ITEM 1. BUSINESS.
NATURE OF THE BUSINESS
The company, incorporated under the laws of the State of Wisconsin in 1899, 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 Rhinelander Division, which consists of Rhinelander Paper Company, Inc., a wholly-owned subsidiary operating a paper mill in Rhinelander, Wisconsin. 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).
Unless stated otherwise, the terms "company" and "Wausau Papers" mean the company and its subsidiaries.
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 facilities at Groveton, New Hampshire. The Groveton facilities were purchased in April 1993, by the company's wholly-owned subsidiary Wausau Papers of New Hampshire, Inc.
RHINELANDER DIVISION
The Rhinelander Division, located in Rhinelander, Wisconsin, manufactures lightweight, dense, technical specialty papers which are sold directly to converters and end users throughout the United States. International markets for Rhinelander'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 and multiple laminated products. 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.
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.
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 remaining 40% of required pulp at Brokaw and all of the required pulp at the Rhinelander and Groveton 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.
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 mill operates a power plant which provides 100% of the mill's steam requirements and a portion of its electrical needs. The primary fuels burned at Groveton are wood chips and fuel oil. The Rhinelander Division 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 Groveton and Rhinelander mills purchase approximately 73% and 61% of their electrical needs, respectively, from public utility companies. The fuels used at each mill are all available on a contract basis at prevailing market prices.
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 thereby assuring natural gas delivery at competitive rates under a long-term contract. 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 wood chips and fuel oil. Transportation of natural gas to the Groveton mill is scheduled to begin in fiscal 1999.
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 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 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.
MAJOR CUSTOMERS
Avery Dennison Corporation and ResourceNet International, a division of International Paper Company, accounted for 12.7% and 11.5% of consolidated net sales, respectively, in fiscal 1996. The loss of either customer would have an initial material adverse effect; 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, 1996 amounted to $26,749,000, or just over 2 weeks of operation. This is 20% higher on a tonnage basis than the backlog of orders of $24,981,000 or about 2 weeks of operation at August 31, 1995. The backlog increase is due to increased demand for the company's printing and writing and technical specialty grades.
Backlog totals are not a true indicator of the strength of the company's business activity. A significant and growing 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, 1996 is expected to be shipped during fiscal 1997.
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 Rhinelander Division produces technical specialty papers and is a leader in its markets. Rhinelander's market position varies by product segment and, thus, competition also includes small to large paper manufacturers. Rhinelander sells 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 $1,381,000 in 1996, $1,219,000 in 1995, and $1,158,000 in 1994.
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. The $14 million rebuild and expansion of the wastewater treatment plant at the Brokaw mill is nearing completion. In addition, in the past year the company invested $1.6 million in modifications to the wastewater treatment plant at the Rhinelander mill. The company estimates that its capital expenditures for environmental purposes will be less than $5 million in fiscal 1997.
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 1996 or early 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 financial position or results of operations.
EMPLOYEES
The company had 1,771 employees at August 31, 1996. The company has collective bargaining contracts with the United Paperworkers International Union covering approximately 1,382 employees. These contracts expire in March 1997, December 2000 and May 2001 at the Groveton, Rhinelander and Brokaw 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.
EXECUTIVE OFFICERS
The executive officers of the company as of October 1, 1996, 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., 55
Chairman of the Board of Directors since December 1989 and, Chief Executive Officer from July 1994 to December 1995, and 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, 49
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, 57
Senior Vice President, Administration since December 1990; prior thereto, Vice President, Administration.
STEVEN A. SCHMIDT, 42
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, 34
Vice President and General Manager, Rhinelander 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, 47
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.
All executive officers of the company are elected annually by the Board of Directors.
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:
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.
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.
Changes in the price of pulp, the company's main raw material. Over 75% 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.
Unforeseen operational problems at any of the company's facilities causing significant lost production and/or cost issues.
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.
Changes in laws or regulations which affect the company.
ITEM 2.
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 1996, producing approximately 460 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 1996, 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 98% of capacity in fiscal 1996 due to capital improvement related downtime for the rebuild of No. 7 paper machine and limited downtime taken on one paper machine in the first quarter due to market weakness. The Rhinelander mill produced approximately 390 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 owns approximately 43,500 acres of timberland in Wisconsin. The company believes the market value of these lands exceeds the August 31, 1996 book value of $1,430,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Legal proceedings are discussed in Note 11 to the Consolidated Financial Statements on page 34 of this report.
ITEM 4.
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 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS.
The company's common stock trades on The Nasdaq Stock Market under the symbol WSAU. The number of shareholders of record as of October 1, 1996 was 2,043. The company believes that there are approximately 6,957 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, 1996, is 9,000. Information related to high and low closing prices and dividends is explained in detail in Item 8, Financial Statements and Supplementary Data, and appears on page 35 of this report. Dividend restrictions under certain loan covenants are explained in Note 4 to the Consolidated Financial Statements which is found on page 25 of this report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
In fiscal 1996, the company achieved record sales and shipments, while net earnings represent the second best performance ever. Net sales were $542.7 million in fiscal 1996, up 5.2% from 1995 results. Shipments of 409,700 tons were 2.6% ahead of last year's shipment level. Net earnings increased 31.9% in fiscal 1996 to $41.2 million, compared to fiscal 1995 net earnings.
Fiscal 1996 was a year of extremes for Wausau Papers. During the first part of the year, pulp prices continued their upward trend, which began in January 1994. Market pressures prevented the company from recovering much of the increased pulp costs through higher paper prices, which negatively impacted first and second quarter earnings results. While demand for the company's printing and writing grades remained strong, market weakness in the technical specialty grades continued from fiscal 1995 into early fiscal 1996. As a result, some limited downtime was taken at the Rhinelander mill in the first quarter of fiscal 1996. Worldwide demand in the pulp and paper markets softened in mid-fiscal 1996, which resulted in a series of rapid pulp price declines in the second and third quarters of the fiscal year. This, coupled with improved demand for Rhinelander's technical specialty grades, continued strong business conditions at the company's Printing and Writing Division and less volatility in the company's paper prices, compared to pulp prices, resulted in record second half earnings in fiscal 1996.
Worldwide pulp market conditions have shown signs of stabilizing toward the latter part of fiscal 1996 and into 1997. Pulp price increases were implemented near the end of the fiscal year and another pulp price increase had been announced for October 1996, though current market conditions did not support this latest increase and it was delayed. Should the October pulp price increase eventually take effect, pulp prices, on average, will still be well below the average pulp prices experienced during fiscal 1996 and 1995.
NET SALES Net sales for fiscal 1996 were a record $542.7 million, an increase of 5.2% over fiscal 1995 net sales of $515.7 million. Fiscal 1994 net sales were $426.5 million. Shipments were a record 409,700 tons in fiscal 1996, up 2.6% compared to the 399,300 tons shipped in 1995. Shipments were 355,100 tons in fiscal 1994.
Strong customer demand led to full operations at the Printing and Writing Division throughout fiscal 1996. Printing and Writing Division shipments increased 2.0% in fiscal 1996 over the previous year. Mix enhancement efforts resulted in a solid increase in premium paper sales while reducing the division's participation in commodity grades. The company expects to continue to grow its printing and writing products in fiscal 1997.
Demand for the company's technical specialty products showed improvement during the second half of fiscal 1996, compared to the first half of the year. Limited downtime was taken on one paper machine at Rhinelander during the first quarter of the year as a result of market weakness. Shipments of Rhinelander's products improved 3.7% in fiscal 1996, compared to the prior year, while shipments of pressure sensitive products, its largest product segment, increased 5.8% over 1995 results. The slow rate of growth in the pressure sensitive industry during late fiscal 1995 and fiscal 1996, compared to historical averages, has limited the company's ability to significantly increase its pressure sensitive volume since the rebuild of the No. 7 paper machine at Rhinelander, although recent order activity for pressure sensitive products has been much improved. Continued mix improvement toward more pressure sensitive grades is expected in fiscal 1997.
The order backlog at August 31, 1996 was $26.7 million, compared to order backlogs of $25.0 million and $25.7 million at August 31, 1995 and 1994, respectively. On a tonnage basis, order backlog at the end of fiscal 1996 was 20% higher than at the end of 1995 and 1% better than the order backlog at the end of 1994. The improved backlog at August 31, 1996, compared to a year ago, is due to increased demand for the company's products. Backlog totals do not accurately indicate the full business strength of the company, however, as a significant and growing volume of orders are shipped out of inventory promptly upon order receipt.
GROSS PROFIT
Gross profit margin increased to 18.3% of net sales for fiscal 1996, compared to 15.7% for the previous year. The gross profit margin was 22.8% in fiscal 1994. The improvement in gross profit margin in fiscal 1996, compared to the prior year, is due primarily to mix improvement, higher average selling prices for the company's products and lower pulp costs, on average.
During the first half of fiscal 1996, market prices for pulp, the company's main raw material in manufacturing paper, continued their upward climb which began in January 1994. However, pulp prices started to decline in the second quarter of the fiscal year as worldwide pulp and paper markets weakened. In fiscal 1996, the average list price of northern bleached softwood kraft, a commonly used benchmark pulp grade, decreased 8%, compared to a 55% increase in fiscal 1995 and a 4% decline in 1994.
More recent declines in worldwide pulp producer inventories have led to pulp price increases on most species of pulp toward the end of fiscal 1996. Additional pulp price increases were announced for October 1996, however, sufficient weakness still exists in the pulp market and pulp producers were
not successful implementing the October increase. Even if the October pulp price increases are eventually fully implemented, the then current market pulp prices will be significantly lower, on average, than those in effect in fiscal 1996 and fiscal 1995.
Production of the company's printing and writing grades increased 3.4% in fiscal 1996 over the previous year as a result of productivity gains from capital improvements and operating both the Brokaw and Groveton mills at capacity, compared to operating them at 98% and 96% of capacity, respectively, in fiscal 1995. Production at the Printing and Writing Division in fiscal 1995 was 22.5% higher than in 1994 when only one of two paper machines was in operation at the Groveton mill.
The Rhinelander mill operated at 98% of capacity in fiscal 1996 due to capital improvement related downtime for the rebuild of No. 7 paper machine and limited downtime taken on one paper machine in the first quarter due to market weakness. Production increased 1.6% in fiscal 1996 over the previous year when the mill operated at 95% of capacity. Production at Rhinelander in fiscal 1995 was comparable to 1994 as productivity gains were offset by extended paper machine downtime taken in the second half of fiscal 1995.
Maintenance and repair costs increased $1.4 million to $31.6 million in fiscal 1996 from $30.2 million in 1995. The increase is primarily attributable to the full operation of the second paper machine at the Groveton mill throughout fiscal 1996 and the addition of a new silicone coater at Rhinelander. Maintenance and repair costs were $29.6 million in fiscal 1994.
LABOR
In fiscal 1996, the company successfully negotiated new five-year labor agreements with the United Paperworkers International Union at the Rhinelander Division and at the Brokaw mill. At Rhinelander, the new labor agreement became effective January 1, 1996 and includes a general wage increase of 3.0% in 1996, 3.5% in both 1997 and 1998 and 3.0% in both 1999 and 2000. On June 1, 1996 the new labor agreement at the Brokaw mill took effect which includes a general wage increase of 3.0% in each of the five years covered by the agreement. Both agreements include changes in work rules to provide greater operating efficiencies and increases in employee benefits. The company is currently in the final year of a four-year labor agreement with the United Paperworkers International Union at the Groveton mill.
The company considers its relationship with its employees to be excellent and is of the opinion that it will be able to successfully negotiate a new labor agreement at the Groveton mill in fiscal 1997.
SELLING, ADMINISTRATIVE AND RESEARCH EXPENSES
Selling, administrative and research expenses were $29.8 million in fiscal 1996, compared to $28.0 million and $27.3 million in 1995 and 1994, respectively. Higher marketing, promotion and incentive plan expenses and increases in labor costs were the primary reasons for the growth in fiscal 1996 expenses over the previous year. Stock appreciation rights, dividend equivalents and stock option discount expense was $.1 million in fiscal 1996, compared to expense of $.1 million in 1995 and income of $.3 million in 1994.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME
Fiscal 1996 interest income was $.6 million, compared to $.2 million in 1995 and $.1 million in 1994. The increase in interest income in fiscal 1996 over the previous year is due to interest income from undisbursed proceeds on a $19 million industrial development bond issue which occurred in August 1995.
Interest expense totalled $2.8 million in fiscal 1996, compared to $1.7 million in 1995 and $2.0 million in 1994. Interest expense increased in fiscal 1996 as a result of higher debt levels, on average, compared to the previous year primarily due to capital spending requirements. Capitalized interest was $.9 million in fiscal 1996, $.7 million in 1995 and $.2 million in 1994. The increase in capitalized interest in fiscal years 1996 and 1995 is due to several major capital projects under construction, including a capacity expansion project 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 and expense was $.5 million expense in 1996, compared to $.5 million expense in 1995 and $.1 million expense in 1994. Capital asset disposal losses are the primary reasons for the increase in other expense since fiscal 1994.
INCOME TAXES
The income tax provision in fiscal 1996 was $25.6 million, for an effective tax rate of 38.3%. The effective tax rates for fiscal years 1995 and 1994 were 38.5% and 38.2%, respectively.
In fiscal 1994, the company adopted Statement of Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes." The adoption was reflected as a one-time cumulative reduction in the net deferred tax liability resulting in a $1.0 million increase in fiscal 1994 net earnings.
NET EARNINGS
Fiscal 1996 net earnings were $41.2 million, an increase of 31.9% compared to 1995 earnings of $31.3 million. Fiscal 1994 earnings were $42.1 million before the cumulative effect of an accounting change from adopting SFAS No. 109. This change in accounting resulted in a one-time cumulative benefit of $1.0 million.
CAPITAL RESOURCES AND LIQUIDITY
LONG-TERM DEBT
Long-term debt decreased by $15.5 million in fiscal 1996 to $53.1 million at August 31, 1996. Long-term debt was $68.6 million and $30.3 million at August 31, 1995 and 1994, respectively. Long-term debt decreased in fiscal 1996 as a result of improved cash flow from operations. The increase in long-term debt in fiscal 1995 over the previous year was primarily due to reduced cash flow from operations and increased capital spending. Long-term debt as a percent of capital was 13.0% in 1996 as compared to 18.0% in 1995 and 9.6% in 1994.
At August 31, 1996, long-term debt consisted primarily of $24.0 million in senior promissory notes (including the current portion) to Prudential Insurance Company of America and its subsidiaries, $19.0 million in industrial
development bonds and $13.5 million outstanding under the company's revolving credit facility. Long-term debt at the end of fiscal 1995 was comprised mainly of $30.0 million in senior promissory notes (including the current portion), $19.0 million in industrial development bonds, $14.2 million outstanding under the revolving credit facility and $8.3 million in commercial paper.
CASH PROVIDED BY OPERATIONS
Fiscal 1996 cash provided by operations was $80.0 million, 68% above fiscal 1995 results of $47.5 million. Cash provided by operations in fiscal 1994 was $64.7 million. The improvement in fiscal 1996 was primarily a result of higher selling prices, a reduction in accounts receivable and smaller increases in inventories compared to the previous year. The reduced operating cash flow in fiscal 1995, compared to 1994, was due to higher unit production costs and increased working capital needs.
CAPITAL EXPENDITURES
Capital expenditures totalled $63.2 million in fiscal 1996, compared to $66.1 million in 1995 and $43.8 million in 1994.
In fiscal 1996, a $42 million expansion project was completed at the Rhinelander mill to increase its pressure sensitive papermaking capacity. As part of this project, a new state-of-the-art supercalender was installed in November 1995 and a major rebuild of No. 7 paper machine was completed in March 1996. The project also included over $3 million for a new gas-fired boiler. This project increased annual pressure sensitive backing paper capacity nearly 40,000 tons while improving quality. In connection with mix changes, the mill's total annual capacity is expected to increase by over 26,000 tons. Other capital improvements at the Rhinelander mill in fiscal 1996 include a new roll wrapping system to enable the mill to handle, wrap and ship larger diameter rolls and an upgrade to the mill's wastewater treatment plant.
At the Brokaw mill, a $16 million fiber handling and processing project was completed in April 1996. This project included a building expansion, additional pulping capacity and a new fiber handling system to process more recycled post-consumer pulp. A major upgrade to the mill's wastewater treatment plant is nearing completion as well and is expected be finished in early fiscal 1997.
A new shrink wrap packaging line at the Groveton mill was completed in March 1996 to reduce converting operating costs on the company's retail product offerings. A centralized starch kitchen was also installed in fiscal 1996, allowing the mill to utilize lower cost raw materials.
At the end of fiscal 1996, the company was committed to spend approximately $22 million to complete capital projects currently under construction. Capital commitments were $62 million and $30 million at the end of 1995 and 1994, respectively. Major capital projects currently in process include a $6 million wood processing facility modernization at the Brokaw mill to improve wood yield, increase process efficiencies, reduce operating costs and improve working conditions. At the Groveton mill, a new saveall and broke metering system is underway to improve fiber yield and reduce operating costs and a turbine upgrade is also in process to reduce the mill's electrical costs.
The company expects capital expenditures to be approximately $150 million over the next three years, including approximately $40 million in fiscal 1997.
FINANCING
The company maintains a revolving credit facility agreement with four banks to provide loans up to $40 million. This credit facility was reduced, at the company's request, from $65 million to $40 million in September 1996. The credit facility will permit the company to borrow $40 million 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. The company had no commercial paper outstanding at the end of fiscal 1996. On August 31, 1996, a combined total of $26.5 million was available (based on the $40 million credit facility in effect after August 1996) for borrowing under the company's credit and commercial paper placement agreements. In a separate agreement, one of the four banks participating in the revolving credit facility has provided a $10 million uncommitted line of credit to the company. In addition, the company also has a $2 million short- term line of credit available. There was no borrowing against these lines at August 31, 1996.
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 senior 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 the 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 are held in a trust fund until they are drawn upon by the company as spending occurs on these projects. As of August 31, 1996, the company had utilized $15.7 million from the bond issue.
Cash provided by operations, industrial development bond proceeds 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 expenditure requirements. The company believes additional financing is readily available, should it be needed, to fund a major expansion or acquisition.
COMMON STOCK REPURCHASES
On June 30, 1994, the 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. In fiscal 1996, the company repurchased 369,500 shares at market prices ranging from $16.750 per share to $18.125 per share. In fiscal 1995, the company repurchased 308,938 shares at market prices ranging from $16.550
per share to $17.091 per share. The company repurchased 123,750 shares at market prices ranging from $17.364 per share to $17.909 per share in fiscal 1994. Shares and per share data have been restated to reflect the five-for- four stock split and the 10% stock dividend which occurred in January 1996 and January 1995, respectively.
DIVIDENDS
The company's Board of Directors declared cash dividends of $.22 per share in fiscal 1996, a 10% increase over the $.20 per share cash dividend declared in fiscal 1995.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WIPFLI ULLRICH BERTELSON Certified Public Accountants
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, 1996 and 1995, 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, 1996 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three- year period ended August 31, 1996, and the supporting schedule presents fairly the information required to be set forth therein, all in conformity with generally accepted accounting principles.
As discussed in Note 8 of the Notes to Consolidated Financial Statements, the company changed its method of accounting for income taxes in 1994.
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 WIPFLI ULLRICH BERTELSON September 18, 1996 Wausau, Wisconsin
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
INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Consolidated Statements of Income for the years ended August 31, 1996, 1995 and 1994 ................................19
Consolidated Balance Sheets as of August 31, 1996 and 1995 .......................................................20
Consolidated Statements of Shareholders' Equity for the years ended August 31, 1996, 1995 and 1994 .................22
Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995 and 1994 ...........................23
Notes to Consolidated Financial Statements .........................24
Schedule for the years ended August 31, 1996, 1995 and 1994
Schedule II - Valuation and Qualifying Accounts ................38
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.
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 the use of certain estimates and assumptions that directly affect the results of reported 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.
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 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. See Note 8 for change in accounting principle in 1994.
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.
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.
The company has outstanding $24 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 3.70% at
August 31, 1996. 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, 1996, bond proceeds of $3,844,000 were not disbursed and are reflected as an asset on the balance sheet.
The company maintains an unsecured revolving credit facility of $40 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 5.62% and 6.21% at August 31, 1996 and 1995, 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, 1996, 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, 1996, $77,357,000 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. There were no amounts outstanding at August 31, 1996. The weighted average interest rate on outstanding commercial paper was 6.20% at August 31, 1995.
The difference between the book and the fair market value of the long-term debt is not material.
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 $10 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, 1996.
Lease amortization is included in depreciation expense.
The future minimum payments for capitalized leases are reflected in the aggregate annual maturities of long-term debt disclosure in Note 4.
Contingent rentals are based upon usage.
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, 1996 and 1995.
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 $1,632,000 in 1996 and $1,377,000 in 1995.
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 $314,000 in 1996, $232,000 in 1995 and $445,000 in 1994.
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.
For 1996 and 1995, the assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11% declining by 1% annually for six 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 $3,801,000 or 12.9% in 1996 and $3,779,000 or 13.1% in 1995. The effect of this change on the aggregate of the service and interest cost would be an increase of $441,000 or 16.6% in 1996 and $416,000 or 14.3% in 1995.
NOTE 8. INCOME TAXES
Effective September 1, 1993, the company adopted the liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standard (SFAS) No. 109. 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. Previously, the company used the deferral method which provided for deferred income taxes on the basis of income and expense items reported for financial accounting and tax purposes in different periods.
The company recognized the cumulative effect of the change as of September 1, 1993. The adoption was reflected as a one-time cumulative reduction in the net deferred tax liability resulting in a $1,000,000 increase in fiscal 1994 net earnings. The effect of the change in method did not have a material effect in 1994.
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 options. The option price for non-qualified options may not be less than 50% of the fair market value of the company's common stock at the date of grant.
During 1996, 64,375 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 46,062 options granted in 1995 terminated when operating goals were not met.
During 1992, options were granted under the plan. The options were to be earned over a three-year period based upon the satisfaction of operating goals set forth in the agreement. A total of 122,229 options terminated in 1994 when operating goals were not met.
Future Accounting Change: Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," is effective September 1, 1996, for the company. The new standard establishes a fair value based method
of accounting for stock-based employee compensation plans or allows companies to continue to account for those plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, the company will adopt the requirements of the standard by making pro forma disclosures of net income and net earnings per share as if the fair value based method had been applied.
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 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 1996, 64,375 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. All dividend equivalents granted in 1995 terminated when operating goals were not met.
During 1992, 245,668 dividend equivalents were granted under the plan and were to be earned over a three-year period based upon the satisfaction of operating goals set forth in the agreement. A total of 112,445 dividend equivalents terminated in 1994 when operating goals were not met.
The pre-tax impact on earnings of all stock option discounts, dividend equivalents and stock appreciation rights for the years ended August 31, 1996, 1995 and 1994 was expense of $78,000, expense of $79,000 and income of $283,000, respectively.
NOTE 10. RESEARCH EXPENSES
Research expenses charged to operations were $1,381,000 in 1996, $1,219,000 in 1995 and $1,158,000 in 1994.
NOTE 11. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
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, 1996, the company was committed to spend approximately $22 million to complete capital projects which were in various stages of completion.
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.
During fiscal 1994, the company purchased 100,000 shares of the company's no par value common stock from a director in a private transaction at $27.625 per share, the average market price on the day of the transaction.
NOTE 12. MAJOR CUSTOMERS
One customer accounted for 12.7% of net sales aggregating $68,797,000, 12.0% of net sales aggregating $61,732,000 and 12.3% of net sales aggregating $52,313,000 in 1996, 1995 and 1994, respectively. Another customer accounted for 11.5% of net sales aggregating $62,563,000 in 1996.
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, the 10% stock dividend occurring in 1995 and the four-for- three stock split occurring in 1994.
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 the caption "Election of Directors" on page 3 of the company's proxy statement dated November 8, 1996 ("1996 Proxy Statement"). Information relating to the identification of executive officers of the company is found in Part I of this Form 10-K, page 5. 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 the caption "Section 16(a) Beneficial Ownership Reporting Compliance", page 3 of the 1996 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 1996 Proxy Statement under the subcaption "Director Compensation", page 5. 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 the caption "Compensation of Executive Officers" and ending with the material set forth under the subcaption "Supplemental Plans", pages 5 through 9, and (2) the material set forth under the subcaption "Committee Interlocks and Insider Participation", page 11, in the 1996 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 1996 Proxy Statement under the caption "Beneficial Ownership of Shares", pages 2 and 3.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
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 on page 15 herein. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the company during the fourth quarter of fiscal 1996. (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.
Exhibit 3 - Articles of Incorporation and Bylaws
(a) Articles of Incorporation, as amended December 21, 1995 ......15-24(1) (b) Bylaws, as restated July 17, 1992 ............................46-81(2)
Exhibit 4 - Instruments Defining the Rights of Security Holders
(a) Articles and Bylaws (see Exhibit 3)
Exhibit 10 - Material Contracts*
(a) Executive Officers' Deferred Compensation Retirement Plan, as amended 09/18/96 (b) Incentive Compensation Plans, as amended 09/18/96 (Printing and Writing Division and Rhinelander Paper Company, Inc.) (c) Corporate Management Incentive Plan, as amended 09/18/96 (d) 1988 Stock Appreciation Rights Plan, as amended 04/17/91 (e) 1988 Management Incentive Plan, as amended 04/17/91 (f) 1990 Stock Appreciation Rights Plan, as amended 04/17/91 (g) Deferred Compensation Agreement dated 03/02/90, as amended 07/01/94 ............................................51-56(3) (h) 1991 Employee Stock Option Plan ............................133-146(4) (i) 1991 Dividend Equivalent Plan ..............................147-155(4) (j) Supplemental Retirement Benefit Plan dated 01/16/92, as amended 11/13/95..........................................13-17(5) (k) Directors' Deferred Compensation Plan .......................71-86(6) (l) Director Retirement Benefit Policy ..........................87-88(6)
*All exhibits represent executive compensation plans and arrangements.
Exhibit 21 - Subsidiaries ..........................................89(6)
Exhibit 27 - Financial Data Schedule
Page numbers set forth herein correspond to the page numbers using the sequential numbering system for documents filed in paper or the page numbers as filed via EDGAR in electronic format where such exhibit can be found in the following reports of the company (Commission File No. 0-7574) filed with the Securities and Exchange Commission:
(1) Registrant's quarterly report on Form 10-Q for the quarterly period ended February 29, 1996. (2) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1992. (3) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1994. (4) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1991. (5) Registrant's quarterly report on Form 10-Q for the quarterly period ended November 30, 1996. (6) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1993.
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 28, 1996
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 28, 1996 October 28, 1996 Chairman of the Board Director
/S/ DANIEL D. KING /S/ STANLEY F. STAPLES, JR. Daniel D. King Stanley F. Staples, Jr. October 28, 1996 October 28, 1996 President and Chief Executive Officer Director (Principal Executive Officer) Director
/S/ HARRY R. BAKER Harry R. Baker October 28, 1996 Director
EXHIBIT INDEX TO FORM 10-K OF WAUSAU PAPER MILLS COMPANY FOR THE PERIOD ENDED DECEMBER 31, 1996 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. 232.102(d))
EXHIBIT 10 - MATERIAL CONTRACTS*
(a) Executive Officers' Deferred Compensation Retirement Plan, as amended September 18, 1996 (b) Incentive Compensation Plans, as amended September 18, 1996 (Printing and Writing Division and Rhinelander Paper Company, Inc.) (c) Corporate Management Incentive Plan, as amended September 18, 1996 (d) 1988 Stock Appreciation Rights Plan, as amended April 17, 1991 (e) 1988 Management Incentive Plan, as amended April 17, 1991 (f) 1990 Stock Appreciation Rights Plan, as amended April 17, 1991
*All exhibits represent executive compensation plans and arrangements.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
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
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
OVERVIEW
In fiscal 1996, the company achieved record sales and shipments, while net earnings represent the second best performance ever. Net sales were $542.7 million in fiscal 1996, up 5.2% from 1995 results. Shipments of 409,700 tons were 2.6% ahead of last year's shipment level. Net earnings increased 31.9% in fiscal 1996 to $41.2 million, compared to fiscal 1995 net earnings.
Fiscal 1996 was a year of extremes for Wausau Papers. During the first part of the year, pulp prices continued their upward trend, which began in January 1994. Market pressures prevented the company from recovering much of the increased pulp costs through higher paper prices, which negatively impacted first and second quarter earnings results. While demand for the company's printing and writing grades remained strong, market weakness in the technical specialty grades continued from fiscal 1995 into early fiscal 1996. As a result, some limited downtime was taken at the Rhinelander mill in the first quarter of fiscal 1996. Worldwide demand in the pulp and paper markets softened in mid-fiscal 1996, which resulted in a series of rapid pulp price declines in the second and third quarters of the fiscal year. This, coupled with improved demand for Rhinelander's technical specialty grades, continued strong business conditions at the company's Printing and Writing Division and less volatility in the company's paper prices, compared to pulp prices, resulted in record second half earnings in fiscal 1996.
Worldwide pulp market conditions have shown signs of stabilizing toward the latter part of fiscal 1996 and into 1997. Pulp price increases were implemented near the end of the fiscal year and another pulp price increase had been announced for October 1996, though current market conditions did not support this latest increase and it was delayed. Should the October pulp price increase eventually take effect, pulp prices, on average, will still be well below the average pulp prices experienced during fiscal 1996 and 1995.
NET SALES Net sales for fiscal 1996 were a record $542.7 million, an increase of 5.2% over fiscal 1995 net sales of $515.7 million. Fiscal 1994 net sales were $426.5 million. Shipments were a record 409,700 tons in fiscal 1996, up 2.6% compared to the 399,300 tons shipped in 1995. Shipments were 355,100 tons in fiscal 1994.
Strong customer demand led to full operations at the Printing and Writing Division throughout fiscal 1996. Printing and Writing Division shipments increased 2.0% in fiscal 1996 over the previous year. Mix enhancement efforts resulted in a solid increase in premium paper sales while reducing the division's participation in commodity grades. The company expects to continue to grow its printing and writing products in fiscal 1997.
Demand for the company's technical specialty products showed improvement during the second half of fiscal 1996, compared to the first half of the year. Limited downtime was taken on one paper machine at Rhinelander during the first quarter of the year as a result of market weakness. Shipments of Rhinelander's products improved 3.7% in fiscal 1996, compared to the prior year, while shipments of pressure sensitive products, its largest product segment, increased 5.8% over 1995 results. The slow rate of growth in the pressure sensitive industry during late fiscal 1995 and fiscal 1996, compared to historical averages, has limited the company's ability to significantly increase its pressure sensitive volume since the rebuild of the No. 7 paper machine at Rhinelander, although recent order activity for pressure sensitive products has been much improved. Continued mix improvement toward more pressure sensitive grades is expected in fiscal 1997.
The order backlog at August 31, 1996 was $26.7 million, compared to order backlogs of $25.0 million and $25.7 million at August 31, 1995 and 1994, respectively. On a tonnage basis, order backlog at the end of fiscal 1996 was 20% higher than at the end of 1995 and 1% better than the order backlog at the end of 1994. The improved backlog at August 31, 1996, compared to a year ago, is due to increased demand for the company's products. Backlog totals do not accurately indicate the full business strength of the company, however, as a significant and growing volume of orders are shipped out of inventory promptly upon order receipt.
GROSS PROFIT
Gross profit margin increased to 18.3% of net sales for fiscal 1996, compared to 15.7% for the previous year. The gross profit margin was 22.8% in fiscal 1994. The improvement in gross profit margin in fiscal 1996, compared to the prior year, is due primarily to mix improvement, higher average selling prices for the company's products and lower pulp costs, on average.
During the first half of fiscal 1996, market prices for pulp, the company's main raw material in manufacturing paper, continued their upward climb which began in January 1994. However, pulp prices started to decline in the second quarter of the fiscal year as worldwide pulp and paper markets weakened. In fiscal 1996, the average list price of northern bleached softwood kraft, a commonly used benchmark pulp grade, decreased 8%, compared to a 55% increase in fiscal 1995 and a 4% decline in 1994.
More recent declines in worldwide pulp producer inventories have led to pulp price increases on most species of pulp toward the end of fiscal 1996. Additional pulp price increases were announced for October 1996, however, sufficient weakness still exists in the pulp market and pulp producers were
not successful implementing the October increase. Even if the October pulp price increases are eventually fully implemented, the then current market pulp prices will be significantly lower, on average, than those in effect in fiscal 1996 and fiscal 1995.
Production of the company's printing and writing grades increased 3.4% in fiscal 1996 over the previous year as a result of productivity gains from capital improvements and operating both the Brokaw and Groveton mills at capacity, compared to operating them at 98% and 96% of capacity, respectively, in fiscal 1995. Production at the Printing and Writing Division in fiscal 1995 was 22.5% higher than in 1994 when only one of two paper machines was in operation at the Groveton mill.
The Rhinelander mill operated at 98% of capacity in fiscal 1996 due to capital improvement related downtime for the rebuild of No. 7 paper machine and limited downtime taken on one paper machine in the first quarter due to market weakness. Production increased 1.6% in fiscal 1996 over the previous year when the mill operated at 95% of capacity. Production at Rhinelander in fiscal 1995 was comparable to 1994 as productivity gains were offset by extended paper machine downtime taken in the second half of fiscal 1995.
Maintenance and repair costs increased $1.4 million to $31.6 million in fiscal 1996 from $30.2 million in 1995. The increase is primarily attributable to the full operation of the second paper machine at the Groveton mill throughout fiscal 1996 and the addition of a new silicone coater at Rhinelander. Maintenance and repair costs were $29.6 million in fiscal 1994.
LABOR
In fiscal 1996, the company successfully negotiated new five-year labor agreements with the United Paperworkers International Union at the Rhinelander Division and at the Brokaw mill. At Rhinelander, the new labor agreement became effective January 1, 1996 and includes a general wage increase of 3.0% in 1996, 3.5% in both 1997 and 1998 and 3.0% in both 1999 and 2000. On June 1, 1996 the new labor agreement at the Brokaw mill took effect which includes a general wage increase of 3.0% in each of the five years covered by the agreement. Both agreements include changes in work rules to provide greater operating efficiencies and increases in employee benefits. The company is currently in the final year of a four-year labor agreement with the United Paperworkers International Union at the Groveton mill.
The company considers its relationship with its employees to be excellent and is of the opinion that it will be able to successfully negotiate a new labor agreement at the Groveton mill in fiscal 1997.
SELLING, ADMINISTRATIVE AND RESEARCH EXPENSES
Selling, administrative and research expenses were $29.8 million in fiscal 1996, compared to $28.0 million and $27.3 million in 1995 and 1994, respectively. Higher marketing, promotion and incentive plan expenses and increases in labor costs were the primary reasons for the growth in fiscal 1996 expenses over the previous year. Stock appreciation rights, dividend equivalents and stock option discount expense was $.1 million in fiscal 1996, compared to expense of $.1 million in 1995 and income of $.3 million in 1994.
INTEREST INCOME, INTEREST EXPENSE AND OTHER INCOME
Fiscal 1996 interest income was $.6 million, compared to $.2 million in 1995 and $.1 million in 1994. The increase in interest income in fiscal 1996 over the previous year is due to interest income from undisbursed proceeds on a $19 million industrial development bond issue which occurred in August 1995.
Interest expense totalled $2.8 million in fiscal 1996, compared to $1.7 million in 1995 and $2.0 million in 1994. Interest expense increased in fiscal 1996 as a result of higher debt levels, on average, compared to the previous year primarily due to capital spending requirements. Capitalized interest was $.9 million in fiscal 1996, $.7 million in 1995 and $.2 million in 1994. The increase in capitalized interest in fiscal years 1996 and 1995 is due to several major capital projects under construction, including a capacity expansion project 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 and expense was $.5 million expense in 1996, compared to $.5 million expense in 1995 and $.1 million expense in 1994. Capital asset disposal losses are the primary reasons for the increase in other expense since fiscal 1994.
INCOME TAXES
The income tax provision in fiscal 1996 was $25.6 million, for an effective tax rate of 38.3%. The effective tax rates for fiscal years 1995 and 1994 were 38.5% and 38.2%, respectively.
In fiscal 1994, the company adopted Statement of Financial Accounting Standard (SFAS) No. 109 "Accounting for Income Taxes." The adoption was reflected as a one-time cumulative reduction in the net deferred tax liability resulting in a $1.0 million increase in fiscal 1994 net earnings.
NET EARNINGS
Fiscal 1996 net earnings were $41.2 million, an increase of 31.9% compared to 1995 earnings of $31.3 million. Fiscal 1994 earnings were $42.1 million before the cumulative effect of an accounting change from adopting SFAS No. 109. This change in accounting resulted in a one-time cumulative benefit of $1.0 million.
CAPITAL RESOURCES AND LIQUIDITY
LONG-TERM DEBT
Long-term debt decreased by $15.5 million in fiscal 1996 to $53.1 million at August 31, 1996. Long-term debt was $68.6 million and $30.3 million at August 31, 1995 and 1994, respectively. Long-term debt decreased in fiscal 1996 as a result of improved cash flow from operations. The increase in long-term debt in fiscal 1995 over the previous year was primarily due to reduced cash flow from operations and increased capital spending. Long-term debt as a percent of capital was 13.0% in 1996 as compared to 18.0% in 1995 and 9.6% in 1994.
At August 31, 1996, long-term debt consisted primarily of $24.0 million in senior promissory notes (including the current portion) to Prudential Insurance Company of America and its subsidiaries, $19.0 million in industrial
development bonds and $13.5 million outstanding under the company's revolving credit facility. Long-term debt at the end of fiscal 1995 was comprised mainly of $30.0 million in senior promissory notes (including the current portion), $19.0 million in industrial development bonds, $14.2 million outstanding under the revolving credit facility and $8.3 million in commercial paper.
CASH PROVIDED BY OPERATIONS
Fiscal 1996 cash provided by operations was $80.0 million, 68% above fiscal 1995 results of $47.5 million. Cash provided by operations in fiscal 1994 was $64.7 million. The improvement in fiscal 1996 was primarily a result of higher selling prices, a reduction in accounts receivable and smaller increases in inventories compared to the previous year. The reduced operating cash flow in fiscal 1995, compared to 1994, was due to higher unit production costs and increased working capital needs.
CAPITAL EXPENDITURES
Capital expenditures totalled $63.2 million in fiscal 1996, compared to $66.1 million in 1995 and $43.8 million in 1994.
In fiscal 1996, a $42 million expansion project was completed at the Rhinelander mill to increase its pressure sensitive papermaking capacity. As part of this project, a new state-of-the-art supercalender was installed in November 1995 and a major rebuild of No. 7 paper machine was completed in March 1996. The project also included over $3 million for a new gas-fired boiler. This project increased annual pressure sensitive backing paper capacity nearly 40,000 tons while improving quality. In connection with mix changes, the mill's total annual capacity is expected to increase by over 26,000 tons. Other capital improvements at the Rhinelander mill in fiscal 1996 include a new roll wrapping system to enable the mill to handle, wrap and ship larger diameter rolls and an upgrade to the mill's wastewater treatment plant.
At the Brokaw mill, a $16 million fiber handling and processing project was completed in April 1996. This project included a building expansion, additional pulping capacity and a new fiber handling system to process more recycled post-consumer pulp. A major upgrade to the mill's wastewater treatment plant is nearing completion as well and is expected be finished in early fiscal 1997.
A new shrink wrap packaging line at the Groveton mill was completed in March 1996 to reduce converting operating costs on the company's retail product offerings. A centralized starch kitchen was also installed in fiscal 1996, allowing the mill to utilize lower cost raw materials.
At the end of fiscal 1996, the company was committed to spend approximately $22 million to complete capital projects currently under construction. Capital commitments were $62 million and $30 million at the end of 1995 and 1994, respectively. Major capital projects currently in process include a $6 million wood processing facility modernization at the Brokaw mill to improve wood yield, increase process efficiencies, reduce operating costs and improve working conditions. At the Groveton mill, a new saveall and broke metering system is underway to improve fiber yield and reduce operating costs and a turbine upgrade is also in process to reduce the mill's electrical costs.
The company expects capital expenditures to be approximately $150 million over the next three years, including approximately $40 million in fiscal 1997.
FINANCING
The company maintains a revolving credit facility agreement with four banks to provide loans up to $40 million. This credit facility was reduced, at the company's request, from $65 million to $40 million in September 1996. The credit facility will permit the company to borrow $40 million 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. The company had no commercial paper outstanding at the end of fiscal 1996. On August 31, 1996, a combined total of $26.5 million was available (based on the $40 million credit facility in effect after August 1996) for borrowing under the company's credit and commercial paper placement agreements. In a separate agreement, one of the four banks participating in the revolving credit facility has provided a $10 million uncommitted line of credit to the company. In addition, the company also has a $2 million short- term line of credit available. There was no borrowing against these lines at August 31, 1996.
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 senior 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 the 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 are held in a trust fund until they are drawn upon by the company as spending occurs on these projects. As of August 31, 1996, the company had utilized $15.7 million from the bond issue.
Cash provided by operations, industrial development bond proceeds 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 expenditure requirements. The company believes additional financing is readily available, should it be needed, to fund a major expansion or acquisition.
COMMON STOCK REPURCHASES
On June 30, 1994, the 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. In fiscal 1996, the company repurchased 369,500 shares at market prices ranging from $16.750 per share to $18.125 per share. In fiscal 1995, the company repurchased 308,938 shares at market prices ranging from $16.550
per share to $17.091 per share. The company repurchased 123,750 shares at market prices ranging from $17.364 per share to $17.909 per share in fiscal 1994. Shares and per share data have been restated to reflect the five-for- four stock split and the 10% stock dividend which occurred in January 1996 and January 1995, respectively.
DIVIDENDS
The company's Board of Directors declared cash dividends of $.22 per share in fiscal 1996, a 10% increase over the $.20 per share cash dividend declared in fiscal 1995.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WIPFLI ULLRICH BERTELSON Certified Public Accountants
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, 1996 and 1995, 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, 1996 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, 1996 and 1995, and the results of their operations and cash flows for each of the years in the three- year period ended August 31, 1996, and the supporting schedule presents fairly the information required to be set forth therein, all in conformity with generally accepted accounting principles.
As discussed in Note 8 of the Notes to Consolidated Financial Statements, the company changed its method of accounting for income taxes in 1994.
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 WIPFLI ULLRICH BERTELSON September 18, 1996 Wausau, Wisconsin
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
INDEX TO FINANCIAL STATEMENTS COVERED BY REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
Consolidated Statements of Income for the years ended August 31, 1996, 1995 and 1994 ................................19
Consolidated Balance Sheets as of August 31, 1996 and 1995 .......................................................20
Consolidated Statements of Shareholders' Equity for the years ended August 31, 1996, 1995 and 1994 .................22
Consolidated Statements of Cash Flows for the years ended August 31, 1996, 1995 and 1994 ...........................23
Notes to Consolidated Financial Statements .........................24
Schedule for the years ended August 31, 1996, 1995 and 1994
Schedule II - Valuation and Qualifying Accounts ................38
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.
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 the use of certain estimates and assumptions that directly affect the results of reported 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.
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 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. See Note 8 for change in accounting principle in 1994.
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.
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.
The company has outstanding $24 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 3.70% at
August 31, 1996. 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, 1996, bond proceeds of $3,844,000 were not disbursed and are reflected as an asset on the balance sheet.
The company maintains an unsecured revolving credit facility of $40 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 5.62% and 6.21% at August 31, 1996 and 1995, 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, 1996, 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, 1996, $77,357,000 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. There were no amounts outstanding at August 31, 1996. The weighted average interest rate on outstanding commercial paper was 6.20% at August 31, 1995.
The difference between the book and the fair market value of the long-term debt is not material.
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 $10 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, 1996.
Lease amortization is included in depreciation expense.
The future minimum payments for capitalized leases are reflected in the aggregate annual maturities of long-term debt disclosure in Note 4.
Contingent rentals are based upon usage.
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, 1996 and 1995.
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 $1,632,000 in 1996 and $1,377,000 in 1995.
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 $314,000 in 1996, $232,000 in 1995 and $445,000 in 1994.
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.
For 1996 and 1995, the assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 11% declining by 1% annually for six 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 $3,801,000 or 12.9% in 1996 and $3,779,000 or 13.1% in 1995. The effect of this change on the aggregate of the service and interest cost would be an increase of $441,000 or 16.6% in 1996 and $416,000 or 14.3% in 1995.
NOTE 8. INCOME TAXES
Effective September 1, 1993, the company adopted the liability method of accounting for income taxes prescribed by Statement of Financial Accounting Standard (SFAS) No. 109. 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. Previously, the company used the deferral method which provided for deferred income taxes on the basis of income and expense items reported for financial accounting and tax purposes in different periods.
The company recognized the cumulative effect of the change as of September 1, 1993. The adoption was reflected as a one-time cumulative reduction in the net deferred tax liability resulting in a $1,000,000 increase in fiscal 1994 net earnings. The effect of the change in method did not have a material effect in 1994.
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 options. The option price for non-qualified options may not be less than 50% of the fair market value of the company's common stock at the date of grant.
During 1996, 64,375 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 46,062 options granted in 1995 terminated when operating goals were not met.
During 1992, options were granted under the plan. The options were to be earned over a three-year period based upon the satisfaction of operating goals set forth in the agreement. A total of 122,229 options terminated in 1994 when operating goals were not met.
Future Accounting Change: Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," is effective September 1, 1996, for the company. The new standard establishes a fair value based method
of accounting for stock-based employee compensation plans or allows companies to continue to account for those plans using the intrinsic value based method prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with SFAS No. 123, the company will adopt the requirements of the standard by making pro forma disclosures of net income and net earnings per share as if the fair value based method had been applied.
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 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 1996, 64,375 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. All dividend equivalents granted in 1995 terminated when operating goals were not met.
During 1992, 245,668 dividend equivalents were granted under the plan and were to be earned over a three-year period based upon the satisfaction of operating goals set forth in the agreement. A total of 112,445 dividend equivalents terminated in 1994 when operating goals were not met.
The pre-tax impact on earnings of all stock option discounts, dividend equivalents and stock appreciation rights for the years ended August 31, 1996, 1995 and 1994 was expense of $78,000, expense of $79,000 and income of $283,000, respectively.
NOTE 10. RESEARCH EXPENSES
Research expenses charged to operations were $1,381,000 in 1996, $1,219,000 in 1995 and $1,158,000 in 1994.
NOTE 11. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
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, 1996, the company was committed to spend approximately $22 million to complete capital projects which were in various stages of completion.
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.
During fiscal 1994, the company purchased 100,000 shares of the company's no par value common stock from a director in a private transaction at $27.625 per share, the average market price on the day of the transaction.
NOTE 12. MAJOR CUSTOMERS
One customer accounted for 12.7% of net sales aggregating $68,797,000, 12.0% of net sales aggregating $61,732,000 and 12.3% of net sales aggregating $52,313,000 in 1996, 1995 and 1994, respectively. Another customer accounted for 11.5% of net sales aggregating $62,563,000 in 1996.
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, the 10% stock dividend occurring in 1995 and the four-for- three stock split occurring in 1994.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10.
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 the caption "Election of Directors" on page 3 of the company's proxy statement dated November 8, 1996 ("1996 Proxy Statement"). Information relating to the identification of executive officers of the company is found in Part I of this Form 10-K, page 5. 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 the caption "Section 16(a) Beneficial Ownership Reporting Compliance", page 3 of the 1996 Proxy Statement.
ITEM 11.
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 1996 Proxy Statement under the subcaption "Director Compensation", page 5. 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 the caption "Compensation of Executive Officers" and ending with the material set forth under the subcaption "Supplemental Plans", pages 5 through 9, and (2) the material set forth under the subcaption "Committee Interlocks and Insider Participation", page 11, in the 1996 Proxy Statement.
ITEM 12.
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 1996 Proxy Statement under the caption "Beneficial Ownership of Shares", pages 2 and 3.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
None.
PART IV
ITEM 14.
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 on page 15 herein. (b) Reports on Form 8-K. No reports on Form 8-K were filed by the company during the fourth quarter of fiscal 1996. (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.
Exhibit 3 - Articles of Incorporation and Bylaws
(a) Articles of Incorporation, as amended December 21, 1995 ......15-24(1) (b) Bylaws, as restated July 17, 1992 ............................46-81(2)
Exhibit 4 - Instruments Defining the Rights of Security Holders
(a) Articles and Bylaws (see Exhibit 3)
Exhibit 10 - Material Contracts*
(a) Executive Officers' Deferred Compensation Retirement Plan, as amended 09/18/96 (b) Incentive Compensation Plans, as amended 09/18/96 (Printing and Writing Division and Rhinelander Paper Company, Inc.) (c) Corporate Management Incentive Plan, as amended 09/18/96 (d) 1988 Stock Appreciation Rights Plan, as amended 04/17/91 (e) 1988 Management Incentive Plan, as amended 04/17/91 (f) 1990 Stock Appreciation Rights Plan, as amended 04/17/91 (g) Deferred Compensation Agreement dated 03/02/90, as amended 07/01/94 ............................................51-56(3) (h) 1991 Employee Stock Option Plan ............................133-146(4) (i) 1991 Dividend Equivalent Plan ..............................147-155(4) (j) Supplemental Retirement Benefit Plan dated 01/16/92, as amended 11/13/95..........................................13-17(5) (k) Directors' Deferred Compensation Plan .......................71-86(6) (l) Director Retirement Benefit Policy ..........................87-88(6)
*All exhibits represent executive compensation plans and arrangements.
Exhibit 21 - Subsidiaries ..........................................89(6)
Exhibit 27 - Financial Data Schedule
Page numbers set forth herein correspond to the page numbers using the sequential numbering system for documents filed in paper or the page numbers as filed via EDGAR in electronic format where such exhibit can be found in the following reports of the company (Commission File No. 0-7574) filed with the Securities and Exchange Commission:
(1) Registrant's quarterly report on Form 10-Q for the quarterly period ended February 29, 1996. (2) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1992. (3) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1994. (4) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1991. (5) Registrant's quarterly report on Form 10-Q for the quarterly period ended November 30, 1996. (6) Registrant's annual report on Form 10-K for the fiscal year ended August 31, 1993.
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 28, 1996
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 28, 1996 October 28, 1996 Chairman of the Board Director
/S/ DANIEL D. KING /S/ STANLEY F. STAPLES, JR. Daniel D. King Stanley F. Staples, Jr. October 28, 1996 October 28, 1996 President and Chief Executive Officer Director (Principal Executive Officer) Director
/S/ HARRY R. BAKER Harry R. Baker October 28, 1996 Director
EXHIBIT INDEX TO FORM 10-K OF WAUSAU PAPER MILLS COMPANY FOR THE PERIOD ENDED DECEMBER 31, 1996 Pursuant to Section 102(d) of Regulation S-T (17 C.F.R. 232.102(d))
EXHIBIT 10 - MATERIAL CONTRACTS*
(a) Executive Officers' Deferred Compensation Retirement Plan, as amended September 18, 1996 (b) Incentive Compensation Plans, as amended September 18, 1996 (Printing and Writing Division and Rhinelander Paper Company, Inc.) (c) Corporate Management Incentive Plan, as amended September 18, 1996 (d) 1988 Stock Appreciation Rights Plan, as amended April 17, 1991 (e) 1988 Management Incentive Plan, as amended April 17, 1991 (f) 1990 Stock Appreciation Rights Plan, as amended April 17, 1991
*All exhibits represent executive compensation plans and arrangements.
EXHIBIT 27 - FINANCIAL DATA SCHEDULE
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