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 March 31, 1997
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 1-3560
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P. H. GLATFELTER COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
228 South Main Street, Spring Grove, Pennsylvania 17362
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 225-4711
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(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 .
--- ---
Shares of Common Stock outstanding at May 12, 1997 were 42,207,026.
1
P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
- - ------------------------------
Financial Statements:
Condensed Consolidated Statements of Income and Retained
Earnings - Three Months Ended March 31, 1997 and 1996
(Unaudited) ............................................... 3
Condensed Consolidated Balance Sheets - March 31, 1997
(Unaudited) and December 31, 1996.......................... 4
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 1997 and 1996 (Unaudited)....... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................ 6-8
Independent Accountants' Report............................... 9
Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10-12
Part II - Other Information......................................... 13
- - ---------------------------
Signature........................................................... 14
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Index of Exhibits
- - -----------------
Exhibit 10 - P.H. Glatfelter Company 1992 Key Employee
Long-Term Incentive Plan, as amended
April 23, 1997 (incorporated by reference
to Exhibit A of Registrant's Proxy Statement
dated March 14, 1997)
Exhibit 11 - Computation of Net Income per Share................. 16
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information......................................... 17
Exhibit 27 - Financial Data Schedule............................. 18
2
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS (in
thousands, except number of shares and per share amounts)
(UNAUDITED)
Three Months Ended
3/31/97 3/31/96
----------- -----------
Net sales $ 142,185 $ 140,335
Other income - net
Energy sales - net 2,215 2,297
Interest on investments and
other - net 1,044 182
Gain (loss) from property
dispositions, etc., - net (275) 229
----------- -----------
Total 145,169 143,043
Costs and expenses
Cost of products sold 112,005 108,814
Selling, general and
administrative expenses 8,897 8,858
Interest on debt - net 2,350 2,347
Preferred stock of
subsidiary - expense 1,200 --
----------- -----------
Total 124,452 120,019
Income before income taxes 20,717 23,024
Income tax provision
Current taxes 4,697 4,563
Deferred taxes 3,197 4,491
----------- -----------
Total 7,894 9,054
Net income 12,823 13,970
Retained earnings at beginning
of period 462,337 431,762
----------- -----------
Total 475,160 445,732
Common stock dividends declared 7,400 7,476
----------- -----------
Retained earnings at end
of period $ 467,760 $ 438,256
=========== ===========
Weighted average number of common
shares outstanding 42,555,461 43,301,550
Net income per common share $ .30 $ .32
=========== ===========
Dividends declared per common
share $ .175 $ .175
=========== ===========
See accompanying notes to condensed consolidated financial statements.
3
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
3/31/97 12/31/96
(unaudited)
----------- ----------
Current assets:
Cash and cash equivalents $ 10,412 $ 31,802
Marketable securities 152,885 811
Accounts receivable - net 58,058 49,703
Inventories:
Raw materials 32,070 36,355
In process and finished products 35,883 33,073
Supplies 32,890 31,803
--------- ---------
Total inventory 100,843 101,231
Prepaid expenses and other current assets 4,582 4,522
--------- ---------
Total current assets 326,780 188,069
Plant, equipment and timberlands - net 454,110 455,190
Other assets 76,608 72,051
--------- ---------
Total assets $ 857,498 $ 715,310
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 150,000 $ --
Accounts payable 30,045 35,249
Dividends payable 7,400 7,444
Federal, state and local taxes 7,346 4,305
Accrued compensation, other expenses
and deferred income taxes 28,436 39,185
--------- ---------
Total current liabilities 223,227 86,183
Long-term debt -- 150,000
Deferred income taxes 102,488 99,139
Other long-term liabilities 50,451 48,958
Preferred stock of subsidiary 149,212 --
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 41,700 41,601
Retained earnings 467,760 462,337
--------- ---------
Total 510,004 504,482
Less cost of common stock in treasury (177,884) (173,452)
--------- ---------
Total shareholders' equity 332,120 331,030
Total liabilities and
shareholders' equity $ 857,498 $ 715,310
========= =========
See accompanying notes to condensed consolidated financial statements.
4
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Three Months Ended
3/31/97 3/31/96
----------- -----------
Cash Flows from Operating Activities:
Net income $ 12,823 $ 13,970
Items included in net income not using (providing) cash:
Depreciation and depletion 9,161 8,538
Gain on disposition of fixed assets 37 12
Expense related to employee stock purchase and
401(k) plans 420 395
Change in assets and liabilities:
Accounts receivable (8,355) (1,976)
Inventories 388 1,989
Prepaid expenses and other assets (4,617) (3,531)
Accounts payable, accrued compensation,
other expenses, deferred income taxes
and other long-term liabilities (11,958) (10,927)
Federal, state and local taxes 3,041 5,450
Deferred income taxes - non-current 3,349 4,491
----------- -----------
Net cash provided by operating activities 4,289 18,411
----------- -----------
Cash Flows from Investing Activities:
Purchase of marketable securities and
long-term investments - net (1,723) --
Proceeds from disposal of fixed assets 18 10
Additions to plant, equipment and timberlands (8,196) (4,662)
Decrease in liabilities related to
fixed asset acquisitions (2,441) (862)
----------- -----------
Net cash used in investing activities (12,342) (5,514)
----------- -----------
Cash Flows from Financing Activities:
Issuance of subsidiary's preferred stock to others 150,100 --
Decrease in preferred stock of subsidiary (888) --
Deposit into trust to defease certain covenants of
current portion of long-term debt (150,351) --
Dividends paid (7,444) (7,597)
Purchases of common stock (5,188) (12,716)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan 434 426
----------- -----------
Net cash used in financing activities (13,337) (19,887)
----------- -----------
Net decrease in cash and cash equivalents (21,390) (6,990)
Cash and Cash Equivalents:
At beginning of period 31,802 18,864
----------- -----------
At end of period $ 10,412 $ 11,874
=========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 4,570 $ 4,920
Income taxes 1,750 3,397
See accompanying notes to condensed consolidated financial statements.
5
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. A reconciliation between the income tax provision computed by applying the
statutory federal income tax rate of 35% to income before income taxes, and
the actual income tax provision follows (in thousands):
Three Months Ended
3/31/97 3/31/96
--------- ---------
Federal income tax provision at
statutory rate $ 7,251 $ 8,058
State income taxes after deducting
federal income tax benefit 640 879
Other 3 117
--------- ---------
Actual income tax provision $ 7,894 $ 9,054
========= =========
The deferred income tax provisions for the three-month periods ended
March 31, 1997 and 1996 result from the following temporary differences
(in thousands):
Three Months Ended
3/31/97 3/31/96
--------- ---------
Depreciation $ 1,990 $ 3,076
Pensions 1,079 1,138
Alternative minimum tax 876 674
Other (748) (397)
--------- ---------
$ 3,197 $ 4,491
========= =========
The provision for deferred income taxes is, in part, estimated based on an
allocation of the appropriate amount relative to the number of months
reported herein and in conformance with existing tax regulations.
2. The number of shares of common stock outstanding decreased by 254,992 in
the first three months of 1997. This decrease was due to the repurchase of
306,500 shares of common stock for the treasury, which more than offset the
delivery of 49,408 treasury shares pursuant to the various employee stock
purchase and 401(k) plans of the Registrant and the delivery of 2,100
treasury shares pursuant to the exercise of stock options under the
Registrant's 1992 Key Employee Long-Term Incentive Plan. At March 31, 1997,
12,077,144 shares of common stock were held in treasury.
3. The Registrant's Board of Directors has authorized the repurchase in the
open market or in privately negotiated transactions of up to 12,000,000
shares of the Registrant's common stock in the aggregate. Repurchased
shares are added to the treasury and are available for future sale. Under
these authorizations, as of March 31, 1997, the Registrant had repurchased
an aggregate of 11,391,803 shares for a total consideration of
$192,857,511.
4. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No.128, "Earnings Per Share" ("SFAS
No.128"). SFAS No.128 specifies the computation, presentation and
disclosure requirements of earnings per share and supersedes Accounting
Principles Board Opinion No.15, "Earnings Per Share". SFAS No.128 requires
a dual presentation of basic and diluted earnings per share on the face of
the Registrant's consolidated statement of income and a reconciliation of
the computation of basic earnings per share to diluted earnings per share.
Basic earnings per share 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
earnings per share includes the effect of potential dilution from the
exercise of outstanding common stock equivalents into common stock using
the treasury stock method.
SFAS No.128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997 and early adoption is not
permitted. When adopted by the Registrant for the fourth quarter and year
ending December 31, 1997, all prior years' earnings per share information
will be required to be restated. Assuming that SFAS No.128 had been
implemented, the pro forma amounts of basic and diluted earnings per share
each would have been $.30 and $.32 for the three-month periods ended March
31, 1997 and 1996, respectively. Under this statement, basic and diluted
earnings per share would not have differed from the net income per common
share disclosed on the Registrant's Condensed Consolidated Statements of
Income and Retained Earnings.
6
5. In February 1997, the Registrant invested approximately $122,500,000 to
acquire approximately 99.9% of the voting Class A common stock of a company
that intends to qualify as a real estate investment trust ("REIT"). The
REIT also issued $150,000,000 of step-down preferred stock, with an initial
dividend of approximately 13.9%, to other investors. The REIT's dividend
payments include an amortization component of the preferred stock; the
effective yield on the preferred stock is approximately 8.1%. The REIT has
been consolidated in the Registrant's financial statements and a line item
entitled "preferred stock of subsidiary" has been reported on the Condensed
Consolidated Balance Sheets. On the Registrant's Condensed Consolidated
Statements of Income and Retained Earnings, a "preferred stock of
subsidiary-expense" has been reported which represents the effective yield
of the preferred stock.
Subsequent to the establishment of the REIT in February, the Registrant
borrowed $270,000,000 from the REIT under a note to be secured by certain
real estate assets of the Registrant. Using the proceeds of the note and
other available cash, the Registrant immediately repaid, with interest, an
amount initially borrowed to purchase the common stock of the REIT. The
Registrant also deposited $154,757,000 into a trust to defease certain
covenants under the Registrant's indenture dated as of January 15, 1993
under which the Registrant's $150,000,000 principal amount of 5-7/8% Notes
due March 1, 1998 are outstanding. On March 1, 1997 $4,406,000 of the
amount in trust was used to pay interest due on the 5 7/8% Notes. The
balance of the amount in trust will be applied solely to pay the principal
and remaining interest due on the 5 7/8% Notes. The amount deposited in the
trust is reported on the Registrant's Condensed Consolidated Balance Sheets
as a component of "marketable securities", and will remain until March 1,
1998 when the Registrant's $150,000,000 principal amount of 5-7/8% Notes
become due.
Subsequent to the above transactions, the Internal Revenue Service
announced that it expects to issue regulations that would cause the
Registrant to lose certain tax benefits of the transaction, but would not
otherwise materially adversely affect the Registrant.
6. 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 its disposal of solid waste generated by its
operations. In order to comply with environmental laws and regulations, the
Registrant has incurred substantial capital and operating expenditures over
the past several years. The Registrant anticipates that environmental
regulation of the Registrant's 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 other paper companies located in the
United States are generally subject to the same environmental regulations,
the Registrant does not believe that its competitive position in the United
States paper industry will be materially adversely affected by its capital
expenditures for, or operating costs of, pollution abatement facilities for
its present mills or the limitations which environmental compliance may
place on its operations.
The amount and timing of future expenditures for environmental compliance,
clean-up, remediation and personal injury and property damage liability
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. Among other environmental matters, the Registrant
continues to negotiate with the State of Wisconsin and has resumed
negotiations with the United States Departments of Interior and Justice and
the United States Fish and Wildlife Service regarding natural resources
restoration and damages related to the discharge of polychlorinated
biphenyls ("PCBs") and other hazardous substances into the lower Fox River,
on which the Registrant's Neenah mill is located. The cost of such
restoration and damages is presently unknown but could be substantial. The
Registrant continues to evaluate its exposure and the level of its
reserves. Management's current assessment, after consultation with legal
counsel, is that such expenditures are not likely to have a material
adverse effect on the Registrant's financial condition or liquidity, but
could have a material adverse effect on the Registrant's results from
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 financial condition or liquidity will not occur at some
future time.
7. In the opinion of the Registrant, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which comprise
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
7
on Form 10-K for the year ended December 31, 1996. The accompanying
unaudited condensed consolidated financial statements have been reviewed by
the Registrant's independent public accountants, Deloitte & Touche LLP, in
accordance with the established professional standards and procedures for
such limited review. No additional adjustments or disclosures were required
as a result of this review.
8
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 March 31, 1997, and the related
condensed consolidated statements of income and retained earnings and of cash
flows for the three-month periods ended March 31, 1997 and 1996. These financial
statements are the responsibility of the Company's management.
We conducted our review 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 review, 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, 1996, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 24, 1997, 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, 1996 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
April 14, 1997
9
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Any statements set forth below or otherwise made in writing or orally by the
Registrant with regard to its expectations as to industry conditions and its
financial results, demand for or pricing of its products and other aspects of
its business may constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Registrant makes
such statements based on assumptions which 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, (ii) changes in the cost or availability of raw
materials used by the Registrant, in particular market pulp, pulp substitutes
and wastepaper; (iii) 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) the gain or loss of
significant customers; (v) cost and other effects of environmental compliance,
cleanup, damages, remediation or restoration, or personal injury or property
damage related thereto, such as the cost 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) significant changes in cigarette
consumption, both domestically and internationally; (vii) enactment of adverse
state or federal legislation or changes in government policy or regulation;
(viii) adverse results in litigation; and (ix) disruptions in production and/or
increased costs due to labor disputes.
RESULTS OF OPERATIONS:
- - ---------------------
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income and Retained Earnings is shown
below.
Comparison of Three Months Ended
March 31, 1997 and March 31, 1996
---------------------------------
Increase (Decrease)
(dollars in thousands)
Net sales $ 1,850 1.3 %
Other income - net 276 10.2 %
Cost of products sold 3,191 2.9 %
Selling, general and
administrative expenses 39 0.4 %
Interest on debt 3 0.1 %
Preferred stock of subsidiary-expense 1,200 N/C
Income tax provision (1,160) -12.8 %
Net income (1,147) - 8.2 %
N/C - not calculable
Net Sales
- - ---------
The Registrant classifies product sales into two groups: 1) printing papers; and
2) tobacco and other specialty papers. Overall net sales increased $1,850,000,
or 1.3%, for the first three months of 1997 compared to the corresponding period
of 1996.
Printing paper net sales decreased $2,352,000, or 2.6%, for the first quarter of
1997 compared to the first quarter of 1996. Although printing paper net sales
tons increased significantly, this increase was more than offset by the effect
of lower average net selling prices for the first three months of 1997 versus
the corresponding period of 1996. The average net selling price of printing
papers was 17.9% lower in the first quarter of 1997 compared to the first
quarter of 1996.
Increased demand and improved operating productivity, as well as improved
weather conditions, were the primary factors resulting in higher printing paper
net sales volume during the first three months of 1997. During this period, no
unscheduled downtime was taken at any of the Registrant's three paper mills. In
contrast, during the first three months of 1996 approximately seven days of
unplanned downtime were taken at the Registrant's Spring Grove, Pennsylvania
mill.
Although demand for the Registrant's printing papers has improved, overall
industry demand remains sluggish. Customer and producer inventory levels,
although lower than the first quarter of 1996, remain high. As a result, average
net selling prices have decreased in the first quarter of 1997 compared to the
same period of 1996. As these inventories are reduced to normal levels, demand
for printing paper on an industry-wide basis should improve and result in an
environment more conducive to price increases.
10
Modest price increases have recently been announced for certain commodity grades
of uncoated-free sheet paper, including envelope papers. The price increase for
envelope papers, if it holds, will have a positive impact on the Registrant's
results of operations. The announced price increase on other commodity grades
will not affect many of the Registrant's products but, if it holds, would be a
positive signal that the market may ultimately support higher printing paper
prices. There has also been a modest price increase announced for market pulp.
Higher market pulp prices typically provide an environment conducive to printing
paper price increases. As a result of these events, the Registrant is hopeful
that some price relief for printing papers will occur later this year.
Net sales of tobacco and other specialty papers were $4,202,000, or 8.2%, higher
in the first three months of 1997 compared to the first three months of 1996.
This improvement was the result of increased net sales volume of 9.6%, which was
partially offset by a modest 1.3% decline in average net selling prices during
the first quarter of 1997 versus the first quarter of 1996. Despite a decline in
domestic tobacco paper net sales of 16.4%, total tobacco paper net sales
increased as export tobacco paper sales volume was particularly strong during
the first three months of 1997 compared to the corresponding period in 1996.
Export tobacco paper net sales volume improved 64.1% versus the comparable
period in 1996. The Registrant achieved substantial increases in export tobacco
paper sales volume with the large international tobacco companies as well as
with other large markets such as China.
Although the Registrant expects the trend toward lower domestic tobacco
consumption to continue, the favorable effects of continued growth in tobacco
consumption overseas should more than negate the impact of lower shipments
domestically. The Registrant continues to devote resources to increase net sales
volume in other specialty papers. The installation of a gravure coater, expected
to commence operation in December 1997 at the Registrant's Spring Grove mill, is
a key capital project which will enable the Registrant to manufacture new
products to enhance its other specialty papers business.
Other Income - Net
- - ------------------
The Registrant's other income - net, including interest income, increased
$276,000, or 10.2%, for the first three months of 1997 compared to the
corresponding period of 1996. Interest income was $862,000 higher in the first
quarter of 1997 versus the first quarter of 1996. In February 1997, the net
proceeds from the issuance by a subsidiary of the Registrant of $150,000,000 of
step-down preferred stock were invested in interest-bearing marketable
securities. The additional interest earned on these securities resulted in a
significant increase in the Registrant's interest income. This increase in
interest income was partially offset by lower income from energy sales and
higher miscellaneous other expenses.
Cost of Products Sold
- - ---------------------
The Registrant's gross margin decreased $1,341,000 during the first three months
of 1997 compared to the same period of 1996. Gross margin as a percentage of net
sales declined from 22.5% for the first quarter of 1996 to 21.2% for the first
quarter of 1997. This decrease was the result of lower average net selling
prices, which more than offset a decrease in the cost of products sold per ton.
Fiber costs were lower, particularly for purchased pulp and wastepaper. The cost
of products sold per ton was also lower as the Registrant's fixed costs for its
manufacturing process were absorbed over more tons of products manufactured
during the first three months of 1997 versus the comparable period of 1996.
Selling, General and Administrative Expenses
- - --------------------------------------------
The Registrant's selling, general and administrative expenses for the first
quarter of 1997 were $39,000, or 0.4%, higher than for the comparable period of
1996.
Interest on Debt
- - ----------------
The Registrant's interest on debt for the first three months of 1997 was nearly
the same as for the first three months of 1996. The need for short-term bank
borrowings was negligible during both periods.
Preferred Stock of Subsidiary-Expense
- - -------------------------------------
During the first quarter of 1997, the Registrant's preferred stock of
subsidiary-expense was $1,200,000. This expense represents the effective yield
on the $150,000,000 step-down preferred stock issued in February 1997 by a
subsidiary of the Registrant, as discussed in Note 5 to the Registrant's
condensed consolidated financial statements.
Income Tax Provision
- - --------------------
The Registrant's provision for income taxes decreased by $1,160,000, or 12.8%,
for the first quarter of 1997 compared to the same period in 1996, primarily due
to lower taxable income. The Registrant's provision for income taxes was also
lower due to a modest decrease in its effective tax rate.
11
The Internal Revenue Service announced that it expects to issue regulations that
would cause the Registrant to lose certain tax benefits of the REIT transaction
described in Note 5 to the Registrant's condensed consolidated financial
statements. The Registrant's tax provision includes a reserve for the loss of
such potential tax benefits. The ultimate outcome of this matter is not
determinable at this time and it is uncertain if the tax benefits related to
this transaction will be realized.
FINANCIAL CONDITION:
- - -------------------
Liquidity
- - ---------
The Registrant's cash and cash equivalents decreased by $21,390,000 during the
first three months of 1997. Significant uses of cash in the first three months
of 1997 were $5,188,000 for purchases of common stock for the treasury,
$7,444,000 for the payment of dividends, and $10,637,000 for the funding of
capital projects.
Subsequent to the REIT transaction completed in February 1997, the Registrant
deposited $154,757,000 into a trust to defease certain covenants under the
Registrant's indenture dated as of January 15, 1993 under which the Registrant's
$150,000,000 principal amount of 5-7/8% Notes due March 1, 1998 are outstanding.
On March 1, 1997 $4,406,000 of the amount in trust was used to pay interest due
on the 5 7/8% Notes. The balance of the amount in trust will be applied solely
to pay the principal and remaining interest due on the 5 7/8% Notes.
The Registrant expects to meet all of its near and long-term cash needs from a
combination of internally generated funds, cash, cash equivalents, marketable
securities and existing bank lines of credit. Should the Registrant not realize
the tax benefits contemplated by the REIT transaction, the transaction will be
undone and additional long-term borrowings may be necessary.
Capital Resources
- - -----------------
The Registrant's $15,000,000 capital project to install a gravure coater at its
Spring Grove mill continues to progress on schedule. This project is expected to
be completed in December 1997. Through March 1997 a total of $2,655,000 had been
spent on this project, including $2,131,000 of expenditures during the current
year. A project to install a precipitated calcium carbonate plant at the
Registrant's Spring Grove facility also continues and is scheduled for
completion during the first quarter of 1998. Through March 1997 the Registrant
had spent a total of $996,000 of the $9,500,000 committed to this project. Of
this amount, $193,000 occurred during the first quarter of 1997.
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 its disposal of solid waste generated by its operations. In order to
comply with environmental laws and regulations, the Registrant has incurred
substantial capital and operating expenditures over the past several years. The
Registrant anticipates that environmental regulation of the Registrant's
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 State of Wisconsin and has resumed negotiations
with the United States Departments of Interior and Justice and the United States
Fish and Wildlife Service regarding natural resources restoration and damages
related to the discharge of polychlorinated biphenyls ("PCBs") and other
hazardous substances into the lower Fox River, on which the Registrant's Neenah
mill is located. The cost of such restoration and damages is presently unknown
but could be substantial. The Registrant's current assessment, after
consultation with legal counsel, is that such expenditures are not likely to
have a material adverse effect on its financial condition or liquidity, but
could have a material adverse effect on the Registrant's results from operations
in a given year; however, there can be no assurance that the Registrant's
reserves will be adequate or that a material adverse effect on the Registrant's
financial condition or liquidity will not occur at some future time.
12
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 23, 1997. All
of management's nominees for Directors were elected by the shareholders. The
votes cast for election of Directors were as follows (cumulative voting
applied):
For Withheld
--- --------
Elected for a term expiring in 1999:
R. W. Kelso 37,012,236 558,703
Elected for a term expiring in 2000:
R. E. Chappell 36,724,895 846,044
G. H. Glatfelter II 37,023,820 547,119
T. C. Norris 37,021,544 549,395
R. L. Smoot 36,810,782 760,157
At the meeting the holders of common stock also approved amendments to the
Registrant's 1992 Key Employee Long-Term Incentive Plan. These amendments
increased the maximum aggregate number of shares of common stock which may be
issued under the plan, limited the maximum number of shares of common stock with
respect to which options may be granted under the plan to any individual during
any calendar year, extended the termination date for the plan by five years,
permitted directors to be granted stock options and restricted stock awards
under the plan, granted the Compensation Committee of the Board of Directors
greater authority to accelerate the exercisability or vesting of awards and
extend the post-termination exercise periods for options granted under the plan,
specified the types of performance goals that the Compensation Committee may use
when granting performance-based awards, limited the number of performance shares
and the dollar amount of any performance units awarded to any individual during
any calendar year, and required that the Registrant seek shareholder approval of
future amendments to the plan only if such approval is necessary to comply with
applicable rules and regulations. The holders of common stock voted 29,829,892
shares in favor of approval to the amendments, 2,306,730 shares against
approval, and abstained from voting 839,742 shares; 4,594,575 shares were broker
non-votes.
In addition, the common shareholders approved the Registrant's Management
Incentive Plan. This plan essentially establishes incentive bonus opportunities
designed to encourage greater efforts on the part of key salaried employees to
increase the Registrant's profits. The holders of 34,312,914 shares of common
stock voted in favor of approval to the Management Incentive Plan, the holders
of 556,728 shares voted against approval, the holders of 1,139,413 shares
abstained from voting, and the holders of 1,561,884 shares were broker
non-votes.
No other matters were voted upon at the meeting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Number Description of Documents
------ ------------------------
10 P.H. Glatfelter Company 1992 Key Employee
Long-Term Incentive Plan, as amended
April 23, 1997 (incorporated by reference
to Exhibit A of Registrant's Proxy Statement
dated March 14, 1997).
11 Computation of Net Income per Share
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) The Registrant filed the following reports on
Form 8-K during the quarter ended March 31, 1997:
Date of Report Item Reported
-------------- -------------
January 27, 1997 5
January 30, 1997 5
13
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: May 14, 1997 _____________________________
R. P. Newcomer
Senior Vice President
and Chief Financial Officer
14
INDEX OF EXHIBITS
-----------------
Number Description of Documents
------ ------------------------
10 P.H. Glatfelter Company 1992 Key Employee
Long-Term Incentive Plan, as amended
April 23, 1997 (incorporated by reference
to Exhibit A of Registrant's Proxy Statement
dated March 14, 1997).
11 Computation of Net Income per Share
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
15