This filing is being made to add the Consolidated Statements of Income to the
previously filed Form 10-K.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.
<TABLE>
Consolidated Balance Sheets Consolidated Papers, Inc. and Subsidiaries
As of December 31
(Dollars in thousands) 1998 1997 1996
Current Assets
<S> <C> <C> <C>
Cash and cash equivalents $ 3,230 $ 13,169 $ 12,928
Accounts and notes receivable,
net of reserves of $6,504 in 1998,
$6,374 in 1997 and $5,313 in 1996 147,307 160,874 126,103
Inventories
Finished and partly finished
products 89,377 92,245 55,474
Raw materials 39,616 51,726 39,428
Stores supplies 60,127 6l,075 43,052
189,120 205,046 137,954
Prepaid expenses 48,550 26,506 46,912
Total current assets 388,207 405,595 323,897
Investments and Other Assets
Investments in affiliates, at cost
plus equity in undistributed
earnings 39,668 37,188 34,784
Restricted cash related to leases 438,429 427,026 423,618
Other assets 19,651 23,877 42,553
Goodwill 140,211 148,049 59,034
637,959 636,140 559,989
Plant and Equipment
Buildings 323,969 281,988 236,004
Machinery and equipment 3,200,392 2,647,374 1,962,835
3,524,361 2,929,362 2,198,839
Less-accumulated depreciation 1,048,409 883,265 775,080
2,475,952 2,046,097 1,423,759
Land 14,069 13,383 11,447
Timber and timberlands, net of
depletion 26,762 26,391 25,150
Capital additions in process 84,537 219,904 188,000
2,601,320 2,305,775 1,648,356
$ 3,627,486 $ 3,347,510 $ 2,532,242
Current Liabilities
Accounts payable $ 88,651 $ 92,330 $ 73,147
Payroll and employee benefits 78,083 65,628 49,661
Income taxes 367 2,844 -
Property taxes 11,661 11,082 10,016
Other current liabilities 44,199 37,477 30,932
Total current liabilities 222,961 209,361 163,756
Noncurrent Liabilities and
Deferred Credits
Long-term debt 1,054,564 868,665 272,467
Capital lease obligations 465,613 456,321 462,084
Deferred income taxes 349,573 309,875 251,955
Postretirement benefits 148,508 152,470 98,614
Other noncurrent liabilities 31,416 33,151 13,544
2,049,674 1,820,482 1,098,664
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 90,713,876 shares in 1998,
90,009,898 shares in 1997 and
89,536,722 shares in 1996 90,714 90,010 89,537
Capital in excess of par value 61,657 46,400 36,049
Accumulated other comprehensive income (2,705) (2,610) (2,290)
Treasury stock, at cost, 409,426 shares
in 1998, 278,816 shares in 1997
and 79,800 shares in 1996 (9,906) (7,370) (2,020)
Reinvested earnings 1,215,091 1,191,237 1,148,546
Total shareholders' investment 1,354,851 1,317,667 1,269,822
$ 3,627,486 $ 3,347,510 $ 2,532,242
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) 1998 1997 1996
<S> <C> <C> <C>
Net sales $ 1,989,315 $1,679,311 $1,545,091
Cost of goods sold 1,649,265 1,386,023 1,175,304
Gross profit 340,050 293,288 369,787
Selling, general and administrative
expenses 102,038 83,778 78,527
Income from operations 238,012 209,510 291,260
Other Income (Expense)
Interest expense (95,918) (49,576) (15,298)
Interest income 31,168 27,079 10,999
Miscellaneous, net 5,007 3,381 2,209
Total (59,743) (19,116) ( 2,090)
Income before provision for
income taxes 178,269 190,394 289,170
Provision for Income Taxes
Current 36,147 46,922 90,019
Deferred 35,162 25,428 19,866
Total 71,309 72,350 109,885
Net income before extraordinary item 106,960 118,044 179,285
Loss on debt extinguishment, net of
tax benefit of $3,069 ( 4,603) - -
Net income $ 102,357 $ 118,044 $ 179,285
Net income per share before
extraordinary item - basic $ 1.19 $ 1.32 $ 2.01
Net income per share before
extraordinary item - diluted $ 1.18 $ 1.31 $ 2.00
Net income per share - basic $ 1.13 $ 1.32 $ 2.01
Net income per share - diluted $ 1.13 $ 1.31 $ 2.00
Average number of common
shares outstanding 90,199,750 89,692,396 89,349,964
Consolidated Statements of Shareholders' Investment
Accumu-
Capital lated
in Other Compre-
Excess Compre- Treas- hen-
(Dollars in Common of Par hensive ury Reinvested sive
thousands) Stock Value Income Stock Earnings Total Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December
31, 1995 $89,248 $29,701 $(2,369) $(2,100) $1,044,317 $1,158,797
Net income - - - - 179,285 179,285 $179,285
Cash
dividends - - - - (75,056) (75,056) -
Exercise of
stock
options 289 6,103 - - - 6,392 -
Tax benefit
related
to stock
options - 240 - - - 240 -
Cumulative
transla-
tion ad-
justment - - 79 - - 79 79
Comprehen-
sive
income $179,364
Treasury
stock
purchase - - - (1,687) - (1,687)
Issuance of
treasury
stock - 5 - 1,767 - 1,772
Balance,
December
31, 1996 $89,537 $36,049 $(2,290) $(2,020) $1,148,546 $1,269,822
Net income - - - - 118,044 118,044 $118,044
Cash
dividends - - - - (75,353) (75,353) -
Exercise of
stock
options 473 9,447 - - - 9,920 -
Tax benefit
related
to stock
options - 962 - - - 962 -
Cumulative
transla-
tion ad-
justment - - ( 320) - - ( 320) (320)
Comprehen-
sive
income $117,724
Treasury
stock
purchase - - - (7,646) - ( 7,646)
Issuance of
treasury
stock - (58) - 2,296 - 2,238
Balance,
December
31, 1997 $90,010 $46,400 $(2,610) $(7,370) $1,191,237 $1,317,667
Net income - - - - 102,357 102,357 $102,357
Cash
dividends - - - - (78,503) (78,503) -
Exercise of
stock
options 704 13,506 - - - 14,210 -
Tax benefit
related
to stock
options - 1,703 - - - 1,703 -
Cumulative
transla-
tion ad-
justment - - ( 95) - - ( 95) (95)
Comprehen-
sive
income $102,262
Treasury
stock
purchase - - - (5,007) - ( 5,007)
Issuance of
treasury
stock - 48 - 2,471 - 2,519
Balance,
December
31, 1998 $90,714 $61,657 $(2,705) $(9,906) $1,215,091 $1,354,851
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) 1998 1997 1996
Cash Flows from Operating Activities
<S> <C> <C> <C>
Net income $ 102,357 $ 118,044 $ 179,285
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and depletion 171,156 121,587 100,220
Amortization of goodwill and
intangibles 10,182 7,013 7,600
Debt premium amortization ( 7,090) - -
Undepreciated cost of plant and
equipment retirements 2,577 6,957 7,694
Earnings of affiliates ( 4,755) ( 4,557) ( 3,341)
Deferred income taxes 35,162 25,428 19,866
(Increase) decrease in accounts
receivable 13,567 11,331 13,969
(Increase) decrease in inventories 15,926 ( 2,508) ( 5,511)
(Increase) decrease in prepaid
expenses ( 17,508) 11,801 1,135
Increase (decrease) in accounts
payable ( 3,679) ( 14,930) 869
Increase (decrease) in current
liabilities, other than current
maturities of long-term debt
and accounts payable 17,279 1,653 ( 8,352)
Increase (decrease) in postretirement
benefits ( 3,962) ( 901) 4,912
Increase (decrease) in other
noncurrent liabilities ( 1,735) ( 6,926) 3,201
Net cash provided by operating activities 329,477 273,992 321,547
Cash Flows from Investing Activities
Capital expenditures (348,856) (236,198) (287,893)
Acquisitions, net of cash - (250,690) -
Proceeds from sale and leaseback - 135,600 422,398
Noncurrent investments - - (393,229)
Other 1,952 130 7,605
Net cash (used in) investing activities (346,904) (351,158) (251,119)
Cash Flows from Financing Activities
Cash dividends ( 78,503) ( 75,353) ( 75,056)
Proceeds from long-term debt 160,000 282,000 23,467
Repayment of long-term debt (143,831) (405,103) -
Net borrowings under lines of credit
and revolvers 56,397 270,389 ( 18,000)
Common stock issued (net) 13,425 5,474 6,717
Net cash provided by (used in)
financing activities 7,488 77,407 ( 62,872)
Net increase (decrease) in cash and
cash equivalents ( 9,939) 241 7,556
Cash and cash equivalents - beginning
of year 13,169 12,928 5,372
Cash and cash equivalents - end of year $ 3,230 $ 13,169 $ 12,928
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, 1998, 1997 and 1996
1. Summary of Accounting Policies.
Principles of Consolidation - The consolidated financial statements
include the accounts of Consolidated Papers, Inc. and 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.
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.
Accounting Standards - The Financial Accounting Standards Board (FASB)
recently issued Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," which establishes standards for
the reporting of the components of comprehensive income, SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information,"
which requires certain information about operating segments to be
reported on a basis consistent with internal decision making, and SFAS
No. 132, "Employer's Disclosures about Pensions and Other Postretirement
Benefits," which standardizes the disclosure requirements for pensions
and other postretirement benefits. Required disclosures have been made
and prior years' information has been reclassified for the impact of
adopting SFAS Nos. 130, 131 and 132 in 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires that every derivative
instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that
changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. In March
1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which revises the
accounting for software development costs and will require the
capitalization of certain costs that the company has historically
expensed. The company is currently analyzing the impacts of these
statements, which are required to be adopted in 2000 and 1999,
respectively, and does not expect either statement to have a material
impact on the company's financial position, results of operations or cash
flows.
Cash and Cash Equivalents - For financial statement purposes, 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 50% in 1998, 45% in 1997 and 57% in
1996) 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, 1998, 1997 and 1996, by $18.2 million, $21.5 million and
$21.3 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 $9.1 million, $5.6
million and $4.1 million in 1998, 1997 and 1996, respectively. At
December 31, 1998, accumulated amortization of goodwill was $21.3
million. 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 1998, 1997 and 1996 was $1.6 million, $3.1
million and $7.5 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.
Research and Development - Research and development costs are charged to
expense as incurred. Research and development expenses in 1998, 1997 and
1996 were approximately $7.3 million, $6.8 million and $6.5 million,
respectively.
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 $24 million, $30
million and $12 million at December 31, 1998, 1997 and 1996,
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, 1998, the company had accrued $5.9 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 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.
Basic and diluted earnings per share are reconciled as follows:
For the years ended
December 31
1997 1996
(In thousands, except per share data) (Unaudited) (Unaudited)
<S> <C> <C>
Net sales $1,953,449 $1,820,659
Net income 150,538 244,267
Net income per share - basic 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. Long-term Debt and Lines of Credit. A summary of long-term debt as of
December 31 is as follows:
(In thousands) 1998 1997 1996
<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, repurchased in
May and June 1998 - 30,241 -
Senior Notes with interest
at 6.71% to 7.14%, due October 31,
2004, to October 31, 2017 277,000 277,000 -
Senior Notes with interest at 6.93%
to 7.30%, due May 8, 2009,
to May 8,2023 160,000 - -
Industrial Revenue Bonds with
interest at 4.20% at December
31, 1998, reset weekly,
due July 1, 2012 5,000 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 20,369 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 1,195 1,204 -
Revolving credit agreements with
financial institutions, unsecured,
with a weighted average interest
rate of 5.35% and 5.91%, respectively 400,000 440,000 -
Line of credit agreements with
financial institutions, unsecured,
with a weighted average interest
rate of 6.08%, 6.91% and 5.96%,
respectively 106,000 9,600 164,000
Total long-term debt $1,054,564 $ 868,665 $ 272,467
The company has a $699 million unsecured revolving credit agreement with
15 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 $335 million in unsecured lines of credit with seven
financial institutions. There are no commitment fees for these lines of
credit. 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.
The company recorded an extraordinary loss of $4.6 million after taxes as
a result of the early redemption of a $143.8 million face value term
loan. This term loan was assumed as part of the operating lease buyout on
production equipment at Lake Superior Paper Industries, which occurred
partly in 1997 and was completed in January 1998 (see Note 4). The loss
consisted primarily of a prepayment penalty and costs associated with the
early redemption, net of the write-off of the remaining debt premium and
net of tax benefits of $3.1 million. The redemption of the 12.08% debt
was financed with proceeds from the $160 million private placement notes
with interest rates between 6.93% and 7.30%.
As of December 31, 1998, the maturities of long-term debt are as follows:
<S> <C> <C>
(In thousands) 1999 $ -
2000 30,000
2001 -
2002 420,369
2003 -
Thereafter 604,195
4. 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 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 also 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, 1998, the company recorded assets for the
deposits from the sale proceeds of $457 million and liabilities for the
lease obligations of $484 million. $18.6 million of both the deposits
and lease obligations are recorded as current. The net amount of capital
lease assets at December 31, 1998, is $261 million.
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 $11.0 million, $33.8 million
and $35.3 million for 1998, 1997 and 1996, respectively.
In January 1998, the company completed the exercise of 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. The company had previously purchased a portion of
the equipment in December 1997 by paying $38.9 million in cash and
assuming $30.2 million in debt. The total transaction resulted in an
increase in fixed assets of $338.8 million.
Future scheduled minimum lease payments under capital and noncancelable
operating leases as of December 31, 1998, are as follows:
(In thousands) Operating Leases Capital Leases
<S> <C> <C>
1999 $ 13,533 $ 23,242
2000 11,506 26,969
2001 10,947 28,334
2002 9,900 29,769
2003 7,559 31,276
Thereafter 65,556 857,084
Total minimum lease payments $ 119,001 996,674
Imputed interest (512,478)
Present value of capitalized lease payments 484,196
Less current portion
(included in other current liabilities) 18,583
Long-term capitalized lease obligations $ 465,613
5. Fair Values of Financial Instruments. The carrying amounts and fair
values of the company's financial instruments at December 31 were as
follows:
1998 1997 1996
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 $ 3,230 $ 3,230 $ 13,169 $ 13,169 $ 12,928 $ 12,928
Restricted cash
related to leases 457,012 457,012 439,675 439,675 423,618 423,618
Long-term debt,
including current
maturities 1,054,564 1,072,071 868,665 875,534 272,467 275,222
The following methods and assumptions were used by the company in
estimating fair values for financial instruments:
Cash, cash equivalents and restricted cash - 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.
6. Risk Management. The company periodically uses interest rate lock and
swap agreements to manage its exposure to interest rate changes.
Payments or receipts for fluctuations in interest rates under these
agreements are recorded as adjustments to interest expense and were not
material in any period. At December 31, 1998, the company had
outstanding interest rate swap agreements with a notional principal
amount of $50 million that convert floating-rate debt to fixed-rate debt.
The company neither holds nor issues financial instruments for trading
purposes.
7. Employee Pension and Other Benefit Plans. The company and its
subsidiaries sponsor pension plans covering substantially all employees.
Retirement benefits are provided based on employees' years of service and
earnings. Normal retirement age is 65, with provisions for earlier
retirement. The company's funding policy is to contribute amounts to the
plans when deductible for income tax purposes. This policy generally
includes amortization of unfunded prior service costs over a 10-year
period.
The company also provides certain noncontributory 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
Inter Lake Papers, Inc. were continued after the acquisition. The amounts
herein reflect the assumption of these additional liabilities and costs.
Summarized information on the company's postretirement plans is as
follows:
Pension Benefits Other Benefits
12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Change
in benefit
obligation
Benefit
obligation
at
begin-
ning of
year $ 480,029 $ 444,637 $ 437,927 $ 221,325 $ 157,705 $ 149,905
Service
cost 16,769 13,760 13,867 5,792 4,619 4,194
Interest
cost 33,117 31,247 29,730 15,039 11,736 10,636
Amendments 2,648 - - - - -
Acquisi-
tion - - - - 54,610 -
Net
actuar-
ial
loss/
(gain) 21,592 13,172 (15,769) 5,313 ( 399) 96
Benefits
paid (24,571) (22,787) (21,118) (9,221) (6,946) $ (7,126)
Benefit
obliga-
tion
at end
of year 529,584 480,029 444,637 238,248 221,325 157,705
Change in
plan
assets
Fair
value
of plan
assets
at be-
ginning
of year 615,648 514,314 468,312 52,637 39,463 33,141
Actual
return on
plan
assets 41,815 123,937 62,877 741 9,076 4,549
Employer
contri-
butions 200 184 4,244 12,902 11,044 8,899
Benefits
paid (24,571) (22,787) (21,118) (9,221) (6,946) (7,126)
Fair
value
of plan
assets
at end
of year 633,092 615,648 514,315 57,059 52,637 39,463
Net amount
recognized
Funded
status 103,508 135,619 69,677 (181,189) (168,688) (118,242)
Unrecog-
nized
prior
service
cost 19,151 19,072 21,640 ( 16,657) ( 18,051) ( 19,445)
Unrecog-
nized
tran-
sition
(asset) ( 14,188) ( 17,027) ( 19,866) - - -
Unrecog-
nized
net
actu-
arial
loss/
(gain) (121,526) (148,938) ( 80,334) 30,166 21,830 28,509
(Accrued)
benefit
cost $ (13,055) $ (11,274) $( 8,883) $(167,680) $(164,909) $(109,178)
Amounts
recog-
nized
in the
statement
of fin-
ancial
position
consist
of:
Prepaid
benefit
cost 22,605 17,415 14,342 - - -
Accrued
benefit
lia-
bility (35,660) (28,689) (23,225) (167,680) (164,909) $(109,178)
Net
amount
recog-
nized $ (13,055) $ (11,274) $( 8,883) $(167,680) $(164,909) $(109,178)
Weighted-
average
assump-
tions at
end of
year Dis-
count rate 6.75% 7.00% 7.25% 6.75% 7.00% 7.25%
Expected
return
on
plan
assets 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%
Rate of
compen-
sation
increase 5.00% 5.00% 5.00% 5.00% 5.00% 5.00%
For measurement purposes, the health care cost trend rates are as
follows:
For participants who retired before January 1, 1995, an 8% annual rate of
increase in the per capita cost of covered health care benefits was
assumed for 1998. The rate was assumed to decrease gradually to 5% for
2001 and remain at that level thereafter.
For participants who retired after January 1, 1995, a 5.25% annual rate
of increase in the per capita cost of covered health care benefits was
assumed for 1998. The rate was assumed to decrease gradually to 4% for
2001 and remain at that level thereafter.
Pension Benefits Other Benefits
12/31/98 12/31/97 12/31/96 12/31/98 12/31/97 12/31/96
<S> <C> <C> <C> <C> <C> <C>
(In thousands)
Components
of net
periodic
benefit
cost
Service
cost $ 16,769 $ 13,760 $ 13,867 $ 5,792 $ 4,619 $ 4,194
Interest
cost 33,117 31,247 29,730 15,039 11,736 10,636
Expected
return
on
plan
assets (46,855) (41,990) (34,013) (4,446) (3,490) (2,819)
Amortiza-
tion of
prior
service
cost 2,568 2,568 2,568 (1,394) (1,394) (1,394)
Amortiza-
tion of
transi-
tion
(asset) (2,839) (2,839) (2,839) - - -
Recognized
net actu-
arial
loss/
(gain) ( 779) ( 172) 49 682 702 1,387
Net peri-
odic
benefit
cost $ 1,981 $ 2,574 $ 9,362 $ 15,673 $ 12,173 $ 12,004
The net actuarial loss/(gain) in excess of a 10% corridor, the prior
service cost and the transition (asset) are being amortized over the
average remaining service period of active participants at the date
established on a straight-line basis.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $8.6 million, $4.1 million and
$0, respectively, as of December 31, 1998, and $8.5 million, $3.9 million
and $0, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plan. A 1% change in assumed health
care cost trend rates would have the following effects:
1% Increase 1% Decrease
(In thousands)
Effect on total of service and interest
cost components $3,747 ($2,948)
Effect on postretirement benefit
obligation 32,069 (25,914)
8. 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. In April 1998, the company
adopted a similar plan, the 1998 Incentive Compensation Plan. This plan
provides for the granting of options, stock appreciation rights, stock or
cash awards to directors, officers and all other nonunion employees. The
company accounts for these plans under Accounting Principles Board
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 $.01, $.02 and $.01 for the years ended December 31, 1998, 1997 and
1996, 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 plans reserved 10 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 2,302,480 options outstanding at December 31, 1998, 966,682 have
exercise prices between $17.56 and $23.38, with a weighted average
exercise price of $20.28 and a weighted average remaining contractual
life of 3.41 years. 965,104 of these options are exercisable with a
weighted average exercise price of $20.28. The remaining 1,335,798
options have exercise prices between $24.06 and $32.97, with a weighted
average exercise price of $26.92 and a weighted average remaining
contractual life of 8.17 years. 424,323 of these options are exercisable
with a weighted average exercise price of $26.13.
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 1998, 1997 and 1996, respectively:
risk-free interest rates of 4.95%, 5.79% and 6.38%; expected dividend
yields of 3.20%, 3.15% and 3.42%; expected lives of 10, 10, and 10 years;
and expected volatility of 26.05%, 27.75% and 29.50% for 1998 options,
19.25% and 18.81% for 1997 options and 16.41% and 16.57% for 1996
options.
An analysis of the stock option plans at December 31, 1998, 1997 and 1996
follows:
Weighted Weighted Weighted
Average Average Average
1998 Exercise 1997 Exercise 1996 Exercise
Shares Price Shares Price Shares Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of
year 2,411,328 $ 22 2,331,104 $ 21 2,078,556 $ 19
Granted 534,728 29 475,258 24 417,400 27
Exercised (617,664) 19 (338,358) 19 (150,168) 18
Expired or
canceled ( 25,912) 27 ( 56,676) 24 ( 14,684) 24
Outstanding at
end of year 2,302,480 24 2,411,328 22 2,331,104 21
Exercisable at
end of year 1,389,427 22 1,611,150 20 1,650,978 19
Weighted
average fair
value of
options
granted $ 8.09 $ 6.30 $ 5.96
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, 1998, none of the shares had been
issued.
9. Income Taxes.
The provision for income taxes includes the following components:
(In thousands) 1998 1997 1996
<S> <C> <C> <C>
Current:
Federal $ 29,383 $ 39,040 $ 76,312
State 3,695 7,882 13,707
Total current 33,078 46,922 90,019
Deferred:
Federal 33,311 23,591 17,408
State 1,851 1,837 2,458
Total deferred 35,162 25,428 19,866
Total provision $ 68,240 $ 72,350 $ 109,885
The following summarizes the major differences between the U.S. statutory
tax rates and the company's effective tax rates:
1998 1997 1996
Statutory federal tax rates 35.0% 35.0% 35.0%
State income taxes 2.7 3.3 4.0
Other items _2.3 (.3) (1.0)
Effective tax rates 40.0% 38.0% 38.0%
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) 1998 1997 1996
<S> <C> <C> <C>
Deferred tax assets:
Postretirement benefits $ 66,524 $ 65,395 $ 43,331
Accrued vacation 12,866 10,029 9,118
Net operating loss carryforward 51,191 50,322 -
AMT credit 3,546 1,403 -
Tax credit carryforward 11,757 7,875 1,487
Capital loss carryforward 8,974 8,449 -
Valuation allowance ( 10,504) ( 7,907) -
Other 20,321 23,184 18,820
Total deferred tax assets __164,675 158,750 72,756
Deferred tax liabilities:
Plant and equipment (476,184) (432,265) (288,152)
Equity method investments ( 10,140) ( 10,576) ( 8,711)
Other ( 11,778) ( 13,428) ( 15,182)
Total deferred tax liabilities (498,102) (456,269) (312,045)
Net deferred tax liability $(333,427) $(297,519) $(239,289)
The consolidated balance sheets reflect current deferred income taxes of
$16.2 million, $12.4 million and $12.7 million in prepaid expenses and a
long-term deferred income tax liability of $349.6 million, $309.9 million
and $252.0 million at December 31, 1998, 1997 and 1996, respectively.
As of December 31, 1998, the company had tax carryforwards of
approximately $75.5 million, which expire from 1999 through 2013. Due to
the uncertainty of the realization of certain tax carryforwards, the
company has established a valuation allowance against these carryforwards
in the amount of $10.5 million.
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 $7.3 million of outstanding Steam Utility Revenue Bonds as of
December 31, 1998, which mature at various times through April 1, 2002,
and certain other costs, principally capital expenditures. The company
paid $2.8 million in 1998, 1997 and 1996, to service these bonds. Annual
payments for the principal and interest portion of these bonds are
expected to be $2.8 million in 1999 through 2001, with a final payment of
$.7 million in 2002.
As of December 31, 1998, the company had capital expenditure commitments
outstanding of approximately $153.8 million.
11. Segment Information. The company's principal business is the manufacture
of paper and paper-related products. Consolidated Papers, Inc. is a
leading manufacturer of coated and supercalendered printing papers. The
company is also the nation's leading manufacturer of coated specialty
papers used in consumer product packaging and labeling. Other products
and services include recycled pulp made from printed, preconsumer and
postconsumer scrap paper, paperboard, paperboard products, corrugated
products and hospitality and lodging services provided at a company-owned
hotel.
The company's headquarters and major operating facilities are all located
in the United States. Some forestlands and a small wood chip production
facility are located in Canada. These Canadian operations account for
$.6 million of consolidated total assets.
The principal markets for the company's products are in the United
States. Export sales, primarily to Canada, amounted to $88.2 million in
1998, $65.8 million in 1997 and $37.4 million in 1996.
Sales to one customer amounted to 13.6%, 14.3% and 13.0% of consolidated
net sales in 1998, 1997 and 1996, respectively. Sales to another
customer amounted to 10.1% and 10.2% of net sales in 1998 and 1997.
The company is managed along product lines including coated and
supercalendered printing papers, coated specialty papers, paperboard
products, and corrugated products. Several operating divisions producing
groundwood-free, groundwood and supercalendered printing papers have been
aggregated into the coated and supercalendered printing papers reportable
segment because these operating segments are similar in economic
characteristics, products, production processes, type of customer and
distribution methods. The coated specialty papers, paperboard products
and corrugated products operating segments do not meet the quantitative
thresholds for a reportable segment and thus are included in the "Other"
category.
The coated and supercalendered printing papers reportable segment derives
revenues from the sale of printing papers used by commercial printers and
publishers for magazines, annual reports, advertising brochures,
catalogs, coupons and newspaper inserts. The "Other" category includes
the sales of coated specialty papers (used for flexible packaging,
pressure-sensitive labels and technical papers), recycled pulp,
paperboard products and corrugated products, as well as revenues from the
company-owned hotel.
Segment sales include intersegment sales valued at arm's-length transfer
prices. Segment operating profit is revenue less direct and allocable
operating expenses. Segment identifiable assets are those which are
directly used in or identified to segment operations. Corporate items
include nonoperating overhead, selling, general and administrative
expense, research and development expenditures, interest expense, inter-
segment eliminations, and other income and deductions items. Corporate
assets are principally cash and cash equivalents, certain nontrade
receivables, prepaid items, equity method investments, and certain
nonoperating fixed assets.
Financial information by business segment follows:
Printing Corporate
(In thousands) Papers Other Items Total
<S> <C> <C> <C> <C>
1998
Revenues $1,751,226 $ 281,690 $ ( 43,601) $1,989,315
Segment profit (loss) 323,475 16,575 (161,781) 178,269
Total assets 2,754,789 325,538 547,159 3,627,486
Capital expenditures 315,459 29,663 3,734 348,856
Depreciation and
amortization 160,514 18,168 ( 4,434) 174,248
1997
Revenues $1,440,005 $ 284,820 $ ( 45,514) $1,679,311
Segment profit (loss) 264,710 28,578 (102,894) 190,394
Total assets 2,514,870 313,684 518,956 3,347,510
Capital expenditures 181,582 50,338 4,278 236,198
Depreciation and
amortization 105,063 21,248 2,289 128,600
1996
Revenues $1,296,536 $ 277,122 $ ( 28,567) $1,545,091
Segment profit (loss) 325,654 44,133 ( 80,617) 289,170
Total assets 1,575,482 401,015 555,745 2,532,242
Capital expenditures 175,501 108,550 3,842 287,893
Depreciation and
amortization 87,808 17,867 2,145 107,820
QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of selected quarterly financial data for 1998 and
1997:
(Dollars in
thousands, except First Second Third Fourth
per share data) Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
1998
Net sales $ 517,009 $ 508,437 $ 491,580 $ 472,289 $ 1,989,315
Gross profit 104,127 94,045 69,584 72,294 340,050
Net income after
extraordinary item 39,043 27,100 17,179 19,035 102,357
Net income per share
after extraordinary
item - diluted .43 .30 .19 .21 1.13
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 -
diluted .31 .34 .26 .40 1.31
Per share amounts restated to reflect the two-for-one stock split of May, 1998.
1998 amounts reflect a $4.6 million after taxes extraordinary loss on debt
extinguishment.
1997 amounts reflect the acquisition, effective October 1, 1997, of Inter Lake
Papers, Inc. formally Repap USA.
Net income per share is based upon the weighted average number of shares
outstanding during the period.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholders and the Board of Directors of
Consolidated Papers, Inc.:
We have audited the accompanying consolidated balance sheets of Consolidated
Papers, Inc. (a Wisconsin corporation) and subsidiaries as of December 31,
1998, 1997 and 1996, and the related consolidated statements of income,
shareholders' investment and cash flows (see Pages 15, 16, 17, and 18) for
each of the years in the three-year period ended December 31, 1998. 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, 1998, 1997 and
1996, and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 1998, 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 14, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this amendment to the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
CONSOLIDATED PAPERS, INC.
Registrant
/s/Carl R. Lemke March 26, 1999
Carl R. Lemke, Date
Assistant Secretary
</TABLE>
