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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JuneSeptember 30, 2000
( ) 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
P. H. GLATFELTER COMPANY
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
96 South George Street, Suite 500, York, Pennsylvania 17401
(Address of principal executive offices) (Zip Code)
(717) 225-4711
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [ ].X
No______.
Shares of Common Stock outstanding at JulyOctober 31, 2000 were 42,358,413.42,415,751.
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P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months and SixNine Months Ended JuneSeptember 30,
2000 and 1999 (Unaudited)..................................... 3....................................3
Condensed Consolidated Balance Sheets - JuneSeptember 30, 2000
(Unaudited) and December 31, 1999............................. 41999............................4
Condensed Consolidated Statements of Cash Flows - SixNine
Months Ended JuneSeptember 30, 2000 and 1999 (Unaudited)............... 5.........5
Notes to Condensed Consolidated Financial Statements
(Unaudited)................................................... 6..................................................6
Independent Accountants' Report........................................... 12Report...............................................12
Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................... 13Operations............................................13
Quantitative and Qualitative Disclosures About Market Risk................ 19Risk....................19
Part II - Other Information............................................... 19
Signature................................................................. 21Information...................................................19
Signature.....................................................................21
Index of Exhibits......................................................... 22Exhibits.............................................................22
Exhibit 3(ii)- By-Laws, as amended June 21, 2000
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
Three Months Ended SixNine Months Ended
6/9/30/2000 6/00 9/30/1999 6/99 9/30/2000 6/00 9/30/1999
--------- --------- --------- ---------99
------- ------- ------- -------
Revenues
Net sales $177,497 $167,234 $358,757 $333,080$ 170,547 $ 170,030 $ 529,304 $ 503,110
Other income - net
Energy sales - net 1,362 2,706 3,828 4,9442,711 2,402 6,539 7,346
Interest on investments and
other - net 701 428 1,989 798762 427 2,751 1,225
Gain from property
dispositions, etc. - net 459 1,163 767 2,083
-------- -------- -------- --------
2,522 4,297 6,584 7,825201 690 968 2,773
--------- --------- --------- ---------
3,674 3,519 10,258 11,344
Total revenues 180,019 171,531 365,341 340,905174,221 173,549 539,562 514,454
Costs and expenses
Cost of products sold 137,653 132,778 285,406 270,941144,770 145,956 430,176 416,897
Selling, general and
administrative expenses 16,610 14,293 29,713 27,80214,254 12,909 43,967 40,711
Interest on debt - net 3,997 4,601 8,377 9,3914,017 4,735 12,394 14,126
Unusual item -- -- 3,336 --
-------- -------- -------- --------
158,260 151,672 326,832 308,134--------- --------- --------- ---------
163,041 163,600 489,873 471,734
Income before income taxes 21,759 19,859 38,509 32,77111,180 9,949 49,689 42,720
Income tax provision (benefit)
Current taxes 4,835 3,408 9,325 7,5341,113 (102) 10,438 7,432
Deferred taxes 2,886 3,908 4,502 4,554
-------- -------- -------- --------2,888 3,651 7,390 8,205
--------- --------- --------- ---------
Total 7,721 7,316 13,827 12,0884,001 3,549 17,828 15,637
Net income $ 14,0387,179 $ 12,5436,400 $ 24,68231,861 $ 20,683
======== ======== ======== ========27,083
========= ========= ========= =========
Basic and diluted earnings per share $ 0.330.17 $ 0.300.15 $ 0.580.75 $ 0.49
======== ======== ======== ========0.64
========= ========= ========= =========
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
6/9/30/200000 12/31/199999
(unaudited)
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents $ 87,14490,845 $ 76,035
Accounts receivable - net 80,37883,889 74,638
Inventories:
Raw materials 31,54229,526 41,013
In processIn-process and finished 45,77538,868 42,463
Supplies 33,04032,086 31,624
----------- --------------------- ----------
Total inventories 110,357100,480 115,100
Prepaid expenses and other current assets 3,6412,781 2,354
----------- --------------------- ----------
Total current assets 281,520277,995 268,127
Plant, equipment and timberlands - net 560,113546,182 582,213
Other assets 165,077171,471 153,440
----------- --------------------- ----------
Total assets $ 1,006,710 $ 1,003,780
=========== ===========995,648 $1,003,780
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 1,7381,620 $ 1,824
Short-term debt 15,49412,037 26,566
Accounts payable 42,20843,012 40,047
Dividends payable 7,4107,417 7,393
Income taxes payable 11,10811,219 9,601
Accrued compensation and other expenses
and deferred income taxes 43,56445,296 47,200
----------- -----------
Total current liabilities 121,522120,601 132,631
Long-term debt
300,171288,047 301,380
Deferred income taxes 153,356155,722 147,698
Other long-term liabilities 63,70864,081 63,947
----------- -----------
Total liabilities 638,757628,451 645,656
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 41,98641,810 42,296
Retained earnings 506,546506,623 496,680
Accumulated other comprehensive income (2,463)(3,833) (1,392)
----------- -----------
Total 546,613545,144 538,128
Less cost of common stock in treasury (178,660)(177,947) (180,004)
----------- -----------
Total shareholders' equity 367,953367,197 358,124
----------- -----------
Total liabilities and
shareholders' equity $ 1,006,710995,648 $ 1,003,780
=========== ===========
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
SixNine Months Ended
6/9/30/2000 6/00 9/30/1999
--------- ---------99
------- -------
Cash flows from operating activities:
Net income $ 24,68231,861 $ 20,68327,083
Items included in net income not using
(providing) cash:
Depreciation, depletion and amortization 23,755 24,48835,811 36,613
Loss (gain) on disposition of fixed assets 452 (1,005)(1,124)
Expense related to 401(k)401 (k) plans and other 1,034 1,1401,571 1,631
Changes in assets and liabilities, net of
effect of acquisition:
Accounts receivable (11,501) (13,206)(13,516) (13,420)
Inventories 8,820 (557)11,446 1,454
Other assets and prepaid expenses (14,909) (8,312)(22,696) (14,380)
Accounts payable, accrued compensation
and other expenses, deferred income
taxes and other long-term liabilities (664) 6,8305,705 12,270
Income taxes payable 1,658 1631,376 (404)
Deferred income taxes - noncurrent 6,029 4,5548,883 8,205
-------- --------
Net cash provided by operating activities 39,356 34,77860,893 57,928
-------- --------
Cash flows from investing activities:
Sale or maturity of investments - net -- 64
Proceeds from disposal of fixed assets 107 1,059116 1,258
Additions to plant, equipment and timberlands (9,390) (11,659)(17,511) (17,685)
Acquisition of Cascadec -- (7,399)
-------- --------
Net cash used in investing activities (9,283) (17,993)(17,395) (23,822)
-------- --------
Cash flows from financing activities:
Net borrowing (payment) of debt (4,203) 1,429(6,464) 1,715
Dividends paid (14,796) (14,740)(22,232) (22,122)
-------- --------
Net cash used in financing activities (18,999) (13,311)(28,696) (20,407)
-------- --------
Effect of exchange rate changes on cash 35 (234)8 (237)
-------- --------
Net increase in cash and cash equivalents 11,109 3,24014,810 13,462
Cash and cash equivalents:
At beginning of year 76,035 50,907
-------- --------
At end of period $ 87,14490,845 $ 54,14764,369
======== ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 8,62115,403 $ 11,90721,098
Income taxes 8,431 5,4259,123 8,615
See accompanying notes to condensed consolidated financial statements.
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. EARNINGS PER SHARE ("EPS")
Basic EPS excludes the dilutive impact of common stock equivalents and
is computed by dividing net income by the weighted-average number of
shares of common stock outstanding for the period. Diluted EPS includes
the effect of potential dilution from the issuance of common stock,
pursuant to common stock equivalents, using the treasury stock method.
A reconciliation of the Registrant's basic and diluted EPS follows with
the dollar and share amounts in thousands:
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
---------------------- ---------------------------------- ------------
2000 1999 2000 1999
------- ------- ------- ----------- ---- ---- ----
Shares Shares Shares Shares
------- ------- ------- ------------- ------ ------ ------
Basic EPS 42,318 42,158 42,293 42,13442,361 42,195 42,316 42,155
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 145 4 101 795 -- 99 5
Performance stock
awards 43 127126 43 135132
Employee stock
options -- 96233 -- 48110
------- ------- ------- -------
Diluted EPS 42,506 42,385 42,437 42,32442,499 42,554 42,458 42,402
======= ======= ======= =======
Net income $14,038 $12,543 $24,682 $20,683$ 7,179 $ 6,400 $31,861 $27,083
Basic and diluted EPS $ 0.330.17 $ 0.300.15 $ 0.580.75 $ 0.490.64
Basic and diluted EPS of $.58$.75 for the sixnine months ended JuneSeptember 30,
2000, as presented on the Condensed Consolidated Statement of Income,
reflects the negative impact of an after-tax restructuring charge
(unusual item) of $.05 per share (see Note 2).
2. UNUSUAL ITEM
The Registrant announced in September 1999 that, effective January 1,
2000, prices would be increased for certain of its tobacco paper
products. This initiative was required for the Registrant to remain a
viable, high-quality supplier to its tobacco paper customers. As the
Registrant expected, certain of these customers sought other suppliers
after this announcement. As a result, the Registrant announced in
December 1999 that it would begin reducing its tobacco paper
manufacturing capacity at its Ecusta mill during 2000.
During the first quarter of 2000, the Registrant finalized its plan of
restructuring and has begunshortly thereafter began to reduce the workforce at
Ecusta. The workforce reduction is expected to besubstantially completed by late
2000 and will
ultimately result in the reduction of approximately 250200 salaried and
hourly jobs associated with the Registrant's tobacco paper production
capacity. The Registrant accrued and charged to expense $3,336,000 on a
pre-tax basis ($2,120,000 after tax) in the first quarter of 2000
primarily as a result of the voluntary portion, specifically 42
salaried employees, of this restructuring. The amount of actual
termination benefits paid and charged against the liability as of
September 30, 2000 was $79,000, covering 21 salaried employees.
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3. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives), and for hedging activities. SFAS No. 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 137, issued in July 1999, deferred
the effective date of SFAS No. 133 until the beginning of
the Registrant's first quarter ofJanuary 1, 2001. SFAS No. 138,
issued in June 2000, addresses a limited number of issues causing
implementation difficulties for numerous entities that applyin applying SFAS No. 133 and amends the
accounting and reporting standards of that Statement for certain derivative
instruments and certain hedging activities.Statement. The Registrant is
evaluating the effects that the adoption of SFAS Nos. 133 and 138 may
have on its consolidated financial position and results of operations.
4. INTEREST RATE SWAP AGREEMENTS
In January 1998, the Registrant entered into two interest rate swap
agreements, each having a total notional principal amount of DM
52,600,000 (approximately $25,700,000$23,700,000 as of JuneSeptember 30, 2000). One
such agreement expired January 6, 2000. Under the remaining agreement,
which expires January 3, 2001, the Registrant receives a floating rate
of the six-month DM London Interbank Offered Rate ("LIBOR") and pays a
fixed rate of 4.45% for the term of the agreement.
In January 1999, the Registrant entered into two additional interest
rate swap agreements, each having a total notional principal amount of
DM 50,000,000 (approximately $24,400,000$22,500,000 as of JuneSeptember 30, 2000).
Under these agreements, which were effective April 6, 1999 and July 6,
1999 and which expire December 22, 2002, the Registrant receives a
floating rate of the three-month DM LIBOR plus twenty basis points and
pays a fixed rate of 3.41% and 3.43%, respectively, for the term of the
agreements.
The Registrant has other interest rate swap agreements outstanding
which do not have a material impact on the Registrant's consolidated
financial statements. All of the Registrant's interest rate swap
agreements convert a portion of the Registrant's borrowings from a
floating rate to a fixed rate basis. Although the Registrant can
terminate any of its swap agreements at any time, the Registrant
intends to hold all of its swap agreements until their respective
maturities.
5. COMPREHENSIVE INCOME
Comprehensive income was $13,429,000$5,809,000 and $14,435,000$5,889,000 for the secondthird
quarter of 2000 and 1999, respectively, and $23,611,000$29,420,000 and $22,026,000$27,915,000
for the first sixnine months of 2000 and 1999, respectively. Comprehensive
income includes the effects of changes in certain currency exchange
rates relative to the U.S. dollar.
6. COMMITMENTS AND CONTINGENCIES
The Registrant is subject to loss contingencies resulting from
regulation by various federal, state, local and foreign governmental
authorities with respect to the environmental impact of air and water
emissions and noise from its mills, as well as the disposal of solid
waste generated by its 7
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operations. To comply with environmental laws
and regulations, the
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Registrant has incurred substantial capital and operating expenditures
in past years. The Registrant anticipates that environmental regulation
of its operations will continue to become more burdensome and that
capital and operating expenditures will continue, and perhaps increase,
in the future. In addition, the Registrant may incur obligations to
remove or mitigate any adverse effects on the environment resulting
from its operations, including the restoration of natural resources,
and liability for personal injury and damage to property, including
natural resources. Because environmental regulations are not consistent
worldwide, the Registrant's ability to compete in the world marketplace
may be adversely affected by capital and operating expenditures
required for environmental compliance.
Subject to permit approval, the Registrant has undertaken an initiative
under the Voluntary Advanced Technical Incentive Program of the United
States Environmental Protection Agency ("EPA") to comply with the new
"Cluster Rule" regulations. This initiative, the Registrant's "New
Century Project," will require capital expenditures currently estimated
at approximately $30,000,000 to be incurred before April 2004.
TheOn September 7, 2000, the Pennsylvania Department of Environmental
Protection ("DEP") has
proposed to reissuereissued the Registrant's wastewater discharge
permit for the Spring Grove mill effective October 1, 2000, on terms
unacceptable to the Registrant. The reissued permit calls for
reductions in the mill's discharge of color that the Registrant
believes cannot be achieved at this time without a curtailment of
operations. On September 7, DEP has
concurrently publicly proposed termsalso issued to the Registrant an
administrative order calling for resolutionachievement of the limitations in the
permit on a schedule extending until 2007. Both the permit and the
order contemplate adoption of an anticipated
appeal fromalternative limitation on color which
would be more relaxed. The Registrant expects to be able to meet the
issuancealternative limitation without a curtailment of thatoperations under the
schedule set forth in the order. Under the schedule set forth in the
permit, which terms, subjecthowever, the Registrant may not be able to meet the alternative
limitation without a curtailment of operations. The Registrant has
appealed the permit and the order to the satisfaction of certain conditions, are acceptable toPennsylvania Environmental
Hearing Board. After an evidentiary hearing, the Registrant.
However, such terms may be unacceptable to EPA or certain third parties.
The Registrant cannot determine the impact that the new permit will have
on the Registrant if it contains objectionable terms because the material
terms of the final formBoard granted a stay
of the permit are unknown.limitation during the pendency of the appeal. The Board
did not grant a stay of the more relaxed alternative limitation because
it is not yet in effect, and will not come into effect until a change
in the Pennsylvania Water Quality Standard for color is approved; in
this case, "approval" includes an approval by EPA. The Pennsylvania
Public Interest Research Group ("Penn PIRG") and several other plaintiffsparties (collectively
"Penn PIRG") have appealed the alternative, relaxed limitation and have
also intervened in the Registrant's appeal of the permit. The
Registrant is engaged in settlement discussions with Penn PIRG and DEP,
but also continues to litigate all appeals vigorously.
In June 1999, Penn PIRG brought a citizen suit under the Federal Clean
Water Act and Pennsylvania Clean Streams Law seeking a reduction in the
Spring Grove mill's discharge of color, civil penalties and costs of
litigation. The Registrant believes Penn PIRG's lawsuit to be without
merit, but the Registrant cannot predict the impact on the Registrant
of any relief the court might award because the case is not yet at a
stage where the nature and extent of any relief can be predicted.
In 1999, EPA and DEP issued to the Registrant separate Notices of
Violation ("NOVs") alleging violations of the federal and state air
pollution control laws, primarily for purportedly failing to obtain
appropriate preconstruction air quality permits in conjunction with
certain modifications to the Registrant's Spring Grove mill. EPA
announced that the Registrant was one of seven pulp and paper mill
operators to have received contemporaneously an NOV alleging this kind
of violation. EPA and DEP alleged that the Registrant's modifications
produced (1) significant net emissions increases in certain air
pollutants which should have been covered
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by appropriate permits imposing new emissions limitations, and (2)
certain other violations.
For all but one of the modifications cited by EPA, the Registrant
applied for and obtained from DEP the preconstruction permits which the
Registrant concluded were required by applicable law. EPA reviewed
those applications before the permits were issued. DEP's NOV only
pertained to the modification for which the Registrant did not receive
a preconstruction permit. The Registrant conducted an evaluation at the
time of this modification, and determined that the preconstruction
permit cited by EPA and DEP was not required. The Registrant has been
informed that EPA and DEP will seek substantial emissions reductions,
as well as civil penalties, to which the Registrant believes it has
meritorious defenses. Nevertheless,
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the ultimate outcome of these matters or the costs involved.
The Registrant, along with six other companies which operate or
formerly operated facilities along the Fox River in Wisconsin, has been
identified as a potentially responsible party ("PRP") under the federal
Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA") and other laws for (a) investigation and cleanup and (b)
natural resources damages arising from the alleged discharge of
polychlorinated biphenyls ("PCBs") and other hazardous substances to
the Fox River below Lake Winnebago (the "lower Fox River") and the Bay
of Green Bay. A dispute presently exists as to which sovereign controls
which claims concerning this matter. Accordingly, the Registrant has
been in discussions with EPA, the Wisconsin Department of Natural
Resources ("DNR"), the United States Fish and Wildlife Service ("FWS"),
the National Oceanic and Atmospheric Administration ("NOAA"), the
Menominee Indian Tribe of Wisconsin, the Oneida Tribe of Indians of
Wisconsin, and the state and federal Departments of Justice.
On July 11, 1997, these agencies and tribes entered into a Memorandum
of Agreement (the "MOA") which provides for coordination and
cooperation among those parties in addressing the release or threat of
release of hazardous substances into the lower Fox River, Green Bay and
Lake Michigan environment. The MOA sets forth a mutual goal of
remediating and/or responding to hazardous substance releases and
threats of releases, and restoring injured and potentially injured
natural resources. The MOA further states that, based on current
information, removal of the PCB-contaminated sediments in the lower Fox
River is expected to be the principal, but not exclusive, action
undertaken to achieve restoration and rehabilitation of injured natural
resources. The MOA anticipates funding from the Registrant and the six
other companies.
On February 26, 1999, DNR released a draft remedial investigation and
feasibility study ("RI/FS") for the lower Fox River for public comment.
In the draft RI/FS, DNR reviewed and summarized a number of possible
remedial alternatives for the site estimated to cost in the range of $0
to $721,000,000, but did not select a preferred remedy. The Registrant
does not believe that the no action remedy will be selected. The
largest components of the costs of certain of the remedial alternatives
are attributable to large-scale sediment removal and disposal. There is
no assurance that the cost estimates in the draft RI/FS will not differ
significantly from actual costs. The Registrant and the other six
companies have submitted extensive technical comments to the draft
RI/FS. In addition, the Registrant has submitted its individual
comments to the draft RI/FS. DNR and EPA have announced that the RI/FS
will be revised. The revision may add, delete or amend the remedial
alternatives, and a final RI/FS and a proposed remedial action plan
will be issued. The agencies have publicly stated that these documents
may be issued in late 2000.
Based on current information and advice from its environmental
consultants, the Registrant continues to believe that an aggressive
effort, as included
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in certain remedial alternatives in the draft RI/FS, to remove
PCB-contaminated sediment, much of which is buried under cleaner
material or is otherwise unlikely to move and which is abating
naturally, would be environmentally detrimental and, therefore,
inappropriate.
Natural resources damages may be assessed in addition to cleanup costs.
In November 1999,2000, FWS, announcedthe United States Department of the Interior,
the United States Department of Justice, the Oneida Tribe of Indians of
Wisconsin, the Menominee Indian Tribe of Wisconsin, NOAA, the Little
Traverse Bay Bands of Odawa Indians and the Michigan Attorney General
issued a preliminary estimateRestoration and Compensation Determination Plan ("RCDP")
estimating damages in connection with the release of damages asPCBs to the resultlower
Fox River and the Bay of injury to recreational fishing.Green Bay. The range of damages announcedin the RCDP is
from $106$176 million to $150$333 million. The Registrant believes that this
range is significantly overstated. FWS and the federal and tribal trustees
have not yet announced estimates of certain other components of their
natural resources damages claim. The Registrant believes DNR to be
the lead agency
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assessing damages with DNR independent of the federal agencies. DNR did
not participate in the issuance of the RCDP.
The Registrant currently is unable to predict the ultimate costs to the
Registrant related to this matter, because the Registrant cannot
predict which remedy will be selected for the site or the ultimate
amount of natural resources damages nor can the Registrant predict its
share of these costs or damages.
The Registrant continues to believe it is likely that this matter will
result in litigation; however, the Registrant believes it will be able
to persuade a court that removal of a substantial amount of
PCB-contaminated sediments is not an appropriate remedy. There can be
no assurance, however, that the Registrant will be successful in
arguing that removal of PCB-contaminated sediments is inappropriate or
that it would prevail in any resulting litigation.
The amount and timing of future expenditures for environmental
compliance, cleanup, remediation and personal injury, natural resource
damage and property damage liability, including but not limited to
those related to the lower Fox River and the Bay of Green Bay, cannot
be ascertained with any certainty due to, among other things, the
unknown extent and nature of any contamination, the extent and timing
of any technological advances for pollution control, the remedial
actions which may be required and the number and financial resources of
any other responsible parties. The Registrant continues to evaluate its
exposure and the level of its reserves, including, but not limited to,
its share of the costs and damages (if any) associated with the lower
Fox River and the Bay of Green Bay. The Registrant believes that it is
insured against certain losses related to the lower Fox River,
depending on the nature and amount thereof. Coverage, which is
currently being investigated under reservation of rights by various
insurance companies, is dependent upon the identity of the plaintiff,
the procedural posture of the claims asserted and how such claims are
characterized. The Registrant does not know when the insurers'
investigation as to coverage will be completed.
The Registrant's current assessment, after consultation with legal
counsel, is that ultimately it should be able to resolve these
environmental matters without a long-term material adverse impact on
the Registrant. In the meantime, however, these matters could, at any
particular time or for any particular period, have a material adverse
effect on the Registrant's consolidated financial condition, liquidity
or results of operations or result in a default under the Registrant's
loan covenants. Moreover, there can be no assurance that the
Registrant's reserves will be adequate to provide for future
obligations related to these matters, that the Registrant's share of
costs and/or damages for these matters will not exceed its available
resources or that such obligations will not have a long-term
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material adverse effect on the Registrant's consolidated financial
condition, liquidity or results of operations.
7. DIRECTORS' COMPENSATION
On May 1, 2000, the Registrant granted to each non-employee member of its
Board of Directors options to purchase 1,500 shares of common stock for a
total of 13,500 options granted. Such options become exercisable on May 1,
2001 at an exercise price of $10.78125, which represents the average
quoted market price of the Registrant's common stock on the date of grant,
and expire on April 30, 2010.
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8. DISCLOSURE STATEMENT
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 for the year ended December 31,
1999.
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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 JuneSeptember 30, 2000, the related
condensed consolidated statements of income for the three months and sixnine months
ended JuneSeptember 30, 2000 and 1999, and the related condensed consolidated
statements of cash flows for the sixnine months ended JuneSeptember 30, 2000 and 1999.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted auditing standards,in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted accounting principles.in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted auditing
standards,in the United States of America, the consolidated balance sheet of P.
H. Glatfelter Company and subsidiaries as of December 31, 1999, and the related
consolidated statements of income and comprehensive income, shareholders' equity
and cash flows for the year then ended (not presented herein); and in our report
dated February 11, 2000, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 1999 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
July 19,October 16, 2000
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis contains forward-looking statements. See
"Cautionary Statement" set forth in Item 5.
RESULTS OF OPERATIONS
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income is shown below.
Comparison of
-------------------------------------------------------------------
Three Months Ended SixNine Months Ended
JuneSept. 30, 2000 and 1999 JuneSept. 30, 2000 and 1999
------------------------ --------------------------------------------- -----------------------
Increase (Decrease)
(dollars in thousands)
Net sales 10,263 6.1517 0.3 % 25,677 7.726,194 5.2 %
Other income - net (1,775) (41.3)155 4.4 % (1,241) (15.9)(1,086) (9.6)%
Cost of products sold 4,875 3.7 (1,186) (0.8)% 14,465 5.313,279 3.2 %
Selling, general and
administrative expenses 2,317 16.21,345 10.4 % 1,911 6.93,256 8.0 %
Interest on debt - net (604) (13.1)(718) (15.2)% (1,014) (10.8)(1,732) (12.3)%
Income tax provision 405 5.5452 12.7 % 1,739 14.42,191 14.0 %
Net income 1,495 11.9779 12.2 % 3,999 19.34,778 17.6 %
Net Sales
Net sales increased $10,263,000,$517,000, or 6.1%0.3%, for the secondthird quarter of 2000 compared to
the secondthird quarter of 1999 as a result ofslightly improved pricing partially offset by slightly lowera weaker mix of
products sold. This combination yielded constant average net selling prices with
flat sales volume. Although demandDemand for most of the Registrant's product lines during the
secondthird quarter of 2000 was steady, market
conditions were slightly weaker than anticipated.steady. Net sales increased $25,677,000,$26,194,000, or 7.7%5.2%, for
the first sixnine months of 2000 versus the corresponding period in 1999 primarily
as a result of both improved pricing, andas well as slightly higher overall sales
volume.
The Registrant classifies its sales into two product groups: specialized
printing papers and engineered papers (which includes tobacco papers). Net sales
of specialized printing papers increased 19.1%15.4% in the secondthird quarter of 2000
compared to the secondthird quarter of 1999 primarily due to a 16.3%7.3% increase in average net
selling prices resulting primarily from favorable pricing, and an improved mix
of products sold, combined with a 2.4%7.5%
increase in net sales volume. Net sales of specialized printing papers increased
18.9%17.7% for the first sixnine months of 2000 compared to the like period in 1999 as a
result of a 14.4%12.6% increase in average net selling prices, also due to favorable
pricing and an improved mix of products sold, and a 3.9%4.6% increase in net sales
volume.
The increased sales volume of specialized printing papers was largely due to
improved overallstronger demand in the secondthird quarter and first sixnine months of 2000 versus the
like periods of 1999. Despite this improvedstronger demand, somewhat weak and
inconsistent demand for certain of such papers caused some market-related
downtime due to lack of orders during the first and second quarters of 2000. No
market-related downtime occurred during the third quarter of 2000. During the
first halfnine months of 1999, the Registrant did not experience significant
market-related downtime related to its specialized printing papers operations.
The Registrant believes that overall market conditions for its products are still
strong and will support existing pricing over the near term, as indicated by
stronger backlogs
at the end of June 2000.current backlogs.
Net sales of engineered papers for the three months and sixnine months ended
JuneSeptember 30, 2000 were 5.6%13.4% and 3.2%6.3%, respectively, lower than for the
13
14
corresponding 1999 periods. The decreases were primarily the result of demand
erosion for the
13
14 Registrant's tobacco papers, partially offset by an increase in
pricing for such papers. As explained in "Unusual Item""UNUSUAL ITEM" below, the Registrant
has increased pricing for certain of its tobacco papers, which has resulted in
reduced sales volume. Although demand remains stronger than expected and price
increases to date have held, the Registrant expects that, in the long run, net
sales of tobacco papers will continue to trend downward, with volume decreases
more than offsetting any improvements in pricing. Future price changes will be
determined based on contractual provisions to reflect changes in market pulp
prices.
Net sales of engineered papers, excluding tobacco papers, increased 10.9% and
4.3%decreased 3.6% in the
secondthird quarter and first six months of 2000 respectively, versus the like periodsperiod of 1999 primarily as a result of ana
9.3% decrease in net sales volume. The decrease in net sales volume was
partially offset by a 6.2% increase in net sales
volume.average selling prices. The
Registrant believes it is difficult to characterize such engineered papers in
terms of demand trends and pricing actions due to the fragmentation and small
size of markets within this group. Net average selling prices for such papers
were 2.3% higher forin the secondthird quarter of 2000, principally due to selective price increases, and
remained relatively flat for the first half of 2000 compared to similar periods
in 1999. The increases in net sales volume were a resultthe third quarter of unit growth in a
diverse group1999
due to an improved mix of products that are typically less cyclical by reasonsold. Net sales of their
special applications.such engineered papers
increased 1.8% in the first nine months of 2000 versus the same period of 1999
due to higher net average selling prices from selective price increases.
Overall, demand for suchthese engineered papers has remained steady, and the
Registrant expects pricing to be stable for the remainder of the year with some limited improvement in certain products.year.
Other Income - Net
Other income - net decreased $1,775,000,increased $155,000, or 41.3%4.4%, for the secondthird quarter of 2000
compared to the corresponding period of 1999 and decreased $1,241,000,$1,086,000, or 15.9%9.6%,
for the first sixnine months of 2000 compared to the first sixnine months of 1999.
Energy sales - net decreased $1,344,000 and $1,116,000increased $309,000 for the three months ended September 30,
2000 and sixdecreased $807,000 for the nine months ended JuneSeptember 30, 2000 respectively, versus
the comparable periods in 1999. The decreases weredecrease for the first nine months of 2000
was due to equipment problems experienced at the power generator of the
Registrant's Spring Grove, Pennsylvania manufacturing facility during the second
quarter of 2000 that led to approximately one and one-half months of downtime and lost energy
sales. The Registrant's scheduled annual maintenance shutdown of this power
generator normally occurs in the third quarter. Since the scheduled maintenance
occurred in the second quarter of 2000 during the unexpected downtime, energy
sales as well as additional maintenance expense.- net increased in the third quarter of 2000 compared to the third quarter
of 1999.
Interest on investments and other - net increased $273,000$335,000 and $1,191,000$1,526,000 in the
secondthird quarter of 2000 and the first halfnine months of 2000, respectively, versus
the same periods in 1999 as a result of higher average cash balances and higher
average interest rates. In addition, the Registrant recognized minority interest
expense of $343,000 in the first quarter of 1999. No such minority interest
expense was recognized in the
first quarter of 2000.
Gain from property dispositions, etc. - net decreased $704,000$489,000 and $1,316,000$1,805,000
for the three months and sixnine months ended JuneSeptember 30, 2000, respectively,
versus the like periods in 1999. During the first quarter of 1999, the
Registrant realized a gain of $976,000 resulting from the sale of a tract of
timberland. In the second quarterand third quarters of 1999, the Registrant sold
various fully-depreciated items, in addition to the rights to standing timber on
select tracts of land, but no single sale was material to the Registrant's
results of operations. No significant sales of such property occurred in the
second quarter of 2000. During the first quarter of 1999, the Registrant
realized a gain of $976,000 resulting from the sale of a tract of timberland,
while no significant sales of property occurred in the first
quarternine months of 2000.
Cost of Products Sold and Gross Margin
Cost of products sold increased $4,875,000,decreased $1,186,000, or 3.7%0.8%, for the secondthird quarter of
2000 versus the secondthird quarter of 1999 primarily as a result of the Registrant's cash
savings
15
15
project (as described below), strong productivity from its manufacturing
facilities and increased costs
of raw materials,pension income, which were partially offset by
slightly lower overall sales volume. Cost
of products sold increased $14,465,000, or 5.3%, for the first six months of
2000 versus the first six months of 1999 due to a 1.4% higher overall sales
volumeenergy and increased raw materials costs. In the second quarter and first six
months of 2000, such cost increases were offset somewhat by increased pension
income.
Overall, prices for certain of the Registrant's principal raw materials,
especiallymaterial costs, specifically market pulp and
wastepaper, have increased over the past five
quarters thereby increasing its net marginal cost of products sold by 3.9% for
the first six months of 2000 versus the same period of 1999. This increase in
net marginal
14
15
cost of products sold was more than offset by an increase in average net selling
price per ton, resulting in an increase in gross margin per ton of 16.4% for the
first half of 2000 compared to the first half of 1999.wastepaper. The Registrant expects that market pulp prices will continue to increase overremain constant
through the last two quartersfirst quarter of 2000. Since pricing for many of the Registrant's
products typically follows that of market pulp, the Registrant also expects
corresponding improved pricing for such products.
Income resulting from the overfunded status of the Registrant's defined benefit
pension plans and other postretirement benefit plans decreased cost2001.
Cost of products sold increased by $7,905,000 and $5,550,000 for the second quarter of 2000 and the same
quarter of 1999, respectively, and by $14,067,000 and $9,454,000$13,279,000, or 3.2%, for the first halfnine
months of 2000 andcompared to the like periodfirst nine months of 1999 respectively. This improved level of
income was primarilydue to increased energy
and raw material costs and a 1.1% increase in overall sales volume, which were
partially offset by the result of investment performance of the plans' assets.
In addition,Registrant's cash savings project, strong productivity
from the Registrant'sits manufacturing facilities helped increase gross margin in the second quarter of 2000. Further, theand increased pension income.
The Registrant begancontinued to realize the benefits of its cash savings project,
known as "DRIVE," in the secondthird quarter of 2000. Such savings began in the second
quarter of 2000 and have been offset, in the short term, have been
offset by the Registrant's
costs of implementing the project.project (see "Selling, General and Administrative
Expenses" below). The Registrant remains on pace to achieve its DRIVE target of
$50,000,000 in sustainable, annual cash savings. The Registrant is currently
realizing savings on projects that when fully implemented by the fourth quarter
of 2001 will result in $40,000,000 of expected annual savings. The remaining
$10,000,000 is expected to be realized, on an annualized basis, by midlate 2002.
Income resulting from the overfunded status of the Registrant's defined benefit
pension plans and other postretirement benefit plans decreased cost of products
sold by $7,054,000 and $4,702,000 for the third quarter of 2000 and the same
quarter of 1999, respectively, and by $21,008,000 and $14,266,000 for the first
nine months of 2000 and the like period of 1999, respectively. This improved
level of income was primarily the result of investment performance of the plans'
assets.
Marginal cost of products sold per ton decreased 1.2% for the third quarter of
2000 versus the same period of 1999, resulting in an increase in gross margin
per ton of 6.7%. Marginal cost of products sold per ton increased 2.1% for the
first nine months of 2000 compared to the like period of 1999. This increase was
more than offset by a 4.1% increase in average net selling price per ton,
resulting in an increase in gross margin per ton of 13.8%.
As a result of the aforementioned items, gross margin as a percentage of net
sales increased to 22.4%15.1% for the secondthird quarter of 2000 from 20.6%14.2% for the like
quarter of 1999 and increased to 20.4%18.7% for the first halfnine months of 2000 from
18.7%17.1% for the corresponding period of 1999. Gross margin as a percentage of net
sales is typically lower in the third quarter compared to the first nine months
of the same year since the third quarter is negatively affected by the
additional expenses incurred during the Registrant's scheduled maintenance
shutdowns at its U.S. facilities.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the secondthird quarter of 2000 were
$2,317,000,$1,345,000, or 16.2%10.4%, higher than for the secondthird quarter of 1999 and for the
first halfnine months of 2000 were $1,911,000,$3,256,000, or 6.9%8.0%, higher than for the like
period of 1999 as1999. These increases were a result of increased legal and professional
expenses, stemming mainly from outside consulting services associated with the
Registrant's DRIVEIMPACT (see "IMPACT PROJECT" below) and other strategicDRIVE projects. Pension
income reduced selling, general and administrative expenses by $210,000$254,000 and
$297,000$222,000 for the secondthird quarter of 2000 and the same quarter of 1999,
respectively, and by $403,000$770,000 and $517,000$629,000 for the first halfnine months of 2000 and
the like period of 1999, respectively.
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16
Interest on Debt - Net
Interest on debt - net decreased $604,000,$718,000, or 13.1%15.2%, and $1,014,000,$1,732,000, or 10.8%12.3%,
for the three months and sixnine months ended JuneSeptember 30, 2000, respectively,
versus the comparable periods of 1999. Due to changes in certain currency
exchange rates, especially the weakening of the Deutsche Mark relative to the
U.S. dollar, the Registrant's average reported borrowings have decreased,
resulting in lower interest expense for the periods indicated.
Income Tax Provision
The income tax provision increased $405,000,$452,000, or 5.5%12.7%, for the secondthird quarter of
2000 versus the secondthird quarter of 1999 and increased $1,739,000,$2,191,000, or 14.4%14.0%, for
the first halfnine months of 2000 compared to the first halfnine months of 1999. The
increases were primarily due to higher income before income taxes in 2000 versus
1999. The increase for the nine months ended September 30, 2000 versus the same
period of 1999 was partially offset by a lower effective income tax rates in the 2000 periods.
15
16rate.
UNUSUAL ITEM
The Registrant's tobacco papers business has suffered from extremely low pricing
in recent years as a result of industry overcapacity and declining domestic
consumption. To combat such depressed pricing, the Registrant announced in
September 1999 that, effective January 1, 2000, prices would be increased for
certain of its tobacco paper products. This initiative was required for the
Registrant to remain a viable, high-quality supplier to its tobacco paper
customers. As the Registrant expected, certain of these customers sought other
suppliers after this announcement. As a result, the Registrant announced in
December 1999 that it would begin reducing its tobacco paper manufacturing
capacity at its Ecusta mill during 2000.
During the first quarter of 2000, the Registrant finalized its plan of
restructuring and has begunshortly thereafter began to reduce the workforce at Ecusta.
The workforce reduction is expected to besubstantially completed by late
2000 and will ultimately result in
the reduction of approximately 250200 salaried and hourly jobs associated with the
Registrant's tobacco paper production capacity. This reduction in jobs is lower
than originally estimated due to stronger customer demand than anticipated. The
Registrant accrued and charged to expense $3,336,000 on a pre-tax basis
($2,120,000 after tax) in the first quarter of 2000 primarily as a result of the
voluntary portion, specifically 42 salaried employees, of this restructuring.
The amount of actual termination benefits paid and charged against the liability
as of September 30, 2000 was $79,000, covering 21 salaried employees.
IMPACT PROJECT
In July 2000, the Registrant initiated its IMPACT project, which is focused on
identifying and implementing changes to the Registrant's organization and its
business processes. The initial phase, the preliminary design work, has been
completed. The second phase of the IMPACT project is underway and is expected to
extend over the next few years.
FINANCIAL CONDITION
Liquidity
Cash and cash equivalents increased $11,109,000$14,810,000 during the first sixnine months of
2000. Net2000, principally due to cash provided by operating activitiesfrom operations of $39,356,000 more than$60,893,000. Such cash
generation was partially offset by cash used in investing activities of
$9,283,000 and financing activities of
$18,999,000. Significant cash activities during the first six months of 2000
included the payment of $14,796,000 of dividends and $9,390,000$17,395,000, mainly for additions to plant, equipment and timberlands.timberlands, and cash
used in financing activities of $28,696,000, primarily for dividend payments.
To finance the acquisition of S&H Papier-Holding GmbH, on December 22, 1997, the
Registrant entered into a $200,000,000 multi-currency revolving credit facility
("Revolving Credit Facility") with a syndicate of major lending institutions.
The
16
17
Revolving Credit Facility enables the Registrant to borrow up to the equivalent
of $200,000,000 in certain currencies in the form of revolving credit loans with
a final maturity date of December 22, 2002, and with interest periods
determined, at the Registrant's option, on a daily or one- to six-month basis.
Interest on the revolving credit loans is at variable rates based, at the
Registrant's option, on the Eurocurrency Rate or the Base Rate (lender's prime
rate), plus applicable margins. Margins are based on the higher of the
Registrant's debt ratings as published by Standard & Poor's and Moody's. As of
JuneSeptember 30, 2000, the Registrant's outstanding borrowings were DM 296,900,000297,100,000
(approximately $144,900,000)$133,800,000) under the Revolving Credit Facility.
In January 1998, the Registrant entered into two interest rate swap agreements,
each having a total notional principal amount of DM 52,600,000 (approximately
$25,700,000$23,700,000 as of JuneSeptember 30, 2000). One such agreement expired January 6,
2000. Under the remaining agreement, which expires January 3, 2001, the
Registrant receives a floating rate of the six-month DM London Interbank Offered
Rate ("LIBOR") and pays a fixed rate of 4.45% for the term of the agreement.
In January 1999, the Registrant entered into two additional interest rate swap
agreements, each having a total notional principal amount of DM 50,000,000
(approximately $24,400,000$22,500,000 as of JuneSeptember 30, 2000). Under these agreements,
which were effective April 6, 1999 and July 6, 1999 and which expire December
22, 2002, the Registrant receives a floating rate of the three-month DM LIBOR
plus twenty basis points and pays a fixed rate of 3.41% and 3.43%, respectively,
for the term of the agreements.
16
17
The Registrant has other interest rate swap agreements outstanding which do not
have a material impact on the Registrant's consolidated financial statements.
All of the Registrant's interest rate swap agreements convert a portion of the
Registrant's borrowings from a floating rate to a fixed rate basis. Although the
Registrant can terminate any of its swap agreements at any time, the Registrant
intends to hold all of its swap agreements until their respective maturities.
On July 22, 1997, the Registrant issued $150,000,000 principal amount of 6-7/8%
Notes due July 15, 2007. Interest on the Notes is payable semiannually on
January 15 and July 15. The 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 Notes were used primarily to repay certain short-term unsecured debt
and related interest.
The Registrant expects to meet all its near- and long-term cash needs from a
combination of internally generated funds, cash, cash equivalents and its
existing Revolving Credit Facility or other bank lines of credit and, if
prudent, other long-term debt.
Interest Rate Risk
The Registrant uses its Revolving Credit Facility and proceeds from the issuance
of its 6-7/8% Notes to finance a significant portion of its operations. The
Revolving Credit Facility provides for variable rates of interest and exposes
the Registrant to interest rate risk resulting from changes in the DM LIBOR. The
Registrant uses off-balance sheet interest rate swap agreements to hedge
partially interest rate exposure associated with the Revolving Credit Facility.
All of the Registrant's derivative financial instrument transactions are entered
into for non-trading purposes.
To the extent that the Registrant's financial instruments expose the Registrant
to interest rate risk and market risk, they are presented in the table below.
The table presents principal cash flows and related interest rates by year of
maturity for the Registrant's Revolving Credit Facility and 6-7/8% Notes as of
JuneSeptember 30, 2000. For interest rate swap agreements, the table presents
notional amounts
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18
and the related reference interest rates by year of maturity. Fair values
included herein have been determined based upon (1) rates currently available to
the Registrant for debt with similar terms and remaining maturities, and (2)
estimates obtained from dealers to settle interest rate swap agreements.
Year of Maturity
--------------------------------------------------------------------------------------------------------------------------------------------
(dollar amounts in thousands)
Total
Due at Fair Value
2000 2001 2002 2003 2004 ThereafterThere- Total Fair
after Due at Value at
Maturity at 6/9/30/00
---- ---- ---- ---- ---- ----------------- -------- ------------------
Debt:
Fixed rate -- $ 1,7381,620 $ 1,4511,339 $ 1,2921,192 $1,046 $ 1,133 $ 946 $150,414 $156,974 $150,005873 $149,768 $155,838 $149,099
Average interest rate 6.85% 6.86% 6.86% 6.87% 6.87% 6.87%
Variable rate -- $ -- $ -- $144,935$133,829 $ -- $ -- $ -- $144,935 $144,935$133,829 $133,829
Average interest rate 4.44% 4.54% 4.54%4.29% 4.65% 4.65% -- -- --
Interest rate swap agreements:
Variable to fixed swaps -- $27,508 $25,677$25,383 $23,694 $ 48,81645,045 $ -- $ -- $ -- $102,001 $ 2,28094,122 $ 1,886
Average pay rate 3.75% 3.42% 3.42% -- -- --
Average receive rate 4.30% 4.50% 4.50%4.75% 5.20% 5.20% -- -- --
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18
Capital Expenditures
The Registrant expended $9,390,000$17,511,000 on capital projects for the first sixnine
months of 2000 compared to $11,659,000$17,685,000 for the first sixnine months of 1999.
Capital spending is expected to range frombe approximately $35,000,000 during 2000, a
small portion of which relates to $40,000,000the Registrant's IMPACT project. Capital
spending is expected to be approximately $75,000,000 during 2000.2001, including
approximately $25,000,000 associated within the Registrant's IMPACT project.
Total spending on the IMPACT project, which should be completed by the end of
2002, is expected to be approximately $49,000,000, of which $45,000,000 will be
capital related.
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 the disposal of solid waste generated by its operations. To comply
with environmental laws and regulations, the Registrant has incurred substantial
capital and operating expenditures in past years. During 1999, 1998 and 1997,
the Registrant incurred approximately $15,800,000, $17,700,000 and $14,800,000,
respectively, in operating costs related to complying with environmental laws
and regulations. 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 continuesremains
open to negotiatenegotiations with EPA and DEP regarding the NOVs under the federal and
state air pollution control laws andlaws. The Registrant continues to negotiate with the
State of Wisconsin and the United States regarding natural resources damages and
response costs related to the discharge of PCBs and other hazardous substances
in the lower Fox River, on which the Registrant's Neenah mill is located. The
Registrant also is in settlement discussions with DEP and Penn PIRG regarding
the wastewater discharge permit for its Spring Grove mill. The costs associated
with such matters are presently unknown but could be substantial and perhaps
exceed the Registrant's available resources. The Registrant's current
assessment, after consultation with legal counsel, is that ultimately it should
be able to resolve
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19
these environmental matters without a long-term material adverse impact on the
Registrant. In the meantime, however, these matters could, at any particular
time or for any particular period, have a material adverse effect on the
Registrant's consolidated financial condition, liquidity or results of
operations. Moreover, there can be no assurance that the Registrant's reserves
will be adequate to provide for future obligations related to these matters or
that such obligations will not have a long-term material adverse effect on the
Registrant's consolidated financial condition, liquidity or results of
operations. See Note 6 to the Registrant's unaudited condensed consolidated
financial statements.
ENVIRONMENTAL ACHIEVEMENT
On May 19, 2000, the Registrant announced that its Neenah, Wisconsin paper mill
achieved ISO 14001 certification for its environmental management system and its
commitment to environmental excellence. ISO 14001 requires that an organization
have an environmental policy that includes commitments to prevention of
pollution, compliance with environmental laws and regulations and continual
improvements in its environmental management system. The Registrant's Spring
Grove, Pennsylvania and Gernsbach, Germany paper mills are already ISO 14001
certified. As a part of maintaining its certification, the mill's environmental
management system will be audited by an independent third party on an ongoing,
periodic basis. The Registrant's Pisgah Forest, North Carolina paper mill is
currently working on achieving ISO 14001 certification. The Registrant expects
its Pisgah Forest mill to be certified by the end of 2001 and plans to have all
of its principal operating facilities certified by 2002.
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19
YEAR 2000
The Registrant's efforts to achieve Year 2000 compliance for its information
technology systems and non-information technology systems have been successful
to date. The Registrant will continue to monitor its systems, as well as its
interaction with vendors, suppliers and customers, for potential Year 2000
noncompliance through the remainder of 2000.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under the headings "Liquidity" and "Interest Rate Risk" in
Item 2 as well as Note 4 to the Registrant's unaudited condensed consolidated
financial statements.
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 goals for revenues, cost reductions and return on
capital, expectations as to industry conditions and the Registrant's operatingfinancial
results and cash flow, demand for or pricing of its products, environmental
matters, Year 2000 compliance 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 that 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 identifies the following important
factors, among others, which could cause its results to differ from any results
which might be projected, forecasted or estimated by the Registrant in any such
forward-looking statements: (i) variations in demand for or pricing of its
products, including variations resulting from the Registrant's previously
announced tobacco paper
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price increases; (ii) the Registrant's ability to identify, finance and
consummate future alliances or acquisitions; (iii) the Registrant's ability to
develop new, high value-added engineered products; (iv) the Registrant's ability
to identify and implement its planned cost reductions;reductions pursuant to its DRIVE
project and changes to its business processes contemplated by its IMPACT
project; (v) changes in the cost or availability of raw materials used by the
Registrant, in particular market pulp, pulp substitutes and wastepaper; (vi)
changes in industry paper production capacity, including the construction of new
mills, the closing of mills and incremental changes due to capital expenditures
or productivity increases; (vii) the gain or loss of significant customers;
(viii) cost and other effects of environmental compliance, cleanup, damages,
remediation or restoration, or personal injury or property damage related
thereto, such as costs associated with the NOVs issued by EPA and DEP, and the costs
of natural resource restoration or damages related to the presence of PCBs in
the lower Fox River on which the Registrant's Neenah mill is located;located and the
effect of complying with the wastewater discharge limitations of the Spring
Grove mill permit which the Registrant is currently appealing; (ix) significant
changes in cigarette consumption, both domestically and internationally; (x)
enactment of adverse state, federal or foreign legislation or changes in
government policy or regulation; (xi) adverse results in litigation; (xii)
fluctuations in currency exchange rates; (xiii) failure of third parties which
are material to the Registrant to be Year 2000 compliant thereby interrupting
their and the Registrant's business operations; and (xiv) disruptions in
production and/or increased costs due to labor disputes.
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ITEM 6. EXHIBITS
(a) EXHIBITS
Number Description of Documents
------ ------------------------
3(ii) By-Laws, as amended June 21, 2000
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P. H. GLATFELTER COMPANY
Date: AugustNovember 14, 2000
---------------------------------
C. Matthew Smith
Chief Financial Officer
21
22
INDEX OF EXHIBITS
Number Description of Documents
------ ------------------------
3(ii) By-Laws, as amended June 21, 2000
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
22