UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(checked box) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
(box) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
COMMISSION FILE NUMBER 1-13923
WAUSAU PAPER CORP.
(Exact name of registrant as specified in charter)
100 PAPER PLACE WISCONSIN
MOSINEE, WISCONSIN 54455 (State of incorporation)
(Address of principal executive office) 39-0690900
(I.R.S. Employer Identification Number)
Registrant's telephone number, including area code: 715-693-4470
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer,
as defined in Rule 405 of the Securities Act.
Yes (box) No (checked box)
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes (box) No (checked box)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such report), and (2) has been subject to such
filing requirements for the past 90 days.
Yes (checked box) No (box)
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 the 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. (checked box)
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer (box) Accelerated filer (checked box)
Non-accelerated filer (box)
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes (box) No (checked box)
As of June 30, 2005, the aggregate market value of the common stock
shares held by non-affiliates was approximately $556,501,154. For purposes of
this calculation, the registrant has assumed its directors and executive
officers are affiliates. As of February 16, 2006, 51,021,276 shares of common
stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT FOR USE IN CONNECTION WITH 2006 ANNUAL MEETING OF SHAREHOLDERS
(TO THE EXTENT NOTED HEREIN): PART III
TABLE OF CONTENTS
Page
PART I
Item 1. Business............................................................1
Item 1A. Risk Factors........................................................9
Item 1B. Unresolved Staff Comments..........................................15
Item 2. Properties.........................................................16
Item 3. Legal Proceedings..................................................18
Item 4. Submission of Matters to a Vote of Security Holders................18
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters,
and Issuer Purchases of Equity Securities................19
Item 6. Selected Financial Data............................................21
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................22
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..........37
Item 8. Financial Statements and Supplementary Data........................38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures.....................72
Item 9A. Controls and Procedures............................................72
Item 9B. Other Information..................................................73
PART III
Item 10. Directors and Executive Officers of the Registrant.................73
Item 11. Executive Compensation.............................................74
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..........................75
Item 13. Certain Relationships and Related Transactions.....................76
Item 14. Principal Accountant Fees and Services.............................76
PART IV
Item 15. Exhibits and Financial Statement Schedules.........................77
-i-
FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K includes forward-looking statements. A
cautionary statement regarding forward-looking statements is set forth under
the caption "Information Concerning Forward-Looking Statements" in Item 7.
This report should be considered in light of such cautionary statement and the
risk factors disclosed in Item 1A.
PART I
ITEM 1. BUSINESS
GENERAL
Wausau Paper Corp. ("Wausau Paper") manufactures, converts, and sells paper and
paper products within three principal operating segments: Specialty Products,
Printing & Writing and Towel & Tissue. All three of our business segments
market their products under the Wausau Paper(trademark) label. Our principal
office is located in Mosinee, Wisconsin. At December 31, 2005, we had
approximately 3,000 employees at eleven operating facilities located in seven
states.
FINANCIAL INFORMATION ABOUT SEGMENTS
Information relating to our sales, a measure of operating profit or loss, and
total assets by segment is set forth in Note 13 of the Notes to Consolidated
Financial Statements.
NARRATIVE DESCRIPTION OF BUSINESS
Wausau Paper competes in different markets within the paper industry. Each of
our business segments serve distinct market niches. The various markets for
our products are highly competitive, with competition based on service,
quality, and price.
Wausau Paper's eleven operating facilities are organized into the three
business segments as described below.
SPECIALTY PRODUCTS
Specialty Products produces a wide variety of technical specialty papers at
three facilities located in Rhinelander, Wisconsin; Mosinee, Wisconsin; and
Jay, Maine. The markets for technical specialty papers are diverse and highly
fragmented. Specialty Products' market position varies by product, but it is a
leading producer of supercalendered backing papers used as a base from which
"peel-and-stick" pressure sensitive labels are dispensed. These backing papers
are designed for high-speed labeling machines, which apply labels on consumer
products such as shampoo and deodorant. Specialty Products is also North
America's largest producer of unsaturated masking tape base paper used in the
production of masking tape. Other products include a broad range of food,
medical, and industrial papers used in a variety of applications including
grease-resistant protective barrier paper for pet food and microwave popcorn,
-1-
lightweight paper for sterilized medical packaging, interleaver paper used in
steel processing and to protect polished steel after production, and coating
and laminating base papers used in composite can labeling.
Specialty Products' papers are sold to manufacturers and converters, primarily
in the United States, that serve a host of industries including consumer
products, food service, pet food, medical packaging, and manufacturing. Under
the Wausau Paper(trademark) label, products are marketed under a variety of
brands including ExperTec(trademark), DuraTec(trademark), InvenTec(trademark),
ProGard(trademark), ProRedi(trademark), ProPly(trademark), and
ProTec(trademark).
Primary competition for Specialty Products comes from approximately 12 paper
producing companies of which our principal competitors include Thilmany LLC,
Longview Fibre Company, Stora Enso, and Fraser Paper, Inc.
Specialty Products also operates converting facilities in Columbus, Wisconsin,
and Jackson, Mississippi, which produce moisture-barrier laminated roll wrap
used to protect rolls of paper during storage and shipment, and related
specialty finishing and packaging products such as custom coating, laminating,
and converting. These products are sold to manufacturers and converters who
serve multiple industries including paper, industrial packaging, and corrugated
containers. Specialty Products' moisture-barrier laminated roll wrap sales are
estimated to be approximately 44% of the North American roll wrap market.
Primary competition in roll wrap comes from approximately 4 other wax and poly
laminators and includes Cascades/Sonoco, Inc. and Ludlow Coated Products.
PRINTING & WRITING
Printing & Writing produces and converts fine printing and writing paper
products in four facilities. At facilities in Appleton and Brokaw, Wisconsin;
Groveton, New Hampshire; and Brainerd, Minnesota, Printing & Writing
manufactures and converts a broad line of premium uncoated printing, writing,
imaging, text, cover; and board grades, in various weights, colors, sizes, and
finishes. Approximately 55% of the fine printing and writing papers produced
are colored papers. Distribution warehouses are currently maintained in
Appleton and Brokaw, Wisconsin; Groveton, New Hampshire; Dallas, Texas; and Los
Angeles, California.
Under the Wausau Paper(trademark) label, products are marketed under a variety
of brands, including Astrobrights(reg-trade-mark), Astropaque(reg-trade-mark),
Royal, Professional Series(trademark), and Creative Collection(trademark).
These papers are used for printed and photocopied documents such as annual
reports, brochures, announcements, and greeting cards. Approximately 75% of
Printing & Writing's products are sold in sheet form to paper distributors, who
sell to commercial printers, in-plant print shops, quick printers, and copy
centers and to office supply and mass merchandisers to reach consumers.
Products are also sold in roll form to converters that serve the greeting card,
envelope, and announcement industry. The segment's fine printing and writing
sales are estimated to be less than 3% of the total uncoated free-sheet market
although greater share is held in certain segments of the market.
-2-
Competition in printing and writing grades comes from specialty divisions of
major integrated paper companies as well as smaller, privately held non-
integrated companies. We estimate that the number of principal competitors in
the printing and writing grade papers portion of the uncoated free-sheet market
is approximately 14 of which our principal competition includes International
Paper Company, Domtar, Inc., and Weyerhaeuser Company.
TOWEL & TISSUE
Towel & Tissue produces a broad line of paper towel and tissue products which
are marketed along with soap and dispensing system products for the industrial
and commercial "away-from-home" market.
Under the Wausau Paper(trademark) name, Bay West(reg-trade-mark) towel and
tissue products, made primarily from recycled material, are marketed under a
number of brands including DublSoft(reg-trade-mark), EcoSoft(trademark),
OptiCore(trademark), Revolution(trademark), and Dubl-Tough(reg-trade-mark).
These products include washroom roll and folded towels, tissue products, a
variety of towel, tissue, and soap dispensers, windshield folded towels,
industrial wipers, dairy towels, household roll towels, and other premium towel
and tissue products. Products are sold to paper and sanitary supply
distributors in North America that serve factories and other commercial and
industrial locations, health service facilities, office buildings, restaurants,
theme parks, airports, and hotels. Towel & Tissue's paper mill is located in
Middletown, Ohio and its converting facility and main distribution warehouse
are located in Harrodsburg, Kentucky. In addition, Towel & Tissue currently
maintains a distribution warehouse in Los Angeles, California.
Competition comes from major integrated paper companies and smaller converters
which service consumer and food service markets as well as the industrial and
institutional markets concentrated on by Towel & Tissue. Our major competitors
include Georgia-Pacific Corporation, Kimberly Clark Corporation, and SCA
Hygiene Products.
EXPORT SALES
Currently, foreign sales represent approximately 8 percent of Wausau Paper's
consolidated net sales, with sales to Canada representing 6 percent of
consolidated net sales. Refer to Note 13 of the Notes to Consolidated Financial
Statements for our geographic data.
In January 2002, the Appellate Body of the World Trade Organization ("WTO")
held that the United States extraterritorial income exclusion ("ETI") was a
prohibited export subsidy similar to the benefits derived from a foreign sales
corporation. The United States enacted legislation in October 2004 which
addressed the European Union's objections regarding the ETI regime. The
American Jobs Creation Act of 2004 included the repeal of ETI and provided a
deduction with respect to income of certain United States manufacturing
activity in 2005. The ETI regime repeal becomes fully effective in 2007. For
transactions prior to 2005, we will retain 100 percent of the ETI benefit. For
transactions in 2005 and 2006, the ETI benefit will be available, but at a
reduced rate of 80 percent and 60 percent, respectively. During February 2006,
the WTO appellate panel ruled that because the American Jobs Creation Act of
2004 allowed for a gradual phaseout of ETI, the United States is still in
breach of the WTO rules. In the absence of a
-3-
resolution to the dispute, European Union sanctions could be imposed by May 14,
2006. We are currently evaluating the financial impact of the repeal of ETI and
the implementation of the qualified production activities deduction.
RAW MATERIALS
Pulp is the basic raw material for paper production and represents
approximately one-half of the total raw material cost of making paper. The
Mosinee and Brokaw mills were our only facilities with pulping operations. In
November 2005, the Brokaw pulping operation was permanently shut down. During
2005, the pulp mills provided a percentage of the fiber needs to our Wisconsin
paper operations as follows: Mosinee, 60%; Brokaw, 51%; and Rhinelander, 5%.
Wood fiber required for operation of our pulp mills in 2005 was purchased on
the open market in the form of pulpwood and chips from independent contractors.
In addition, approximately 9% of the timber consumed in pulping operations is
produced from Wausau Paper-owned timberlands. Open-market pulpwood was
purchased from approximately 200 independent loggers at market prices under
contracts that typically provide for the delivery of a specified amount of wood
and are entered into on a quarterly basis. Open-market chips were also
purchased from independent sawmills. The balance of our pulp needs at Mosinee
and Brokaw and all of the pulp used at our other facilities (an aggregate of
approximately 450,000 air-dried metric tons in 2005) was purchased on the open
market, principally from pulp mills throughout the United States and Canada.
We have purchased, and may, from time to time in the future, purchase pulp
futures contracts as a hedge against significant future increases in the market
price of pulp.
Recycled, de-inked fiber with a high content of post-consumer waste is
purchased from domestic suppliers as part of the fiber requirements for
Printing & Writing's recycled products. Recycled fiber is in adequate supply
and readily obtainable. Additionally, Towel & Tissue fulfills substantially
all of its de-inked fiber needs from 100% recycled wastepaper which is readily
available from domestic suppliers. Approximately 150,000 standard tons of
wastepaper is consumed annually. In addition, approximately 40% of Towel &
Tissue's parent roll supply needs are purchased from outside sources at then
current market prices.
Various chemicals are used in the pulping and papermaking processes. These
industrial chemicals are available from a number of suppliers and are purchased
at current market prices.
ENERGY
Wausau Paper's paper mills require large amounts of electrical and steam energy
which are adequately supplied by public utilities or generated at Wausau Paper
operated facilities. We generate approximately 33% of our electrical power
needs from spent pulping liquor, fuel oil, coal, wood chips, fiber cake,
natural gas, and hydropower. Spent pulping liquor, wood chips, and fiber cake
are byproducts of mill operations. We continue to explore alternative power
sources as an ongoing business process and are party to an operating lease for
a co-generation electrical power facility for our Groveton mill.
-4-
Wausau Paper contracts for the supply and delivery of natural gas at some of
our facilities. Under these contracts, we are committed to the transportation
of a fixed volume of natural gas from our natural gas suppliers to our
facilities. We are not required to buy or sell minimum gas volumes under the
agreement but are required to pay a minimum transportation fee for the
contracted period. Contracts expire at various times between 2006 and 2019.
At December 31, 2005, we also have volume commitments for the supply of fuel
oil, natural gas, coal, paper, and certain raw materials. These obligations
expire in 2006 and 2007. Wausau Paper may also purchase, from time to time,
natural gas contracts with fixed prices for a certain portion of our facility
requirements.
PATENTS AND TRADEMARKS
Wausau Paper develops and files trademarks and patents, as appropriate.
Trademarks include Wausau Paper(trademark), ProPly(trademark),
ExperTec(trademark), DuraTec(trademark), InvenTec(trademark),
ProGard(trademark), ProRedi(trademark), ProTec(trademark),
Astrobrights(reg-trade-mark), Astropaque(reg-trade-mark),
Exact(reg-trade-mark), Bay West(reg-trade-mark), EcoSoft(trademark),
DublSoft(reg-trade-mark), OptiCore(trademark), Revolution(trademark), and Wave
'N Dry(reg-trade-mark), among others. Our patents cover various paper towel
dispensers and metering or other mechanisms for towel dispensers and cabinets
and certain silicone release papers. We consider our trademarks and patents,
in the aggregate, to be material to our business, although we believe the loss
of any one such mark or patent right would not have a material adverse effect
on our business. We do not own or hold material licenses, franchises or
concessions.
SEASONAL NATURE OF BUSINESS
The markets for some of the grades of paper produced by Wausau Paper tend to be
somewhat seasonal. However, the marketing seasons for these grades are not
necessarily the same. Overall, we generally experience lower sales in the
first quarter, in comparison to the rest of the year, primarily due to reduced
business activity for many customers following the year-end holiday season.
WORKING CAPITAL
As is customary in the paper industry, Wausau Paper carries adequate amounts of
raw materials and finished goods inventory to facilitate the manufacture and
rapid delivery of paper products to our customers.
MAJOR CUSTOMERS
A substantial portion of our business is with customers in various paper
converting, paper merchant, or distribution businesses. No single customer
accounted for 10% or more of our consolidated net sales during 2005. On a
segment basis, one customer accounted for approximately 18% of our Printing &
Writing business net sales and one customer accounted for approximately 13% of
our Towel & Tissue net sales while no single customer in Specialty Products'
business segment comprised 10 % or more of the respective segment net sales.
-5-
BACKLOG
Consolidated order backlogs at December 31, 2005 increased to approximately
42,500 tons representing $52.1 million in sales compared to 35,100 tons, or
$42.0 million of sales at December 31, 2004 and 31,600 tons, or $33.4 million
in sales at December 31, 2003. The change in customer order backlog at December
31, 2005 compared to December 31, 2004 does not necessarily indicate a change
in business conditions, as a large portion of orders is shipped directly from
inventory upon receipt and does not impact backlog numbers. A backlog of
unmade customer orders is monitored to optimize paper machine production. The
majority of our customer orders are filled within 15 days of receipt. The
entire backlog at December 31, 2005 is expected to be shipped during fiscal
2006. Information on backlogs by business segment is included in Item 7 of this
report.
RESEARCH AND DEVELOPMENT
Research and development projects for the last three fiscal years primarily
involved development of new release liners for Specialty Products' line of
"peel-and-stick" liner papers, food-packaging/food-service papers and the
development of new color and writing grades at Printing & Writing.
Expenditures for product development were $1.9 million in 2005, $1.9 million in
2004, and $2.2 million in 2003.
ENVIRONMENT
Wausau Paper is subject to extensive regulation by various federal, state,
provincial, and local agencies concerning compliance with environmental control
statutes and regulations. These regulations impose limitations, including
effluent and emission limitations, on the discharge of materials into the
environment, as well as require us to obtain and operate in compliance with
conditions of permits and other governmental authorizations. Future
regulations could materially increase our capital requirements and certain
operating expenses in future years.
Wausau Paper has a strong commitment to protecting the environment. Like our
competitors in the paper industry, we face increasing capital investments and
operating expenses to comply with expanding and more stringent environmental
regulations. We estimate that our capital expenditures for environmental
purposes will approximate $3.5 million in 2006.
We believe that capital expenditures associated with compliance with
environmental regulations will not have a material adverse effect on our
competitive position, consolidated financial condition, liquidity, or results
of operations.
Wausau Paper is not involved in any proceedings under the Comprehensive
Environmental Response, Compensation and Liability Act. In 1986, the Wisconsin
Department of Natural Resources ("DNR") notified a subsidiary of Wausau Paper
that under Wisconsin environmental laws we may be a potentially responsible
party ("PRP") for the Gorski landfill in Mosinee, Wisconsin, and nominated the
landfill to the Environmental Protection Agency's ("EPA") National Priorities
List. The DNR had identified elevated concentrations of chlorinated volatile
organic compounds in three private water supply wells located in close
proximity to the landfill. The DNR has identified 10 PRPs. No action was
taken by either the DNR or the EPA until June
-6-
2000, when the DNR requested certain parties who had disposed of waste at the
site to form an ad hoc group to cooperatively investigate the environmental
contamination at the site. In October 2001, we entered into an agreement with
three other parties to fund a study of the landfill to determine possible
remediation strategies. We worked with the DNR on the development of the study
and work plan which was initiated in early 2003. A report based upon the study
was submitted to the DNR in 2004. The DNR has not provided a response to the
study submission. We estimate that the costs of remediation of the entire site
for all parties will be approximately $3 million, based upon the remediation
method our consultants believe to be the most likely to be used. This estimate
is preliminary. Actual costs of remediation of the site could be materially
different since no timetable or decision on the actual remediation work has yet
been developed. Our share of the cost of such remediation cannot be determined
with certainty at this time, but based on the estimated costs at year-end and
the number and nature of other PRPs, we are of the opinion that such costs will
not have a material adverse effect on the consolidated financial condition,
liquidity, or results of operations of Wausau Paper. We are also pursuing
insurance coverage of our remediation costs following a 2003 Wisconsin Supreme
Court decision in an unrelated case that remediation claims may amount to
damages for purposes of general liability insurance.
Note 10 of the Notes to Consolidated Financial Statements discusses our
policies with respect to the accrual of remediation costs. Estimates of costs
for future remediation are necessarily imprecise due to, among other things,
the identification of presently unknown remediation sites and the allocation of
costs among PRPs. We believe that our share of the costs of cleanup for our
current remediation site will not have a material adverse impact on our
consolidated financial position. As is the case with most manufacturing and
many other entities, there can be no assurance that we will not be named as a
PRP at additional sites in the future or that the costs associated with such
additional sites would not be material.
EMPLOYEES
Wausau Paper had approximately 3,000 employees at the end of 2005. Most hourly
mill employees are covered under collective bargaining agreements. A new four-
year labor agreement was negotiated with USW International Union at Specialty
Products' Mosinee, Wisconsin facility in 2005. The labor contract at our
Specialty Products' Rhinelander, Wisconsin facility expired on December 31,
2005 and is in the process of being negotiated. Labor agreements will expire at
other facilities in 2006, 2007, 2008 and 2009. We maintain good labor
relations at all facilities and expect that new multi-year contracts will be
negotiated at competitive rates.
-7-
EXECUTIVE OFFICERS OF THE COMPANY
The following information relates to executive officers of Wausau Paper as of
March 15, 2006. Unless otherwise specified, current positions listed for an
executive officer have been held for a minimum of five years.
SAN W. ORR, JR., 64
Chairman of the Board of the Company and Advisor, Estates of A. P.
Woodson and family; Chief Executive Officer of the Company (2000; 1994-
1995; 1989-1990); formerly Chairman of the Board (1987-1997) and a
Director (1972-1997) of Mosinee Paper Corporation; also a Director of
Marshall & Ilsley Corporation.
THOMAS J. HOWATT, 56
President and Chief Executive Officer. Previously, Senior Vice President,
Printing & Writing (1997-2000), Vice President and General Manager,
Printing & Writing Division (1994-1997), Vice President and General
Manager, Wausau Papers of New Hampshire (1993-1994), Vice President
Operations, Brokaw Division (1990-1993), and prior thereto, Vice
President, Administration, Brokaw Division.
STUART R. CARLSON, 59
Executive Vice President, Administration. Previously, Senior Vice
President, Specialty Paper Group (1997-2000), and Senior Vice President -
Administration (1993-1996), and Vice President Human Resources (1991-
1993) of Mosinee Paper Corporation. Also Director of Human Resources,
Georgia Pacific, Inc. (1990-1991) and Corporate Director of Industrial
Relations, Great Northern Nekoosa Corporation (1989-1990).
ALBERT K. DAVIS, 58
Senior Vice President, Specialty Products and Acting Senior Vice
President, Printing & Writing. Previously, Vice President of Operations
(1996 - 2000), Vice President of Engineering (1990 - 1996), and Director
of Engineering (1983-1990), Rhinelander Paper Company, Inc.
PETE R. CHIERICOZZI, 62
Senior Vice President, Towel & Tissue since September, 2003. Previously,
Consultant, Self-employed (2002), Vice President, Sales and Marketing,
SCA Tissue (2001), Executive Vice President, Sales and Marketing,
Georgia-Pacific Tissue (2000), Executive Vice-President, Wisconsin Tissue
(Division of Chesapeake Corporation) (1999).
SCOTT P. DOESCHER, 46
Senior Vice President, Finance, Secretary and Treasurer since May, 2001.
Previously, Vice President, Finance, Printing & Writing Group (1998-
2001), Director of Finance, Printing & Writing Division (1992-1998) and
Corporate Director Financial Analysis and Internal Audit and Assistant
Secretary/Treasurer (1988-1992).
-8-
DENNIS M. URBANEK, 61
Senior Vice President, Engineering and Environmental Services.
Previously, Vice President, Engineering and Environmental Services (1996-
1997) of Mosinee Paper Corporation, Vice President and General Manager of
Mosinee's Pulp & Paper Division (1992-1996), and Vice President and
General Manager, Sorg Paper Company (1990-1992).
AVAILABLE INFORMATION
Information regarding our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and any amendments to these reports,
are available, free of charge, on our website by going to "Investor Information
- SEC Filings" at www.wausaupaper.com. These reports are available as soon as
reasonably practicable after we electronically file such reports with or
furnish them to the Securities and Exchange Commission ("SEC").
ITEM 1A. RISK FACTORS
An investment in Wausau Paper stock involves risk. You should carefully
consider the following risk factors and the other information contained in this
Annual Report on Form 10-K and in other reports that we file from time to time
with the SEC. Our business, financial condition and results of operations
could be harmed if any of the following risks occur. In that case, the trading
price of our common stock may decline. In addition to the following risk
factors, you should carefully review the cautionary statement made under
"Information Concerning Forward-Looking Statements" in Item 7.
THE SEGMENTS OF THE PAPER INDUSTRY IN WHICH WE OPERATE ARE HIGHLY
COMPETITIVE AND INCREASED COMPETITION COULD REDUCE OUR SALES AND PROFITABILITY.
We compete in different markets within the paper industry on the basis of
the quality of our products, customer service, product development activities,
price, and distribution. All of our markets are highly competitive. Our
competitors vary in size, and many have greater financial and marketing
resources than we do. In some of our markets, the industry's capacity to make
products exceeds current demand levels. Competitive conditions in some of our
segments have caused us to incur lower net selling prices and reduced gross
margins and net earnings. These conditions may continue indefinitely. See
Item 1 of this report for information regarding the number and identities of
our competitors in our operating segments. See Item 7 concerning recent
competitive conditions in the markets we serve.
As a producer of specialty papers, we target markets in which our
relative size, equipment and product development capabilities, and customer
service emphasis provide us a competitive advantage. We work to limit our
exposure to commodity products where larger competitors with more efficient
equipment generally have production cost advantages. Recent improvements in
some commodity products have narrowed the quality differential between these
products and our specialty products. Changes of this nature could further
"commoditize" and reduce the size of our target markets.
-9-
CHANGES WITHIN THE PAPER INDUSTRY MAY ADVERSELY AFFECT OUR FINANCIAL
PERFORMANCE.
Changes in the identity, ownership structure, and strategic goals of our
competitors and the emergence of new competitors in our target markets may harm
our financial performance. New competitors may include foreign-based companies
and commodity-based domestic producers who could enter our specialty markets if
they are unable to compete in their traditional markets. The paper industry
has also experienced consolidation of producers and distribution channels.
Further consolidation could unite other producers with distribution channels
through which we currently sell, limiting access to our target markets.
OUR BUSINESS AND FINANCIAL PERFORMANCE MAY BE ADVERSELY AFFECTED BY
DOWNTURNS IN THE TARGET MARKETS THAT WE SERVE OR REDUCED DEMAND FOR THE TYPES
OF PRODUCTS WE SELL.
Demand for our products is often affected by general economic conditions
as well as product-use trends in our target markets. These changes may result
in decreased demand for our products. For example, our "away-from-home" towel
and tissue business usually declines during periods of economic slowdowns as
business and recreational travel is curtailed. Also, demand for uncoated
freesheet papers, the broad market category in which Printing & Writing
competes, has declined in five of the last six years due to such factors as
general economic conditions, office employment trends and the increased use of
electronic communications. There may be periods during which demand for our
products is insufficient to enable us to operate our production facilities in
an economical manner. The occurrence of these conditions is beyond our ability
to control and, when they occur, they may have a significant impact on our
sales and results of operations.
THE COST OF RAW MATERIALS AND ENERGY USED TO MANUFACTURE OUR PRODUCTS
COULD INCREASE.
Raw materials comprise approximately 50% of our cost of sales, with
market pulp, purchased parent rolls, and wastepaper accounting for more than
one-half of this total. Raw material prices will change based on supply and
demand on a worldwide spectrum. Pulp price changes can occur due to worldwide
consumption levels of pulp, pulp capacity, expansions or curtailments,
inventory building or depletion, and pulp producer cost changes related to wood
availability, environmental issues, or other variables.
We generate approximately 33% of our energy needs. Energy costs may
fluctuate significantly due to increased worldwide consumption levels,
disruptions in supply due to natural catastrophes or political turmoil, or
decreased production capacity.
We may not be able to pass increased cost for raw materials or energy to
our customers if the market or existing agreements with our customers do not
allow us to raise the prices of our finished products. Even if we are able to
pass through increased cost of raw materials or energy, the resulting increase
in the selling prices for our products could reduce the volume of products we
sell and decrease our revenues. While we may try, from time to time, to hedge
against price increases, we may not be successful in doing so.
-10-
We currently purchase approximately 40%, or more than 60,000 tons per
year, of our towel and tissue parent roll needs from other producers in the
paper industry. A disruption in supply of these parent rolls could have an
adverse affect on our ability to meet demand for our products and a significant
increase in the cost of these parent rolls could unfavorably impact
profitability.
THE FAILURE TO DEVELOP NEW PRODUCTS COULD REDUCE THE OVERALL DEMAND FOR
OUR PRODUCTS AND OUR NET INCOME.
We have a goal of generating at least 25% of our annual revenue from
products introduced within the previous three years. Our sales volume and net
earnings may decrease if we do not satisfy new customer product preferences or
fail to meet new technology demands of our customers.
IF WE FAIL TO MAINTAIN SATISFACTORY RELATIONSHIPS WITH OUR LARGER
CUSTOMERS, OUR BUSINESS MAY BE HARMED.
We do not have long-term, fixed quantity supply agreements with our
customers. Due to competition or other factors we may lose business from our
customers, either partially or completely. The loss of one or more of our
significant customers, or a substantial reduction of orders by any of our
significant customers, could harm our business and results of operations.
Moreover, our customers may vary their order levels significantly from period
to period, and customers may not continue to place orders with us in the future
at the same levels as in prior periods. In the event we lose any of our larger
customers, we may not be able to replace that revenue source, which could harm
our financial results.
WE MAY BE UNABLE TO MAINTAIN OUR RELATIONSHIPS WITH ORGANIZED LABOR
UNIONS.
The majority of our hourly production workforce is represented by labor
unions. While we believe we enjoy satisfactory relationships with all of the
labor organizations that represent our employees, we cannot guarantee that
labor-related disputes will not arise. Labor disputes could result in
disruptions in production and could also cause increases in production costs,
which could damage our relationships with our customers and adversely affect
our business and financial results.
THE COSTS OF COMPLYING WITH ENVIRONMENTAL REGULATIONS MAY INCREASE
SUBSTANTIALLY AND ADVERSELY AFFECT OUR CONSOLIDATED FINANCIAL CONDITION,
LIQUIDITY, OR RESULTS OF OPERATIONS.
We are subject to various environmental laws and regulations that govern
discharges into the environment and the handling and disposal of hazardous
substances and wastes. Environmental laws impose liability and clean-up
responsibility for releases of hazardous substances into the environment. We
will continue to incur substantial capital and operating expenses in order to
comply with current law. Any changes in these laws or their interpretation by
government agencies or the courts may significantly increase our capital
expenditures and operating expenses and decrease the amount of funds available
for investment in other areas of operation. In addition, we may be required to
eliminate or mitigate any adverse effects on the
-11-
environment caused by the release of hazardous materials, whether or not we had
knowledge of, or were responsible for, such release. We may also incur
liability for personal injury and property damages as a result of discharges
into the environment. The costs of remediation of known environmental sites,
such as described in Note 10 of the Notes to Consolidated Financial Statements,
may exceed current estimates and there may be additional sites not now known to
us that may require significant remediation expenses in the future. If costs
or liabilities related to environmental compliance increase significantly, our
consolidated financial condition, liquidity, or results of operations may be
adversely affected.
WE MAY BE UNABLE TO GENERATE SUFFICIENT CASH FLOW TO SIMULTANEOUSLY FUND
OUR OPERATIONS, FINANCE CAPITAL EXPENDITURES, SATISFY OTHER OBLIGATIONS, AND
MAKE DIVIDEND PAYMENTS ON OUR COMMON STOCK.
Our business is capital intensive and requires significant expenditures
for equipment maintenance and new or enhanced equipment for environmental
compliance matters, and to support our business strategies. We expect to meet
all of our near- and longer-term cash needs from a combination of operating
cash flow, cash and cash equivalents, sale of timberlands, our existing credit
facility or other bank lines of credit, and other long-term debt. If we are
unable to generate sufficient cash flow from these sources or if we are unable
to secure needed credit, we could be unable to meet our near- and longer-term
cash needs or make dividend payments.
IF WE HAVE A CATASTROPHIC LOSS OR UNFORESEEN OR RECURRING OPERATIONAL
PROBLEMS AT ANY OF OUR FACILITIES, WE COULD SUFFER SIGNIFICANT LOST PRODUCTION
AND/OR COST INCREASES.
Our paper making and converting facilities and distribution warehouses
may suffer catastrophic loss due to fire, flood, terrorism, or other natural or
man-made events. If any of these facilities were to experience a catastrophic
loss, it could disrupt our operations, delay production, delay or reduce
shipments, reduce revenue, and result in significant expenses to repair or
replace the facility. These expenses and losses may not be adequately covered
by property or business interruption insurance. Even if covered by insurance,
our inability to deliver our products to customers, even on a short-term basis,
may cause us to lose market share on a more permanent basis.
OUR ACQUISITIONS, FACILITY CLOSINGS, OR OTHER STRUCTURAL CHANGES MAY
RESULT IN FINANCIAL RESULTS THAT ARE DIFFERENT THAN EXPECTED.
In the normal course of business, we frequently engage in discussions
with third parties relating to the possible acquisition of additional
facilities and may consider, from time to time, the acquisition of another
business. We also continually review and may implement structural changes
designed to improve our operations or to reflect anticipated changes in long-
term market conditions. As a result of recent or similar future transactions,
our financial results may differ from the investment community's expectations
in a given quarter, or over the long term. We may have difficulty integrating
the acquisition of a newly acquired company in a way that enhances the
performance of our combined businesses or product lines to realize the value
from expected synergies. We may also have difficulty integrating a new
manufacturing facility into current operations. These difficulties can arise
for a variety of reasons, including, the size and
-12-
complexity of the acquisition, the retention of key employees, the retention of
key customers, and the ability to integrate manufacturing systems and transfer
our corporate culture to new employees and facilities. If we do not realize
the expected benefits or synergies of such transactions, our consolidated
financial position, liquidity, and results of operations could be negatively
impacted.
IF WE INCUR A MATERIAL WEAKNESS IN OUR INTERNAL CONTROL OVER FINANCIAL
REPORTING, IT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, OPERATING
RESULTS, AND STOCK PRICE.
Section 404 of the Sarbanes-Oxley Act of 2002 and related rules and
regulations promulgated by the SEC (collectively, "Section 404") require us to
assess and report on our internal control over financial reporting as of the
end of each fiscal year. In our report under Section 404 which is included in
Item 8 of this report, we have concluded that our internal control over
financial reporting is effective. Our auditors have concurred on that
assessment.
If we should develop a material weakness in our control over financial
reporting, it could have a material adverse effect on the company. A material
weakness is a control deficiency, or a combination of control deficiencies,
that results in there being more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by management or employees in the
normal course of performing their assigned functions. If a material weakness
occurs, it could adversely affect our financial reporting process and our
financial statements. If we fail to maintain an effective internal control
environment it could have a material adverse effect on our business, operating
results, and our stock price.
FUTURE CHANGES IN FINANCIAL ACCOUNTING STANDARDS MAY ADVERSELY AFFECT OUR
REPORTED RESULTS OF OPERATIONS.
A change in financial accounting standards can have a significant effect
on our reported results. New accounting pronouncements may adversely affect
our reported financial results in the future or require us to restate results
we have already reported. New financial accounting standards or
interpretations may require us to recognize additional expenses in the future
or change the manner in which amounts currently recognized are determined.
Such additional expense recognition may result in lower reported net earnings
or increased balance sheet liabilities, either of which may reduce the market
price of our common stock or affect our compliance with various covenants
relating to our indebtedness.
WE MAY INCUR SIGNIFICANT, UNEXPECTED LIABILITIES FROM CURRENT OR FUTURE
CLAIMS, INCLUDING MATTERS NOW THREATENED OR IN LITIGATION.
We deal with claims which are threatened or made by third parties in the
normal course of our business. Some claims result in formal administrative or
legal proceedings in which the amounts claimed are significant. We assess each
claim and make a judgment whether the claim will have a material adverse effect
on our consolidated financial condition, liquidity, or results of operations.
Claims which we believe could have material adverse effect if not resolved in
our favor, or other claims which we believe to be significant, are discussed in
Item 3 of this report
-13-
and in Note 10 of the Notes to Consolidated Financial Statements for the most
recent fiscal year which are included in Item 8 of this report. Our reports do
not disclose or discuss all claims of which we are aware. Our assessment of
the materiality of any claim is based upon the amount involved, the underlying
facts, and our assessment of the likelihood of a material adverse outcome. If
our assessment of a claim as immaterial is not correct, we may not have made
adequate provision for such loss and our consolidated financial condition,
liquidity, or results of operations could be harmed.
WE MAY BECOME INVOLVED IN CLAIMS CONCERNING INTELLECTUAL PROPERTY RIGHTS,
AND WE COULD SUFFER SIGNIFICANT LITIGATION OR RELATED EXPENSES IN DEFENDING OUR
OWN INTELLECTUAL PROPERTY RIGHTS OR DEFENDING CLAIMS THAT WE INFRINGED THE
RIGHTS OF OTHERS.
None of our trademarks or patents is, in itself, considered to be
material to our business. However, taken together, we consider our
intellectual property to be a material asset. We may lose market share and
suffer a decline in our revenue and net earnings if we cannot successfully
defend one or more trademarks or patents.
We do not believe that any of our products infringe the valid
intellectual property rights of third parties. However, we may be unaware of
intellectual property rights of others that may cover some of our products or
services. In that event, we may be subject to significant claims for damages.
Any litigation regarding patents or other intellectual property could be
costly and time-consuming and could divert our management and key personnel
from our business operations. Claims of intellectual property infringement
might also require us to enter into license agreements, which would reduce our
operating margins, or in some cases, we may not be able to obtain license
agreements on terms acceptable to us.
SOME ANTI-TAKEOVER PROVISIONS IN OUR ARTICLES OF INCORPORATION AND
BYLAWS, AS WELL AS PROVISIONS OF WISCONSIN LAW, COULD IMPAIR A TAKEOVER
ATTEMPT.
Our articles of incorporation and bylaws, and our shareholders rights
plan, could have the effect of rendering more difficult or discouraging an
acquisition of Wausau Paper that is deemed undesirable by our board of
directors. These include provisions that:
(circle)permit our board of directors to issue one or more series of
preferred stock with rights and preferences designated by our board,
including stock with voting, liquidation, dividend, and other rights
superior to our common stock;
(circle)impose advance notice requirements for shareholder proposals and
nominations of directors to be considered at shareholder meetings;
(circle)divide our board of directors into three classes of directors
serving staggered terms;
(circle)allow the board of directors to fill any vacancies on our board;
-14-
(circle)under our articles of incorporation, prohibit us from entering into
a "business combination" transaction with any person who acquires 10% of
our voting stock at any time (an "interested 10% shareholder") unless
certain "fair price" requirements are met or, in the alternative, either
(a) two-thirds of the shares entitled to vote which are not held by the
interested shareholder are voted for the transaction, or (b) the board of
directors has approved the transaction;
(circle)under Wisconsin law, require that two-thirds of our voting stock
must vote to approve any merger with another corporation, a share
exchange, or the sale of substantially all of our assets;
(circle)under Wisconsin law, prohibit us from entering into a "business
combination" transaction with an interested 10% shareholder for a period
of three years from the date such person makes such an acquisition unless
our board of directors had approved the business combination or the
acquisition of shares before the date of the acquisition;
(circle)under Wisconsin law, prohibit us from entering into a "business
combination" transaction with an interested 10% shareholder at any time
after a period of three years from the date of becoming an interested 10%
shareholder unless our board of directors had approved the acquisition of
shares before the date of the acquisition, the business combination meets
certain "fair price" requirements, or the business combination is
approved by a majority of the shares entitled to vote which are not
beneficially owned by the interested 10% shareholder;
(circle)under Wisconsin law, reduce the voting power of any shares held by a
shareholder who holds in excess of 20% of the shares outstanding to 10%
of the full voting power of the excess shares;
(circle)require a vote by the holders of four-fifths of our outstanding
shares to amend the provisions of our articles or bylaws described above;
and
(circle)require that, in many potential takeover situations, rights issued
under our shareholder rights plan become exercisable to purchase our
common stock and potentially other securities at a price substantially
discounted from the then applicable market price.
These provisions and similar provisions that could apply to us in the future
may discourage potential takeover attempts, discourage bids for our common
stock at a premium over market price, or otherwise adversely affect the market
price of, and the voting and other rights of the holders of, our common stock.
Such provisions could also discourage proxy contests and make it more difficult
for shareholders to elect directors other than the candidates nominated by our
board of directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
-15-
ITEM 2. PROPERTIES
Wausau Paper's headquarters are located in Mosinee, Wisconsin. Executive
officers and corporate staff who perform corporate accounting, financial, and
human resource services are located in the corporate headquarters, as are
certain business segment personnel. Our operating facilities consist of the
following:
Number of
Paper Practical 2005
Facility Product Machines Capacity*(tons) Actual(tons)
Specialty Products
Rhinelander, WI Paper 4 150,000 147,500
Otis, ME Paper 2 71,000 68,800
Mosinee, WI Paper 4 116,000 112,800
Pulp 96,000 77,300
Columbus, WI and Laminated/
Jackson, MS Coated Papers N/A 150,000 66,700
Printing & Writing
Brokaw, WI Paper 4 177,000 150,000
Groveton, NH Paper 2 117,000 111,400
Brainerd, MN Paper 2 170,000 76,900
Appleton, WI Converting N/A 70,000 35,000
Towel & Tissue
Middletown, OH Towel & Tissue 2 110,000 109,100
Deink Pulp 110,000 106,200
Harrodsburg, KY Converted Towel
& Tissue N/A 200,000 163,500
* "Practical capacity" is the amount of finished product a mill can produce
with existing papermaking equipment, grade mix and workforce and usually
approximates maximum, or theoretical, capacity. At Wausau Paper's converting
operations it reflects the approximate maximum amount of product that can be
made on existing equipment, but would require additional days and/or shifts of
operation to achieve.
-16-
Wausau Paper currently maintains warehouse distribution facilities in order to
provide prompt delivery of its products. The facilities are:
Owned or
Segment Location Square Feet Leased (Expiration Date)
Printing & Writing Appleton, WI 36,000 Owned
Brokaw, WI 174,000 Owned
Dallas, TX 70,000* Leased (December 2006)
Groveton, NH 80,000 Owned
Los Angeles, CA 85,000* Leased (December 2006)(dagger)
Towel & Los Angeles, CA 45,000* Leased (December 2006)(dagger)
Tissue
Harrodsburg, KY 460,000 Owned
* guaranteed space
(dagger)Aggregate of approximately 130,000 square feet under one agreement
which will expire in December 2006.
Specialty Products and Towel & Tissue also lease limited space in various
warehouses to facilitate deliveries to specific customers.
Wausau Paper owns approximately 119,000 acres of timberland in the state of
Wisconsin. The growing stock inventory on Company timberlands is an estimated
8 million board feet of saw timber and an estimated 570,000 cords of pulpwood.
During 2005, we announced our intent to sell, over the next three to four
years, approximately 42,000 acres of timberlands. During the year we sold
approximately 1,200 acres of timberlands. Our timberland sales program is
expected to increase to a pace in 2006 that will allow us to complete our sales
program within the time period specified.
-17-
ITEM 3. LEGAL PROCEEDINGS
Wausau Paper has been named as a potentially responsible party with respect to
a Mosinee, Wisconsin landfill. See "Environment" in Item 1 and Note 10 in
Notes to Consolidated Financial Statements included in Item 8 of this report.
Wausau Paper strives to maintain compliance with applicable environmental
discharge regulations at all times. However, from time to time, our operating
facilities may exceed permitted levels of materials into the environment or
inadvertently discharge other materials. Such discharges may be caused by
equipment malfunction, prevailing environmental conditions, or other factors.
It is our policy to report any violation of environmental regulations to the
appropriate environmental authority as soon as we become aware of such an
occurrence and to work with such authorities to take appropriate remediatory or
corrective actions.
Wausau Paper may be involved from time to time in various other legal and
administrative proceedings or subject to various claims in the normal course of
its business. Although the ultimate disposition of legal proceedings cannot be
predicted with certainty, in the opinion of management, the ultimate
disposition of any threatened or pending matters, either individually or on a
combined basis, will not have a material adverse effect on our consolidated
financial condition, liquidity, or results of operations. See Item 1A, page
13, concerning the possible effect of unexpected liabilities from current or
future claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter
of 2005.
-18-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
MARKET AND DIVIDEND INFORMATION
Wausau Paper common stock is traded on the New York Stock Exchange under the
symbol "WPP".
As of the record date of the annual meeting, February 16, 2006, (the "Record
Date") there were approximately 2,800 holders of record of Wausau Paper common
stock. We estimate that as of the Record Date there were approximately 6,100
additional beneficial owners whose shares were held in street name or in other
fiduciary capacities. As of the Record Date, there were 51,021,276 shares of
common stock outstanding.
The following table sets forth the range of high and low sales price
information of Wausau Paper common stock and the dividends declared on the
common stock, for the calendar quarters indicated.
Market Price Cash Dividend
Calendar Quarter High Low Declared
2005
First Quarter $18.13 $13.57 *
Second Quarter $14.63 $11.16 $.17
Third Quarter $13.23 $11.28 $.085
Fourth Quarter $12.63 $10.08 $.085
2004
First Quarter $14.11 $12.20 *
Second Quarter $17.44 $13.19 $.17
Third Quarter $17.40 $14.54 $.085
Fourth Quarter $19.12 $15.15 $.085
2003
First Quarter $12.08 $ 9.30 *
Second Quarter $12.23 $10.20 $.17
Third Quarter $13.40 $11.03 $.085
Fourth Quarter $13.85 $11.75 $.085
*Two dividends of $.085 per share were declared in the second quarter in
2005, 2004 and 2003.
-19-
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Purchases of Equity Securities - Quarter ending December 31, 2005
Maximum number
Total number (or approximate
of shares (or dollar value) of
Total number units) purchased shares (or units)
of shares Average price as part of publicly that may yet be
(or units) paid per share announced plans purchased under the
purchased (or unit) or programs plans or programs
Period (a) (b) (c)(1) (d)(1)
October 40,000 $10.84 40,000
November 214,700 $11.35 214,700
December 0 0 0
Quarterly Totals 254,700 $11.27 254,700 1,979,974
(1) Includes shares purchased under a program announced on April 20, 2000,
pursuant to which the Board of Directors authorized the repurchase of up to
2,571,000 shares in open market or privately negotiated transactions (the "2000
Plan"). No price or expiration date was specified for the program's purchases.
STOCK AVAILABLE UNDER COMPENSATION PLANS
Information required by Item 201(d) of SEC Regulation S-K is set forth under
Item 12, Part III of this report.
-20-
ITEM 6. SELECTED FINANCIAL DATA
WAUSAU PAPER CORP. AND SUBSIDIARIES SELECTED FINANCIAL DATA
(all amounts in thousands,
except per share data) For the Year Ended December 31,
2005* 2004 2003** 2002 2001
FINANCIAL RESULTS
Net sales $1,097,093 $1,040,717 $971,444 $948,698 $943,729
Depreciation, depletion, and amortization 91,554 59,965 60,823 60,624 60,948
Operating (loss) profit (23,129) 41,724 35,278 47,422 28,279
Interest expense 10,957 10,285 10,188 10,845 14,416
(Loss) earnings before (credit) provision
for income taxes (33,590) 32,378 25,180 36,618 14,143
Net (loss) earnings (19,465) 20,393 15,863 23,068 8,913
Cash dividends paid 17,523 17,560 17,527 17,520 17,498
Cash flows from operating activities 18,223 70,737 63,105 76,269 103,866
PER SHARE
Net (loss) earnings - basic and diluted $ (0.38) $0.39 $0.31 $0.45 $0.17
Cash dividends declared 0.34 0.34 0.34 0.34 0.34
Stockholders' equity 6.03 6.91 6.80 6.91 7.09
Basic average number of shares outstanding 51,448 51,662 51,549 51,532 51,466
Price range (low and high closing) $10.35-17.64 $12.33-19.12 $9.45-13.58 $8.26-13.80 $8.82-14.00
FINANCIAL CONDITION
Working capital $130,719 $139,542 $136,414 $118,398 $101,724
Total assets 820,513 882,234 858,100 873,757 892,008
Long-term debt 161,011 161,833 162,174 162,763 192,264
Stockholders' equity 310,219 357,092 350,316 355,948 364,855
Capital expenditures 31,494 29,565 24,261 19,201 29,791
RATIOS
Percent net earnings to sales (1.8%) 2.0% 1.6% 2.4% 1.0%
Percent net earnings to average stockholders' equity (5.8%) 5.8% 4.5% 6.4% 2.6%
Ratio of current assets to current liabilities 1.9 TO 1 1.9 to 1 2.2 to 1 2.0 to 1 1.8 to 1
Percent of long-term debt to total capitalization 34.2% 31.2% 31.6% 31.4% 34.5%
*In 2005, includes after-tax expense of $24.2 million ($38.4 million pretax)
or $0.47 per share for closure costs and restructuring expense as a result of
closing the sulfite pulp mill at Printing & Writing's Brokaw, Wisconsin
facility.
**In 2003, includes after-tax income of $2.6 million ($4.2 million pretax) or
$0.05 per share for a fee for licensing certain patent dispenser technologies
as a result of a settlement of all claims of the parties in a patent litigation
case.
-21-
ITEM 7. MANAGEMENT'S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INFORMATION CONCERNING FORWARD-LOOKING STATEMENTS
The following discussion and analysis of our financial condition and results of
operations contains forward-looking statements that involve risks,
uncertainties, and assumptions. Forward-looking statements are not guarantees
of performance. If the risks or uncertainties ever materialize or the
assumptions prove incorrect, the results of Wausau Paper and our consolidated
subsidiaries may differ materially from those expressed or implied by such
forward-looking statements and assumptions. All statements other than
statements of historical fact are statements that could be deemed forward-
looking statements. Forward-looking statements may be identified by, among
other things, beliefs or expectations that certain events may occur or are
anticipated and projections or statements of expectations with respect to
various aspects of our business, our plans or intentions, our stock
performance, the industry within which we operate, the economy, and any other
expressions of similar import or covering other matters relating to our
business and operations. Risks, uncertainties, and assumptions relating to our
forward-looking statements include the level of competition for our products,
changes in the paper industry, downturns in our target markets, adverse changes
in our relationships with large customers and our labor unions, costs of
compliance with environmental regulations, our ability to fund our operations,
changes in the price or availability of raw materials and energy, the failure
to develop new products that meet customer needs, unforeseen operating
problems, changes in strategic plans or our ability to execute such plans,
maintenance of adequate internal controls, changes in financial accounting
standards, unforeseen liabilities arising from current or prospective claims,
and the effect of certain organizational anti-takeover provisions. These and
other risks, uncertainties, and assumptions are described under the caption
"Risk Factors" in Item 1A of our Annual Report on Form 10-K for the year ended
December 31, 2005, and from time to time in our other filings with the
Securities and Exchange Commission after the date of such annual report. We
assume no obligation, and do not intend, to update these forward-looking
statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States which require us
to make estimates and assumptions that affect the reported amounts of assets
and liabilities at the date of the consolidated financial statements and
revenues and expenses during the periods reported. Actual results could differ
from those estimates. We believe the following are the accounting policies
which could have the most significant effect on our reported results and
require subjective or complex judgments by management.
SALES RETURNS AND ALLOWANCES
Wausau Paper maintains reserves for expected returns and allowances based on
return practices and historical experience. Reserves for returns and
allowances may need to be adjusted if actual sales returns differ from
estimates.
-22-
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Wausau Paper records allowances for doubtful accounts based upon customer-
specific analysis and general matters such as current assessment of past-due
balances. Additional allowances for doubtful accounts may be required if there
is an increase in past-due balances or for customer-specific circumstances,
such as financial difficulty. The allowance for doubtful accounts was $1.7
million and $1.8 million at December 31, 2005 and 2004, respectively.
EXCESS AND OBSOLETE INVENTORY
Wausau Paper records allowances for excess and obsolete inventory based on
historical and estimated future demand and market conditions. Additional
inventory allowances may be required if future demand or market conditions are
less favorable than we have estimated.
IMPAIRMENT OF LONG-LIVED ASSETS
Wausau Paper evaluates the recoverability of the carrying amount of long-lived
assets whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be fully recoverable. We use judgment when applying
the impairment rules to determine when an impairment test is necessary.
Factors we consider which could trigger an impairment review include
significant underperformance relative to historical or forecasted operating
results, a significant decrease in the market value of an asset, a significant
change in the extent or manner in which an asset is used, and significant
negative or industry trends.
Impairment losses are measured as the amount by which the carrying value of an
asset exceeds its estimated fair value. We are required to make estimates of
our future cash flows related to the asset subject to review. These estimates
require assumptions about demand for our products, future market conditions,
and technological developments. Other assumptions include determining the
discount rate and future growth rates.
INCOME TAXES
Wausau Paper's estimate of income taxes payable, deferred income taxes, and the
effective tax rate is based on an analysis of many factors including
interpretations of federal, state, and foreign income tax laws, the difference
between tax and financial reporting basis of assets and liabilities, estimates
of amounts currently due or owed, realization of income tax benefits in future
years, and current accounting standards. Estimates are reviewed and updated on
a quarterly basis as facts and circumstances change and actual results are
known. In addition, federal and state taxing authorities periodically review
our estimates and interpretations of income tax laws. Adjustments to the
effective income tax rate and recorded assets and liabilities may occur in
future periods if actual results differ significantly from original estimates
and interpretations.
-23-
PENSION BENEFITS
Defined benefit pension costs and obligations are actuarially determined and
are affected by assumptions including discount rate, the expected rate of
return on plan assets, and assumed annual rate of compensation increase for
plan employees, among other factors. Changes in discount rate and differences
from actual and assumed asset returns as well as changes in other assumptions
will affect the amount of pension expense recognized in future periods.
Additional information regarding pension benefits is available in "Note 6 -
Pension and Other Post-retirement Benefit Plans" in the Notes to Consolidated
Financial Statements.
OTHER POST-RETIREMENT BENEFITS
The costs and obligations for post-retirement benefits other than pension are
also actuarially determined and are affected by assumptions including the
discount rate and expected future increase in per capita costs of covered post-
retirement health care benefits. Changes in the discount rate and differences
between actual and assumed per capita health care costs may affect the recorded
amount of the expense in future periods. Additional information regarding
post-retirement benefits is available in "Note 6 - Pension and Other Post-
retirement Benefit Plans" in the Notes to Consolidated Financial Statements.
LITIGATION, CLAIMS, AND CONTINGENCIES
Wausau Paper records environmental liabilities based on estimates for known
environmental remediation exposures utilizing information received from third-
party experts and our past experience with these matters. At third-party sites
where more than one potentially responsible party has been identified, we
record a liability for its estimated allocable share of costs related to our
involvement with the site as well as an estimated allocable share of costs
related to the involvement of insolvent or unidentified parties. Environmental
liability estimates may be affected by changing determinations of what
constitutes an environmental exposure or acceptable level of cleanup. To the
extent that remediation procedures change or the financial condition of other
potentially responsible parties is adversely affected, the estimate of our
environmental liabilities may change.
FUTURE ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-
Based Payment" ("SFAS 123R"), which will be effective for Wausau Paper on
January 1, 2006. SFAS 123R requires compensation cost on all share-based
payments to employees, including grants of employee stock options, to be
recognized as an operating expense in the statement of operations over the
requisite service period based on the grant-date fair value of the award.
Additional information regarding the adoption of SFAS 123R is contained in
"Note 1 - Description of the Business and Summary of Significant Accounting
Policies."
-24-
Other significant accounting policies, not involving the same level of
uncertainties as those previously discussed, are important to an understanding
of the Consolidated Financial Statements. Additional information regarding
significant accounting policies is available in "Note 1 - Description of the
Business and Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements.
OPERATIONS REVIEW
OVERVIEW
Market conditions in 2005 varied significantly among each of our three business
segments. Demand for uncoated freesheet papers, the broad market category
within which our Printing & Writing business competes, declined modestly in
2005. Uncoated freesheet demand has now declined in five of the last six years
with only 2004 showing a slight improvement over this period. Demand for
products manufactured in our Towel & Tissue and Specialty Products business
segments improved modestly in 2005 and 2004, although demand for specialty
products varied widely by product category. Product pricing also varied by
business segment with average net selling price increasing in our Towel &
Tissue and Specialty Products businesses, but declining in our Printing &
Writing segment due primarily to a higher percentage of lower-priced fill
products such as commodity offset and reply card in the 2005 sales mix.
On a consolidated basis, the benefits of year-over-year increases in average
selling price and shipments were insufficient to offset higher manufacturing
costs, losses associated with first full-year operation of the paper mill in
Brainerd, Minnesota, and charges related to the closure of a sulfite pulp mill,
resulting in a net loss in 2005 as compared to a net earnings in 2004.
Additional information on the acquisition of the Brainerd, Minnesota mill and
the closure of the sulfite pulp mill is available in "Note 9 - Acquisitions"
and "Note 2 - Pulp Mill Closure" in the Notes to Consolidated Financial
Statements, respectively. Manufacturing cost increases were due, in large
part, to record-high energy prices and increased fiber costs in the most recent
year. These increases were in addition to energy and raw material price
escalations experienced in 2004.
Despite these near-term cost pressures, we continued to pursue our core
business strategies in 2005 and 2004, focusing on product innovation, benchmark
customer service, and operational excellence to drive long-term results.
During 2005 and 2004, revenues from products developed in the previous three
years exceeded our corporate goal of 25%, helping to increase sales of higher-
margin premium products. Paper mill productivity increased 1% in 2005
following a 2% improvement in 2004. In addition, we targeted cost reductions
equal to 2% of prior-year cost of sales in both 2005 and 2004, equalizing for
production volume and mix differences as well as fiber and energy price
variations. While falling slightly short of this goal in 2005, the objective
was fully achieved in 2004. In both 2005 and 2004, we achieved a composite
internal rate of return for capital approved that exceeded our goal of 17%.
These and other improvement initiatives are intended to help us achieve a long-
term return-on-capital-employed target of 13%. Our ability to ultimately
achieve this target is influenced by internal initiatives as well as external
factors including general economic conditions, the price of energy and raw
materials, competitive factors, and changes in market demand and paper pricing.
-25-
Effective with the first quarter of 2005, the Specialty Products business
segment included the results from two of our converting facilities, which were
previously included in the Printing & Writing business segment. As a result,
certain prior-year segment information has been reclassified to conform to the
2005 presentation.
NET SALES
(all dollar amounts in thousands) 2005 2004 2003
Net sales $1,097,093 $1,040,717 $971,444
Percent increase 5% 7% 2%
Net sales for the year ended December 31, 2005, were $1,097.1 million compared
to net sales of $1,040.7 million for the year ended December 31, 2004. Total
shipments increased 2% in 2005 to 882,267 tons from the 863,055 tons shipped in
2004. Net sales in 2003 were $971.4 million, and total tons shipped were
844,740 tons.
Average net selling price increased nearly 3%, improving net sales by $28
million, in 2005 as compared to 2004, with selling price increases offsetting a
slight decline in product mix. Actual product selling prices improved
approximately 3%, increasing net sales $33 million while sales mix differences
reduced net sales by more than $4 million. Compared to 2003, 2004 average net
selling price improved 5%, or $49 million, with actual product selling prices
improving 3%, or $29 million, and mix enhancements improving average selling
price by 2%, or net sales by $20 million.
Discussion of market conditions and trends is included in the segment summaries
that follow. If published market data is available, it is referenced in the
discussion. Certain markets within which Wausau Paper competes are small and
highly fragmented. Where industry data is not available, our analysis is based
on more subjective market indicators, such as order patterns for Wausau Paper
products and discussion with customers regarding overall industry volumes.
Specialty Products recorded net sales of $459.0 million on total shipments of
403,747 tons for the year ended December 31, 2005, compared with net sales of
$462.8 million on shipments of 421,449 tons in 2004. Lower sales and shipments
in 2005 were primarily due to reduced paper mill packaging - comprised
primarily of moisture-barrier laminated roll wrap product - and fill product
volumes including tablet writing papers. Net sales and shipments in 2003 were
$417.1 million and 412,157 tons, respectively. Average net selling price
increased 3% in 2005 as compared to 2004, improving net sales by approximately
$14 million with the improvement nearly evenly split between actual selling
price increases and mix enhancements. Average selling price improved 9% in
2004 compared with 2003, increasing net sales by $37 million. Actual selling
price gains increased average net selling price by 6% and net sales by nearly
$27 million while sales mix enhancement increased average net selling price by
3% and net sales by $10 million.
Market demand improved in Specialty Products' largest product category,
pressure-sensitive backing papers, increasing an estimated 4% in both 2005 and
2004. Demand in Specialty
-26-
Products' second largest product category, food-packaging/food-service papers,
also increased an estimated 4% in both 2005 and 2004. Demand for paper mill
packaging products declined in both 2005 and 2004 as production of uncoated
freesheet, newsprint, and other paper grades trended lower across the industry.
Demand for other industrial and consumer papers, most notably masking tape base
stock, improved modestly over the comparable two-year period.
Shipments of Specialty Products' pressure-sensitive backing papers decreased 1%
in 2005 after increasing 8% in 2004, while food-packaging/food-service
shipments improved 3% in 2005 and 6% in 2004. Paper mill packaging shipments
declined 13% and 6% in 2005 and 2004, respectively. Shipments of lower-price
fill products declined more than 60% in 2005 and nearly 40% in 2004. Specialty
Products continued its focused product development efforts in 2005 with
revenues from products developed in the previous three years exceeding the
corporate goal of 25%.
Despite recent growth in demand, markets remained competitive with competition
coming from paper-based products as well as other film-based substrates. As
2006 began, Specialty Products announced selling price increases of 4% to 7% on
select paper products as market demand continued to grow at a moderate rate.
The success of these increases will likely vary from product to product.
Printing & Writing net sales were $378.1 million in 2005 on shipments of
316,234 tons compared with 2004 net sales of $352.3 million and shipments of
289,703 tons. In 2003, net sales were $341.7 million on shipments of 281,738
tons. Net sales and shipments were favorably impacted in 2005 and 2004 by the
fourth-quarter 2004 acquisition and start-up of the Brainerd paper mill. The
largest of Brainerd's two paper machines - with production capacity of 90,000
tons per year of uncoated freesheet paper - was started in the fourth quarter
of 2004. Weak market conditions, coupled with Brainerd's added production
capacity, resulted in higher 2005 production and shipment of lower-priced fill
products such as commodity offset and reply card. As weak market conditions
persisted throughout 2005, a decision was made to take approximately 23,000
tons of production downtime in the second half of the year. As part of this
downtime, a 50,000 ton-per-year machine was temporarily idled at Printing &
Writing's Brokaw, Wisconsin, paper mill late in the third quarter with that
machine remaining down in early 2006. Management anticipates the restart of
this paper machine although no timetable has been established for this machine
or the start up of Brainerd's second paper machine, which has production
capacity of 80,000 tons per year.
Average net selling price declined 3% in 2005, reducing net sales by $10
million as compared to 2004. Product mix differences, primarily related to
higher fill volumes, reduced average net selling price 5%, or net sales by $17
million, while actual product selling prices increased 2%, impacting net sales
by more than $7 million. Average net selling price increased less than 1% in
2004 as compared to 2003, improving net sales by $1 million. Product mix
enhancements improved average selling price by more than 1%, or net sales by $5
million, while actual product selling prices declined approximately 1%,
impacting net sales by $4 million.
Demand for uncoated freesheet papers declined 3% in 2005 following a 1%
increase in 2004. Uncoated freesheet demand, impacted by such factors as
employment trends and increased
-27-
electronic data communications, declined in five of the last six years. Demand
in the text and cover segment of the uncoated freesheet market declined 4% in
2005 following a 1% decline in 2004. Despite continued difficult market
conditions, shipments of our premium printing and writing papers, including
text and cover, increased 4% in 2005 and 11% in 2004. Shipments through
Printing & Writing's retail distribution channel such as office supply stores
and other retailers increased 5% in 2005 and 24% in 2004. At the same time,
shipments through Printing & Writing's largest distribution channel,
traditional paper merchants, increased 9% in 2005 while declining 1% in
2004. Increased paper merchant shipments are the result of higher fill volumes
sold in the most recent year. Product pricing has remained very competitive
despite the industry-wide capacity rationalization that has occurred in recent
years. As 2006 began, prices were firming somewhat due primarily to improved
supply discipline within the industry.
Towel & Tissue 2005 net sales were $260.0 million and shipments were 162,286
tons compared to 2004 net sales of $225.7 million and shipments of 151,903
tons. In 2003, net sales were $212.7 million on shipments of 150,845 tons.
Average net selling price increased 9% in 2005 as compared to 2004, favorably
impacting net sales by $19 million. Actual product price increases improved
average selling price by more than 7% and net sales by $17 million, while mix
enhancements improved average selling price and net sales by 1% and more than
$2 million, respectively. Average net selling price increased 5% in 2004 as
compared to 2003, favorably impacting net sales by $12 million. Actual product
selling prices increased 3% in 2004, improving net sales by more than $6
million, while sales mix enhancements improved average selling price by 2% and
net sales by $5 million.
The "away-from-home" segment of the Towel & Tissue market grew nearly 1% in
2005 and 2% in 2004. Steady growth and industry rationalization of production
capacity have resulted in a balanced market and pricing leverage over the past
two years. As a result, significant selling price increases were implemented
in 2005 and 2004. Shipments of Towel & Tissue's higher-priced, value-added
products increased 10% in 2005 and 11% in 2004, while shipments of lower-priced
standard products increased 5% in 2005 and declined 2% in 2004.
Approximately 40%, or more than 60,000 tons per year, of Towel & Tissue's total
parent roll supply is purchased from other towel and tissue manufacturers.
Industry supply of these parent rolls tightened somewhat in 2004 as a result of
improved production capacity utilization rates in the industry. Parent roll
supply improved late in 2004 with adequate supplies available throughout 2005.
We believe that adequate parent roll supply will continue to be available to
meet our converting needs. As 2006 began, "away-from-home" towel and tissue
market conditions remained stable with demand continuing to expand at a
moderate rate.
GROSS PROFIT ON SALES
(all dollar amounts in thousands) 2005 2004 2003
Gross profit on sales $52,626 $117,541 $102,897
Gross profit margin 5% 11% 11%
-28-
Gross profit margin decreased to $52.6 million, or 4.8% of net sales in 2005
compared with $117.5 million, or 11.3% of net sales in 2004. Gross profit
margin in 2003 was $102.9 million, or 10.6% of net sales. An increased average
selling price, operational efficiency gains, and cost reductions were
insufficient to offset higher manufacturing costs - most notably energy and
fiber prices - and charges related to the closure of the sulfite pulp mill at
our Brokaw mill, resulting in lower 2005 margins. Gross profit margins
decreased from 8.6% in the first quarter of 2005 to 1.7% in the fourth quarter
due, in part, to increased energy costs, pulp mill closure charges, and market
demand differences. Compared to 2003, 2004 gross profit margins improved
somewhat as an increased average selling price, operational efficiency
improvements, and cost reductions more than offset increased fiber, natural
gas, and transportation costs.
Raw materials comprise approximately 50% of our total cost of sales with market
pulp and wastepaper accounting for approximately one-half of this total. Labor
and fringes are approximately 20% of our total cost of sales while utilities
account for approximately 10%. Other operating expenses, including outbound
freight, depreciation, and maintenance, comprise the remaining 20% of our cost
of sales.
Fiber prices - consisting primarily of market pulp, wastepaper, linerboard,
pulpwood, and purchased towel and tissue parent rolls - increased over the last
two years. As compared to 2004, 2005 fiber costs increased approximately $16
million after increasing approximately $20 million in 2004 as compared with
2003.
Market pulp prices increased over the first half of 2003 before holding
relatively steady the balance of the year. Pulp prices increased in the first
three quarters of 2004 before declining late in the year. Prices moved higher
once again in the first quarter of 2005 followed by another increase in the
third quarter before declining somewhat in the fourth quarter. Wastepaper
prices declined in the second quarter of 2003 before increasing late in the
year through the third quarter of 2004. Pricing declined in the fourth quarter
of 2004 with additional declines occurring throughout 2005. In 2005, we
consumed approximately 450,000 air-dried metric tons of market pulp and 150,000
standard tons of wastepaper. Approximately 400,000 air-dried metric tons of
market pulp and 150,000 standard tons of wastepaper were consumed in 2004. The
average consumption price of market pulp, the primary raw material used in the
production of paper, increased approximately $22 per air-dried metric ton, or
$9 million, in 2005 as compared to 2004. As compared with 2003, the average
price of market pulp increased $40 per air-dried metric ton, or $16 million in
2004. The average price of wastepaper, used in the production of towel and
tissue products, decreased $21 per standard ton, or $3 million, in 2005 as
compared to 2004 after increasing a like amount in 2004 as compared to 2003.
Prices for linerboard, used in the production of moisture-barrier laminated
roll wrap, increased approximately $2 million in 2005 as compared to 2004 while
pulpwood, used at the company's pulp mills, increased $4 million. Linerboard
and pulpwood prices each increased more than $1 million in 2004 as compared to
2003. Purchased towel and tissue parent rolls, used in Towel & Tissue's
converting operation, increased $71 per standard ton, or more than $4 million,
in 2005 as compared to 2004 after decreasing $18 per standard ton, or $1
million the year before.
Energy-related prices - consisting primarily of natural gas, electricity, coal,
fuel oil, and transportation - increased dramatically in 2005 after increasing
at a significant but more modest
-29-
rate in 2004. While natural gas prices have been the most volatile of our
energy sources, all forms of energy have moved higher in 2005. In total,
energy-related costs increased $23 million in 2005 as compared with 2004 and $7
million in 2004 as compared with 2003.
Natural gas prices continued an upward trend in early 2003, peaking in March
before generally declining through the balance of the year. Average prices
held steady through the first half of 2004, before trending higher in the third
and fourth quarters. Natural gas prices trended generally higher in the first
three quarters of 2005 before moving significantly higher in the fourth
quarter. The late-year move was related, in part, to supply disruptions caused
by hurricanes impacting the Gulf of Mexico in the late summer and early fall
seasons. The average price of natural gas increased approximately 33%, or $11
million, in 2005 as compared to 2004 after increasing 9%, or $3 million, in
2004 compared with the prior year. Through our cost reduction efforts, we have
been successful in improving our energy efficiencies and reducing natural gas
consumption in recent years. We currently consume approximately 5 million
decatherms annually and have the ability to substitute fuel oil and coal for a
portion of this draw if economics allow. We price protect, from time to time,
certain volumes of natural gas through fixed-price contracts. Our policy
allows for the price protection of up to 50% of our expected use on a rolling
12-month basis. Early in the first quarter of 2006, we had approximately 25%
of our April through December 2006 requirements protected at a price 30% below
our fourth-quarter 2005 average.
In addition to natural gas, price increases were experienced in 2005 with other
sources of energy that are significant to our operations. As compared with
2004, 2005 electricity costs increased 14% or more than $3 million, fuel oil
costs increased 35% or $2 million, and coal costs increased 14% or nearly $2
million. Prices for each of these energy costs were relatively flat in 2004 as
compared with 2003. In addition, transportation prices increased nearly $5
million in 2005 as compared with 2004 after increasing approximately $4 million
the year before.
Market pulp list prices remain relatively stable in early 2006 while natural
gas prices have trended lower. Although lower than fourth-quarter levels,
natural gas prices are well above historical averages and remain quite
volatile.
Labor and fringe costs increased 2.5% in 2005 as compared to 2004 and 2.9% in
2004 as compared to 2003. Health insurance expenses for active employees
increased approximately 3% in 2005 following a 21% increase in 2004.
Depreciation expenses increased nearly 60% in 2005 as compared with 2004 due
primarily to accelerated depreciation related to the 2005 closure of the
sulfite pulp mill at Brokaw. Other operating costs, including maintenance,
were generally higher in 2005 as a result of operating Brainerd for a full
year.
Specialty Products gross profit margins were 7.4% in 2005, 9.8% in 2004, and
7.6% in 2003. Selling price increases, sales mix enhancements, and production
efficiency improvements only partially offset higher manufacturing expenses -
including energy and fiber - resulting in lower 2005 margins. Energy prices
increased more than $6 million in 2005 as compared with 2004 while fiber costs
increased more than $7 million over the same period. Energy and fiber costs
increased a combined $11 million in 2004 as compared to 2003. Gross profit
margins
-30-
deteriorated through the course of 2005 to 4.7% in the fourth quarter as
late-year energy cost increases significantly impacted margins.
Printing & Writing recorded a negative gross margin of 9.7% in 2005 compared
with gross profit margins of 7.6% in 2004 and 8.2% in 2003. Gross profit in
2005 was unfavorably impacted by a $37.1 million charge to cost of goods sold
as a result of the fourth-quarter closure of the sulfite pulp mill located in
Brokaw. The pulp mill closure charge, which impacted 2005 gross profit margins
by nearly 10 percentage points, included accelerated depreciation on pulp mill
related assets that were abandoned as a result of the closure and a write-down
of related pulp mill inventory to net realizable value. The pulp mill was
closed due to the unit's high cost of operation and capital investment
requirements related to aging plant and equipment. Additional charges related
to the closure of $0.6 million are expected in the first quarter of 2006.
Gross profit was also unfavorably impacted by losses incurred at the Brainerd
mill in its first full year of operation, market-related production downtime
taken during the second half of 2005, and increased energy and fiber costs. As
compared with 2004, 2005 energy prices increased more than $12 million while
fiber prices increased more than $6 million. Energy and fiber costs increased
a combined $11 million in 2004 as compared with 2003.
Towel & Tissue gross profit margin was 21.6% in 2005, 20.5% in 2004, and 20.9%
in 2003. Gross profit margin in 2003 included, as a reduction of cost of
sales, $4.2 million as a fee for licensing certain patented dispenser
technologies. Selling price increases and mix enhancements offset increased
energy and fiber prices, improving 2005 margins as compared to 2004. Energy
prices increased $4 million in 2005 as compared with 2004 while fiber prices
increased $2 million. As compared with 2003, 2004 energy costs increased $2
million while fiber prices increased $3 million.
Consolidated customer order backlogs increased to approximately 42,500 tons,
representing $52.1 million in sales at December 31, 2005, compared to 35,100
tons, representing $42.0 million in sales as of December 31, 2004.
Consolidated customer order backlogs were 31,600 tons, or $33.4 million in
sales as of December 31, 2003. The increase in customer order backlogs was due
to our Specialty Products business segment where backlog totaled 32,200 tons at
December 31, 2005, compared to 23,600 tons at December 31, 2004. Printing &
Writing's backlog tons decreased from 9,100 tons at December 31, 2004, to 8,400
tons at December 31, 2005. In the Towel & Tissue business segment, backlog
tons were 1,900 tons at December 31, 2005, compared to 2,400 tons at December
31, 2004. The change in customer backlog at December 31, 2005, compared to
December 31, 2004, does not necessarily indicate a change in business
conditions, as a large portion of orders is shipped directly from inventory
upon receipt and does not impact backlog numbers. The entire backlog at
December 31, 2005, is expected to be shipped during fiscal 2006.
-31-
LABOR
A new four-year labor agreement was negotiated with USW International Union at
Specialty Products' Mosinee, Wisconsin, facility in 2005. The labor contract
at Specialty Products' Rhinelander, Wisconsin, facility expired on December 31,
2005, and is in the process of being negotiated. Labor agreements will expire
at other facilities in 2006, 2007, 2008, and 2009. We maintain good labor
relations at all facilities and expect that new multi-year contracts will be
negotiated at competitive rates.
SELLING AND ADMINISTRATIVE EXPENSES
(all dollar amounts in thousands) 2005 2004 2003
Selling and administrative expense $74,423 $75,817 $67,619
Percent increase/(decrease) (2%) 12% 4%
As a percent of net sales 7% 7% 7%
In 2005, 2004, and 2003, selling and administrative expenses were impacted by
stock incentive program charges or credits, which were determined by Wausau
Paper's common stock price change. During 2005, the credit for these programs
was $2.4 million compared to charges of $2.8 million in 2004 and $1.7 million
in 2003. For additional information on our stock incentive programs, refer to
"Note 8 - Stock Compensation Plans" in the Notes to Consolidated Financial
Statements. In addition, selling and administrative costs included advertising
expense increases of $1.1 million in 2005 as compared with 2004. Other expense
categories were generally higher in 2005 due to the first full-year operation
of the Brainerd mill.
RESTRUCTURING CHARGE
Wausau Paper recorded a pre-tax $1.3 million closure charge for the year ending
December 31, 2005, for employee severance benefits and other associated closure
costs directly related to the closure of the sulfite pulp mill located at
Printing & Writing's Brokaw papermaking mill. Other associated closure costs
of approximately $0.6 million are expected to be recorded in the first half of
2006. For additional information on the closure of our sulfite pulp mill,
refer to "Note 2 - Pulp Mill Closure" in the Notes to Consolidated Financial
Statements.
OTHER INCOME AND EXPENSE
(all dollar amounts in thousands) 2005 2004 2003
Interest expense $10,957 $10,285 $10,188
Other income (expense), net 496 939 90
Interest expense was higher for the year ending December 31, 2005, at $11.0
million compared to $10.3 million for the year ending December 31, 2004, due
principally to increased interest rates year over year. Interest expense for
the year ending December 31, 2003, was $10.2 million. Long-term debt levels
were $161.0 million, $161.8 million, and $162.2 million as of December 31,
2005, 2004, and 2003, respectively.
-32-
In 2006, interest expense is expected to increase somewhat compared with 2005,
as a modestly higher average debt level is expected to be carried in 2006.
Interest capitalized in 2005, 2004, and 2003 was not significant. Our
capitalized interest methodology is outlined in "Note 1 - Description of the
Business and Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements.
Other income and expense includes interest income of $0.5 million, $0.7
million, and $0.1 million in 2005, 2004, and 2003, respectively. The decrease
in interest income in 2005 was driven primarily by lower average cash and cash
equivalent balances as compared to 2004.
INCOME TAXES
(all dollar amounts in thousands) 2005 2004 2003
Income tax (credit) provision ($14,125) $11,985 $9,317
Effective tax rate (42%) 37% 37%
In 2005, our effective tax rate was favorably impacted by $1.7 million for
changes in state tax laws which lowered our effective state rate. The
effective rate for 2006 is expected to approximate a 37%.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS AND CAPITAL EXPENDITURES
(all dollar amounts in thousands) 2005 2004 2003
Cash provided by operating activities $ 18,223 $ 70,737 $ 63,105
Percent increase/(decrease) (74%) 12% (17%)
Working capital $ 130,719 $ 139,542 $ 136,414
Percent increase/(decrease) (6%) 2% 15%
Current ratio 1.9:1 1.9:1 2.2:1
Capital expenditures $ 31,494 $ 29,565 $ 24,261
Percent increase 7% 22% 26%
Cash provided by operating activities decreased in 2005 compared to 2004 due,
in part, to a net loss in 2005, increased inventory levels, higher receivable
balances, and a decline in income taxes payable in the current year. In 2004,
cash provided by operating activities increased compared to 2003 due, in part,
to increased 2004 earnings and higher accounts payable balances in 2004. These
factors were somewhat offset by greater 2004 increases in receivables,
inventories, and other assets. We contributed $16.0 million to defined benefit
pension plans during 2005, compared with contributions of $20.2 million and
$20.8 million in 2004 and 2003, respectively. Benefit plans are discussed in
"Note 6 - Pension and Other Post-retirement Benefit Plans" in the Notes to
Consolidated Financial Statements.
In 2005, we continued our initiative to limit capital spending to necessary
maintenance-related and high-return capital projects. We met our targeted
composite internal rate of return of 17% for capital approved in 2005. Capital
expenditures totaled $31.5 million, $29.6 million, and
-33-
$24.3 million in 2005, 2004, and 2003, respectively. In 2006, it is expected
that capital spending will approximate 2005 levels.
For 2005, capital expenditures for projects with total spending expected to
exceed $1.0 million occurred in all three business segments. Specialty
Products spent $2.5 million on paper mill related equipment at the Rhinelander,
Wisconsin, Mosinee, Wisconsin, and Jay, Maine, mills. Printing & Writing spent
$1.1 million on a palletizer project at the Groveton, New Hampshire facility
and $0.3 million as part of a capital project to expand premium papers
production capabilities at the Brokaw, Wisconsin, paper mill. Towel & Tissue
spent $4.5 million on various converting lines.
The balance of $23.1 million in 2005 capital spending was related to projects
that individually cost less than $1.0 million. These expenditures included
$16.8 million for essential non- or low-return projects, including maintenance-
related capital and approximately $6.3 million on projects expected to provide
a return in excess of our targeted internal rate of return.
During 2004, capital expenditures for projects with total spending expected to
exceed $1.0 million were $1.4 million in Printing & Writing as part of a
capital project to expand premium papers production and $1.3 million for a
digester replacement at the Brokaw mill, $0.3 million for finishing equipment
at the Groveton mill, and $1.1 million on a paper machine applicator at the
Brainerd mill. Please refer to "Note 9 - Acquisitions" in the Notes to
Consolidated Financial Statements. In Towel & Tissue, project spending
included $0.2 million for a screw press project, $1.3 million on production
equipment, and $3.9 million for various converting lines.
During 2005, we announced our intent to sell, over the next three to four
years, approximately 42,000 acres of timberlands at values expected to result
in an after-tax gain of $29 million. During the year we sold approximately
1,200 acres of timberlands for an after-tax gain of $1.3 million. Our
timberland sales program is expected to increase to a pace in 2006 that will
allow us to complete our sales program within the time period specified.
We believe that the available credit under our credit agreements and our
earnings for 2006 will be sufficient to meet our cash flow needs for capital,
working capital, and investing activities in 2006.
DEBT AND EQUITY
(all dollar amounts in thousands) 2005 2004 2003
Short-term debt $ 86 $ 115 $ 112
Long-term debt 161,011 161,833 162,174
Total debt 161,097 161,948 162,286
Stockholders' equity 310,219 357,092 350,316
Total capitalization 471,316 519,040 512,602
Long-term debt/capitalization ratio 34% 31% 32%
At December 31, 2005, total debt was $161.1 million, which is comparable to the
$161.9 million reported at December 31, 2004.
-34-
The total amount of long-term debt outstanding includes a private placement of
$138.5 million in senior notes. The notes mature in 2007, 2009, and 2011 at
$35 million, $68.5 million, and $35 million, respectively. In addition, we have
a $100 million unsecured revolving-credit agreement with four participating
banks that expires on August 31, 2008. Under the facility, we may elect the
base for interest from either domestic or offshore rates. In addition, the
facility provides for sublimits of $50 million for the issuance of standby
letters of credit and $10 million for certain short-term bid loans among the
bank group.
On June 28, 2005, Wausau Paper and the required holders of our $138.5 million
senior notes agreed to amend certain financial covenants included in the
related Note Purchase Agreement in order to bring the covenants into conformity
with the financial covenants under our existing $100 million senior credit
facility, which will expire on August 31, 2008.
Wausau Paper maintains an unrated commercial paper placement agreement with a
bank to issue up to $50 million of unsecured debt obligations. The agreement
requires unused credit availability under our revolving-credit agreement equal
to the amount of outstanding commercial paper. There were no borrowings under
this agreement at December 31, 2005 and 2004.
On November 2, 2004, we entered into a loan agreement with the Economic
Development Authority of the city of Brainerd, Minnesota. Under the agreement,
we borrowed $500,000, of which $100,000 is forgivable upon meeting certain
employment criteria at our Brainerd, Minnesota, facility by November 1, 2006.
Interest is payable quarterly on the outstanding balance, less the forgivable
portion, at a rate of 2% per annum, beginning January 1, 2005. Quarterly
payments of principal and interest commence on January 1, 2006. The loan is
due and payable no later than November 1, 2013.
In August 1995, we obtained $19 million in industrial development bond
financing to fund an upgrade of the Brokaw mill wastewater treatment plant.
The bonds mature in 2023 and bear interest at short-term rates. The bonds are
supported by a letter of credit that was issued by a bank.
On December 31, 2005, we had a total of $100 million available for borrowing
under existing credit facilities.
We do not have material market risk associated with interest-rate risk, foreign
currency exchange risk, or commodity-price risk. Wausau Paper conducts U.S.
dollar denominated export transactions or immediately exchanges all foreign
currency attributable to export sales for U.S. dollars.
In April 2000, our Board of Directors authorized the repurchase of 2,571,000
shares of Wausau Paper common stock. This authorization added to the balance
remaining on a 1998 authorization to repurchase 5,650,000 shares of Wausau
Paper common stock. During 2005, we repurchased 658,700 shares of common
stock. There were no repurchases in 2004 or 2003. Repurchases may be made
from time to time in the open market or through privately negotiated
transactions.
-35-
At December 31, 2005, there were 1,979,974 shares available for
purchase under the existing authorization.
During 2005, 2004, and 2003, the Board of Directors declared cash dividends of
$0.34 per share of common stock.
COMMITMENTS AND CONTRACTUAL OBLIGATIONS
The following is a summary of our contractual obligations and payments due by
period subsequent to December 31, 2005:
Payments Due by Period
(all dollar amounts in thousands) Total 2006 2007 2008 2009 2010 Thereafter
Long-term debt $157,990 $ 65 $35,065 $ 66 $68,568 $ 69 $54,157
Interest on debt 47,488 11,003 10,128 8,348 6,479 3,140 8,390
Capital lease 21 21 - - - - -
Operating leases 7,553 1,650 1,555 1,551 1,536 1,261 -
Capital spending commitments 5,157 5,157 - - - - -
Purchase obligations 82,917 38,206 23,485 3,670 3,328 1,650 12,578
$301,126 $56,102 $70,233 $13,635 $79,911 $6,120 $75,125
For additional information on debt and interest obligations, please refer to
"Note 4 - Debt" in the Notes to Consolidated Financial Statements. For
additional information on capital and operating leases, please refer to "Note 5
- Lease Commitments" in the Notes to Consolidated Financial Statements.
Commitments for capital spending and additional information with respect to the
purchase obligations are described in "Note 10 - Commitments and Contingencies"
in the Notes to Consolidated Financial Statements. The Company also has
various employee benefit plan obligations that are described in "Note 6 -
Pension and Other Post-retirement Benefit Plans."
-36-
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Wausau Paper does not have a material market risk associated with interest rate
risk, foreign currency exchange risk, or commodity price risk. We conduct U.S.
dollar denominated export transactions or immediately exchanges all foreign
currency attributable to export sales for U.S. dollars. On August 31, 1999, we
issued notes in the amount of $138.5 million that remain outstanding at
December 31, 2005 and 2004. The principal amounts, maturities, and interest
rates on the notes are: (1) $35 million, 8 years, 7.20%; (2) $68.5 million, 10
years, 7.31%; and (3) $35 million, 12 years, 7.43%. The fair value of this
fixed rate debt was $146.8 million at December 31, 2005, and $152.4 million at
December 31, 2004. The potential loss in fair value on such fixed-rate debt
obligations from a hypothetical 10% increase in market interest rates would not
be material to the overall fair value of the debt. We currently have no plans
to repurchase its outstanding fixed-rate instruments and, therefore,
fluctuations in market interest rates would not have an effect on our results
of operations or stockholders' equity.
We also have $19,000,000 of Industrial Development Bonds due July 1, 2023, at
variable rates of interest. The fair value of these obligations approximated
their carrying values at December 31, 2005 and 2004, and would not have been
materially affected by a 10% hypothetical change in market interest rates.
-37-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
We are responsible for establishing and maintaining adequate internal control
over financial reporting. Internal control over financial reporting is defined
in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of
1934 as a process designed by, or under the supervision of, our principal
executive and principal financial officers and effected by our board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally
accepted accounting principles and includes those policies and procedures that:
* Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of our
assets;
* Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that our receipts
and expenditures are being made only in accordance with authorizations
of our management and directors; and
* Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
We assessed the effectiveness of our internal control over financial reporting
as of December 31, 2005. In making this assessment, we used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated Framework.
Based on our assessment, we believe that, as of December 31, 2005, our internal
control over financial reporting is effective based on those criteria.
Our independent registered public accounting firm has issued a report on our
assessment of our internal control over financial reporting. This report
appears on page 39.
-38-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Wausau Paper Corp.
Mosinee, WI
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting, that Wausau
Paper Corp. and subsidiaries (the "Company") maintained effective internal
control over financial reporting as of December 31, 2005, based on criteria
established in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. The Company's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on
management's assessment and an opinion on the effectiveness of the Company's
internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by
the company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and
directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
-39-
In our opinion, management's assessment that the Company maintained effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the criteria established in Internal
Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2005, based on the criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements and financial statement schedule as of and for the year ended
December 31, 2005 of the Company and our report dated February 21, 2006
expressed an unqualified opinion on those financial statements and financial
statement schedule.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 21, 2006
-40-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Wausau Paper Corp.
Mosinee, WI
We have audited the accompanying consolidated balance sheets of Wausau Paper
Corp. and subsidiaries (the "Company") as of December 31, 2005 and 2004, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 2005.
Our audits also included the financial statement schedule included in
Item 8. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedule based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Wausau Paper Corp. and
subsidiaries as of December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on the
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report
dated February 21, 2006 expressed an unqualified opinion on management's
assessment of the effectiveness of the Company's internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
DELOITTE & TOUCHE LLP
Milwaukee, Wisconsin
February 21, 2006
-41-
WAUSAU PAPER CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(all dollar amounts in thousands) As of December 31,
2005 2004
ASSETS
Current assets:
Cash and cash equivalents $ 15,500 $ 51,914
Receivables, net 97,904 95,731
Refundable income taxes 5,831 48
Inventories 145,846 126,932
Deferred income taxes 9,971 8,592
Other current assets 4,632 4,075
Total current assets 279,684 287,292
Property, plant, and equipment - net 494,228 551,160
Other assets 46,601 43,782
Total Assets $820,513 $882,234
LIABILITIES
Current liabilities:
Current maturities of long-term debt $ 86 $ 115
Accounts payable 78,726 74,558
Accrued and other liabilities 70,153 73,077
Total current liabilities 148,965 147,750
Long-term debt 161,011 161,833
Deferred income taxes 91,334 105,885
Post-retirement benefits 58,171 57,303
Pension 26,905 30,996
Other noncurrent liabilities 23,908 21,375
Total liabilities 510,294 525,142
Commitments and contingencies - -
STOCKHOLDERS' EQUITY
Preferred stock, no par value (500,000 shares authorized; no shares issued) - -
Common stock, no par value (100,000,000 shares authorized;
issued 60,122,812 shares in 2005 and 2004) 173,456 173,172
Retained earnings 286,713 323,645
Unearned compensation - (84)
Accumulated other comprehensive loss (29,119) (26,661)
Treasury stock, at cost (9,085,562 and 8,427,561 shares
in 2005 and 2004, respectively) (120,831) (112,980)
Total stockholders' equity 310,219 357,092
Total Liabilities and Stockholders' Equity $820,513 $882,234
See accompanying Notes to Consolidated Financial Statements.
-42-
WAUSAU PAPER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(all amounts in thousands,
except per share data) For the Year Ended December 31,
2005 2004 2003
Net sales $1,097,093 $1,040,717 $971,444
Cost of sales 1,044,467 923,176 868,547
Gross profit 52,626 117,541 102,897
Selling and administrative 74,423 75,817 67,619
Restructuring 1,332 - -
Operating (loss) profit (23,129) 41,724 35,278
Other income (expense):
Interest expense (10,957) (10,285) (10,188)
Interest income 479 666 65
Other, net 17 273 25
(Loss) earnings before (credit) provision
for income taxes (33,590) 32,378 25,180
(Credit) provision for income taxes (14,125) 11,985 9,317
Net (loss) earnings $ (19,465) $ 20,393 $ 15,863
Net (loss) earnings per share - basic $ (0.38) $ 0.39 $ 0.31
Net (loss) earnings per share - diluted $ (0.38) $ 0.39 $ 0.31
Weighted average shares outstanding - basic 51,448 51,662 51,549
Weighted average shares outstanding - diluted 51,448 51,940 51,663
Dividends declared per common share $ 0.34 $ 0.34 $ 0.34
See accompanying Notes to Consolidated Financial Statements.
-43-
WAUSAU PAPER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
(all dollar amounts in thousands) 2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) earnings $(19,465) $20,393 $15,863
Provision for depreciation, depletion, and amortization 91,554 59,965 60,823
Provision (credit) for losses on accounts receivable 248 103 (261)
Loss on property, plant, and equipment disposals 497 3,356 3,234
Compensation expense for stock option grants 487 292 39
Deferred income taxes (13,878) (348) 7,154
Changes in operating assets and liabilities:
Receivables (2,421) (13,859) (9,396)
Inventories (18,914) (11,001) 4,548
Other assets (15,361) (8,406) (6,198)
Accounts payable and other liabilities 6,739 15,428 (18,934)
Accrued and refundable income taxes (11,263) 4,814 6,233
Net cash provided by operating activities 18,223 70,737 63,105
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (31,494) (29,565) (24,261)
Acquisitions - (9,935) (8,518)
Proceeds from property, plant, and equipment disposals 2,366 45 13
Net cash used in investing activities (29,128) (39,455) (32,766)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings (repayments) of notes payable (10) 500 -
Payments under capital lease obligation (115) (112) (89)
Dividends paid (17,523) (17,560) (17,527)
Proceeds from stock option exercises - 1,499 199
Payments for purchase of company stock (7,861) - -
Net cash used in financing activities (25,509) 15,673) (17,417)
Net increase (decrease) in cash and cash equivalents (36,414) 15,609 12,922
Cash and cash equivalents at beginning of year 51,914 36,305 23,383
Cash and cash equivalents at end of year $ 15,500 $ 51,914 $ 36,305
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid - net of amount capitalized $10,734 $10,722 $10,647
Income taxes paid $11,131 $9,019 $6,275
See accompanying Notes to Consolidated Financial Statements.
-44-
WAUSAU PAPER CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Accumulated
Other Com- Total
(all dollar amounts in Common Retained Unearned prehensive Treasury Stockholders'
thousands) Stock Earnings Compensation Income(Loss) Stock Equity
Balances December 31, 2002 $173,081 $322,485 $ - $(24,515) $(115,103) $355,948
Comprehensive earnings, 2003:
Net earnings 15,863 15,863
Minimum pension liability
(Net of $2,470 deferred tax) (4,208) (4,208)
Comprehensive earnings, 2003 11,655
Cash dividends declared (17,525) (17,525)
Stock options exercised (83) 282 199
Stock option compensation 39 39
Balances December 31, 2003 173,037 320,823 - (28,723) (114,821) 350,316
Comprehensive earnings, 2004:
Net earnings 20,393 20,393
Minimum pension liability
(Net of $1,210 deferred tax) 2,062 2,062
Comprehensive earnings, 2004 22,455
Cash dividends declared (17,571) (17,571)
Restricted stock grant 20 (87) 67 -
Recognition of restricted stock
compensation expense 3 3
Stock options exercised (275) 1,774 1,499
Tax benefit related to stock options 101 101
Stock option compensation 289 289
BALANCES DECEMBER 31, 2004 173,172 323,645 (84) (26,661) (112,980) 357,092
COMPREHENSIVE EARNINGS, 2005:
NET (LOSS) (19,465) (19,465)
MINIMUM PENSION LIABILITY
(NET OF $1,443 DEFERRED TAX) (2,458) (2,458)
COMPREHENSIVE (LOSS), 2005 (21,923)
CASH DIVIDENDS DECLARED (17,467) (17,467)
RECOGNITION OF RESTRICTED STOCK
COMPENSATION EXPENSE 84 84
SETTLEMENT OF PERFORMANCE
UNIT GRANT (14) 10 (4)
TAX BENEFIT RELATED TO STOCK OPTIONS (4) (4)
STOCK OPTION COMPENSATION 302 302
PURCHASES OF TREASURY STOCK (7,861) (7,861)
BALANCES DECEMBER 31, 2005 $173,456 $286,713 $ - $(29,119) $(120,831) $310,219
See accompanying Notes to Consolidated Financial Statements.
-45-
WAUSAU PAPER CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Wausau Paper Corp. manufactures, converts, and sells paper and paper products
within three principal segments: Specialty Products, Printing & Writing, and
Towel & Tissue. The majority of our products are sold within the United States
and Canada.
Specialty Products produces a wide variety of technical specialty papers that
include supercalendered backing papers for pressure-sensitive labeling
applications, tape backing, and packaging materials for a broad range of food,
medical, and industrial applications. In addition, the business segment
includes two converting facilities that produce laminated roll wrap and related
specialty finishing and packaging products.
Printing & Writing manufactures, converts, and markets a broad line of premium
printing and writing grades.
Towel & Tissue produces a complete line of towel and tissue products that are
marketed along with soap and dispensing systems for the industrial and
commercial "away-from-home" market.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Wausau Paper
Corp. and our subsidiaries. All significant intercompany transactions and
accounts have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of the accompanying financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue, and expenses. Actual results may
differ from these estimates.
CASH AND CASH EQUIVALENTS
We define cash equivalents as highly liquid, short-term investments with an
original maturity of three months or less. Cash and cash equivalents are
stated at cost, which approximates market. At December 31, 2005, approximately
$7.8 million of cash and cash equivalents were on deposit with one bank.
INVENTORIES
Pulpwood, finished paper products, and approximately 93% of raw materials are
valued at the lower of cost, determined on the last-in, first-out (LIFO)
method, or market. All other inventories are valued at the lower of average
cost or market. Liquidations in individual LIFO
-46-
inventory pools decreased cost of sales by $1.4 million and $0.2 million for
the years ended December 31, 2005 and 2004, respectively.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost and are depreciated over the
estimated useful lives of the assets using the straight-line method for
financial statement purposes. Land and construction in progress are stated at
cost. The cost and related accumulated depreciation of all plant and equipment
retired or otherwise disposed of are removed from the accounts, and any
resulting gains or losses are included in the statements of operations.
Buildings are depreciated over a 20- to 45-year period; machinery and equipment
over a three- to 20-year period. Maintenance and repair costs are charged to
expense as incurred. Improvements that extend the useful lives of the assets
are added to the plant and equipment accounts.
Our policy is to capitalize interest incurred on debt during the course of
projects that exceed one year in construction and $1 million, or projects that
exceed $10 million. Interest capitalized in 2005, 2004, and 2003 was not
significant.
We assess the recoverability of assets to be held and used by comparing the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured as the amount by which the carrying
amount of the assets exceeds the fair value of the assets, based on a
discounted cash flow analysis. No impairment losses were recorded in 2005,
2004, or 2003.
Timber and timberlands are stated at net depleted value. We capitalize the
cost of purchasing timberlands and reforestation costs. Interest and taxes
related to timberlands are expensed as incurred. Reforestation costs include
site preparation, planting, fertilizing, herbicide application, and thinning.
Temporary logging roads are expensed while long-term logging roads are
capitalized and amortized over the estimated useful lives of the roads, which
is generally 15 to 20 years. Depletion is recorded as timber is harvested and
included in inventory until conversion into saleable product. Depletion is
calculated using the block and units-of-production methods. Under these
methods, the capitalized costs of large land tracts are divided by the
estimated volume of timber anticipated to be harvested on each tract. As the
timber is harvested, depletion is either recorded as each block is harvested or
as a percentage of each block is harvested.
INCOME TAXES
Estimates of income taxes refundable and payable, deferred income tax assets
and liabilities, and the effective tax rate are based on an analysis of many
factors including interpretations of Federal, state, and foreign income tax
laws, the difference between tax and financial reporting basis of assets and
liabilities, estimates of amounts currently due or owed, realization of income
tax benefits in future years, and current accounting standards. Estimates are
reviewed and updated on a quarterly basis as facts and circumstances change and
actual results are known. Adjustments to the effective income tax rate and
recorded assets and liabilities may occur in future periods if actual results
differ significantly from original estimates and interpretations.
-47-
TREASURY STOCK
Common stock purchased for treasury is recorded at cost. At the date of
subsequent reissue, the treasury stock account is reduced by the cost of such
stock on the weighted-average cost basis.
OTHER COMPREHENSIVE INCOME (LOSS)
For all periods presented, the accumulated other comprehensive income (loss) is
comprised solely of additional minimum pension liability, net of tax of $17.1
million and $15.7 million at December 31, 2005 and 2004, respectively.
REVENUE RECOGNITION
Revenue is recognized, net of estimated discounts, allowances and returns upon
shipment of goods at which time title passes to the customer. Upon shipment,
the customer is obligated to pay us and we have no remaining obligation. We
grant credit to customers in the ordinary course of business.
Shipping and handling costs billed to customers are included in net sales, and
the related costs are included in cost of sales in the Consolidated Statements
of Operations.
STOCK-BASED COMPENSATION PLANS
As permitted under Statement of Financial Accounting Standard ("SFAS") No. 123,
we have measured compensation cost for stock-based compensation plans using the
"intrinsic value based method" prescribed under APB No. 25, "Accounting for
Stock Issued to Employees." Compensation expense for restricted stock and
performance stock awards is recognized ratably over the performance period
based on changes in quoted market prices of Wausau Paper common stock and the
likelihood of achieving performance goals. The exercise price of all employee
stock options is at least equal to their grant-date market value. Accordingly,
no compensation expense is recorded for stock options granted to employees.
See Note 8 for the pro forma impact had we elected to adopt the "fair-value
based method" of SFAS No. 123.
EARNINGS PER SHARE
We present both basic and diluted net (loss) earnings per share ("EPS")
amounts. Basic EPS is calculated based on the weighted average number of
common shares outstanding during the respective year, while diluted EPS is
calculated based on the weighted average number of common shares and common
stock equivalents outstanding during the respective year. The difference
between basic and diluted EPS is solely attributable to stock-based
compensation plans. See Note 8 for information on stock-based compensation
plans. We use the treasury-stock method to calculate the impact of outstanding
stock options and restricted stock awards. Stock options for which the
exercise price exceeds the average market price over the period have an
antidilutive effect on EPS and, accordingly, are excluded from the calculation.
-48-
For the years ended December 31, 2005, 2004, and 2003, stock-based grants for
2,160,804, 375,071, and 801,715 shares, respectively, were excluded from the
diluted EPS calculation because the shares were antidilutive.
Basic and diluted (loss) earnings per share are reconciled as follows:
(all amounts in thousands, except per share data) 2005 2004 2003
Net (loss) earnings ($19,465) $ 20,393 $ 15,863
Basic weighted average common
shares outstanding 51,448 51,662 51,549
Dilutive securities:
Stock compensation plans - 278 114
Diluted weighted average common
shares outstanding 51,448 51,940 51,663
Net (loss) earnings per share - basic $(0.38) $0.39 $0.31
Net (loss) earnings per share - diluted $(0.38) $0.39 $0.31
DERIVATIVES
In the past, we have used derivative instruments to mitigate our exposure to
interest rate risk. We do not issue such instruments for trading purposes. At
December 31, 2005 and 2004, there were no derivative instruments outstanding.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development costs are expensed as incurred. Expenditures for
product development were $1.9 million in 2005, $1.9 million in 2004, and $2.2
million in 2003.
FUTURE ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 123 (revised 2004), "Share-
Based Payment" ("SFAS 123R"), which will be effective for Wausau Paper on
January 1, 2006. SFAS 123R requires compensation cost on all share-based
payments to employees, including grants of employee stock options, to be
recognized as an operating expense in the statement of operations over the
requisite service period based on the grant-date fair value of the award. As
permitted under the new standard, we will be using the modified prospective
transition method to reflect the adoption of SFAS 123R. The effect of adoption
of SFAS 123R is currently estimated to be an after-tax expense of $0.4 million
to $0.7 million, or $0.01 per share, for 2006; however, our actual share-based
compensation expense in 2006 depends on a number of factors, including the fair
value of awards at the time of grant.
-49-
NOTE 2 PULP MILL CLOSURE
In July 2005, we announced plans to permanently close the sulfite pulp mill at
our Brokaw, Wisconsin, papermaking facility. The pulp mill was closed in
November 2005 and the related long-lived assets were abandoned. The closure
resulted in the elimination of 57 permanent jobs, or approximately 10% of the
facility's total workforce. The cost of sales for the year ending December 31,
2005, as reflected in the Consolidated Statements of Operations, includes $37.1
million in pre-tax charges for accelerated depreciation, an adjustment of pulp
mill inventory to net realizable value, and a portion of the severance and
benefit continuation expense. Pre-tax restructuring expense related to certain
assets disposed of as a direct result of the closure and other associated costs
were $1.3 million for the twelve months ended December 31, 2005.
The following table sets forth information with respect to pulp mill closure
charges:
(all dollar amounts in thousands) YEAR ENDED
DECEMBER 31,
2005
Depreciation on abandoned equipment $31,970
Inventory write-down 4,635
Severance and benefit continuation 862
Other associated costs 973
Total $38,440
Additional pre-tax closure charges of approximately $0.6 million are expected
to be recognized in the first half of 2006.
-50-
NOTE 3 SUPPLEMENTAL BALANCE SHEET INFORMATION
(all dollar amounts in thousands) 2005 2004
Receivables
Trade $ 97,829 $ 95,787
Other 1,736 1,778
99,565 97,565
Less: allowances for doubtful accounts (1,661) (1,834)
$ 97,904 $ 95,731
Inventories
Raw materials $ 36,810 $ 38,247
Work in process and finished goods 112,776 89,992
Supplies 32,008 28,731
Inventories at cost 181,594 156,970
LIFO reserve (35,748) (30,038)
$ 145,846 $ 126,932
Property, plant, and equipment
Buildings $ 133,197 $ 138,919
Machinery and equipment 1,016,297 1,067,129
1,149,494 1,206,048
Less: accumulated depreciation (675,285) (685,916)
Net depreciated value 474,209 520,132
Land 6,896 6,438
Timber and timberlands, net of depletion 5,998 5,922
Construction in progress 7,125 18,668
$ 494,228 $ 551,160
Accrued and other liabilities
Payroll $ 7,446 $ 9,322
Vacation pay 12,971 12,548
Employee retirement plans 5,768 5,978
Rebates 13,899 10,316
Accrued income taxes 5,371 10,244
Other 24,698 24,669
$ 70,153 $ 73,077
-51-
NOTE 4 DEBT
A summary of long-term debt as of December 31 is as follows:
(all dollar amounts in thousands) 2005 2004
Senior notes with interest from 7.20% to 7.43%,
due between August 31, 2007, and August 31, 2011 $138,500 $138,500
Industrial development bonds due July 1, 2023, with weighted
average interest rate of 2.70% in 2005 and 1.52% in 2004 19,000 19,000
Note payable 490 500
Capitalized leases (see Note 5) 21 136
Subtotal 158,011 158,136
Premium on senior notes 3,086 3,812
Total debt 161,097 161,948
Less: current maturities of long-term debt (see Note 5) (86) (115)
Total long-term debt $161,011 $161,833
Wausau Paper has $138.5 million outstanding in unsecured private placement
notes that were closed and funded on August 31, 1999. The principal amounts,
maturities, and interest rates on the notes are (1) $35 million, eight years,
7.20%; (2) $68.5 million, 10 years, 7.31%; and (3) $35 million, 12 years,
7.43%. In connection with the note offering, we entered into an interest-rate
swap agreement under which the interest rate paid by us with respect to (1)
$58.5 million of the 10-year notes was the three-month LIBOR rate, plus .4925%,
and (2) $30 million of the 12-year notes was the three-month LIBOR rate, plus
..55%. During 2001, we terminated its interest-rate swap arrangement in
exchange for cash payments of $6.4 million. The amounts received from the swap
counterparties at termination approximated the fair values of the swaps at the
respective termination dates. The premium recorded on debt during the period
the swaps were outstanding will continue to be amortized using the effective
interest-rate method over the remaining term of the respective debt
instruments. See Note 12 for additional information regarding the interest-
rate swap and amortization of debt premium.
We have a $100 million unsecured revolving-credit agreement with four
participating banks that expires on August 31, 2008. Under the facility, we
may elect a base rate which is a fluctuating rate per annum for interest from
either domestic or offshore rates plus an applicable rate based upon our
consolidated leverage ratio. In addition, the facility provides for sublimits
of $50 million for the issuance of standby letters of credit and $10 million
for certain short-term bid loans among the bank group. We pay the banks a
facility fee under this agreement based on quarterly debt/capitalization
ratios. Total facility fees paid on this agreement and previous agreements
were $303,000 in 2005, $280,000 in 2004, and $266,000 in 2003. There were no
borrowings against the agreement at December 31, 2005 and 2004.
On June 28, 2005, Wausau Paper and the required holders of our $138.5 million
senior notes agreed to amend certain financial covenants included in the
related Note Purchase Agreement in order to bring the covenants into conformity
with the financial covenants under our existing $100 million senior credit
facility. In addition to general business and reporting covenants customary in
financing agreements of these types, the senior notes and revolving-credit
facility require that we comply quarterly with a consolidated debt-to-capital
ratio of less than 55%. Both agreements require an adjustable minimum net
worth covenant ($284.0 million at December 31, 2005). In
-52-
addition, the revolving-credit facility includes an interest coverage ratio
covenant of 3.5. As of December 31, 2005 and 2004, we were in compliance with
all required covenants.
Wausau Paper maintains an unrated commercial paper placement agreement with a
bank to issue up to $50 million of unsecured debt obligations. The agreement
requires unused credit availability under our revolving-credit agreement equal
to the amount of outstanding commercial paper. There were no borrowings under
this agreement at December 31, 2005 and 2004.
On November 2, 2004, we entered into a loan agreement with the Economic
Development Authority of the city of Brainerd, Minnesota. Under the agreement,
we borrowed $500,000, of which $100,000 is forgivable upon meeting certain
employment criteria at our Brainerd, Minnesota, facility by November 1, 2006.
Interest is payable quarterly on the outstanding balance, less the forgivable
portion, at a rate of 2% per annum, beginning January 1, 2005. Quarterly
payments of principal and interest commence on January 1, 2006. The loan is due
and payable no later than November 1, 2013.
In August 1995, we obtained $19 million in industrial development bond
financing to fund an upgrade of the Brokaw mill wastewater treatment plant.
The bonds mature in 2023 and bear interest at short-term rates. The bonds are
supported by a letter of credit that was issued by a bank.
The aggregate annual maturities of long-term debt, excluding capital leases
(see Note 5), are as follows:
(all dollar amounts in thousands) 2006 2007 2008 2009 2010 THEREAFTER
Annual Maturities $65 $35,065 $66 $68,568 $69 $54,157
NOTE 5 LEASE COMMITMENTS
Wausau Paper has various leases for real estate, mobile equipment, and
machinery that generally provide for renewal privileges or for purchase at
option prices established in the lease agreements. Property, plant and
equipment include the following amount for capitalized leases as of December
31:
(all dollar amounts in thousands) 2005 2004
Machinery and equipment $347 $347
Allowance for amortization (179) (110)
Net value $168 $237
Lease amortization is included in depreciation expense.
-53-
Future minimum payments, by year and in the aggregate, under capitalized leases
and noncancelable operating leases with initial or remaining terms of one year
or more consisted of the following at December 31, 2005:
(all dollar amounts in thousands) Capital Operating
Leases Leases
2006 $ 21 $ 1,650
2007 - 1,555
2008 - 1,551
2009 - 1,536
2010 - 1,261
Thereafter - -
Total minimum payments $ 21 $ 7,553
Rental expense for all operating leases was as follows:
(all dollar amounts in thousands) 2005 2004 2003
Rent expense $7,691 $6,493 $7,934
NOTE 6 PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS
Wausau Paper Corp. and our subsidiaries sponsor defined benefit pension plans
covering substantially all employees. Retirement benefits for salaried and
nonunion employees are based on pay and company performance. Plans covering
hourly employees provide benefits based on years of service and fixed benefit
amounts for each year of service. The defined benefit pension plans are funded
in accordance with federal laws and regulations.
We have supplemental retirement agreements with certain present and past key
officers, directors, and employees. The principal cost of such plans is being
or has been accrued over the period of active employment to the full
eligibility date. The supplemental retirement agreements are unfunded.
Wausau Paper also provides certain defined benefit post-retirement health and
life insurance plans that cover qualifying retirees. Benefits and eligibility
for various employee groups vary by location and union agreements. The defined
benefit post-retirement plans are unfunded.
We selected September 30, 2005 and 2004, as the measurement dates for plan
assets and obligations in 2005 and 2004, respectively.
-54-
The following schedules present changes in, and components of, net assets
(liabilities) for retirement and other post-retirement benefits:
Other
Post-retirement
Retirement Benefits Benefits
(all dollar amounts in thousands) 2005 2004 2005 2004
Change in benefit obligation:
Benefit obligation at September 30, 2004 and 2003 $171,683 $159,116 $86,983 $99,888
Service cost 7,250 6,899 2,513 2,275
Interest cost 9,584 9,828 4,740 5,413
Amendments 1,651 3,637 (3,329) (9,368)
Net actuarial loss (gain) 13,990 1,641 12,332 (5,596)
Participant contributions - - 2,063 1,595
Benefits paid (9,663) (9,438) (7,884) (7,224)
Settlements (1,063) - - -
Benefit obligation September 30, 2005 and 2004 $193,432 $171,683 $97,418 $86,983
Change in plan assets:
Fair value at September 30, 2004 and 2003 $125,148 $100,639 $ - $ -
Actual gain 17,491 14,046 - -
Company contributions 15,183 19,901 5,821 5,629
Participant contributions - - 2,063 1,595
Benefits paid (9,663) (9,438) (7,884) (7,224)
Settlements (1,063) - - -
Fair value at September 30, 2005 and 2004 $147,096 $125,148 $ - $ -
Net amount recognized:
Funded status $(46,336) $(46,535) $(97,418) $(86,983)
Unrecognized prior service cost (benefit) 16,095 16,694 (8,321) (8,047)
Unrecognized net actuarial loss 50,514 45,361 41,075 30,095
Cash contribution subsequent to measurement date 4,040 3,266 1,293 1,932
Accrued benefit cost at December 31 $ 24,313 $ 18,786 $(63,371) $(63,003)
Amounts recognized in the Balance Sheet consist of:
Accrued benefit liability $(37,990) $(40,201) $(63,371) $(63,003)
Intangible asset 16,083 16,668 - -
Accumulated other comprehensive income 46,220 42,319 - -
Net amount recognized at December 31 $ 24,313 $ 18,786 $(63,371) $(63,003)
For 2005, the amendment to retirement benefit plans reflects the impact of a
discretionary interest credit. In 2004, amendments to retirement benefit plans
reflect union negotiated rate increases. Previously, we utilized the 1983
Group Annuity Mortality Table for our expected life assumption. For 2005, we
adopted the RP-2000 Static Mortality Table which, due to an increased life
expectancy assumption for participants, resulted in an actuarial loss of
approximately $8.0 million for our retirement benefit plans. For 2005 and 2004,
other post-retirement benefit plans were amended to reflect increased
contributions by retirees for medical benefits.
The total accumulated benefit obligation for pension plans was $189.1 million
and $168.4 million at December 31, 2005 and 2004, respectively, and exceeded
the plan assets for all of the defined benefit pension plans.
-55-
Pension Benefits
Target Percentage of Plan Assets
Allocations at Measurement Date
2005 2004
Asset category
Equity securities 70.0% 71.0% 78.2%
Debt securities 30.0% 29.0% 21.8%
Total 100.0% 100.0% 100.0%
Wausau Paper's Benefits Committee, as established by the Board of Directors,
monitors pension assets and the performance of pension investments. The
Benefits Committee is managing toward an asset allocation consisting of
approximately 70% equity securities and 30% debt securities. An external
investment manager is used to assist us in establishing our investment
strategies and policies. We consider the historical and projected returns for
each asset category and believe that the investment strategy employed will
provide a blended rate of return on pension assets consistent with current
pension valuation assumptions.
Although we do not have a minimum funding requirement for defined benefit
pension plans in 2006, we may elect to make contributions of up to $17.6
million directly to pension plans. We also expect to contribute $4.4 million
directly to other post-retirement plans. Benefit payments expected to be paid
and subsidy amounts to be received in each of the next five years and in the
aggregate for the five years thereafter are:
(all dollar amounts in thousands) Pension Other Post-retirement
Benefit Payments Benefit Payments Subsidy
2006 $ 8,753 $ 4,423 $ 210
2007 $ 9,563 $ 4,600 $ 233
2008 $10,477 $ 4,902 $ 256
2009 $11,047 $ 5,195 $ 280
2010 $12,052 $ 5,551 $ 299
2011-2015 $71,486 $33,269 $1,866
The components of net periodic benefit costs recognized in the Consolidated
Statements of Operations and the weighted average assumptions used in the
calculation of the year-end obligation and net periodic benefit costs are as
follows:
Pension Benefits Other Post-retirement Benefits
(all dollar amounts in thousands) 2005 2004 2003 2005 2004 2003
Components of net periodic benefit cost:
Service cost $7,250 $6,899 $5,517 $2,513 $2,275 $2,015
Interest cost 9,584 9,828 9,317 4,740 5,413 5,424
Expected return on plan assets (10,832) (10,012) (8,223) - - -
Amortization of:
Prior service cost (benefit) 2,250 2,075 1,939 (3,055) (1,971) (357)
Transition (asset) - (50) (189) - - -
Actuarial (gain) loss 1,862 1,677 749 1,352 1,635 899
Settlement 316 30 248 - - -
Net periodic benefit cost $10,430 $10,447 $9,358 $5,550 $7,352 $7,981
-56-
Pension Benefits Other Post-retirement Benefits
2005 2004 2003 2005 2004 2003
Weighted-average assumptions used to
determine benefit obligations at September 30:
Discount rate 5.50% 5.75% 6.25% 5.50% 5.75% 6.25%
Rate of compensation increase 4.25% 4.25% 4.25% N/A n/a n/a
Weighted-average assumptions used to
determine net periodic benefit cost for
year ended December 31:
Discount rate 5.75% 6.25% 6.75% 5.75% 6.0% 6.75%
Expected return on plan assets 8.25% 8.50% 8.50% N/A n/a n/a
Rate of compensation increase 4.25% 4.25% 4.25% N/A n/a n/a
Assumed health care cost trend rates at
at December 31:
Health care cost trend rate assumed N/A n/a n/a 10% 10% 10%
Ultimate trend rate N/A n/a n/a 5% 5% 5%
Year that the rate reaches the ultimate trend rate N/A n/a n/a 2010 2009 2008
In accordance with the adoption of FSP 106-2, Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003, on July 1, 2004, we remeasured our post-retirement
benefit obligation during 2004 which resulted in a net actuarial gain of $5.9
million and a $0.5 million reduction in net periodic benefit cost for the year
ended December 31, 2004. In addition, the discount rate reflected for the net
periodic benefit cost is a weighted-average rate for 2004.
Assumed health care cost trend rates significantly affect reported amounts for
retiree medical benefits. For 2005, the effect of a one-percentage-point
change in the assumed health care cost trend rate would have had the following
effects:
One percentage point
(all dollar amounts in thousands) Increase Decrease
Effect on the post-retirement benefit obligation $14,676 $(12,755)
Effect on the sum of the service and interest cost components 1,391 (1,153)
Wausau Paper also sponsors defined contribution pension plans, several of which
provide for company contributions based on a percentage of employee
contributions. The cost of such plans totaled $2.7 million in 2005, $2.7
million in 2004, and $2.6 million in 2003.
We have deferred-compensation agreements with certain present and past key
officers, directors, and employees. The principal cost of such plans is being
or has been accrued over the period of active employment to the full
eligibility date. The annual cost of the deferred-compensation agreements is
not significant. At December 31, 2005 and 2004, the amounts accrued under the
deferred-compensation agreements are included in other noncurrent liabilities
on the Consolidated Balance Sheets.
-57-
NOTE 7 INCOME TAXES
Deferred tax assets and liabilities are determined based on the estimated
future tax effects of temporary differences between the financial statement and
tax bases of assets and liabilities, as measured by the current enacted tax
rates. Deferred tax expense (credit) is the result of changes in the deferred
tax asset and liability.
The (credit) provision for income taxes is comprised of the following:
(all dollar amounts in thousands) 2005 2004 2003
Current tax (credit) expense:
Federal $ (1,074) $ 9,898 $ 574
State 827 2,435 1,589
Total current (247) 12,333 2,163
Deferred tax (credit) expense:
Federal (10,615) (581) 6,447
State (3,263) 233 707
Total deferred (13,878) (348) 7,154
Total (credit) provision for income taxes $(14,125) $11,985 $9,317
A reconciliation between taxes computed at the federal statutory rate and our
effective tax rate follows:
(all dollar amounts in thousands) 2005 2004 2003
Federal statutory tax rate $ (11,757) (35.0%) $11,332 35.0% $8,813 35.0%
State taxes (net of federal tax benefits) (2,796) (8.3) 1,684 5.2 1,644 6.5
Export sales benefit (438) (1.3) (690) (2.1) (336) (1.3)
Other 866 2.3 (341) (1.1) (804) (3.2)
Effective tax rate $ (14,125) (42.3%) $11,985 37.0% $9,317 37.0%
At the end of 2005, $195.6 million of unused state operating loss and credit
carryovers existed, which may be used to offset future state taxable income in
various amounts through the year 2020. Because separate state tax returns are
filed, Wausau Paper is not able to offset consolidated income with the
subsidiaries' losses. Under the provisions of SFAS No. 109, the benefits of
state tax losses are recognized as a deferred tax asset, subject to appropriate
valuation allowances.
-58-
The major temporary differences that give rise to the deferred tax assets and
liabilities at December 31, 2005 and 2004, are as follows:
(all dollar amounts in thousands) 2005 2004
Deferred tax assets:
Accrued compensated absences $ 4,289 $ 4,277
Pensions 1,698 3,360
Post - retirement benefits 24,754 25,262
State net operating loss carry forward 14,257 11,237
Other 22,377 13,894
Gross deferred tax asset 67,375 58,030
Less valuation allowance (10,927) (8,369)
Net deferred tax assets 56,448 49,661
Deferred tax liabilities:
Property, plant, and equipment (126,734) (137,601)
Other (11,077) (9,353)
Gross deferred tax liability (137,811) (146,954)
Net deferred tax liability $ (81,363) $ (97,293)
The total deferred tax assets (liabilities) as presented in the accompanying
consolidated balance sheets are as follows:
(all dollar amounts in thousands) 2005 2004
Net deferred tax assets $ 9,971 $ 8,592
Net long - term deferred tax liabilities (91,334) (105,885)
Net deferred tax liability $ (81,363) $ (97,293)
A valuation allowance has been recognized for Wausau Paper and two of our
subsidiaries' state loss carry forward and future deductible items, as
cumulative losses create uncertainty about the realization of the tax benefits
in future years.
NOTE 8 STOCK COMPENSATION PLANS
STOCK OPTIONS, RESTRICTED STOCK AWARDS, AND PERFORMANCE UNITS
Wausau Paper has one stock incentive plan, the "2000 Stock Incentive Plan",
under which awards to grantees are issued. Under the 2000 Stock Incentive
Plan, in addition to stock options, awards of restricted shares of common stock
and performance units may be granted. We also maintain various other employee
stock option plans under which options are outstanding. The plans provide for
the determination of purchase price, time, and method of exercise. As of
December 31, 2005, there were 1,280,404 shares of common stock authorized for
future issuance.
-59-
OPTIONS
Options are granted for terms up to 20 years. The option price is equal to the
fair market value of Wausau Paper common stock at the date of grant for
incentive and non-qualified options. Fixed option grant agreements define
service condition vesting requirements and other transferability restrictions
on a grant-by-grant basis, and performance-based options vest in relation to
defined performance.
The following table summarizes the status of all outstanding stock options as
of December 31, 2005, 2004, and 2003, and changes during those years:
2005 2004 2003
WEIGHTED Weighted Weighted
AVERAGE Average Average
2005 EXERCISE 2004 Exercise 2003 Exercise
SHARES PRICE Shares Price Shares Price
Outstanding at January 1 2,259,732 $13.15 2,213,768 $11.88 2,464,768 $11.79
Granted 624,562 12.49 553,108 17.12 140,000 12.29
Terminated/canceled (394,452) 17.37 (374,784) 12.09 (370,000) 11.57
Exercised - - (132,360) 11.33 (21,000) 9.47
Outstanding at December 31 2,489,842 $12.32 2,259,732 $13.15 2,213,768 $11.87
Exercisable at December 31 2,026,624 $12.32 1,686,624 $11.88 1,794,768 $11.90
Fair value of options granted during the year $4.14 $5.45 $3.93
The preceding table includes performance-based options that vest in relation to
achieving defined performance criteria. The following table summarizes the
status of outstanding performance-based stock options as of December 31, 2005,
2004, and 2003, and changes during those years:
2005 2004 2003
WEIGHTED Weighted Weighted
AVERAGE Average Average
2005 EXERCISE 2004 Exercise 2003 Exercise
SHARES PRICE Shares Price Shares Price
Outstanding at January 1 456,108 $16.26 417,000 $11.24 768,000 $11.30
Granted 384,562 12.10 378,108 17.40 - -
Terminated/canceled (384,452) 16.93 (324,000) 11.39 (345,000) 11.38
Exercised - - (15,000) 10.71 (6,000) 10.71
Outstanding at December 31 456,218 $12.08 456,108 $16.26 417,000 $11.24
Exercisable at December 31 78,000 $10.74 78,000 $10.74 93,000 $10.73
In accordance with APB No. 25, we recognize expense to the extent the fair
market value of Wausau Paper stock exceeds the grant price of the options as
certain performance criteria are met. As a result of not achieving certain
operating profit levels for the years ended December 31, 2005, 2004, and 2003,
no compensation expense was recorded for performance-based option grants.
-60-
Additional information regarding all grants outstanding and exercisable at
December 31, 2005, is as follows:
Weighted Average
Remaining Weighted Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices Options Life (years) Exercise Price Options Exercise Price
Fixed-option grants:
$8.75 - $10.17 857,913 12.43 $ 9.11 857,913 $ 9.11
$10.71 - $14.98 617,800 17.08 $12.61 587,800 $12.59
$15.58 - $18.22 497,161 12.59 $16.85 442,161 $16.84
$18.50 - $21.61 60,750 7.91 $19.34 60,750 $19.34
Performance-based option grants:
$10.71 - $12.36 456,218 19.00 $12.08 78,000 $10.74
RESTRICTED STOCK
On December 17, 2004, 5,000 shares of restricted stock were granted by Wausau
Paper. In accordance with the plan, the 5,000 shares were valued at the fair
value of Wausau Paper's stock on the date of grant and reflected in equity as a
reduction in treasury stock outstanding. Compensation expense was recognized
for the restricted stock award on a straight-line basis over the vesting period
of the entire award with the balance of unearned compensation reflected in the
equity section of the balance sheet. Under the plan, shares of restricted
stock have voting rights. Cash dividends on the restricted shares were deferred
and held by us until satisfaction of the vesting requirements which occurred on
December 17, 2005. For the year ended December 31, 2005, $84,000 in expense
was recognized for restricted stock.
PERFORMANCE UNITS
Under the 2000 Stock Incentive Plan, we granted performance units that vested
in relation to (1) achieving certain operating profit levels and (2) completion
of a service requirement. Upon satisfaction of the vesting requirements, the
performance units and a dividend equivalent calculated based upon shares earned
will be paid out in whole shares of Wausau Paper's common stock, with
fractional shares paid in cash. Prior to vesting, no shares are issued and
performance units have no voting rights. Under APB No. 25, prior to the
measurement date, compensation cost is being recognized as expense over the
service period to the extent the fair market value of Wausau Paper's stock
exceeds the grant price of the performance units. At the measurement date,
total compensation expense is fixed and any unrecognized cost is expensed over
the remaining service period.
-61-
The following table summarizes the activity relating to performance unit
grants:
2005 2004 2003
Outstanding at January 1 (number of units) 75,993 29,578 -
Granted 43,533 46,415 31,101
Terminated (18,404) - (1,523)
Settled (10,593) - -
Outstanding at December 31 (number of units) 90,529 75,993 29,578
Total compensation expense recognized for performance units for the years ended
December 31 totaled $0.4 million in 2005 and $0.3 million in 2004. No
compensation expense was recognized for the year ended December 31, 2003.
STOCK APPRECIATION RIGHTS
Wausau Paper maintains various stock appreciation rights plans that entitle
certain management employees to receive cash equal to the sum of the
appreciation in the value of the stock and the hypothetical value of cash
dividends which would have been paid on the stock covered by the grant assuming
reinvestment in Wausau Paper stock. The stock appreciation rights granted may
be exercised in whole or in such installments and at such times as specified in
the grant. In all instances, the rights lapse if not exercised within 20 years
of the grant date. Additions or reductions to compensation expense are
recorded in each period based upon the quoted market value of the shares and
the exercise provisions.
The following table summarizes the activity relating to our stock appreciation
rights plans:
2005 2004 2003
Outstanding at January 1 (number of shares) 253,797 289,472 307,805
Terminated - (4,875) -
Exercised - (30,800) (18,333)
Outstanding and exercisable at December 31
(number of shares) 253,797 253,797 289,472
Price range of rights exercised $8.12-$9.33 $8.12-$9.33 $6.26
Price range of outstanding and exercisable rights:
$4.06 - $9.58 243,797 243,797 274,597
$17.16 10,000 10,000 14,875
At December 31, 2005, the weighted average remaining contractual life on
outstanding stock appreciation rights with an exercise price of between $4.06
and $9.58 was 4.1 years, and with an exercise price of $17.16 was 13 years.
DIVIDEND EQUIVALENTS
We maintain a Dividend Equivalent Plan. Upon termination of employment, or at
the time of exercise of options granted in tandem with the dividend
equivalents, participants are entitled to receive the cash value of the grant.
The cash value is determined by the sum of the value of cash
-62-
dividends that would have been paid on the stock covered by the grant had it
been actual stock and assuming all such hypothetical dividends had been
reinvested in Wausau Paper stock. Additions or reductions to compensation
expense are recorded in each period based upon the quoted market value of the
shares and the exercise provisions.
The following table summarizes the activity relating to our dividend equivalent
plan:
2005 2004 2003
Outstanding at January 1 (number of shares) 154,750 174,114 174,114
Exercised - (19,364) -
Outstanding and exercisable at December 31
(number of shares) 154,750 154,750 174,114
The provision (credit) for stock appreciation rights and dividend equivalents
were as follows:
(all dollar amounts in thousands) 2005 2004 2003
Stock appreciation rights $(1,897) $1,486 $1,024
Dividend equivalents (175) 227 169
Total $(2,072) $1,713 $1,193
Pro forma net earnings and net earnings per share had we elected to adopt the
"fair-value-based method" of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation," are as follows:
(all dollar amounts in thousands, except per share data) 2005 2004 2003
Net earnings:
As reported $(19,465) $20,393 $15,863
Add: Total stock - based employee compensation expense (credit)
under APB No. 25, net of related tax effects (1,505) 1,748 1,067
Deduct: Total stock - based employee compensation expense
determined under fair - value - based method for all awards,
net of related tax effects 468 (2,034) (1,242)
Pro forma $(20,502) $20,107 $15,688
Net earnings per share - basic:
As reported $(0.38) $0.39 $0.31
Pro forma $(0.40) $0.39 $0.30
Net earnings per share - diluted:
As reported $(0.38) $0.39 $0.31
Pro forma $(0.40) $0.39 $0.30
-63-
The fair value of each option grant has been estimated on the grant date using
the Black-Scholes option-pricing model based on the following weighted average
assumptions:
2005 2004 2003
Risk - free interest rate 4.42% 3.71% 3.25%
Expected life in years 11 6 6
Price volatility 29.16% 34.05% 38.97%
Dividend yield 2.49% 1.99% 2.78%
NOTE 9 ACQUISITIONS
On October 21, 2004, we acquired the assets of the Brainerd, Minnesota, paper
mill of the Missota Paper Company, LLC, for approximately $9.9 million. The
purchase price was allocated using the fair values of the acquired property,
plant, and equipment. We assumed no liabilities of the mill. No goodwill or
other intangible assets resulted from the transaction. The acquired assets are
included in the Printing & Writing business segment.
Effective March 3, 2003, we acquired certain assets of a laminated papers
producer for approximately $8.5 million in cash. The acquisition was accounted
for as a purchase business combination and, accordingly, the purchase price was
allocated using the fair values of the acquired receivables, inventory,
machinery and equipment, and identifiable intangible assets. No additional
liabilities or goodwill were recorded as a result of this acquisition. The pro
forma disclosures under SFAS No. 141, "Business Combinations," have not been
presented, as the impact of this acquisition does not materially impact the
results of operations. The acquired assets are included in the Specialty
Products business segment.
-64-
NOTE 10 COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER CLAIMS
Wausau Paper may be involved from time to time in various legal and
administrative proceedings or be subject to various claims in the normal course
of its business. Although the ultimate disposition of legal proceedings cannot
be predicted with certainty, in the opinion of management, the ultimate
disposition of any threatened or pending matters, either individually or on a
combined basis, will not have a material adverse effect on our consolidated
financial condition, liquidity, or results of operations.
As a result of a settlement of all claims of the parties in a patent litigation
case, we recognized $4.2 million of income in 2003 as a fee for licensing
certain patented dispenser technologies.
ENVIRONMENTAL MATTERS
Wausau Paper is subject to extensive regulation by various federal, state,
provincial, and local agencies concerning compliance with environmental control
statutes and regulations. These regulations impose limitations, including
effluent and emission limitations, on the discharge of materials into the
environment, as well as require us to obtain and operate in compliance with
conditions of permits and other governmental authorizations. Future
regulations could materially increase our capital requirements and certain
operating expenses in future years.
In 1986, the Wisconsin Department of Natural Resources ("DNR") notified a
subsidiary of Wausau Paper that under Wisconsin environmental laws we may be a
potentially responsible party ("PRP") for the Gorski landfill in Mosinee,
Wisconsin, and nominated the landfill to the Environmental Protection Agency's
("EPA") National Priorities List. The DNR had identified elevated
concentrations of chlorinated volatile organic compounds in three private water
supply wells located in close proximity to the landfill. The DNR has
identified 10 PRPs. No action was taken by either the DNR or the EPA until
June 2000, when the DNR requested certain parties who had disposed of waste at
the site to form an ad hoc group to cooperatively investigate the environmental
contamination at the site. In October 2001, we entered into an agreement with
three other parties to fund a study of the landfill to determine possible
remediation strategies. We worked with the DNR on the development of the study
and work plan which was initiated in early 2003. A report based upon the study
was submitted to the DNR in 2004. The DNR has not provided a response to the
study submission. We estimate that the costs of remediation of the entire site
for all parties will be approximately $3 million, based upon the remediation
method our consultants believe to be the most likely to be used. This estimate
is preliminary. Actual costs of remediation of the site could be materially
different since no timetable or decision on the actual remediation work has yet
been developed. Our share of the cost of such remediation cannot be determined
with certainty at this time, but based on the estimated costs at year-end and
the number and nature of other PRPs, we are of the opinion that such costs will
not have a material adverse effect on the operations, financial condition, or
liquidity of Wausau Paper. We are also pursuing insurance coverage of our
remediation costs following a 2003 Wisconsin Supreme Court decision in an
unrelated case that remediation claims may amount to damages for purposes of
general liability insurance.
-65-
It is our policy to accrue remediation costs when it is probable that such
costs will be incurred and when a range of loss can be reasonably estimated.
Estimates of loss are developed based on currently available information
including environmental studies performed by third-party experts and our past
experience with these matters. Our accrued environmental liabilities,
including all remediation and landfill closure costs, totaled $6.2 million and
$6.1 million at December 31, 2005 and 2004, respectively. The provision for
remediation and landfill costs was not significant for the years ended December
31, 2005, 2004, and 2003, respectively. We periodically review the status of
all significant existing or potential environmental issues and adjust our
accruals as necessary. The accruals do not reflect any possible future
insurance recoveries. Estimates of costs for future remediation are
necessarily imprecise due to, among other things, the identification of
presently unknown remediation sites and the allocation of costs among PRPs. We
believe that our share of the costs of cleanup for our current remediation site
will not have a material adverse impact on our consolidated financial position.
As is the case with most manufacturing and many other entities, there can be no
assurance that we will not be named as a PRP at additional previously or
currently owned sites in the future or that the costs associated with such
additional sites would not be material.
OTHER COMMITMENTS
As of December 31, 2005, Wausau Paper was committed to spend approximately $5.2
million on capital projects, which were in various stages of completion.
Wausau Paper contracts for the supply and delivery of natural gas at some of
its facilities. Under these contracts, we are committed to the transportation
of a fixed volume of natural gas from our natural gas suppliers to our
facilities. We are not required to buy or sell minimum gas volumes under the
agreement but are required to pay a minimum transportation fee for the
contracted period. Contracts expire at various times between 2006 and 2019.
At December 31, 2005, we also have commitments for the purchase of machine
clothing from various suppliers and volume commitments for the supply of fuel
oil, natural gas, coal, paper, and certain raw materials. These obligations
expire in 2006 and 2007. Wausau Paper may also purchase, from time to time,
natural gas contracts with fixed prices for a certain portion of our facility
requirements.
NOTE 11 PREFERRED SHARE PURCHASE RIGHTS PLAN
Wausau Paper maintains a rights plan under which one preferred share purchase
right is issued for each outstanding share of common stock. Each right
entitles its holder to purchase 1 one-thousandth of a share of Series A Junior
Participating Preferred Stock, at an exercise price of $60 per 1 one-thousandth
of a preferred share, subject to adjustment. The rights will become
exercisable only if a person or group (with certain exceptions) acquires
beneficial ownership of 15% or more of the outstanding common stock (an
"Acquiring Person"). Once exercisable, each holder of a right, other than the
Acquiring Person, will thereafter have the right to receive common stock having
a market value of two times the exercise price of the right. Upon the
occurrence of certain events, each holder of a right, other than an Acquiring
Person, will have the right to receive (in lieu of preferred shares) our common
stock (or a successor company) that has a market value of two times the
exercise price of the right. Until exercisable, the rights will not
-66-
be issued or traded in separate form from the common stock. After any person
or group becomes an Acquiring Person, and prior to the acquisition by the
Acquiring Person of 50% or more of the common stock, we may exchange the
rights, other than rights owned by the Acquiring Person, at an exchange ratio
of one share per right (subject to adjustment). At any time prior to any
person or group becoming an Acquiring Person, we may redeem the rights at a
price of $0.01 per right. The rights will expire on October 31, 2008.
NOTE 12 FINANCIAL INSTRUMENTS
Financial instruments consisted of the following:
CASH AND CASH EQUIVALENTS
The carrying amount approximates fair value due to the relatively short period
to maturity for these instruments.
ACCOUNTS RECEIVABLE, ACCOUNTS PAYABLE, AND ACCRUED LIABILITIES
The carrying amounts approximate fair value due to the relatively short-term
nature of these instruments.
LONG-TERM DEBT
The fair value of our long-term debt is estimated based on current rates
offered to us for debt of the same remaining maturities. At December 31, 2005
and 2004, the fair value of the long-term debt exceeded the carrying value by
approximately $8.3 million and $13.9 million, respectively.
INTEREST RATE AGREEMENT
Interest-rate swaps designated in fair value hedge relationships have been used
by us in the past to mitigate the risk of reductions in the fair value of
existing fixed-rate long-term notes due to decreases in LIBOR-based interest
rates. Gains and losses on these instruments were reflected in interest
expense in the period in which they occurred, and an offsetting gain or loss is
also reflected in interest expense based on changes in the fair value of the
debt instrument being hedged due to changes in LIBOR-based interest rates.
During 2001, the interest rate agreements were terminated. The amounts
received from the swap counterparties at termination approximated the fair
values of the swaps at the respective termination dates. The premium recorded
on debt during the period the swaps were outstanding will continue to be
amortized using the effective interest rate method over the remaining term of
the respective debt instruments. Debt premium amortization reduced interest
expense by approximately $0.7 million for the years ended December 31, 2005,
2004, and 2003.
-67-
NOTE 13 SEGMENT DATA
Wausau Paper has reclassified certain prior-year segment information to conform
to the 2005 presentation. The reclassification is the result of a change in
the management of two converting facilities from the Printing & Writing segment
to the Specialty Products segment.
FACTORS USED TO IDENTIFY REPORTABLE SEGMENTS
Our operations are classified into three principal reportable segments:
Specialty Products, Printing & Writing, and Towel & Tissue, each providing
different products. Separate management of each segment is required because
each business unit is subject to different marketing, production, and
technology strategies.
PRODUCTS FROM WHICH REVENUE IS DERIVED
Specialty Products produces specialty papers at its manufacturing facilities in
Rhinelander, Wisconsin; Mosinee, Wisconsin; and Jay, Maine. Specialty Products
also includes two converting facilities that produce laminated roll wrap and
related specialty finishing and packaging products. Printing & Writing
produces a broad line of premium printing and writing grades at manufacturing
facilities in Brokaw, Wisconsin; Groveton, New Hampshire; and Brainerd,
Minnesota. Printing & Writing also includes a converting facility that
converts printing and writing grades. Towel & Tissue produces a complete line
of towel and tissue products that are marketed along with soap and dispensing
systems for the "away-from-home" market. Towel & Tissue operates a paper mill
in Middletown, Ohio, and a converting facility in Harrodsburg, Kentucky.
During 2005, no single customer accounted for 10% or more of our consolidated
net sales. On a segment basis, one customer accounted for approximately 18% of
Printing & Writing business net sales and one customer accounted for
approximately 13% of Towel & Tissue net sales while no single customer
Specialty Products' business segment comprised 10 % or more of the respective
segment net sales.
MEASUREMENT OF SEGMENT PROFIT AND ASSETS
We evaluate performance and allocate resources based on operating profit or
loss. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies.
-68-
RECONCILIATIONS
The following are reconciliations to corresponding totals in the accompanying
consolidated financial statements:
(all dollar amounts in thousands) 2005 2004 2003
Net sales external customers:
Specialty Products $ 459,028 $ 462,779 $417,085
Printing & Writing 378,073 352,286 341,686
Towel & Tissue 259,992 225,652 212,673
$1,097,093 $1,040,717 $971,444
Operating (loss) profit:
Specialty Products $ 11,974 $ 22,666 $ 11,490
Printing & Writing (62,855) 5,806 7,976
Towel & Tissue 37,991 29,148 28,691
Corporate and eliminations (10,239) (15,896) (12,879)
$ (23,129) $ 41,724 $ 35,278
Segment assets:
Specialty Products $ 333,482 $ 342,724
Printing & Writing 254,528 281,378
Towel & Tissue 175,134 171,080
Corporate and unallocated 57,369 87,052
$ 820,513 $ 882,234
-69-
OTHER SIGNIFICANT ITEMS
Depreciation, Expenditures
(all dollar amounts in thousands) Depletion, and for Long-Lived
Amortization Assets
2005
SPECIALTY PRODUCTS $24,756 $11,273
PRINTING & WRITING 45,958 10,014
TOWEL & TISSUE 19,642 9,758
CORPORATE AND UNALLOCATED 1,198 449
$91,554 $31,494
2004
Specialty Products $25,072 $ 7,543
Printing & Writing 15,527 13,863
Towel & Tissue 18,177 7,128
Corporate and unallocated 1,189 1,031
$59,965 $29,565
2003
Specialty Products $25,897 $ 5,176
Printing & Writing 15,927 10,592
Towel & Tissue 18,218 7,574
Corporate and unallocated 781 919
$60,823 $24,261
COMPANY GEOGRAPHIC DATA
We have no long-lived assets outside the United States. Net sales to customers
within the United States and other countries, of which the majority relates to
Canadian customers, are as follows:
(all dollar amounts in thousands) 2005 2004 2003
United States $1,005,818 $954,684 $895,776
All foreign countries 91,275 86,033 75,668
$1,097,093 $1,040,717 $971,444
-70-
QUARTERLY FINANCIAL DATA (UNAUDITED)
(all dollar amounts in thousands, First Second Third Fourth
except per share data) Quarter Quarter* Quarter** Quarter** Annual
2005
NET SALES $267,741 $275,291 $285,624 $268,437 $1,097,093
GROSS PROFIT 23,135 16,846 8,142 4,503 52,626
OPERATING (LOSS) PROFIT 5,608 (1,707) (11,192) (15,838) (23,129)
NET (LOSS) EARNINGS 1,936 (2,691) (8,992) (9,718) (19,465)
NET (LOSS) EARNINGS PER SHARE BASIC
AND DILUTED $0.04 $(0.05) $(0.18) $(0.19) $(0.38)
2004
Net sales $251,815 $264,109 $262,428 $262,365 $1,040,717
Gross profit 26,698 28,136 32,445 30,262 117,541
Operating profit 7,814 8,382 15,287 10,241 41,724
Net earnings 3,452 3,737 8,108 5,096 20,393
Net earnings per share basic and diluted $0.07 $0.07 $0.16 $0.10 $0.39
2003
Net sales $239,826 $242,833 $249,529 $239,256 $971,444
Gross profit 20,879 25,096 28,439 28,483 102,897
Operating profit 4,635 7,677 12,013 10,953 35,278
Net earnings 1,335 3,228 5,981 5,319 15,863
Net earnings per share basic and diluted $0.03 $0.06 $0.12 $0.10 $0.31
* In 2005, includes after-tax expense of $6.0 million ($9.5 million pretax) or
$0.12 per share related to closure costs and restructuring expense associated
with the closing of the sulfite pulp mill at Printing & Writing's Brokaw,
Wisconsin facility. In 2003, includes after-tax income of $2.6 million ($4.2
million pretax) or $0.05 per share related to the settlement of a patent
litigation case.
**In 2005, the third and fourth quarters include after-tax expense of $13.6
million ($20.8 million pretax) or $0.26 per share and $5.1 million ($8.1
million pretax) or $0.10 per share, respectively, related to closure costs and
restructuring expense related to the closing of the sulfite pulp mill at
Printing & Writing's Brokaw, Wisconsin facility.
MARKET PRICES FOR COMMON SHARES (UNAUDITED)
2005 2004 2003
CASH Cash Cash
DIVIDENDS Dividends Dividends
PRICE PRICE PAID PER Price Price Paid Per Price Price Paid Per
Quarter HIGH LOW SHARE High Low Share High Low Share
1st $18.13 $13.57 $0.085 $14.11 $12.20 $0.085 $12.08 $9.30 $0.085
2nd 14.63 11.16 0.085 17.44 13.19 0.085 12.23 10.20 0.085
3rd 13.23 11.28 0.085 17.40 14.54 0.085 13.40 11.03 0.085
4th 12.63 10.08 0.085 19.12 15.15 0.085 13.85 11.75 0.085
All prices represent the high and the low sales prices for the common stock as
reported on the New York Stock Exchange.
-71-
Financial Statement Schedule II - Valuation and Qualifying Accounts
Allowance for Valuation Allowance
Doubtful Accounts for Deferred Tax Assets
Balance December 31, 2002 $ 2,376 $ 3,259
Charges to cost and expense (276) 3,202
Deductions (172) (899)
Balance December 31, 2003 1,928 5,562
Charges to cost and expense 92 2,824
Deductions (186) (17)
Balance December 31, 2004 1,834 8,369
Charges to cost and expense 256 3,849
Deductions (429) (1,291)
Balance December 31, 2005 $ 1,661 $10,927
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
As of the end of the period covered by this Form 10-K, management, under the
supervision, and with the participation, of the our President and Chief
Executive Officer and the Chief Financial Officer, evaluated the effectiveness
of the design and operation of our disclosure controls and procedures as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. Based
upon, and as of the date of such evaluation, the President and Chief Executive
Officer and the Chief Financial Officer concluded that our disclosure controls
and procedures were effective in all material respects.
INTERNAL CONTROL OVER FINANCIAL REPORTING
Management's report on our internal control over financial reporting and
material changes in such internal control, and the attestation report of our
independent registered public accounting firm on management's assessment of our
internal control are set forth in Item 8, pages 38 and 39. There have been no
changes in the our internal control over financial reporting or in other
factors which could materially affect such internal control subsequent to the
date we carried out our evaluation.
-72-
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS AND EXECUTIVE OFFICERS
Information relating to our directors is incorporated into this Form 10-K by
this reference to the disclosure in our proxy statement relating to the 2006
annual meeting of shareholders (the "2006 Proxy Statement") under the
subcaption "Election of Directors - Election of Directors."
Information relating to our executive officers is found in Part I of this Form
10-K.
Information required under Rule 405 of Regulation S-K is incorporated into this
Form 10-K by this reference to the disclosure in the 2006 Proxy Statement under
the subcaption "Stock Ownership - Section 16(a) Beneficial Ownership Reporting
Compliance."
CODE OF ETHICS
We have adopted a Code of Business Conduct and Ethics for all directors,
officers, and employees and a Code of Compliance and Reporting Requirements for
Chief Executive Officer and Senior Financial Officers which covers our Chief
Executive Officer, Chief Financial Officer, Controller, Manager of Corporate
Accounting, and Manager of Internal Audit. Each of these codes is available at
"About Wausau Paper - Corporate Governance" on the Company's website
(www.wausaupaper.com). Shareholders may also obtain a free copy by writing to
the address set forth under the following subcaption. In the event we amend or
waive any provision of the Code of Compliance and Reporting Requirements for
Chief Executive Officer and Senior Financial Officers applicable to its
principal executive officers, principal financial officers, or controller, we
intend to disclose such amendment or waiver at the website address where the
code may also be found.
CORPORATE GOVERNANCE GUIDELINES AND COMMITTEE CHARTERS
We have adopted Corporate Governance guidelines and charters for the Board of
Directors' Audit, Compensation, and Corporate Governance Committees. These
guidelines and charters are available at "About Wausau Paper - Corporate
Governance" on our website (www.wausaupaper.com). Shareholders may also
request a free copy of these documents by writing to:
Corporate Secretary
Wausau Paper
100 Paper Place
Mosinee, WI 54455-9099
-73-
AUDIT COMMITTEE
Our Board of Directors has appointed an Audit Committee in accordance with
Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). The members of the Audit Committee satisfy the NYSE and SEC
rules for independence applicable to audit committees of listed companies. Mr.
Freels (Chairman), Mr. Alexander, Mr. Baur, Mr. Knetter, and Mr. Kuester serve
on the Audit Committee.
FINANCIAL EXPERT
Our Board of Directors has determined that Gary W. Freels is an audit committee
financial expert. Mr. Freels is an independent director under NYSE listing
standards. Mr. Freels has 25 years of experience in commercial banking and,
for the last 10 years, has managed the investment portfolios of the private
foundation he serves as chief executive officer. He has also served on the
Audit Committee since 1996, and as its chairman since April, 2004.
ITEM 11. EXECUTIVE COMPENSATION
DIRECTOR COMPENSATION
Information relating to director compensation is incorporated into this Form
10-K by this reference to the disclosure in the 2006 Proxy Statement under the
subcaption "Election of Directors - Compensation of Directors."
EXECUTIVE OFFICER COMPENSATION
Information relating to the compensation of executive officers is incorporated
into this Form 10-K by this reference to (1) the disclosure in the 2006 Proxy
Statement beginning under the caption "Executive Compensation," through the
disclosure under the subcaption "- Retirement Benefits," and (2) the disclosure
in the 2006 Proxy Statement under the subcaption "- Report of the Compensation
Committee - Committee Interlocks and Insider Participation."
-74-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information concerning (1) any person or group known to us to be the beneficial
owner of more than 5% of our voting stock, and (2) ownership of its equity
securities by management is incorporated by reference to the material under the
heading "Stock Ownership" in the 2006 Proxy Statement.
The following table provides information with respect to compensation plans
under which our common stock is authorized for future issuance:
Plan category Number of securities to be Weighted-average exercise Number of securities
issued upon exercise of price of outstanding remaining available for
outstanding options, options, warrants and future issuance under
warrants and rights (1)(2) rights (1)(2)(3) equity compensation plans
(excluding securities
reflected in column (a)) (1)(2)
(a) (b) (c)
Equity compensation plans
approved by security
holders 2,415,171 $12.35 1,280,404
Equity compensation plans
not approved by security
holders 0 n/a 0
Total 2,415,171 $12.35 1,280,404
(1) Shares indicated relate to common stock issuable upon exercise of
options awarded under the 1991 Employee Stock Option Plan and upon
exercise of options or the vesting of performance units awarded under
the 2000 Stock Incentive Plan.
(2) Table excludes options with respect to 165,200 shares granted under
stock option plans of Mosinee Paper Corporation as of December 17,
1997 (the date of the merger between Wausau Paper Mills Company and
Mosinee Paper Corporation) at a weighted-average exercise price of
$11.96. No additional options will be granted from the stock-option
plans of Mosinee Paper Corporation.
(3) The exercise price calculation is based only on outstanding options to
purchase 2,324,642 shares. Shares issuable pursuant to performance
units have no exercise price.
BENEFICIAL OWNERSHIP
Information relating to security ownership of certain beneficial owners and
management is incorporated into this Form 10-K by this reference to the
disclosure in the 2006 Proxy Statement beginning under the caption "Stock
Ownership - Stock Ownership of Directors, Executive Officers, and 5%
Shareholders" and ending at the subcaption "- Section 16(a) Beneficial
Ownership Reporting Compliance."
-75-
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions with our
directors and officers is incorporated into this Form 10-K by this reference to
the disclosure in the 2006 Proxy Statement under the subcaption "Election of
Directors - Determination of Independence of Directors."
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information relating to the fees and services of our principal accountant is
incorporated into this Form 10-K by this reference to the disclosure in the
2006 Proxy Statement under the subcaption "Report of the Audit Committee and
Related Matters - Independent Auditor and Fees," and "Audit Committee Pre-
Approval Policies."
-76-
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this report
(1) The following consolidated financial statements of Wausau Paper and the
Reports of our Independent Registered Public Accounting Firm thereon are
filed as part of this report:
(i) Consolidated Balance Sheets as of December 31, 2005 and 2004
(ii) Consolidated Statements of Operations for the years ended December
31, 2005, 2004, and 2003
(iii) Consolidated Statements of Cash Flows for the years ended December
31, 2005, 2004, and 2003
(iv) Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2005, 2004, and 2003
(v) Notes to Consolidated Financial Statements
(2) Financial Statement Schedules
The following financial statement schedule is filed as part of this
report:
(i) Financial Statement Schedule II - Valuation and Qualifying Accounts
for the years ended December 31, 2005, 2004, and 2003 (page 72)
All other schedules prescribed by Regulation S-X are not submitted
because they are not applicable or not required, or because the required
information is included in the Consolidated Financial Statements and
Notes thereto.
(3) Exhibits
The following exhibits required by Item 601 of Regulation S-K are filed
as part of this report:
Exhibit
Number Description
3.1 Restated Articles of Incorporation, as amended May 12, 2005
(incorporated by reference to Exhibit 3.1 to Current Report on Form
8-K dated May 12, 2005)
3.2 Restated Bylaws, as amended May 12, 2005 (incorporated by reference
to Exhibit 3.2 to Current Report on Form 8-K dated May 12, 2005)
4.1 Rights Agreement, dated as of October 21, 1998, including the Form
of Restated Articles of Incorporation as Exhibit A and the Form of
Rights Certificate as Exhibit B (incorporated by reference to
Exhibit 4.1 to Registration Statement on Form 8-A dated October 21,
1998)
4.2 First Amendment dated August 22, 2000 to Rights Agreement dated
October 21, 1998 (incorporated by reference to Exhibit 4.1(a) to
Amendment No. 1 to Registration Statement on Form 8-A, filed on
December 19, 2000)
-77-
4.3 Summary of Rights to Purchase Preferred Shares, Exhibit C to Rights
Agreement filed as Exhibit 4.1 thereto (incorporated by reference
to Exhibit 4.2 to Registration Statement on Form 8-A, filed on
October 29, 1998)
4.4 $138,500,000 Note Purchase Agreement dated August 31, 1999
(incorporated by reference to Exhibit 4.3 to Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 1999)
4.5 Amendment No. 1, dated June 28, 2005, to Note Purchase Agreement
dated August 31, 1999 (incorporated by reference to Current Report
on Form 8-K dated June 28, 2005)
4.6 Credit Agreement dated August 31, 2004 among Wausau Paper and Bank
of America, N.A., M&I Marshall & Ilsley Bank, Harris Trust and
Savings Bank, and Wells Fargo Bank, National Association
(incorporated by reference to Exhibit 4.1 to Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2004)
10.1 Supplemental Retirement Plan, as last amended December 16, 2005*
10.2 1988 Stock Appreciation Rights Plan, as last amended March 4, 1999
(incorporated by reference to Exhibit 10.4 to Annual Report on Form
10-K for the fiscal year ended December 31, 1998)*
10.3 1990 Stock Appreciation Rights Plan, as last amended March 4, 1999
(incorporated by reference to Exhibit 10.6 to Annual Report on Form
10-K for the fiscal year ended December 31, 1998)*
10.4 Deferred Compensation Agreement dated March 2, 1990, as last
amended December 16, 2005 (incorporated by reference to Exhibit
10.9 to Current Report on Form 8-K dated December 16, 2005)*
10.5 1991 Employee Stock Option Plan, as last amended March 4, 1999
(incorporated by reference to Exhibit 10.8 to Annual Report on Form
10-K for the fiscal year ended December 31, 1998)*
10.6 1991 Dividend Equivalent Plan, as last amended March 4, 1999
(incorporated by reference to Exhibit 10.9 to Annual Report on Form
10-K for the fiscal year ended December 31, 1998)*
10.7 Supplemental Retirement Benefit Plan dated January 16, 1992, as
last amended December 16, 2005 (incorporated by reference to
Exhibit 10.8 to Current Report on Form 8-K dated December 16,
2005)*
10.8 Directors' Deferred Compensation Plan, as last amended March 4,
1999 (incorporated by reference to Exhibit 10.11 to Annual Report
on Form 10-K for the fiscal year ended December 31, 1998)*
10.9 Directors Retirement Benefit Policy, as amended December 16, 2005
(incorporated by reference to Exhibit 10.5 to Current Report on
Form 8-K dated December 16, 2005)*
10.10 Mosinee Paper Corporation 1985 Executive Stock Option Plan, as last
amended March 4, 1999 (incorporated by reference to Exhibit 10.14
to Annual Report on Form 10-K for the fiscal year ended December
31, 1998)*
10.11 Mosinee Paper Corporation 1988 Stock Appreciation Rights Plan, as
last amended March 4, 1999 (incorporated by reference to Exhibit
10.15 to Annual Report on Form 10-K for the fiscal year ended
December 31, 1998)*
10.12 Mosinee Paper Corporation Supplemental Retirement Benefit Agreement
dated November 12, 1991, as last amended December 16, 2005
(incorporated by reference to Exhibit 10.10 to Current Report on
Form 8-K dated December 16, 2005)*
-78-
10.13 Mosinee Paper Corporation 1994 Stock Option Plan, as last amended
March 4, 1999 (incorporated by reference to Exhibit 10.13 to Annual
Report on Form 10-K for the fiscal year ended December 31, 2001)*
10.14 2005 Incentive Compensation Plan for Executive Officers
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K dated December 17, 2004)*
10.15 2006 Incentive Compensation Plan for Executive Officers
(incorporated by reference to Exhibit 10.3 to Current Report on
Form 8-K dated December 16, 2005)*
10.16 2000 Stock Incentive Plan (incorporated by reference to Exhibit
10.7 to Current Report on Form 8-K dated December 16, 2005)*
10.17 Executive Deferred Compensation Plan (incorporated by reference to
Exhibit 10.6 to Current Report on Form 8-K dated December 16,
2005)*
10.18 2005 Directors Deferred Compensation Plan (incorporated by
reference to Exhibit 10.4 to Current Report on Form 8-K dated
December 16, 2005)*
10.19 2005 Executive Deferred Compensation Plan (incorporated by
reference to Exhibit 10.6 to Current Report on Form 8-K dated
December 16, 2005)*
10.20 Standard Form of Restricted Stock Agreement (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K dated
December 17, 2004)*
10.21 Standard Form of Performance Unit Grant Agreement (incorporated by
reference to Exhibit 10.1 to Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 2004)*
10.22 Standard Form of Non-Qualified Performance Stock Option Agreement
(incorporated by reference to Exhibit 10.2 to Quarterly Report on
Form 10-Q for the quarterly period ended September 30, 2004)*
10.23 Standard Form of Non-Qualified Stock Option Agreement (incorporated
by reference to Exhibit 10.11 to the Company's Current Report on
Form 8-K dated December 16, 2005)*
10.24 Standard Form of Non-Qualified Stock Option Agreement for Directors
(incorporated by reference to Exhibit 10.12 to the Company's
Current Report on Form 8-K dated December 16, 2005)*
10.25 Board of Directors Compensation Policy dated December 16, 2005
(incorporated by reference to Exhibit 10.1 to Current Report on
Form 8-K dated December 16, 2005)*
10.26 Form of Grant of Performance Units Pursuant to Director
Compensation Policy dated December 16, 2005 (incorporated by
reference to Exhibit 10.2 to Current Report on Form 8-K dated
December 16, 2005)*
21.1 Subsidiaries of Wausau Paper
23.1 Consent of Deloitte & Touche LLP
31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32.1 Certification of CEO and CFO furnished pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
* Executive compensation plans or arrangements. All plans are sponsored
or maintained by Wausau Paper unless otherwise noted.
-79-
(b) Exhibits
See Item 15(a)(3).
(c) Financial Schedules
See Item 15(a)(2).
-80-
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.
WAUSAU PAPER CORP.
March 15, 2006 SCOTT P. DOESCHER
Scott P. Doescher
Senior Vice President - Finance,
Secretary and Treasurer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
-81-
Pursuant to the requirement 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.
March 15, 2006
THOMAS J. HOWATT SAN W. ORR, JR.
Thomas J. Howatt San W. Orr, Jr.
President and Chief Executive Officer Chairman of the Board
(Principal Executive Officer)
WALTER ALEXANDER ANDREW N. BAUR
Walter Alexander Andrew N. Baur
Director Director
GARY W. FREELS MICHAEL M. KNETTER
Gary W. Freels Michael M. Knetter
Director Director
DENNIS J. KUESTER DAVID B. SMITH, JR.
Dennis J. Kuester David B. Smith, Jr.
Director Director
-82-
EXHIBIT INDEX*
TO
FORM 10-K
OF
WAUSAU PAPER CORP.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
PURSUANT TO SECTION 102(D) OF REGULATION S-T
(17 C.F.R. Section 232.102(D))
Exhibit 10.1 Supplemental Retirement Plan, as last amended December 16, 2005
Exhibit 21.1 Subsidiaries of Wausau Paper
Exhibit 23.1 Consent of Deloitte & Touche LLP
Exhibit 31.1 Certification of CEO pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
Exhibit 31.2 Certification of CFO pursuant to Section 302 of Sarbanes-Oxley
Act of 2002
Exhibit 32.1 Certification of CEO and CFO pursuant to Section 906 of
Sarbanes-Oxley Act of 2002
* Exhibits required by Item 601 of Regulation S-K which have previously been
filed and are incorporated herein by reference are set forth in Part IV, Item
15 of Form 10-K to which this Exhibit Index relates.