FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from____________ to _________________
Commission file number: 0-7574
WAUSAU-MOSINEE PAPER CORPORATION
(Exact name of registrant as specified in charter)
WISCONSIN 39-0690900
(State of incorporation) (I.R.S Employer Identification
Number)
1244 KRONENWETTER DRIVE
MOSINEE, WISCONSIN 54455-9099
(Address of principal executive office)
Registrant's telephone number, including area code: 715-693-4470
Indicate by check mark 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
The number of common shares outstanding at October 31, 1998, was
54,397,539.
WAUSAU-MOSINEE PAPER CORPORATION
AND SUBSIDIARIES
INDEX
PAGE NO.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of
Income, Three Months and Nine Months
Ended September 30, 1998 (unaudited) and
September 30, 1997 (unaudited) 1
Condensed Consolidated Balance
Sheets, September 30, 1998 (unaudited)
and December 31, 1997 (derived from
audited financial statements) 2
Condensed Consolidated Statements
of Cash Flows, Nine Months
Ended September 30, 1998 (unaudited)
and September 30, 1997 (unaudited) 3
Notes to Condensed Consolidated
Financial Statements 4
Item 2. Management's Discussion and
Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 18
-i-
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
WAUSAU-MOSINEE PAPER CORPORATION AND SUBSIDIARIES
Three Months Ended Nine Months Ended
September 30, September 30,
($ in thousands, except share data - unaudited) 1998 1997 1998 1997
Net sales $241,603 $248,578 $722,899 $694,951
Cost of sales 199,340 194,231 585,640 539,951
Gross profit 42,263 54,347 137,259 155,000
Operating expenses:
Selling 6,185 6,345 19,256 19,355
Administrative 2,625 14,439 23,219 31,849
Restructuring 0 0 37,700 0
Total operating expenses 8,810 20,784 80,175 51,204
Operating profit 33,453 33,563 57,084 103,796
Interest expense ( 1,738) (2,220) (5,608) (6,076)
Other (54) 372 251 615
Earnings before income taxes 31,661 31,715 51,727 98,335
Provision for income taxes 12,050 11,992 19,550 37,320
Net earnings $ 19,611 $ 19,723 $ 32,177 $ 61,015
Net earnings
per share - Basic $ 0.34 $ 0.34 $ 0.56 $ 1.05
Net earnings
per share - Diluted $ 0.34 $ 0.34 $ 0.56 $ 1.05
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CONSOLIDATED BALANCE SHEETS
WAUSAU-MOSINEE PAPER CORPORATION AND SUBSIDIARIES
($ in thousands*) September 30, December 31,
ASSETS 1998 1997
Current Assets
Cash and cash equivalents $ 5,185 $ 2,584
Receivables, net 79,330 69,674
Refundable income taxes 0 2,799
Inventories 134,208 143,610
Deferred income taxes 17,968 15,152
Other current assets 2,189 1,110
Total current assets 238,880 234,929
Property, plant and equipment - net 617,282 604,930
Other assets 30,322 32,205
TOTAL ASSETS $ 886,484 $ 872,064
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 26,076 $ 6,207
Accounts payable 50,428 53,181
Accrued and other liabilities 60,660 48,888
Total current liabilities 137,164 108,276
Long-Term Liabilities
Long-term debt 121,452 140,500
Deferred income taxes 90,010 92,947
Other long-term liabilities 102,087 88,926
Total long-term liabilities 313,549 322,373
Commitments and contingencies --- ---
Preferred stock of subsidiary 1,255 1,255
Shareholders' equity 434,516 440,160
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 886,484 $ 872,064
<FN>
*The consolidated balance sheet at September 30, 1998 is unaudited. The
December 31, 1997 consolidated balance sheet is derived from audited
financial statements.
-2-
CONSOLIDATED STATEMENTS OF CASH FLOWS
WAUSAU-MOSINEE PAPER CORPORATION AND SUBSIDIARIES
Nine Months Ended
September 30,
($ in thousands - unaudited) 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 32,177 $ 61,015
Provision for depreciation, depletion
and amortization 37,325 34,737
Recognition of deferred revenue (30) (30)
Provision for losses on accounts receivable 124 (280)
Gain on property, plant
and equipment disposals (13) (296)
Deferred income taxes (5,753) 5,234
Changes in operating assets and liabilities:
Accounts receivable (9,780) (16,770)
Inventories 9,402 2,390
Other assets 207 (12,464)
Accounts payable and other liabilities 16,780 7,208
Accrued income taxes 9,038 1,851
NET CASH PROVIDED BY OPERATING ACTIVITIES 89,477 82,595
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (54,559) (48,969)
Acquisition of companies 0 (61,382)
Proceeds from property, plant and
equipment disposals 9,468 464
Cash distributed from IRB trust fund 0 1,297
NET CASH USED IN INVESTING ACTIVITIES (45,091) (108,590)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under credit agreements 821 47,246
Dividends paid (11,684) (12,069)
Proceeds from stock options exercised 1,741 32
Payments for purchase of company stock (32,663) (10,927)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (41,785) 24,282
Net increase (decrease) in cash and cash equivalents 2,601 (1,713)
Cash and cash equivalents at beginning of year 2,584 482
Cash and cash equivalents at end of period $ 5,185 $ (1,231)
Supplemental Cash Flow Information:
Interest paid - net of amount capitalized $ 6,006 $ 6,066
Income taxes paid $ 16,302 $ 30,235
-3-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The accompanying condensed financial statements, in the opinion
of management, reflect all adjustments which are normal and
recurring in nature and which are necessary for a fair statement
of the results for the periods presented. Some adjustments
involve estimates which may require revision in subsequent
interim periods or at year-end. In all regards, the financial
statements have been presented in accordance with generally
accepted accounting principles. Refer to notes to the financial
statements which appear in the Annual Report on Form 10-K for
the year ended August 31, 1997, for the company's accounting
policies which are pertinent to these statements.
Note 2. On December 17, 1997, Wausau Paper Mills Company ("Wausau")
completed a merger with Mosinee Paper Corporation ("Mosinee")
in which Mosinee became a wholly-owned subsidiary of Wausau.
Simultaneous with the consummation of the merger, Wausau changed
its name to Wausau-Mosinee Paper Corporation ("the company").
Wausau issued 1.4 shares of common stock for each share of
Mosinee outstanding common stock. A total of 21,281,795 shares
of the company's common stock were issued as a result of the
merger (after adjustment for fractional shares).
The merger qualified as a tax-free exchange and was accounted
for as a pooling of interests. Accordingly, all prior period
financial statements presented have been restated to include the
financial position, results of operations, and cash flows for
Wausau and Mosinee combined. Prior to the merger, Wausau's
fiscal year-end was August 31 and Mosinee's was December 31.
Subsequent to the merger, the company adopted a calendar
year-end.
Note 3. In connection with the merger, the company has implemented a
plan to reduce its work force by over 8%. An after-tax expense
of $23.4 million ($37.7 million pretax) or $0.40 per share was
recorded in the first quarter 1998 to cover the cost of this
work force reduction initiative as well as smaller amounts for
other merger related costs.
Note 4. Selling and administrative expenses include expenses for
stock-based incentive plans calculated by using the average
price of the company's stock at the close of the reporting
period as if all grants under such plans had been exercised on
that day. For the three months ended September 30, 1998, these
plans resulted in after-tax income of $4,067,000 or $0.07 per
share, compared to an after-tax expense of $3,213,000 or $0.06
per share for the same period last year. Year-to-date, 1998,
these plans resulted in after-tax income of $2,800,000 or $0.05
per share, compared to after-tax expense of $3,215,000 or $.06
per share for the same period of 1997.
Note 5. Accounts receivable consisted of the following:
($ in thousands) September 30, December 31,
1998 1997
Customer Accounts $85,559 $74,482
Misc. Notes and Accounts Receivable 3,124 3,931
88,683 78,413
Less: Allowances for Discounts,
Doubtful Accounts and Pending Credits 9,353 8,739
Receivables, Net $79,330 $69,674
-4-
Note 6. The various components of inventories were as follows:
($ in thousands) September 30, December 31,
1998 1997
Raw Materials and Supplies $ 79,006 $ 87,486
Finished Goods and Work in Process 73,415 76,279
Subtotal 152,421 163,765
Less: LIFO Reserve (18,213) (20,155)
Net inventories $ 134,208 $ 143,610
Note 7. The accumulated depreciation on fixed assets was $416,830,000
as of September 30, 1998, and $385,679,000 as of December
31, 1997.
Note 8. Earnings per share amounts prior to 1998 have been restated as
required to comply with Statement of Financial Accounting
Standards No. 128, Earnings Per Share.
Note 9. A summary of long-term debt excluding current maturities is as
follows:
($ in thousands) September 30, December 31,
1998 1997
Bonds, Mortgages and Similar Debt $ 121,452 $ 140,449
Capitalized Leases 0 51
Total Long-Term Debt $ 121,452 $ 140,500
Note 10. Dividends declared per share were as follows:
Three Months Ending Nine Months Ending
September 30, September 30, September 30, September 30,
1998* 1997 1998* 1997
$.00 $0.0625 $.14 $.1875
<FN>
*Due to the change in fiscal year from an August 31 year-end to a
December 31 year-end, no dividend was declared in the first quarter
of 1998. Two quarterly dividends were declared in the second quarter
of 1998. No quarterly dividend was declared in the third quarter of
1998, however on October 21, 1998 a cash dividend of $.07 per share was
declared. The cash dividend is payable November 16, 1998 to
shareholders of record as of November 6, 1998.
Note 11. Certain legal proceedings are described under Part II, Item 1
of this report.
-5-
Note 12. Interim Segment Information:
The company will adopt Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" for the year ended December 31, 1998, as required.
The company has elected to disclose certain interim period segment
information beginning with the 1998 second quarter report.
Wausau-Mosinee Paper Corporation is organized into three operating
groups and a corporate staff. The Specialty Paper Group produces
specialty papers at its manufacturing facilities in Rhinelander,
Wisconsin; Mosinee, Wisconsin; Jay, Maine; and Middletown, Ohio.
The Printing and Writing Group produces a broad line of premium
printing and writing grades at manufacturing facilities in Brokaw,
Wisconsin and Groveton, New Hampshire. The Printing and Writing
Group also includes two converting facilities which produce
wax-laminated roll wrap and related specialty finishing and
packaging products and a converting facility which produces school
papers. The Towel and Tissue Group manufactures a complete line
of towel, tissue, soap and dispensing systems for the
"away-from-home" market. The Towel and Tissue Group
operates a paper mill in Middletown, Ohio and a converting facility
in Harrodsburg, Kentucky.
Asset information by segment is as follows:
($ in thousands-unaudited) September 30, December 31,
1998 1997
Segment Assets
Specialty Paper $ 361,751 $ 366,489
Printing & Writing 303,599 304,102
Towel & Tissue 175,025 166,146
Corporate & Unallocated* 46,109 35,327
$ 886,484 $ 872,064
<FN>
* Segment assets do not include intersegment accounts
receivable, cash, deferred tax assets and certain other assets
which are not identifiable with industry segments.
-6-
Sales and operating profit information by segment is as follows:
($ in thousands-unaudited) Three Months Nine Months
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
1998 1997 1998 1997
Net Sales External Customers
Specialty Paper $102,964 $111,114 $323,452 $307,499
Printing & Writing 99,056 100,109 288,166 286,961
Towel & Tissue 39,583 37,355 111,281 100,491
$241,603 $248,578 $722,899 $694,951
Net Sales - Intersegment
Specialty Paper $ 3,665 $ 3,269 $ 11,332 $ 7,195
Printing & Writing 452 321 1,222 665
Towel & Tissue 11 2 75 72
$ 4,128 $ 3,592 $ 12,629 $ 7,932
Operating Profit
Specialty Paper $ 8,934 $ 14,968 $ 37,985 $ 45,410
Printing & Writing 14,056 17,770 40,238 48,979
Towel & Tissue 6,051 9,260 20,097 24,936
Total Reportable Segment
Operating Profit 29,041 41,998 98,320 119,325
Corporate & Eliminations 4,412 (8,435) (3,536) (15,529)
Restructuring Charge (37,700)
Interest Expense (1,738) (2,220) (5,608) (6,076)
Other Income/Expense (54) 372 251 615
Earnings Before
Income Taxes $ 31,661 $ 31,715 $ 51,727 $ 98,335
-7-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS*
On December 17, 1997, Wausau Paper Mills Company ("Wausau") completed a
merger with Mosinee Paper Corporation ("Mosinee") in which Mosinee
became a wholly-owned subsidiary of Wausau. Simultaneous with the
consummation of the merger, Wausau changed its name to Wausau-Mosinee
Paper Corporation (the "company"). The merger qualified as a tax-free
exchange and was accounted for as a pooling of interests. Prior to the
merger, Wausau's fiscal year-end was August 31 and Mosinee's was
December 31. Subsequent to the merger, the company adopted a calendar
year-end. The company's 1997 financial statements have been recast to
a twelve-month period ending December 31, 1997. All financial statements
presented, Management's Discussion and Analysis of Financial Condition
and Results of Operations, and all other sections of this report on Form
10-Q are presented for the combined operations of Wausau and Mosinee as
if the merger had occurred at the beginning of the 1997 period presented.
RESULTS OF OPERATIONS
Net Sales
Net sales for the quarter ended September 30, 1998 were $241.6 million,
down 2.8% from the net sales in the same three month period of 1997.
Shipments for the third quarter of 1998 were 213,800 tons, a decline of
.6% from 1997. Selling prices for many of the company's products
declined from both the second quarter, 1998 and year ago levels. Very
competitive market conditions are prevalent in virtually all of the
company's product lines resulting in lower selling prices. For the
first nine months of 1998, net sales totalled $722.9 million, 4.0%
higher than the net sales for the same period in 1997. Year-to-date
shipments total 632,700 tons, up 6.6% from the 1997 shipments level.
1998 shipments and sales are higher, due in part to the acquisitions
of B & J Supply and Otis Specialty Products in April and May of 1997,
respectively.
Net sales for the Printing and Writing Group for the quarter ended
September 30, 1998 were $99.1 million, a decline of 1.1% from the third
quarter, 1997 sales performance. Printing and Writing shipments were
1.2% lower than the prior year, with weaker shipments of the manufactured
paper products more than offsetting volume gains in converted products.
The decline in manufactured paper products is due to the company choosing
to pursue only minimal amounts of commodity business as a result of
extremely low market pricing for these products. Year-to-date sales for
the Printing and Writing Group total $288.2 million, up .4% from the
sales in first nine months of 1997, due principally to acquiring B & J
Supply on April 1, 1997.
Third quarter 1998 net sales for the Specialty Paper Group were $103.0
million, down $8.1 million or 7.3% from the third quarter 1997 net sales.
Specialty Paper shipments declined 3.7% while lower selling prices for
many of the product lines accounted for the balance of the sales
decline. Specialty Paper's pressure sensitive and decorative laminate
markets in particular were weak. For the first nine months of 1998,
Specialty Paper Group sales were $323.5 million, up 5.2% over the same
period a year ago on shipment volume improvement of 9.4%. Specialty
Paper Group 1998 sales and shipment comparisons were aided by the
acquisition of Otis Specialty Papers in mid-May of 1997.
* Matters discussed in this report with respect to the company's
expectations are forward-looking statements that involve risks and
uncertainties. Reference Part II, Item 5. - Cautionary Statement
Regarding Forward-Looking Information.
-8-
The Towel and Tissue Group achieved net sales of $39.6 million for the
three month period ended September 30, 1998, up 6.0% from sales in the
same period last year. Shipments improved 12.0% for the quarter but
average selling prices declined from both last quarter and the prior
year. Conditions remain very competitive in the "away from home" towel
and tissue markets. Towel and Tissue Group sales for the first nine
months of 1998 were $111.3 million, an increase of 10.7% over the same
1997 period. Shipment volume of towel and tissue products is up 15.3%
through September 1998 compared to 1997.
Order backlog at September 30, 1998 was 6% lower than at September
30, 1997 due to weak business conditions in the Printing and Writing
and several of the Specialty Paper markets. Towel and Tissue Group
backlogs were higher, reflecting the volume growth experienced in the
past year. The company believes backlog totals do not indicate entirely
the strength of its business, given that a substantial percentage of
orders are shipped out of inventory promptly upon order receipt.
Gross Profit
Gross profit for the quarter ended September 30, 1998 was $42.3 million
or 17.5% of net sales, compared to gross profit for the same quarter in
1997 of $54.3 million or 21.9%. The decline in gross profit is due
primarily to lower selling prices for the company' products. The
quarter was impacted by capital equipment modifications at three mills.
The associated downtime to complete the projects and subsequent
fine-tuning of the modifications cost the company over $2.5 million of
gross profit. Pulpwood and wastepaper prices were higher than a year ago
while average pulp prices fell during the quarter to levels below third
quarter, 1997 prices.
The company's paper manufacturing facilities operated at near full
capacity during the third quarter 1998 except for downtime associated
with capital improvements at the Otis, Mosinee and Bay West-Middletown
mills. Despite this downtime, total finished production including
converting production was 1.3% higher in third quarter 1998 than in third
quarter 1997, as a result of a strong increase in towel and tissue
production. Paper inventory quantities at September 30, 1998 were 1.3%
higher than a year ago.
Selling and Administrative Expenses
Selling and administrative expenses for the three months ended
September 30, 1998 were $8.8 million compared to expenses of $20.8
million in the same period in 1997. Adjustments for incentive
compensation programs based on the market price of the company's stock
accounted for $11.8 million of the year over year variance as an income
adjustment of $6.6 million was recorded for the current quarter compared
to expense of $5.2 million in the third quarter of 1997. The balance of
the expense reduction is related to overhead cost reductions resulting
from the merger.
For the nine months ended September 30, 1998, selling and administrative
expenses, excluding a restructuring charge discussed below, were $42.5
million compared to expenses of $51.2 million in the first nine months
of 1997. Adjustments for stock incentive programs resulted in income of
$4.5 million in 1998 compared to expense of $5.2 million for the first
nine months of 1997. The balance of the increase is due principally to
the addition of B & J Supply and Otis Specialty Papers in the second
quarter of 1997.
-9-
Restructuring Charge
In March 1998, the company announced and began implementation of
a workforce reduction program, which is expected to reduce company-wide
employment by over 8%. The job reductions will take place throughout
1998 and 1999 primarily through early retirement incentives along with
voluntary separation arrangements and involuntary severance programs.
Upon completion of the program, and several capital projects, the
company expects to realize $23 million annually in labor cost savings.
As a result, the company recorded a one-time pre-tax restructuring
charge of $37.7 million ($23.4 million after-tax) in the first quarter of
1998 to cover the cost of the workforce reduction program as well as
other costs related to the merger.
Merger related cost reduction activities are proceeding on plan.
Participation in the voluntary early retirement program initiated by the
company in March is high and as a result, a majority of the intended job
reductions will be accomplished without layoffs. Company-wide cost
savings from the workforce reduction program and other merger related
cost reduction activities are projected to reach $30 million annually by
the end of 1999, significantly greater than the $19 million in savings
originally estimated.
Interest Expense and Other Income/Expense
For the three months ended September 30, 1998, interest expense was $1.7
million compared to $2.2 million in the same quarter of 1997. The
decline in interest expense is due to lower average debt levels during
the quarter compared to the prior year. Capitalized interest was $.1
million in third quarter 1998 compared to $.2 million last year. Other
income or expenses was $.1 million of expense for the third quarter of
1998 compared to $.4 million of income in third quarter, 1997. The 1997
period included sales of non-strategic timberlands.
Income Taxes
The income tax provision for the three months ended September 30, 1998
was $12.1 million for an effective tax rate of 38.1%. This compares to
a tax provision of $12.0 million in the quarter ended September 30, 1997
which was an effective tax rate of 37.8%. For the first nine months of
1998, an income tax provision of $19.6 million was recorded for an
effective tax rate of 37.8%. The tax provision for the first nine
months of 1997 was $37.3 million or 38.0% of pre-tax income.
Net Earnings
Net earnings for the quarter ended September 30, 1998 were $19.6 million
or $.34 per share compared to net earnings of $19.7 million or $.34 per
share in the same period in 1997. For the first nine months of 1998,
net earnings totalled $32.2 million or $.56 per share including an
after-tax restructuring charge of $23.4 million ($37.7 million pre-tax)
or $.40 per share. Net earnings for the first nine months of 1997 were
$61.0 million or $1.05 per share.
-10-
CAPITAL RESOURCES AND LIQUIDITY
Cash Provided by Operations
For the nine months ended September 30, 1998, cash provided by
operations was $89.5 million, compared to $82.6 million for the same
period of 1997. The increase in cash provided by operations is primarily
the result of a reduction in inventory, a smaller increase in accounts
receivable, and increases in accounts payable and accrued liabilities
which offset the reduction in earnings compared to a year ago.
Capital Expenditures
Capital expenditures totaled $54.6 million for the nine months ended
September 30, 1998, compared to $49.0 million for the same period last
year.
During the first nine months of 1998, the Printing & Writing Group
completed several projects at the Groveton mill totaling $5.8 million
consisting of paper machine upgrades and a stock blending system for
better efficiency, faster and continuous furnish, less broke and a
reduction in the usage of higher cost fiber. The Brokaw mill has also
spent $3.7 million year-to-date on an $8.8 million pulp mill distributive
control system.
The Specialty Paper Group is proceeding with several major capital
projects in its pulp and paper mills. At the Mosinee mill, a wet lap
machine was installed to improve paper machine scheduling and
flexibility. The #1 paper machines at the Mosinee and Sorg paper mills
are in the process of rebuilds to increase production capacity at each of
the locations. The Otis mill has spent $1.3 million to date on an
approved $25 million of capital improvements to expand the production
capacity of both paper machines and add significant new manufacturing
capabilities for one of the machines which is expected to give the
Specialty Paper Group an improved sales mix. This project is
anticipated to be completed in the first quarter of 1999.
The Towel & Tissue Group has completed a building and warehouse
expansion project which increases the operating plant and warehouse
space by 268,000 square feet. Also at Bay West, capital investment
continues for additional towel and tissue converting equipment to keep
pace with increasing sales volume. The Board also approved $4 million
for a new toweling line at the Bay West converting plant to be completed
in 1999 for added capacity to meet the expected increases in sales and
distribution.
Total capital expenditures are projected to be less than $80 million in
1998, down from the company's original estimates. This decrease is not
the result of changes in capital strategies, but merely reflects
refinement of earlier estimates and timetables.
Financing
Total current and long-term debt increased slightly for the nine months
ended September 30, 1998 to $147.5 million. The current portion of debt
consisted of a $20 million loan agreement with a bank, with a fixed rate
of 7.83%, and $6 million in notes to Prudential Insurance Company of
America and its subsidiaries at a fixed rate of 6.03%. Long-term debt
at September 30, 1998 included $65.5 million outstanding under the
company's revolving credit facility, with interest rates between 5.75%
and 5.94%. In September 1998, the company executed a $20 million
promissory note for a line of credit with one bank at interest rates
that are lower than the revolving credit facility. At the end of the
period, $11 million was outstanding against this line with interest
rates between 5.56% and 5.78%. In addition, the company had $6
-11-
million in notes outstanding to Prudential Insurance Company of America
and its subsidiaries, at a fixed rate of 6.03%, and $19 million in
variable rate development bonds, with an interest rate of 4.3% at the
end of September. There was also $20 million in commercial paper
outstanding at September 30, 1998, at interest rates between 5.75%
and 5.94%.
The company maintains a $105 million revolving credit facility with four
banks, as well as the new $20 million line of credit. Cash provided by
operations and this borrowing capacity are expected to meet current and
anticipated working capital needs and dividend requirements, as well as
fund the company's planned capital expenditures and stock repurchases.
The company believes additional financing is readily available, should
it be needed, to fund a major expansion, an acquisition, or additional
stock repurchases.
Common Stock Repurchase
The repurchase of common stock authorized by the Board of Directors
in June, 1994 was completed in August, 1998. In August, the Board
authorized the company to repurchase up to 5,650,000 additional shares,
subject to adjustment for future stock splits or dividends. This
repurchase authorization represents approximately ten percent of the
shares then outstanding. Under the 1994 and 1998 authorizations, the
company repurchased an aggregate of 2,206,500 shares during the
nine-month period ended September 30, 1998. The company also
repurchased an additional 1,295,700 shares in October, 1998, reducing the
remaining repurchase authorizations under the August, 1998 resolution to
3,208,600 shares at October 31, 1998.
Dividends
Since the company has changed from a fiscal year ending in August to a
calendar year reporting basis, no dividend declaration was made in the
first quarter. The dividend declared in December 1997, of $.0625 per
share was paid January 15, 1998 to shareholders of record as of January
5, 1998. At the April 16, 1998 meeting, the Board of Directors approved
a 12% increase in the cash dividend. The quarterly cash dividend of $.07
per share was paid May 15, 1998 to stockholders of record as of May
1, 1998. On June 18, 1998 the Board of Directors declared a quarterly
cash dividend of $.07 per share payable August 17, 1998 to shareholders
of record on August 3, 1998. No dividend was declared in third quarter
1998, however on October 21, 1998 the Board of Directors declared a
quarterly cash dividend of $.07 per share payable November 16, 1998 to
shareholders of record on November 6, 1998.
YEAR 2000
THE YEAR 2000 PROBLEM
Wausau-Mosinee Paper Corporation, like most companies today, is heavily
dependent upon computer technology to effectively carry out its
day-to-day operations. In addition, the company is dependent on
suppliers and customers who also employ computer technology in their
business. For purposes of this discussion, the terms "Year 2000 issues"
or "Year 2000 problems", or terms of similar import, refer to the
potential for failure of computer applications as a result of the
failure of a program or hardware to properly recognize the year 2000 and
to properly handle dates beyond the year 1999, and the term "Year 2000
readiness", or terms of similar import, mean that the particular
equipment or processes referred to has been modified or replaced and the
company believes that such modified or replaced equipment or process will
operate as designed after 1999 without Year 2000 problems. Such computer
applications involve, in the case of the company, manufacturing process
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controllers, environmental systems, order processing, inventory
management and the shipment of finished goods, and internal financial
and other information systems, among others.
READINESS
The company's assessment of the possible consequences of Year 2000
issues on the company's business, results of operations, or financial
condition is not complete, but is continuing in accordance with the
company's Year 2000 compliance plan (the "Year 2000 Plan"). The Year
2000 Plan consists of seven steps: 1. Awareness and plan development,
2. Inventory, 3. Assessment, 4. Corrective actions and resolution,
5. Test requirements, 6. Integrated tests of linked processes, and
7. Implementation. The Year 2000 Plan is being administered by a
corporate team representing the company's information systems,
finance, environmental, logistics, manufacturing, and engineering
departments (the "Year 2000 Team"). An additional team operating under
the direction of the Year 2000 team at each of the company's facilities
is responsible for Year 2000 Plan implementation at the facility. The
Year 2000 Team is responsible for the communication and implementation of
the Year 2000 Plan and the communication of Year 2000 Plan progress and
Year 2000 readiness status to management. The specific actions to be
taken under the seven steps of the Year 2000 Plan are periodically
reviewed and modified by the Year 2000 Team as appropriate. Pursuant to
the Year 2000 Plan, the company intends to (1) upgrade its information
technology software and all software and embedded technology applications
in its equipment and facilities to be Year 2000 ready, (2) assess the
Year 2000 readiness of suppliers and customers, and (3) develop
contingency plans, if practical, for critical systems and processes.
Implementation of the Year 2000 Plan has begun, although the degree of
completion of the seven steps of the Year 2000 Plan varies. All
facilities have largely completed the identification of third party links
and the inventory of critical process equipment and manufacturing
facilities.
The company is working closely with a core group of key manufacturers of
controls and equipment for the paper industry. These manufacturers are
developing internal organizations and a standardized methodology to
respond to the demand for Year 2000 assessment, resolution, testing, and
implementation procedures. Purchase orders have been awarded for
equipment assessment, audits, testing, and certification at some
locations, with assessment and testing expected to be completed by May,
1999. The Year 2000 Plan calls for Year 2000 problems identified by the
assessment and testing process to be corrected on an ongoing basis. The
company has also identified and is addressing its energy, environmental,
logistics, and safety issues with internal and outside resources.
Approximately 50% of the company's information systems are Year 2000
ready as of the date of this report. The company has adopted a
time-phased enterprise resource planning system (ERP) to improve business
practices and reduce costs by enhancing order entry, financial,
purchasing, manufacturing, and logistics reporting capabilities at all
facilities. The ERP system is also intended to bring the remainder of
the company's information systems to Year 2000 readiness. Training and
implementation of this company-wide, common software system is being
conducted by internal resources with guidance from outside consultants.
Implementation of the ERP system began in the second quarter of 1998 and
is on schedule for all of the company's information systems becoming
Year 2000 ready by July, 1999.
The Year 2000 problem extends beyond the company's own information and
manufacturing systems. Because the company is dependent on its suppliers
and customers to successfully operate its business, the Year 2000 Plan
assessment process involves contacting those vendors or customers deemed
most critical to the operations and business of the company and to obtain
survey responses from all other suppliers or service providers. Vendors
include suppliers of both
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goods and services, including transportation services, communications,
and utilities in addition to raw materials, equipment, technology, and
other areas directly related to the manufacturing process. Response to
the company's inquiries has been good and the company anticipates
completion of vendor surveys during the fourth quarter of 1998.
Additional evaluation of certain sources of raw materials or critical
services will be done in consultation with suppliers to develop
contingency plans as warranted.
Although the company has a broad line of products and a broad customer
base, interruptions to the business of certain customers or markets
because of Year 2000 problems could have a material adverse effect on the
company's business. To date, efforts to determine Year 2000 readiness
of customers in key markets or among customers have been relatively
informal. A more formal analysis to determine the possible effect of
Year 2000 problems on a broad base of customers is expected to begin in
the fourth quarter of 1998 and to be substantially completed in mid-1999.
The Year 2000 Plan requires continued analysis throughout 1999 in such
areas.
COSTS
A substantial amount of the work done on the Year 2000 Plan to date has
been accomplished with internal staff or as part of projects implemented
for business reasons other than Year 2000 concerns. The company has
contracted with several suppliers of equipment and software to the paper
industry to evaluate Year 2000 readiness. The costs of achieving Year
2000 readiness have not been material to date and are not expected to be
material. As of the date of this report, remediation for key paper
making process controls and equipment is expected to cost less than $2
million, although not all equipment or facilities have yet been
assessed. The implementation of the company-wide ERP system is expected
to require a capital investment of approximately $5.5 million.
Although the ERP implementation timetable was not accelerated to address
Year 2000 issues, those issues were considered in determining the
overall timetable for its implementation.
RISKS
The company expects no material adverse effect on its results of
operations, liquidity, or financial condition as a result of problems
encountered in its own business as a result of Year 2000 issues or as a
result of the impact of Year 2000 problems on its customers or vendors.
However, the risks to the company associated with Year 2000 issues are
many. While the company is undertaking its own evaluation and testing
of its information technology and non-information technology systems, it
is, like most companies, dependent to some extent on the assurances and
guidance provided by the suppliers of the technology as to its Year 2000
compliance readiness. Similarly, the company's Year 2000 Plan provides
for an ongoing analysis of the effect of the Year 2000 problem on the
company's suppliers of raw materials and non-information technology
services, as well as the anticipated effect of Year 2000 issues on its
customers and the demand for its products. The company has limited
ability to independently verify the possible effect of Year 2000 problems
on its customers and vendors. Therefore, the company's assumptions
concerning the effect of Year 2000 issues on its results of operations,
liquidity, and financial condition relies, in part, on its ability
to analyze the business and operations of each of its critical vendors
or customers. This process is, by the nature of the problem, limited to
such persons' public statements, their responses to the company's
inquiries, and the information available to the company from third
parties concerning the industries or particular vendors or customers
involved. The company believes, however, that Year 2000 problems which
cause customers to be unable to place orders would have a material
adverse impact on its results of operations, liquidity, or financial
condition only if the problem was widespread and long-lived. The company
believes it is likely that Year 2000 problems would be
-14-
temporary or that alternative processes could be implemented by the
affected customers to prevent the Year 2000 problem from interrupting
business transactions with the company for a long period of time. The
company has a broad customer base which also would alleviate the adverse
effects of isolated customer Year 2000 problems.
Some risk also exists that despite the company's best efforts, critical
manufacturing systems may malfunction due to Year 2000 problems and
curtail the manufacturing process. The company does not anticipate such
interruptions and it is unlikely that any such curtailment would be
lengthy. With eleven manufacturing facilities, a temporary interruption
at one facility is unlikely to have a material adverse impact on the
company's business or profitability.
Interruptions of communication services or power supply due to Year 2000
problems can cause the affected location to cease or curtail production
or receipt and shipment of orders. While the company believes the risk
of such curtailment to be small, the company is dependent on the
suppliers of power and communication services that no interruption take
place for periods which would result in a material adverse effect on the
company's business. Interruption of raw material supply due to supplier
problems caused by Year 2000 issues are unlikely to be material as the
company stocks raw materials to protect against supply problems and
alternative sources of supply exist to obtain the raw materials.
CONTINGENCY PLANS
As part of its Year 2000 Plan, the company continues to identify and
evaluate risks and possible alternatives should various contingencies
arise. The company believes that the most critical information systems,
primarily the sales order processing, inventory, and shipping systems are
already Year 2000 ready or, if not, that such systems have been given
first priority to be made Year 2000 ready and will be ready by
July, 1999.
Certain risks, such as the supply of raw materials, can and will be
addressed as other sources of supply are likely to be available. To a
more limited extent, the company may not be able to develop effective
contingency plans. For example, the company may not be able to develop
satisfactory alternatives for communication services or the supply of
fuel or power, although it will continue to explore alternatives for
these services or commodities. The company will continue to analyze and
develop contingency plans where possible and not cost prohibitive.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 13, 1997, the Attorney General of the State of Florida filed a
civil complaint in the United States District Court for the Northern
District of Florida against ten manufacturers of commercial sanitary
paper products, including the company's wholly owned subsidiary, Bay
West Paper Corporation. The suit alleges a conspiracy to fix prices of
commercial sanitary paper products starting at least as early as 1993.
Since the filing of this suit, numerous class action suits have been
filed by private direct purchasers of commercial sanitary paper products
in various federal district courts throughout the country. Additional
federal lawsuits have recently been filed by the Attorney Generals' of
the States of Maryland, New York, and West Virginia. All of these
federal cases have been consolidated in a multi-district litigation
proceeding in the United States District Court for the Northern District
of Florida in Gainesville. In addition, class actions have been
commenced by indirect purchasers of sanitary commercial paper products
in various state courts alleging a conspiracy to fix prices under state
anti-trust laws. All of these actions are in their early stages. The
company does not believe that it has violated any antitrust laws and it
is vigorously defending these claims.
ITEM 5. OTHER INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q, 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-Q may include one or more "forward-looking
statements" within the meaning of sections 27A of the Securities Act of
1933 and 21E of the Securities Exchange Act of 1934 as enacted in the
Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Forward-looking statements of the company may be identified by, among
other things, expressions of the company's or company officers' beliefs
or expectations that certain events may occur or are anticipated, and
projections or statements of expectations with respect to (i) any
aspects of the company's business (including, but not limited to, net
income, the availability or price of raw materials, or customer demand
for company products), (ii) the company's plans or intentions, (iii) the
company's stock performance, (iv) the industries within which the
company operates, (v) the economy, and (vi) any other expressions of
similar import or covering other matters relating to the company or its
operations. 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 are not guarantees of performance.
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. Many of
the factors that will determine these results are beyond the company's
ability to control or predict. Shareholders are cautioned not to put
undue reliance on any forward-looking statements. For those statements,
the company claims the protection of the safe harbor for forward-looking
statements contained in the Reform Act.
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:
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<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 customer 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 raw materials, principally pulp,
wastepaper and linerboard. A substantial portion of the
company's raw materials, including approximately two-thirds of
the company's pulp needs, are purchased on the open market and
price changes could have a significant impact on the company's
costs. Fiber represents a substantial portion of the cost of
making paper and significant price increases for fiber could
materially affect the company's financial condition. Raw
material prices will change based on supply and demand on a
worldwide spectrum. Pulp price changes can occur due to
worldwide consumption levels of pulp, pulp capacity additions,
expansions or curtailments of 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> Unforseen operational problems at any of the company's
facilities causing significant lost production and/or cost
increases.
<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 or to
successfully integrate an acquisition.
<bullet> Unforseen business interruptions or operational failures as a
result of unanticipated Year 2000 compliance problems
encountered by the company, its vendors, or customers.
<bullet> Changes in laws or regulations which affect the company.
The paper industry is subject to stringent environmental laws
and regulations and any changes required to comply with such
laws or regulations may increase the company's capital
expenditures and operating costs.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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>
3.1 Restated Articles of Incorporation, as amended
October 21, 1998 .........................3.1{(1)}
3.2 Restated Bylaws, as amended December 17, 1997 4.2{(2)}
4.1 Rights Agreement, dated as of October 21, 1998,
between Wausau-Mosinee Paper Corporation and
Harris Trust and Savings Bank, including the
Form of Restated Articles of Incorporation
as Exhibit A and the Form of Rights Certificate as
Exhibit B.................................4.1(1)
4.2 Summary of Rights to Purchase Preferred Shares
(Exhibit C to Rights Agreement)...........4.2(9)
10.1 Wausau-Mosinee Supplemental Retirement Plan
as amended April 16, 1998 ...............10.1{(11)}
10.2 Incentive Compensation Plans, as amended
September 17, 1997 (Printing and Writing Division
and Technical Specialty Division)* .......10.2{(3)}
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* .........10.8{(6)}
10.9 1991 Dividend Equivalent Plan* ..........10(i){(7)}
10.10 Supplemental Retirement Benefit Plan dated
January 16, 1992, as amended November 13, 1995* 10{(8)}
10.11 Directors' Deferred Compensation Plan, as amended
February 19, 1998* .....................10.11{(11)}
10.12 Directors Retirement Benefit Policy, as amended
April 16, 1998* ........................10.12{(11)}
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10.13 Transition Benefit Agreement with President
and CEO* ..............................10.13{(6)}
10.14 Mosinee Paper Corporation 1985 Executive Stock Option
Plan, as amended August 24, 1997* ......10.14{(10)}
10.15 Mosinee Paper Corporation 1988 Stock
Appreciation Rights Plan, as amended 4/18/91* 10.15{(10)}
10.16 Mosinee Paper Corporation 1996 and 1997
Incentive Compensation Plan for Corporate
Executive Officers* ....................10.16{(10)}
10.17 Mosinee Paper Corporation Supplemental
Retirement Benefit Plan dated October 17, 1991,
as amended August 24, 1997* ............10.17{(10)}
10.18 Mosinee Paper Corporation Supplemental
Retirement Benefit Agreement
dated November 15, 1991* ...............10.18{(10)}
10.19 Mosinee Paper Corporation
1994 Executive Stock Option Plan,
as amended August 24, 1997* ............10.19{(10)}
10.20 Incentive Compensation Plan
for Executive Officers (1998) * ........10.20{(11)}
27.1 Financial Data Schedule
27.2 Financial Data Schedule (restated)
99.1 Subsidiaries as of December 31, 1997 ....99.1{(10)}
*Executive compensation plans or arrangements.
<dagger> 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 October 21, 1998.
(2) Registration Statement on Form S-8 dated December 17, 1997.
(3) Quarterly report Form 10-Q for the quarterly period ended
November 30, 1997.
(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) Annual report on Form 10-K for the fiscal year ended August
31, 1997.
(7) Quarterly report on Form 10-Q for the quarterly period ended
November 30, 1996.
(8) Quarterly report on Form 10-Q for the quarterly period ended
November 30, 1995.
(9) Registration Statement on Form 8-A, filed on October 29,
1998.
(10) Transition report on Form 10-Q for the transition period
ended December 31, 1997.
(11) Quarterly report on Form 10-Q for the quarterly period ended
March 31, 1998.
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(b) Reports on Form 8-K:
None
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WAUSAU-MOSINEE PAPER
CORPORATION
November 12, 1998 GARY P. PETERSON
Gary P. Peterson
Senior Vice President-Finance,
Secretary and Treasurer
(On behalf of the Registrant
and as Principal Financial Officer)
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EXHIBIT INDEX
TO
FORM 10-Q
OF
WAUSAU-MOSINEE PAPER CORPORATION
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
Pursuant to Section 102(d) of Regulation S-T
(17 C.F.R. <section>232.102(d))
EXHIBIT 27.1 FINANCIAL DATA SCHEDULE
EXHIBIT 27.2 FINANCIAL DATA SCHEDULE (RESTATED)
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