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, 1997
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 10, 1998 of the voting stock held by
nonaffiliates of the registrant was approximately $1.68 billion, based upon
the NYSE closing price on March 10, 1998 and an estimate that 60.8% of the
stock is owned by nonaffiliates.
On March 10, 1998 there were 44,949,487 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 27, 1998.
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) and
supercalendered 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 and recycled 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.
Effective July 1, 1995, the Company acquired Niagara of Wisconsin Paper
Corporation, Niagara, Wisconsin, a manufacturer of coated groundwood
publication papers; Lake Superior Paper Industries, Duluth, Minnesota, a
manufacturer of supercalendered paper; and Superior Recycled Fiber Industries,
Duluth, Minnesota, a producer of high-quality recycled pulp from post-consumer
wastepaper.
On October 1, 1997, the Company acquired Repap USA, Inc., the holding company
for Repap Wisconsin, Inc. and Repap Sales Corporation. The operations are now
known as Inter Lake Papers, Inc., a company of Consolidated Papers, Inc.
Inter Lake Papers, Inc. manufactures groundwood and groundwood-free coated
papers for the printing and publishing industries.
The Company's principal product is coated printing papers. The Company is
North America's leading manufacturer of these papers and a leading
manufacturer of supercalendered printing papers for the printing and
publishing industries. In addition, the Company is the largest manufacturer
of lightweight coated specialty papers in the United States.
The percent of coated printing paper sales to total sales was 79.8% (1993),
80.0% (1994), 76.7% (1995), 72.4% (1996) and 85.5% (1997).
Coated and supercalendered printing papers are sold directly to magazine and
catalog 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 COATED PRINTING PAPER SALES IN TONS
<CAPTION>
Direct
Publisher Merchant
Accounts And Other
Year % %
<S> <C> <C>
1993 56% 44%
1994 52% 48%
1995 52% 48%
1996 49% 51%
1997 53% 47%
The Company competes in the coated printing paper market, supercalendered
printing paper market, and coated specialty paper market (1) by providing
paper of high quality incorporating special properties 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, timely 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 the largest manufacturer
of coated printing papers in North America, having shipped 1,411,864 tons of
coated printing papers in 1997, which represents approximately 18% of the U.S.
market for this product. Sales to Unisource and xpedx, paper merchants, as a
percent of net sales, amounted to 14% and 10%, respectively in 1997. The
Company's principal U.S. competitors are Bowater Incorporated; Champion
International Corporation; Crown Vantage Inc.; International Paper Company;
Madison Paper Industries; Mead Corporation; the Northwest Paper Division of
Potlatch Corporation; S.D. Warren, a subsidiary of Sappi Ltd.; UPM-Kymmene;
and Westvaco Corporation.
The Company's energy sources during 1997 were:
<S> <C>
Coal 29.2%
Process Waste 39.3%
Natural Gas 13.2%
Electricity 17.7%
Petroleum products .6%
The Company experienced no shortages of energy in 1997. The Company currently
purchases 79% of its coal requirement under two contracts, one for low-sulfur
western U.S. coal, and the other for Kentucky coal, both of which expire
December 31, 1999. The remaining 21% of its coal requirement is purchased on
annual contracts. Coal is currently in ample supply, and we anticipate no
supply problems in 1998.
The Company is in the second year of a six-year agreement for the firm
transportation of approximately 86% of its total natural gas supply.
Approximately 14% of the Company's natural gas consumption is in the
interruptible category, which means it is subject to reduction whenever cold
weather or other events decrease the amount of pipeline space 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 1998.
The Company is integrated through ownership of forest lands and through its
own pulp-producing facilities. The harvest during 1997 from Company lands
produced 10% of the wood used in the Company's pulp mills. Wood used in the
Company's pulp mills from non-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 1997 and expects that its regular suppliers will be able to
furnish it with an adequate supply of pulpwood and wood chips for 1998
operations.
The Company also purchases market pulp on a regular basis and purchased 31.7%
of the total pulp consumed by the Company's paper mills during 1997. 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 76% of its
anticipated requirements for 1998. Market pulp is currently in ample supply,
and the Company anticipates no supply problems in 1998.
The principal raw materials consumed in the manufacture of kraft pulp include
pulpwood, methanol, 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, post consumer recycled 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 1997, the Company was able to procure adequate supplies of
all principal raw materials and experienced no interruptions of production due
to materials shortages. Most raw materials remain in good supply. The
Company expects no interruptions of production due to materials shortages in
1998.
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 $6.8 million in 1997, $6.5 million in 1996, and
$5.8 million in 1995 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.
The Company remains in compliance with all conditions and limitations of its
wastewater permits. The Company continues to invest capital funds to upgrade
wastewater treatment facilities in preparation for production increases and
future regulations. Wastewater permit renewal applications were completed and
submitted to the Wisconsin Department of Natural Resources (WDNR) during 1997.
During 1997, the Environmental Protection Agency (EPA) finalized the Great
Lakes Water Quality Initiative (GLWQI) to regulate the discharge of toxic
substances. The Company has evaluated the GLWQI regulations and determined
that significant capital expenditures should not be required. The renewed
wastewater permit requirements and GLWQI are not expected to cause material
changes in the Company's business or affect its competitive position.
The Company has received general tier 1 storm-water discharge permits for its
applicable operations. 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 is in the process of implementing 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.
Clean Air Act operating permit applications for all of the Company's major
sources have been submitted to the WDNR. The WDNR is required to issue all
major source air operating permits by April 1998. Our facilities are allowed
to continue to operate under existing permits until the new air operating
permits are issued. The air operating permit requirements are not expected to
cause material changes in the Company's business or affect its competitive
position.
On June 20, 1996, the Environmental Protection Agency (EPA) published the
final accidental release prevention rules. The risk management rules require
applicable facilities to develop, submit and register a risk management plan
by June 21, 1999. The Company is developing cost-effective plans to comply.
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 ConsoGro (Water Quality
Center (WQC) wastewater treatment biosolids) agricultural landspreading
program in 1993. The ConsoGro program began operation on November 1, 1993.
The Company's Niagara facility initiated its NiAGro (wastewater treatment
biosolids) agricultural landspreading program on May 3, 1996. The ConsoGro
and NiAGro programs reduce dependence on landfills and benefit the local
agricultural community and environment. The Company continues to distribute
lime sludge from its kraft pulp mill as an agricultural liming agent and for
use to neutralize wastewater. The Company completes landfill site life
evaluations annually to assure adequate lead time for permitting and
constructing required new sites. The Company obtained all approvals and
permits to expand landfill capacity at the WQC and Water Renewal Center (WRC)
during 1997. Niagara's new landfill was completed during 1996 at a cost of
$2.3 million and began operation in February 1997. Clearing and base grading
of WQC's landfill expansion is in progress. Construction will be scheduled as
needed. Construction of a fourth landfill cell at our Water Renewal Center
was completed in 1997. The Company has adequate landfill capacity to meet
projected needs. At this time, the Company is unable to predict the effect of
future landfill or groundwater 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 Company has implemented a multiphase program to reduce the use of
elemental chlorine in the pulp-bleaching process. Phase I 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
caustic-extraction stage. Phase II of the chlorine-reduction program was
completed in 1993 and included the addition of softwood oxygen delignification
and associated brownstock washing. The Company has been using oxygen
delignification on hardwood since 1986. Phase I produced nondetectable levels
of dioxin (2, 3, 7, 8-TCDD) in our treated wastewater effluent and assured
compliance with permit limits. Phase II was optimized during 1994 with
emphasis on further reducing elemental chlorine. Phase II 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 II 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 late 1996, the Company eliminated elemental chlorine from its kraft pulp by
using chlorine dioxide in the first stage of bleaching. Phase III of our
chlorine-reduction program has eliminated the use of chlorine dioxide in the
first stage of the hardwood pulp-bleaching process. Our new ECF pulp-
bleaching process utilizes chlorine dioxide on softwood and high-consistency
ozone on hardwood to replace chlorine dioxide in the first stage of bleaching.
All equipment for Phase III has been installed and began operation in early
1997. Our new ECF bleach process has resulted in significant environmental
improvements.
Due to the Company's proactive environmental planning and expenditures, we are
well prepared to meet the requirements of new EPA air and wastewater
regulations. These regulations are commonly referred to as the "Cluster
Rules" and were finalized by EPA in November 1997. The Cluster Rules are
expected to be promulgated in early 1998 requiring compliance within three
years. The Cluster Rules are applicable to our bleached kraft pulp mill. The
recently completed chlorine-reduction program has positioned the Company to
already be in compliance with many of the requirements of the Cluster Rules.
The Company is in the process of evaluating the Cluster Rules, defining
requirements and determining the most cost-effective options for compliance.
The Company estimates that additional capital expenditures of $25 million will
be required to comply with the Cluster Rules. Additional annual operating
costs of approximately $9 million may be required. Compliance with the
Cluster Rules requirements is not expected to cause material changes in the
Company's business or affect its competitive position.
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 are directed at protecting the
environment through both pollution control and 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's environmental staff performs annual internal multimedia
environmental audits to assure compliance with environmental laws and
regulations.
The Company is a potentially responsible party with respect to several
hazardous waste sites under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA). While CERCLA provides for joint and
several liability, remediation costs are generally allocated among waste
generators and others involved with the site. The Company has established
accruals for its share of estimated clean-up costs at these sites. These
accruals are reviewed periodically and adjusted when appropriate. Accruals as
of December 1997 were less than $1 million in the aggregate.
The Company continues to follow closely sediment remediation activities under
way on various watershed systems, including the Fox River and Wisconsin River.
On the Fox River, state and federal agencies have focused on study and
remediation of sediments containing polychlorinated biphenols (PCBs), which
are believed to have been discharged by companies which manufactured or
recycled carbonless papers in the 1960s and early 1970s. Neither the
Company's former Appleton Division, closed in 1982, nor the Inter Lake Papers
facility, acquired in 1997, was involved in a carbonless paper manufacture or
recycling. However, it is possible that the scope of Fox River remediation
efforts will expand, and remediation activities may impact operations at Inter
Lake Papers. On the Wisconsin River, the Wisconsin Department of Natural
Resources has prepared a comprehensive management plan (CMP) addressing a
variety of environmental issues relating to the Petenwell and Castle Rock
flowages, including sediment contamination and water quality. These flowages
are artificial impoundments created by dams downstream of the Company's
operations. The CMP calls for further environmental studies of the flowages,
but contains no mandatory timetables or overall funding mechanism for any
remedial actions which ultimately may be required.
The Company is engaged in groundwater studies at its Niagara facility. Lagoon
closure activities at this facility were completed in 1997. See Note 1 of the
Notes to Consolidated Financial Statements - Environmental Matters.
The Company cannot predict the potential economic impact of future
environmental regulations or laws. The global warming issue could result in
mandated reductions of greenhouse gases that would have a negative economic
impact on energy intensive industries including pulp and paper.
At the end of 1997 the Company employed approximately 7,244 people,
essentially all of whom were full-time employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Officer
Name Age Since Positions
<S> <C> <C> <C>
George W. Mead 70 1971 Chairman of the Board
Gorton M. Evans 59 1989 President and Chief Executive Officer
William P. Orcutt 69 1977 Senior Vice President
Richard J. Kenney 57 1989 Senior Vice President, Finance
Ronald E. Swanson 48 1995 Senior Vice President
John T. Hurley 63 1995 Senior Vice President, Sales and
Marketing
James E. Shewchuk 61 1989 Vice President, Administration
David A. Krommenacker 55 1994 Vice President, Packaging Operations
John B. Steele 53 1997 Vice President, Free Sheet Operations
Roger L. Wangen 56 1997 Vice President, Groundwood Operations
Carl H. Wartman 45 1990 Secretary and General Counsel
David P. Nimtz 44 1996 Controller
John D. Steinberg 62 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 1997, operated thirteen manufacturing plants in
nine 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 13 4 - Wisconsin Rapids, WI)
1 - Biron, WI )
1 - Whiting, WI ) 10,413,955 1,174
1 - Stevens Point, WI )
1 - Adams, WI )
1 - Niagara, WI )
2 - Duluth, MN )
1 - Kimberly, WI )
1 - Appleton, WI )
Equipment in operation at the close of 1997 included 23 paper machines, two
continuous kraft-pulp digesters, two recycled pulp mills, one paperboard
machine, one corrugating machine, and electrical production facilities with a
nameplate rated capacity of 258,562 KW (with actual capacity at any time
subject to boiler capacity and river flow availability for electrical
production).
The Water Quality Center in Wisconsin Rapids is a pollution-abatement facility
on a 475-acre site that treats the mill effluent of two paper mills and one
pulp mill.
The Water Renewal Center near Stevens Point is a pollution-abatement facility
on a 192-acre site that treats the effluent of two paper mills.
Available capacity utilization during 1997 was 99.8% for coated papers and
84.1% for supercalendered papers. Production facilities are considered to be
well maintained and adequate for their purpose.
The Company owns 331,768 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,
1997 is 6,345.
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
1997
<S> <C> <C> <C> <C> <C>
High $ 53.00 $ 57.13 $ 60.56 $ 59.13 $ 60.56
Low 47.13 50.63 54.25 49.13 47.13
Close 52.13 54.00 55.50 53.38 53.38
Cash dividend .42 .42 .42 .42 1.68
1996
High $ 57.75 $ 57.88 $ 54.88 $ 52.75 $ 57.88
Low 50.00 49.75 49.13 48.25 48.25
Close 56.25 52.00 52.00 49.13 49.13
Cash dividend .42 .42 .42 .42 1.68
Item 6. SELECTED FINANCIAL DATA.
FIVE-YEAR COMPARISON OF SELECTED
FINANCIAL DATA
FOR THE YEARS 1993 THROUGH 1997
(Dollars in thousands, except per share data)
Year Net Income Cash
Ended Per Total Long-Term Dividends
Dec. 31 Net Sales Amount Share-Basic Assets Debt Per Share
<S> <C> <C> <C> <C> <C> <C>
1997 $ 1,679,311 $ 118,044 $ 2.63 $ 3,347,510 $ 868,665 $ 1.68
1996 1,545,091 179,285 4.01 2,532,242 272,467 1.68
1995 1,579,061 229,230 5.16 1,933,061 267,000 1.43
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
1997 amounts reflect the acquisition, effective October 1, 1997, of Inter Lake
Papers, Inc. formerly Repap USA, Inc.
1996 amounts reflect a lower 1996 tax rate, resulting in a benefit of 12 cents
per share, all recorded in the fourth quarter.
1995 amounts reflect acquisition, effective July 1, 1995, of Niagara of
Wisconsin Paper Corporation, Lake Superior Paper Industries and Superior
Recycled Fiber Industries.
1994 amounts reflect the change in 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.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition and Results of Operations
Recent Acquisitions.
Effective October 1, 1997, the Company completed the acquisition of Repap USA,
Inc., the holding Company for Repap Wisconsin, Inc. and Repap Sales
Corporation, in Kimberly, Wisconsin. The Company renamed these operations
Inter Lake Papers, Inc., Inter Lake Wisconsin, Inc. and Inter Lake Sales
Corp., respectively. Effective July 1, 1995, the Company completed the
acquisition of Niagara of Wisconsin Paper Corporation in Niagara, Wisconsin
and Lake Superior Paper Industries and Superior Recycled Fiber Industries,
both in Duluth, Minnesota. The operating results of the acquired companies
subsequent to the acquisition dates are included in the Consolidated
Statements of Income. Details of the acquisitions are included in Note 2 of
the Notes to Consolidated Financial Statements.
Sales and Cost of Sales.
Net sales increased to a record $1.7 billion in 1997, compared with 1996 net
sales of $1.5 billion and 1995 net sales of $1.6 billion. Record shipments of
1,884,529 tons were an increase of 21% over the previous record year of 1996,
which was a 4% increase over 1995. Gross margin as a percent of sales was
17.5%, compared with 23.9% in 1996 and 28.6% in 1995. The lower 1997 margin
was due primarily to reduced selling prices and less-than-optimal product mix.
1996 margins were lower than in 1995 due to lower selling prices, coupled with
less-than-full running conditions only partially offset by lower pulp costs
and better productivity.
Plant Operations.
Groundwood-free coated shipments (primarily Wisconsin Rapids and Converting
divisions) increased 13% in 1997 due to near-capacity operations and continued
productivity improvements on all paper machines, compared with a 3% decrease
in 1996 due to less-than-capacity operations mostly offset by productivity
improvements. During 1997, the Wisconsin Rapids Division operated at 100% of
available capacity, compared with 89% in 1996 and 97% in 1995. The industry
average capacity utilization was 93% for groundwood-free grades in 1997, 86%
in 1996 and 92% in 1995. On average, selling prices decreased 5% in 1997,
following a decrease of 7% in 1996 and a 22% increase in 1995. The Converting
Division, which converts heavier-weight groundwood-free coated rolls into
sheets, operated at 99% of available capacity, compared with 95% in 1996 and
89% in 1995.
Groundwood coated shipments (Biron, Wisconsin River and Niagara divisions)
increased 17% in 1997, following a 5% decline in 1996. The divisions operated
at 97% of available capacity, compared with 85% in 1996 and almost 100% in
1995. The U.S. industry average utilization was 93% for groundwood grades in
1997, 87% in 1996 and 94% in 1995. During 1997, selling prices declined 13%,
following a decline of 29% in 1996 and an increase of 35% in 1995.
Lake Superior Paper Industries (supercalendered groundwood paper) operated at
99% of available capacity in 1997, compared with 84% in 1996 and 100% in 1995.
Shipments in 1997 increased 4%, compared to a 76% increase in 1996. Year 1996
was a full year of operations, compared with a half year in 1995. Continued
weak markets resulted in selling prices declining 17% in 1997, compared with a
decline of 33% in 1996 and an increase of 41% in 1995.
The Stevens Point Division's coated specialty paper shipments increased 13% in
1997, compared with declines of 3% in 1996 and 1% in 1995. The mill's newest
paper machine, No. 35, which increased the division's annual capacity from
116,000 tons to 180,000 tons, began operations during the first quarter of
1997 and exceeded our expectations for quality and productivity. Due to the
added capacity and weakened markets, the division operated at 84% of available
capacity for 1997, compared with 99% in 1996 and 97% in 1995. Selling prices
decreased 9% in 1997, following a decrease of 8% in 1996 and an increase of 8%
in 1995.
Superior Recycled Fiber Industries operated at 89% of available capacity in
1997, compared with 85% in 1996 and 100% in 1995. Reduced demand for recycled
pulps resulted in continued selling price reductions of 11% in 1997.
Paperboard products shipments decreased 3%, and corrugated products shipments
increased 9% in 1997. The paperboard products and corrugated products
businesses both operated in highly competitive markets and continued their
marketing emphasis on producing high-value-added specialty products.
Inter Lake Papers, Inc. (formerly Repap, USA, Inc.) which produces a
combination of groundwood-free and groundwood coated papers, operated at 100%
of available capacity during the fourth quarter of 1997. This facility was
acquired in October 1997.
Selling, General and Administrative Expenses.
Selling, general and administrative expenses increased $5 million in 1997 to
$84 million, compared with increases of $12 million in 1996 and $4 million in
1995. The 1997 increase resulted from general inflation increases and the
fold-in of the Inter Lake Papers' selling, general and administrative expenses
for the fourth quarter. The large increase in 1996 reflects a full year's
costs for the July 1995 acquisition.
Other Income and Income Taxes.
Other income (expense) was ($19 million) in 1997, ($2 million) in 1996 and ($4
million) in 1995. Included in the interest expense and interest income for
1997 is ($23 million) and $26 million, respectively, which represents a full
year's results of the 1996 sale and leaseback of two paper machines. Interest
expense in 1997 increased $20 million, primarily due to the higher debt
associated with the October 1997 acquisition. Details are included in Notes 2
and 5 of the Notes to Consolidated Financial Statements.
Effective tax rates were 38.0%, 38.0% and 39.8% in 1997, 1996 and 1995,
respectively. The lower rates in 1996 and 1997 are due to lower state taxes
and some resolution of long-standing tax audits.
Liquidity and Capital Resources.
Current Account Changes.
The October 1997 and July 1995 acquisitions were accounted for as purchases,
and the assets and liabilities, which have been stated at their fair value,
affect the comparison to prior periods. Accounts receivable in 1997 increased
by $35 million, of which $32 million represents Inter Lake Papers, Inc.,
compared with a decrease of $14 million in 1996 and an increase of $52 million
in 1995, principally due to the 1995 acquisition. The increase exclusive of
the acquisition was principally due to greater sales volume. The days' sales
outstanding has not materially changed, and the Company believes its
collection period is well within the industry's standards. Inventories
increased $67 million compared with 1996, of which $52 million was due to
Inter Lake Papers, Inc. Finished goods increased $37 million, of which $32
million was due to Inter Lake Papers and the rest was mainly due to the
Company maintaining higher inventory levels to be more responsive to customer
needs. Raw materials increased $12 million, and stores supplies increased $18
million, with Inter Lake Papers contributing $14 million and $6 million,
respectively.
Prepaid expenses decreased $20 million, primarily due to the Lake Superior
Paper Industries lease buy-out, which resulted in the reclassification of a
$19 million prepaid lease expense to plant and equipment.
Accounts payable increased $19 million, of which $26 million was due to Inter
Lake Papers and the difference was due to timings of payments. Payroll and
employee benefits increased $16 million, of which $9 million was due to Inter
Lake Papers and the rest was primarily due to full operations in 1997,
compared with less-than-full operations at the end of 1996.
The year-end ratio of current assets to current liabilities was 1.9:1 in 1997,
compared with 2.0:1 in 1996 and 1.3:1 in 1995. Most of the 1996 increase
resulted from no current maturities of long-term debt at the end of 1996.
Capital Commitments and Spending.
At the end of 1997, authorized but uncompleted capital projects totaled $131
million. A 1998 capital approval budget of $245 million is in place. This
$245 million, plus the $131 million carry-over from 1997, less anticipated
carry-over of $136 million at the end of 1998, will result in planned capital
spending of $240 million in 1998, compared with expenditures of $236 million
in 1997, $288 million in 1996 and $159 million in 1995. The major 1997
expenditures included $39 million for a lease buy-out of a paper machine at
Lake Superior Paper Industries, $35 million for completion of a paper machine
addition at the Stevens Point Division, $17 million for a 1998 paper machine
rebuild project at Lake Superior Papers, $15 million for a new supercalender
at the Niagara Division, and $8 million for a finished goods warehouse
expansion at the Converting Division. The 1998 capital approval budget for
$245 million consists of $109 million for necessary replacement and quality
projects, $40 million for high-return projects, nearly $90 million for a paper
machine rebuild at the Biron Division to be completed in 1999 and $6 million
for environmental-control projects. Included in the 1998 approval budget is
$38 million for new projects for the Inter Lake Papers operation.
Long-Term Debt.
The Company's borrowings as of year-end were $869 million, an increase of $596
million, following increases of $5 million in 1996 and $149 million in 1995.
The increase primarily resulted from the Inter Lake Papers acquisition for
$258 million in cash and the assumption of $419 million of debt, of which $356
million of the face value was refinanced in December 1997. The financing for
the acquisition (including the December 1997 refinancing) was provided from
proceeds of a private placement of $277 million of Senior Notes and proceeds
under a new $750 million revolving credit facility.
In December 1997, the Company completed the sale and leaseback of its new No.
35 paper machine at the Stevens Point Division. The proceeds for the sale of
$136 million were used to pay down debt of the revolving credit facility. The
lease will be classified as an operating lease, and the term of the lease is
expected to be approximately 16 years.
As of December 31, 1997 the Company has $310 million available for further use
under its $750 million revolving credit facility. The Company also has unused
lines of credit of approximately $285 million. Such amounts, together with
cash flow from future operations, are expected to be more than sufficient to
fund projected capital commitments.
Interest increased, excluding interest related to the sale and leaseback of
two paper machines, totaling almost $29 million in 1997, with $26 million
charged against income and $3 million capitalized as a part of the cost of
related capital projects.
Substantially all of the machinery and equipment at Lake Superior Paper
Industries was under operating leases. The Company had options under these
leases to purchase the interests of the owner-participants at set prices at
various times during the leases and again at the conclusion of the leases for
the then fair market value of the equipment. According to the terms of the
leases, in December 1997, the Company commenced the conversion of the
operating leases by buying out one of five owner-participants. Completed in
January 1998, the lease was converted to a balance sheet asset and will be
reported as conventional debt.
As discussed in Note 6 of the Notes to Consolidated Financial Statements, the
Company entered into sale and leaseback transactions for two paper machines
during 1996. These leases are capital in nature, resulting in lease
obligations of $469 million at December 31, 1997. Because deposits of $440
million at December 31, 1997, are believed to be adequate for future lease
payments, the Company will not need to generate or borrow significant
additional funds to make the required lease payments.
Environmental Matters.
The paper industry is subject to extensive environmental regulations, many of
which require significant capital and operational expenditures. In 1997, the
Company completed a multiphase chlorine-reduction program involving equipment
and process changes at the Kraft Division, which manufactures chemical pulp.
This program was designed to ensure compliance with dioxin wastewater permit
limitations and with Wisconsin regulations requiring best-available chloroform
emission control technology. Mechanical pulp manufactured by the Company for
use at its groundwood mills is bleached using a totally chlorine-free process.
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 U.S. Environmental Protection Agency (EPA) recently
adopted rules to reduce the Industry's discharge of air and water pollutants,
and has proposed additional rules to further reduce industry emissions of
hazardous air pollutants. The additional proposed regulations addressing air
pollutants are subject to further change prior to final promulgation, now
expected in February, 1999. These final and proposed regulations are commonly
referred to as the "Cluster Rules." The Company's review of the Cluster Rules
indicates that additional capital expenditures of approximately $25 million
for process and equipment changes will likely be required three years after
the Cluster Rules are final. Additional annual operating costs of
approximately $9 million also may be required.
Other statutory and regulatory environmental initiatives now under
consideration could have a material impact on the pulp and paper industry.
These initiatives include mandated reductions in greenhouse gases by energy-
intensive industries and efforts to further reduce access to fiber sources.
The Company is a potentially responsible party with respect to several
hazardous waste sites under the Comprehensive Environmental Response,
Compensation, and Liability Act (CERCLA). While CERCLA provides for joint and
several liability, remediation costs are generally allocated among waste
generators and others involved with the site. The Company has established
accruals for its share of estimated cleanup costs at these sites. These
accruals are reviewed periodically and adjusted when appropriate. Accruals as
of December 1997 were less than $1 million in the aggregate.
The Company continues to follow closely sediment remediation activities under
way on various watershed systems, including the Fox River and Wisconsin River.
On the Fox River, state and federal agencies have focused on study and
remediation of sediments containing polychlorinated biphenols (PCBs), which
are believed to have been discharged by companies which manufactured or
recycled carbonless papers in the 1960s and early 1970s. Neither the
Company's former Appleton Division, closed in l982, nor the Inter Lake Papers
facility, acquired in 1997, was involved in carbonless paper manufacture or
recycling. However, it is possible that the scope of Fox River remediation
efforts will expand, and remediation activities may impact operations at Inter
Lake Papers. On the Wisconsin River, the Wisconsin Department of Natural
Resources has prepared a comprehensive management plan (CMP) addressing a
variety of environmental issues relating to the Petenwell and Castle Rock
flowages, including sediment contamination and water quality. These flowages
are artificial impoundments created by dams downstream of the Company's
operations. The CMP calls for further environmental studies of the flowages,
but contains no mandatory timetables or overall funding mechanism for any
remedial actions which ultimately may be required.
The Company is engaged in groundwater studies at its Niagara facility. Lagoon
closure activities at this facility were completed in 1997.
Management believes that the resolution of existing environmental matters will
not have a material impact on the Company's results of operations.
Year 2000 Compliance.
The Company is assessing the impact of the year 2000 on its operations,
including business information systems, manufacturing systems and
infrastructure systems. Although final plans and costs estimates are not yet
determinable, the Company expects to complete its assessment in 1998 and does
not expect the modification expenses to have a material impact on the
Company's ongoing results of operations.
Forward Looking Statements.
Certain statements in Management's Discussion and Analysis and elsewhere in
the Company's Annual Report to Shareholders may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Because these forward-looking statements include risks and
uncertainties, actual future results may differ materially from those
expressed in or implied by the statements. Factors that could cause actual
results to differ include, among other things: (1) increased competition from
either domestic or foreign paper producers, including increases in competitive
capacity through construction of new mills or conversion of older facilities
to produce competitive products; (2) variations in demand for the Company's
products; (3) changes in the cost or availability of the raw materials used by
the Company, particularly market pulp and wood; (4) costs of compliance with
new environmental laws and regulations; (5) decisions by the Company to make a
significant acquisition or a significant increase in production capacity; and
(6) unanticipated costs or problems associated with Year 2000 compliance.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
Consolidated Balance Sheets Consolidated Papers, Inc. and Subsidiaries
As of December 31
(Dollars in thousands) 1997 1996 1995
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 13,169 $ 12,928 $ 5,372
Accounts and notes receivable,
net of reserves of $6,374 in 1997,
$5,313 in 1996 and $4,628 in 1995 160,874 126,103 140,072
Inventories
Finished and partly finished
products 92,245 55,474 49,651
Raw materials 51,726 39,428 47,068
Stores supplies 6l,075 43,052 35,724
205,046 137,954 132,443
Prepaid expenses 26,506 46,912 36,930
Total Current Assets 405,595 323,897 314,817
Investments and Other Assets
Investments in affiliates, at cost
plus equity in undistributed
earnings 37,188 34,784 33,800
Restricted cash related to leases 427,026 423,618 -
Other assets 23,877 42,553 42,666
Goodwill 148,049 59,034 73,401
636,140 559,989 149,867
Plant and Equipment
Buildings 281,988 236,004 207,980
Machinery and equipment 2,647,374 1,962,835 1,952,927
2,929,362 2,198,839 2,160,907
Less: Accumulated depreciation 883,265 775,080 830,764
2,046,097 1,423,759 1,330,143
Land 13,383 11,447 11,106
Timber and timberlands, net of
depletion 26,391 25,150 22,890
Capital additions in process 219,904 188,000 104,238
2,305,775 1,648,356 1,468,377
$ 3,347,510 $ 2,532,242 $ 1,933,061
Current Liabilities
Current maturities of long-term debt $ - $ - $ 70,000
Accounts payable 92,330 73,147 72,278
Payroll and employee benefits 65,628 49,661 49,426
Income taxes 2,844 - 11,420
Property taxes 11,082 10,016 11,797
Other current liabilities 37,477 30,932 26,318
Total Current Liabilities 209,361 163,756 241,239
Noncurrent Liabilities and
Deferred Credits
Long-term debt 868,665 272,467 197,000
Capital lease obligations 456,321 462,084 -
Deferred income taxes 309,875 251,955 221,560
Postretirement benefits 152,470 98,614 93,702
Other noncurrent liabilities 33,151 13,544 20,763
1,820,482 1,098,664 533,025
Shareholders' Investment
Preferred stock, authorized and
unissued 15,000,000 shares - - -
Common stock, authorized 200,000,000
shares, par value $1.00 per share;
issued 45,004,949 shares in 1997,
44,768,361 shares in 1996 and
44,623,881 shares in 1995 45,005 44,768 44,624
Capital in excess of par value 91,405 80,818 74,325
Cumulative translation adjustment (2,610) (2,290) (2,369)
Treasury stock, at cost, 139,408 shares
in 1997, 39,900 shares in 1996
and 38,000 shares in 1995 (7,370) (2,020) (2,100)
Reinvested earnings 1,191,237 1,148,546 1,044,317
Total Shareholders' Investment 1,317,667 1,269,822 1,158,797
$ 3,347,510 $ 2,532,242 $ 1,933,061
The accompanying Notes to Consolidated Financial Statements are an integral
part of these balance sheets.
Consolidated Statements of Income Consolidated Papers, Inc. and Subsidiaries
(Dollars in thousands, except per For the Years Ended December 31
share data) 1997 1996 1995
<S> <C> <C> <C>
Net sales $1,679,311 $1,545,091 $1,579,061
Cost of goods sold 1,386,023 1,175,304 1,127,286
Gross profit 293,288 369,787 451,775
Selling, general and administrative
expenses 83,778 78,527 67,025
Income from operations 209,510 291,260 384,750
Other Income (Expense)
Interest expense (49,576) (15,298) (11,711)
Interest income 27,079 10,999 1,947
Miscellaneous, net 3,381 2,209 5,759
Total (19,116) ( 2,090) ( 4,005)
Income before provision for
income taxes 190,394 289,170 380,745
Provision for Income Taxes
Current 46,922 90,019 108,035
Deferred 25,428 19,866 43,480
Total 72,350 109,885 151,515
Net income $ 118,044 $ 179,285 $ 229,230
Net income per share - basic $ 2.63 $ 4.01 $ 5.16
Net income per share - diluted $ 2.62 $ 4.00 $ 5.14
Average number of common
shares outstanding 44,846,198 44,674,982 44,418,780
Consolidated Statements of Shareholders' Investment
Capital Net
in Cumu- Loss on
Excess lative Invest-
of Trans- ment Treas-
(Dollars in Common Par lation Secur- ury Reinvested
thousands) Stock Value Adj. ities Stock Earnings
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1994 $44,200 $56,082 $(2,113) $(879) $ - $ 878,597
Net income - - - - - 229,230
Cash dividends - - - - - (63,510)
Exercise of stock
options 424 16,213 - - - -
Tax benefit related
to stock options - 2,030 - - - -
Translation - - ( 256) - - -
Realized net loss
on investment
securities - - - 879 - -
Treasury stock
purchase - - - - (2,100) -
Balance,
December 31, 1995 $44,624 $74,325 $(2,369) $ - $(2,100) $1,044,317
Net income - - - - - 179,285
Cash dividends - - - - - (75,056)
Exercise of stock
options 144 6,248 - - - -
Tax benefit related
to stock options - 240 - - - -
Translation - - 79 - - -
Treasury stock
purchase - - - - (1,687) -
Issuance of treasury
stock - 5 - - 1,767 -
Balance,
December 31, 1996 $44,768 $80,818 $(2,290) $ - $(2,020) $1,148,546
Net income - - - - - 118,044
Cash dividends - - - - - (75,353)
Exercise of stock
options 237 9,683 - - - -
Tax benefit related
to stock options - 962 - - - -
Translation - - ( 320) - - -
Treasury stock
purchase - - - - (7,646) -
Issuance of treasury
stock - (58) - - 2,296 -
Balance,
December 31, 1997 $45,005 $91,405 $(2,610) - $(7,370) $1,191,237
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
Consolidated Papers, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended December 31
(Dollars in thousands) 1997 1996 1995
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 118,044 $ 179,285 $ 229,230
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and depletion 121,587 100,220 88,072
Amortization of goodwill and
intangibles 7,013 7,600 4,582
Undepreciated cost of plant and
equipment retirements 6,957 7,694 3,420
Earnings of affiliates ( 4,557) ( 3,341) ( 4,327)
Deferred income taxes 25,428 19,866 43,480
(Increase) decrease in accounts
receivable 11,331 13,969 6,526
(Increase) decrease in inventories ( 2,508) ( 5,511) ( 18,051)
(Increase) decrease in prepaid
expenses 11,801 1,135 ( 9,314)
Increase (decrease) in accounts
payable ( 14,930) 869 ( 9,674)
Increase (decrease) in current
liabilities, other than current
maturities of long-term debt
and accounts payable 1,653 ( 8,352) 24,697
Increase (decrease) in postretirement
benefits ( 901) 4,912 (31,528)
Increase (decrease) in other
noncurrent liabilities ( 6,926) 3,201 92
Net Cash Provided by Operating Activities 273,992 321,547 327,205
Cash Flows from Investing Activities
Capital expenditures (236,198) (287,893) (158,716)
Acquisitions, net of cash (250,690) - (225,276)
Proceeds from sale and leaseback 135,600 422,398 -
Noncurrent investments - (393,229) -
Other 130 7,605 3,810
Net Cash (Used in) Investing Activities (351,158) (251,119) (380,182)
Cash Flows from Financing Activities
Cash dividends ( 75,353) ( 75,056) ( 63,510)
Proceeds from long-term debt 282,000 23,467 85,000
Repayment of long-term debt (405,103) - -
Net borrowings under lines of credit
and revolvers 270,389 ( 18,000) 12,137
Common stock issued (net) 5,474 6,717 16,567
Net Cash Provided by (Used in)
Financing Activities 77,407 ( 62,872) 50,194
Net increase (decrease) in cash and
cash equivalents 241 7,556 ( 2,783)
Cash and cash equivalents - beginning
of year 12,928 5,372 8,155
Cash and Cash Equivalents - end of year $ 13,169 $ 12,928 $ 5,372
Cash paid during the year for:
Interest $ 29,333 $ 17,281 $ 7,330
Income taxes 32,007 93,184 103,234
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, 1997, 1996 and 1995
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.
Industry Segment - 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. Sales to one customer,
as a percent of net sales, amounted to 14.3%, 13.0% and 12.4% in 1997,
1996 and 1995, respectively, while sales to another customer amounted to
10.2% in 1997.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Cash and Cash Equivalents - For purposes of the Consolidated 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 45% in 1997, 57% in 1996 and 56% in
1995) 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, 1997, 1996 and 1995, by $21.5 million, $21.3 million and
$30.8 million, 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.
Goodwill Resulting from Business Acquisitions - Goodwill resulting from
business acquisitions consists of the excess of the acquisition cost over
the fair value of the net assets of the businesses acquired. Goodwill is
amortized on a straight-line basis over 15 to 20 years. Amortization of
goodwill resulting from business acquisitions was $5.6 million, $4.1
million and $2.5 million in 1997, 1996 and 1995, respectively.
Subsequent to acquisitions, the Company continues to evaluate whether
events and circumstances have occurred that indicate the remaining
estimated useful life of goodwill may warrant revision or that the
remaining balance of goodwill is not recoverable. Recoverability is
determined by comparing the undiscounted net cash flows of the assets to
which the goodwill applies to the net book value, including goodwill, of
those assets.
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. Useful lives for financial
reporting purposes are 20 years for land improvements, 33 years for
buildings, and five to 20 years for machinery and equipment.
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 1997, 1996 and 1995 was $3.1 million, $7.5
million and $1.2 million, 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. During l997, approximately $1.7 million of start-up
costs relating to the Company's No. 35 paper machine project were charged
against income. There were no start-up costs in 1996 or 1995.
Timber and Timberlands - Timber and timberlands are recorded at cost,
less amortization for cost of timber harvested. Amortization is computed
on the units-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 $30 million,
$12 million and $14 million at December 31, 1997, 1996 and 1995,
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.
Environmental Matters - The Company recognizes a liability for
environmental remediation costs when it is probable a liability has been
incurred and the amount can be reasonably estimated. The liabilities are
developed based on currently available information and are generally
recognized no later than completion of a remedial feasibility study. The
Company accrues closure costs and discounted amounts for long-term care
costs for its landfills over their estimated useful lives. As of
December 31, 1997, the Company had accrued $5.4 million of the
anticipated $7.1 million for such costs.
Income Taxes - Deferred income taxes have been provided for temporary
differences arising from differences in bases of assets and liabilities
for tax and financial reporting purposes. Deferred income taxes are
recorded on temporary differences at the tax rate expected to be in
effect when the temporary differences reverse.
Net Income per Share - Effective January 1, 1997, the Company adopted the
requirements of Statement of Financial Accounting Standards (SFAS) No.
128 "Earnings per Share," and, accordingly, basic earnings per share is
calculated based on the weighted average number of common shares
outstanding during the year, while diluted earnings per share is
calculated based on the dilutive effect of potential common shares. All
prior period amounts have been restated for comparable purposes.
Accounting Standards - The Financial Accounting Standards Board has
issued Statement of Financial Accounting Standards (SFAS) No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The Company will
adopt these disclosure requirements in 1998.
2. Acquisitions. Effective October 1, 1997, the Company acquired all of the
outstanding stock of Repap USA, Inc., the holding company for Repap
Wisconsin, Inc. and Repap Sales Corporation, for approximately $258
million in cash and assumed debt of $419 million and other liabilities of
$156 million. The Company renamed these operations Inter Lake Papers,
Inc., Inter Lake Wisconsin, Inc. and Inter Lake Sales Corp.,
respectively. This acquisition was accounted for as a purchase and,
accordingly, the assets and liabilities have been stated at their fair
values with the excess of purchase price over assets acquired and
liabilities assumed being recorded as goodwill. Goodwill of $95 million
resulting from the acquisition will be amortized over 20 years. The
purchase price allocation is subject to change as management continues to
refine the estimated fair value of the acquired assets and assumed
liabilities. In management's opinion, any future revisions are expected
to be immaterial. Results of operations of the acquired companies are
included in the consolidated financial statements subsequent to the
acquisition.
In December 1997, the Company repurchased $356 million of the $377
million face value of outstanding public debt of Repap Wisconsin, Inc.
The difference between the purchase price and fair value was not
material.
Effective July 1, 1995, the Company acquired Niagara of Wisconsin Paper
Corporation, Lake Superior Paper Industries and Superior Recycled Fiber
Industries for approximately $235 million in cash and extinguished
$52 million of debt. The Company entered into new debt agreements
totaling $335 million and borrowed $279 million. This acquisition was
accounted for as a purchase and, accordingly, the assets and liabilities
have been stated at their fair values.
The unaudited consolidated pro forma results of operations for the
periods ended December 31, 1997, 1996 and 1995 assume the July 1, 1995
acquisition occurred as of January 1, 1995 and the October 1, 1997
acquisition occurred as of January 1, 1996. The pro forma information is
provided for information purposes only. It is based on historical
information and, therefore, is not necessarily indicative of either the
results that would have occurred had the acquisitions been made as of
those dates or of future results.
For the years ended
December 31
1997 1996 1995
(In thousands, except per share data) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C>
Net sales $2,025,628 $1,953,449 $1,820,659
Net income 62,916 150,538 244,267
Net income per share - basic 1.40 3.37 5.50
This pro forma information reflects all adjustments that are, in the
opinion of management, necessary to a fair statement of the results.
3. 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.
Both the bargaining and nonbargaining employees of Niagara of Wisconsin
Paper Corporation were included in Consolidated's pension plans under the
terms of the purchase agreement. The amounts below reflect the
assumption of these additional liabilities and costs from July 1, 1995.
The employees of Lake Superior Paper Industries continued under their
defined contribution plan, which is not included. Effective January 1,
1998, employees of Lake Superior Paper Industries will be covered under
the Company's plan for salaried employees. Benefits will accrue only on
service on and after January 1, 1998.
The Company's net periodic pension cost includes the following
components:
(In thousands)
1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 13,760 $ 13,867 $ 8,349
Interest cost on projected benefits 31,247 29,730 27,145
Actual return on plan assets (107,378) (53,260) (73,448)
Amortization of net asset at transition ( 2,839) ( 2,839) ( 2,608)
Amortization of unrecognized prior
service cost 2,568 2,568 2,429
Amortization of unrecognized net
loss or (gain) ( 172) 49 ( 1,698)
Deferral of net asset gains 65,388 19,247 41,666
Net periodic pension cost $ 2,574 $ 9,362 $ 1,835
The funded status of the Company's pension plans as of December 31, 1997,
1996 and 1995, based on projected December 31, 1997, 1996 and 1995 asset
values, is as follows:
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Actuarial present value of
benefit obligation:
Vested benefit obligation $(372,556) $(337,952) $(346,334)
Accumulated benefit obligation $(407,860) $(369,731) $(367,140)
Projected benefit obligation $(480,029) $(444,637) $(437,927)
Plan assets at market value 615,648 514,314 468,312
Plan assets in excess of
projected benefit obligation 135,619 69,677 30,385
Unrecognized net asset at transition ( 17,027) ( 19,866) ( 22,705)
Unrecognized net gain (148,938) ( 80,334) ( 35,652)
Unrecognized prior service cost 19,072 21,640 24,207
Prepaid (accrued) pension cost $( 11,274) $( 8,883) $( 3,765)
The actuarial assumptions used for determining the present value of the
projected benefit obligation, as measured on December 31, 1997, 1996 and
1995, are as follows:
1997 1996 1995
<S> <C> <C> <C>
Discount rate 7.00% 7.25% 7.00%
Expected long-term rate of
return on the market
value of plan assets 9.00% 9.00% 8.50%
Future compensation growth rate 5.00% 5.00% 5.00%
The decrease in the discount rate in 1997 resulted in a $12.1 million
increase 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. These
benefits are paid from a trust that holds corporate and U.S. Treasury
debt securities and corporate equities.
The postretirement benefits for both active and retired employees of
Niagara of Wisconsin Paper Corporation, Lake Superior Paper Industries
and Inter Lake Papers, Inc. were continued after the acquisitions. The
amounts below reflect the assumption of these additional liabilities and
costs from July 1, 1995, for Niagara of Wisconsin Paper Corporation and
Lake Superior Paper Industries and from October 1, 1997, for Inter Lake
Papers, Inc. Postretirement benefit cost for 1997, 1996 and 1995
includes the following components:
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Service cost-benefits earned
during the year $ 4,619 $ 4,194 $ 2,323
Interest cost on accumulated
postretirement benefit obligation 11,736 10,636 8,631
Actual return on plan assets ( 9,076) (4,550) (2,387)
Net amortization and deferral 4,894 1,724 (1,597)
Total postretirement benefit cost $ 12,173 $ 12,004 $ 6,970
The plan's funded status at December 31, 1997, 1996 and 1995, is as
follows:
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Actuarial present value of benefit
obligation:
Retirees $(101,920) $( 76,242) $( 71,278)
Fully eligible active participants ( 36,861) ( 28,197) ( 27,227)
Other active participants ( 82,544) ( 53,266) ( 51,400)
Accumulated postretirement
benefit obligation $(221,325) $(157,705) $(149,905)
Plan assets at market value 52,637 39,463 33,141
Accumulated postretirement benefit
obligation in excess of
plan assets $(168,688) $(118,242) $(116,764)
Unrecognized net loss 21,830 28,509 31,530
Unrecognized prior service cost ( 18,051) ( 19,445) ( 20,839)
Accrued postretirement benefit cost $(164,909) $(109,178) $(106,073)
The actuarial assumptions used for determining the accumulated post-
retirement benefit obligations as measured on December 31, 1997, 1996 and
1995, are as follows:
1997 1996 1995
<S> <C> <C> <C>
Discount rate 7.00% 7.25% 7.00%
Expected long-term rate of return
on the market value of plan asset 9.00% 9.00% 8.50%
Health-care cost trend rates:
- Existing retirees through 2001 8.00% 8.00% 8.00%
Thereafter 5.00% 5.00% 5.00%
- Future retirees through 2001 5.25% 5.25% 5.25%
Thereafter 4.00% 4.00% 4.50%
The decrease in the discount rate in 1997 resulted in a $5.0 million
increase in the accumulated benefit obligation. A one-percentage-point
increase in the assumed postretirement benefit cost trend rates would
increase the accumulated postretirement benefit obligation as of
December 31, 1997, by approximately $33.4 million, and the total of the
service and interest cost components of postretirement benefit cost for
the year then ended by approximately $2.7 million.
4. 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 Company accounts for
these plans under APB Opinion No. 25, under which no compensation cost
has been recognized. Had compensation cost for these plans been
determined consistent with FASB Statement No. 123, basic earnings per
share would have been reduced by $.04, $.02 and $.01 for the years ended
December 31, 1997, 1996 and 1995, respectively. Because the Statement
No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
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.
Of the 1,205,664 options outstanding at December 31, 1997, 593,219 have
exercise prices between $35.13 and $39.88, with a weighted average
exercise price of $37.65 and a weighted average remaining contractual
life of three years. All of these options are exercisable. The
remaining 612,445 options have exercise prices between $40.25 and $55.31,
with a weighted average exercise price of $49.20 and a weighted average
remaining contractual life of eight years. 212,356 of these options are
exercisable with a weighted average exercise price of $47.91.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997, 1996 and 1995, respectively:
risk-free interest rates of 5.79%, 6.38% and 5.58%; expected dividend
yields of 3.15%, 3.42% and 2.55%; expected lives of 10, 10 and 9.5 years;
and expected volatility of 19.25% and 18.81% for 1997 options, 16.41% and
16.57% for 1996 options, and 17.56% and 17.83% for 1995 options.
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, 1997, none of the shares had been
issued.
An analysis of the Stock Option Plan at December 31, 1997, 1996 and 1995
follows:
Weighted Weighted Weighted
Average Average Average
1997 Exercise 1996 Exercise 1995 Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 1,165,552 $ 42 1,039,278 $ 39 1,214,446 $ 37
Granted 237,629 49 208,700 53 183,579 46
Exercised (169,179) 37 ( 75,084) 37 (348,780) 37
Expired or
canceled ( 28,338) 49 ( 7,342) 47 ( 9,967) 42
Outstanding at
end of year 1,205,664 44 1,165,552 42 1,039,278 39
Exercisable at
end of year 805,575 40 825,489 38 811,287 38
Weighted
average fair
value of
options
granted $ 12.60 $ 11.91 $ 17.10
5. Long-term Debt and Lines of Credit. A summary of long-term debt as of
December 31 is as follows:
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Term loan from a financial
institution, unsecured,
with interest at 7.05%,
due June 30, 2000 $ 30,000 $ 30,000 $ 30,000
Term loan from a financial
institution, unsecured,
with interest at 7.40%,
due June 30, 2005 55,000 55,000 55,000
Term loan from a financial
institution, secured by equipment,
with interest at 9.94%,
repurchased in September, 1997 - 23,467 -
Term loan from a financial
institution, secured by equipment,
with interest at 12.08%, due
January 1, 2007 30,241 - -
Senior Secured Notes with interest
at 6.71% to 7.14%, due October 31,
2004 to October 31, 2017 277,000 - -
Industrial Revenue Bonds with
interest at 4.3% due July 30, 2012 5,000 - -
First Priority Senior Secured Notes
of Inter Lake Papers, Inc. with
9.25% interest, $19,473 face
amount and due February 1, 2002 20,620 - -
Second Priority Senior Secured Notes
of Inter Lake Papers, Inc. with
9.875% interest, $1,099 face
amount and due May 1, 2006 1,204 - -
Revolving credit agreements with
financial institutions, unsecured,
with a weighted average interest
rate of 5.91% 440,000 - -
Line of credit agreements with
financial institutions, unsecured,
with a weighted average interest
rate of 6.91%, 5.96% and 5.96%,
respectively 9,600 164,000 182,000
868,665 272,467 267,000
Less - current maturities - - 70,000
Total long-term debt $ 868,665 $ 272,467 $ 197,000
The Company has a $750 million unsecured revolving credit agreement with
16 participating financial institutions with an expiration date of
September 26, 2002. This agreement has a competitive bid loan option
with varying rates of interest. The Company pays the banks a facility fee
under this agreement.
The Company has $295 million in unsecured lines of credit with six
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 debt agreements contain restrictions on net worth and other matters.
As of December 31, 1997, the maturities of long-term debt are as follows:
(In thousands)
<S> <C>
1998 -
1999 -
2000 $ 30,000
2001 -
2002 $ 460,620
Thereafter $ 378,045
6. Leases. The Company sold certain assets for $136 million in December,
1997. The assets were leased back from the purchaser over a period of 16
years. The resulting lease is being accounted for as an operating lease
and the resulting gain of $17 million is being amortized over the life of
the lease. The lease requires the Company to pay customary operating and
repair expenses and to observe certain operating restrictions and
covenants. The lease contains renewal options at lease termination and
purchase options at amounts approximating fair market value in 2005, 2010
and at lease termination.
The Company sold certain assets for $253 million and $169 million in May
1996 and September 1996, respectively. The assets were leased back from
the purchaser over a period of 15 years. Under the agreements, the
Company will maintain deposits, initially in the amount of $393 million,
which together with interest earned are expected to be sufficient to fund
the Company's lease obligations, including the repurchase of the assets.
These lease agreements contain restrictions on net worth and other
matters. These transactions are being accounted for as financing
arrangements and the resulting gains are amortized over a 15-year period.
At December 31, 1997, the Company recorded assets for the deposits from
the sale proceeds of $440 million and liabilities for the lease
obligations of $469 million. $12.6 million of both the deposits and
lease obligations are recorded as current. The net amount of capital
lease assets at December 31, 1997, is $283 million.
The Company also leases substantially all its production equipment at one
of its locations acquired on July 1, 1995, under 25-year operating leases
expiring in 2012. Rent expense for 1997, 1996 and 1995 (six months) was
$29.8 million, $29.8 million and $14.9 million, respectively. This lease
requires the Company to pay customary operating and repair expenses, and
to observe certain operating restrictions and covenants. As discussed in
Note 11 of the Notes to Consolidated Financial Statements, the Company
exercised its purchase option to buy out this lease in January, 1998.
The Company also leases certain manufacturing facilities, office space,
and machinery and equipment under various operating lease agreements,
which have remaining lease terms of two to five years.
Rent expense under all operating leases was approximately $33.8 million,
$35.3 million and $20.3 million for 1997, 1996 and 1995, respectively.
Future scheduled minimum lease payments, excluding the lease bought out
in January 1998, under capital and noncancelable operating leases as of
December 31, 1997, are as follows:
(In thousands) Operating Leases Capital Leases
<S> <C> <C>
1998 $ 9,413 $ 21,087
1999 12,313 25,551
2000 10,381 26,844
2001 9,988 28,203
2002 9,410 29,631
Later years 72,607 884,461
Total minimum lease payments $ 124,112 1,015,777
Imputed interest ( 546,807)
Present value of capitalized lease payments 468,970
Less - current portion
(included in other current liabilities) 12,649
Long-term capitalized lease obligations $ 456,321
7. Fair Values of Financial Instruments. The carrying amounts and fair
values of the Company's financial instruments at December 31 were as
follows:
1997 1996 1995
Carrying Fair Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value Amount Value
<S> <C> <C> <C> <C> <C> <C>
Cash and cash
equivalents $ 13,169 $ 13,169 $ 12,928 $ 12,928 $ 5,372 $ 5,372
Restricted cash
related to leases 439,675 439,675 423,618 423,618 - -
Long-term debt,
including current
maturities 868,665 875,534 272,467 275,222 267,000 271,136
The following methods and assumptions were used by the Company in estimating
fair values for financial instruments:
Cash and cash equivalents - The carrying amount approximates fair value due
to the relatively short period to maturity of these instruments.
Long-term debt - The fair value of the Company's long-term debt is estimated
based on current rates offered to the Company for debt of the same remaining
maturities.
8. Income Taxes.
The provision for income taxes includes the following components:
(In thousands) 1997 1996 1995
<S> <C> <C> <C>
Current:
Federal $ 39,040 $ 76,312 $ 83,472
State 7,882 13,707 24,563
Total current 46,922 90,019 108,035
Deferred:
Federal 23,591 17,408 43,217
State 1,837 2,458 263
Total deferred 25,428 19,866 43,480
Total provision $ 72,350 $ 109,885 $ 151,515
The following summarizes the major differences between the U.S. statutory
tax rates and the Company's effective tax rates:
1997 1996 1995
<S> <C> <C> <C>
Statutory federal tax rates 35.0% 35.0% 35.0%
State income taxes 3.3 4.0 4.9
Other items (.3) (1.0) ( .1)
Effective tax rates 38.0% 38.0% 39.8%
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) 1997 1996 1995
<S> <C> <C> <C>
Current deferred taxes:
Postretirement benefits $ 4,929 $ 4,184 $ 2,050
Other 7,427 8,482 7,417
Total current deferred taxes 12,356 12,666 9,467
Noncurrent deferred taxes:
Plant and equipment (439,056) (304,072) (268,502)
Postretirement benefits 60,698 39,051 33,350
AMT credit 1,403 - 4,728
Net operating loss carryforward 50,322 - -
Valuation allowance ( 7,907) - -
Other 24,665 13,066 8,864
Total noncurrent deferred taxes (309,875) (251,955) (221,560)
Total deferred taxes $(297,519) $(239,289) $(212,093)
9. Research & Development. Research and development expenses in 1997, 1996
and 1995 were approximately $6.8 million, $6.5 million and $5.8 million,
respectively.
10. Other Commitments. The Company has agreed to purchase paper mill process
steam from the City of Duluth Steam District No. 2 Cooperative
Association at a unit cost to be determined based upon operating,
maintenance and capital costs of the steam plant. In addition, the
Company pays an amount equal to the principal and interest requirements
on $9.1 million of outstanding Steam Utility Revenue Bonds as of
December 31, 1997, which mature at various times through April 1, 2002,
and certain other costs, principally capital expenditures. The Company
paid $2.8 million, $2.8 million and $1.4 million for 1997, 1996, and the
six months ended December 31, 1995, to service these bonds. Annual
payments for the principal and interest portion of these bonds are
expected to be $2.8 million in 1998 through 2001, with a final payment of
$.7 million in 2002.
As of December 31, 1997, the Company had capital expenditure commitments
outstanding of approximately $131 million.
11. Subsequent Event. In January 1998, the Company exercised its early
purchase option to buy out an operating lease on production equipment at
Lake Superior Paper Industries by paying $149.3 million in cash and
assuming $120.4 million in debt. This purchase resulted in an increase
in fixed assets of $269.7 million.
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for 1997 and
1996:
(Dollars in
thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1997
Net sales $ 379,841 $ 392,975 $ 396,795 $ 509,700 $ 1,679,311
Gross profit 64,445 70,748 60,287 97,808 293,288
Net income 28,056 30,376 23,776 35,836 118,044
Net income per share -
basic .63 .68 .52 .80 2.63
1996
Net sales $ 424,139 $ 376,085 $ 380,833 $ 364,034 $ 1,545,091
Gross profit 105,857 102,630 84,860 76,440 369,787
Net income 52,735 49,062 40,268 37,220 179,285
Net income per share -
basic 1.18 1.10 .90 .83 4.01
Net income per share is based upon the weighted average number of shares
outstanding during the period.
1997 amounts reflect the acquisition, effective October 1, 1997, of Inter Lake
Papers, Inc. formerly Repap USA.
1996 amounts reflect a lower 1996 tax rate, resulting in a benefit of 12 cents
per share, all recorded in the fourth quarter.
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,
1997, 1996 and 1995, and the related consolidated statements of income,
shareholders' investment and cash flows (see Pages 14, 15, 16, and 17) for
each of the years in the three-year period ended December 31, 1997. 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, 1997, 1996 and
1995, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1997, in conformity with
generally accepted accounting principles.
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 schedule has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic consolidated financial
statements taken as a whole.
/S/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
January 15, 1998.
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 27, 1998
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 27, 1998 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 27, 1998 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, 1995, 1996 and
1997.
Consolidated Statements of Income for the Years Ended December 31,
1995, 1996 and 1997.
Consolidated Statements of Shareholders' Investment for the Years
Ended December 31, 1995, 1996 and 1997.
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.
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 report 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, Registration Statement File No. 33-37838,
Registration Statement File No. 33-60263 and Registration Statement File
No. 33-64393.
/s/ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Milwaukee, Wisconsin,
March 25, 1998.
(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)(i) to Form 10-Q for the quarter ended
March 31, 1996 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.)
4.a. $750,000,000 Credit Agreement among the Registrant and Wachovia
Bank of Georgia, N.A. (Filed as Exhibit 4.a. to Registrant's
Current Report on Form 8-K (Date of Report September 30, 1997) and
incorporated herein by reference.)
4.b. $277,000,000 Note Purchase Agreement dated October 15, 1997
between the Registrant and the purchasers listed therein (together
with a list briefly identifying the contents of all omitted
exhibits and schedules thereto). (Filed electronically herewith.)
The Registrant agrees to provide copies of such exhibits and
schedules to the Commission upon request.
The Registrant has additional long-term debt that does not exceed
10 percent of its total assets. The Registrant agrees to provide
copies of agreements covering such indebtedness to the Commission
on request.
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 as Exhibit
10.g. to Form 10-K for the fiscal year ended December 31, 1994 and
incorporated herein by reference.)
10.h. 1995 Compensation Award Program description. (Filed as Exhibit
10.h. to Form 10-K for the fiscal year ended December 31, 1995
and incorporated herein by reference.)
10.i. 1996 Compensation Award Program description. (Filed as Exhibit
10.i. to Form 10-K for the fiscal year ended December 31, 1996
and incorporated herein by reference.)
10.j. 1997 Compensation Award Program description. (Filed electronically
herewith.)
10.k. Consolidated Papers, Inc. 1998 Incentive Compensation Plan.
(Filed with the Registrant's proxy statement dated March 17, 1998
and incorporated by reference.)
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, 1997 (to be filed
within 180 days after the Plan's year-end).
Exhibits 2, 11, 12, 13, 16, 18, 22, 23, and 24 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/Gorton M. Evans March 25, 1998
Gorton M. Evans, 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 25, 1998
George W. Mead, Chairman of the Board,
and Director
/s/Gorton M. Evans Date March 25, 1998
Gorton M. Evans, President and
Chief Executive Officer, and Director
/s/Richard J. Kenney Date March 25, 1998
Richard J. Kenney, Senior Vice President, Finance
(Principal Financial Officer)
/s/David P. Nimtz Date March 25, 1998
David P. Nimtz, Controller
/s/Ruth Baldwin Barker Date March 25, 1998
Ruth Baldwin Barker, Director
/s/Patrick F. Brennan Date March 25, 1998
Patrick F. Brennan, Director
/s/Wiley N. Caldwell Date March 25, 1998
Wiley N. Caldwell, Director
/s/James D. Ericson Date March 25, 1998
James D. Ericson, Director
/s/Sally M. Hands Date March 25, 1998
Sally M. Hands, Director
/s/J. Joseph King Date March 25, 1998
J. Joseph King, Director
/s/Bernard S. Kubale Date March 25, 1998
Bernard S. Kubale, Director
/s/D. Richard Mead, Jr. Date March 25, 1998
D. Richard Mead, Jr., Director
/s/Gilbert D. Mead Date March 25, 1998
Gilbert D. Mead, Director
/s/Lawrence R. Nash Date March 25, 1998
Lawrence R. Nash, Director
/s/Glenn N. Rupp Date March 25, 1998
Glenn N. Rupp, Director
/s/John S. Shiely Date March 25, 1998
John S. Shiely, Director
Schedule II - Valuation and Qualifying Accounts (Dollars in Thousands).
Changes in the reserves other than accumulated depreciation for the years
ended December 31, 1997, 1996 and 1995 are summarized as follows:
Charges
For
Purposes
For Which
Additions Reserve
Beginning Charged 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, 1997 $ 5,313 $ 1,143 $ 82 $ 6,374
1996 $ 4,628 $ 861 $ 176 $ 5,313
1995 $ 4,066 $ 1,625 $ 1,063 $ 4,628
EXHIBIT 10.j. TO FORM 10-K FOR
CONSOLIDATED PAPERS, INC.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
April 21, 1997
We are pleased to announce that the details of the 1997 Compensation Award
Program (CAP) have been finalized. This year's program represents a major
revision from the program that has been in existence since 1992. While it has
been very successful for Consolidated and its management employees, like any
program, it should be periodically reviewed.
The maximum potential CAP award has been increased from 3% to 5% of normal
earnings. This is the second consecutive year that the potential award has
been increased.
Another change is that each division/department will have annual goals that
are unique to them. They will then be measured against those goals and based
upon their results receive different CAP awards. We believe this will more
appropriately recognize employees for achievements in those areas where they
have some control.
An outline of the 1997 program is attached. You will receive further details
regarding the goals for your specific division/department from your manager.
We hope this program can help make 1997 a great year.
/s/ Gorton M. Evans
1997 COMPENSATION AWARD PROGRAM
ELIGIBILITY
You will be eligible for a CAP award in 1997 based upon the following
conditions:
1. You must be a management employee from January 1, 1997 through
December 31, 1997.
2. You must be eligible to participate in TIP.
3. You must receive a merit increase during 1997.
4. If you are employed in a staff department, you must have a CAP goal and
make significant progress toward meeting that goal. This goal can be
either an individual goal or a team goal. Staff Budget Managers will be
asked to approve each eligible employee in their department for a CAP
award based upon their achievement toward their individual or team CAP
goal.
TARGETS
The 1997 Compensation Award Program is designed to have different goals for
operating divisions and staff departments. This enables the company to more
appropriately reward employees in each area of the company for their results.
Operating Divisions - A matrix is designed for each operating division with
four performance categories. (See example on next page.) Controllable costs
remains one of the four categories. It can result in a CAP award of up to 2%
of normal earnings if a $25 million savings level is achieved and is based
upon total favorable controllable costs for the corporation. Other categories
in the various matrices are custom designed for each division and include
safety performance, quality performance, environmental performance and percent
return on capital among others.
The other categories were developed for each individual operating division
with specific goals based upon that division's past performance. The
potential CAP award for each of the three remaining categories is up to 1% of
normal earnings. This results in a total potential award of up to 5%.
Division management will communicate the 1997 CAP award categories and award
matrix to the management employees of their divisions.
Staff Departments - Staff departments also have the potential to receive a CAP
award of up to 5%. This award will be made up of two components. Since staff
departments are expected to support the operating divisions in achieving their
goals, they will receive 60% of the average CAP award of the operating
divisions for the first component. The maximum award potential for this
component is 3% (60% of 5%).
The second component of the CAP award for staff departments will have a
maximum potential award of up to 2% of normal earnings and will be based upon
CAP goals. Each staff department will develop and submit CAP goals as done in
past years. The CAP results will be evaluated by each vice president based
upon the following criteria:
CAP Goal Results CAP Goal Award
<S> <C>
Outstanding 100% of 2% = 2%
Overly Exceeds Goal 80% of 2% = 1.6%
Exceeds Goal 60% of 2% = 1.2%
Meets Goal 40% of 2% = .8%
Almost Meets Goal 20% of 2% = .4%
The recommendation will then be submitted to Mr. Evans for approval.
AWARD
As a management employee of Consolidated Papers, Inc., you will be eligible to
receive a maximum award of 5% of your 1997 normal earnings as 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.
EXAMPLE: OPERATING DIVISION
Max.
Award 1 2 3 4 5
Performance Category % 0% 20% 40% 60% 80% 100%
<S> <C> <C> <C> <C> <C> <C> <C>
Controllable Costs (millions $)
(Total favorable for corporation) 2 <5 >5 >10 >15 >20 >25
Safety Performance
(Serious injury index) 1 >.35 <.35 <.30 <.25 <.20 <.15
Quality Performance
(Complaints/1000 tons) 1 >.68 <.68 <.62 <.56 <.50 <.44
Environmental Performance
(Weighted spills) 1 >4 <4 <3 <2 <1 <0
Maximum
Award % of
Category Results % Award Award1
<S> <C> <C> <C> <C>
Controllable Costs $12 M 2% 40% .8%
Safety Performance .18 1% 80% .8%
Quality Performance .54 1% 60% .6%
Environmental Performance 1 1% 80% .8%
3.0% of 1997
normal earnings2
EXAMPLE - STAFF DEPARTMENT
<S> <C> <C>
Average Operating Division CAP Award - 3.0% x 60% = 1.8%
Department CAP Goal Results
Meets Goal - 2.0% x 40% = .8%
Total CAP Award1 2.6% of 1997
normal earnings2
1 Consolidated Papers, Inc. common stock equivalent to the value as noted.
2 This will exclude certain payments (special project pay, vacation taken as
cash, etc.).
SUMMARY
The Compensation Award Program for 1997 focuses not only on controllable costs
but has placed greater emphasis on safety, quality and environmental
performance among other criteria.
Controllable costs which you may have influence over may include such items as
payroll, maintenance and repairs, outside services, expense work orders,
waste, emergency material usage, etc.
Staff departments will develop specific goals that are tangible and measurable
which can help to improve our bottom line.
Staff department goals for 1997 are to be submitted to Mr. Evans by May 16th.
Status reports must then be submitted to the staff qualify council at the end
of each subsequent quarter.
If you have questions on the above, see your manager or call Chuck Bigelow at
3765.
EXHIBIT 21 TO FORM 10-K FOR
CONSOLIDATED PAPERS, INC.
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1997
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 By State Or
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
100% LSPI Duluth Corp. Minnesota
100% LSPI Paper Corporation Minnesota
100% LSPI Fiber Co. Minnesota
100% Superior Recycled Fiber Corporation Minnesota
100% Consolidated Papers International
Leasing, L.L.C. Delaware
100% CONDEPCO, Inc. Delaware
100% Inter Lake Papers, Inc. Wisconsin
100% Inter Lake Wisconsin, Inc. Wisconsin
100% Inter Lake Sales Corporation New York
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
December 31, 1997 consolidated balance sheet and the consolidated statements
of income, shareholders' equity and cash flows for the twelve-month period
ended 12/31/97 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-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 13,169
<SECURITIES> 0
<RECEIVABLES> 167,248
<ALLOWANCES> 6,374
<INVENTORY> 205,046
<CURRENT-ASSETS> 405,595
<PP&E> 3,189,040
<DEPRECIATION> 883,265
<TOTAL-ASSETS> 3,347,510
<CURRENT-LIABILITIES> 209,361
<BONDS> 868,665
<COMMON> 45,005
0
0
<OTHER-SE> 1,317,667
<TOTAL-LIABILITY-AND-EQUITY> 3,347,510
<SALES> 1,679,311
<TOTAL-REVENUES> 1,679,311
<CGS> 1,386,023
<TOTAL-COSTS> 1,386,023
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 49,576
<INCOME-PRETAX> 190,394
<INCOME-TAX> 72,350
<INCOME-CONTINUING> 118,044
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118,044
<EPS-PRIMARY> 2.63
<EPS-DILUTED> 2.62
</TABLE>
