of America and its subsidiaries. The
loan was in the form of unsecured term notes bearing a fixed interest rate
of 6.03%. Principal is payable in equal semi-annual installments, with the
final payment due June 16, 2000. Proceeds from the notes were used to
reduce borrowings from the revolving credit facility.
In August 1995, the company obtained $19 million in industrial development
bond financing to fund an upgrade of the Brokaw mill wastewater treatment
plant, the construction of a new landfill and several other projects which
qualify for this type of financing. The bonds, which were issued by a
local governmental unit, mature on July 1, 2023 and have a floating
interest rate commensurate with short-term municipal bond rates on similar
issues. The interest rate can be converted to a fixed rate at the option
of the company. Principal is due upon maturity or earlier at the
company's option. Proceeds from the bond issue were held in a trust fund
until they were drawn upon by the company as spending occurred on these
projects. Bond proceeds were fully disbursed as of January 1997.
Cash provided by operations and the revolving credit facility are expected
to meet current and anticipated working capital needs and dividend
requirements, as well as fund the company's planned capital expenditures.
The company believes additional financing is readily available, should it
be needed, to fund a major expansion or another acquisition.
COMMON STOCK REPURCHASE
On June 30, 1994, the company's Board of Directors authorized the
repurchase of up to 1,856,250 shares of the company's common stock from
time to time in the open market or through privately negotiated
transactions at prevailing market prices. The company did not repurchase
any shares of the company's common stock in fiscal 1997. In fiscal 1996,
369,500 shares were repurchased at market prices ranging from $16.750 per
share to $18.125 per share. The company repurchased 308,938 shares in
fiscal 1995 at market prices ranging from $16.550 per share to $17.091 per
share and, in fiscal 1994, 123,750 shares were repurchased at market
prices ranging from $17.364 per share to $17.909 per share. Shares and per
share data have been restated to reflect
-15-
the five-for-four stock split and 10% stock dividend which occurred in
January 1996 and January 1995, respectively.
DIVIDENDS
During fiscal 1997, the company's Board of Directors declared cash
dividends of $.25 per share, an increase of 13.6% from the $.22 per share
cash dividend declared in fiscal 1996.
-16-
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WIPFLI ULLRICH BERTELSON LLP
To the Shareholders and Board of Directors
Wausau Paper Mills Company
Wausau, Wisconsin
We have audited the accompanying consolidated balance sheets of Wausau
Paper Mills Company and Subsidiaries as of August 31, 1997 and 1996, and
the related consolidated statements of income, cash flows and
shareholders' equity for each of the years in the three-year period ended
August 31, 1997 and the supporting schedule listed in the accompanying
index to financial statements. These financial statements and supporting
schedule are the responsibility of the company's management. Our
responsibility is to express an opinion on these financial statements and
supporting schedule based on our audits.
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 and
supporting schedule are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements and supporting schedule. 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 audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wausau
Paper Mills Company and Subsidiaries at August 31, 1997 and 1996, and the
results of its operations and cash flows for each of the years in the
three-year period ended August 31, 1997, and the supporting schedule
presents fairly the information required to be set forth therein, all in
conformity with generally accepted accounting principles.
We hereby consent to the incorporation by reference of this report in the
Registration Statements on Form S-8 and amendments thereto filed with the
Securities and Exchange Commission by Wausau Paper Mills Company on April
26, 1996, March 18, 1996, August 25, 1995, January 3, 1992 and January 27,
1988.
Wipfli Ullrich Bertelson LLP
WIPFLI ULLRICH BERTELSON LLP
September 17, 1997
Wausau, Wisconsin
-17-
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The management of Wausau Paper Mills Company is responsible for the
integrity and objectivity of the financial data contained in the financial
statements and supporting schedule. The financial statements and
supporting schedule have been prepared in conformity with generally
accepted accounting principles appropriate under the circumstances and,
where necessary, reflect informed judgments and estimates of the effects
of certain events and transactions based on currently available
information at the date the financial statements were prepared.
The company's management depends on the company's system of internal
accounting controls to assure itself of the reliability of the financial
statements. The internal control system is designed to provide reasonable
assurance, at appropriate cost, that assets are safeguarded and
transactions are executed in accordance with management's authorizations
and recorded properly to permit the preparation of financial statements in
accordance with generally accepted accounting principles. Periodic
reviews are made of internal controls by management and corrective action
is taken if needed.
The Board of Directors reviews and monitors financial statements through
its audit committee. The audit committee meets with the independent
public accountants and management to review internal accounting controls,
auditing and financial reporting matters.
The independent public accountants are engaged to provide an objective and
independent review of the company's financial statements in accordance
with generally accepted auditing standards and to express an opinion
thereon. The report of the company's independent public accountants is
included in this annual report.
Daniel D. King Steven A. Schmidt
DANIEL D. KING STEVEN A. SCHMIDT
President and Chief Executive Vice President Finance,
Officer Secretary and Treasurer
-18-
INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS
Page
Consolidated Statements of Income for the years ended
August 31, 1997, 1996 and 1995 20
Consolidated Balance Sheets as of August 31, 1997 and 1996 21
Consolidated Statements of Shareholders' Equity for
the years ended August 31, 1997, 1996 and 1995 23
Consolidated Statements of Cash Flows for the years
ended August 31, 1997, 1996 and 1995 24
Notes to Consolidated Financial Statements 25
Schedule for the years ended August 31, 1997, 1996 and 1995
Schedule II - Valuation and Qualifying Accounts 43
All other schedules called for under Regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is included in the Consolidated Financial Statements and Notes
thereto.
-19-
WAUSAU PAPER MILLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(all dollar amounts in thousands, For the years ended August 31,
except per share data) 1997 1996 1995
Net Sales $570,258 $542,669 $515,743
Cost of products sold 456,239 443,383 434,995
Gross Profit 114,019 99,286 80,748
Selling, administrative and research
expenses 32,499 29,763 27,994
Operating Profit 81,520 69,523 52,754
Interest expense ( 3,520) ( 2,786) ( 1,688)
Interest income 172 562 239
Other 227 ( 470) ( 454)
Earnings Before Income Taxes 78,399 66,829 50,851
Provision for income taxes 29,500 25,600 19,600
Net Earnings $ 48,899 $ 41,229 $ 31,251
Net Earnings Per Common Share $ 1.34 $ 1.12 $ 0.85
<FN>
See accompanying notes to consolidated financial statements.
All per share data has been restated to reflect a five-for-four stock
split occurring in 1996 and a 10% stock dividend occurring in 1995.
-20-
WAUSAU PAPER MILLS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(all dollar amounts in thousands) As of August 31,
1997 1996
Assets
Current Assets
Cash and cash equivalents $ 5,297 $ 2,372
Accounts and notes receivable:
Customers, less allowances of $5,875 in 1997
and $6,004 in 1996 46,904 36,814
Other 3,392 1,403
Inventories 84,112 70,443
Deferred income taxes 8,324 7,688
Other current assets 1,390 520
Total current assets 149,419 119,240
Property, Plant and Equipment
Buildings 67,850 56,461
Machinery and equipment 487,136 420,958
554,986 477,419
Less: Accumulated depreciation (188,969) (164,983)
366,017 312,436
Land 2,285 1,982
Timberlands, net of depletion of
$803 in 1997 and $745 in 1996 1,405 1,430
Capital additions in process 16,759 14,688
Total property, plant and equipment 386,466 330,536
Other Assets
Cash restricted for capital additions 3,844
Deferred charges and other assets 19,730 13,408
Total other assets 19,730 17,252
Total Assets $555,615 $467,028
<FN>
See accompanying notes to consolidated financial statements.
-21-
(all dollar amounts in thousands) As of August 31,
1997 1996
Liabilities
Current Liabilities
Current maturities of long-term debt $ 6,290 $ 6,340
Accounts payable 29,890 26,307
Accrued salaries and wages 10,980 9,197
Accrued and other liabilities 13,426 14,299
Accrued income taxes 1,719 2,910
Total current liabilities 62,305 59,053
Long-Term Liabilities
Long-term debt 83,510 53,119
Deferred income taxes 49,301 43,469
Postretirement benefits 34,319 31,849
Pension 17,413 10,194
Other liabilities 5,213 4,633
Total long-term liabilities 189,756 143,264
Commitments and contingencies
Shareholders' Equity
Preferred stock: (500,000 shares authorized)
no par value
No shares issued
Common stock: (100,000,000 shares authorized)
no par value
38,840,403 shares issued - 1997
38,840,403 shares issued - 1996 139,284 139,155
Retained earnings 183,240 143,470
322,524 282,625
Less: Treasury stock at cost
(2,325,431 shares in 1997 and
2,327,875 shares in 1996) ( 17,703) ( 17,721)
Net loss not recognized as pension expense
(net of deferred taxes) ( 1,267) ( 193)
Total shareholders' equity 303,554 264,711
Total Liabilities and Shareholders' Equity $555,615 $467,028
-22-
WAUSAU PAPER MILLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(all dollar amounts Common Stock Treasury Stock
in thousands) Common Total
Stock- Share-
Shares Retained Net Pension Shares holder's
Issued Amount Earnings Shares Amount Adjustment Outstanding Equity
Balance August 31, 1994 28,248,240 $ 80,380 $143,424 (1,390,210) ($ 7,604) ($ 1,382) 26,858,030 $214,818
Net earnings, 1995 31,251 31,251
Cash dividends declared ( 7,385) ( 7,385)
10% stock dividend 2,824,083 56,945 ( 56,945) ( 144,856) 2,679,227
Purchases of treasury
shares ( 226,500) ( 5,222) ( 226,500)( 5,222)
Stock options exercised 872 153,130 1,174 153,130 2,046
Tax benefit related to
stock options 587 587
Change in unrecognized
pension expense (net
of deferred taxes) 594 594
Balance August 31, 1995 31,072,323 $138,784 $110,345 (1,608,436) ($ 11,652) ($ 788) 29,463,887 $236,689
Net earnings, 1996 41,229 41,229
Cash dividends declared ( 8,104) ( 8,104)
Five-for-four stock
split 7,768,080 ( 402,343) 7,365,737
Purchases of treasury
shares ( 369,500) ( 6,376) ( 369,500) ( 6,376)
Stock options exercised ( 10) 52,404 307 52,404 297
Tax benefit related to
stock options 351 351
Stock option discount
(net of deferred
taxes) 30 30
Change in unrecognized
pension expense (net
of deferred taxes) 595 595
Balance August 31, 1996 38,840,403 $139,155 $143,470 (2,327,875) ( $17,721) ($ 193) 36,512,528 $264,711
Net earnings, 1997 48,899 48,899
Cash dividends declared ( 9,129) ( 9,129)
Stock options exercised 14 2,444 18 2,444 32
Tax benefit related to
stock options 5 5
Stock option discount
(net of deferred
taxes) 110 110
Change in unrecognized
pension expense (net
of deferred taxes) ( 1,074) ( 1,074)
Balance August 31, 1997 38,840,403 $139,284 $183,240 (2,325,431) ($ 17,703) ( $1,267) 36,514,972 $303,554
<FN>
See accompanying notes to consolidated financial statements.
-23-
WAUSAU PAPER MILLS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all dollar amounts in thousands) For the years ended August 31,
1997 1996 1995
Operating Activities:
Net earnings $ 48,899 $ 41,229 $ 31,251
Noncash items:
Provision for depreciation,
depletion and amortization 26,586 23,140 19,940
Loss on property, plant and
equipment disposals 494 1,259 585
Deferred income taxes 6,630 6,186 4,581
Changes in operating assets and
liabilities:
Receivables ( 3,752) 4,212 ( 7,320)
Inventories ( 9,445) ( 2,969) ( 7,252)
Other assets ( 7,059) ( 5,643) 521
Accounts payable and other
liabilities 6,429 10,893 4,139
Accrued income taxes ( 1,191) 1,651 1,067
Net Cash Provided by Operating
Activities 67,591 79,958 47,512
Investing Activities:
Capital expenditures ( 36,715) ( 61,389) ( 64,479)
Acquisition of Otis Specialty Papers ( 55,147)
Proceeds from property, plant
and equipment disposals 11 85 115
Net cash used from (invested in) funds
restricted for capital additions 3,844 10,888 ( 14,732)
Net Cash Used in Investing Activities ( 88,007) ( 50,416) ( 79,096)
Financing Activities:
Net borrowings (repayments)
revolving credit facility 25,500 ( 700) 14,200
Net borrowings (repayments) of
commercial paper 13,004 ( 8,300) 8,300
Repayment of long-term debt ( 340) ( 500) ( 451)
Repayment of long-term notes ( 6,000) ( 6,000)
Proceeds from issuance of
long-term bonds 19,000
Dividends paid ( 8,855) ( 7,938) ( 7,156)
Proceeds from stock option exercises 32 297 2,046
Payments for purchases of
treasury stock ( 6,376) ( 5,222)
Net Cash Provided by (Used in)
Financing Activities 23,341 ( 29,517) 30,717
Net increase (decrease) in cash
and cash equivalents 2,925 25 ( 867)
Cash and cash equivalents at
beginning of year 2,372 2,347 3,214
Cash and Cash Equivalents at
End of Year $ 5,297 $ 2,372 $ 2,347
Supplemental Cash Flow Information:
Interest paid (net of amount
capitalized) $ 3,485 $ 2,793 $ 1,554
Income taxes paid 24,846 17,830 13,762
<FN>
Noncash investing and financing activities: Capital lease obligations of
$498 and $497 in 1996 and 1995, respectively, were incurred when the
company entered into leases for new equipment.
See accompanying notes to consolidated financial statements.
-24-
WAUSAU PAPER MILLS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
CONSOLIDATION - The consolidated financial statements include the accounts
of the company and its subsidiaries. All significant intercompany
transactions, balances and profits have been eliminated in consolidation.
REVENUE RECOGNITION - Revenue is recognized upon shipment of goods and
transfer of title to the customer. The company grants credit to customers
in the ordinary course of business. A substantial portion of the
company's accounts receivable is with customers in various paper
converting industries or the paper merchant business. Concentrations of
credit risk with respect to trade receivables are limited due to the large
number of customers and their geographic dispersion.
USE OF ESTIMATES IN PREPARATION OF CONSOLIDATED FINANCIAL STATEMENTS -
The preparation of the accompanying consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. Actual results may
differ from these estimates.
CASH EQUIVALENTS - The company defines cash equivalents as highly liquid,
short-term investments with an original maturity of three months or less.
INVENTORIES - Pulpwood, finished paper products and the majority of raw
materials are valued at the lower of cost, determined on the last-in,
first-out (LIFO) method, or market. All other inventories are valued at
the lower of average cost or market.
PROPERTY, PLANT AND EQUIPMENT - Plant and equipment are stated at cost and
are depreciated over the estimated useful lives of the assets using the
straight-line method for financial statement purposes. The cost and
related accumulated depreciation of all plant and equipment retired or
otherwise disposed of are removed from the accounts and any resulting
gains or losses are included in the consolidated statements of income.
Buildings are depreciated over a 25- to 45-year period; machinery and
equipment over a 4- to 20-year period. Maintenance and repair costs are
charged to expense as incurred. Renewals and improvements which extend
the useful lives of the assets are added to the plant and equipment
accounts.
Equipment financed by long-term leases, which in effect are installment
purchases, have been recorded as assets and the related obligations as
debt.
Land is stated at cost. Timberlands are at cost less the pro rata cost of
timber harvested since acquisition. Depletion expense is calculated using
the block method, which groups timberland into logical management areas
called "blocks" for which the cost basis is determinable. The annual
depletion is determined by multiplying the per unit cost basis of the
block of timber by the number of units harvested from the block during the
year.
INCOME TAXES - Deferred income taxes have been provided under the
liability method. Deferred tax assets and liabilities are determined
based upon the estimated future tax effects of
-25-
differences between the financial statement and tax bases of assets and
liabilities, as measured by the current enacted tax rates. Deferred tax
expense is the result of changes in the deferred tax asset and liability.
EARNINGS PER SHARE - Earnings per common share are based on the weighted
average number of common shares outstanding. Dilution of earnings per
common share due to common stock equivalents (stock options) is negligible
and, accordingly, no dilution has been reported.
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." This statement
is effective for periods ending after December 15, 1997. If SFAS No. 128
had been adopted during 1997, the company's reported basic earnings per
share and diluted earnings per share would have been unchanged at $1.34
per share.
FUTURES CONTRACTS - The company utilizes futures contracts to hedge the
price risk of anticipated purchases of pulp and natural gas. Because the
pulp futures markets are very new and liquidity may be limited, the
company has not hedged substantial quantities of pulp. Changes in the
market value of the futures contracts are included as part of the
acquisition price of pulp and natural gas and are realized when the
finished paper is sold and the natural gas is consumed.
NOTE 2. INVENTORIES
(all dollar amounts in thousands) 1997 1996
Raw materials $ 32,983 $ 24,273
Supplies 16,611 16,549
Work in process and finished goods 47,418 41,630
Inventories at cost 97,012 82,452
LIFO reserve ( 12,900) ( 12,009)
Net inventories $ 84,112 $ 70,443
Because various components of the inventories are valued by use of the
last-in, first-out (LIFO) method, it is impracticable to segregate the
LIFO reserve between raw materials and work in process and finished goods.
NOTE 3. ACCRUED AND OTHER LIABILITIES
(all dollar amounts in thousands) 1997 1996
Employee retirement plans $ 1,868 $ 2,142
Taxes other than income 1,149 1,633
Interest 491 483
Stock appreciation rights 3,314 2,408
Other 6,604 7,633
Total $13,426 $14,299
-26-
NOTE 4. DEBT
The company's long-term debt, excluding current maturities as of August
31, is outlined below:
(all dollar amounts in thousands) 1997 1996
6.03% Senior promissory notes $12,000 $18,000
Industrial development bonds 19,000 19,000
Revolving credit facility agreement 39,000 13,500
Commercial paper 13,004
Fixed asset payables to be financed
with revolving credit agreement 421 2,244
Capitalized leases 85 375
Totals $83,510 $53,119
The company has outstanding $18 million in unsecured senior promissory
notes. Interest is payable quarterly on the outstanding balance at a rate
of 6.03% per annum. Principal is payable in equal semi-annual
installments, with the final payment due June 16, 2000.
During 1995, the company borrowed $19 million related to industrial
development bonds issued by a local governmental unit. The variable rate
bonds require quarterly interest payments and had an interest rate of
3.65% at August 31, 1997. The company also pays fees for a bank letter of
credit and remarketing services related to the bonds which it includes in
net interest expense. The interest rate can be converted to a fixed rate,
at the company's option, after which semi-annual interest payments will be
required. The bonds mature on July 1, 2023. At August 31, 1997, all bond
proceeds had been disbursed.
The company maintains an unsecured revolving credit facility of $105
million with four banks which continues through March 29, 2001 at which
time, or earlier at the company's option, the revolving credit converts to
a term loan facility, and the loans then outstanding are payable in four
equal quarterly installments. The company may elect the base for interest
from either domestic rate loans, eurodollar loans, adjusted CD rate loans,
offered loans or treasury rate loans. The weighted average interest rate
on borrowings under the revolving credit facility was 5.87% and 5.62% at
August 31, 1997 and 1996, respectively. The credit agreement provides for
commitment fees during the revolving loan period. Fees are based on
quarterly funded debt to equity levels. Based on debt and equity levels
at August 31, 1997, the fees are .1% per annum.
Consistent with the classification of the revolving credit agreement,
fixed asset payables that will be financed through the agreement are
classified as long-term debt.
The senior promissory notes and the revolving credit facility agreement
require the company to comply with certain covenants, one of which
requires the company maintain minimum net worth. At August 31, 1997,
$91,750,000 of retained earnings was available for payment of cash
dividends without violation of the minimum net worth covenant related to
the senior promissory notes.
The company maintains a commercial paper placement agreement with a bank
to issue up to $40 million of unsecured debt obligations which requires
unused credit availability under its revolving credit agreement equal to
the amount of outstanding commercial paper. At August 31, 1997,
$13,004,000 was outstanding. There were no amounts outstanding at August
31, 1996. The weighted average interest rate on outstanding commercial
paper was 5.86% at August 31, 1997.
-27-
The aggregate annual maturities of long-term debt are as follows:
(all dollar amounts
in thousands) 1998 1999 2000 2001 2002 Thereafter
$6,290 $6,085 $6,000 $13,106 $39,319 $19,000
Annual maturities will be affected by future borrowings.
A bank participating in the revolving credit agreement has provided a
separate uncommitted revolving line of credit to the company in the amount
of up to $5 million. The specific terms of any revolving loans borrowed
pursuant to this line of credit will be negotiated at the time of the
borrowing and any revolving loans so borrowed will be payable on demand.
In addition, the company has a $2 million line of credit with interest
payable at the prime rate. The line does not require a compensating
balance or a commitment fee. There was no borrowing against these lines
at August 31, 1997.
NOTE 5. LEASE COMMITMENTS
The company has various leases for real estate, mobile equipment and
machinery which generally provide for renewal privileges or for purchase
at option prices established in the lease agreements. Property, plant and
equipment includes the following amounts for capitalized leases:
(all dollar amounts in thousands) 1997 1996
Machinery and equipment $ 1,416 $ 1,416
Allowance for amortization ( 729) ( 354)
Net value $ 687 $ 1,062
Lease amortization is included in depreciation expense.
Future minimum payments, by year and in the aggregate, under capitalized
leases and noncancelable operating leases with initial or remaining terms
of one year or more consisted of the following at August 31, 1997:
Capital Operating
(all dollar amounts in thousands) Leases Leases
1998 $ 301 $ 226
1999 86 170
2000 93
2001 33
2002 33
Thereafter 77
Total minimum payments 387 632
Amounts representing interest ( 12)
Present value of net minimum lease payments $ 375 $ 632
The future minimum payments for capitalized leases are reflected in the
aggregate annual maturities of long-term debt disclosure in Note 4.
-28-
Rental expense for all operating leases consists of:
(all dollar amounts in thousands) 1997 1996 1995
Minimum rentals $ 1,428 $ 1,323 $ 1,347
Contingent rentals 532 288 267
Totals $ 1,960 $ 1,611 $ 1,614
Contingent rentals are based upon usage.
NOTE 6. INTEREST EXPENSE AND CAPITALIZED INTEREST
Total Net
Interest Capitalized Interest
(all dollar amounts in thousands) Expense Interest Expense
1997 $ 3,768 $ 248 $ 3,520
1996 3,698 912 2,786
1995 2,423 735 1,688
NOTE 7. RETIREMENT PLAN
Substantially all employees are covered under retirement plans. The
defined benefit plans covering salaried employees provide benefits based
on final average pay formulas; the plans covering hourly employees provide
benefits based on years of service and fixed benefit amounts for each year
of service. The plans are funded in accordance with federal laws and
regulations.
The company selected measurement dates of plan assets of May 31, 1997 and
1996.
The components of net periodic pension cost follow:
(all dollar amounts in thousands) 1997 1996 1995
Service cost $ 2,790 $ 2,345 $ 2,199
Interest cost 5,097 4,266 3,920
Actual return on assets ( 7,808) ( 11,019) ( 4,365)
Net amortization and deferral 4,654 7,625 1,201
Net pension cost $ 4,733 $ 3,217 $ 2,955
-29-
The following table sets forth the benefit obligations and funded status
of the plans at August 31:
1997 1996
Plans Plans Plans Plans
With Assets With Assets With Assets With Assets
Exceeding Less Than Exceeding Less Than
Accumulated Accumulated Accumulated Accumulated
Benefit Benefit Benefit Benefit
Obligation Obligation Obligation Obligation
Actuarial present value of
benefit obligations:
Vested benefits ($12,228) ($52,978) ($29,548) ($25,550)
Nonvested benefits ( 2,813) ( 10,817) ( 5,402) ( 3,867)
Accumulated benefit obligations ( 15,041) ( 63,795) ( 34,950) ( 29,417)
Additional amounts related to
projected salary increases ( 4,599) ( 518) ( 4,379) ( 421)
Projected benefit obligation ( 19,640) ( 64,313) ( 39,329) ( 29,838)
Plan assets at market value at
May 31 19,475 47,987 41,214 18,007
Plan assets in excess of (less
than) projected benefit
obligation ( 165) ( 16,326) 1,885 ( 11,831)
Unrecognized net loss (gain) ( 1,289) 1,310 ( 4,831) 732
Unrecognized prior service costs 673 14,691 5,235 8,524
Unrecognized initial net
obligation (asset) ( 1,051) 311 ( 1,339) 500
Cash contributions to plans
subsequent to May 31 397 1,251 109
Adjustment to recognize minimum
liability ( 17,045) ( 9,335)
Net pension asset (liability)
recognized in the consolidated
balance sheets ($ 1,435) ($15,808) $ 1,059 ($11,410)
Projected benefit obligations were determined using an assumed discount
rate of 7.5% and an assumed rate of increases in future compensation
levels of 5.0%. The assumed long-term rate of return on plan assets was
8.0%. Plan assets consist principally of publicly traded stocks and fixed
income securities and include Wausau Paper Mills Company common stock with
a market value of $1,440,300 in 1997 and $1,632,000 in 1996.
For plans where the accumulated benefit obligation exceeds the fair value
of plan assets, a minimum pension liability has been established to
recognize the plans' underfunding, with an offsetting intangible asset
and reduction to stockholders equity, net of deferred taxes.
The company also sponsors defined contribution pension plans, several of
which provide for company contributions based on a percentage of employee
contributions. The cost of such plans totaled $452,000 in 1997, $314,000
in 1996 and $232,000 in 1995.
The company has deferred compensation or supplemental retirement
agreements with certain present and past key officers and employees. The
principal cost of such plans is being or has been accrued over the period
of active employment to the full eligibility date. The annual cost of the
deferred compensation and supplemental retirement agreements does not
represent a material amount.
The company sponsors unfunded defined benefit postretirement health and
life insurance plans that cover substantially all employees reaching
normal retirement age while working for the company. Benefits and
eligibility for various employee groups vary by location and union
agreements. Generally, employees are eligible after reaching age 55 or 62
and meeting minimum service requirements. At age 65, the benefits become
coordinated with Medicare. The company funds the benefit costs on a
current basis.
-30-
Postretirement benefit cost includes the following components:
(all dollar amounts in thousands) 1997 1996 1995
Service cost $ 1,018 $ 911 $ 933
Interest cost 2,173 2,033 1,984
Net periodic postretirement benefit cost $ 3,191 $ 2,944 $ 2,917
The plans' status at August 31, were as follows:
(all dollar amounts in thousands) 1997 1996
Actuarial present value of benefit obligation:
Retirees $ 10,591 $ 10,188
Fully eligible active participants 10,024 8,236
Other active participants 15,692 10,982
Accumulated postretirement benefit obligation 36,307 29,406
Unrecognized net gain (loss) (1,988) 2,443
Accrued postretirement benefit liability $ 34,319 $ 31,849
For 1997, the assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 8% declining by 1%
annually for three years to an ultimate rate of 5%. The weighted average
discount rate was 7.5%.
For 1996, the assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation was 9% declining by 1%
annually for four years to an ultimate rate of 5%. The weighted average
discount rate was 7.5%.
A one-percentage-point increase in the assumed health care cost trend
rates would increase the accumulated postretirement benefit obligation as
of August 31 by approximately $4,977,000 or 13.7% in 1997 and $3,801,000
or 12.9% in 1996. The effect of this change on the aggregate of the
service and interest cost would be an increase of $498,000 or 15.6% in
1997 and $441,000 or 15.0% in 1996.
NOTE 8. INCOME TAXES
Deferred tax assets and liabilities are determined based on the estimated
future tax effects of temporary differences between the financial
statement and tax bases of assets and liabilities, as measured by the
current enacted tax rates. Deferred tax expense is the result of changes
in the deferred tax asset and liability.
-31-
The provision for income taxes is comprised of the following:
(all dollar amounts in thousands) 1997 1996 1995
Currently payable
Federal $ 20,768 $ 17,776 $ 13,487
State 2,102 1,638 1,532
22,870 19,414 15,019
Deferred
Federal 6,021 5,668 4,197
State 609 518 384
6,630 6,186 4,581
Totals $ 29,500 $ 25,600 $ 19,600
A reconciliation between taxes computed at the federal statutory rate and
the company's effective tax rate follows:
(all dollar amounts in thousands) 1997 1996 1995
Federal statutory tax rate $ 27,440 35.0% $ 23,390 35.0% $ 17,798 35.0%
State taxes (net of federal
tax benefits) 1,922 2.4 1,472 2.2 1,324 2.6
Other 138 .2 738 1.1 478 .9
Effective tax $ 29,500 37.6% $ 25,600 38.3% $ 19,600 38.5%
-32-
The major temporary differences that give rise to the deferred tax assets
and liabilities at August 31, 1997 and 1996 are as follows:
(all dollar amounts in thousands) 1997 1996
Deferred tax asset:
Allowances on accounts receivable $ 1,242 $ 865
Accrued compensated absences 1,940 1,772
Stock appreciation rights plans 1,328 982
Inventories 2,226 2,105
Postretirement benefits 13,292 12,627
Other 1,587 1,963
Gross deferred tax asset 21,615 20,314
Deferred tax liability:
Property, plant and equipment ( 62,163) ( 54,823)
Other ( 429) ( 1,272)
Gross deferred tax liability ( 62,592) ( 56,095)
Net deferred tax liability ($ 40,977) ($ 35,781)
The total deferred tax liabilities (assets) as presented in the
accompanying consolidated balance sheets are as follows:
(all dollar amounts in thousands) 1997 1996
Net long-term deferred tax liabilities $ 49,301 $ 43,469
Net current deferred tax assets ( 8,324) ( 7,688)
Net deferred tax liability $ 40,977 $ 35,781
NOTE 9. STOCK OPTIONS AND APPRECIATION RIGHTS
The company maintains the 1991 Employee Stock Option Plan. The plan
specifies purchase price, time and method of exercise. Payment of the
option price may be made in cash or by tendering an amount of common stock
having a fair market value equal to the option price.
Options are granted for terms up to 20 years, the option price being equal
to the fair market value of the company's common stock at the date of
grant for incentive and non-qualified options.
During 1997, 67,000 options were granted under the plan to be earned in
the current year based upon the satisfaction of operating goals set forth
in the agreement. A total of 43,000 options were earned based upon actual
operating results. During 1996, 64,375 options were earned based upon the
satisfaction of operating goals set forth in the agreement. A total of
46,062 options granted in 1995 terminated when operating goals were not
met.
-33-
The following table summarizes the activity relating to the company's
stock option plans:
1997 1996 1995
Stock Options: Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Options outstanding at
beginning of year 399,030 $17.99 308,792 $15.43 439,426 $16.19
Granted 67,000 17.69 143,125 18.95 132,687 19.18
Terminated (27,125) 17.78 ( 53,390) 17.01
Exercised ( 2,444) 13.13 ( 52,887) 5.61 (209,931) 9.75
Options outstanding at
end of year 436,461 17.99 399,030 17.99 308,792 15.43
Options exercisable at
end of year 432,336 17.99 384,905 17.88 280,832 15.22
<FN>
All shares and option prices have been restated to reflect the
five-for-four stock split occurring in 1996 and the 10% stock dividend
occurring in 1995.
Effective September 1, 1996, the company has adopted Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation." As permitted under SFAS No. 123, the company will continue
to measure compensation cost for stock option plans using the "intrinsic
value based method" prescribed under APB No. 25, "Accounting for Stock
Issued to Employees." Accordingly, no compensation cost has been
recognized for the stock option plans. If compensation cost had been
determined consistent with the provisions of SFAS No. 123, which
prescribes the "fair value based method" on the grant date, earnings per
share would have been reduced by $.01 and $.02 for the years ended
August 31, 1997 and 1996, respectively.
The weighted-average grant-date exercise prices and weighted-average fair
values for options granted are as follows:
1997 1996
Exercise price equals market price
Exercise price ---- $18.50
Fair Value ---- 7.21
Exercise price less than market price
Exercise price $17.69 $19.36
Fair value 8.67 8.14
The fair value of each option grant has been estimated on the grant date
using the Black-Scholes option pricing model based on the following
weighted-average assumptions:
1997 1996
Risk-free interest rate 6.27% 5.97%
Expected life in years 5 5
Price volatility 32.1% 31.5%
Dividend yield * 0 0
<FN>
* Dividend yield is assumed to be zero because dividend equivalents
were granted in tandem with the options granted. As such,
dividends do not reduce the economic value of the options.
-34-
The 1988 Management Incentive Plan entitles certain management employees
the right to receive cash equal to the sum of the appreciation in value of
the stock and the hypothetical value of cash dividends which would have
been paid on the stock covered by the grant assuming reinvestment in
company stock. The stock appreciation rights granted may be exercised in
whole or in such installments and at such times as specified in the grant.
In all instances, the rights lapse if not exercised within 20 years of the
grant date. Compensation expense is recorded with respect to the rights
based upon the quoted market value of the shares and the exercise
provisions.
The following table summarizes the activity relating to the company's
stock appreciation rights plans:
STOCK APPRECIATION RIGHTS:
1997 1996 1995
Rights outstanding at beginning of
year (number of shares) 163,728 179,555 184,555
Exercised ( 15,827) ( 5,000)
Rights outstanding at end of year
(number of shares) 163,728 163,728 179,555
Rights exercisable at end of year
(number of shares) 163,728 163,728 179,555
Price range of stock appreciation
rights exercised $ 4.46 $ 5.88
Price range of outstanding
stock appreciation rights $4.46-6.26 $4.46-6.26 $4.46-6.26
<FN>
All shares and price ranges have been restated to reflect the
five-for-four stock split occurring in 1996 and the 10% stock dividend
occurring in 1995.
The company maintains the 1991 Dividend Equivalent Plan. Participants are
entitled to receive cash based on the hypothetical value of cash dividends
which would have been paid on the stock covered by the grant assuming
reinvestment in company stock. During 1997, 67,000 dividend equivalents
were granted under the plan to be earned in the current year based upon
the satisfaction of operating goals set forth in the agreement. A total
of 43,000 dividend equivalents were earned based upon actual operating
results. During 1996, 64,375 dividend equivalents were earned based upon
the satisfaction of operating goals set forth in the agreement. All
dividend equivalents granted in 1995 terminated when operating goals were
not met.
-35-
DIVIDEND EQUIVALENTS: 1997 1996 1995
Equivalents outstanding at beginning of
year (number of shares) 276,347 142,999 142,999
Granted 67,000 143,125 46,063
Exercised ( 5,569) ( 9,777)
Terminated ( 24,000) ( 46,063)
Equivalents outstanding at end of year
(number of shares) 313,778 276,347 142,999
Equivalents exercisable at end of year
(number of shares) 313,778 276,347 142,999
<FN>
All shares have been restated to reflect the five-for-four stock split
occurring in 1996 and the 10% stock dividend occurring in 1995.
The pre-tax impact on earnings of all stock option discounts, dividend
equivalents and stock appreciation rights for the years ended August 31,
1997, 1996 and 1995 was expense of $1,092,000, $78,000 and $79,000,
respectively.
NOTE 10. ACQUISITION OF OTIS SPECIALTY PAPERS
On May 12, 1997, the company acquired the business and assets of Otis
Specialty Papers ("Otis"). The acquisition was accounted for using the
purchase method of accounting. The financial statements reported herein
include the net sales, operating profit and net earnings of Otis from the
date of purchase. The following table presents unaudited pro forma
condensed results of operations for the years ended August 31, 1997 and
1996 as if the acquisition were completed at the beginning of the period:
(Unaudited) (Unaudited)
1997 1996
Net Sales $631,766 $618,225
Operating Profit 87,124 72,005
Net Earnings 51,005 40,961
Net Earnings per Common Share $ 1.40 $ 1.11
The unaudited pro forma financial information includes certain assumptions
or adjustments, not material in amount, which the company believes are
necessary to fairly present such information. Historical costs
representing the seller's corporate allocations, interest expense and
one-time expenses related to the sale of Otis are included in the pro
forma information. The pro forma information does not purport to
represent what the company's results of operations would actually have
been if this transaction had occurred at the beginning of the earliest
period presented.
NOTE 11. RESEARCH EXPENSES
Research expenses charged to operations were $1,503,000 in 1997,
$1,381,000 in 1996 and $1,219,000 in 1995.
-36-
NOTE 12. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
On August 24, 1997, Wausau Paper Mills Company, Mosinee Paper Corporation
("Mosinee") and WPM Holdings, Inc., a wholly-owned subsidiary of the
company ("Merger Sub"), entered into an Agreement and Plan of Merger (the
"Merger Agreement") pursuant to which Merger Sub will be merged with and
into Mosinee (the "Merger") with Mosinee being the surviving corporation.
Under the terms of the Merger Agreement, which was unanimously approved by
the Boards of Directors of the company and Mosinee, each outstanding share
of Mosinee common stock will be converted into the right to receive 1.4
shares of Wausau common stock, with cash paid in lieu of fractional
shares. The Merger, which is subject to approval by the shareholders of
both the company and Mosinee, regulatory approval and other customary
conditions, will be accounted for as a pooling of interests and is
expected to close by the end of calendar 1997.
The company is involved in various legal proceedings in the normal course
of business. It is the opinion of management that any judgment or
settlement resulting from pending or threatened litigation would not have
a material adverse effect on the financial position or on the operations
of the company.
As of August 31, 1997, the company was committed to spend approximately
$34.0 million to complete capital projects which were in various stages of
completion.
On November 9, 1996, the company's pulp mill in Brokaw, Wisconsin
experienced damage to two of its four high-pressure cooking vessels known
as digesters. The digesters were out of production for approximately five
months resulting in a significant loss of pulp production and extensive
repair work. Insurance was in effect to cover property damage and
business interruption costs. Approximately $3.5 million in pre-tax
expense was recorded in fiscal 1997 for the potential uninsured operating
expenses, including insurance deductibles. The company is in discussions
with its insurers as to insurance proceeds to which the company believes
it is entitled. Insurance proceeds under the company's property damage
claim will be recorded upon receipt or final settlement of the claim.
Insurance proceeds under the business interruption claim may exceed the
insurance recovery receivable recorded in fiscal 1997. Additional
proceeds from the business interruption claim will be included in income
when received but are not expected to be material in amount.
In July 1996, the company signed a natural gas transportation agreement
with the Portland Natural Gas Transmission System (PNGTS). Under the
terms of the agreement, PNGTS will construct necessary gas supply and
delivery equipment to the company's Groveton, New Hampshire mill. The
company is committed to the transportation of a fixed volume of natural
gas over the 20-year agreement. Capital improvements to the Groveton
mill's power plant will be required to take advantage of this agreement.
Transportation of natural gas to the Groveton mill is scheduled to begin
in fiscal 1999.
NOTE 13. FUTURES CONTRACTS
At August 31, 1997, the company was party to various futures contracts for
the purchase of pulp and natural gas. The pulp contracts require the
company to purchase 2,424 tons of pulp during fiscal 1998. The price of
the pulp varies from $531 to $557 per ton. The natural gas contracts
require the company to purchase 1,150,000 decatherms of natural gas during
fiscal 1998. The delivered price of 700,000 decatherms varies from $2.77
to $3.00 per decatherm. The remaining 450,000 decatherms are to be
purchased at the lower of the contract cap price of $3.42 per decatherm or
market. At August 31, 1997, the company's futures contracts have no
carrying
-37-
value. The fair value of the contracts and the total deferred
gain on the contracts are immaterial at August 31, 1997.
NOTE 14. MAJOR CUSTOMERS
One customer accounted for 13.9% of net sales aggregating $79,462,000,
12.7% of net sales aggregating $68,797,000 and 12.0% of net sales
aggregating $61,732,000 in 1997, 1996 and 1995, respectively. Another
customer accounted for 10.9% of net sales aggregating $62,416,000 and
11.5% of net sales aggregating $62,563,000 in 1997 and 1996, respectively.
NOTE 15. FAIR VALUES OF FINANCIAL INSTRUMENTS
The fair value of the following financial instruments is not materially
different from the carrying value: cash and cash equivalents, long-term
debt, capital leases and futures contracts.
The following methods and assumptions were used by the company in
estimating fair values of financial instruments:
Cash and cash equivalents - The carrying amount approximates fair value
due to the relatively short period to maturity for these instruments.
Long-term debt - The fair value of the company's long-term debt is
estimated based on current rates offered to the company for debt of the
same remaining maturities.
Capital leases - The carrying amount reported in the balance sheets for
capital leases approximates fair value.
Futures contracts - The fair values of the company's pulp and natural gas
futures contracts were estimated using the prices published by Lynch
Futures Inc. and NYMEX, respectively, the contract price and the remaining
pulp and natural gas to be purchased under the contracts.
-38-
QUARTERLY DATA (UNAUDITED)
(all dollar amounts in thousands,
except per share data) 1997 1996
Fourth Third Second First Fourth Third Second First
Net Sales $161,099 $143,555 $125,965 $139,639 $132,729 $139,446 $128,590 $141,904
Gross Profit 32,547 31,736 23,396 26,340 30,005 31,048 18,605 19,628
Operating Profit 22,846 23,785 16,565 18,324 21,997 23,781 11,533 12,212
Net earnings 13,466 14,451 9,868 11,114 13,113 14,094 6,717 7,305
Per share $0.37 $0.40 $0.27 $0.30 $0.36 $0.38 $0.18 $0.20
Per Share basis:
Cash dividends* $ 0.0625 $0.0625 $ 0.125 $ 0.055 $ 0.055 $0.11
Common stock price
(closing)**
High $ 22.38 $ 20.50 $ 21.38 $ 20.38 $ 22.75 $ 24.13 $ 23.50 $ 22.70
Low $ 18.50 $ 17.25 $ 17.88 $ 17.50 $ 16.25 $ 20.50 $ 20.00 $ 18.60
<FN>
*Dividends reported as of declaration date. During each year presented,
two quarterly dividends were declared in the second quarter.
**Such prices reflect the high and low "closing" price quotation on The
Nasdaq National Market and do not reflect markups, markdowns or
commissions and may not necessarily reflect actual transactions.
The estimated effective tax rate utilized for the first three quarters of
each fiscal year was different than the final annual effective rate and
the adjustment of income taxes was all reflected in the quarter ended
August 31 of each fiscal year.
All per share data has been restated to reflect the five-for-four stock
split occurring in 1996.
-39-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information relating to directors of the company is incorporated into this
Form 10-K by this reference to the material set forth in the table under
"INFORMATION RELATING TO THE WAUSAU ANNUAL MEETING-Election of Directors"
in the company's proxy statement relating to the 1997 annual meeting of
shareholders ("1997 Proxy Statement"). Information relating to the
identification of executive officers of the company is found in Part I of
this Form 10-K. Information relating to compliance with Section 16(a) of
the Securities Exchange Act of 1934 is incorporated by this reference to
the material set forth under "INFORMATION RELATING TO THE WAUSAU ANNUAL
MEETING-Section 16(a) Beneficial Ownership Reporting Compliance" in
the 1997 Proxy Statement.
Item 11. EXECUTIVE COMPENSATION.
Information relating to director compensation is incorporated into this
Form 10-K by this reference to the material set forth in the 1997 Proxy
Statement under "INFORMATION RELATING TO THE WAUSAU ANNUAL
MEETING-Director Compensation." Information relating to the compensation
of executive officers is incorporated into this Form 10-K by this
reference to (1) the material set forth under "INFORMATION RELATING TO THE
WAUSAU ANNUAL MEETING-Compensation of Executive Officers", ending with the
material set forth under "INFORMATION RELATING TO THE WAUSAU ANNUAL
MEETING-Pension Plan and Other Benefits", and (2) the material set forth
under "INFORMATION RELATING TO THE WAUSAU ANNUAL MEETING-Committee
Interlocks and Insider Participation", in the 1997 Proxy Statement.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Information relating to security ownership of certain beneficial owners
and management is incorporated into this Form 10-K by this reference to
the material set forth in the 1997 Proxy Statement under "INFORMATION
RELATING TO THE WAUSAU ANNUAL MEETING-Beneficial Ownership of Wausau
Common Shares."
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K.
(a) Financial statements and financial statement schedules, filed as
part of this report and required by Item 14(d), are set forth in
Part II, Item 8.
(b) Reports on Form 8-K.
Form 8-K dated August 24, 1997 relating to the merger of the
Registrant. See Item 1.
(c) Exhibits required by Item 601 of Regulation S-K.
The following exhibits are filed with the Securities and Exchange
Commission as part of this report.
Incorporated
Exhibit <dagger>
2.1 Agreement and Plan of Merger dated August 24, 1997
among Registrant, Mosinee Paper Corporation and
WPM Holdings, Inc. 99.1(1)
3.1 Articles of Incorporation, as amended December 21,
1995 3(2)
3.2 Bylaws, as restated July 17, 1992 3(b)(3)
4.1 Articles and Bylaws (see Exhibits 3.1 and 3.2)
10.1 Executive Officers' Deferred Compensation
Retirement Plan, as amended September 18, 1996* 10(a)(4)
10.2 Incentive Compensation Plans, as amended
September 17, 1997 (Printing and Writing Division
and Technical Specialty Division)*
10.3 Corporate Management Incentive Plan, as amended
September 18, 1996* 10(c)(4)
10.4 1988 Stock Appreciation Rights Plan, as amended
April 17, 1991* 10(d)(4)
10.5 1988 Management Incentive Plan, as amended
April 17, 1991* 10(e)(4)
10.6 1990 Stock Appreciation Rights Plan, as amended
April 17, 1991* 10(f)(4)
10.7 Deferred Compensation Agreement dated March 2,
1990, as amended July 1, 1994* 10(h)(5)
10.8 1991 Employee Stock Option Plan*
-41-
10.9 1991 Dividend Equivalent Plan* 10(i)(6)
10.10 Supplemental Retirement Benefit Plan dated
January 16, 1992, as amended November 13, 1995* 10(7)
10.11 Directors' Deferred Compensation Plan* 10(k)(6)
10.12 Director Retirement Benefit Policy* 10(o)(8)
10.13 Transition Benefit Agreement with President and
CEO
27.1 Financial Data Schedule
29.1 Subsidiaries as of August 31, 1997
*All exhibits represent executive compensation plans and arrangements.
<bullet> Where exhibit has been previously filed and incorporated
herein by reference, exhibit numbers set forth herein
correspond to the exhibit number of such exhibit in the
following reports of the registrant (Commission File No.
0-7574) filed with the Securities and Exchange Commission.
(1) Current report on Form 8-K dated August 24, 1997.
(2) Quarterly report on Form 10-Q for the quarterly period ended
February 29, 1996.
(3) Annual report on Form 10-K for the fiscal year ended August 31, 1992.
(4) Annual report on Form 10-K for the fiscal year ended August 31, 1996.
(5) Annual report on Form 10-K for the fiscal year ended August 31, 1994.
(6) Quarterly report on Form 10-Q for the quarterly period ended
November 30, 1996.
(7) Quarterly report on Form 10-Q for the quarterly period ended
November 30, 1995.
(8) Annual report on Form 10-K for the fiscal year ended August 31, 1993.
-42-
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Allowance Allowance
for Allowance for
(all dollar amounts in Doubtful for Pending
thousands) Total Accounts Discounts Credits
Balance August 31, 1994 $ 4,644 $ 1,335 $ 517 $ 2,792
Charges to costs and expenses 17,099 141 7,781 9,177
Deductions ( 16,663) ( 3) ( 7,658) ( 9,002)
Balance August 31, 1995 $ 5,080 $ 1,473 $ 640 $ 2,967
Charges to costs and expenses 17,599 48 8,003 9,548
Deductions ( 16,675) ( 100) ( 8,042) ( 8,533)
Balance August 31, 1996 $ 6,004 $ 1,421 $ 601 $ 3,982
Charges to costs and expenses 18,372 215 8,139 10,018
Deductions ( 18,501) ( 77) ( 8,052) ( 10,372)
Balance August 31, 1997 $ 5,875 $ 1,559 $ 688 $ 3,628
-43-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant had duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
WAUSAU PAPER MILLS COMPANY
/s/ STEVEN A. SCHMIDT
Steven A. Schmidt
Vice President Finance,
Secretary and Treasurer
(Principal Accounting and
Financial Officer)
Date: October 31, 1997
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/ SAN W. ORR, JR. /s/ DAVID B. SMITH, JR.
San W. Orr, Jr. David B. Smith, Jr.
October 31, 1997 October 31, 1997
Chairman of the Board Director
/s/ DANIEL D. KING /s/ GARY W. FREELS
Daniel D. King Gary W. Freels
October 31, 1997 October 31, 1997
President and Chief Director
Executive Officer
(Principal Executive Officer)
Director
/s/ HARRY R. BAKER
Harry R. Baker
October 31, 1997
Director
-44-
EXHIBIT INDEX<dagger>
TO
FORM 10-K
OF
WAUSAU PAPER MILLS COMPANY
FOR THE PERIOD ENDED AUGUST 31, 1997
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. <section>232.102(d))
EXHIBIT 10 - MATERIAL CONTRACTS*
10.2 Incentive Compensation Plans, as amended
September 17, 1997 (Printing and Writing Division
and Technical Specialty Division)
10.8 1991 Employee Stock Option Plan
10.13 Transition Benefit Agreement with President and CEO
*All exhibits represent executive compensation plans and
arrangements.
EXHIBIT 21.1 - SUBSIDIARIES OF THE REGISTRANT
Subsidiaries of the Registrant as of August 31, 1997
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
<dagger>Exhibits required by Item 601 of Regulation S-K
which have been previously filed and are incorporated by
reference are set forth in Part IV, Item 14(c) of the Form
10-K to which this Exhibit Index relates.
-45-