FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1994
Commission File No. 0-1051
Consolidated Papers, Inc.
(A Wisconsin Corporation)
IRS Employer Identification No. 39-0223100
Wisconsin Rapids, Wisconsin 54495-8050
Telephone No. 715-422-3111
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, Par Value $1.00 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes (X) No ( )
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. ( )
The aggregate market value of March 7, 1995 of the voting stock held by
nonaffiliates of the registrant was approximately $1.29 billion, based upon
the NYSE closing price on March 7, 1995 and an estimate that 60.2% of the
stock is owned by nonaffiliates.
On March 7, 1995 there were 44,259,833 shares of common stock outstanding.
Information required by Items 10, 11, and 12 of Form 10-K is incorporated by
reference (except as specifically excepted in the Proxy Statement) into
Part III hereof from the registrant's Proxy Statement to Shareholders for the
Annual Meeting of Shareholders to be held April 24, 1995.
PART I
Item 1. BUSINESS.
Consolidated Papers, Inc. was incorporated in Wisconsin in 1894. The company
and its subsidiaries (collectively, the "Company") operate primarily in the
pulp and paper industry. Operations in pulp and paper involve the manufacture
and sale of enamel printing paper (also known as coated printing paper) for
the printed communications industry, coated specialty papers used largely in
the packaging and labeling of food and consumer products, and the manufacture
of pulp for use in the manufacture of these papers. The Company also
manufactures paperboard, paperboard products and corrugated products.
Integrated in the business are electrical power operations, which have nominal
sales to others.
There was no change in the business done by the Company during 1994.
The Company's principal product is coated printing paper. The Company is a
leading producer of these papers and of coated specialty papers.
The percent of coated printing paper sales to total sales was 84.6% (1990),
81.5% (1991), 80.7% (1992), 79.8% (1993), and 80.0% (1994).
Coated printing papers are sold directly to magazine publishers and through
paper merchants to publishers and commercial printers. Distribution of other
paper products is by means of direct sales to quantity users.
<TABLE>
DISTRIBUTION OF ENAMEL PRINTING PAPER SALES IN TONS
<CAPTION>
Direct
Publisher Merchant
Accounts And Other
Year % %
<S> <C> <C>
1990 62% 38%
1991 62% 38%
1992 61% 39%
1993 56% 44%
1994 52% 48%
The Company competes in the coated printing paper market and coated specialty
paper market (1) by providing paper of high quality incorporating special
qualities desired by its customers, (2) by pricing its products competitively,
and (3) by emphasizing service to customers in the form of prompt attention to
orders, prompt and reliable delivery of products to customers, and technical
assistance to printers that use the Company's products.
Few paper manufacturers have unique qualities in coated papers or coated
specialty papers, or unique machines or secret processes that give them a
strong competitive advantage over other paper manufacturers. Because of this,
price competition is a more important marketing factor during periods of
excess supply of, or low demand for, this product. These two factors often
occur at once.
The Company competes in the coated printing paper market with other paper
companies, some of which are substantially larger, more diversified, and with
greater financial resources. However, the Company is one of the largest
manufacturers of coated printing papers in the United States, having shipped
968,313 tons of coated printing papers in 1994, which represents approximately
12% of the U.S. market for this product. The Company's principal U.S.
competitors in this market are Blandin Paper Company, a subsidiary of Fletcher
Challenge Canada Ltd.; Boise Cascade Corporation; Bowater Incorporated;
Champion International Corporation; James River Corp.; International Paper
Company; Mead Corporation; Repap Wisconsin Inc., an affiliate of Repap
Enterprises Corporation Inc.; Pentair, Inc.; Northwest Paper Division of
Potlatch Corporation; S.D. Warren Division of Sappi Ltd.; Westvaco
Corporation; and Weyerhaeuser Company.
The Company's energy sources during 1994 were:
<S> <C>
Coal 27.4%
Process Waste 44.1%
Natural Gas 13.8%
Electricity 14.4%
Petroleum products .3%
The Company experienced no shortages of energy in 1994. The Company currently
purchases 100% of its coal requirement under two contracts, one for low-sulfur
western U.S. coal, which expires December 31, 1999, and the other for Kentucky
coal, which expires September 30, 1997. Coal is currently in ample supply,
and we anticipate no supply problems in 1995.
The Company is in the second year of a five-year agreement for the firm
transportation of approximately 65% of its total natural gas supply.
Approximately 35% of the Company's natural gas consumption is in the
interruptible category, which means it is subject to reduction in supply
whenever cold weather or other events decrease the amount of pipeline gas
available. When such reductions occur, production is maintained by
substituting fuel oil or propane, of which the Company has an adequate supply.
Natural gas is currently in good supply and minimal interruption is expected
in 1995.
The Company is integrated through ownership of forest lands and through its
own pulp-producing facilities. The harvest during 1994 from Company lands was
the equivalent of 17% of the wood used in the Company's pulp mills. Wood used
in the Company's pulp mills from outside Company land came from independent
producers who obtain their wood products from public and private lands, and
from sawmill residues. The Company was able to acquire an adequate supply of
pulpwood and wood chips during 1994 and expects that its regular suppliers
will be able to furnish it with an adequate supply of pulpwood and wood chips
for 1995 operations.
The Company also purchases market pulp on a regular basis and purchased 23.7%
of the total pulp consumed by the Company's paper mills during 1994. The
Company has been able to acquire sufficient pulp to operate its mills at
planned rates to date and has contracts and other arrangements for 95% of its
anticipated requirements for 1995. Market pulp is currently in short supply.
Labor negotiations are currently underway at several Canadian pulp mills.
Should negotiations fail and strikes occur, the possibility of some selective
paper production curtailment exists.
The principal raw materials consumed in the manufacture of kraft pulp include
pulpwood, chlorine, caustic soda, oxygen, hydrogen peroxide, sulfuric acid,
sodium chlorate, and lime. The principal raw materials consumed in the
manufacture of coated papers include kraft pulp, groundwood pulp,
thermomechanical pulp, starch, soya protein, clay, calcium carbonate, latex,
and titanium dioxide pigment.
The Company has multiple sources for all principal raw materials consumed and
purchases most raw materials from domestic sources. The majority of the
purchased kraft pulp is imported from Canada, along with small quantities of
wood chips. During 1994, the Company was able to procure adequate supplies of
all principal raw materials and thus experienced no interruptions of
production due to materials shortages. Most raw materials remain in good
supply, while caustic soda, sodium chlorate, and hydrogen peroxide are in
tight supply and wood pulp is in short supply. The Company expects no
interruptions of production due to materials shortages with the exception of
wood pulp where labor unrest and mill strikes raise the possibility of
selective paper production curtailments.
The Company has various patents but does not believe its business is dependent
on any one patent or group of patents.
The Company spent an estimated $5.9 million in 1994, $5.7 million in 1993, and
$5.6 million in 1992 on research and development. These funds were devoted to
the development of improved processes and new process control systems, the
development of new products and the improvement of existing products, and
environmental projects.
The Company is committed to complying with all state and federal environmental
regulations.
Our wastewater permits were renewed on September 30, 1994. The renewed
permits contain some favorable provisions including reduced dioxin monitoring
and elimination of the aluminum, copper, and zinc limits in Water Quality
Center's (WQC) permit. However, the Company has petitioned for an
adjudicatory hearing to challenge a number of permit conditions including
WQC's cadmium limit, the annual mass phosphorus limits for Water Renewal
Center and WQC, the requirement to relocate WQC's effluent outfall and various
wastewater treatment sludge landspreading requirements. The Company is
actively attempting to resolve the permit issues with the Wisconsin Department
of Natural Resources (WDNR), thus avoiding the need for the hearing. We
remain in compliance with all conditions and limitations of our renewed
wastewater permits. The Company does not expect that compliance with its
renewed wastewater permits will cause material changes in its business or
affect its competitive position. The Company is unable to predict the effect
of future amendments to the Clean Water Act, which may require additional
wastewater treatment. The Company continues to invest capital funds to
upgrade wastewater treatment facilities in preparation for production
increases and future regulations.
The Company received general tier 1 storm-water discharge permits for its
applicable operations on December 8, 1994. The permits include a pollution-
prevention plan and best-management practices, and may require storm-water
sampling and testing, and pollution control. The Company has defined storm-
water permit requirements and schedules, and will implement a cost-effective
strategy to comply. The storm-water permit requirements are not expected to
cause material changes in the Company's business or affect its competitive
position.
The Company continues to implement plans to assure continued compliance with
WDNR's hazardous air emissions regulations.
The Federal Clean Air Act Amendments of 1990 and the Clean Water Act Effluent
Guidelines are expected to have a significant financial impact on the paper
industry. The Environmental Protection Agency proposed rules to reduce the
discharge of water pollutants and emissions of hazardous air pollutants from
the paper industry on December 17, 1993. These proposed regulations are
commonly referred to as the "Cluster Rule." The Company's preliminary review
of the proposed Cluster Rule indicates that capital expenditures of
$60 million to $95 million for process and equipment changes may be required
by the end of 1998. Additional annual operating costs of $20 million to
$25 million may be required to comply with the Cluster Rule. The industry's
national trade associations are working with Company representatives to
carefully review these significant regulations. Detailed comments were filed
seeking relief as appropriate. The proposed Cluster Rule is subject to change
prior to final promulgation, which is currently scheduled for early 1996.
Therefore, our capital and operating cost estimates are also subject to change
and will be updated as required by the final Cluster Rule. Because the
Company's principal competitors will also be subject to similar regulatory
requirements, the Company does not expect that compliance with the Cluster
Rule will affect its competitive position.
The Company remains in compliance with the monitoring and reporting
requirements of state groundwater regulations applicable to its active and
inactive landfills. The Company continues to explore solid waste reduction
and recycling alternatives to decrease costs and reliance on landfills. The
Company obtained regulatory approval to restart its ConsGr (WQC wastewater
treatment sludge) agricultural landspreading program in 1993. The ConsGr
program began operation on November 1, 1993. The ConsGr program reduces our
dependence on landfills, and benefits the local agricultural community and
environment. The Company continues to distribute lime sludge from its Kraft
pulp mill as a liming agent and for use in asphalt mixtures. The Company
completes landfill site life evaluations annually to assure adequate lead time
for permitting and constructing required new sites. The Company continues to
make progress in obtaining all approvals and permits to expand landfill
capacity at the Water Quality Center. At this time, the Company is unable to
predict the effect of future landfill, groundwater or sediment remediation
regulations.
The Company's Hazardous Materials Committee continues to ensure timely and
full compliance with all regulations applicable to the purchase,
transportation and disposal of hazardous materials. The committee also
ensures compliance with the Department of Transportation rules regarding
training of all employees who handle and transport hazardous materials.
The unintended generation of dioxin is a global concern and a challenge for
the paper industry. The industry's use of elemental chlorine in the pulp-
bleaching process has been linked to the formation of trace amounts of
dioxins, furans, chloroform and other chlorinated organics. The Company has
developed a multiphase program to reduce the use of elemental chlorine in the
pulp-bleaching process. The Company's multiphase chlorine reduction program
achieved new levels of success in 1994. Phase 1 of the chlorine-reduction
program was completed in 1992 and included improved hardwood brownstock
washing, increased substitution of chlorine dioxide in the first stage of pulp
bleaching and use of hydrogen peroxide and oxygen in the lignin-extraction
stage. Phase 2 of the chlorine-reduction program was completed in 1993 and
includes the addition of softwood oxygen delignification and associated
brownstock washing. The Company has been using oxygen delignification on
hardwood since 1986. Phase 1 produced nondetectable levels of dioxin
(2,3,7,8-TCDD) in our treated wastewater effluent and assures compliance with
permit limits. Phase 2 was optimized during 1994 with emphasis on further
reducing elemental chlorine. Phase 2 has resulted in nondetectable levels of
dioxin (2,3,7,8-TCDD) in pulp and wastewater treatment plant sludge and also
has significantly reduced the formation of other chlorinated organics,
including chloroform. Phase 2 also resulted in the elimination of elemental
chlorine in the bleaching of softwood pulp, achieving the commonly referred to
status of elemental chlorine free (ECF). In March 1994, the Company announced
further chlorine-reduction plans. Phase 3 of our chlorine-reduction program
will eliminate the use of elemental chlorine in the hardwood pulp-bleaching
process by the end of 1996. Our new ECF pulp-bleaching process utilizes
chlorine dioxide on softwood and will utilize high-consistency ozone on
hardwood to replace elemental chlorine in the first stage of bleaching. We
will define technology options, implementation schedules and budgets to meet
future regulatory requirements and market demand. The Company continues to
evaluate the technical and economical feasibility of nonchlorine bleaching if
required by future regulation or the marketplace.
The Company continues to comply with its voluntary commitment to the Food and
Drug Administration to reduce dioxin (2,3,7,8-TCDD) in bleached wood pulp used
to manufacture food packaging to two parts per trillion or less.
The Company remains in compliance with all conditions of a 1993 consent decree
that settled a lawsuit for violation of particulate emission limits applicable
to Kraft Division's lime kiln. To remedy the violation, the Company installed
a $2.4 million electrostatic precipitator that will assure compliance with
current and anticipated future particulate emission limits. The consent
decree contains various operational and reporting requirements effective until
October 1995. We have an internal management system to assure compliance with
all conditions of the consent decree.
The Company also settled a lawsuit brought by the United States seeking
recovery of cleanup expenses incurred at a Superfund site (Schmalz site) in
Harrison, Wisconsin. The Company's share for the Schmalz site was $1.3
million, which was partially offset by recoveries from two defendants and
insurers. Settlement of the Schmalz Superfund cleanup will not materially
affect the Company. It is possible that the Company will be named as a
potentially responsible party with respect to several other sites (probably in
Wisconsin), although the Company has not been advised of any formal action
regarding other sites to date. The State of Wisconsin has undertaken sediment
remediation studies on various watershed systems, including the Wisconsin
River and the Fox River. Substantially all of the Company's current
manufacturing operations use water from and discharge treated effluent into
the Wisconsin River. The studies with respect to the Wisconsin River system
are in the early stages. The Company does not know what actions will be
necessary with respect to the Wisconsin River, or whether the Company may be
involved in any remediation efforts on the Wisconsin River system. The
Company's Appleton Division, closed in 1982, was on the Fox River. To date,
the Company has not been involved in any discussions concerning the Fox River.
The Company remains in compliance with all provisions of emergency planning
community right-to-know legislation and federal and state underground storage
tank regulations. Environmental activities not only are directed at
protecting the environment through pollution control, but also through
pollution prevention. The Company actively participates in the Wisconsin
Paper Council's innovative pollution prevention partnership with the WDNR.
The Company continues to look for cost-effective pollution prevention
opportunities.
The Company estimates current environmental operating costs to be
$23.5 million annually, including depreciation of $5.9 million. In 1994, the
Company spent $3.8 million on capitalized environmental improvements and will
spend another $18.6 million in 1995. The Company anticipates that compliance
with regulations to be promulgated to implement the Clean Air Act Amendments
of 1990 will require significant capital expenditures over the next five years
and will significantly increase operating costs at the Company's Kraft
Division. These costs are described in more detail in Part II, Item 7,
Management's Discussion and Analysis of Liquidity and Capital Resources -
Environmental Matters. The Company attempts to recover some of its
environmental expenses through increased prices of its products.
At the end of 1994 the Company employed approximately 4,850 people,
essentially all of whom were full-time employees. In 1994 new five-year labor
contracts were signed with five unions that currently represent approximately
3,740 employees. The Company considers its labor relations to be excellent.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officer
Name Age Since Positions
<S> <C> <C> <C>
George W. Mead 67 1971 Chairman of the Board
Patrick F. Brennan 63 1988 President and
Chief Executive Officer
William P. Orcutt 66 1977 Vice President, Manufacturing
Roy E. Schulz 64 1988 Vice President, Manufacturing
James R. Kolinski 56 1993 Vice President
David A. Krommenacker 52 1994 Vice President
Gorton M. Evans, Jr. 56 1989 Vice President, Marketing, Enamel
Printing Papers
Richard J. Kenney 54 1989 Vice President, Finance
Carl H. Wartman 42 1990 Secretary and Corporate Attorney
James E. Shewchuk 58 1989 Controller
John D. Steinberg 59 1990 Treasurer
All executive officers of the Company are elected annually by the Board of
Directors.
All of the executive officers of the Company have served in executive or
managerial positions in the Company for the past five years.
Item 2. PROPERTIES.
The Company, at the close of 1994, operated eight manufacturing plants in five
municipalities. The following table describes the Company's facilities.
No. Sq. Ft.
Manufac- Production, Plant
turing Plant Office, Sites
Industry Plants Locations Whse. Space (Acres)
<S> <C> <C> <C> <C>
Paper and pulp 8 4 - Wisconsin Rapids, WI)
1 - Biron, WI )
1 - Whiting, WI ) 6,212,632 593
1 - Stevens Point, WI )
1 - Adams, WI )
Equipment in operation at the close of 1994 included 15 paper machines, two
continuous kraft-pulp digesters, one paperboard machine, one corrugating
machine, and power production facilities with a nameplate rated capacity of
189,610 KW (with actual capacity at any time subject to boiler capacity and
river flow availability for power production).
The Water Quality Center in Wisconsin Rapids is a pollution-abatement facility
on a 417-acre site which treats the mill effluent of two paper mills and one
pulp mill.
The Water Renewal Center in the Town of Linwood is a pollution-abatement
facility on a 192-acre site that currently treats the effluent of two paper
mills.
Available capacity utilization during 1994 was 92.5% for coated papers.
Production facilities are considered to be well maintained and adequate for
their purpose.
The Company owns 316,177 acres of timberlands in the United States and 356,927
acres in Canada. A forest-management plan prescribes allowable cuts on all
timberlands with the objective of maximum return from this resource while
keeping harvests in balance with growth.
Item 3. LEGAL PROCEEDINGS.
There were no pending legal proceedings other than ordinary litigation of a
nonmaterial nature incidental to the business of the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
fourth quarter of the fiscal year covered by this Form 10-K.
PART II
Item 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The number of record holders of the Company's common stock as of December 31,
1994 is 7,125.
The Company's common stock is traded on the New York Stock Exchange. The
Company's symbol is CDP.
COMMON STOCK MARKET PRICE AND CASH DIVIDENDS
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
1994
<S> <C> <C> <C> <C> <C>
High $ 49.00 $ 44.25 $ 52.38 $ 52.00 $ 52.38
Low 41.00 36.25 42.25 41.88 36.25
Close 41.50 43.75 51.75 45.00 45.00
Cash dividend .32 .32 .32 .32 1.28
1993
High $ 40.50 $ 53.75 $ 54.25 $ 46.00 $ 54.25
Low 37.50 39.00 38.50 39.50 37.50
Close 40.13 53.50 41.50 43.25 43.25
Cash dividend .32 .32 .32 .32 1.28
Item 6. SELECTED FINANCIAL DATA.
FIVE-YEAR COMPARISON OF SELECTED
FINANCIAL DATA
FOR THE YEARS 1990 THROUGH 1994
(Dollars in thousands, except per share data)
Year Net Income Cash
Ended Per Total Long-Term Dividends
Dec. 31 Net Sales Amount Share Assets Debt Per Share
<S> <C> <C> <C> <C> <C> <C>
1994 $ 1,027,551 $ 86,734** $ 1.97** $ 1,499,511 $ 68,000 $ 1.28
1993 947,336 64,195 1.46 1,467,067 121,000 1.28
1992 904,232 12,359* .28* 1,486,967 171,000 1.28
1991 871,864 91,445 2.10 1,410,707 178,000 1.28
1990 948,815 142,494 3.27 1,191,970 - 1.26
* 1992 amounts reflect the cumulative effect of changes in accounting principles as
detailed on the Consolidated Statements of Income on page 14.
** 1994 amounts reflect the change in estimated useful lives of machinery and
equipment used in the pulp and papermaking process to a 20-year versus the former
16-year period.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION.
Sales and Cost of Sales.
Net sales increased 8.5% in 1994 to a record $1.03 billion, compared with $947
million in 1993 and $904 million in 1992. Shipments were a record 1,151,000
tons, an increase of 9.8% over the previous record year of 1993. Gross
margins as a percent of sales were 19.5% in 1994, compared to 18.5% in 1993
and 16.2% in 1992. The 1994 margin increase was the result of $18.2 million
due to higher volume, $23.6 million due to a lengthening of depreciable lives
of pulp and papermaking equipment, and cost controls partially offset by
higher pulp costs.
Plant Operations.
Groundwood-free coated shipments (primarily Wisconsin Rapids Division)
increased compared with 1993 due to improved demand and No. 16 machine's
continued productivity improvements. The Wisconsin Rapids Division's smallest
machine (No. 11) was idled in 1992 and did not operate in 1993 or 1994. The
division's Nos. 12, 14, and 15 machines were also down for 22, 28 and 120
days, respectively, due to lack of orders. During 1994, the division operated
at 90.5% of available capacity, compared with 86.8% in 1993 and 81.9% in 1992.
The U.S. industry average capacity utilization was 91.4% for groundwood-free
grades in 1994, 90.2% in 1993 and 89.7% in 1992. For the fourth consecutive
year, average selling prices declined because of excess industry capacity.
However, a stronger market in the last half of 1994 allowed price increases of
3% to 5% late in the third quarter and approximately 11% in December.
Lightweight coated groundwood shipments (primarily Biron and Wisconsin River
divisions) increased due to improved demand in the second half resulting from
increased catalog business and magazine advertising pages. The four machines
at the Biron Division were down for a total of 18 days due to lack of orders.
Our Company's smallest groundwood-paper machine at the Wisconsin River
Division (No. 61) was down for 187 days in 1994, primarily in the first half
of the year, compared with 191 days in 1993, mostly in the second half, and 92
days in 1992. In addition, the No. 64 paper machine at that division was down
in the first quarter of 1994 for 38 days for a major rebuild and speedup. The
other two machines at the Wisconsin River Division were down for a total of
nine days due to lack of orders. Overall, the groundwood mills operated at
93.8% of available capacity in 1994, compared with 88.4% and 94.3% in 1993 and
1992, respectively. The U.S. industry average capacity utilization was 93.4%
for groundwood grades in 1994, 92.5% in 1993 and 93.0% in 1992. On average,
selling prices for groundwood grades declined 5.5% in 1994, following a 3.8%
increase in 1993 and an 8.2% decline in 1992. In the fourth quarter 1994,
demand for lightweight coated papers allowed a price increase of approximately
7%, and another selling price increase of 11% in January 1995.
Coated specialty paper shipments (Stevens Point Division) in 1994 recorded a
fourth consecutive record year, increasing 10.5% over 1993. This followed
increases of 24.3% in 1993 and 21.5% in 1992. The trend reflects the Stevens
Point Division's No. 34 machine progress in reaching its design capacity,
following its start-up in late 1990. Operations were at 100% of available
capacity for 1994, compared with 99.2% in 1993 and 80.1% in 1992. Selling
prices were flat until the second half of 1994. When pulp costs escalated,
selling prices were increased by approximately 4% in July, 4% in October and
4% in January 1995.
Corrugated products shipments increased 9.5%, while paperboard products
shipments decreased 12.2% in 1994. Paperboard Products Division is striving
to fill the sales void left by the changing business environment and the loss
of its spiral-can business early in 1994.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $1 million in 1994 to
$63 million, compared with a $1 million increase in 1993 and a $1 million
decrease in 1992. The 1994 changes are considered normal in the current
environment.
Other Income and Income Taxes.
Other income (expense) increased $9 million in 1994, compared with an increase
of $2 million in 1993 and a decrease of $13 million in 1992. In 1994, the
Company recorded a one-time benefit of $5.5 million, following settlement of a
patent-infringement suit. Interest expense was $5 million in 1994 compared
with $8 million in 1993 and $9 million in 1992. The reduced interest expense
reflects reduced funded debt.
Effective tax rates were 39.2%, 41.8% and 37.9% in 1994, 1993 and 1992,
respectively. In 1993, the Company adjusted its deferred income tax balances
and current income taxes to reflect the increased federal income tax rate from
34% to 35%. The higher federal tax rate increased deferred tax liabilities at
January 1, 1993, by $3.6 million and the tax provision for 1993 by $1.1
million. In 1992, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
than Pensions," and No. 109, "Accounting for Income Taxes." Details are
included in Notes 2 and 5, respectively, of the Notes to Consolidated
Financial Statements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF LIQUIDITY AND CAPITAL RESOURCES
Current Account Changes.
Accounts receivable increased in 1994 by $27 million, compared with a decrease
of $11 million in 1993 and an increase of $15 million in 1992. The 1994
increase was due to increased sales late in the fourth quarter, compared with
the opposite occuring in the fourth quarter of 1993. The days' sales
outstanding has not materially changed since 1987. The Company believes its
collection period is well within the industry's standards. Inventories were
down $12 million compared with 1993. Increased customer needs decreased
finished goods inventory $15 million, while raw materials inventories
increased. Accounts payable increased by $14 million for 1994 due to timing
of payments.
The year-end ratio of current assets to current liabilities was 1.3:1 in 1994
and 1.2:1 in 1993 and 1992.
Capital Commitments and Spending.
At the end of 1994, authorized but uncompleted capital commitments totaled $59
million. A $116 million 1995 capital approval budget for new projects and a
$166 million paper machine expansion at the Stevens Point Division have been
authorized by the board of directors. This $282 million, plus the $59 million
carryover, less anticipated carryover of $167 million at the end of 1995, will
result in planned capital spending of $174 million in 1995, compares with
expenditures of $98 million in 1994, $83 million in 1993 and $137 million in
1992. The major 1994 expenditures included $7 million on an off-line hot-soft
calender addition at the Stevens Point Division, $7 million for a major
speedup and rebuild of a paper machine at the Wisconsin River Division, and
$24 million for a grinder room replacement project at the Wisconsin River
Division. The 1995 authorized $116 million capital approval budget includes
$67 million for necessary replacement and quality projects, $14 million for
high-return projects, and $35 million for environmental-control projects.
Long-Term Debt.
The Company's borrowings as of year-end were $118 million, a decrease of $53
million, after decreasing $50 million in 1993 and increasing $43 million in
1992. Current plans are to use excess cash to pay down the debt. Interest
costs incurred totaled almost $6 million in 1994, with $5 million charged
against income and $1 million capitalized as part of the cost of related
capital projects.
Environmental Matters.
The Company has completed two phases of a multiphase chlorine-reduction
program involving equipment and process changes at the Kraft Division that are
designed to ensure full compliance with dioxin wastewater permit limitations
and with Wisconsin regulations requiring best-available chloroform emission
control technology. Phase 2 also resulted in the elimination of elemental
chlorine in the bleaching of softwood pulp. The second phase of this program
was completed in November 1993. Completion of the first two phases of this
program cost $35 million. Phase 3, which will eliminate elemental chlorine
from the hardwood pulp-bleaching process, is expected to cost approximately
$33 million and is planned for completion in mid-1996. Mechanical pulp is
bleached using a totally chlorine-free process.
During 1993, the Company settled a lawsuit brought by the United States
seeking recovery of cleanup expenses incurred at a Superfund site in Harrison,
Wisconsin. It is possible that the Company will be named as a potentially
responsible party with respect to several other sites (probably in Wisconsin),
although the Company has not been advised of any formal action regarding other
sites to date. The state of Wisconsin has undertaken sediment remediation
studies on various watershed systems, including the Wisconsin River and the
Fox River. Substantially all of the Company's current manufacturing
operations use water from and discharge treated effluent into the Wisconsin
River. The studies with respect to the Wisconsin River system are in the
early stages. The Company does not know what actions will be necessary with
respect to the Wisconsin River, or whether the Company may be involved in any
remediation efforts on the Wisconsin River system. The Company's Appleton
Division, closed in 1982, was on the Fox River. To date, the Company has not
been involved in any discussions concerning the Fox River.
The Clean Air Act Amendments of 1990 and the Clean Water Act Effluent
Guidelines Limitations are expected to have a significant financial impact on
the paper industry. The Environmental Protection Agency proposed rules to
reduce the discharge of water pollutants and emissions of hazardous air
pollutants from the pulp and paper industry on December 17, 1993. These
proposed regulations are commonly referred to as the "Cluster Rule." The
Company's preliminary review of the proposed Cluster Rule indicates that
capital expenditures of $60 million to $95 million for process and equipment
changes may be required by the end of 1998. Additional annual operating costs
of $20 million to $25 million may be required. The EPA's proposed Cluster
Rule is subject to change prior to final promulgation, which is scheduled for
early 1996.
Management believes that the resolution of existing environmental matters will
not have a material impact on the Company's results of operations.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Consolidated Balance Sheets Consolidated Papers, Inc. and Subsidiaries
As of December 31
(Dollars in thousands) 1994 1993 1992
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 8,155 $ 2,123 $ 1,965
Accounts and notes receivable, net of reserves
of $4,066 in 1994, $3,558 in 1993 and
$3,300 in 1992 88,462 61,321 72,013
Inventories
Finished and partly finished products 29,078 44,481 41,273
Raw materials 26,380 24,921 27,434
Stores supplies 32,555 30,885 31,324
88,013 100,287 100,031
Prepaid expenses 14,698 17,859 10,567
Total Current Assets 199,328 181,590 184,576
Investments and Other Assets
Investments in affiliates, at cost plus equity
in undistributed earnings 30,887 29,147 27,471
Other assets 29,322 33,075 31,431
60,209 62,222 58,902
Plant and Equipment
Buildings 168,952 159,464 159,397
Machinery and equipment 1,739,000 1,674,455 1,608,066
1,907,952 1,833,919 1,767,463
Less: Accumulated depreciation 753,263 680,767 589,407
1,154,689 1,153,152 1,178,056
Land and riparian rights 7,620 7,309 7,235
Timber and timberlands, net of depletion 21,764 21,006 20,059
Capital additions in process 55,901 41,788 38,139
1,239,974 1,223,255 1,243,489
$ 1,499,511 $ 1,467,067 $ 1,486,967
Current Liabilities
Current maturities of long-term debt $ 50,000 $ 50,000 $ 50,000
Accounts payable 47,436 33,352 39,653
Payroll and employee benefits 38,873 39,351 29,890
Income taxes 126 - 5,207
Property taxes 7,421 8,983 8,878
Other current liabilities 13,094 13,999 24,305
Total Current Liabilities 156,950 145,685 157,933
Noncurrent Liabilities and Deferred Credits
Long-term debt 68,000 121,000 171,000
Deferred income taxes 181,778 158,448 133,398
Postretirement benefits 109,558 98,776 99,575
Other noncurrent liabilities 7,338 4,110 3,458
366,674 382,334 407,431
Shareholders' Investment
Preferred stock, authorized and unissued 15,000,000 shares - - -
Common stock, authorized 93,750,000 shares, par value
$1.00 per share; issued 44,199,736 shares in 1994,
44,014,385 shares in 1993 and 43,826,911 shares in 1992 44,200 44,014 43,827
Capital in excess of par value 56,082 48,770 40,448
Cumulative translation adjustment (2,113) (2,047) (2,004)
ESOP loan guarantee - - (1,000)
Unrealized net loss on investment securities ( 879) - -
Reinvested earnings 878,597 848,311 840,332
Total Shareholders' Investment 975,887 939,048 921,603
$ 1,499,511 $ 1,467,067 $ 1,486,967
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Consolidated Statements of Income Consolidated Papers, Inc. and Subsidiaries
For the Years Ended December 31
(Dollars in thousands, except per share data) 1994 1993 1992
Net sales $ 1,027,551 $ 947,336 $ 904,232
Cost of goods sold 827,448 772,066 758,112
Gross profit 200,103 175,270 146,120
Selling, general and administrative expenses 63,479 62,097 60,654
Income From Operations 136,624 113,173 85,466
Other Income (Expense)
Interest expense ( 5,244) ( 8,200) ( 8,881)
Interest income 142 456 20
Miscellaneous, net 11,083 4,939 4,551
Total 5,981 ( 2,805) ( 4,310)
Income Before Provision for Income Taxes 142,605 110,368 81,156
Provision for Income Taxes
Current 30,654 24,213 22,765
Deferred 25,217 21,960 7,984
Total 55,871 46,173 30,749
Net income before cumulative effect of changes
in accounting principles 86,734 64,195 50,407
Cumulative effect of changes in accounting principles
Postretirement benefits (less income tax
benefit of $37,658 in 1992) - - (59,901)
Income taxes - - 21,853
Net Income $ 86,734 $ 64,195 $ 12,359
Net income per share before cumulative effect of
changes in accounting principles $ 1.97 $ 1.46 $ 1.15
Cumulative effect of changes in accounting principles
Postretirement benefits - - (1.37)
Income taxes - - .50
Net Income Per Share $ 1.97 $ 1.46 $ .28
Average Number of Common Shares Outstanding 44,106,953 43,923,577 43,758,559
Consolidated Statements of Reinvested Earnings
For the Years Ended December 31
(Dollars in thousands) 1994 1993 1992
Balance beginning of period $ 848,311 $ 840,332 $ 883,977
Add: Net income 86,734 64,195 12,359
Deduct: Cash dividends of $1.28 per share in 1994,
1993 and 1992 (56,448) (56,216) (56,004)
Balance End of Period $ 878,597 $ 848,311 $ 840,332
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Statements of Cash Flows Consolidated Papers, Inc. and Subsidiaries
For the Years Ended December 31
(Dollars in thousands) 1994 1993 1992
Cash Flows from Operating Activities:
Net Income $ 86,734 $ 64,195 $ 12,359
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and depletion 78,563 99,560 89,463
Undepreciated cost of plant and equipment retirements 2,457 3,277 2,984
Earnings of affiliates ( 3,101) ( 3,186) ( 2,784)
Deferred income taxes - cumulative effect of change
in accounting principles - - (59,511)
Deferred income taxes - current year 25,217 21,960 7,984
Non-cash litigation settlement ( 2,500) - -
(Increase) decrease in accounts receivable ( 26,189) 10,692 (15,341)
(Increase) decrease in inventories 12,274 ( 256) ( 7,059)
(Increase) decrease in prepaid expenses 1,274 ( 4,304) ( 4,568)
Increase (decrease) in accounts payable 15,632 ( 6,301) 7,060
Increase (decrease) in current liabilities, other
than current maturities of long-term debt and
accounts payable ( 2,819) ( 5,845) 17,926
Postretirement benefits - cumulative effect of change
in accounting principles - - 97,559
Increase (decrease) in postretirement benefits 10,782 ( 799) 2,016
Increase (decrease) in other noncurrent liabilities 3,228 1,652 ( 250)
Net Cash Provided by Operating Activities 201,552 180,645 147,838
Cash Flows from Investing Activities:
Capital expenditures ( 97,739) ( 82,603) (137,269)
(Increase) decrease in investments and other assets 4,169 ( 177) ( 6,700)
Net Cash (Used in) Investing Activities ( 93,570) ( 82,780) (143,969)
Cash Flows from Financing Activities:
Cash dividends ( 56,448) ( 56,216) ( 56,004)
Increase (decrease) in long-term debt ( 53,000) ( 50,000) 43,000
Common stock issued 7,498 8,509 4,482
Net Cash (Used in) Financing Activities (101,950) ( 97,707) ( 8,522)
Net increase (decrease) in cash and cash equivalents 6,032 158 ( 4,653)
Cash and cash equivalents - beginning of year 2,123 1,965 6,618
Cash and Cash Equivalents - end of year $ 8,155 $ 2,123 $ 1,965
Cash paid during the year for:
Interest $ 7,128 $ 9,239 $ 10,883
Income taxes 27,458 35,476 22,930
The accompanying notes to consolidated financial statements are an integral part of these statements.
Consolidated Papers, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1994, 1993 and 1992
1. Summary of Accounting Policies. Principles of Consolidation - The
consolidated financial statements include the accounts of all
subsidiaries. Investments in companies in which ownership is at least
20%, but less than a majority of the voting stock, are accounted for
using the equity method. The Company operates in a single segment, which
is paper and paper-related products. The Company grants credit to
customers with businesses throughout the United States and Canada. A
substantial portion of the Company's accounts receivable is with
customers in the media and publishing industries. All receivables
arising out of the normal course of business are uncollateralized. No
sales to a single customer exceeded 10% of net sales in 1994, 1993 or
1992.
Cash and Cash Equivalents. For purposes of the Statements of Cash Flows,
the Company considers all highly liquid debt instruments purchased with a
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair market value.
Inventories - Inventories accounted for using the last-in, first-out
(LIFO) cost method (approximately 60% in 1994, 63% in 1993 and 62% in
1992) are stated at amounts that do not exceed market. If the first-in,
first-out (FIFO) method of accounting for inventories had been used by
the Company, inventories would have been higher than that reported at
December 31, 1994, 1993 and 1992, by $21,890,000, $14,098,000 and
$12,621,000, respectively. The remaining inventories are stated at the
lower of cost or market using the FIFO method, except for stores supplies
and certain manufacturing supplies, which are accounted for on a moving
average cost basis.
Investments: Available-for-sale - Effective January 1, 1994, the Company
adopted Statement of Financial Accounting Standards (SFAS) No. 115,
"Accounting for Certain Investments in Debt and Equity Securities." The
Company's securities have been classified as available-for-sale. The
asset balances are included in other assets on the balance sheets. In
accordance with SFAS No. 115, the securities are recorded at fair market
value with the unrealized gains and losses excluded from current earnings
and shown as a separate component of shareholders' investment.
Investment securities as of December 31, 1994 and 1993 consist of the
following:
(In Thousands)
1994 1993
Market Cost Market Cost
<S> <C> <C> <C> <C>
U.S. Government securities $ 24,314 $ 25,772 $ 27,248 $ 27,651
Corporate debt securities 6,155 6,155 207 207
Other assets 294 294 513 513
$ 30,763 $ 32,221 $ 27,968 $ 28,371
The net unrealized holding loss of $1,458,000 ($879,000 net of taxes) is
reflected as a separate component of shareholders' investment. Prior year
financial statements have not been restated.
The cost and market values by contractual maturity for debt securities are as
follows:
(In Thousands)
1994
Market Cost
<S> <C> <C>
Due in 1 year or less $ 18,511 $ 19,121
Due after 1 year through 5 years 11,958 12,806
$ 30,469 $ 31,927
Proceeds from sales and maturities of the securities totaled $129 million
in 1994. Gross realized gains and losses are recorded in income as
incurred. The realized net loss from sales of securities totaled
$237,000 for the year ended December 31, 1994.
Plant and Equipment - Plant and equipment are recorded at cost and are
depreciated over the estimated useful lives of the assets using
principally the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. In 1994, the Company
elected to lengthen the estimated useful lives of machinery and equipment
used in the pulp and papermaking process to a 20-year period versus the
former 16-year period. The effect of the change increased 1994 after-tax
income by $14 million, or 32 cents per share.
The Company's policy is to capitalize interest incurred on debt during
the course of major projects that exceed one year in construction.
Interest capitalized in 1994, 1993 and 1992 was $926,000, $699,000 and
$2,043,000, respectively.
Maintenance and repair costs are charged to expense as incurred, and
renewals and improvements that extend the useful life of the assets are
added to the plant and equipment accounts.
Start-up Costs - Start-up costs of new capital projects are charged to
expense as incurred. In 1992, approximately $23 million of start-up
costs and capacity-related costs during the start-up period relating to
the Company's No. 16 paper machine project were charged against income.
There were no start-up costs in 1993 or 1994.
Timber and Timberlands - Timber and timberlands are recorded at cost,
less amortization for cost of timber harvested. Amortization is computed
on the unit-of-production method. Timber carrying costs are expensed as
incurred.
Accounts Payable - The Company's banking system provides for the daily
replenishment of major bank accounts for check clearing requirements.
Accordingly, there were negative book cash balances of $12 million,
$8 million and $9 million at December 31, 1994, 1993 and 1992,
respectively. Such balances result from outstanding checks that had not
yet been paid by the bank and are reflected in accounts payable in the
consolidated balance sheets.
Income Taxes - Deferred income taxes have been provided to recognize the
deduction of certain costs for financial reporting purposes on a basis
different from that permitted for income tax purposes.
Net Income per Share - Net income per share is based upon the weighted
average number of shares outstanding during the year.
2. Employee Pension and Other Benefit Plans. The Company and its
subsidiaries sponsor noncontributory pension plans covering substantially
all employees. Retirement benefits are provided based on employees'
years of service and earnings. Normal retirement age is 65, with
provisions for earlier retirement. The Company's funding policy is to
contribute amounts to the plans when deductible for income tax purposes.
This policy generally includes amortization of unfunded prior service
costs over a 10-year period.
The Company's net periodic pension cost includes the following
components:
(In Thousands)
1994 1993 1992
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 9,677 $ 8,045 $ 7,753
Interest cost on projected benefits 23,945 22,702 21,708
Actual return on plan assets ( 7,979) (58,568) (24,052)
Amortization of net asset at transition ( 2,839) ( 2,839) ( 2,839)
Amortization of unrecognized prior
service cost 2,191 2,180 2,180
Deferral of net asset gains or (losses) (22,471) 29,942 ( 2,331)
Net periodic pension cost $ 2,524 $ 1,462 $ 2,419
The funded status of the Company's pension plans as of December 31, 1994, 1993
and 1992, based on October 31, 1994, 1993 and 1992 asset values, is as
follows:
(In Thousands)
1994 1993 1992
<S> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation $(223,675) $(247,690) $(215,040)
Accumulated benefit obligation $(242,041) $(267,903) $(231,947)
Projected benefit obligation $(296,581) $(334,030) $(291,700)
Plan assets at market value 414,724 420,702 366,450
Plan assets in excess of projected
benefit obligation 118,143 86,672 74,750
Unrecognized net asset at transition ( 25,544) ( 28,383) ( 31,222)
Unrecognized net gain (117,117) ( 80,026) ( 69,434)
Unrecognized prior service cost 23,433 23,118 25,299
Prepaid (accrued) pension cost $( 1,085) $ 1,381 $ ( 607)
The actuarial assumptions used for determining the present value of the
projected benefit obligation, as measured on December 31, 1994, 1993 and
1992, are as follows:
1994 1993 1992
<S> <C> <C> <C>
Discount rate 8.50% 7.25% 8.00%
Expected long-term rate of
return on the market-related
value of plan assets 8.50% 8.50% 8.50%
The increase in the discount rate in 1994 resulted in a $42.8 million
decrease in the accumulated benefit obligation. Plan assets are
comprised primarily of corporate and U.S. Treasury debt securities and
corporate equities.
Other Postretirement Benefits - The Company provides certain medical,
dental and life insurance benefits to qualifying retirees. Effective
January 1, 1992, the Company adopted the requirements of Statement of
Financial Accounting Standards (SFAS) No. 106 "Employers' Accounting for
Postretirement Benefits Other than Pensions." This statement requires
the accrual of the cost of providing these postretirement benefits over
the active service period of the employee. Effective January 1, 1992,
the Company recorded the transition obligation as a cumulative effect of
an accounting change. Prior to January 1, 1992, the cost of medical,
dental and life coverage was expensed as incurred.
Postretirement benefit cost for 1994, 1993 and 1992 includes the
following components:
(In Thousands) 1994 1993 1992
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 3,945 $ 3,580 $ 3,084
Interest cost on accumulated
postretirement benefit obligation 9,067 9,234 8,034
Net amortization and deferral (92) - -
Total postretirement benefit cost $ 12,920 $ 12,814 $ 11,118
The plan's status at December 31, 1994, 1993 and 1992, was as follows:
(In Thousands) 1994 1993 1992
<S> <C> <C> <C>
Actuarial present value
of benefit obligation:
Retirees $( 44,541) $( 57,117) $( 40,706)
Fully eligible active participants ( 15,765) ( 20,265) ( 15,904)
Other active participants ( 43,625) ( 55,792) ( 48,840)
Accumulated postretirement
benefit obligation $(103,931) $(133,174) $(105,450)
Plan assets at market value - - -
Accumulated postretirement benefit
obligation in excess
of plan assets $(103,931) $(133,174) $(105,450)
Unrecognized net loss ( 3,120) 20,199 -
Unrecognized prior service cost ( 13,331) - -
Accrued postretirement benefit cost $(120,382) $(112,975) $(105,450)
The discount rate used in determining the accumulated postretirement
benefit obligation was 8.50%, 7.25% and 8.0% as of December 31, 1994, 1993
and 1992, respectively. The increase in the discount rate in 1994 resulted
in an $18.3 million decrease in the accumulated benefit obligation. An
8.0% annual rate of increase in the per capita cost of covered health,
dental and life insurance benefits was assumed through the year 2001; the
rate was then assumed to decrease to 5.5% and remain at that level
thereafter. A one-percentage-point increase in the assumed postretirement
benefit cost trend rates would increase the accumulated postretirement
benefit obligation as of December 31, 1994, by approximately $14.8 million,
and the total of the service and interest cost components of postretirement
benefit cost for the year then ended by approximately $1.2 million.
3. Shareholders' Investment. In April 1989, the shareholders approved a Stock
Option Plan providing for granting of options to directors, officers and
all other nonunion employees. The plan reserved 2.5 million shares of
common stock to be issued at prices equal to 100% of the fair market value
of the shares on the date the option is granted. Options are exercisable
not earlier than six months and not later than 10 years after the date of
the grant. An analysis of the options outstanding and exercisable follows:
1994 1993 1992
<S> <C> <C> <C>
Options outstanding, beginning of year 1,220,420 1,361,552 1,434,369
Granted - $38.875 to $48.125 per share 123,000 13,000 -
Exercised - $35.125 to $43.73 per share (124,752) (133,160) (48,204)
Expired or canceled ( 3,900) (20,972) (24,613)
Options outstanding, end of year 1,214,768 1,220,420 1,361,552
Options available for grant
at December 31 893,529 1,012,629 1,004,657
There are also 15 million shares of Class A Preferred Stock authorized
with a par value of $.01 per share, to be issued at the discretion of the
board of directors. As of December 31, 1994, none of the shares had been
issued.
In February 1989, Consolidated Employees' Stock Ownership Trust obtained
a $5 million loan and used the proceeds to purchase 142,000 shares of
Company common stock from the estate of a significant shareholder. The
Company guarantee of the loan was recorded as a liability and a reduction
of shareholders' investment. This guarantee and the related loan have
been reduced by $1 million in each of the years 1993 and 1992. The loan
was completely repaid as of December 31, 1993.
Changes in common stock outstanding and capital in excess of par value
resulted from the net exercise of stock options of 112,004 shares for
$4,002,000 in 1994, 132,048 shares for $4,816,000 in 1993 and 42,357
shares for $1,484,000 in 1992. As of January 1, 1991, the board of
directors authorized the establishment of a Dividend Reinvestment and
Stock Purchase Plan and reserved 750,000 shares of common stock for this
purpose. The Company issued 73,347 shares for $3,155,000 in 1994, 69,726
shares for $3,098,000 in 1993 and 75,064 shares for $2,998,000 in 1992
under this plan. During 1993, the Company canceled 14,300 shares of
treasury stock.
4. Lines of Credit and Long-Term Debt. A summary of long-term debt as of
December 31 is as follows:
(In Millions) 1994 1993 1992
<S> <C> <C> <C>
Term loan from a financial institution,
unsecured, with interest at 8.27%, due
December 15, 1993 $ - $ - $ 50
Line of credit agreements with financial
institutions, unsecured, with a weighted
average interest rate of 5.99%, 3.37%
and 3.76%, respectively 118 137 119
Revolving credit agreements with financial
institutions, unsecured, with a weighted
average interest rate of 3.38% and 3.79%,
in 1993 and 1992, respectively - 34 52
118 171 221
Less - current maturities 50 50 50
Total long-term debt $ 68 $ 121 $ 171
The Company has $345 million in unsecured lines of credit with eight
financial institutions. There are no commitment fees for these lines of
credit, however, compensating balances are required in certain instances.
There are no restrictions on the Company's use of these compensating
balances. Amounts due under these lines of credit have been classified
as long-term debt because the Company has the intent and the unused
facilities to refinance the loans on a long-term basis.
The revolving credit agreements were canceled in the first quarter of
1994.
The line of credit agreements contain restrictions on net worth and other
matters. Under the terms of the restrictions, as of December 31, 1994,
the Company had $37 million available for the payment of dividends.
As of December 31, 1994, the portion of debt expected to be repaid in the
subsequent years is as follows:
<S> <C>
1995 $50,000,000
1996 $68,000,000
5. Income Taxes. The Company adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109 "Accounting for Income
Taxes" effective January 1, 1992, resulting in a gain of $21.9 million or
$.50 per share.
The provision for income taxes includes the following components:
(In Thousands)
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal $ 28,240 $ 23,223 $ 22,726
State 2,414 990 39
Total current 30,654 24,213 22,765
Deferred:
Federal 22,284 18,181 4,646
State 2,933 3,779 3,338
Total deferred 25,217 21,960 7,984
Total provision $ 55,871 $ 46,173 $ 30,749
The following summarizes the major differences between the U.S. statutory tax
rates and the Company's effective tax rates:
1994 1993 1992
<S> <C> <C> <C>
Statutory tax rates 35.0% 35.0% 34.0%
State income taxes 3.2 4.1 4.1
Federal rate increase - 3.3 -
Other items 1.0 (.6) (.2)
Effective tax rates 39.2% 41.8% 37.9%
Deferred taxes are determined based on the estimated future tax effects
of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws. The net
deferred tax liability is comprised of the following:
(In Thousands) 1994 1993 1992
<S> <C> <C> <C>
Current deferred taxes:
Postretirement benefits $ 5,652 $ 5,652 $ 2,268
Employee benefits ( 2,121) ( 2,121) ( 2,296)
Other 3,409 3,452 3,386
Total current deferred taxes 6,940 6,983 3,358
Noncurrent deferred taxes:
Plant and equipment (245,911) (215,188) (179,914)
Postretirement benefits 48,417 43,301 40,503
AMT credit 31,887 27,517 12,848
Employee benefits ( 16,370) ( 13,159) ( 9,323)
Other 199 ( 919) 2,488
Total noncurrent deferred taxes (181,778) (158,448) (133,398)
Total Deferred Taxes $(174,838) $(151,465) $(130,040)
During 1994, 1993 and 1992, the Company was in an alternative minimum tax
paying position. As of December 31, 1994, the excess of tax paid over
the amount of regular tax that would have been paid was approximately
$31.9 million. This amount may be used to reduce regular tax in future
years.
Included in shareholders' investment is a $340,000 tax benefit related to
the exercise of stock options during 1994.
The Company adjusted its deferred income tax balances and current income
taxes to reflect the increased federal income tax rate from 34% to 35% in
1993. The cumulative effect of the change in the tax rate totaled $3.6
million, or $.08 per share, for deferred tax liabilities at January 1,
1993, and $1.1 million, or $.03 per share, for the 1993 tax provision.
6. Research & Development. Research and development expenses in 1994, 1993
and 1992 were approximately $5.9 million, $5.7 million and $5.6 million,
respectively.
7. Commitments. As of December 31, 1994, the Company had capital
expenditure purchase commitments outstanding of approximately
$17.4 million.
8. Environmental Matters. The Company accrues for closure and long-term
care costs for its landfills over their lives. As of December 31, 1994,
the Company had accrued $3 million of the anticipated $5.8 million for
such costs.
9. Litigation Settlement. During 1994, the Company settled a patent
infringement suit resulting in an increase in other income of $5.5
million, $3.3 million after tax, or $.08 per share. The settlement
included $3 million in cash and $2.5 million of credits.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for 1994 and
1993:
(Dollars in
thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1994
Net sales $ 232,191 $ 233,855 $ 272,903 $ 288,602 $ 1,027,551
Gross profit 40,681 49,372 46,805 63,245 200,103
Net income 15,290* 23,311* 19,464* 28,669* 86,734*
Net income per share .35* .53* .44* .65* 1.97*
1993
Net sales $ 241,596 $ 260,302 $ 228,776 $ 216,662 $ 947,336
Gross profit 44,380 57,524 34,328 39,038 175,270
Net income 17,473 25,554 7,283 13,885 64,195
Net income per share .40 .58 .17 .31 1.46
Net income per share is based upon the weighted average number of shares
outstanding during the period.
* 1994 amounts reflect the change in estimated useful lives of machinery
and equipment used in pulp and papermaking process to a 20-year period
versus the former 16-year period.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Consolidated Papers, Inc.
We have audited the accompanying consolidated balance sheets of Consolidated
Papers, Inc. (a Wisconsin corporation) and subsidiaries as of December 31,
1994, 1993 and 1992, and the related consolidated statements of income,
reinvested earnings and cash flows (see Pages 13, 14, and 15) for each of the
years in the three-year period ended December 31, 1994. These financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and 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 are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our 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
Consolidated Papers, Inc. and subsidiaries as of December 31, 1994, 1993 and
1992, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1994, in conformity with
generally accepted accounting principles.
As discussed in Note 2 and Note 5 of the Notes to Consolidated Financial
Statements, effective January 1, 1992, the Company changed its method of
accounting for postretirement benefits other than pensions and income taxes.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in
the index at item 14 is the responsibility of the Company's management and is
presented for the purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic consolidated
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 19, 1995.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
There have been no changes in or disagreements with the independent public
accountants (Arthur Andersen LLP) on accounting and financial disclosure.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The identification of directors and all persons nominated to become directors,
as required by Item 10 of this Form 10-K, is included in the Proxy Statement
to Shareholders which has been filed with the Securities and Exchange
Commission for the Annual Meeting of Shareholders to be held April 24, 1995
and is incorporated herein by reference.
The identification of executive officers of the registrant, as required by
Item 10 of this Form 10-K, is included in Item 1 of Part I of this Form 10-K
Annual Report.
Item 11. EXECUTIVE COMPENSATION.
The information regarding executive compensation required by Item 11 of this
Form 10-K is included in the Proxy Statement to Shareholders which has been
filed with the Securities and Exchange Commission for the Annual Meeting of
Shareholders to be held April 24, 1995 and is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information about security ownership required by Item 12 of this Form 10-K
is included in the Proxy Statement to Shareholders which has been filed with
the Securities and Exchange Commission for the Annual Meeting of Shareholders
to be held April 24, 1995 and is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
There were no relationships or transactions since the beginning of the last
fiscal year of the nature required to be reported under Item 13 of this
Form 10-K.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K Annual
Report:
1. Financial Statements.
Included in Item 8 of Part II of this Form 10-K are the following
financial statements, related notes thereto, and auditor's report:
Consolidated Balance Sheets As Of December 31, 1992, 1993 and
1994.
Consolidated Statements of Income for the Years Ended
December 31, 1992, 1993 and 1994.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1992, 1993 and 1994.
Consolidated Statements of Reinvested Earnings for the Years
Ended December 31, 1992, 1993 and 1994.
Notes to Consolidated Financial Statements.
Report of Independent Public Accountants (Arthur Andersen LLP).
2. Financial Statement Schedules.
The following schedule is filed as part of this Form 10-K and should
be read in conjunction with the financial statements:
Schedule II - Valuation and Qualifying Accounts
The following schedules are omitted as not applicable or not
required under rules of Regulation S-X: I, III, IV, and V.
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K, into Consolidated Papers, Inc.'s
previously filed Registration Statement File No. 2-87423, Registration
Statement File No. 33-28786, and Registration Statement File No. 33-37838.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin
March 16, 1995
(b) The following exhibits are filed as a part of this Form 10-K Annual
Report:
3.a. Restated Articles of Incorporation of Consolidated Papers, Inc.
(Filed as Exhibit 3.a. to Form 10-Q for the quarter ended
March 31, 1989 and incorporated herein by reference.)
3.b. Bylaws of Consolidated Papers, Inc. (Filed as Exhibit 3.b. to Form
10-Q for the quarter ended March 31, 1994 and incorporated herein
by reference.)
9. Mead Voting Trust Agreement dated December 20, 1986. (Filed as
Exhibit 9 to Form 10-K for the fiscal year ended December 31, 1986
and incorporated herein by reference.)
10.a. Consolidated Papers, Inc. 1989 Stock Option Plan. (Filed as
Exhibit 10.a. to Form 10-Q for the quarter ended March 31, 1994
and incorporated herein by reference.)
10.b. Consolidated Employees' Tax-saver & Investment Plan. (Filed as
Exhibit 10.b. to Form 10-K for the fiscal year ended December 31,
1993 and incorporated herein by reference.)
10.c. Consolidated Employees' Stock Ownership Plan. (Filed as Exhibit
10.c. to Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference.)
10.d. Consolidated Salaried Employees' Retirement Plan. (Filed as
Exhibit 10.d. to Form 10-K for the fiscal year ended December 31,
1993 and incorporated herein by reference.)
10.e. 1992 Compensation Award Program description. (Filed as Exhibit
10.e. to Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference.)
10.f. 1993 Compensation Award Program description. (Filed as Exhibit
10.f. to Form 10-K for the fiscal year ended December 31, 1993 and
incorporated herein by reference.)
10.g. 1994 Compensation Award Program description. (Filed
electronically herewith.)
21. Subsidiaries of the Registrant. (Filed electronically herewith.)
27. Financial Data Schedule. (Filed electronically herewith.)
99. Form 11-K Annual Report of the Consolidated Employees' Tax-saver &
Investment Plan for the year ended December 31, 1994 (to be filed
within 180 days after the Plan's year-end).
Exhibits 2, 4, 11, 12, 13, 16, 18, 22, 23, 24, and 28 are omitted as not
applicable or not required under rules of Regulation S-K.
(c) Individual financial statements of 50% or less owned companies included
in the consolidated financial statements on the equity basis of
accounting are not filed because those companies do not, in aggregate,
constitute significant subsidiaries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED PAPERS, INC.
Registrant
/s/ Patrick F. Brennan March 16, 1995
Patrick F. Brennan, President and Date
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ George W. Mead Date March 16, 1995
George W. Mead, Chairman of the Board,
and Director
/s/ Patrick F. Brennan Date March 16, 1995
Patrick F. Brennan, President and
Chief Executive Officer, and Director
/s/ Richard J. Kenney Date March 16, 1995
Richard J. Kenney, Vice President, Finance
(Principal Financial Officer)
/s/ James E. Shewchuk Date March 16, 1995
James E. Shewchuk, Controller
/s/ Ruth Baldwin Barker Date March 16, 1995
Ruth Baldwin Barker, Director
/s/ James R. Bostic Date March 16, 1995
James R. Bostic, Director
/s/ Wiley N. Caldwell Date March 16, 1995
Wiley N. Caldwell, Director
/s/ Sally M. Hands Date March 16, 1995
Sally M. Hands, Director
/s/ Bernard S. Kubale Date March 16, 1995
Bernard S. Kubale, Director
/s/ D. Richard Mead, Jr. Date March 16, 1995
D. Richard Mead, Jr., Director
/s/ Gilbert D. Mead Date March 16, 1995
Gilbert D. Mead, Director
/s/ Lawrence R. Nash Date March 16, 1995
Lawrence R. Nash, Director
/s/ Glenn N. Rupp Date March 16, 1995
Glenn N. Rupp, Director
CONSOLIDATED PAPERS, INC. AND SUBSIDIARIES
SUPPLEMENTAL SCHEDULES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1993 AND 1992
Schedule II - Valuation and Qualifying Accounts (Dollars in Thousands).
Changes in the reserves other than accumulated depreciation for the years ended December 31, 1994, 1993
and 1992 are summarized as follows:
Charges For
Purposes
Additions For Which
Beginning Charged Reserve Was Ending
Balance To Income Created Balance
<S> <C> <C> <C> <C>
Reserves deducted from
assets in consolidated
balance sheet -
Reserve for doubtful
accounts - year ended
December 31, 1994 $ 3,558 $ 535 $ 27 $ 4,066
1993 $ 3,300 $ 508 $ 250 $ 3,558
1992 $ 4,255 $ - $ 955 $ 3,300
EXHIBIT 10.g. TO FORM 10-K FOR
CONSOLIDATED PAPERS, INC.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
March 11, 1994
The Compensation Award Program (CAP) was successful in 1993. In addition to the
more than $8 million gains in controllable costs we realized in 1992, we achieved in
excess of another $4 million savings in controllable costs and inventory changes in
1993. As a result, most employees received a CAP payment in January. This
achievement was particularly noteworthy, as it was accomplished in a year during
which we continued to experience deteriorating market conditions and resulting
downtimes, especially at our divisions that make lightweight coated papers - Biron
and Wisconsin River divisions.
In the current market situation with the excess industry capacity, expected
continuance of these marketplace conditions in 1994 and weak prices for most of our
paper products, we must continue to focus on cost control, as this is the one area
we can influence. Therefore, we have decided to continue CAP for 1994. Through our
efforts we must reduce costs and improve profits.
The CAP program for 1994 is similar to the 1993 program; however, we have made some
modifications in the payment of the CAP awards. These changes will make a good
program even better.
The attached pages detail the 1994 CAP program.
We still have opportunities to realize additional cost savings. In today's
competitive business environment, we must strive toward achieving these savings
while safely producing products of the highest quality. This is not an easy goal;
however, by working together we can accomplish this.
/s/ Patrick F. Brennan
1994 COMPENSATION AWARD PROGRAM
Measurement Factors
The 1994 Compensation Award Program (CAP) will be measured primarily on controllable
costs and inventory changes. It will be calculated as follows:
A. Controllable Costs - The total of controllable manufacturing cost improvements
over the 1994 Profit Plan; plus,
B. Inventory Changes - As of December 31, 1993, the measurable inventory
(excluding finished goods) was $77.2 million. Our goal
is to reduce this average inventory. Since we estimate
that our cost of carrying inventory is 20%, any reduction
or increase in this average inventory will receive a 20%
credit or charge to the CAP goal. For example, if the
average inventory decreases $5 million, 20% of that, or
$1 million, will be credited to the CAP goal. Similarly,
if the average inventory increases $5 million, there will
be an unfavorable charge of $1 million to the CAP goal.
Targets
If the sum of the net cost improvements in controllable costs and 20% of net
inventory change is at least $4 million in 1994, we will achieve the minimum goal
required for a CAP award. If greater savings are achieved, employees will be
eligible for a larger CAP award. The maximum CAP award will be made if savings of
$8 million are achieved.
Payment
If the minimum target is achieved, the CAP award will be a contribution of company
stock into your Tax-Saver & Investment Plan (TIP) account. If you do not have a TIP
account, one will be established for you with this company contribution. We believe
that this change will prove to be advantageous to you, as it will allow you to defer
taxes on your award.
The amount of the award will be calculated on your pay and based upon the following
schedule.
Target CAP Award1
<S> <C>
$4 million 1% of 1994 normal earnings2
$5 million 1.25% of 1994 normal earnings2
$6 million 1.50% of 1994 normal earnings2
$7 million 1.75% of 1994 normal earnings2
$8 million 2.00% of 1994 normal earnings2
There remain many details to be resolved. We will communicate further with you as
these details are worked out.
1Consolidated Papers, Inc. common stock equivalent to the value as noted.
2This will exclude certain payments (special project pay, vacation taken as cash,
etc.)
To Qualify for 1994 CAP Award
A. The Corporation must attain a minimum of $4 million as outlined above.
B. You must be a management employee from January 1 through December 31, 1994 and
be eligible to participate in TIP.
C. You must receive a merit increase during 1994.
D. Your operating division must be favorable for the sum of controllable cost
improvements and inventory changes; or,
In the case of corporate staff departments, your staff department must develop a
set of goals which focus on improved services and achieve significant progress
in meeting these goals.
Other
By reducing controllable costs, the operating divisions directly impact productivity
and profits. For example, you have influence over payroll, maintenance and repairs,
outside services, expense work orders, waste, material usage, energy, etc.
Corporate staff departments are expected to continue to support operating divisions
in reaching their goals and to accomplish their own specific staff department goals.
Corporate staff departments will establish performance measures to monitor
continuous improvement. Areas that staff departments could focus on include
increased customer satisfaction, improved systems, reduced error rate and quicker
response to operating department requests. These and other improvements will result
in reducing our costs and, therefore, increase earnings.
We must emphasize product quality and employee safety as top priorities. Emphasis
on doing it right the first time in order to reduce broke, job lot, complaints,
returns and allowances will result in favorable cost variances and improve our
earnings. Similarly, a safe work place also translates into favorable cost
variances and improves our company's earnings.
Summary
1. Control costs.
2. Improve inventory turnover.
3. Set and accomplish corporate staff goals.
We will report the progress on numbers 1 and 2 on a regular basis. Number 3 should
be specific and aimed toward improving the bottom line in a tangible and measurable
way. Specific corporate staff goals for 1994 should be submitted to Pat Brennan by
the end of April. Personal goals (included on performance review) may be
appropriate. A status report must be submitted to the staff quality council at the
end of each subsequent quarter measuring results against the goals. The staff
quality council will evaluate all corporate staff department goals and the
performance against these goals.
EXHIBIT 21 TO FORM 10-K FOR
CONSOLIDATED PAPERS, INC.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1994
SUBSIDIARIES OF THE REGISTRANT
Consolidated Papers, Inc. was incorporated under the laws of the State of Wisconsin
and owns or controls the following corporations by means of owning the indicated
percents of their voting securities:
Percent Voting
Securities Owned State Or
By Consolidated Province Of
Papers, Inc. Subsidiary Incorporation
<S> <C> <C>
100% Consolidated Water Power Company Wisconsin
100% Newaygo Forest Products Limited Ontario
100% Consolidated Papers Foreign Sales Corporation U.S. Virgin Islands
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from the
December 31, 1994 consolidated balance sheet and the consolidated
statements of income, reinvested earnings and cash flows for the twelve-
month period ended 12/31/94 and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<CASH> 8,155
<SECURITIES> 0
<RECEIVABLES> 92,528
<ALLOWANCES> 4,066
<INVENTORY> 88,013
<CURRENT-ASSETS> 199,328
<PP&E> 1,993,237
<DEPRECIATION> 753,263
<TOTAL-ASSETS> 1,499,511
<CURRENT-LIABILITIES> 156,950
<BONDS> 68,000
<COMMON> 0
0
44,200
<OTHER-SE> 975,887
<TOTAL-LIABILITY-AND-EQUITY> 1,499,511
<SALES> 1,027,551
<TOTAL-REVENUES> 1,027,551
<CGS> 827,448
<TOTAL-COSTS> 827,448
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,244
<INCOME-PRETAX> 142,605
<INCOME-TAX> 55,871
<INCOME-CONTINUING> 86,734
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,734
<EPS-PRIMARY> 1.97
<EPS-DILUTED> 1.97
</TABLE>
