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, 1997
------------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______________________to ________________________
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
- - --------------------------------------------------------------------------------
(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
--------------
(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 November 7, 1997 were 42,196,859.
1
P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
------------------------------
Financial Statements:
Condensed Consolidated Statements of Income and Retained
Earnings - Three Months and Nine Months Ended
September 30, 1997 and 1996 (Unaudited)................ 3
Condensed Consolidated Balance Sheets - September 30, 1997
(Unaudited) and December 31, 1996...................... 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1997 and 1996 (Unaudited)... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................ 6-9
Independent Accountants' Report........................... 10
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 11-15
Part II - Other Information.................................... 16
---------------------------
Signature....................................................... 17
---------
Index of Exhibits............................................... 18
-----------------
4.1 Indenture, dated as of July 22, 1997, between
P.H. Glatfelter Company and The Bank of New York,
relating to the 6-7/8% Notes due 2007 (incorporated
by reference to Exhibit 4.1 to the Registrant's Form S-4
Registration Statement, Reg. No. 333-36395).
4.2 Registration Rights Agreement, dated as of July 22, 1997,
among P.H. Glatfelter Company, Bear, Stearns & Co. Inc.
and BT Securities Corporation, relating to the 6-7/8%
Notes due 2007 (incorporated by reference to Exhibit 4.3
to the Registrant's Form S-4 Registration Statement,
Reg. No. 333-36395).
Exhibit 11 - Computation of Net Income Per Share............. 19
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information..................................... 20
Exhibit 27 - Financial Data Schedule......................... 21
2
PART I - FINANCIAL INFORMATION
------------------------------
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 Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
----------- ----------- ----------- ------------
Net sales $ 139,192 $ 139,748 $ 423,312 $ 424,770
Other income - net
Energy sales - net 2,361 2,156 7,076 6,863
Interest on investments and
other - net 1,951 466 5,031 1,042
Gain (loss) from property
dispositions, etc., - net 225 (50) 2,128 245
----------- ----------- ----------- ------------
Total 143,729 142,320 437,547 432,920
Costs and expenses
Cost of products sold 118,120 109,311 344,960 327,041
Selling, general and
administrative expenses 8,576 8,960 27,453 27,588
Interest on debt - net 4,850 2,313 9,549 6,957
Preferred Stock of
subsidiary-expense 60 - 4,235 -
----------- ----------- ----------- ------------
Total 131,606 120,584 386,197 361,586
Income before income taxes 12,123 21,736 51,350 71,334
Income tax provision (credit)
Current taxes 3,494 4,640 19,929 14,916
Deferred taxes 1,206 3,859 (47) 12,935
----------- ----------- ----------- ------------
Total 4,700 8,499 19,882 27,851
Net income 7,423 13,237 31,468 43,483
Retained earnings at beginning
of period 471,608 447,069 462,337 431,762
----------- ----------- ----------- ------------
Total 479,031 460,306 493,805 475,245
Common stock dividends declared 7,383 7,441 22,157 22,380
----------- ----------- ----------- ------------
Retained earnings at end
of period $ 471,648 $ 452,865 $ 471,648 $ 452,865
=========== =========== =========== ============
Weighted average number of common
and common equivalent
shares outstanding 42,422,247 42,788,792 42,438,052 42,977,978
Net income per common sha $ 0.17 $ 0.31 $ 0.74 $ 1.01
=========== =========== =========== ============
Dividends declared per common
share $ 0.175 $ 0.175 $ 0.525 $ 0.525
=========== =========== =========== ============
See accompanying notes to condensed consolidated financial statements.
3
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
9/30/97 12/31/96
(unaudited)
----------- ---------
Current assets:
Cash and cash equivalents $ 11,812 $ 31,802
Marketable securities 153,048 811
Accounts receivable - net 57,042 49,703
Inventories:
Raw materials 30,314 36,355
In process and finished products 32,578 33,073
Supplies 32,709 31,803
----------- ---------
Total inventory 95,601 101,231
Prepaid expenses and other current assets 2,862 4,522
----------- ---------
Total current assets 320,365 188,069
Plant, equipment and timberlands - net 468,609 455,190
Other assets 82,481 72,051
----------- ---------
Total assets $ 871,455 $ 715,310
=========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 150,000 $ -
Accounts payable 33,191 35,249
Dividends payable 7,383 7,444
Federal, state and local taxes 7,173 4,305
Accrued compensation, other expenses
and deferred income taxes 34,966 39,185
----------- ---------
Total current liabilities 232,713 86,183
Long-term debt 150,000 150,000
Deferred income taxes 99,546 99,139
Other long-term liabilities 54,656 48,958
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,444 41,601
Retained earnings 471,648 462,337
----------- ---------
Total 514,636 504,482
Less cost of common stock in treasury (180,096) (173,452)
----------- ---------
Total shareholders' equity 334,540 331,030
Total liabilities and
shareholders' equity $ 871,455 $ 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)
Nine Months Ended
9/30/97 9/30/96
----------- ----------
Cash Flows from Operating Activities:
Net income $ 31,468 $ 43,483
Items included in net income not using (providing) cash:
Depreciation and depletion 27,206 25,600
Gain on disposition of fixed assets (2,161) (45)
Expense related to employee stock purchase and
401(k) plans 996 954
Change in assets and liabilities:
Accounts receivable (7,339) (1,161)
Inventories 5,630 (4,471)
Prepaid expenses and other assets (11,033) (13,954)
Accounts payable, accrued compensation,
other expenses, deferred income taxes
and other long-term liabilities 2,221 1,381
Federal, state and local taxes 2,868 4,088
Deferred income taxes - non-current 407 13,480
--------- --------
Net cash provided by operating activities 50,263 69,355
--------- --------
Cash Flows from Investing Activities:
Sale of marketable securities and
long-term investments - net 377 1,163
Proceeds from disposal of fixed assets 3,682 93
Additions to plant, equipment and timberlands (42,262) (25,397)
Decrease in liabilities related to
fixed asset acquisitions (2,272) (957)
--------- --------
Net cash used in investing activities (40,475) (25,098)
--------- --------
Cash Flows from Financing Activities:
Proceeds of long-term debt issuance 150,000 -
Deposit into trust to defease certain covenants
related to indebtedness (150,351) -
Dividends paid (22,218) (22,536)
Purchases of common stock (9,857) (18,220)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan 2,648 1,168
--------- --------
Net cash used in financing activities (29,778) (39,588)
--------- --------
Net increase (decrease) in cash and cash equivalents (19,990) 4,669
Cash and Cash Equivalents:
At beginning of period 31,802 18,864
--------- --------
At end of period $ 11,812 $ 23,533
========= ========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 9,929 $ 9,665
Income taxes 17,481 15,278
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 Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
--------- --------- --------- ---------
Federal income tax provision at
statutory rate $4,243 $ 7,608 $ 17,973 $ 24,967
State income taxes after deducting
federal income tax benefit 182 808 1,334 2,688
Other 275 83 575 196
------ -------- -------- --------
Actual income tax provision $4,700 $ 8,499 $ 19,882 $ 27,851
====== ======== ======== ========
The deferred income tax provisions for the nine-month periods ended
September 30, 1997 and 1996 result from the following temporary differences
(in thousands):
Nine Months Ended
9/30/97 9/30/96
--------- ---------
Depreciation $ (1,469) $ 8,950
Pensions 3,308 3,673
Alternative minimum tax 1,168 2,087
Other (3,054) (1,775)
-------- ---------
$ (47) $ 12,935
======== =========
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. The
deferred income tax provisions reflect the impact of any audits by federal
and state authorities.
2. The number of shares of common stock outstanding decreased by 358,814 in
the first nine months of 1997. This decrease was due to the repurchase of
577,200 shares of common stock for the treasury, which more than offset the
delivery of 116,516 treasury shares pursuant to the various employee stock
purchase and 401(k) plans of the Registrant, the delivery of 88,520
treasury shares pursuant to the exercise of stock options under the
Registrant's 1992 Key Employee Long-Term Incentive Plan and the delivery of
13,350 treasury shares pursuant to stock awards granted under the
Registrant's 1988 Restricted Common Stock Award Plan. At September 30,
1997, 12,180,966 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 for the purpose of
enhancing shareholder value. Repurchased shares are added to the treasury
and are available for future sale. Under this authorization, as of
September 30, 1997, the Registrant had repurchased an aggregate of
11,662,503 shares for a total consideration of $197,526,884.
4. Pursuant to the Registrant's 1992 Key Employee Long-Term Incentive Plan
(the "Plan"), on July 1, 1997 the Registrant granted to certain key
employees non-qualified stock options to purchase an aggregate of 147,000
shares of common stock. Of this amount, stock options for 128,000 shares
of common stock, subject to certain conditions, are exercisable for 25% of
such shares beginning on January 1, 1998 and for an additional 25% of such
shares beginning on January 1 of each of the next three years. Subject to
certain conditions, the remaining 19,000 stock options are exercisable
beginning on January 1, 1998. All of the stock options, which expire on
June 30, 2007, were granted at an exercise price of $18.78125 per share,
representing the fair market value of the Registrant's common stock on July
1, 1997.
5. In February 1997, the Financial Accounting Standards Board ("FASB") 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
6
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. Pro forma amounts of basic and diluted
earnings per share under SFAS No. 128 are summarized as follows:
Three Months Ended Nine Months Ended
9/30/97 9/30/96 9/30/97 9/30/96
--------- --------- --------- ---------
Basic EPS $.18 $ .31 $ .75 $ 1.01
Diluted EPS $.17 $ .31 $ .74 $ 1.01
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim
and annual periods beginning after December 15, 1997, although earlier
adoption is permitted. Reclassification of financial information for
earlier periods presented for comparative purposes is required under SFAS
No. 130. As this statement only requires additional disclosures in the
Registrant's consolidated financial statements, its adoption will not have
any impact on the Registrant's consolidated financial position or results
of operations. The Registrant expects to adopt SFAS No. 130 effective
January 1, 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). This statement,
which establishes standards for the reporting of information about
operating segments and requires the reporting of selected information about
operating segments in interim financial statements, is effective for fiscal
years beginning after December 15, 1997. Reclassification of segment
information for earlier periods presented for comparative purposes is
required under SFAS No. 131. The Registrant is evaluating whether the
adoption of this statement will result in any changes to its presentation
of financial data. The Registrant expects to adopt SFAS No. 131 effective
January 1, 1998.
6. In February, 1997, the Registrant formed GWS Valuch, Inc. ("GWS Valuch"), a
corporation organized under the laws of the State of Delaware, with the
intention that GWS Valuch would qualify as a real estate investment trust.
The Registrant invested approximately $122,500,000 to acquire approximately
99.9% of the voting Class A common stock of GWS Valuch. GWS Valuch also
issued shares of step-down preferred stock (the "Step-Down Preferred
Stock"), having a liquidation preference of $150,000,000 and an initial
dividend of approximately 13.9%, to other investors. This dividend
included an amortization component of the Step-Down Preferred Stock,
resulting in an effective yield of approximately 8.1%. GWS Valuch has been
consolidated in the Registrant's financial statements. On the Registrant's
Condensed Consolidated Statements of Income and Retained Earnings a
"Preferred stock of subsidiary-expense" has been reported which is based
upon the effective yield of the Step-Down Preferred Stock.
Immediately following the establishment and capitalization of GWS Valuch,
the Registrant borrowed $270,000,000 from GWS Valuch 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 Class A
common stock of GWS Valuch. The Registrant also deposited $154,757,000,
including $4,406,000 to pay interest due on March 1, 1997, 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 is outstanding. As of March 1, 1998, the
amount initially deposited into the trust and interest earned thereon will
have been used to pay the principal of, 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 classified as such until March 1,
1998 when the Registrant's $150,000,000 principal amount of 5-7/8% Notes
becomes due.
Subsequent to the above transactions, the Internal Revenue Service
announced that it intended to issue regulations with retroactive effect on
transactions using self-amortizing investments in conduit financing
entities. As a result of this announcement, the likelihood that the
Registrant could lose certain tax benefits arising from GWS Valuch's Step-
Down Preferred Stock financing increased substantially. Accordingly, on
7
July 2, 1997, using the proceeds of a short-term unsecured loan in the
principal amount of $144,675,000, the Registrant purchased approximately
145,000 shares of Class A common stock of GWS Valuch. The funds received
were used by GWS Valuch to redeem all 150,000 outstanding shares of the
Step-Down Preferred Stock.
7. On July 22, 1997 the Registrant issued $150,000,000 principal amount of 6-
7/8% Notes due July 15, 2007. Interest on the 6-7/8% Notes is payable
semiannually on January 15 and July 15 of each year. 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, and constitute unsecured and unsubordinated
indebtedness of the Registrant. The net proceeds from the sale of the 6-
7/8% Notes were used to repay the $144,675,000 principal amount of the
short-term unsecured loan described in Note 6 and approximately $501,000 of
related interest. The remaining balance of the net proceeds was applied to
general corporate purposes.
8. 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 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 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, natural resource damage 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 or restoration actions which may be required and the number and
financial resources of any other responsible parties.
Among other environmental matters, the Registrant and six other companies
which operate or formerly operated facilities on the lower Fox River in
Wisconsin continue to negotiate with the State of Wisconsin, the United
States Departments of the Interior and Justice and the United States Fish
and Wildlife Service regarding claims for natural resources restoration and
damages under the federal Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") and other laws associated with
the alleged discharge of polychlorinated biphenyls ("PCBs") into the lower
Fox River on which the Registrant's Neenah mill is located. Effective as
of March 1, 1997, the Registrant and six other companies entered into an
agreement with the United States which provided that, between March 1 and
May 29, 1997, all limitations periods were tolled and the parties would
forbear from litigation; the parties have entered into an agreement to
extend the time of the tolling and forbearance agreement to December 2,
1997.
On June 17, 1997, the United States Environmental Protection Agency
("EPA"), Region 5, announced its intention to begin the process to list the
lower Fox River on the National Priorities List ("NPL") maintained by EPA
under CERCLA. Further, by letter dated July 3, 1997, EPA provided "special
notice" under CERCLA and invited the Registrant and the six other companies
to begin discussions concerning terms under which the companies would agree
to perform a remedial investigation and feasibility study ("RI/FS") for the
site and to further extend the tolling and forbearance agreement. In the
event the companies and EPA are unable to reach agreement on terms under
which the companies would perform the RI/FS, EPA has stated it may conduct
an RI/FS and seek to recover the costs incurred from the companies.
On July 11, 1997, the Wisconsin Department of Natural Resources, the United
States Department of the Interior, the Menominee Indian Tribe of Wisconsin,
the Oneida Tribe of Indians of Wisconsin, the National Oceanic and
Atmospheric Administration and EPA 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
8
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, all of which are
identified as potentially responsible parties.
The Registrant, with advice from its environmental consultants, continues
to believe that an aggressive effort, as currently proposed by the
governmental authorities, to remove PCB contaminated sediments, many of
which are buried under cleaner material or are otherwise unlikely to move,
would be environmentally detrimental and therefore inappropriate.
Furthermore, the Registrant's share of the cost of such removal, depending
on the amount of sediments to be removed, could exceed its available
resources. The Registrant believes it will be able to persuade the parties
to the MOA or a court against removal of a substantial amount of PCB
contaminated sediments. There can be no assurance, however, that the
Registrant will be successful in arguing that removal of PCB contaminated
sediments is inappropriate, that it would prevail in any resulting
litigation or that its share of the cost of any such removal would not have
a material adverse effect on the Registrant's financial condition,
liquidity and results of operation.
The Registrant's current assessment, after consultation with legal counsel,
is that future expenditures for environmental matters 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 of 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.
9. 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 on
Form 10-K and Form 10-K/A for the year ended December 31, 1996. Certain
reclassifications have been made of previously reported amounts in order to
conform with classifications used in the current year.
9
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, 1997, and the related
condensed consolidated statements of income and retained earnings for the three-
month and nine-month periods ended September 30, 1997 and 1996 and of cash flows
for the nine months ended September 30, 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
October 15, 1997
10
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
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.
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 Nine Months Ended
Sept. 30, 1997 and Sept. 30, 1997 and
Sept. 30, 1996 Sept. 30, 1996
----------------------------------------------
Increase(Decrease)
(dollars in thousands)
Net sales $ (556) (0.4)% $ (1,458) (0.3)%
Other income - net 1,965 76.4 % 6,085 74.7 %
Cost of products sold 8,809 8.1 % 17,919 5.5 %
Selling, general and
administrative expenses (384) (4.3)% (135) (0.5)%
Interest on debt 2,537 109.7 % 2,592 37.3 %
Preferred Stock of
subsidiary-expense 60 N/A 4,235 N/A
Income tax provision (3,799) (44.7)% (7,969) (28.6)%
Net income (5,814) (43.9)% (12,015) (27.6)%
N/A - not applicable
Net Sales
- - ---------
The Registrant classifies product sales into two groups: 1) printing papers;
and 2) tobacco and other specialty papers. Overall net sales declined $556,000,
or 0.4%, in the third quarter of 1997 compared to the third quarter of 1996, and
$1,458,000, or 0.3%, in the first nine months of 1997 compared to the
corresponding period in the prior year.
Printing paper net sales increased $2,708,000, or 3.3%, in the third quarter of
1997 versus the corresponding period in 1996. This increase was due primarily
to a 7.2% increase in net sales volume, which was partially offset by a 3.7%
decrease in the average net selling price per ton. For the first nine months of
1997 compared to the first nine months of 1996, printing paper net sales
declined $3,465,000, or 1.3%. Although net sales tons improved 9.7% for the
first nine months of 1997 versus the comparable period of 1996, the effect of
this increase was more than offset by a 10.1% decline in the average net selling
price per ton.
Increased demand for the Registrant's printing papers has had a significant
favorable impact on the Registrant's printing paper sales volume during 1997
compared to 1996. High demand and full order backlogs allow the Registrant to
more efficiently schedule its production equipment, which in turn results in
improved production yields and increased output. The Spring Grove, Pennsylvania
and Neenah, Wisconsin mills have had no market related downtime since the first
quarter of 1996. In contrast, the Spring Grove mill had seven days of
unscheduled downtime in the first quarter of 1996 due to fewer orders and
adverse weather conditions. An unexpected power outage on September 2, 1997 at
the Registrant's Spring Grove, Pennsylvania mill caused approximately one day of
unplanned downtime. Lost sales tonnage due to this power outage was more than
offset by significantly higher production rates during the balance of the
quarter relative to the third quarter of 1996.
Despite the increase in demand for the Registrant's printing papers, pricing for
the Registrant's printing papers remained under adverse market pressure
throughout much of the first half of 1997. Although prices began to stabilize
in the second quarter and actually improved in the third quarter of 1997,
pricing remained below the average levels experienced during the comparable
1996 periods. The Registrant has successfully implemented price increases for
many of its printing paper products. A price increase for envelope papers was
implemented in August, and an additional increase became effective October 1.
Prices for book publishing products increased in September. Stronger printing
paper demand and higher market pulp prices are the key factors contributing to
the successful implementation of these price increases. The Registrant is
cautiously optimistic that higher prices can be sustained if the paper industry
continues to recover from its recent downturn.
11
Net sales of tobacco and other specialty paper products declined $3,264,000, or
5.7%, in the third quarter of 1997 compared to the third quarter of 1996 as a
result of lower average net selling prices per ton and reduced net sales volume.
Net sales volume and average net selling prices per ton declined 2.4% and 3.3%,
respectively, during the third quarter of 1997 relative to the corresponding
period of the prior year. Net sales tons of other specialty paper products
modestly improved; however, this improvement was more than offset by lower net
sales tons of tobacco paper products. A major rebuild of one of the
Registrant's ten tobacco paper producing machines resulted in approximately 51
days of downtime during the third quarter of 1997. This rebuild is expected to
improve the quality of tobacco papers produced on this machine. Any improvement
in production capacity is not expected to be significant. In addition, all
tobacco paper producing machines were down a total of seven days in July, 1997
as a result of weak domestic demand, which was impacted by a reduction of
inventories by the Registrant's domestic tobacco paper customers. Although the
Registrant expects this inventory adjustment period to be short lived, one of
the Registrant's ten tobacco paper producing machines has remained temporarily
shut down since October 6, 1997 due to a lack of sufficient tobacco paper
orders.
For the first nine months of 1997 relative to the first nine months of 1996, net
sales of tobacco and other specialty products improved $2,007,000, or 1.3%. A
4.5% increase in net sales volume more than offset a 3.1% decrease in the
average net selling price per ton. The improvement in net sales volume was the
result of increased shipments of other specialty papers. Shipments of other
specialty paper products increased as a result of improved productivity at each
of the Registrant's paper mills.
Net sales volume of tobacco papers was relatively flat during the first nine
months of 1997 versus the corresponding period of 1996. Demand for tobacco
papers overseas has been strong during 1997, as export tobacco paper net sales
volume during the first nine months of 1997 increased 18.7% relative to the
first nine months of 1996. This volume improvement was offset by a 13.9%
reduction in domestic tobacco paper net sales volume. Although the Registrant
expects the trend toward lower domestic tobacco consumption to continue,
continued growth in tobacco consumption overseas should enable the Registrant to
maintain, and perhaps improve, its total tobacco paper net sales volume in
future periods.
Other Income - Net
- - ------------------
The Registrant's other income - net increased $1,965,000, or 76.4%, and
$6,085,000, or 74.7%, for the third quarter and first nine months of 1997,
respectively, compared to the corresponding periods of 1996. Results for the
third quarter and first nine months of 1997 were favorably impacted by increased
investment income. Net investment income was $1,485,000 and $3,989,000 higher
in the three and nine-month periods ended September 30, 1997, respectively,
relative to the corresponding periods in 1996. The proceeds from the issuance
of $150,000,000 of Step-Down Preferred Stock by a subsidiary, GWS Valuch, Inc.,
were placed in trust, as described in Note 6 to the Registrant's condensed
consolidated financial statements, and invested in interest bearing marketable
securities. The additional interest earned on these securities resulted in a
significant increase in the Registrant's interest income. Despite a mill-wide
power outage at the Registrant's Spring Grove, Pennsylvania mill on September 2,
1997 which reduced the amount of kilowatt hours that otherwise would have been
sold, total income from energy sales improved $205,000 and $213,000 for the
third quarter and first nine months of 1997, respectively, versus the comparable
periods of 1996. Gain from property dispositions, etc. - net improved $275,000
for the third quarter of 1997 relative to the third quarter of 1996, and
$1,883,000 for the first nine months of 1997 relative to the corresponding
period of the prior year. Much of the improvement during the first nine months
of 1997 was the result of the sale of a large piece of recreational property
near the Registrant's Pisgah Forest, North Carolina mill. This sale, completed
during the second quarter of 1997, resulted in a pretax gain of approximately
$2,200,000.
Cost of Products Sold
- - ---------------------
The Registrant's gross margin decreased $9,365,000, or 30.8%, in the third
quarter of 1997 in comparison to the third quarter of 1996, and $19,377,000, or
19.8%, in the first nine months of 1997 versus the corresponding period of the
prior year. Gross margin as a percentage of net sales dollars declined from
21.8% for the third quarter of 1996 to 15.1% for the third quarter of 1997, and
from 23.0% for the first nine months of 1996 to 18.5% for the first nine months
of 1997.
The decline in gross margin during the third quarter of 1997 relative to the
corresponding period of 1996 was the result of decreased net sales dollars of
$556,000, or 0.4%, and increased cost of products sold of $8,809,000, or 8.1%.
The decline in gross margin during the first nine
12
months of 1997 versus the first nine months of 1996 was due to decreased net
sales dollars of $1,458,000, or 0.3%, and increased cost of products sold of
$17,919,000, or 5.5%. Much of the increase in cost of products sold during the
third quarter and first nine months of 1997 relative to the comparable 1996
periods was due to higher net sales volume. Net sales volume increased 5.0% and
8.6% for the three and nine months ended September 30, 1997, respectively,
relative to the corresponding periods ended September 30, 1996. A more complete
analysis of net sales is located in the "Net Sales" section of Management's
Discussion and Analysis of Financial Condition and Results of Operations.
The Registrant's cost of products sold per ton was 3.0% higher in the third
quarter of 1997 versus the comparable quarter of 1996, primarily due to higher
prices for market pulp, pulp substitutes and wastepaper. Prices paid by the
Registrant for market pulp and wastepaper increased approximately 3% and 7% per
ton, respectively, during the third quarter of 1997 relative to the
corresponding quarter ended September 30, 1996. Maintenance spending was also
higher. Normal annual maintenance downtime was taken at each of the
Registrant's three mills in July. The related routine repair costs were higher
than expected, and exceeded prior year levels. In contrast, the Registrant's
cost of products sold per ton was 2.9% lower for the first nine months of 1997
relative to the comparable period of 1996. Although fiber costs were slightly
higher during the third quarter of 1997 relative to the third quarter of 1996,
on average fiber costs for the first nine months of 1997 were significantly
below average levels for the corresponding period of the prior year. Prices
paid by the Registrant for market pulp and wastepaper decreased approximately 6%
and 5% per ton, respectively, during the first nine months of 1997 relative to
the first nine months of 1996. As a result of improved production yields and
increased output, the Registrant's fixed costs of its manufacturing process were
absorbed over more tons of products manufactured during the third quarter and
first nine months of 1997 versus the corresponding periods of the prior year.
This had a favorable relative impact on the Registrant's cost of products sold
per ton during both periods.
The Registrant's third quarter financial results, as compared to other quarters
in the year, are always negatively impacted by planned annual maintenance
shutdowns. This is due to higher maintenance expense and lower production
resulting in higher fixed costs per ton produced. Such shutdowns were taken at
the Registrant's three mills during the third quarters of 1997 and 1996.
Market pulp costs increased modestly in July, but have remained stable
subsequent to that time. An announced increase for October has yet to be
implemented. Although higher pulp costs increase the Registrant's cost of
products sold per ton, they also typically provide an environment conducive to
higher paper prices which could improve the Registrant's financial results.
Selling, General and Administrative Expense
- - -------------------------------------------
The Registrant's selling, general and administrative expenses for the three and
nine-month periods ended September 30, 1997 decreased $384,000, or 4.3%, and
$135,000, or 0.5%, respectively, versus the comparable periods ended September
30, 1996. These decreases were primarily the result of lower profit sharing and
incentive related expenses, partially offset by increased expenditures for
professional services and additional resources for the Registrant's information
systems. The Registrant also incurred approximately $351,000 of expense during
the first nine months of 1997 related to the write-off of unamortized stock
issuance costs of a subsidiary, GWS Valuch, Inc., as described in Note 6 to the
Registrant's condensed consolidated financial statements.
Interest on Debt
- - ----------------
The Registrant's interest on debt for the third quarter and first nine months of
1997 was $2,537,000 and $2,592,000 higher than the corresponding periods of
1996.
As described in Note 7 to the Registrant's condensed consolidated financial
statements, on July 22, 1997 the Registrant issued $150,000,000 principal amount
of 6-7/8% Notes due July 15, 2007. Interest on the 6-7/8% Notes is payable
semiannually on January 15 and July 15 of each year. During the third quarter
of 1997 interest expense on the 6-7/8% Notes was approximately $1,998,000.
Included in this amount is an amortized component of debt issuance costs. Costs
related to the issuance of the 6-7/8% notes have been capitalized and included
on the Registrant's condensed consolidated balance sheets as a component of
"Other assets." These costs will be amortized to interest expense until the
Notes mature on July 15, 2007. A portion of the net proceeds from the sale of
the 6-7/8% Notes was used to repay the $144,675,000 principal amount of a short-
term unsecured loan, as described in Note 6 to the Registrant's condensed
consolidated financial statements, and $501,000 of related interest. Short-term
bank borrowings were negligible during 1996.
13
Interest expense recognized on the Registrant's interest rate swap agreement,
which has a total notional principal amount of $50,000,000, increased
approximately $38,000 and $93,000 for the three and nine-month periods ended
September 30, 1997, respectively, relative to the corresponding periods ended
September 30, 1996. These increases were the result of a slightly higher
variable interest rate. On September 2, 1997 the variable interest rate on the
swap agreement was recalculated. Based on this revised interest rate, interest
expense will be approximately $9,000 higher in the fourth quarter of 1997
relative to the fourth quarter of 1996. The interest rate swap agreement will
terminate effective March 1, 1998.
Preferred Stock of Subsidiary-Expense
- - -------------------------------------
The Registrant's preferred stock of subsidiary-expense was $60,000 and
$4,235,000 in the third quarter and first nine months of 1997, respectively.
This expense is based upon the effective yield on the $150,000,000 Step-Down
Preferred Stock issued by GWS Valuch, Inc., a subsidiary of the Registrant, in
February, 1997 as described in Note 6 to the Registrant's condensed consolidated
financial statements. On July 2, 1997 GWS Valuch redeemed all 150,000
outstanding shares of the Step-Down Preferred Stock. The Registrant will have
no further expense related to the Step-Down Preferred Stock.
Income Tax Provision
- - --------------------
The Registrant's provision for income taxes decreased $3,799,000, or 44.7%, and
$7,969,000, or 28.6%, for the three and nine-month periods ended September 30,
1997, respectively, versus the comparable periods ended September 30, 1996.
These decreases were primarily the result of lower taxable income.
FINANCIAL CONDITION:
- - --------------------
Liquidity
- - ---------
The Registrant's cash and cash equivalents decreased by $19,990,000 during the
first nine months of 1997. Net cash provided by operating activities of
$50,263,000 was more than offset by cash used in investing activities of
$40,475,000 and cash used in financing activities of $29,778,000. Significant
uses of cash in the first nine months of 1997 were $44,534,000 for the funding
of capital projects, $22,218,000 for the payment of common stock dividends and
$9,857,000 for purchases of common stock for the treasury.
In conjunction with the transactions involving GWS Valuch described in Note 6 to
the Registrant's condensed consolidated financial statements, the Registrant
deposited $154,757,000, including $4,406,000 to pay interest due on March 1,
1997, 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 is outstanding. As of March 1, 1998,
the amount initially deposited into the trust and interest earned thereon will
have been used to pay the principal of, and remaining interest due on, the 5-
7/8% Notes.
On July 2, 1997, using the proceeds of a short-term unsecured loan in the
principal amount of $144,675,000, the Registrant purchased approximately 145,000
shares of Class A common stock of a subsidiary, GWS Valuch. GWS Valuch used
these funds to redeem all 150,000 outstanding shares of the Step-Down Preferred
Stock it had issued in February, 1997. On July 22, 1997 the Registrant issued
$150,000,000 principal amount of 6-7/8% Notes due July 15, 2007. Interest on
the 6-7/8% Notes is payable semiannually on January 15 and July 15 of each year.
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, and constitute unsecured and unsubordinated
indebtedness of the Registrant. The net proceeds from the sale of the 6-7/8%
Notes were used to repay the $144,675,000 principal amount of the short-term
unsecured loan and approximately $501,000 of interest related thereto. The
remaining balance of the net proceeds was applied to general corporate purposes.
The Registrant expects to meet all of its remaining near and long-term cash
needs from a combination of internally generated funds, cash, cash equivalents,
marketable securities, existing bank lines of credit and long-term debt.
Capital Resources
- - -----------------
Work continues on the Registrant's $15,000,000 capital project to install a
gravure coater at its Spring Grove, Pennsylvania mill. Through September, 1997
a total of $7,817,000 had been paid on this project, including $4,022,000 and
$7,293,000 in the third quarter and first nine months of 1997, respectively.
This project is expected to be completed in December, 1997 and will enable the
Registrant to manufacture new products which will enhance its other specialty
papers business.
14
A project to install a precipitated calcium carbonate plant, also at the
Registrant's Spring Grove facility, is progressing toward a scheduled completion
in early 1998. Through September, 1997 the Registrant had paid a total of
$3,850,000 of the $9,500,000 committed to this project. Of this amount,
$1,605,000 was paid during the third quarter of 1997 and $3,047,000 was paid
during the first nine months of the year. When completed, this project will
enable the Registrant to produce rather than purchase precipitated calcium
carbonate, a key raw material in the paper-making process. The Registrant
expects that its own produced precipitated calcium carbonate will be of a higher
quality and lower cost than that which is readily available for purchase.
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 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. In particular, the Registrant continues to negotiate with
the State of Wisconsin, 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 and perhaps exceed the
Registrant's available resources, as discussed in Note 8 to the Registrant's
condensed consolidated financial statements. 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.
15
PART II - OTHER INFORMATION
---------------------------
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 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.
Item 6. Exhibits and Reports on Form 8-K
- - -----------------------------------------
(a) Exhibits
--------
Number Description of Documents
------ ------------------------
4.1 Indenture, dated as of July 22, 1997, between P.H.
Glatfelter Company and The Bank of New York,
relating to the 6-7/8% Notes due 2007
(incorporated by reference to Exhibit 4.1 to the
Registrant's Form S-4 Registration Statement, Reg.
No. 333-36395).
4.2 Registration Rights Agreement, dated as of July
22, 1997, among P.H. Glatfelter Company, Bear,
Stearns & Co. Inc. and BT Securities Corporation,
relating to the 6-7/8% Notes due 2007
(incorporated by reference to Exhibit 4.3 to the
Registrant's Form S-4 Registration Statement, Reg.
No. 333-36395).
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 since June
30, 1997:
Date of Report Item Reported
-------------- -------------
July 11, 1997 5
16
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 12, 1997 R. P. Newcomer
Senior Vice President
and Chief Financial Officer
17
INDEX OF EXHIBITS
-----------------
Number Description of Documents
------ ------------------------
4.1 Indenture, dated as of July 22, 1997, between
P.H. Glatfelter Company and The Bank of New
York, relating to the 6-7/8% Notes due 2007
(incorporated by reference to Exhibit 4.1 to
the Registrant's Form S-4 Registration
Statement, Reg. No. 333-36395).
4.2 Registration Rights Agreement, dated as of
July 22, 1997, among P.H. Glatfelter Company,
Bear, Stearns & Co. Inc. and BT Securities
Corporation, relating to the 6-7/8% Notes due
2007 (incorporated by reference to Exhibit
4.3 to the Registrant's Form S-4 Registration
Statement, Reg. No. 333-36395).
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
18