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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999March 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________________to_______________________________________________to______________________
Commission File No. 1-3560
P. H. GLATFELTER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
96 South George Street, Suite 500, York, Pennsylvania 17401
(Address of principal executive offices) (Zip Code)
(717) 225-4711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No______.N .
--- ----
Shares of Common Stock outstanding at November 11, 1999April 28, 2000 were 42,225,187.42,314,942.
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P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
Condensed Consolidated Statements of Income -
Three Months and Nine Months Ended September 30,
1999 and 1998 (Unaudited)............................... 3
Condensed Consolidated Balance Sheets - September 30, 1999
(Unaudited) and December 31, 1998....................... 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1999 and 1998 (Unaudited)... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 6
Independent Accountants' Report............................. 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations.............................. 12
Quantitative and Qualitative Disclosures About Market Risk.. 20
Part II - Other Information..................................... 20
Signature.......................................................Part I - Financial Information
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 (Unaudited).... 3
Condensed Consolidated Balance Sheets - March 31, 2000
(Unaudited) and December 31, 1999......................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 (Unaudited).......... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
Independent Accountants' Report................................ 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Quantitative and Qualitative Disclosures About Market Risk..... 18
Part II - Other Information........................................ 18
Signature.......................................................... 20
Index of Exhibits.................................................. 21
Index of Exhibits............................................... 22
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
Nine Months Ended
9/30/99 9/30/98 9/30/99 9/30/98
------- ------- ------- -------3/31/2000 3/31/1999
--------- ---------
Revenues
Net sales $ 170,030 $ 167,245 $ 503,110 $ 544,168$181,260 $165,846
Other income - net
Energy sales - net 2,402 2,543 7,346 7,0912,466 2,238
Interest on investments and
other - net 427 569 1,225 2,0291,288 370
Gain from property
dispositions, etc. - net 690 18 2,773 103
--------- --------- --------- ---------
3,519 3,130 11,344 9,223308 920
-------- --------
4,062 3,528
Total revenues 173,549 170,375 514,454 553,391185,322 169,374
Costs and expenses
Cost of products sold 145,956 143,204 416,897 440,918147,753 138,163
Selling, general and
administrative expenses 12,909 11,161 40,711 37,94113,103 13,509
Interest on debt - net 4,735 5,259 14,126 16,3224,380 4,790
Unusual item 3,336 --
5,577 -- 5,577
--------- --------- --------- ---------
163,600 165,201 471,734 500,758-------- --------
168,572 156,462
Income before income taxes 9,949 5,174 42,720 52,63316,750 12,912
Income tax provision
(benefit)
Current taxes (102) 2,258 7,432 15,9604,490 4,126
Deferred taxes 3,651 (290) 8,205 4,349
--------- --------- --------- ---------1,616 646
-------- --------
Total 3,549 1,968 15,637 20,3096,106 4,772
Net income $ 6,40010,644 $ 3,206 $ 27,083 $ 32,324
========= ========= ========= =========8,140
======== ========
Basic and diluted earnings per share $ 0.150.25 $ 0.08 $ 0.64 $ 0.77
========= ========= ========= =========0.19
======== ========
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
9/30/993/31/2000
(unaudited) 12/31/98
------- --------
(unaudited)1999
----------- -----------
Current assets:
Cash and cash equivalents $ 64,36972,719 $ 50,90776,035
Accounts receivable - net 81,347 70,07687,626 74,638
Inventories:
Raw materials 35,154 37,55938,553 41,013
In process and finished 49,452 49,90140,480 42,463
Supplies 28,739 30,392
--------- ---------31,239 31,624
----------- -----------
Total inventories 113,345 117,852110,272 115,100
Prepaid expenses and other current assets 1,909 3,073
--------- ---------3,931 2,354
----------- -----------
Total current assets 260,970 241,908274,548 268,127
Plant, equipment and timberlands - net 595,792 628,156565,936 582,213
Other assets 131,226 120,674
--------- ---------155,843 153,440
----------- -----------
Total assets $ 987,988996,327 $ 990,738
========= =========1,003,780
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,9041,744 $ 2,0881,824
Short-term debt 26,824 28,99024,791 26,566
Accounts payable 43,418 34,29341,508 40,047
Dividends payable 7,387 7,3657,400 7,393
Income taxes payable 8,205 8,18913,888 9,601
Accrued compensation and other expenses
and deferred income taxes 41,367 45,951
--------- ---------37,626 47,200
----------- -----------
Total current liabilities 129,105 126,876126,957 132,631
Long-term debt 311,973 325,381293,916 301,380
Deferred income taxes 131,526 123,321150,489 147,698
Other long-term liabilities 64,056 71,231
--------- ---------63,476 63,947
----------- -----------
Total liabilities 636,660 646,809634,838 645,656
----------- -----------
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,319 42,61242,149 42,296
Retained earnings 489,733 484,793499,922 496,680
Accumulated other comprehensive income (779) (1,611)
--------- ---------(1,854) (1,392)
----------- -----------
Total 531,817 526,338540,761 538,128
Less cost of common stock in treasury (180,489) (182,409)
--------- ---------(179,272) (180,004)
----------- -----------
Total shareholders' equity 351,328 343,929
--------- ---------361,489 358,124
----------- -----------
Total liabilities and
shareholders' equity $ 987,988996,327 $ 990,738
========= =========1,003,780
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
NineThree Months Ended
9/30/99 9/30/98
------- -------3/31/2000 3/31/1999
--------- ---------
Cash flows from operating activities:
Net income $ 27,08310,644 $ 32,3248,140
Items included in net income not using
(providing) cash:
Depreciation, depletion and amortization 36,613 36,20711,820 12,292
Loss (gain) on disposition of fixed assets (1,124) 62598 (908)
Expense related to employee stock purchase and
401(k) plans 1,631 1,261
Change481 63
Changes in assets and liabilities, net of effect
of acquisition:liabilities:
Accounts receivable (13,420) (2,296)(14,406) (11,358)
Inventories 1,454 11,6194,932 2,683
Other assets and prepaid expenses (14,380) (8,276)(5,471) (4,001)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities 12,270 (7,362)(7,217) 453
Income taxes payable (404) (5,227)4,431 984
Deferred income taxes - noncurrent 8,205 5,270
--------- ---------2,791 2,322
-------- --------
Net cash provided by operating activities 57,928 64,145
--------- ---------8,103 10,670
-------- --------
Cash flows from investing activities:
Sale or maturity of investments - net 4 154,870-- 2
Proceeds from disposal of fixed assets 1,258 3440 949
Additions to plant, equipment and timberlands (17,685) (30,290)
Acquisition of S&H - net of cash acquired -- (147,491)
Acquisition of Cascadec (7,399) --
--------- ---------(3,429) (5,914)
-------- --------
Net cash used in investing activities (23,822) (22,877)
--------- ---------(3,389) (4,963)
-------- --------
Cash flows from financing activities:
Net borrowing of short-term debt 1,715 16,384
Net payment of other long-term debt -- (17,791)
Repayment of 5-7/8% Notes -- (150,000)
Acquisition-related borrowings -- 101,500(638) (637)
Dividends paid (22,122) (22,080)
Purchases of common stock -- (4,344)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan -- 829
--------- ---------(7,393) (7,365)
-------- --------
Net cash used in financing activities (20,407) (75,502)
--------- ---------(8,031) (8,002)
-------- --------
Effect of exchange rate changes on cash (237) 2551 (380)
-------- --------
Net increase (decrease)decrease in cash and cash equivalents 13,462 (33,979)(3,316) (2,675)
Cash and cash equivalents:
At beginning of year 76,035 50,907
66,919
--------- ----------------- --------
At end of period $ 64,36972,719 $ 32,940
========= =========48,232
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 21,0987,168 $ 14,9178,595
Income taxes 8,615 21,041265 844
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACQUISITIONS
Effective January 2, 1998, the Registrant acquired all of the
outstanding common stock of S&H Papier-Holding GmbH ("S&H"), the
specialty paper division of the Schoeller and Hoesch Group, for DM
268,900,000 (approximately $150,000,000) in cash. The purchase price
was finalized in the fourth quarter of 1998. The Registrant accounted
for the S&H acquisition under the purchase method of accounting, and
S&H was consolidated with the Registrant beginning in January 1998.
The acquisition of S&H included a 50% controlling ownership interest in
Papeteries de Cascadec S.A. ("Cascadec"), a French company, along with
the option to acquire the remaining 50% at a future time. On April 9,
1999, the Registrant exercised its option and purchased the remaining
50% of Cascadec for FF 45,181,233 ($7,399,000) in cash.
2. EARNINGS PER SHARE ("EPS")
Basic EPS excludes the dilutive impact of common stock equivalents and
is computed by dividing net income by the weighted-average number of
shares of common stock outstanding for the period. Diluted EPS includes
the effect of potential dilution from the issuance of common stock,
pursuant to common stock equivalents, using the treasury stock method.
A reconciliation of the Registrant's basic and diluted EPS follows with
the dollar and share amounts in thousands:
Three Months Ended
Nine Months Ended
September 30 September 30March 31
----------------------------
2000 1999
1998 1999 1998---- ----
Shares Shares Shares Shares
------ ------
------ ------
Basic EPS 42,195 41,995 42,155 42,047factors 42,267 42,110
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards --62 11 5 18
Performance stock
awards 126 126 132 126
Employee stock
options 233 -- 110 17
------- ------- -------39 142
-------- -------
Diluted EPS 42,554 42,132 42,402 42,208
======= ======= =======factors 42,368 42,263
======== =======
Net income $ 6,40010,644 $ 3,206 $27,083 $32,3248,140
Basic and diluted EPS $ 0.150.25 $ 0.08 $ 0.64 $ 0.770.19
The 2000 basic and diluted EPS of $.25, as presented on the Condensed
Consolidated Statement of Income, reflects the negative impact of an
after-tax restructuring charge (unusual item) of $.05 per share (see
Note 2).
2. UNUSUAL ITEM
The Registrant announced in September 1999 that, effective January 1,
2000, prices would be increased for certain of its tobacco paper
products. This initiative was required for the Registrant to remain a
viable, high-quality supplier to its tobacco paper customers. As the
Registrant expected, certain of these customers sought other suppliers
after this announcement. As a result, the Registrant announced in
December 1999 that it would begin reducing its tobacco paper
manufacturing capacity at its Ecusta mill during 2000. During the first
quarter of 2000, the Registrant finalized its plan of restructuring and
will begin to reduce the workforce at Ecusta shortly. The workforce
reduction is expected to be completed by late 2000 and will ultimately
result in the reduction of approximately 300 salaried and hourly jobs
associated with the Registrant's tobacco paper production capacity. The
Registrant accrued and charged to expense $3,336,000 on a pre-tax basis
($2,120,000 after tax) in the first quarter of 2000 primarily as a
result of the voluntary portion, specifically 42 salaried employees, of
this restructuring.
3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASBFinancial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other
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contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 requires that an entity recognize all
derivatives as either assets or liabilities in the statement of
financial position and measure those instruments at fair value. SFAS
No. 137, issued in July 1999, deferred the effective date of SFAS No.
133 until the beginning of the Registrant's first quarter of 2001. The
Registrant is evaluating the effects that the adoption of SFAS No. 133
may have on its consolidated financial position and results of
operations.
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4. INTEREST RATE SWAP AGREEMENTS
In January 1998, the Registrant entered into two interest rate swap
agreements, each having a total notional principal amount of DM
52,600,000 (approximately $28,700,000$25,700,000 as of September 30, 1999)March 31, 2000). One such
agreement expired on January 6, 2000. Under the agreements,remaining agreement,
the Registrant pays fixed rates of 4.18% and 4.45% for
periods of two and three years, respectively, and receives a floating rate of the six-month DM London
Interbank Offered Rate ("LIBOR") and pays a fixed rate of 4.45% until
January 6, 2001. The six-month DM LIBOR applicable for the first half
of 2000 is approximately 3.8%.
In January 1999, the Registrant entered into two additional interest
rate swap agreements, each having a total notional principal amount of
DM 50,000,000 (approximately $27,300,000$24,400,000 as of September 30, 1999)March 31, 2000). Under
one agreement, which was effective April 6, 1999, the Registrant
receives a floating rate of the three-month DM LIBOR plus twenty basis
points and pays a fixed rate of 3.4075%approximately 3.41% for the term of the
agreement. Under the second agreement, which was effective July 6,
1999, the Registrant receives a floating rate, which is also the
three-month DM LIBOR plus twenty basis points, and pays a fixed rate of
3.425%3.43% for the term of the agreement.
The Registrant has other various interest rate swap agreements
outstanding which do not have a material impact on the Registrant's
consolidated financial statements. All of the Registrant's interest
rate swap agreements convert a portion of the Registrant's borrowings
from a floating rate to a fixed rate basis. Although the Registrant can
pay to terminate any of its swap agreements at any time, the Registrant
intends to hold all of its swap agreements until their maturities.
5. COMPREHENSIVE INCOME
ComprehensiveFor the three months ended March 31, 2000 and 1999, comprehensive
income was $5,889,000$10,182,000 and $1,568,000 for the third
quarter of 1999 and 1998, respectively, and $27,915,000 and $30,528,000
for the first nine months of 1999 and 1998,$7,591,000, respectively. Comprehensive
income includes the effects of changes in certain currency exchange
rates relative to the U.S. dollar.
6. COMMITMENTS AND CONTINGENCIES
The Registrant is subject to loss contingencies resulting from
regulation by various federal, state, local and foreign governmental
authorities with respect to the environmental impact of air and water
emissions and noise from its mills, as well as the disposal of solid
waste generated by its operations. To comply with environmental laws
and regulations, the Registrant has incurred substantial capital and
operating expenditures over thein past several years. The Registrant anticipates that
environmental regulation of its operations will continue to become more
burdensome and that capital and operating expenditures will continue,
and perhaps increase, in the future. In addition, the Registrant may
incur obligations to remove or mitigate any adverse effects on the
environment resulting from its operations, including the restoration of
natural resources, and liability for personal injury and damage to
property, including natural resources. Because environmental
regulations are not consistent worldwide, the Registrant's ability to
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compete in the world marketplace may be adversely affected by capital
and operating expenditures required for environmental compliance.
Subject to permit approval, the Registrant has undertaken an initiative
under the Voluntary Advanced Technical Incentive Program of the United
States Environmental Protection Agency ("EPA") to comply with the new
"Cluster Rule" regulations. This initiative, the Registrant's "New
Century Project," will require capital expenditures currently estimated
at approximately $30,000,000 to be incurred before April 2004.
The Pennsylvania Department of Environmental Protection ("DEP") has
proposed to reissue the Registrant's wastewater discharge permit for
the Spring Grove mill on terms unacceptable to the Registrant. Moreover,DEP has
concurrently publicly proposed terms for resolution of an anticipated
appeal from the issuance of that permit which may beterms, subject to the
satisfaction of certain conditions, are acceptable to the Registrant and DEPRegistrant.
However, such terms may be unacceptable to the United States Environmental Protection Agency
("EPA")EPA or certain third
parties. The Registrant cannot determine the impact that the new permit
will have on the Registrant if it contains objectionable terms because
the material terms of the final form of the permit are unknown.
The Pennsylvania Public Interest Research Group ("Penn PIRG") and
several other plaintiffs have brought a citizen suit under the federalFederal
Clean Water 7
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Act and the Pennsylvania Clean Streams Law seeking a reduction
in the Spring Grove mill's discharge of color, civil penalties and
costs of litigation. The Registrant believes Penn PIRG's lawsuit to be
without merit, but the Registrant cannot predict the impact on the
Registrant of any relief the court might award because the case is not
yet at a stage where the nature and extent of any relief can be
predicted.
On or about April 16,In 1999, EPA and DEP issued to the Registrant a Noticeseparate Notices of
Violation ("NOV"NOVs") alleging violations of the federal Clean Air Act,and state air
pollution control laws, primarily for purportedly failing to obtain
appropriate preconstruction air quality permits in conjunction with
certain modifications to itsthe Registrant's Spring Grove mill. EPA
announced that the Registrant was one of seven pulp and paper mill
operators to have received contemporaneously an NOV alleging this kind
of violation. EPA and DEP alleged that the Registrant's modifications
produced (1) significant net emissions increases in certain air
pollutants which should have been covered by appropriate permits
imposing new emissions limitations, and (2) certain other violations.
For all but one of the modifications cited by EPA, the Registrant
applied for and obtained from the DEP the preconstruction permits which the
Registrant concluded were required by applicable law. EPA reviewed
those applications before the permits were issued. DEP's NOV only
pertained to the modification for which the Registrant did not receive
a preconstruction permit. The Registrant conducted an evaluation at the
time of the otherthis modification, and concludeddetermined that the preconstruction
permit cited by EPA and DEP was not required. DEP has issued a separate NOV pertaining to this
modification. The Registrant expectshas been
informed that EPA and DEP will seek substantial emissions reductions,
as well as civil penalties, to which the Registrant believes it has
meritorious defenses. Nevertheless, the Registrant is unable to predict
the ultimate outcome of these matters or the costs involved.
The Registrant, along with six other companies which operate or
formerly operated facilities along the Fox River in Wisconsin, has been
identified as a potentially responsible party ("PRP") under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and other laws for (a) investigation and cleanup and (b)
natural resources damages arising from the alleged discharge of
polychlorinated biphenyls ("PCBs") and other hazardous substances to
the Fox River below Lake Winnebago (the "lower Fox River") and the Bay
of Green Bay. A dispute presently exists as to
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which sovereign controls which claims concerning this matter.
Accordingly, the Registrant has been in discussions with EPA, the
Wisconsin Department of Natural Resources ("DNR"), the United States
Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric
Administration ("NOAA"), the Menominee Indian Tribe of Wisconsin, the
Oneida Tribe of Indians of Wisconsin, and the state and federal
Departments of Justice.
On July 11, 1997, these agencies and tribes entered into a Memorandum
of Agreement (the "MOA") which provides for coordination and
cooperation among those parties in addressing the release or threat of
release of hazardous substances into the lower Fox River, Green Bay and
Lake Michigan environment. The MOA sets forth a mutual goal of
remediating and/or responding to hazardous substance releases and
threats of releases, and restoring injured and potentially injured
natural resources. The MOA further states that, based on current
information, removal of the PCB-contaminated sediments in the lower Fox
River is expected to be the principal, but not exclusive, action
undertaken to achieve restoration and rehabilitation of injured natural
resources. The MOA anticipates funding from the Registrant and the six
other companies.
On February 26, 1999, DNR released a draft remedial investigation and
feasibility study ("RI/FS") for the lower Fox River for public comment.
In the draft RI/FS, DNR reviewed and summarized a number of possible
remedial alternatives for the site estimated to cost in the range of $0
to $721,000,000, but did not select a preferred remedy. The Registrant
does not believe that the no action remedy will be selected. The
largest components of the costs of certain of the remedial alternatives
are attributable to large-scale sediment removal and disposal. There is
no assurance that the cost estimates in the draft RI/FS will not differ
significantly from actual costs. The Registrant and the other six
companies have submitted extensive technical comments to the draft
RI/FS. In addition, the Registrant has submitted its individual
comments to the draft RI/FS. DNR and EPA have announced that the RI/FS
will be revised. The revision may add, delete or amend the remedial
alternatives, and a final RI/FS and a proposed remedial 8
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action plan
will be issued. The Registrant understandsagencies have publicly stated that these documents
may be issued in mid to late 2000.
Based on current information and advice from its environmental
consultants, the Registrant continues to believe that an aggressive
effort, as included in certain remedial alternatives in the draft
RI/FS, to remove PCB-contaminated sediment, much of which is buried
under cleaner material or is otherwise unlikely to move and which is
abating naturally, would be environmentally detrimental and, therefore,
inappropriate.
Natural resources damages may be assessed in addition to cleanup costs.
In November 1999, FWS announced a preliminary estimate of damages as
the result of injury to recreational fishing. The range of damages
announced is from $106 million to $150 million. The Registrant believes
that this range is significantly overstated. FWS and the federal and
tribal trustees have not yet announced estimates of certain other
components of their natural resources damages claim. The Registrant
believes DNR to be the lead agency for assessment of damages, and has
been cooperatively assessing damages with DNR independent of the
federal agencies.
The Registrant currently is unable to predict the ultimate costs to the
Registrant related to this matter, because the Registrant cannot
predict which remedy will be selected for the site or the ultimate
amount of natural resources damages nor can the Registrant predict its
share of the
cost of that remedy.these costs or damages.
The Registrant continues to believe it is likely that this matter will
result in litigation; however, the Registrant believes it will be able
to persuade a court that removal of a substantial amount of
PCB-contaminated
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sediments is not an appropriate remedy. There can be no assurance,
however, that the Registrant will be successful in arguing that removal
of PCB-contaminated sediments is inappropriate or that it would prevail
in any resulting litigation, that its share of
the cost of any remedy selected would not have a material adverse
effect on the Registrant's consolidated financial condition, liquidity
and results of operations or that the Registrant's share of such cost
would not exceed its available resources.
Natural resources damages may be assessed in addition to cleanup costs.
In November 1999, FWS announced a preliminary estimate of damages,
ranging from $106 million to $150 million, as the result of injury to
recreational fishing. FWS and the federal and tribal trustees have not
yet announced estimates of certain other components of their natural
resources damages claim. The Registrant believes DNR, not FWS or the
other federal or tribal trustees, to be the lead agency for assessment
of damages, and has been cooperatively assessing damages with DNR
independent of the federal agencies.litigation.
The amount and timing of future expenditures for environmental
compliance, clean up,cleanup, remediation and personal injury, natural resource
damage and property and
natural resource damage liability, including but not limited to
those related to the lower Fox River and the Bay of Green Bay, cannot
be ascertained with any certainty due to, among other things, the
unknown extent and nature of any contamination, the extent and timing
of any technological advances for pollution control, the remedial
actions which may be required and the number and financial resources of
any other responsible parties. The Registrant continues to evaluate its
exposure and the level of its reserves, including, but not limited to,
costs associated with the NOV and its share of the costs and damages (if any) associated with the lower
Fox River and the Bay of Green Bay. The Registrant believes that it is
insured against certain losses related to the lower Fox River,
depending on the nature and amount thereof. Coverage, which is
currently being investigated under reservation of rights by various
insurance companies, is dependent upon the identity of the plaintiff,
the procedural posture of the claims asserted and how such claims are
characterized. The Registrant does not know when the insurers'
investigation as to coverage will be completed.
The Registrant's current assessment, after consultation with legal
counsel, is that future expenditures forultimately it should be able to resolve these
environmental matters are not likely
to havewithout a long-term material adverse impact on
the Registrant's consolidated
financial conditionRegistrant. In the meantime, however, these matters could, at any
particular time or liquidity, but couldfor any particular period, have a material adverse
effect on the Registrant's consolidated results of operations in a
given year; however, there can be no assurances that the Registrant's
reserves will be adequate or that a material adverse
effect on the Registrant's consolidated financial condition, liquidity
or liquidityresults of operations or result in a default under the Registrant's
loan covenants. Moreover, there can be no assurance that the
Registrant's reserves will be adequate to provide for future
obligations related to these matters, that the Registrant's share of
costs and/or damages for these matters will not occurexceed its available
resources or that such obligations will not have a long-term material
adverse effect on the Registrant's consolidated financial condition,
liquidity or results of operations.
7. SUBSEQUENT EVENTS
On April 18, 2000, certain flax inventory held at some future time.
7.a facility owned and
operated by the Registrant, located in Manitoba, Canada, sustained
substantial damage as a result of a fire. The Registrant believes it is
fully insured for such loss, subject to a modest deductible. The
Registrant does not believe that its operations will be materially
adversely affected by this incident.
On May 1, 2000, the Registrant granted to each non-employee member of
its Board of Directors options to purchase 1,500 shares of common stock
for a total of 13,500 options granted. Such options become exercisable
on May 1, 2001 at an exercise price of $10.78125, which represents the
average quoted market price of the Registrant's common stock on the
date of grant, and expire on April 30, 2010.
8. DISCLOSURE STATEMENT
In the opinion of the Registrant, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which
comprise
9
10 only normal recurring accruals) necessary for a fair
presentation of the financial information contained therein. These
unaudited condensed consolidated financial statements should be read in
conjunction with the more complete disclosures contained in the
Registrant's Annual Report on
10
11
Form 10-K for the year ended December 31, 1998.1999. Certain
reclassifications have been made of previously reported amounts to
conform with classifications used in the current year.
1011
1112
INDEPENDENT ACCOUNTANTS' REPORT
P. H. Glatfelter Company:
We have reviewed the accompanying condensed consolidated balance sheet of P. H.
Glatfelter Company and subsidiaries as of September 30, 1999,March 31, 2000, and the related
condensed consolidated statements of income and cash flows for the three months
ended March 31, 2000 and nine months ended September 30, 1999 and 1998.1999. These financial statements are the responsibility
of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of P. H. Glatfelter Company and
subsidiaries as of December 31, 1998,1999, and the related consolidated statements of
income and comprehensive income, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated February 26,
1999,11,
2000, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 19981999 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 15, 1999
11April 18, 2000, except for Note 7 as to
which the date is May 1, 2000
12
1213
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis contains forward-looking statements. See
"Cautionary Statement" set forth in Item 5.
Effective January 2, 1998, the Registrant acquired all of the outstanding common
stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper division of the
Schoeller and Hoesch Group, for DM 268,900,000 (approximately $150,000,000) in
cash. The purchase price was finalized in the fourth quarter of 1998. The
Registrant accounted for the S&H acquisition under the purchase method of
accounting, and S&H was consolidated with the Registrant beginning in January
1998.
The acquisition of S&H included a 50% controlling ownership interest in
Papeteries de Cascadec S.A. ("Cascadec"), a French company, along with the
option to acquire the remaining 50% at a future time. On April 9, 1999, the
Registrant exercised its option and purchased the remaining 50% of Cascadec for
FF 45,181,233 ($7,399,000) in cash.
RESULTS OF OPERATIONS
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income is shown below.
Comparison of
Three Months Ended
Nine Months Ended
Sept. 30,March 31, 2000 and
March 31, 1999
and 1998 Sept. 30, 1999 and 1998
----------------------- ---------------------------------------------
Increase (Decrease)
(dollars in thousands)
Net sales 2,785 1.7 % (41,058) (7.5)15,414 9.3 %
Other income - net 389 12.4 % 2,121 23.0534 15.1 %
Cost of products sold 2,752 1.9 % (24,021) (5.4)9,590 6.9 %
Selling, general and
administrative expenses 1,748 15.7 % 2,770 7.3 (406) (3.0)%
Interest on debt - net (524) (10.0)% (2,196) (13.5)(410) (8.6)%
Income tax provision 1,581 80.3 % (4,672) (23.0)1,334 28.0 %
Net income 3,194 99.6 % (5,241) (16.2)2,504 30.8 %
Net Sales
Worldwide net sales increased $2,785,000,$15,414,000, or 1.7%, for the third quarter of 1999
compared to the third quarter of 1998 and decreased $41,058,000, or 7.5%9.3%, for the first nine monthsquarter of
19992000 compared to the corresponding period of 1998.
The increase in net sales for the thirdfirst quarter of 1999 relative to the third
quarter of 1998 is a result of increased sales volume partially offset by lower
average pricing primarily due to a change in the mix of products sold. The
decrease in net sales for the nine months ended September 30, 1999 compared to
the same period of 19981999. This increase was a result of a decrease inboth
improved pricing and sales volume, due to weak
demand early in 1999, exacerbated by a change in the mix of products sold.volume.
The Registrant classifies its sales into two product groups: specialized
printing papers and engineered papers. Netpapers (which includes tobacco papers). Total net
sales of specialized printing papers increased by 2.3%18.4% in the thirdfirst quarter of
2000 compared to the first quarter of 1999 and decreased by 10.6% duringas the first nine monthsimpact of 1999 compared to the same periods of 1998. In the third
quarter of 1999,a 5.6% increase in
net sales volume was higher thancompounded by a 12.1% increase in the third quarter of 1998 as a
result of increased demand for the Registrant's specialized printing papers. The
increased volume was partially offset by decreased average net selling
prices
for such products, as the Registrant sold a mix of products with a lower average
selling price. For the nine months ended September 30, 1999 versus the same
period of
12
13
1998,prices.
The increased sales volume of specialized printing papers were lower as a resultwas largely due to
improved demand in the first quarter of 2000 versus the same
change in product mix, as well as fewer tons sold.
Throughout 1998like period of 1999. The
early part of 1999 was characterized by generally weak demand for such papers
and short order backlogs for the Registrant. During the last three quarters of
1999, demand for the Registrant's specialized printing papers weakened
whileimproved. Such
increased demand for such products in 1999 has steadily strengthened. Demand, on
average, over the first nine months of 1999 has been lower than average demand
over the first nine months of 1998. In addition, during the first quarter of
1999, the Registrant completed the installation of inclined wire technology on
an existing paper machine in Gernsbach, Germany. This installation allowedenabled the Registrant to transfer some ofincrease its production capacity previously dedicatedpricing, as reflected by
various price increases for such papers that became effective in February
through early April 2000.
The Registrant is currently experiencing what it believes to specialized printing papers to more profitable engineered papers.
Asbe a result of improvedtemporary
weakness in demand for its specialized printing papers during 1999,
the Registrant implemented price increases for its envelope papers in both April
and July. The Registrant also increased prices for mostpapers. It has taken a small
amount of market-related downtime at one of its book publishing
papers effective September 1, 1999 and for most of its financial printing papers
effective October 1, 1999. Also, as a result of this improved demand, the
Registrant was able to improve its mix of specialized printing papers sold
during the three and nine months ended September 30, 1999. The Registrant
expects that its product mix will continue to improve in the fourth quarter of
1999 and that thefacilities but believes market
for its specialized printing papers will remainconditions are still strong and perhaps strengthenwill support existing pricing over the next several months.near
term.
Net sales of engineered papers for the three months and nine months ended September 30, 1999March 31, 2000 were
$773,000 higher and $12,824,000slightly lower respectively, than in the corresponding periods1999 period. This decrease was
primarily the result of 1998. Indemand erosion for the third quarter of 1999 versus
the third quarter of 1998, increased sales volume wasRegistrant's tobacco papers,
partially offset by decreased average selling prices as a resultan increase in pricing for such papers. As explained in
"Unusual Item" below, the Registrant has increased pricing for certain of a changeits
tobacco papers, which has resulted in the mixreduced sales volume. The Registrant
expects that net sales of engineeredtobacco papers sold. For the first nine months of 1999, increased saleswill continue to trend downward, with
volume wasdecreases more than offset by decreasedoffsetting improvements in pricing as a result of a change inover the mix of products sold relative to the first nine months of 1998.next
several months.
13
14
Net sales of the Registrant's engineered papers, excluding tobacco papers,
increaseddecreased 2.0% in the three months and nine months ended September 30, 1999 compared
to the like periodsfirst quarter of 1998 by 3.6% and 1.9%, respectively. Sales volume for
such products improved by approximately 10% for each comparative period. Average
net selling prices were lower in both the three months and nine months ended
September 30, 19992000 versus the prior year periods by 5.7% and 7.2%, respectively.
Volume improved in partfirst quarter of 1999 as
a result of a decrease in net average selling prices. Net sales volume for the
paper machine rebuild at the
Registrant's Gernsbach, Germany facility which completed the conversion of the
facility's production capacity from specialized printing papers to engineered
papers. Sales volume also improved ascomparative periods remained flat. The decrease in average net selling prices
was a result of a shift in the successful developmentmix of products sold and marketing of new grades of engineered papers. The Registrant continues to strive
to improve its overall product mix by concentrating its efforts on maximizing
sales of more profitable engineered papers. The installation of inclined wire
technology allows it to produce more profitable engineered papers, including tea
bag, porous plug wrap and overlay papers. In addition, the Registrant's Spring
Grove, Pennsylvania facility continues to pursue aggressively the development
and marketing of new engineered paper products produced with its gravure coater
and expects that this piece of equipment will have an increasingly positive
impact on its future results of operations.
Net sales of tobacco papers declined by 2.5% and 12.6% for the three months and
nine months ended September 30, 1999, respectively, compared to the same periods
of 1998. This reduction in net sales was due primarily to decreases in volume asnot a result of
the continuing erosion of demand for tobacco paper products in the
U.S. as a result of declining consumption of tobacco products.
Exacerbating this situation of declining demand has been a series of other
external factors that have resulted in a reduction of the Registrant's ability
to remain a viable supplier of such papers. As has been widely reported, the
tobacco industry has been and remains under intense political, legal and
financial pressure which has led to an increase in its cost of production and a
need to reduce other of its costs, including those for its raw materials. In
addition, many tobacco companies have consolidated their purchasing functions,
which has
13
14
resulted in fewer buyers with a greater ability to influencedecreased pricing for these
papers. Also, China, which formerly imported much of its required tobacco
papers, has become largely self-sufficient in productive capacity, greatly
reducing the need for imported tobacco papers. To combat all these external
factors, on September 20, 1999, the Registrant announced that it had notified
its major tobacco paper customers that prices will be increased for certain of
its tobacco paper products effective January 1, 2000. Such price increases are
necessary for the Registrant to remain a viable, high-quality supplier to such
customers. It is currently unclear as to what impact the price increases will
have on the Registrant's volume of tobacco paperspecific products. In the event that the
price increases result in a reduction in demand for tobacco paper products, the
Registrant has contingency plans in place which could be implemented, if
necessary, including shutting down capacity and reducing costs.
Other Income - Net
The Registrant's other income - net was $389,000,increased $534,000, or 12.4%15.1%, higher for the three
months ended September 30, 1999 versus the corresponding three months of 1998
and $2,121,000, or 23.0%, higher for the first
nine monthsquarter of 19992000 compared to the first nine monthscorresponding period of 1998.1999. Interest on
investments and other - net was
$804,000 lower for the first nine monthsincreased $918,000 as a result of 1999 compared to the corresponding
period of 1998 because, duringhigher average
cash balances in the first quarter of 1998,2000 versus the first quarter of 1999. In
addition, the Registrant recognized minority interest income on $150,000,000 heldexpense of $343,000 in a defeasance trust which was
ultimately used to repay in full the
principalfirst quarter of and interest on its 5-7/8%
Notes on March 1, 1998.1999. No such trustminority interest incomeexpense was recognized in 1999.
The Registrant's gainthe
first quarter of 2000.
Gain from property dispositions, etc. - net increased by
$672,000 and $2,670,000was $612,000 lower for the first
three months and nine months ended September 30,
1999, respectively,of 2000 versus the like periodsfirst three months of 1998. In1999. During the first
quarter of 1999, the Registrant soldrealized a gain of $976,000 resulting from the
sale of a tract of timberland, located in Delaware, realizing a
gain of $976,000. In the second and third quarters of 1999, the Registrant sold
various other fully-depreciated items, in addition to the rights to standing
timber on select tracts of land. Subsequent to the first quarter of 1999,while no
single sale was material to the Registrant's results of operations. No significant sales of such property occurred
in the first nine monthsquarter of 1998.
From time to time the Registrant divests certain tracts of its timberlands when
it is offered attractive prices. The Registrant does not actively solicit the
sale of its timberlands as it intends to maintain its own sources of raw
materials.2000.
Cost of Products Sold and Gross ProfitMargin
The Registrant's cost of products sold increased by 1.9% for the third quarter
of 1999 compared to the third quarter of 1998 and decreased by 5.4% for$9,590,000, or 6.9%, in the
first ninethree months of 2000 versus the first three months of 1999 versusas a result of
an increased volume of products sold and increased costs of raw materials. The
Registrant sold 5.2% more volume during the first nine months of 1998. While sales
volumes were higher for the third quarter of 1999 versus2000 than the thirdfirst
quarter last
year, they were slightly lowerof 1999. This increased volume was a result of improved demand for
certain of the nine months ended September 30, 1999
versus 1998. The Registrant's products as described above.
Prices for certain of the Registrant's principal raw materials, especially
market pulp and wastepaper, have increased over the past four quarters thereby
increasing its marginal cost of products sold per ton was lower by 4.2%
and 5.4%, respectively, compared to1.6% in the first quarter of
2000 versus the same periods in 1998 despite
difficulties experienced at its Spring Grove pulpmill subsequent to its annual
maintenance shutdown.quarter of 1999.
This decrease was due, in part, to an increase in operational efficiency at many of the Registrant's operating locations. In
addition, as outlined below under the heading, "Early Retirement Program and
Other Cost Control Measures," the Registrant has taken initiatives to remove
costs from its business which have also had a positive impact in reducing itsmarginal cost of products sold per ton.
As described above,was more than offset by an
increase in average net selling prices per ton decreased during the
three months and nine months ended September 30, 1999 compared to the like
periods in 1998. This decrease in net sales per ton more than offset the
decrease in cost of products soldprice per ton, resulting in a decreasean increase in gross
profitmargin per ton of 5.8% and 16.5%, respectively, versus those same periods last
year.
During15.0% in the first nine monthsquarter of 1999,2000 compared to the first
quarter of 1999.
The Registrant expects that market pulp prices have increased
modestly, andwill continue to increase over
the Registrant expects further increases to occur in the fourth
quarterlast three quarters of 1999.2000. Since pricing for many of the Registrant's
products typically follows that 14
15
of market pulp, the Registrant also expects
corresponding improved pricing for such products
subsequent to any market pulp price increases.products.
Selling, General and Administrative Expenses
The Registrant's selling, general and administrative expenses for the third
quarter of 1999 were $1,748,000,decreased
$406,000, or 15.7%3.0%, higher than for the third quarter of
1998 and for the first nine monthsquarter of 2000 versus the comparable period of
1999 were $2,770,000, or 7.3%, higher than
for the like periodas a result of 1998. While the Registrant has taken aggressive steps to
remove costs from its business (see the section entitled "Early Retirement
Program and Other Cost Control Measures" below), increasedreduced legal and professional expenses more than offset such savings in selling, general and
administrative expenses.
Interest on Debt - Net
The Registrant's interest on debt - net decreased by $524,000,$410,000, or 10.0%8.6%, for the
quarterthree months ended September 30, 1999March 31, 2000 versus the samecomparable period of 1998 and decreased by
$2,196,000, or 13.5%, for1999. Due to
changes in certain currency exchange rates, especially the first nine monthsweakening of 1999 as comparedthe
Deutsche Mark
14
15
relative to the first
nine months of 1998. LowerU.S. dollar, the Registrant's average borrowings during the third quarter of 1999
versus the third quarter of 1998 resultedhave decreased,
resulting in lower interest on debt - net for
the quarter. On March 1, 1998, $150,000,000 principal amount of the Registrant's
5-7/8% Notes matured and were retired. As a result, the average borrowings for
the first nine months of 1999 were lower than the like period of 1998, resulting
in the lower interest on debt - net.expense.
Income Tax Provision
The Registrant's income tax provision increased by $1,581,000,$1,334,000, or 80.3%, for the
third quarter of 1999 versus the third quarter of 1998 and decreased by
$4,672,000, or 23.0%28.0%, for the
first nine monthsquarter of 1999 compared to2000 versus the first nine monthsquarter of 1998.1999. The changes wereincrease was
principally due to changesthe increase in net income in 2000 versus 1999.
UNUSUAL ITEM
The Registrant's tobacco papers business has suffered from extremely low pricing
in recent years as a result of industry overcapacity and declining domestic
consumption. To combat such depressed pricing, the Registrant announced in
September 1999 versus 1998.that it had notified its major tobacco paper customers that,
effective January 1, 2000, prices would be increased for certain of its tobacco
paper products. This initiative was required for the Registrant to remain a
viable, high-quality supplier to its tobacco paper customers. As the Registrant
expected, certain of these customers sought other suppliers after this
announcement. As a result, the Registrant announced in December 1999 that it
would begin reducing its tobacco paper manufacturing capacity at its Ecusta mill
during 2000. During the first quarter of 2000, the Registrant finalized its plan
of restructuring and will begin to reduce the workforce at Ecusta shortly. The
workforce reduction is expected to be completed by late 2000 and will ultimately
result in the reduction of approximately 300 salaried and hourly jobs associated
with the Registrant's tobacco paper production capacity. The Registrant accrued
and charged to expense $3,336,000 on a pre-tax basis ($2,120,000 after tax) in
the first quarter of 2000 primarily as a result of the voluntary portion,
specifically 42 salaried employees, of this restructuring.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents increased by $13,462,000decreased $3,316,000 during the first ninethree months of
1999.2000. Net cash provided by operating activities of $57,928,000$8,103,000 was more than
offset by cash used in investing activities of $23,822,000$3,389,000 and financing
activities of $20,407,000.$8,031,000. Significant cash activities during the first ninethree
months of 19992000 included the payment of $22,122,000$7,393,000 of dividends $17,685,000and $3,429,000
for plant, equipment and timberlands and $7,399,000 for the purchase of the remaining 50%
ownership interest in Cascadec.timberlands.
To finance the acquisition of S&H Papier-Holding GmbH, on December 22, 1997, the
Registrant entered into a $200,000,000 multi-currency revolving credit facility
("Revolving Credit Facility") with a syndicate of major lending institutions.
The Revolving Credit Facility enables the Registrant to borrow up to the
equivalent of $200,000,000 in certain currencies in the form of revolving credit
loans with a final maturity date of December 22, 2002, and with interest periods
determined, at the Registrant's option, on a daily or oneone- to six-month basis.
Interest on the revolving credit loans is at variable rates based, at the
Registrant's option, on the Eurocurrency Rate or the Base Rate (lender's prime
rate), plus applicable margins. Margins are based on the higher of the
Registrant's debt ratings as published by Standard & Poor's and Moody's. As of
September 30, 1999,March 31, 2000, the Registrant's outstanding borrowings were DM 284,450,000 ($155,124,000)284,200,000
(approximately $138,500,000) under the Revolving Credit Facility.
In January 1998, the Registrant entered into two interest rate swap agreements,
each having a total notional principal amount of DM 52,600,000 (approximately
$28,700,000$25,700,000 as of September 30, 1999)March 31, 2000). One such agreement was expired on January 6,
2000. Under the agreements,remaining agreement, the Registrant pays
fixed rates of 4.18% and 4.45% for periods of two and three years, respectively,
15
16
and receives a floating rate of
15
16
the six-month DM London Interbank Offered Rate ("LIBOR") and pays a fixed rate
of 4.45% until January 6, 2001. The six-month DM LIBOR applicable for the first
half of 2000 is approximately 3.8%.
In January 1999, the Registrant entered into two additional interest rate swap
agreements, each having a total notional principal amount of DM 50,000,000
(approximately $27,300,000$24,400,000 as of September 30, 1999)March 31, 2000). Under one agreement, which was
effective April 6, 1999, the Registrant receives a floating rate of the
three-month DM LIBOR plus twenty basis points and pays a fixed rate of
3.4075%approximately 3.41% for the term of the agreement. Under the second agreement,
which was effective July 6, 1999, the Registrant receives a floating rate, which
is also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate
of 3.425%3.43% for the term of the agreement.
The Registrant has other various interest rate swap agreements outstanding which
do not have a material impact on the Registrant's consolidated financial
statements. All of the Registrant's interest rate swap agreements convert a
portion of the Registrant's borrowings from a floating rate to a fixed rate
basis. Although the Registrant can pay to terminate any of its swap agreements at any
time, the Registrant intends to hold all of its swap agreements until their
maturities.
On July 22, 1997, the Registrant issued $150,000,000 principal amount of 6-7/8%
Notes due July 15, 2007. Interest on the Notes is payable semiannually on
January 15 and July 15. The 6-7/8% Notes are redeemable, in whole or in part, at the
option of the Registrant at any time at a calculated redemption price plus
accrued and unpaid interest to the date of redemption. The 6-7/8% Notes areredemption, and constitute unsecured
and unsubordinated indebtedness of the Registrant. Interest onThe net proceeds from the
sale of the Notes is payable semiannually on January 15were used primarily to repay certain short-term unsecured debt
and July 15.related interest.
The Registrant expects to meet all its nearnear- and long-term cash needs from a
combination of internally generated funds, cash, cash equivalents marketable
securities, theand its
existing Revolving Credit Facility or other bank lines of credit and, if
prudent, other long-term debt.
Interest Rate Risk
The Registrant uses its Revolving Credit Facility and proceeds from the issuance
of its 6-7/8% Notes to finance a significant portion of its operations. These on-balance sheet financial
instruments, to the extent they provideThe
Revolving Credit Facility provides for variable rates of interest exposeand exposes
the Registrant to interest rate risk resulting from changes in the DM LIBOR. The
Registrant uses off-balance sheet interest rate swap agreements to hedge
partially interest rate exposure associated with on-balance sheet financial
instruments.the Revolving Credit Facility.
All of the Registrant's derivative financial instrument transactions are entered
into for non-trading purposes.
To the extent that the Registrant's financial instruments expose the Registrant
to interest rate risk and market risk, they are presented in the table below.
The table presents principal cash flows and related interest rates by year of
maturity for the Registrant's Revolving Credit Facility and 6-7/8% Notes as of
September 30, 1999.March 31, 2000. For interest rate swap agreements, the table presents notional
amounts and the related reference interest rates by year of maturity. Fair
values included herein have been determined based upon (1) rates currently
available to the Registrant for debt with similar terms and remaining
maturities, and (2) estimates obtained from dealers to settle interest rate swap
agreements.
16
17
Year of Maturity
------------------------------------------------------------------
(dollar amounts in thousands) Total
Due at Fair Value at
1999 2000 2001 2002 2003 2004 Thereafter Maturity 9/30/993/31/00
---- ---- ---- ---- ---- ---------- -------- -------
Debt:
Fixed rate principal $1,559-- $ 1,6211,409 $ 1,6211,449 $ 1,4441,449 $ 1,2661,290 $1,132 $ 151,242150,412 $ 158,753157,141 $ 153,433149,443
Average interest rate 6.84%6.85% 6.85% 6.85% 6.86% 6.86% 6.87%
Variable rate principal-- $ --- $ --- $138,519 $ - $155,124-- $ --- $ --- $ 155,124138,519 $ 155,124138,519
Average interest rate 3.71% 3.53% 3.31% 3.31% - -3.78% 3.82% 3.95% -- -- --
Interest rate swap agreements:
Variable to fixed swaps principal amount-- $ 7773,312 $27,465 $ 34,340 $28,68525,637 $48,740 $ 54,535-- $ --- $ -105,154 $ 118,337 $ 8211,771
Average pay rate 4.38% 3.84%4.34% 3.75% 3.42% 3.42% - --- --
Average receive rate 3.58% 3.40% 3.40% 3.40% - -4.00% 3.95% 4.00% 4.00% -- --
Capital Expenditures
The Registrant invested $17,685,000 inexpended $3,429,000 on capital expendituresprojects for the first ninethree
months of 19992000 compared to $30,290,000$5,914,000 for the first ninethree months of 1998. The
Registrant estimates a total of approximately $29,000,000 will be spent on
capital projects1999.
Capital spending is expected to approximate $40,000,000 during 1999, or 28% less than in 1998.2000.
ENVIRONMENTAL MATTERS
The Registrant is subject to loss contingencies resulting from regulation by
various federal, state, local and foreign governmental authorities with respect
to the environmental impact of air and water emissions and noise from its mills,
as well as itsthe disposal of solid waste generated by its operations. To comply
with environmental laws and regulations, the Registrant has incurred substantial
capital and operating expenditures over thein past several years. During 1999, 1998 1997 and 1996,1997,
the Registrant incurred approximately $15,800,000, $17,700,000 $14,800,000
and $15,200,000,$14,800,000,
respectively, in operating costs related to complying with environmental laws
and regulations. The Registrant anticipates that environmental regulation of the Registrant'sits
operations will continue to become more burdensome and that capital and
operating expenditures will continue, and perhaps increase, in the future. In
addition, the Registrant may incur obligations to remove or mitigate any adverse
effects on the environment resulting from its operations, including the
restoration of natural resources, and liability for personal injury and damage
to property, including natural resources. In particular, the Registrant
continues to negotiate with the United
States Environmental Protection AgencyEPA and the Pennsylvania Department of
Environmental ProtectionDEP regarding the Notice of ViolationNOVs under the federal Clean Air Act and
withstate air pollution control laws and the State of Wisconsin and the United
States regarding natural resources damages and response costs related to the
discharge of polychlorinated biphenyls ("PCBs")PCBs and other hazardous substances in the lower Fox River, on
which the Registrant's Neenah mill is located. The costs associated with such
matters are presently unknown but could be substantial and perhaps exceed the
Registrant's available resources. The Registrant's current assessment, after
consultation with legal counsel, is that such expenditures are
not likelyultimately it should be able to resolve
these environmental matters without a long-term material adverse impact on the
Registrant. In the meantime, however, these matters could, at any particular
time or for any particular period, have a material adverse effect on the
Registrant's consolidated financial condition, or liquidity but could have a material adverse effect on
the Registrant's consolidatedor results of
operations in a given year; however,operations. Moreover, there can be no assurance that the Registrant's reserves
will be adequate to provide for future obligations related to these matters or
that such obligations will not have a long-term material adverse effect on the
Registrant's consolidated financial condition, liquidity or liquidity will not occur at some future time.results of
operations. See Note 6 to the Registrant's condensed consolidated financial
statements.
ENVIRONMENTAL ACHIEVEMENTSSUBSEQUENT EVENT
On April 20, 1999, the Registrant announced that its Spring Grove mill was the
first pulp18, 2000, certain flax inventory held at a facility owned and paper mill in the United States to achieve ISO 14001
certification for its environmental management system and its commitment to
environmental excellence. ISO 14001 requires that an organization have an
environmental policy that includes commitments to prevention of pollution,
compliance with environmental laws and regulations and continual improvements in
its environmental management system. As a part of maintaining its certification,
the mill's
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environmental management system will be audited by a third party on an ongoing,
periodic basis. The Registrant's Gernsbach, Germany facility is also ISO 14001
certified. The Registrant plans to achieve ISO 14001 certification at all of its
other mills by the end of 2002.
Also on April 20, 1999, the Registrant announced its New Century Project. The
New Century Project is a commitmentoperated
by the Registrant, to participate at its
Spring Grove milllocated in the EPA's Advanced Technology Incentive Program under the
Cluster Rules. As a result, the Registrant expects to spend approximately
$32,000,000 over the next six years to eliminate the use of elemental chlorine
in its bleaching process, reduce odor emissions and improve water quality. The
New Century Project demonstrates the Registrant's commitment to minimizing its
impact on natural resources.
EARLY RETIREMENT PROGRAM AND OTHER COST CONTROL MEASURES
During the second quarter of 1998, the Registrant announced a Voluntary Early
Retirement Enhancement Program ("VEREP") for certain of its salaried employees.
The Registrant recognized one-time charges for this VEREP in the third and
fourth quarters of 1998. As of the end of the second quarter of 1999, these
measures were fully implemented. The Registrant estimates that pre-tax cost
savings from the VEREP in the third quarter of 1999 were approximately
$2,100,000. Such quarterly cost savings are permanent in nature and are expected
to continue.
The Registrant's procurement function has undertaken initiatives to reduce costs
for certain purchased products and services. In addition, the Registrant has
reevaluated its target inventory levels for maintenance supplies and raw
materials, renegotiated certain freight contracts and critically reviewed its
needs for routine outside contracting work. The Registrant has achieved
significant cost savingsManitoba, Canada, sustained substantial damage as
a result of these initiatives.a fire. The Registrant believes it is fully insured for such loss,
subject to a modest deductible. The Registrant does not believe that its
operations will be materially adversely affected by this incident.
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YEAR 2000
READINESS DISCLOSURE
The Registrant has achievedRegistrant's efforts to achieve Year 2000 compliance for its mission critical and
non-critical information
technology systems and non-information technology systems.
The Registrant's three-phase approachsystems have been successful
to achieve its internal Year 2000
compliance included an inventory phase, an assessment phase and a modifications
and testing phase.date. The Registrant has completed all phases for all ofwill continue to monitor its information technology and non-information technology systems. Non-information
technology systems, include computer process control equipment as well as
embedded technology, such as micro-controllers, which are critical to the
operation of production equipment and facilities.
The Registrant's information technology systems include both internally and
externally developed business systems, although nearly all have been developed
internally. Accordingly, the Registrant used internal information technology
personnel almost exclusively to inventory, assess, modify and test existing
systems and primarily incurred only normal wage, benefit and related costs for
its normal complement of information technology personnel. The Registrant
expensed approximately $634,000 and $125,000 during 1998 and 1997, respectively,
in such costs supporting its Year 2000 compliance efforts. The Registrant has
incurred approximately $400,000 of expenses in the first nine months of 1999 for
these internal costs and estimates it will incur only very modest additional
expenses during the remainder of the year to complete its Year 2000 efforts.
The Registrant's use of its own information technology personnel to make its
systems Year 2000 compliant delayed some other strategic information systems
development and implementation which would have benefited the Registrant in
various ways and to various extents. The Registrant does not believe that it is
at a competitive disadvantage as a result of these delays and has now resumed
development of such strategic systems.
The Registrant has made minor capital expenditures to replace certain systems or
equipment which were not Year 2000 compliant. The Registrant incurred
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19
approximately $200,000 in capital-related costs during the first nine months of
1999 to achieve Year 2000 compliance of its information and non-information
technology systems. The Registrant does not expect to incur significant
additional capital-related costs during the balance of 1999 related to Year 2000
compliance.
The Registrant relies significantly on select key vendors of raw materials,
energy, telecommunications and other vital services. The Registrant also
generates significant revenues from various key customers. The Registrant has
surveyed key third parties and has assessed all responses received with regard
to their Year 2000 compliance. The Registrant has received and analyzed
responses from all critical vendors. Substantially all responses from
non-critical vendors have been received and analyzed. No significant issues have
been discovered, but the Registrant has not independently verified the accuracy
of the responses received.
While the Registrant does not believe that the risk of noncompliance by such
third parties is significant, a contingency planning team, made up of key
personnel from the Registrant's corporate operations as well as its
operating
locations, has completed a plan to dealinteraction with vendors, suppliers and customers, for potential Year 2000
noncompliance through the possible consequencesremainder of such
third parties' noncompliance. This plan has numerous provisions, including
modestly increasing the Registrant's inventories of certain key raw materials.
Such an inventory build should allow the Registrant to continue operations for a
limited time should certain key vendors be unable to deliver product to the
Registrant. Also, select operating locations will defer normal maintenance
shutdowns that are usually scheduled late in the calendar year. Such maintenance
shutdowns will coincide with year end, which should help to minimize any
potential impact of noncompliance. In addition, the Registrant's disaster
recovery procedures which are normally in place to recover from storms or other
unforeseen events will also be useful in the event of the inability to operate
under ordinary conditions.
Despite such contingency plans, it is reasonably possible that, in the worst
case, some of the Registrant's key vendors or customers could experience
operational interruptions as a result of non-compliance of their own systems,
vendors and/or customers. As a result, the Registrant may be forced to interrupt
the operation of one or more of its mills or be required to increase its costs
or decrease its selling prices to remain operational. In such an event, the
Registrant's business and results of operations could be materially adversely
affected.
19
202000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under the headings "Liquidity" and "Interest Rate Risk" in
Item 2 as well as Note 4 to the Registrant's condensed consolidated financial
statements.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Registrant's Annual Meeting of Shareholders was held on April 26, 2000. All
of the Board of Directors' nominees for election as Directors were elected by
the shareholders. Each was elected to a term expiring in 2003. The votes cast
for election of Directors were as follows:
For Withheld
--- --------
R. E. Chappell 35,961,871 2,712,181
G. H. Glatfelter II 35,830,237 2,843,815
R. L. Smoot 34,795,534 3,878,518
The holders of common stock rejected two Shareholder Proposals as presented, in
accordance with the recommendations of the Registrant's Board of Directors.
Shareholder Proposal 1 called for the declassification of the Registrant's Board
of Directors and was defeated by a majority of the votes cast, with 25,851,520
votes against, 9,707,216 votes for, 2,927,072 broker non-votes and 188,244
abstentions. Shareholder Proposal 2 urged the Registrant's Board of Directors to
arrange for the prompt sale of the Registrant to the highest bidder and was also
rejected by a majority of the votes cast, with 33,208,282 votes against,
2,199,220 votes for, 2,927,071 broker non-votes and 339,479 abstentions.
ITEM 5. OTHER INFORMATION
Cautionary Statement
Any statements set forth herein or otherwise made in writing or orally by the
Registrant with regard to its goals for revenues, cost reductions and return on
capital, expectations as to industry conditions and its
financialthe Registrant's operating
results, demand for or pricing of its products, environmental matters, Year 2000
compliance and other aspects of its business may constitute forward
lookingforward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Although the Registrant makes such statements based on assumptions whichthat it
believes to be reasonable, there can be no assurance that actual results will
not differ materially from the Registrant's expectations. Accordingly, the
Registrant hereby identifies the following important factors, among others, which could
cause its results to differ from any results which might be projected,
forecasted or estimated by the Registrant in any such forward-looking
statements: (i) variations in demand for or pricing of its products, including
variations resulting from the Registrant's previously announced tobacco paper
price increases,increases; (ii) the Registrant's ability to identify, finance and
consummate future alliances or acquisitions; (iii) the Registrant's ability to
develop new, high value-added engineered products; (iv) the Registrant's ability
to identify and implement its
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planned cost reductions; (v) changes in the cost or availability of raw
materials used by the Registrant, in particular market pulp, pulp substitutes
and wastepaper; (iii)(vi) changes in industry paper production capacity, including
the construction of new mills, the closing of mills and incremental changes due
to capital expenditures or productivity increases; (iv)(vii) the gain or loss of
significant customers; (v)(viii) cost and other effects of environmental
compliance, cleanup, damages, remediation or restoration, or personal injury or
property damage related thereto, such as costs associated with the Notices of ViolationNOVs issued
by EPA and DEP and the costs of natural resource restoration or damages related
to the presence of PCBs in the lower Fox River on which the Registrant's Neenah
mill is located; (vi)(ix) significant changes in cigarette consumption, both
domestically and internationally; (vii)(x) enactment of adverse state, federal or
foreign legislation or changes in government policy or regulation; (viii)(xi) adverse
results in litigation; (ix)(xii) fluctuations in currency exchange rates; (x)(xiii)
failure of third parties which are material to the Registrant to becomebe Year 2000
compliant thereby interrupting their and the Registrant's business operations;
and (xi)(xiv) disruptions in production and/or increased costs due to labor
disputes.
ITEM 6. EXHIBITS
AND REPORTS ON FORM 8-K
(a) EXHIBITS
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) Reports on FormREPORTS ON FORM 8-K
None
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SIGNATURE
Pursuant to the requirements 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.
P. H. GLATFELTER COMPANY
Date: November 15, 1999 /s/ R. P. Newcomer
-----------------------------------May 12, 2000
R. P. Newcomer
Executive Vice President
and Chief Financial Officer
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INDEX OF EXHIBITS
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
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