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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER
DECEMBER 31, 1999 1-3560
P. H. GLATFELTER COMPANY
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-0628360
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
96 SOUTH GEORGE STREET, SUITE 500
YORK, PENNSYLVANIA 17401
-------------------------------- -------------------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, (717) 225-4711
INCLUDING AREA CODE
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
COMMON STOCK NEW YORK STOCK EXCHANGE
- --------------------------- ------------------------------------------
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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(TITLE OF CLASS)
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 \ \
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405
OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF THE REGISTRANT'S KNOWLEDGE, IN THE DEFINITIVE PROXY STATEMENT
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE AGGREGATE MARKET VALUE OF THE COMMON STOCK OF THE REGISTRANT HELD BY
NON-AFFILIATES AT MARCH 1, 2000 WAS $304,433,934.
COMMON STOCK OUTSTANDING AT MARCH 1, 2000: 42,411,000 SHARES
DOCUMENTS INCORPORATED BY REFERENCE
PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE IN
THIS REPORT ON FORM 10-K.
1. PROXY STATEMENT DATED MARCH 24, 2000 (PART III)
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PART I
Item 1. Business.
The Registrant, a paper manufacturing company, began operations in
Spring Grove, Pennsylvania in 1864 and was incorporated as a Pennsylvania
corporation in 1905. The Registrant has three paper mills located in the United
States: Spring Grove, Pennsylvania, Pisgah Forest, North Carolina and Neenah,
Wisconsin. The Registrant also has paper mills in Gernsbach, Germany and near
Odet, France. The Registrant also owns and operates a research and development
facility in Wisches, France and an abaca pulpmill in the Philippines. The
Registrant manufactures engineered papers and specialized printing papers.
The Registrant's engineered papers are used in the manufacture of a
variety of products, including tea bags, cigarette papers, cigarette tipping and
plug wrap papers, metalized beverage labels, decorative laminates, food product
casings, stencil papers, photo-glossy ink jet papers, greeting cards, medical
dressings, highway signs and striping, billboard graphics, decorative shopping
bags, playing cards, postage stamps, filters, labels and surgical gowns. Sales
of these papers are generally made directly to the converter of the paper.
Engineered papers are manufactured in each of the Registrant's mills.
Most of the Registrant's specialized printing paper products are
directed at the uncoated free-sheet portion of the industry. The Registrant's
specialized printing paper products are used principally for the printing of
case bound and quality paperback books, commercial and financial printing and
envelope converting. Specialized printing papers are manufactured in each of the
Registrant's mills.
In 1999, sales of paper for book publishing and commercial printing
generally were made through wholesale paper merchants, whereas sales of paper to
financial printers and converters generally were made directly. During 1997, a
wholesale paper merchant, Central National-Gottesman Inc. ("CNGI") (which buys
paper through its division, Lindenmeyr Book Publishing) accounted for 12% of the
Registrant's net sales. Net sales to each of the Registrant's customers,
including CNGI, were less than 10% of the Registrant's net sales during 1998 and
1999.
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A significant portion of the Pisgah Forest mill's sales and a modest
portion of the sales from the Gernsbach and Odet mills are made to a limited
number of major tobacco companies. Legal, regulatory and competitive pressures
on the tobacco industry in the United States and elsewhere could have a material
adverse effect on future tobacco paper sales. The profitability of these mills
has already been negatively affected by these pressures. In that regard, in
December 1999, the Registrant announced that it would be reducing the capacity
at its Pisgah Forest mill for certain of its less profitable tobacco papers.
This action, together with announced price increases for certain tobacco papers,
was designed to increase long-term profitability.
Set forth below is the amount (in thousands) and percentage of net
sales contributed by each of the Registrant's two classes of similar products
during each of the years ended December 31, 1999, 1998 and 1997.
Years Ended December 31,
1999 1998 1997
---- ---- ----
Net Sales % Net Sales* % Net Sales %
--------- - ---------- - --------- -
Specialized Printing
Papers ............. $325,240 48% $351,171 50% $354,076 62%
Engineered
Papers ............. 355,320 52 353,907 50 212,996 38
-------- -------- -------- -------- -------- --------
Total .............. $680,560 100% $705,078 100% $567,072 100%
-------- -------- -------- -------- -------- --------
* Schoeller & Hoesch (S&H) was acquired on January 2, 1998.
See Note 11 to the Registrant's 1999 consolidated financial statements
in Item 8 for certain geographic disclosure.
The competitiveness of the markets in which the Registrant sells its
products varies. The necessity for technical expertise limits the number of
competitors for the Registrant's engineered papers, excluding tobacco papers.
Competition for tobacco papers currently is intense as a result of excess
worldwide capacity. There are a number of companies
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in the United States manufacturing specialized printing papers and no one
company holds a dominant position. Capacity in the worldwide uncoated free-sheet
industry, which includes uncoated specialized printing papers, is not expected
to increase significantly for the next few years.
Service, product performance and technological advances are important
competitive factors in all of the Registrant's businesses. The Registrant
believes its reputation in these areas continues to be excellent.
Backlogs are generally not significant in the Registrant's business, as
substantially all of the Registrant's customer orders are produced within 30
days of receipt. A backlog of unmade customer orders is monitored primarily for
purposes of scheduling production to optimize paper machine performance. From
time to time, the Registrant may determine that the backlog of unmade orders,
along with high finished goods inventory levels, may be insufficient to warrant
a full schedule of paper machine production. In these circumstances, certain
paper machines may be temporarily shut down until backlog and inventory levels
warrant a resumption of operations.
The principal raw material used at the Spring Grove mill is pulpwood.
In 1999, the Registrant acquired approximately 78% of its pulpwood from saw
mills, purchased stumpage and independent logging contractors and 22% from
Company-owned timberlands. Hardwood and softwood purchases constituted 51% and
49% of the pulpwood acquired, respectively. Hardwoods are available within a
relatively short distance of the Registrant's Spring Grove mill. Softwood is
obtained primarily from Maryland, Delaware and Virginia. To protect its sources
of pulpwood, the Registrant actively promotes conservation and forest management
among suppliers and woodland owners. In addition, its subsidiary, The Glatfelter
Pulp Wood Company has acquired woodlands, particularly softwood growing land,
with the objective of having a significant portion of the Registrant's softwood
requirement available from Company-owned woodlands.
The Spring Grove pulpmill converts pulpwood into wood pulp for use in
its papermaking operations. In addition to the pulp it produces, the Spring
Grove mill purchases market pulp from others.
The principal raw material used by the Neenah mill is high-grade
recycled wastepaper. The quality of different types
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of high-grade wastepaper varies significantly depending on the amount of
contamination. Wastepaper prices rose steadily throughout 1999 and early 2000,
and the Registrant expects such prices to remain high for the remainder of 2000.
It is anticipated that there will be an adequate supply of wastepaper in the
future.
The major raw materials used at the Ecusta mill are purchased wood pulp
and processed flax straw, which is derived from linseed flax plants. The current
supply of wood pulp and flax straw is sufficient for the present and anticipated
future operations at the Ecusta mill. Ecusta receives a majority of its
processed flax straw from the Registrant's Canadian operation.
The principal raw materials used by the Gernsbach and Odet mills are
purchased wood pulp and abaca pulp provided by S&H's Philippine pulpmill. The
current supply of such materials is sufficient for the present and anticipated
future operations of these mills.
Wood pulp purchased from others comprised approximately 145,000 short
tons or 29% of the total 1999 fiber requirements of the Registrant. The average
cost of purchased pulp during 1999 was lower than in 1998. Major producers of
market pulp have implemented price increases effective in January 2000. The
Registrant expects additional price increases in the coming months.
The Registrant's Spring Grove mill generates all of its steam
requirements and is 100% self-sufficient in electrical energy generation. The
mill also produces excess electricity which is sold to the local power company
under a long-term co-generation contract. These net energy sales were $9,176,000
in 1999. Principal fuel sources used by the Spring Grove mill are coal, spent
chemicals, bark and wood waste, and oil, which were used to produce
approximately 57%, 35%, 7% and 1%, respectively, of the total energy internally
generated at the Spring Grove mill in 1999.
The Pisgah Forest mill generates all of its steam requirements and a
majority of its electric power requirements (62% in 1999) and purchases the
remainder of its electric power requirements. Coal was used to produce
essentially all of the mill's internally generated energy during 1999.
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During 1998, the Neenah mill began to purchase steam under a
twenty-year contract from a facility of Minergy Corporation. The facility, which
is located adjacent to the Neenah mill, processes paper mill sludge from the
Neenah mill as well as other mills in the Neenah area. During 1999, the Neenah
mill purchased 80% of its steam from Minergy Corporation and generated 20% of
its steam requirements. The Registrant expects to purchase approximately 80% of
its steam requirements from Minergy Corporation during 2000. The Neenah mill
generates a portion of its electric power requirements (11% in 1999) and
purchases the remainder of its electric power requirements. Gas was used to
produce almost all of the mill's internally generated steam during 1999 with
fuel oil being used to generate the remainder.
The Gernsbach and Odet mills both generate all of their own steam
requirements. The Gernsbach mill generated approximately 33% of its 1999
electric power requirements and purchased the balance. Gas was used to produce
almost all of the mill's internally generated energy during 1999. The Odet mill
purchased all of its 1999 electric power requirements.
The Registrant has approximately 3,700 active full-time employees.
Hourly employees at the Registrant's U.S. mills are represented by
different locals of the Paper, Allied-Industrial, Chemical and Energy Workers
International Union. In October 1996 a five-year labor agreement covering
approximately 900 employees at the Pisgah Forest mill was ratified. A five-year
labor agreement covering approximately 320 employees at the Neenah mill was
ratified in August 1997. A five-year labor agreement covering approximately 740
employees in Spring Grove was ratified in January 1998. Under all of these
agreements, wages increased by 3% in 1999 and will increase by 3% per year for
the duration of the agreements.
Approximately 775 hourly employees at the Registrant's S&H locations
are represented by various unions. The labor agreement covering approximately
650 hourly employees at the Gernsbach mill expired on February 28, 2000. The
terms and conditions of the expired agreement remain in effect until a new
agreement is negotiated. The Registrant is not directly involved in these
negotiations as the agreement is being negotiated by paper industry
representatives. This situation is not unusual at the Gernsbach mill and the
Registrant does not believe that the lack of an agreement will result in any
significant operational interruptions.
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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. 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. For further information with respect to such
compliance, reference is made to Item 3 of this report.
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 new "Cluster Rule"
regulations. This initiative is part of the Registrant's "New Century Project,"
which will require capital expenditures currently estimated at approximately
$30,000,000 to be incurred before April 2004.
Compliance with government environmental regulations is a matter of
high priority to the Registrant. To meet environmental requirements, the
Registrant has undertaken a variety of projects. During 1999, the Registrant
expended approximately $2,633,000 on environmental capital projects. The
Registrant estimates that projects requiring total expenditures of $2,908,000
and $426,000 for environmental-related capital will be initiated in 2000 and
2001, respectively. Since capital expenditures for pollution abatement generally
do not increase the productivity or efficiency of the Registrant's mills, the
Registrant's earnings have been and will be adversely affected to the extent
that selling prices have not been and cannot be increased to offset additional
incremental operating costs,
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including depreciation, resulting from such capital expenditures and to offset
additional interest expense on the amounts expended for environmental purposes.
In 1999, EPA and the Pennsylvania Department of Environmental
Protection ("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 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, the Registrant is
unable to predict the ultimate outcome of these matters or the costs involved,
and there can be no assurance that such costs would not have a material adverse
effect on the Registrant's consolidated financial condition, liquidity or
results of operations.
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
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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 mid to late 2000.
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Based on current information and advice from its environmental
consultants, the Registrant continues to believe that an aggressive effort, as
included in certain remedial alternatives in the draft RI/FS, to remove
PCB-contaminated sediment, much of which is buried under cleaner material or is
otherwise unlikely to move and which is abating naturally, would be
environmentally detrimental and, therefore, inappropriate.
Natural resources damages may be assessed in addition to cleanup costs.
In November 1999, FWS announced a preliminary estimate of damages as the result
of injury to recreational fishing. The range of damages announced is from $106
million to $150 million. The Registrant believes that this range is
significantly overstated. FWS and the federal and tribal trustees have not yet
announced estimates of certain other components of their natural resources
damages claim. The Registrant believes DNR to be the lead agency for assessment
of damages, and has been cooperatively assessing damages with DNR independent of
the federal agencies.
The Registrant currently is unable to predict the ultimate costs to the
Registrant related to this matter, because the Registrant cannot predict which
remedy will be selected for the site or its share of the cost of that remedy.
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, that it would prevail in any resulting litigation,
that its share of the cost of any remedy selected would not have a material
adverse effect on the Registrant's consolidated financial condition, liquidity
or results of operations or result in a default under the Registrant's loan
covenants or that the Registrant's share of such cost would not exceed its
available resources.
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
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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. 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.
Item 2. Properties.
The Registrant's executive offices are located in York, Pennsylvania.
The Registrant's paper mills are located in Spring Grove, Pennsylvania; Pisgah
Forest, North Carolina; Neenah, Wisconsin; Gernsbach, Germany; and near Odet,
France.
The Spring Grove facilities include seven uncoated paper machines with
a daily capacity ranging from 12 to 308 tons and an aggregate annual capacity of
about 302,000 tons of finished paper. The machines have been rebuilt and
modernized from time to time. During 1997, the Spring Grove mill completed its
Gravure Coater ("G-Coater") capital project. The Registrant views the G-Coater
as an important long-term strategic project which will allow it to expand its
more profitable engineered paper product group. The G-Coater, along with Spring
Grove's off-line combi-blade coater, gives the Registrant a potential annual
production capacity for coated paper of approximately
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53,000 tons. Since uncoated paper is used in producing coated paper, this does
not represent an increase in the Spring Grove mill capacity. The Spring Grove
facilities also include a pulpmill, which has a production capacity of
approximately 650 tons of bleached pulp per day.
During the first quarter of 1998, the Registrant completed construction
of a precipitated calcium carbonate ("PCC") plant at its Spring Grove mill. This
plant reduced the cost of PCC at this mill as well as lowered the need for
higher-priced raw materials used for increasing the opacity and brightness of
certain papers.
The Pisgah Forest facilities currently include twelve paper machines,
stock preparation equipment, a modified kraft bleached flax pulpmill with
thirteen rotary digesters, a PCC plant and a small recycled pulping operation.
The annual lightweight paper capacity is approximately 99,000 tons. Nine paper
machines are essentially identical while the newer, larger three remaining
machines have design variations specific to the products produced. Converting
equipment includes winders, calendars, slitters, perforators and printing
presses. As explained in Item 7 of this report, in December 1999, the Registrant
announced that it would begin reducing its tobacco paper manufacturing capacity
at this facility during 2000.
The Neenah facilities, consisting of a paper manufacturing mill,
converting plant and offices, are located at two sites. The Neenah mill includes
three paper machines, with an aggregate annual capacity of approximately 162,000
tons and a wastepaper de-inking and bleaching plant with an annual capacity of
approximately 97,000 tons. The converting plant contains a paper processing area
and warehouse space.
The Registrant's subsidiary, S&H, currently owns and operates paper
mills in Gernsbach, Germany and near Odet, France. S&H also owns a pulpmill in
the Philippines which supplies abaca pulp to S&H's paper mills and owns and
operates a research and development facility in Wisches, France.
The Gernsbach facility includes five uncoated paper machines with an
aggregate annual lightweight capacity of about 34,000 tons. In addition, the
Gernsbach facility has the capacity to produce 7,700 tons of metalized papers
annually, using a lacquering machine and two metalizers. The base paper used to
manufacture the metalized paper is purchased. The Odet facility includes two
paper machines with an aggregate annual
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lightweight capacity of approximately 4,900 tons of finished paper. The
Philippine pulpmill has an aggregate annual capacity of approximately 7,500 tons
of abaca pulp. Of this amount, approximately 7,200 tons are supplied to the
Gernsbach and Odet paper mills, with the remainder being sold to outside
parties. The Gernsbach and Odet paper mills obtain substantially all of their
abaca pulp from the Philippine pulpmill.
The Glatfelter Pulp Wood Company, a subsidiary of the Registrant, owns
and manages approximately 112,000 acres of land, most of which is timberland.
The Registrant owns substantially all of the properties used in its
papermaking operations, except for certain land leased from the City of Neenah
under leases expiring in 2050, on which wastewater treatment, storage and other
facilities and a parking lot are located. All of the Registrant's properties,
other than those which are leased, are free from any material liens or
encumbrances. In conjunction with a financing transaction between the Registrant
and one of its subsidiaries completed in February 1997, however, the Registrant
secured the indebtedness to the subsidiary incurred in the transaction with
mortgages on real estate assets having a value of approximately $300 million.
These mortgages have subsequently been assigned to another subsidiary of the
Registrant. The Registrant considers that all of its buildings are in good
structural condition and well-maintained and its properties are suitable and
adequate for present operations.
Item 3. Pending Legal Proceedings.
For a discussion of the separate NOVs issued to the Registrant by EPA
and DEP and the potential legal proceedings involving the lower Fox River, see
"Environmental Matters" in Part I of this report. The Registrant does not
believe that the other environmental matters discussed below will have a
material adverse effect on its business or consolidated financial position,
liquidity or results of operations.
DEP has proposed to reissue the Registrant's wastewater discharge
permit for the Spring Grove mill on terms unacceptable to the Registrant. DEP
has concurrently publicly proposed terms for resolution of an anticipated appeal
from the issuance of that permit which terms, subject to satisfaction of certain
conditions, are acceptable to the Registrant. However, such terms may be
unacceptable to EPA or certain third parties.
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The Registrant cannot determine the impact that the new permit will have on the
Registrant if it contains objectionable terms because the material terms of the
final form of the permit are unknown.
On May 16, 1989, the Pennsylvania Environmental Hearing Board approved
and entered an Amended Consent Adjudication between the Registrant and DEP in
connection with the Registrant's permit to discharge effluent into the West
Branch of the Codorus Creek. The Amended Consent Adjudication establishes
limitations on in-stream color, and requires the Registrant to conduct certain
studies and to submit certain reports regarding internal and external measures
to control the discharge of color and certain other adverse byproducts of
chlorine bleaching to the West Branch of the Codorus Creek. Through June 1999,
the Registrant has submitted these reports annually and met with representatives
of DEP to discuss the reports, possible revisions to or rescission of the
Amended Consent Adjudication, and whether to enter an agreement to install
additional wastewater pollution controls which would be expected to reduce
levels of color discharged.
The Pennsylvania Public Interest Research Group ("Penn PIRG") and
several other plaintiffs have 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 state where the nature and extent of any relief
can be predicted.
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Item 4. Submission of Matters to a Vote of Security Holders.
Not Applicable.
Executive Officers of the Registrant.
Executive Officers Office Age
- ------------------ ------ ---
G. H. Glatfelter II President and Chief Executive Officer (a) 48
T. C. Norris Chairman (b) 61
R. P. Newcomer Executive Vice President and Chief Financial Officer (c) 51
R. S. Lawrence Vice President - General Manager, Ecusta Division 60
L. R. Hall Vice President - General Manager, Glatfelter Division (d) 62
R. L. Miller Vice President - International Business (e) 53
C. M. Smith Vice President - Finance and Assistant Secretary (f) 41
R. S. Wood Vice President - Administration (g) 42
J. R. Anke Treasurer (h) 54
T. D. D'Orazio Controller (i) 41
M. R. Mueller Associate Counsel and Secretary (j) 39
Officers are elected to serve at the pleasure of the Board of
Directors. Except in the case of officers elected to fill a new position or a
vacancy occurring at some other date, officers are generally elected at the
annual meeting of the Board held immediately after the annual meeting of
shareholders.
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(a) Mr. Glatfelter became President and Chief Executive Officer in June
1998. From September 1995 to June 1998, he was Senior Vice President.
Prior to September 1995, he was Vice President - General Manager,
Glatfelter Paper Division.
(b) Mr. Norris is expected to retire as Chairman in April 2000. Prior to
June 1998, Mr. Norris was also President and Chief Executive Officer.
(c) Mr. Newcomer became Executive Vice President in June 1998 and continued
to serve as Chief Financial Officer at that time. From May 1997 to June
1998, he was Senior Vice President and Chief Financial Officer. From
September 1995 to April 1997, he was Senior Vice President, Treasurer
and Chief Financial Officer. From April 1995 to September 1995, he was
Vice President, Treasurer and Chief Financial Officer. Prior to April
1995, he was Vice President and Treasurer.
(d) Mr. Hall became Vice President - General Manager, Glatfelter Division
in August 1998. From November 1995 to August 1998, he was Director of
Operations - Glatfelter Division. Prior to November 1995, he was Spring
Grove Mill Manager.
(e) Mr. Miller became Vice President - International Business in August
1998. From September 1995 to August 1998, he was Vice President -
Administration. From August 1994 to September 1995, he was Director of
Planning, Acquisitions and Governmental Affairs.
(f) Mr. Smith became Assistant Secretary in December 1999 and continued to
serve as Vice President - Finance at that time. From August 1998 to
December 1998, he was Vice President - Finance, Assistant Secretary and
Controller. Prior to August 1998, he was Controller.
(g) Mr. Wood ceased serving as Secretary in December 1999 and continued to
serve as Vice President Administration at that time. From August 1998
to December 1999, he was Vice President - Administration and Secretary.
From May 1997 to August 1998, he was Secretary and Treasurer. Prior to
May 1997, he was Secretary and Assistant Treasurer.
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(h) Mr. Anke became Treasurer in September 1998. From June 1997 to
September 1998, he was Chief Financial Officer for the Senator John
Heinz History Center. From September 1996 to June 1997, he was a
consultant to AMSCO International, Inc. From April 1994 to September
1996, he was Vice President and Treasurer of AMSCO International, Inc.,
where he was responsible for treasury, insurance, retirement plan and
international functions and supervised approximately forty employees.
(i) Mr. D'Orazio became Controller in December 1998. Prior to December
1998, he was Assistant Corporate Controller of Mohawk Industries, Inc.,
where he was responsible for corporate accounting functions and
supervised approximately twenty employees.
(j) Mr. Mueller became Secretary and continued to serve as Associate
Counsel in December 1999. From December 1998 to December 1999, he was
Associate Counsel and Assistant Secretary. From June 1998 to December
1998, he was Associate Counsel. From September 1996 to June 1998, he
was the owner and Vice President of Scheller, Inc., where he was
responsible for the administration of the company. He was Legal Counsel
with Credit Suisse prior to August 1995.
PART II
Item 5. Market for the Registrant's Common Stock and Related Stockholder
Matters.
Common Stock Prices and Dividends Paid Information
The table below shows the high and low prices of the Registrant's common stock
on the New York Stock Exchange and the American Stock Exchange (Ticket Symbol
"GLT") and the dividends paid per share for each quarter during the past two
years. Trading of the Registrant's common stock commenced on the New York Stock
Exchange on November 12, 1998; prior to that date the Registrant's common stock
traded on the American Stock Exchange.
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1999 1998
------------------------------------ ------------------------------------
Quarter High Low Dividends High Low Dividends
1st $12-1/2 $ 9-5/8 $ .175 $18-3/8 $ 16 $ .175
2nd 14-13/16 11 .175 19-1/8 15-1/8 .175
3rd 16-7/16 13-3/16 .175 16-5/8 11-3/16 .175
4th 15-3/4 12-3/8 .175 13-7/16 11-3/8 .175
As of December 31, 1999 the Registrant had 3,059 shareholders of record. A
number of the shareholders of record are nominees.
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Item 6. Selected Financial Data.
Summary of Selected Consolidated Financial Data
Years Ended December 31
(in thousands except per share amounts)
1999 1998 1997 1996 1995 1994
---------- ---------- ---------- ----------- ---------- ----------
Net sales ........ $ 680,560 $ 705,078 $ 567,072 $ 566,084 $ 623,709 $ 478,302
Income (loss)
before accounting
changes ......... 41,425 36,133(a) 45,284 60,399 65,828 (118,251)(b)
Basic earnings
(loss) per share
before accounting
changes ......... .98 .86(a) 1.07 1.41 1.50 (2.67)(b)
Diluted earnings
(loss) per share
before accounting
changes ......... .98 .86(a) 1.07 1.41 1.49 (2.67)(b)
Total assets ..... 1,003,780 990,738 937,583 715,310 673,107 650,810(c)
Debt ............. 329,770 356,459 348,665 150,000 150,000 174,100
Cash dividends
declared per
common share .... $ .70 $ .70 $ .70 $ .70 $ .70 $ .70
1993 1992 1991 1990 1989
---------- ---------- ------------ ------------ ----------
Net sales ........ $ 473,509 $ 540,057 $ 567,764 $ 625,429 $ 598,777
Income (loss)
before accounting
changes ......... 20,409(d) 56,544 76,049 88,332 92,864
Basic earnings
(loss) per share
before accounting
changes ......... .46(d) 1.28 1.68 1.90 1.94
Diluted earnings
(loss) per share
before accounting
changes ......... .46(d) 1.27 1.67 1.88 1.93
Total assets ..... 847,087(e) 648,464 630,115 598,842 550,105
Debt ............. 150,000 10,100 __ __ 1,100
Cash dividends
declared per
common share .... $ .70 $ .70 $ .60 $ .575 $ .50
(a) After impact of an after-tax charge for voluntary early retirement
enhancement program (unusual item) of $5,988,000.
(b) After impact of an after-tax charge for a writedown of impaired assets
(unusual items) of $127,981,000.
(c) After impact of a pre-tax charge for a writedown of impaired assets
(unusual items) of $208,949,000.
(d) After impact of an after-tax charge for rightsizing and restructuring
(unusual items) of $8,430,000 and the effect of an increased federal
corporate income tax rate of $3,587,000.
(e) Includes an increase of $61,062,000 for the adoption of Statement of
Financial Accounting Standards No. 109.
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Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
FORWARD-LOOKING STATEMENTS
Any statements set forth in this annual report or otherwise made in writing
or orally by the Company with regard to its goals for revenues, cost reductions
and return on capital, expectations as to industry conditions and the Company's
operating results, demand for or pricing of its products, development of new
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 Company 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
Company's expectations. Accordingly, the Company 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 Company in
any such forward-looking statements: (i) variations in demand for or pricing of
its products, including variations resulting from the Company's announced
tobacco paper price increases; (ii) the Company's ability to identify, finance
and consummate future alliances or acquisitions; (iii) the Company's ability to
develop new, high value-added engineered products; (iv) the Company's ability to
identify and implement its planned cost reductions; (v) changes in the cost or
availability of raw materials used by the Company, 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 Notices of Violations ("NOVs") issued by the United States
Environmental Protection Agency ("EPA") and the Pennsylvania Department of
Environmental Protection ("DEP") and the costs of natural resource restoration
or damages related to the presence of polychlorinated biphenyls ("PCBs") in the
lower Fox River on which the Company's Neenah mill is located; (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 Company to be Year 2000 compliant thereby interrupting their
and the Company's business operations; and (xiv) disruptions in production
and/or increased costs due to labor disputes.
OVERVIEW
The Company classifies its sales into two product groups: engineered papers
(including tobacco papers) and specialized printing papers. The Glatfelter
Division, which includes the Spring Grove, Pennsylvania and Neenah, Wisconsin
paper mills, produces both specialized printing and engineered papers. The
Ecusta Division is comprised of the Pisgah Forest, North Carolina paper mill
("Ecusta") as well as other various supporting facilities. Schoeller & Hoesch
("S&H") includes paper mills in Gernsbach, Germany and near Odet, France. Both
Ecusta and S&H produce specialized printing papers and engineered papers
(including tobacco papers). S&H was acquired on January 2, 1998.
Overall, demand and pricing for the Company's products strengthened
throughout 1999. After the first quarter of 1999, the Company experienced only
normal seasonal downtime. Demand for the Company's tobacco papers, however,
continued to be very weak during 1999. This portion of the Company's 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 Company announced in September that it had notified its major
tobacco paper customers that, effective January 1, 2000, prices would be
increased for certain of its tobacco paper products. This initiative was
required for the Company to remain a viable, high-quality supplier to its
customers. As a result of this announcement, the Company expected that certain
of its tobacco paper customers would seek other, lower-quality suppliers. In
fact, this has happened. As a result, the Company announced in December 1999
that it would begin reducing its tobacco paper manufacturing capacity at its
Ecusta Division during 2000. Although the extent of the reduction is uncertain,
capacity could be reduced by up to one-third and the workforce reduced by
approximately 300 people. Such workforce reductions will be realized through a
combination of early retirements and layoffs. Because the extent of the sales
volume losses could not be reliably estimated as of the balance sheet date, the
Company has not recognized a one-time charge associated with the workforce
reduction or a one-time charge, if any, associated with the idling of equipment.
Such a charge, which will not materially adversely affect the Company's
financial condition, will be recognized in the first half of 2000.
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21
To offset the loss of such tobacco paper volume, the Company is planning to
grow its specialized printing and engineered papers businesses and has invested
resources into its new product development area. Despite this, the Company
expects that the reduction of its tobacco paper producing capacity will reduce
its total sales volume in the near term. The Company is making vigorous efforts
to remove substantially all costs associated with this loss of business as
capacity is reduced.
Markets for the Company's other engineered papers, excluding tobacco papers,
remained strong throughout 1999. Demand was stable and pricing was consistent.
The Company's net sales volume of other engineered papers increased by 12% in
the fourth quarter of 1999 versus the first quarter of 1999, a result of
improved demand for the Company's existing products.
Most of the Company's specialized printing paper products are directed at the
uncoated free sheet portion of the industry. The demand for such products was
relatively weak early in the year, with demand steadily improving thereafter.
Concurrent with this improving demand, the Company was able to implement various
price increases for its specialized printing paper products in 1999.
The Company announced a price increase for a substantial number of its
specialized printing papers effective in early February 2000. Early indications
are that additional price increases may be forthcoming in 2000. Partially
offsetting the positive financial impact of these price increases are increases
in the cost of certain of the Company's raw materials, especially market pulp
and wastepaper. Major producers of market pulp have implemented price increases
effective in January 2000, and the Company expects additional price increases in
the coming months. Since pricing for many of the Company's products typically
follows that of market pulp, the Company also expects improved pricing for such
products subsequent to any market pulp price increases. Furthermore, because
certain of the Company's operations are not entirely dependent on external
sources of pulp, especially its vertically integrated Spring Grove, Pennsylvania
pulp and paper mill, such increases in fiber prices are generally favorable to
the Company's results of operations.
1999 COMPARED TO 1998
Overall, net sales in 1999 decreased $24,518,000, or 3.5%, compared to 1998.
Though net sales volume was higher in 1999 versus 1998, average net pricing was
lower in 1999.
Sales of specialized printing papers were lower in 1999 than 1998 by 5.9% as
a result of weak demand and pricing for such products early in 1999. Throughout
the remainder of 1999, the Company was able to implement several price increases
as demand and pricing improved during the year. As a result of these price
increases, average net pricing for such products was 7.2% higher in the fourth
quarter of 1999 versus the fourth quarter of 1998. The Company announced
additional price increases for many of these products early in 2000 and
continues to maintain a healthy backlog of orders. The Company expects that
pricing will continue to improve, though at a somewhat slower rate, in 2000
compared to 1999.
Sales of engineered papers (including tobacco papers) increased by 3.5% in
1999 versus 1998, as an increase in net sales volume was partially offset by a
decrease in average net selling price. The increase in volume was largely a
result of successfully marketing certain of the Company's existing products. As
mentioned above, the Company, along with much of the rest of the paper industry,
experienced weakness in demand for many of its products early in 1999. As a
result, the Company accepted orders for certain of its products with lower
average net selling prices. The decrease in average net selling price for the
year 1999, therefore, is almost entirely a result of a change in mix of products
sold and not a weakening of prices for specific products.
The cost of products sold decreased by 3.4% in 1999 compared to 1998. As the
Company reported in 1998 (see "Unusual Item" below), it has taken aggressive
steps to remove costs from its business which has led to the lower cost of
products sold. Further, an increase in operational efficiency at many of the
Company's operating locations was realized as a result of an improving and more
stable order pattern for many of the Company's products. In addition, market
pulp prices, a key raw material in the Company's business, were lower, on
average, than in 1998.
The increase in selling, general and administrative expenses of $4,457,000 in
1999 versus 1998 was primarily a result of additional spending on legal and
professional services relating to certain environmental and other matters.
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22
Profit from operations before interest income and expense and taxes was
$81,582,000 in 1999 compared to $88,599,000 excluding the unusual item in 1998.
This decrease was largely due to the decrease in net sales in 1999 versus 1998,
partially offset by a decrease in cost of products sold.
Interest on investments and other - net remained flat from 1998 to 1999. The
Company's average cash holdings in 1999 were higher than in 1998, yielding
higher interest income. Offsetting this was interest income realized in 1998 on
a trust held to defease certain of the Company's debt. The defeasance trust was
liquidated early in 1998 and no such income was realized in 1999.
Gain from property dispositions, etc. - net increased from $1,019,000 in 1998
to $4,076,000 in 1999. In the first quarter of 1999, the Company sold a tract of
timberland, realizing a gain of $976,000. During the remaining quarters of 1999,
the Company sold various other fully-depreciated items, in addition to the
rights to standing timber on select tracts of land. Subsequent to the first
quarter of 1999, no single sale was material to the Company's results of
operations. No significant sales of such property occurred in 1998. From time to
time, the Company divests certain tracts of its timberlands when it is offered
attractive prices. The Company does not actively solicit the sale of its
timberlands as it intends to maintain its own sources of raw materials.
Interest on debt was $18,424,000 in 1999 compared to $22,007,000 in 1998.
This decrease was a result of lower average borrowings and generally lower
interest rates experienced in 1999 versus 1998. Such lower average borrowings
were partially a result of the Company's repayment of its $150,000,000 principal
amount 5 7/8% Notes early in 1998 as well as strengthening of the U.S. dollar
relative to the DM during 1999.
1998 COMPARED TO 1997
Net sales in 1998 increased $138,006,000, or 24.3%, compared to 1997. Net
sales volume and average selling prices decreased at the Company's Glatfelter
and Ecusta divisions. The resulting decrease in net sales at these divisions was
more than offset by the net sales of S&H.
Sales of engineered papers (including tobacco papers) increased by 65.7% in
1998 versus 1997. This increase was due to the inclusion of S&H in 1998's
results. Overall, the sales volume of engineered papers increased by 34.6%. The
average net selling price per ton for the Company's engineered papers increased
significantly due to a shift in product mix. S&H produces and sells lightweight
papers and, as a result, has higher average net selling prices per ton than
those of the Glatfelter and Ecusta divisions. The average net selling price per
ton of tobacco papers decreased in 1998 versus 1997. Overall, tobacco paper
sales volume increased due to the inclusion of S&H's results in 1998.
Specialized printing paper sales were down less than 1% in 1998 versus 1997.
This decrease was due to lower printing paper sales volume. Average net selling
prices per ton increased slightly. This increase was entirely due to a change in
product mix. Average selling prices per ton for non-S&H printing papers
decreased slightly in 1998 compared to 1997.
The cost of products sold for the Glatfelter and Ecusta divisions decreased
due to a decrease in sales volume and lower costs for certain raw materials in
1998 compared to 1997. Raw material costs had a slightly favorable effect on the
Company's relative performance in 1998 compared to 1997 as cost per ton for the
Company's principal raw materials, market pulp and wastepaper, decreased in 1998
versus 1997. The Company also benefited in 1998 from cost savings achieved
through the start-up of the Spring Grove mill's precipitated calcium carbonate
("PCC") plant. This plant reduced the cost of PCC at this mill as well as
lowered the need for higher priced raw materials used for increasing the opacity
and brightness of certain papers.
The cost of sales per unit decreased at the Glatfelter Division in 1998
versus 1997 due primarily to lower raw material costs. The cost of sales per
unit at the Ecusta Division increased in 1998 as compared to 1997. This increase
was mainly due to the amount of market-related down-time taken at the Ecusta
Division and the resulting absorption of fixed costs over fewer units produced.
Selling, general and administrative expenses increased by $14,990,000 in 1998
versus 1997. This increase was due to the selling, general and administrative
expenses related to S&H, offset somewhat by a decrease in such expenses at the
Glatfelter and Ecusta divisions. S&H has higher selling, general and
administrative expenses as a percentage of sales primarily as a result of higher
selling costs incurred in delivering product to its customers. Selling, general
and
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administrative expenses for the Company were 7.3% and 6.5% of net sales for 1998
and 1997, respectively.
Profit from operations before the unusual item, interest income and expense
and taxes was $88,599,000 in 1998 compared to $84,492,000 in 1997. This increase
was due to the incremental operating results of S&H which more than offset
decreases in profit from operations before the unusual item, interest income and
expense and taxes at the Glatfelter and Ecusta divisions. The decreases at the
Glatfelter and Ecusta divisions were the result of a decrease in net sales,
offset somewhat by a decrease in cost of products sold and selling, general and
administrative expenses. The decrease in net sales at these two divisions in
1998 as compared to 1997 was primarily due to reduced sales volumes, exacerbated
somewhat by a decrease in average selling price per ton.
Interest on investments and other - net decreased from $7,785,000 in 1997 to
$1,956,000 in 1998. This decrease was primarily a result of a decrease in
investment income in 1998 compared to 1997. In 1997, the proceeds from the
issuance of $150,000,000 of step-down preferred stock by a subsidiary, GWS
Valuch, Inc., were placed in trust and invested in interest-bearing marketable
securities, resulting in a significant increase in interest income. The trust
was liquidated in early 1998. This transaction is described in Note 6 to the
Company's 1999 consolidated financial statements.
Gain from property dispositions, etc. - net decreased from $3,166,000 in 1997
to $1,019,000 in 1998. During the second quarter of 1997, the Company completed
the sale of a parcel of recreational property near its Ecusta mill resulting in
a pre-tax gain of approximately $2,200,000. No property sales of this magnitude
were included in the 1998 results.
Interest on debt was $22,007,000 in 1998 compared to $18,700,000 in 1997. The
primary reason for this increase was the Company's higher net borrowing level
during the first quarter of 1998 as compared to the first quarter of 1997, in
part due to the borrowings of approximately $150,000,000 under the Revolving
Credit Facility to finance the acquisition of S&H. The Company repaid its
$150,000,000 principal amount of its 5 7/8% Notes on March 1, 1998.
UNUSUAL ITEM
During 1998, the Company recognized a pre-tax charge of $9,816,000 related
primarily to the accrual of pension and medical benefits for certain salaried
and hourly employees of the Ecusta Division and certain salaried employees of
the Glatfelter Division who elected to participate in a voluntary early
retirement enhancement program. The pre-tax charge also included the cost of
termination of several Glatfelter Division salaried employees which was
necessary to achieve the Company's cost-savings goals. The total after-tax
effect of the unusual item for the year was $5,988,000, or $.14 per share.
ACQUISITION OF SCHOELLER & HOESCH
On January 2, 1998, the Company acquired S&H which currently owns and
operates paper mills in Gernsbach, Germany and near Odet, France. S&H also owns
a pulpmill in the Philippines which supplies abaca pulp to S&H's paper mills and
owns and operates a facility in Wisches, France. S&H primarily manufactures
engineered papers and has the leading position in the world tea bag paper
market. It also manufactures other engineered papers including tobacco,
metalized, stencil, filter and casing papers, as well as some specialized
printing papers.
The acquisition of S&H provided the Company with a strong business position
in the world tea bag paper market and a presence in other long fiber markets,
such as stencil, filter and casing papers. It also strengthened the Company's
tobacco papers business by providing a manufacturing presence in Europe and a
significant share of the European tobacco papers market, plus the ability to
manufacture and market ultraporous plug wrap, a growing segment of the world
tobacco papers market.
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FINANCIAL CONDITION
LIQUIDITY During 1999, the Company's cash and cash equivalents increased by
$25,128,000, principally due to cash provided from operations of $81,658,000.
Such cash generation was partially offset by cash used in investing activities
of $29,229,000, mainly for additions to plant, equipment and timberlands and the
acquisition of the remaining 50% interest in Cascadec, and cash used in
financing activities of $26,682,000, primarily for dividend payments.
The Company 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. The Company is subject to certain financial
covenants under the Revolving Credit Facility. The Company is in compliance with
all such covenants.
INTEREST RATE RISK The Company uses its Revolving Credit Facility and 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 Company to
interest rate risk resulting from changes in the DM London Interbank Offered
Rate. The Company uses off-balance sheet interest rate swap agreements to hedge
partially interest rate exposure associated with the Revolving Credit Facility.
All of the Company's derivative financial instrument transactions are entered
into for non-trading purposes.
To the extent that the Company's financial instruments expose the Company 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 Company's Revolving Credit Facility and 6 7/8% Notes as of
December 31, 1999. For interest rate swap agreements, the table presents
notional amounts and the related reference interest rates by year of maturity.
Fair values included herein have been determined based upon (1) rates currently
available to the Company for debt with similar terms and remaining maturities,
and (2) estimates obtained from dealers to settle interest rate swap agreements.
The table should be read in conjunction with Notes 6 and 7 to the consolidated
financial statements (dollar amounts in thousands).
Year of Maturity Total Fair Value
------------------------------------------------------------------ Due at at
2000 2001 2002 2003 2004 Thereafter Maturity 12/31/99
------ -------- -------- ------- ------ ---------- -------- --------
Debt:
Fixed rate-- $1,824 $ 1,532 $ 1,364 $ 1,197 $1,001 $150,741 $157,659 $151,399
Average interest rate 6.85% 6.85% 6.85% 6.86% 6.86% 6.87%
Variable rate-- $ -- $ -- $145,545 $ -- $ -- $ -- $145,545 $145,545
Average interest rate 3.78% 3.60% 3.38% -- -- --
Interest rate swap agreements:
Variable to fixed swaps-- $3,498 $ 29,011 $ 27,081 $51,485 $ -- $ -- $111,075 $ 1,567
Average pay rate 4.34% 3.75% 3.42% 3.42% -- --
Average receive rate 3.56% 3.37% 3.40% 3.40% -- --
CAPITAL RESOURCES During 1999, the Company expended $24,160,000 on capital
projects. In an effort to reduce its net debt, the Company has made a chief goal
of minimizing capital spending, allotting only sufficient funds to maintain
existing operations and for modest, high-return capital improvements. The
Company will remain in this highly discriminating spending mode at least through
2000 and possibly thereafter. Capital spending is expected to be approximately
$40,000,000 in 2000.
ENVIRONMENTAL MATTERS The Company 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 Company
has incurred substantial capital and operating expenditures in past years.
During 1999, 1998 and 1997, the Company 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 Company anticipates
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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 Company 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 Company continues to negotiate with EPA and DEP regarding the
NOVs under the federal and state air pollution control laws and 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 Company's Neenah mill is located. The costs
associated with such matters are presently unknown but could be substantial and
perhaps exceed the Company's available resources. The Company'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 Company. In the meantime, however, these matters could, at
any particular time or for any particular period, have a material adverse effect
on the Company's consolidated financial condition, liquidity or results of
operations. Moreover, there can be no assurance that the Company'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
Company's consolidated financial condition, liquidity or results of operations.
ENVIRONMENTAL ACHIEVEMENTS On April 20, 1999, the Company announced that its
Spring Grove mill was the first pulp and paper mill in the United States to
achieve ISO 14001 certification for its environmental management system and its
commitment to environmental excellence. ISO 14001 requires that an organization
have an environmental policy that includes commitments to prevention of
pollution, compliance with environmental laws and regulations and continual
improvements in its environmental management system. As a part of maintaining
its certification, the mill's environmental management system will be assessed
by a third party on an ongoing, periodic basis. The Company's Gernsbach, Germany
facility is also ISO 14001 certified. The Company plans to achieve ISO 14001
certification at all of its other mills by the end of 2002.
Also on April 20, 1999, the Company announced its "New Century Project." The
New Century Project is a commitment by the Company to participate at its Spring
Grove mill in EPA's Advanced Technology Incentive Program under the "Cluster
Rules." As a result, the Company expects to spend approximately $30,000,000
prior to April 2004 to eliminate the use of elemental chlorine in its bleaching
process, reduce odor emissions and improve water quality. The New Century
Project demonstrates the Company's commitment to minimizing its impact on
natural resources.
YEAR 2000 The Company's efforts to achieve Year 2000 compliance for its
information technology systems and non-information technology systems have been
successful to date. The Company experienced essentially no problems as a result
of the Year 2000 date change on December 31, 1999. Further, the Company was not
negatively impacted by any noncompliance by its key vendors, suppliers or
customers.
The Company dedicated a substantial portion of the resources of its internal
information technology employees to achieve Year 2000 compliance. Including
primarily normal wage, benefit and related costs for its ordinary complement of
information technology personnel, the Company expensed approximately $450,000,
$634,000 and $125,000 during 1999, 1998 and 1997, respectively, on this project.
The Company made only minor capital expenditures to replace certain systems or
equipment that were not Year 2000 compliant. The Company incurred approximately
$210,000 in capital-related costs during 1999 to achieve Year 2000 compliance.
While the Company 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, the Company has redeployed the
resources associated with its information technology employees to the
development and implementation of strategic information systems.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
See the discussion under the heading "Interest Rate Risk" in Item 7 as
well as Notes 6 and 7 to the Registrant's consolidated financial statements in
Item 8.
Item 8. Financial Statements and Supplementary Data.
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
AND COMPREHENSIVE INCOME
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands except per share amounts) 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
NET SALES $680,560 $705,078 $567,072
OTHER INCOME:
Energy sales - net (Note 1(j)) 9,176 9,652 9,189
Interest on investments and other - net (Note 6) 1,994 1,956 7,785
Gain from property dispositions, etc. - net 4,076 1,019 3,166
-------- ------- -------
Total 695,806 717,705 587,212
-------- ------- -------
COSTS AND EXPENSES:
Cost of products sold 555,974 575,351 458,126
Selling, general and administrative expenses 56,256 51,799 36,809
Interest on debt (Notes 6 and 7) 18,424 22,007 18,700
Unusual item (Note 3) -- 9,816 --
-------- ------- -------
Total costs and expenses 630,654 658,973 513,635
-------- ------- -------
INCOME BEFORE INCOME TAXES 65,152 58,732 73,577
-------- ------- -------
INCOME TAX PROVISION (Note 5):
Current 10,973 14,488 25,453
Deferred 12,754 8,111 2,840
-------- ------- -------
Total 23,727 22,599 28,293
-------- ------- -------
NET INCOME $ 41,425 $ 36,133 $ 45,284
======== ======= =======
BASIC AND DILUTED EARNINGS PER SHARE (Notes 4 and 8) $.98 $ .86 $ 1.07
COMPREHENSIVE INCOME, NET OF TAX:
- ---------------------------------
NET INCOME $ 41,425 $ 36,133 $ 45,284
FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (Note 1(n)) 219 (553) (651)
-------- ------- -------
COMPREHENSIVE INCOME $ 41,644 $ 35,580 $ 44,633
======== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
25
27
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(in thousands except share information) 1999 1998
- -------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 1(b)) $ 76,035 $ 50,907
Accounts receivable (less allowance for doubtful accounts:
1999, $1,227; 1998, $1,532) 74,638 70,076
Inventories (Note 1(c)) 115,100 117,852
Prepaid expenses and other current assets 2,354 3,073
----------- -----------
Total current assets 268,127 241,908
PLANT, EQUIPMENT AND TIMBERLANDS - NET (Notes 1(d) and 10) 582,213 628,156
OTHER ASSETS (Notes 1(e) and 9) 153,440 120,674
----------- -----------
Total assets $ 1,003,780 $ 990,738
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt (Note 6) $ 1,824 $ 2,088
Short-term debt 26,566 28,990
Accounts payable 40,047 34,293
Dividends payable 7,393 7,365
Income taxes payable 9,601 8,189
Accrued compensation and other expenses
and deferred income taxes 47,200 45,951
----------- -----------
Total current liabilities 132,631 126,876
LONG-TERM DEBT (Note 6) 301,380 325,381
DEFERRED INCOME TAXES (Notes 1(f) and 5) 147,698 123,321
OTHER LONG-TERM LIABILITIES (Notes 1(k), 2, 8 and 9) 63,947 71,231
----------- -----------
Total liabilities 645,656 646,809
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 10)
SHAREHOLDERS' EQUITY (Note 8):
Common stock, $.01 par value; authorized - 120,000,000 shares;
issued (including shares in treasury: 1999, 12,115,725;
1998, 12,276,744) - 54,361,980 shares 544 544
Capital in excess of par value 42,296 42,612
Retained earnings 496,680 484,793
Accumulated other comprehensive income (1,392) (1,611)
----------- -----------
Total 538,128 526,338
Less cost of common stock in treasury (180,004) (182,409)
----------- -----------
Total shareholders' equity 358,124 343,929
----------- -----------
Total liabilities and shareholders' equity $ 1,003,780 $ 990,738
=========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
26
28
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1999, 1998 and 1997
Accumulated
Common Capital in Other Total
(in thousands except Shares Common Excess of Retained Comprehensive Treasury Shareholders'
shares outstanding) Outstanding Stock Par Value Earnings Income Stock Equity
Balance, January 1, 1997 42,539,828 $544 $41,601 $462,337 $(407) $(173,452) $330,623
Net income 45,284 45,284
Foreign currency translation
adjustments (651) (651)
Cash dividends declared (29,548) (29,548)
Delivery of treasury shares:
Restricted stock awards 13,350 217 196 413
Employee stock purchase
and 401(k) plans 150,940 545 2,219 2,764
Employee stock options
exercised - net 103,690 260 1,517 1,777
Purchase of stock for treasury (658,200) (11,304) (11,304)
----------- ----- --------- -------- ------- -------- --------
Balance, December 31, 1997 42,149,608 544 42,623 478,073 (1,058) (180,824) 339,358
Net income 36,133 36,133
Foreign currency translation
adjustments (553) (553)
Cash dividends declared (29,413) (29,413)
Delivery of treasury shares:
Employee stock purchase
and 401(k) plans 182,528 (13) 2,713 2,700
Employee stock options
exercised - net 3,100 2 46 48
Purchase of stock for treasury (250,000) (4,344) (4,344)
----------- ----- --------- -------- ------- -------- --------
Balance, December 31, 1998 42,085,236 544 42,612 484,793 (1,611) (182,409) 343,929
Net income 41,425 41,425
Foreign currency translation
adjustments 219 219
Cash dividends declared (29,538) (29,538)
Delivery of treasury shares:
Performance shares 11,440 (28) 170 142
401(k) plans 143,579 (273) 2,146 1,873
Employee stock options
exercised - net 6,000 (15) 89 74
----------- ----- --------- -------- ------- -------- --------
Balance, December 31, 1999 42,246,255 $544 $42,296 $496,680 $(1,392) $(180,004) $358,124
=========== ===== ========= ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
27
29
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1999, 1998 and 1997
(in thousands) 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 41,425 $ 36,133 $ 45,284
Items included in net income not using (providing) cash:
Depreciation, depletion and amortization 47,766 47,738 35,796
Loss (gain) on disposition of fixed assets (1,339) 481 (2,121)
Expense related to employee stock purchase
and 401(k) plans 2,303 1,652 1,270
Changes in assets and liabilities, net of effect
of acquisitions:
Accounts receivable (7,170) 8,703 (484)
Inventories (1,965) 16,437 (1)
Other assets and prepaid expenses (20,886) (2,328) (12,309)
Accounts payable, accrued compensation and
other expenses, deferred income taxes and
other long-term liabilities 13,147 (8,272) 14,111
Income taxes payable (1,994) (4,341) 801
Deferred income taxes - noncurrent 10,371 4,214 2,856
-------- --------- --------
Net cash provided by operating activities 81,658 100,417 85,203
-------- --------- --------
Cash flows from investing activities:
Sale (purchase) or maturity of investments - net 401 158,475 (154,363)
Proceeds from disposal of fixed assets 1,929 319 3,749
Additions to plant, equipment and timberlands (24,160) (40,531) (60,503)
Acquisition of S&H - net of cash acquired -- (147,491) --
Acquisition of Cascadec (7,399) -- --
-------- --------- --------
Net cash used in investing activities (29,229) (29,228) (211,117)
-------- --------- --------
Cash flows from financing activities:
Proceeds from long-term debt issuance -- -- 150,000
Net borrowings of short-term debt 2,828 11,078 --
Net payment of other long-term debt -- (16,669) --
Repayment of 5 7/8% Notes -- (150,000) --
Acquisition-related borrowings -- 101,500 48,665
Dividends paid (29,510) (29,436) (29,601)
Purchases of common stock -- (4,344) (11,304)
Proceeds from issuance of common stock
under employee stock purchase plans
and key employee long-term incentive plan -- 1,088 3,271
-------- --------- --------
Net cash provided by (used in) financing activities (26,682) (86,783) 161,031
-------- --------- --------
Effect of exchange rate changes on cash (619) (418) --
-------- --------- --------
Net increase (decrease) in cash and cash equivalents 25,128 (16,012) 35,117
Cash and cash equivalents:
At beginning of year 50,907 66,919 31,802
-------- --------- --------
At end of year $ 76,035 $ 50,907 $ 66,919
======== ========= ========
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 23,273 $ 22,722 $ 14,293
Income taxes 12,119 19,573 24,650
The accompanying notes are an integral part of these consolidated financial
statements.
28
30
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31, 1999, 1998 and 1997
NOTE 1
Summary of Significant Accounting Policies
(a) NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION P. H. Glatfelter
Company and subsidiaries are manufacturers of engineered papers and specialized
printing papers. Headquartered in York, Pennsylvania, the Company's paper mills
are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Pisgah Forest,
North Carolina; Gernsbach, Germany; and near Odet, France. The Company's
products are marketed in most parts of the United States and in many foreign
countries, either through wholesale paper merchants, brokers and agents or
direct to customers. The accounts of the Company, and those of its subsidiaries,
are included in the consolidated financial statements. All inter-company
transactions have been eliminated. The Company's operating locations have been
aggregated into a single reportable segment since they have similar economic
characteristics, products, production processes, types of customers and
distribution methods. Certain reclassifications have been made to the prior
years' consolidated financial statements to conform to those classifications
used in 1999.
On January 2, 1998, the Company acquired S&H Papier - Holding GmbH
("S&H"), the specialty paper division of the Schoeller and Hoesch Group. The
results of S&H, a German company, are included in the consolidated financial
statements from the date of acquisition. See Note 2 for further discussion of
the acquisition, including disclosure of pro forma information.
(b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid financial
instruments with effective maturities at date of purchase of three months or
less to be cash equivalents.
(c) INVENTORIES Inventories are stated at the lower of cost or market. Raw
materials and in-process and finished inventories of the Company's domestic
operations are valued using the last-in, first out (LIFO) method, and the
supplies inventories are valued principally using the average cost method.
Certain of the Company's inventories are valued using a method which
approximates average cost. Inventories at December 31 are summarized as follows:
1999 1998
-------- --------
(in thousands)
Raw materials $ 41,013 $ 37,559
In-process and finished 42,463 49,901
Supplies 31,624 30,392
-------- --------
Total $115,100 $117,852
======== ========
If the Company had valued all inventories using the average cost
method, inventories would have been $3,790,000 and $4,143,000 higher than
reported at December 31, 1999 and 1998, respectively. During 1998, the Company
liquidated certain LIFO inventories. The effect of the liquidation did not have
a significant impact on net income.
At December 31, 1999 and 1998, the recorded value of the above
inventories exceeded inventories for income tax purposes by approximately
$22,200,000 and $22,100,000, respectively.
(d) PLANT, EQUIPMENT AND TIMBERLANDS Depreciation is computed for financial
reporting using the straight-line method over the estimated useful lives of the
respective assets and for income taxes principally using accelerated methods
over lives established by statute or Treasury Department procedures. Provision
is made for deferred income taxes applicable to this difference. See Notes 1(f)
and 5.
The range of estimated service lives used to calculate financial
reporting depreciation for principal items of property, plant and equipment are
as follows:
Buildings 10 - 45 Years
Machinery and equipment 7 - 35 Years
Other 4 - 40 Years
Depletion of the cost of timber is computed on a unit rate of usage by
growing area based on estimated quantities of recoverable material.
Maintenance and repairs are charged to income and major renewals and
betterments are capitalized. At the time property is retired or sold, the cost
and related reserve are eliminated and any resultant gain or loss is included in
income.
Property, equipment and timberlands accounts, as of December 31, are
summarized as follows:
1999 1998
----------- -----------
(in thousands)
Land and buildings $ 145,898 $ 148,079
Machinery and equipment 1,071,656 1,071,469
Other 37,745 36,562
Less accumulated
depreciation (699,557) (657,581)
----------- -----------
Total 555,742 598,529
Construction in progress 7,893 10,962
Timberlands, less depletion 18,578 18,665
----------- -----------
Plant, equipment and
timberlands - net $ 582,213 $ 628,156
=========== ===========
29
31
(e) INVESTMENTS IN DEBT SECURITIES Long-term investments, which are due over a
remaining 15-year period and are classified as held-to-maturity, are included in
"Other assets" on the Consolidated Balance Sheets at December 31, 1999 and 1998.
The investments consist of approximately $10,400,000 and $10,300,000 in U.S.
Treasury and government obligations at December 31, 1999 and 1998, respectively.
The fair market value of such investments approximated the amortized cost, and
therefore, there were no significant unrealized gains or losses as of December
31, 1999 and 1998.
(f) INCOME TAX ACCOUNTING The Company recognizes deferred tax assets and
liabilities for temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities. The impact on deferred
taxes of changes in tax rates and laws, if any, applied to the years during
which temporary differences are expected to be settled, are reflected in the
consolidated financial statements in the period of enactment.
(g) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the
Consolidated Balance Sheets for cash and cash equivalents, accounts receivable,
other assets, short-term debt and long-term debt approximate fair value.
(h) VALUATION OF LONG-LIVED ASSETS The Company evaluates long-lived assets for
impairment periodically or when a specific event indicates that the carrying
value of an asset may not be recoverable. Recoverability is assessed based on
estimates of future cash flows expected to result from the use and eventual
disposition of the asset. If the sum of expected undiscounted cash flows is less
than the carrying value of the asset, an impairment loss is recognized. The
impairment loss is measured as the amount by which the carrying amount of the
asset exceeds its fair value.
(i) ACCOUNTING ESTIMATES The preparation of financial statements in conformity
with generally accepted accounting principles requires the use of management's
estimates and assumptions. Management believes the estimates and assumptions
used in the preparation of these consolidated financial statements are
reasonable, based upon currently available facts and known circumstances, but
recognizes that actual results may differ from those estimates and assumptions.
See Note 10.
(j) REVENUE RECOGNITION The Company recognizes revenue on product sales upon
shipment and on energy sales when electricity is delivered to its customer.
Certain costs associated with the production of electricity, such as fuel,
labor, depreciation and maintenance are netted against the energy sales for
presentation on the Consolidated Statements of Income and Comprehensive Income.
The Company's current contract to sell electricity generated in excess of its
own use expires in the year 2010 and requires that the customer purchase all of
the Company's excess electricity up to a certain level. The price for the
electricity is determined pursuant to a formula and varies depending upon the
amount sold in any given year.
(k) ENVIRONMENTAL LIABILITIES Accruals for losses associated with environmental
obligations are recorded when it is probable that a liability has been incurred
and the amount of the liability can be reasonably estimated based on existing
legislation and remediation technologies. These accruals are adjusted
periodically as assessment and remediation actions continue and/or further legal
or technical information develops. Accrued environmental liabilities are
classified as "Other long-term liabilities" on the Consolidated Balance Sheets.
Such undiscounted liabilities are exclusive of any insurance or other claims
against third parties.
Costs related to environmental remediation are charged to expense.
Environmental costs are capitalized if the costs extend the life of the
property, increase its capacity and/or mitigate or prevent contamination from
future operations.
(l) STOCK-BASED COMPENSATION The Company has adopted the provisions of SFAS No.
123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but
does not require, companies to record compensation cost for stock-based
compensation plans at fair value. The Company has elected to continue to account
for stock-based compensation in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations, as permitted by
SFAS No. 123. Compensation expense for stock options is measured as the excess,
if any, of the average quoted market price of the Company's stock at the date of
grant over the amount an employee must pay to acquire the stock. Compensation
expense for restricted stock awards is equal to the average quoted market price
of the Company's stock at the date of grant and is recorded ratably over the
period in which forfeiture provisions lapse. Compensation expense for
performance stock awards is recognized over the performance period based on
changes in quoted market prices of the Company's stock and the likelihood of
achieving the performance goals. See Note 8.
30
32
(m) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swap
agreements to manage its exposure to fluctuations in interest rates. Amounts to
be paid or received under interest rate swap agreements are recognized as
interest expense or interest income during the period in which they accrue. The
Company does not hold any derivative financial instruments for trading purposes.
The credit risks associated with the Company's interest rate swap agreements are
controlled through the evaluation and monitoring of creditworthiness of the
counterparties. Although the Company may be exposed to losses in the event of
nonperformance by counterparties, the Company does not expect such losses, if
any, to be significant. See Note 7.
(n) FOREIGN CURRENCY TRANSLATION The Company's subsidiaries outside the United
States use their local foreign currency as the functional currency. Accordingly,
translation gains and losses and the effect of exchange rate changes on
transactions designated as hedges of net foreign investments are included as a
separate component of shareholders' equity. Transaction gains and losses are
included in income in the period in which they occur.
(o) 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 Company's first quarter of 2001. The Company is evaluating the effects that
the adoption of SFAS No. 133 may have on its consolidated financial position and
results of operations.
NOTE 2
ACQUISITION OF THE SPECIALTY PAPER DIVISION OF THE SCHOELLER AND HOESCH GROUP
Effective January 2, 1998, the Company acquired all of the outstanding
common stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper division of
the Schoeller and Hoesch Group, from RQPO Beteiligungs GmbH & Co. Papier KG
("RQPO") and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for DM 268,900,000
(approximately $150,000,000) in cash. The purchase price was finalized in the
fourth quarter of 1998. The principal partners in RQPO were Deutsche
Beteiligungs AG and S&H management. The Company accounted for the S&H
acquisition under the purchase method of accounting, and S&H was consolidated
with the Company beginning in January 1998.
S&H was founded in 1881 in Gernsbach, Germany, where its corporate
offices and major paper production facilities are located. S&H produces a range
of paper products, including tea bag and other long fiber products such as
stencil, filter and casing paper, as well as tobacco papers and printing papers.
S&H owns an abaca pulpmill in the Philippines and other facilities in France and
the United States. The acquisition of S&H initially included a 50% controlling
ownership interest in Papeteries de Cascadec S. A. ("Cascadec"), a French
company, along with the option to acquire the remaining 50% at a future time. As
of December 31, 1998, a minority interest of $10,032,000 associated with this
subsidiary was classified as "Other long-term liabilities" on the Company's
Consolidated Balance Sheet. For the year ended December 31, 1998, the Company
recognized $886,000 of minority interest expense classified as "Gain from
property dispositions, etc. - net" on the Company's Consolidated Statement of
Income and Comprehensive Income. On April 9, 1999, the Company exercised its
option and purchased the remaining 50% of Cascadec for FF 45,181,233
($7,399,000) in cash. During 1999, the Company recognized $343,000 of minority
interest expense through the acquisition date of the remaining 50% of Cascadec.
The purchase price of S&H, including certain transaction costs, was
allocated to the assets acquired and liabilities assumed based upon their fair
values at the date of acquisition. The fair values allocated were approximately
$238,000,000 for the assets acquired and approximately $101,000,000 for the
liabilities assumed. The excess of the purchase price over the
31
33
fair value of net assets acquired of approximately $13,000,000 was recorded as
goodwill and is being amortized on a straight-line basis over 20 years.
To finance the acquisition, on December 22, 1997, the Company entered
into a $200,000,000 multi-currency revolving credit facility ("Revolving Credit
Facility") with a syndicate of major lending institutions. The Revolving Credit
Facility enables the Company 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
Company's option, on a daily or one- to six-month basis. Interest on the
revolving credit loans is at variable rates based, at the Company'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 Company's debt ratings as
published by Standard & Poor's and Moody's. The Company is subject to certain
financial covenants under the Revolving Credit Facility and is in compliance
with all such covenants as of December 31, 1999. The Company must pay an annual
facility fee ranging from .065% to .13% of the total credit commitment, which is
also based on the higher of the Company's debt ratings as published by Standard
& Poor's and Moody's, under the Revolving Credit Facility. During 1999, the
Company paid .10% of the total credit commitment for this facility fee. As of
December 31, 1999, $54,455,000 of credit availability under the Revolving Credit
Facility was unused.
On December 30, 1997, the Company borrowed DM 87,500,000 ($48,665,000)
under the Revolving Credit Facility at a three-day rate of 5.075%. These
proceeds were used to capitalize two German subsidiaries to facilitate the S&H
acquisition. On January 2, 1998, the Company borrowed an additional DM
182,500,000 (approximately $101,500,000) under the Revolving Credit Facility
necessary to complete the acquisition.
The following summarized unaudited combined pro forma information for
the year ended December 31, 1997 is presented as if the S&H acquisition had
occurred on January 1, 1997. This unaudited pro forma information is based on
the historical results of operations adjusted for acquisition costs and, in the
opinion of management, is not necessarily indicative of what the results would
have been had the Company operated S&H since January 1, 1997 (in thousands
except per share data).
Unaudited Pro Forma Information
Year Ended December 31, 1997
---------------------
Net sales $738,547
Net income 50,452
Basic and diluted
earnings per share 1.19
NOTE 3
UNUSUAL ITEM
During 1998, the Company recognized a pre-tax charge of $9,816,000
($5,988,000 after tax) related primarily to the accrual of pension and medical
benefits for certain salaried and hourly employees of the Company's Ecusta
Division and certain salaried employees of the Company's Glatfelter Division who
elected to participate in a voluntary early retirement enhancement program. The
pre-tax charge also included the cost of termination of several Glatfelter
Division salaried employees which was necessary to achieve the Company's
cost-savings goals.
32
34
NOTE 4
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 Company's
basic and diluted EPS follows with the dollar and share amounts in thousands:
1999 1998 1997
------- ------- -------
Basic EPS factors 42,173 42,047 42,220
Effect of potentially dilutive
employee incentive plans:
Restricted stock awards 3 16 31
Performance stock
awards 131 126 96
Employee stock options 124 13 95
------- ------- -------
Diluted EPS factors 42,431 42,202 42,442
======= ======= =======
Net income $41,425 $36,133 $45,284
Basic and diluted EPS $ .98 $ .86 $ 1.07
The 1998 basic and diluted EPS of $.86, as presented on the
Consolidated Statement of Income and Comprehensive Income, reflected the
negative impact of an after-tax charge for a voluntary early retirement
enhancement program (unusual item) of $.14 per share (see Note 3).
NOTE 5
INCOME TAXES
Income taxes are recognized for the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in the Company's
consolidated financial statements or tax returns. The effects of income taxes
are measured based on effective tax law and rates.
The following are domestic and foreign components of pre-tax income for
the years ended December 31:
1999 1998 1997
------- ------- -------
(in thousands)
United States $55,911 $44,602 $69,331
Foreign 9,241 14,130 4,246
------- ------- -------
Total pre-tax income $65,152 $58,732 $73,577
======= ======= =======
The income tax provision for the years ended December 31 consists of
the following:
1999 1998 1997
-------- -------- --------
(in thousands)
Current:
Federal $ 6,953 $ 10,789 $ 23,590
State 217 (106) 626
Foreign 3,803 3,805 1,237
-------- -------- --------
Total current
tax provision 10,973 14,488 25,453
-------- -------- --------
Deferred:
Federal 11,735 6,647 2,358
State 2,197 1,244 444
Foreign (1,178) 220 38
-------- -------- --------
Total deferred
tax provision 12,754 8,111 2,840
-------- -------- --------
Total income tax provision $ 23,727 $ 22,599 $ 28,293
======== ======== ========
33
35
The Company has provided deferred income taxes of $57,000 and $949,000
on undistributed earnings of foreign subsidiaries as of December 31, 1999 and
1998, respectively.
The net deferred tax amounts reported on the Company's Consolidated
Balance Sheets as of December 31 are as follows:
1999 1998
--------------------------------------------------- --------
FEDERAL STATE FOREIGN TOTAL Total
------- ------ ------- ------- ------
(in thousands)
Current asset $ -- $ -- $ 1,225 $ 1,225 $ 1,302
Current liability 3,481 655 852 4,988 3,621
Long-term asset -- -- 27,666 27,666 15,194
Long-term liability 102,925 19,387 25,386 147,698 123,321
The following are components of the net deferred tax balances as of December 31:
1999 1998
----------------------------------------------------- --------
FEDERAL STATE FOREIGN TOTAL Total
-------- -------- -------- -------- --------
(in thousands)
Deferred tax assets:
Current $ 3,798 $ 714 $ 1,225 $ 5,737 $ 7,303
Long-term 21,205 3,988 27,666 52,859 47,958
-------- -------- -------- -------- --------
$ 25,003 $ 4,702 $ 28,891 $ 58,596 $ 55,261
======== ======== ======== ======== ========
Deferred tax liabilities:
Current $ 7,279 $ 1,369 $ 852 $ 9,500 $ 9,622
Long-term 124,130 23,375 25,386 172,891 156,085
-------- -------- -------- -------- --------
$131,409 $ 24,744 $ 26,238 $182,391 $165,707
======== ======== ======== ======== ========
The tax effects of temporary differences as of December 31 are as follows:
1999 1998
--------- ---------
(in thousands)
Deferred tax assets:
Reserves $ 13,469 $ 13,457
Compensation 7,068 8,124
Postretirement benefits 10,752 10,514
Property 16,104 14,528
Pension 3,164 3,209
Net operating loss carryforwards 7,947 3,361
Other 1,339 2,641
--------- ---------
Subtotal 59,843 55,834
Valuation allowance (1,247) (573)
--------- ---------
Total deferred tax assets 58,596 55,261
--------- ---------
Deferred tax liabilities:
Property 131,873 122,422
Pension 39,450 31,171
Inventories 8,648 8,954
Other 2,420 3,160
--------- ---------
Total deferred tax liabilities 182,391 165,707
--------- ---------
Net deferred tax liabilities $ 123,795 $ 110,446
========= =========
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36
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 for the years ended December 31 follows:
1999 1998 1997
-------- -------- --------
(in thousands)
Federal income tax
provision at statutory
rate $ 22,803 $ 20,556 $ 25,752
State income taxes,
net of federal income
tax benefit 1,569 740 696
Tax effect of exempt
earnings of foreign
sales corporation (713) (1,313) (360)
Other 68 2,616 2,205
-------- -------- --------
Actual income tax
provision $ 23,727 $ 22,599 $ 28,293
======== ======== ========
At December 31, 1999, the Company had net operating loss ("NOL")
carryforwards for foreign and state income tax purposes of $28,572,000 and
$14,126,000, respectively, which relate to foreign and state NOL deferred tax
assets of $6,700,000 and $1,247,000, respectively. These foreign and state NOL
carryforwards are available to offset future taxable income, if any. A valuation
allowance of $1,247,000 has been recorded against the state deferred tax asset
due to the uncertainty regarding the Company's ability to utilize the state NOL
carryforwards. The foreign NOL carryforwards do not expire, and the state NOL
carryforwards expire between 2004 and 2018.
NOTE 6
BORROWINGS
Long-term debt at December 31 is summarized as follows:
1999 1998
--------- ---------
(in thousands)
Revolving Credit Facility,
due December 22, 2002 $ 145,545 $ 166,766
6 7/8% Notes, due
July 15, 2007 150,000 150,000
Other Notes, various 7,659 10,703
--------- ---------
Total long-term debt 303,204 327,469
Less current portion (1,824) (2,088)
--------- ---------
Long-term debt, excluding
current portion $ 301,380 $ 325,381
========= =========
The aggregate maturities of long-term debt as of December 31, 1999 are
as follows (in thousands):
2000 $ 1,824
2001 1,532
2002 146,909
2003 1,197
2004 1,001
Thereafter 150,741
--------
$303,204
========
In addition to the Revolving Credit Facility described in Note 2, the
Company has an available line of credit from a bank aggregating $25,000,000 at
interest rates approximating money market rates. The Company had no borrowings
under this line of credit as of December 31, 1999 or 1998.
The Company has $3,191,000 of letters of credit outstanding as of
December 31, 1999. The Company bears the credit risk on this amount to the
extent that it does not comply with the provisions of certain agreements. The
letters of credit do not reduce the amount available under the Company's lines
of credit.
On July 22, 1997, the Company 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. The 6 7/8% Notes are redeemable, in
whole or in part, at the option of the Company 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 Company. The net
proceeds from the sale of the 6 7/8% Notes were used primarily to repay certain
short-term unsecured debt and related interest.
In February 1997, the Company 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
Company invested approxi-
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mately $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
("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 was
consolidated in the Company's financial statements.
Immediately following the establishment and capitalization of GWS
Valuch, the Company borrowed $270,000,000 from GWS Valuch under a note secured
by certain real estate assets of the Company. Using the proceeds of the note and
other available cash, the Company immediately repaid, with interest, an amount
initially borrowed to purchase the Class A common stock of GWS Valuch. The
Company also deposited $154,757,000, which included amounts to pay semiannual
interest, into a trust to defease certain covenants under the Company's
indenture dated as of January 15, 1993, under which the Company's $150,000,000
principal amount of 5 7/8% Notes due March 1, 1998, were outstanding.
Approximately $153,000,000 of U.S. Treasury Notes in the trust, along with
related interest, was held to maturity and used to pay the total amount of
principal of and interest due on the 5 7/8% Notes on March 1, 1998.
As a result of certain Internal Revenue Service regulatory
announcements, on July 2, 1997, the Company 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. "Interest on debt" on the Company's Consolidated Statement of Income and
Comprehensive Income for the year ended December 31, 1997 included $4,235,000,
representing a portion of the dividend paid relating to the Step-Down Preferred
Stock.
NOTE 7
INTEREST RATE SWAP AGREEMENTS
In March 1993, the Company entered into an interest rate swap agreement
having a total notional principal amount of $50,000,000. Under the agreement,
the Company received a fixed rate of 5 7/8% and paid a floating rate (London
Interbank Offered Rate (LIBOR) plus sixty basis points), as determined at
six-month intervals. The agreement converted a portion of the Company's debt
obligation from a fixed rate to a floating rate basis. Under the agreement, the
Company recognized net interest expense of $151,000 and $275,000 in 1998 and
1997, respectively. These amounts were included in "Interest on debt" on the
Company's Consolidated Statements of Income and Comprehensive Income. The
Company held the swap agreement until its March 1, 1998 maturity.
In January 1998, the Company entered into two interest rate swap
agreements, each having a total notional principal amount of DM 52,600,000
($27,000,000 as of December 31, 1999). Under the agreements, the Company pays
fixed rates of 4.18% and 4.45% for periods of two and three years, respectively,
and receives a floating rate of the six-month DM LIBOR. The six-month DM LIBOR
applicable for the first and second half of 1999 was approximately 3.22% and
2.82%, respectively. The six-month DM LIBOR applicable for the first half of
2000 is approximately 3.6%. The Company recognized net interest expense of
$2,148,000 in 1999 related to these agreements. As of December 31, 1999, the
Company's cost to terminate these interest rate swap agreements would have been
$353,000.
In January 1999, the Company entered into two additional interest rate
swap agreements, each having a total notional principal amount of DM 50,000,000
(approximately $25,600,000 as of December 31, 1999). Under one agreement, which
was effective April 6, 1999, the Company receives a floating rate of the
three-month DM LIBOR plus twenty basis points and pays a fixed rate of
approximately 3.41% for the term of the agreement. Under the second agreement,
which was effective July 6, 1999, the Company receives a floating rate, which is
also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate of
approximately 3.43% for the term of the agreement. The Company recognized net
interest expense of $299,000 in 1999 related to these agreements. As of December
31, 1999, the Company's proceeds from termination of these interest rate swap
agreements would have been $2,025,000.
The Company has other various interest rate swap agreements
outstanding, which do not have a material impact on the Company's consolidated
financial statements. All of the Company's interest rate swap agreements convert
a portion of the Company's borrowings from a floating rate to a fixed rate
basis. Although the Company can terminate any of its swap agreements at any
time, the Company intends to hold all of its swap agreements until their
maturities.
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NOTE 8
KEY EMPLOYEE LONG-TERM INCENTIVE PLAN, RESTRICTED COMMON STOCK AWARD PLAN AND
EMPLOYEE STOCK PURCHASE PLANS
On April 23, 1997, the common shareholders amended the 1992 Key
Employee Long-Term Incentive Plan ("1992 Plan") to authorize, among other
things, the issuance of up to 5,000,000 shares of the Company's common stock to
eligible participants. The 1992 Plan provides for incentive stock options,
non-qualified stock options, restricted stock awards, performance shares and
performance units. To date, there have been no grants of incentive stock options
or performance units. The Company's 1988 Restricted Common Stock Award Plan
("1988 Plan") was amended in 1992 to provide that no further awards of common
shares may be made thereunder.
RESTRICTED STOCK AWARDS During December 1999 and December 1998, 101,730 and
60,465 shares, respectively, of common stock were awarded under the 1992 Plan.
Awarded shares are subject to forfeiture, in whole or in part, if the recipient
ceases to be an employee within a specified time period. The shares awarded
under the 1992 Plan are also subject to forfeiture if defined minimum earnings
levels are not met. The Company may reduce the number of shares otherwise
required to be delivered by an amount that would have a fair market value equal
to the taxes withheld by the Company on delivery. The Company may also, at its
sole discretion, elect to pay to the recipients in cash an amount equal to the
fair market value of the shares that would otherwise be required to be
delivered.
On May 1, 1997, 13,350 shares were delivered from treasury (after
reduction of 6,650 shares for taxes). On May 1, 1998, in lieu of delivering
20,000 shares, the Company elected to pay in cash an amount equal to the fair
value of such shares. The Company recognized expense of $262,000 in 1999, income
of $64,000 in 1998 and expense of $166,000 in 1997 related to these restricted
stock awards. During 1999, the remaining 20,000 shares awarded under the 1988
Plan ceased to be subject to forfeiture and were paid in cash. The shares
awarded under the 1992 Plan all cease to be subject to forfeiture by the end of
2003.
PERFORMANCE SHARES On May 1, 1995, January 1, 1996, January 1, 1997 and January
1, 1998, the Company awarded, under the 1992 Plan, 59,620, 44,860, 40,060 and
45,740 shares, respectively, subject to certain conditions, to certain key
employees to be issued in whole or in part depending on the Company's degree of
success in achieving certain financial performance goals during defined
four-year performance periods. The May 1, 1995 award was for the four-year
performance period ended December 31, 1998. Based upon the financial performance
levels achieved during that period, 45,751 shares were earned for distribution.
During February 1999, in lieu of delivering 45,751 shares of common stock, the
Company elected to pay cash equal to the fair value of 34,311 shares as of
December 31, 1998, and deliver 11,440 shares from treasury. During February
2000, in lieu of delivering 27,668 shares of common stock, the Company elected
to pay cash equal to the fair value of 21,620 shares as of December 31, 1999,
and deliver 6,048 shares from treasury.
The January 1, 1996, January 1, 1997, January 1, 1998 awards are for
the performance periods ending December 31, 1999, 2000 and 2001, respectively,
and if earned will be distributed the following year. The Company recognized
expense of $357,000 in 1999, income of $25,000 in 1998 and expense of $722,000
in 1997 related to these awards. The fair market value per share of the shares
granted during 1998, 1997, 1996 and 1995 was $18.38, $17.88, $17.16 and $17.81,
respectively.
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39
NON-QUALIFIED STOCK OPTIONS The following summarizes the activity with respect
to non-qualified options under the 1992 Plan to purchase shares of common stock
for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997
---------------------------- ------------------------------- --------------------------
WEIGHTED Weighted Weighted
AVERAGE Average Average
SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price
---------- -------------- ---------- -------------- ---------- --------------
Outstanding at beginning of year 3,216,580 $ 15.32 1,621,165 $ 17.61 1,403,640 $ 17.42
Options granted 467,850 13.28 1,659,115 13.19 352,750 18.25
Options exercised (6,000) 12.40 (3,100) 15.44 (105,225) 17.20
Options canceled (385,215) 16.82 (60,600) 18.03 (30,000) 17.41
---------- ---------- ----------
Outstanding at end of year 3,293,215 14.86 3,216,580 15.32 1,621,165 17.61
========== ========== ==========
Exercisable at end of year 1,293,709 17.54 1,264,973 17.54 1,001,813 17.49
The following table summarizes information about stock options
outstanding at December 31, 1999:
Options Outstanding Options Exercisable
--------------------------------------------------- --------------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding as Remaining Average Exercisable as Average
Exercise Price of 12/31/99 Contractual Life Exercise Price of 12/31/99 Exercise Price
- ------------ ----------- --------------- -------------- -------------- ---------------
$12.38 - $16.00 1,975,605 8.9 years $12.81 166,100 $14.94
$16.01 - $18.78 1,317,610 5.5 years 17.95 1,127,609 17.92
----------- -----------
3,293,215 7.5 years 14.86 1,293,709 17.54
=========== ===========
An additional 655,823 options became exercisable January 1, 2000, at a
weighted average exercise price of $13.24. The weighted average fair value of
options granted during 1999, 1998 and 1997 was $3.06, $3.12 and $4.92,
respectively, on the date of grant. The fair value of each option on the date of
grant is estimated using the Black-Scholes option pricing model with expected
lives of ten years and the following weighted average assumptions:
1999 1998 1997
------ ------ ------
Risk-free interest rate 6.26% 4.98% 6.43%
Expected dividend yield 5.36% 4.44% 3.86%
Expected volatility 30.0% 28.6% 24.7%
Options typically become exercisable for 25% of the shares of common
stock issuable on exercise thereof, beginning January 1 of the year following
the date of grant, assuming six months has passed, with options for an
additional 25% of such shares becoming exercisable on January 1 of each of the
next three years. Options not exercisable in this format are exercisable in full
either six months or one year from the date of grant. All options expire on the
earlier of termination or, in some instances, a defined period subsequent to
termination of employment, or ten years from the date of grant.
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40
The exercise price represents the average quoted market price of the
Company's common stock on the date of grant, or the average quoted market prices
of the Company's common stock on the first day before and after the date of
grant for which quoted market price information was available if such
information was not available on the date of grant.
PRO FORMA INFORMATION The Company accounts for these plans under APB Opinion No.
25, under which no compensation cost has been recognized for the non-qualified
stock options and for which compensation cost has been recognized for stock
awards, as described in Note 1(I). Had compensation cost for these plans been
determined consistent with SFAS No. 123, the Company's net income and EPS for
the years ended December 31, 1999, 1998 and 1997 would have been reduced to the
following pro forma amounts:
1999 1998 1997
---------- ---------- ----------
(in thousands except per share information)
Net income:
As reported $ 41,425 $ 36,133 $ 45,284
Pro forma 39,960 35,554 45,195
EPS:
Reported - basic
and diluted $ .98 $ .86 $ 1.07
Pro forma - basic .95 .85 1.07
Pro forma - diluted .94 .84 1.06
EMPLOYEE STOCK PURCHASE PLANS Through 1998, under the employee stock purchase
plans, eligible hourly employees could acquire shares of the Company's common
stock at its fair market value. Employees could contribute up to 10% of their
compensation, as defined. For employee contributions up to 6% of their
compensation, the Company would contribute, as specified in the plans, 15% of
the employee's contribution.
As of January 1999, benefits offered to eligible hourly employees under
such stock purchase plans were replaced with similar benefits under a 401(k)
plan. See Note 9.
NOTE 9
RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company has trusteed noncontributory defined benefit pension plans
covering substantially all of its employees. The benefits are based, in the case
of certain plans, on average salary and years of service and, in the case of
other plans, on a fixed amount for each year of service. Plan provisions and
funding meet the requirements of the Employee Retirement Income Security Act of
1974. Pension income of $20,490,000, $5,502,000 and $10,063,000 was recognized
in 1999, 1998 and 1997, respectively. The 1998 pension income was after the
impact of a pre-tax charge of $8,486,000 related to the unusual item discussed
in Note 3.
The Company provides certain health care benefits to eligible retired
employees. These benefits include a comprehensive medical plan for retirees
prior to age 65 and fixed supplemental premium payments to retirees over age 65
to help defray the costs of Medicare. The plan is not funded; claims are paid as
incurred.
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The following table sets forth the status of the Company's defined
benefit pension plans and other postretirement benefit plans at December 31,
1999 and 1998 (in thousands):
Pension Benefits Other Benefits
--------------------------- --------------------------
1999 1998 1999 1998
--------- --------- --------- ---------
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $ 230,921 $ 191,589 $ 31,291 $ 27,450
Benefit obligation - S&H -- 6,340 -- --
Service cost 4,877 4,838 741 728
Interest cost 15,977 14,355 2,153 2,005
Plan amendments -- 6,156 -- (497)
Actuarial loss 3,904 8,813 456 2,691
Benefits paid (14,116) (9,656) (2,420) (2,380)
Unusual item (Note 3) -- 8,486 -- 1,294
--------- --------- --------- ---------
Benefit obligation at end of year $ 241,563 $ 230,921 $ 32,221 $ 31,291
========= ========= ========= =========
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year $ 504,185 $ 413,807 $ -- $ --
Actual return on plan assets 72,677 98,809 -- --
Employer contributions 1,525 1,225 2,420 2,380
Benefits paid (14,116) (9,656) (2,420) (2,380)
--------- --------- --------- ---------
Fair value of plan assets at end of year $ 564,271 $ 504,185 $ -- $ --
========= ========= ========= =========
RECONCILIATION OF THE FUNDED STATUS:
Funded status $ 322,708 $ 273,264 $ (32,221) $ (31,291)
Unrecognized transition asset (7,477) (9,202) -- --
Unrecognized prior service cost 19,695 21,187 (1,634) (1,871)
Unrecognized (gain) loss (239,733) (212,072) 6,297 6,217
--------- --------- --------- ---------
Net amount recognized $ 95,193 $ 73,177 $ (27,558) $ (26,945)
========= ========= ========= =========
AMOUNTS RECOGNIZED ON THE CONSOLIDATED
BALANCE SHEETS CONSIST OF:
Prepaid benefit cost $ 125,603 $ 89,603 $ -- $ --
Accrued benefit liability (30,410) (16,426) (27,558) (26,945)
--------- --------- --------- ---------
Prepaid (accrued) benefit cost $ 95,193 $ 73,177 $ (27,558) $ (26,945)
========= ========= ========= =========
The net prepaid pension cost is included in "Other assets," and accrued
postretirement benefit costs are principally included in "Other long-term
liabilities" on the Consolidated Balance Sheets at December 31, 1999 and 1998.
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Net periodic benefit (income) cost includes the following components
(in thousands):
Pension Benefits Other Benefits
------------------------------------ ----------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Service cost $ 4,877 $ 4,838 $ 4,605 $ 741 $ 728 $ 732
Interest cost 15,977 14,355 13,008 2,152 2,005 2,036
Expected return on plan assets (35,735) (29,607) (25,553) -- --
Amortization of transition asset (1,724) (1,724) (1,725) -- --
Amortization of prior service cost 1,746 1,333 1,200 (212) (175) (149)
Recognized actuarial (gain) loss (5,631) (3,183) (1,598) 352 123 203
-------- -------- -------- -------- -------- --------
Net periodic benefit (income) cost (20,490) (13,988) (10,063) 3,033 2,681 2,822
Unusual item (Note 3) -- 8,486 -- -- 1,294 --
-------- -------- -------- -------- -------- --------
Total net periodic benefit (income) cost $(20,490) $ (5,502) $(10,063) $ 3,033 $ 3,975 $ 2,822
======== ======== ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $20,602,000, $18,972,000 and $0,
respectively, as of December 31, 1999 and $21,384,000, $20,211,000 and $0,
respectively, as of December 31, 1998.
The assumptions used in computing the information above were as follows:
Pension Benefits Other Benefits
------------------- ---------------------
1999 & 1998 1997 1999 & 1998 1997
----------- ----- ----------- ----
Discount rate - benefit expense 7.5% 7.5% 7.5% 7.5%
Expected long-term rate of return on plan assets 9.0% 9.0% -- --
Discount rate - benefit obligation 7.0% 7.5% 7.0% 7.5%
Future compensation growth rate 3.5% 3.5% -- --
For measurement purposes, a 7% and 6% annual rate of increase in the
per capita cost of covered health care benefits was assumed for 1998 and 1999,
respectively. The rate was assumed to decrease 1% per year to 5.5% for 2000 and
remain at that level thereafter.
A one percentage-point change in assumed health care cost trend rates
would have the following effects:
1999 1998
--------------------------- -----------------------------
1% Increase 1% Decrease 1% Increase 1% Decrease
---------- ------------- ------------ ----------
(in thousands)
Effect on postretirement benefit obligation $2,295 $(1,999) $2,243 $(1,949)
Effect on total of service and interest
cost components 266 (226) 268 (228)
The Company maintains 401(k) plans for certain hourly and salaried
employees. Employees may contribute up to 15% of their salary to these plans,
subject to certain restrictions. The Company will match a portion of the
employee's contribution, subject to certain limitations, in the form of shares
of the Company's common stock into the Company stock fund maintained under the
401(k) plans. During 1999, 1998 and 1997, the Company contributed shares of its
common stock valued at $1,626,000, $1,541,000 and $1,093,000, respectively, to
these 401(k) plans.
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NOTE 10
COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS
The Company 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 Company has incurred
substantial capital and operating expenditures in past years. The Company
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 Company 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
Company'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 Company has undertaken an initiative
under the Voluntary Advanced Technical Incentive Program of the United States
Environmental Protection Agency ("EPA") to comply with new "Cluster Rule"
regulations. This initiative, the Company's "New Century Project," will require
capital expenditures currently estimated at approximately $30,000,000 to be
incurred before April 2004.
The Pennsylvania Department of Environmental Protection ("DEP") has
proposed to reissue the Company's wastewater discharge permit for the Spring
Grove mill on terms unacceptable to the Company. DEP has concurrently publicly
proposed terms for resolution of an anticipated appeal from the issuance of that
permit which terms, subject to the satisfaction of certain conditions, are
acceptable to the Company. However, such terms may be unacceptable to EPA or
certain third parties. The Company cannot determine the impact that the new
permit will have on the Company if it contains objectionable terms because the
material terms of the final form of the permit are unknown.
The Pennsylvania Public Interest Research Group ("Penn PIRG") and
several other plaintiffs have brought a citizen suit under the 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
Company believes Penn PIRG's lawsuit to be without merit, but the Company cannot
predict the impact on the Company 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 Company 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 Company's Spring Grove mill. EPA announced that the Company 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 Company's modifications
produced (1) significant net emissions increases in certain air pollutants which
should have been covered by appropriate permits imposing new emissions
limitations, and (2) certain other violations.
For all but one of the modifications cited by EPA, the Company applied
for and obtained from DEP the preconstruction permits which the Company
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 Company did not receive a preconstruction permit. The Company
conducted an evaluation at the time of this modification, and determined that
the preconstruction permit cited by EPA and DEP was not required. The Company
has been informed that EPA and DEP will seek substantial emissions reductions,
as well as civil penalties, to which the Company believes it has meritorious
defenses. Nevertheless, the Company is unable to predict the ultimate outcome of
these matters or the costs involved, and there can be no assurance that such
costs would not have a material adverse effect on the Company's consolidated
financial condition, liquidity or results of operations.
The Company, 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
42
44
sovereign controls which claims concerning this matter. Accordingly, the Company
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 Company 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 Company 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 Company and the other six
companies have submitted extensive technical comments to the draft RI/FS. In
addition, the Company 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 mid to late 2000.
Based on current information and advice from its environmental
consultants, the Company continues to believe that an aggressive effort, as
included in certain remedial alternatives in the draft RI/FS, to remove
PCB-contaminated sediment, much of which is buried under cleaner material or is
otherwise unlikely to move and which is abating naturally, would be
environmentally detrimental and, therefore, inappropriate.
Natural resources damages may be assessed in addition to cleanup costs.
In November 1999, FWS announced a preliminary estimate of damages as the result
of injury to recreational fishing. The range of damages announced is from $106
million to $150 million. The Company 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 Company believes DNR to be the lead agency for assessment of damages, and
has been cooperatively assessing damages with DNR independent of the federal
agencies.
The Company currently is unable to predict the ultimate costs to the
Company related to this matter, because the Company cannot predict which remedy
will be selected for the site or its share of the cost of that remedy.
The Company continues to believe it is likely that this matter will
result in litigation; however, the Company 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 Company
will be successful in arguing that removal of PCB-contaminated sediments is
inappropriate, that it would prevail in any resulting litigation, that its share
of the cost of any remedy selected would not have a material adverse effect on
the Company's consolidated financial condition, liquidity or results of
operations or result in a default under the Company's loan covenants or that the
Company's share of such cost would not exceed its available resources.
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 Company continues to evaluate
its exposure and the level of its reserves, including, but
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45
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 Company 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 Company does not know when the insurers'
investigation as to coverage will be completed.
The Company'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 Company. In the
meantime, however, these matters could, at any particular time or for any
particular period, have a material adverse effect on the Company's consolidated
financial condition, liquidity or results of operation. Moreover, there can be
no assurance that the Company'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 Company's consolidated financial
condition, liquidity or results of operations.
During 1999 and 1998, the Company expended approximately $2,633,000 and
$4,900,000, respectively, on environmental capital projects. The Company
estimates that projects requiring total expenditures of $2,908,000 and $426,000
for environmental-related capital will be initiated in 2000 and 2001,
respectively. During 1999, 1998 and 1997, the Company 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 Company is also involved in various lawsuits. Although the ultimate
outcome of these lawsuits cannot be predicted with certainty, the Company's
management, after consultation with legal counsel, does not expect that such
lawsuits will have a material adverse effect on the Company's consolidated
financial position, results of operations or liquidity.
NOTE 11
OTHER SALES AND GEOGRAPHIC INFORMATION
The Company sells a significant portion of its specialized printing
papers through wholesale paper merchants. During 1997, one wholesale paper
merchant accounted for 11.6% of the Company's net sales. Net sales for this
customer and all other individual customers was less than 10% of the Company's
1999 and 1998 net sales.
The Company's 1999 and 1998 net sales to external customers and
location of net plant, equipment and timberlands as of December 31, 1999 and
1998 are summarized below. Net sales are attributed to countries based upon
origin of shipment. Such information is not presented for 1997, as sales
originated primarily from the United States and net plant, equipment and
timberlands assets were primarily located therein.
1999 1998
------------------------------------- -----------------------------------
Plant, Equipment Plant, Equipment
Net Sales and Timberlands - Net Net Sales and Timberlands - Net
----------- ------------------- ---------- ---------------------
(in thousands)
United States $524,084 $445,376 $535,425 $464,384
Germany 125,376 118,053 130,129 141,743
Other foreign countries 31,100 18,784 39,524 22,029
-------- -------- -------- --------
Total $680,560 $582,213 $705,078 $628,156
======== ======== ======== ========
Net sales information by the Company's product groups for the years
ended December 31 follows:
1999 1998 1997
--------------------- --------------------- ---------------
(dollar amounts in thousands)
Specialized printing papers $325,240 48% $351,171 50% $354,076 62%
Engineered papers
(including tobacco papers) 355,320 52 353,907 50 212,996 38
-------- ----- -------- ---- -------- ----
Total $680,560 100% $705,078 100% $567,072 100%
======== ===== ======== ==== ======== ====
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
MANAGEMENT'S RESPONSIBILITY REPORT
For the Years Ended December 31, 1999, 1998, and 1997
The management of P. H. Glatfelter Company has prepared and is
responsible for the Company's consolidated financial statements and other
corroborating information contained herein. Management bears responsibility for
the integrity of these statements which have been prepared in accordance with
generally accepted accounting principles and include management's best judgments
and estimates. All information in this annual report consistently reflects the
data contained in the consolidated financial statements.
The Company maintains a system of internal controls designed to provide
reasonable assurance that assets are safeguarded, transactions are executed and
recorded in accordance with their authorizations, and financial records are
maintained so as to permit the preparation of reliable financial statements. The
system of internal controls is enhanced by written policies and procedures, an
organizational structure providing appropriate segregation of duties, careful
selection and training of qualified people, and periodic reviews performed by
both its internal audit department and independent public auditors.
The Audit Committee of the Board of Directors, consisting exclusively
of directors who are not Company employees, provides oversight of financial
reporting. The Company's internal audit department and independent auditors meet
with the Audit Committee on a periodic basis to discuss financial reporting and
internal control issues and have completely free access to the Audit Committee.
/s/ George H. Glatfelter II /s/ Robert P. Newcomer
GEORGE H. GLATFELTER II ROBERT P. NEWCOMER
President and Executive Vice President
Chief Executive Officer and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
P. H. Glatfelter Company,
Its Shareholders and Directors:
We have audited the accompanying consolidated balance sheets of P. H.
Glatfelter Company and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income and comprehensive income,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1999. Our audits also included the financial statement
schedule listed in the Index at Item 14. These financial statements and the
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of P. H. Glatfelter Company and
subsidiaries at December 31, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999 in conformity with generally accepted accounting principles. Also, in
our opinion, the financial statement schedule, when considered in relation to
the basic consolidated financial statements taken as a whole, presents fairly in
all material respects the information set forth therein.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 11, 2000
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47
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL INFORMATION
QUARTERLY FINANCIAL DATA
Net Sales Gross Profit Net Income Basic and Diluted
In Thousands In Thousands In Thousands Earnings Per Share
--------------------- --------------------- --------------------- ------------------
1999 1998 1999 1998 1999 1998 1999 1998
-------- -------- -------- -------- ------- ------- ---- ----
First $165,846 $193,216 $ 27,683 $ 40,929 $ 8,140 $15,327 $.19 $.36
Second 167,234 183,707 34,456 38,280 12,543 13,791 .30 .33
Third 170,030 167,245 24,074 24,041 6,400 3,206(a) .15 .08(a)
Fourth 177,450 160,910 38,373 26,477 14,342 3,809(b) .34 .09(b)
-------- -------- -------- -------- ------- ------- ---- ----
Total $680,560 $705,078 $124,586 $129,727 $41,425 $36,133 $.98 $.86
======== ======== ======== ======== ======= ======= ==== ====
(a) After impact of an after-tax charge for voluntary early retirement
enhancement program (unusual item) of $3,402,000.
(b) After impact of an after-tax charge for voluntary early retirement
enhancement program (unusual item) of $2,586,000.
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Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
Not Applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
(a) Directors. The information with respect to directors required under
this item is incorporated herein by reference to pages 3, 4 and 20 of the
Registrant's Proxy Statement, dated March 24, 2000.
(b) Executive Officers of the Registrant. The information with respect
to the executive officers required under this item is set forth in Part I of
this report.
Item 11. Executive Compensation.
The information required under this item is incorporated herein by
reference to pages 7 through 17 of the Registrant's Proxy Statement, dated March
24, 2000.
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49
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required under this item is incorporated
herein by reference to pages 17 through 19 of the Registrant's Proxy Statement,
dated March 24, 2000.
Item 13. Certain Relationships and Related Transactions.
The information required under this item is incorporated
herein by reference to page 17 of the Registrant's Proxy Statement, dated March
24, 2000.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) 1. A. The following Consolidated Financial
Statements of the Registrant are included in Part II, Item 8:
Consolidated Statements of Income and
Comprehensive Income for the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets, December 31, 1999
and 1998
Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements for
the Years Ended December 31, 1999, 1998 and
1997
B. Supplemental Financial Information
for each of the two years in the period ended December 31, 1999 is included in
Part II, Item 8.
2. Financial Statement Schedules (Consolidated)
are included in Part IV:
For Each of the Three Years in the Period Ended
December 31, 1999:
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50
II - Valuation and Qualifying Accounts
Schedules other than those listed above are omitted
because of the absence of conditions under which they
are required or because the required information is
included in the Notes to the Consolidated Financial
Statements.
Individual financial statements of the Registrant are
not presented inasmuch as the Registrant is primarily
an operating company and its consolidated
subsidiaries are essentially wholly-owned.
3. Executive Compensation Plans and
Arrangements: see Exhibits 10(a) through 10(h), described below.
Exhibits:
Number Description of Documents
- ------ ------------------------
(2) Stock Purchase Agreement dated as of November 14, 1997 by and
among certain subsidiaries of P. H. Glatfelter Company, the
Stockholders of S&H Papier-Holding GmbH, Deutsche Beteiligungs
Aktiengesellschaft Unternehmensbeteiligungsgesellschaft and P.
H. Glatfelter Company (incorporated by reference to Exhibit
2.1 of Registrant's Form 8-K dated January 2, 1998).
(3)(a) Articles of Amendment dated April 27, 1977, including restated
Articles of Incorporation (incorporated by reference to
Exhibit 3(a) of Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993) as amended by Articles of
Merger dated January 30, 1979 (incorporated by reference to
Exhibit 3(a) of Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993); a Statement of Reduction of
Authorized Shares dated May 12, 1980 (incorporated by
reference to Exhibit 3(a) of Registrant's Annual Report on
Form 10-K for the year ended December 31, 1993); a Statement
of Reduction of Authorized Shares dated September 23, 1981
(incorporated by reference to Exhibit 3(a) of Registrant's
Annual Report on Form 10-K for the year ended December 31,
1993); a
49
51
Statement of Reduction of Authorized Shares dated August 2,
1982 (incorporated by reference to Exhibit 3(a) of
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1993); a Statement of Reduction of Authorized
Shares dated July 29, 1983 (incorporated by reference to
Exhibit 3(a) of Registrant's Annual Report on Form 10-K for
the year ended December 31, 1993); by Articles of Amendment
dated April 25, 1984 (incorporated by reference to Exhibit
3(a) of Registrant's Annual Report on Form 10-K for the year
ended December 31, 1994); a Statement of Reduction of
Authorized Shares dated October 15, 1984 (incorporated by
reference to Exhibit (3)(b) of Registrant's Form 10-K for the
year ended December 31, 1984); a Statement of Reduction of
Authorized Shares dated December 24, 1985 (incorporated by
reference to Exhibit (3)(b) of Registrant's Form 10-K for the
year ended December 31, 1985); by Articles of Amendment dated
April 23, 1986 (incorporated by reference to Exhibit (3) of
Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1986); a Statement of Reduction of Authorized
Shares dated July 11, 1986 (incorporated by reference to
Exhibit (3)(b) of Registrant's Form 10-K for the year ended
December 31, 1986); a Statement of Reduction of Authorized
Shares dated March 25, 1988 (incorporated by reference to
Exhibit (3)(b) of Registrant's Form 10-K for the year ended
December 31, 1987); a Statement of Reduction of Authorized
Shares dated November 9, 1988 (incorporated by reference to
Exhibit (3)(b) of Registrant's Form 10-K for the year ended
December 31, 1988); a Statement of Reduction of Authorized
Shares dated April 24, 1989 (incorporated by reference to
Exhibit 3(b) of Registrant's Form 10-K for the year ended
December 31, 1989); Articles of Amendment dated November 29,
1990 (incorporated by reference to Exhibit 3(b) of
Registrant's Form 10-K for the year ended December 31, 1990);
Articles of Amendment dated June 26, 1991 (incorporated by
reference to Exhibit 3(b) of Registrant's Form 10-K for the
year ended December 31, 1991); Articles of Amendment dated
August 7, 1992 (incorporated by reference to Exhibit 3(b) of
Registrant's Form 10-K for the year ended December 31, 1992);
Articles of Amendment dated July 30, 1993 (incorporated by
reference to Exhibit 3(b) of Registrant's Form 10-K
50
52
for the year ended December 31, 1993); and Articles of
Amendment dated January 26, 1994 (incorporated by reference to
Exhibit 3(b) of Registrant's Form 10-K for the year ended
December 31, 1993).
(3)(b) Articles of Incorporation, as amended through January 26, 1994
(restated for the purpose of filing on EDGAR) (incorporated by
reference to Exhibit 3(c) of Registrant's Form 10-K for the
year ended December 31, 1993).
(3)(c) By-Laws as amended through March 17, 1999 (incorporated by
reference to Exhibit 3(c) of Registrant's Form 10-K for the
year ended December 31, 1998).
(4)(a) Escrow Agreement, dated as of February 24, 1997, between P. H.
Glatfelter Company and the Bank of New York relating to the
5-7/8% Notes due March 1, 1998 (incorporated by reference to
Exhibit (4)(c) of Registrant's Form 10-K for the year ended
December 31, 1996).
(4)(b) 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)(c) 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).
(9) P. H. Glatfelter Family Shareholders' Voting Trust dated July
1, 1993 (incorporated by reference to Exhibit 1 of the
Schedule 13D filed by P. H. Glatfelter Family Shareholders'
Voting Trust dated July 1, 1993).
(10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted as
of January 1, 1994, as amended December 14, 1999 and effective
January 1, 2000.
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53
(10)(b) P. H. Glatfelter Company 1988 Restricted Common Stock Award
Plan, as amended and restated June 24, 1992 (incorporated by
reference to Exhibit (10)(c) of Registrant's Form 10-K for the
year ended December 31, 1992).
(10)(c) P. H. Glatfelter Company Supplemental Executive Retirement
Plan, as amended and restated effective April 23, 1998
(incorporated by reference to Exhibit 10(c) of Registrant's
Form 10-K for the year ended December 31, 1998).
(10)(d) Deferral Benefit Pension Plan of Ecusta Division, effective
May 22, 1986 (incorporated by reference to Exhibit (10)(e) of
Registrant's Form 10-K for the year ended December 31, 1987).
(10)(e) Description of Executive Salary Continuation Plan
(incorporated by reference to Exhibit (10)(g) of Registrant's
Form 10-K for the year ended December 31, 1990).
(10)(f) P. H. Glatfelter Company Supplemental Management Pension Plan,
effective as of April 23, 1998 (incorporated by reference to
Exhibit 10(f) of Registrant's Form 10-K for the year ended
December 31, 1998).
(10)(g) P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive
Plan, as amended April 23, 1997 (incorporated by reference to
Exhibit A of Registrant's Proxy Statement, dated March 14,
1997).
(10)(h) P. H. Glatfelter Company Deferred Compensation Plan for
Directors, effective as of April 22, 1998 (incorporated by
reference to Exhibit 10(h) of Registrant's Form 10-K for the
year ended December 31, 1998).
(10)(i) Loan Agreement, dated February 24, 1997, between P. H.
Glatfelter Company, as borrower, and GWS Valuch, Inc., as
lender (incorporated by reference to Exhibit (10)(h) of
Registrant's Form 10-K for the year ended December 31, 1996).
(10)(j) Agreement between the State of Wisconsin and Certain Companies
Concerning the Fox River, dated as of
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54
January 31, 1997, among P. H. Glatfelter Company, Fort Howard
Corporation, NCR Corporation, Appleton Papers Inc., Riverside
Paper Corporation, U.S. Paper Mills, Wisconsin Tissue Mills
Inc. and the State of Wisconsin (incorporated by reference to
Exhibit (10)(i) of Registrant's Form 10-K for the year ended
December 31, 1996).
(10)(k) Credit Agreement, dated as of December 22, 1997, among P. H.
Glatfelter Company, various subsidiary borrowers, Bankers
Trust Company, as Agent, and various lending institutions with
Deutsche Bank AG, as Documentation Agent, PNC Bank, National
Association, as Syndication Agent, and First National Bank of
Maryland and Wachovia Bank, N.A., as Managing Agents
(incorporated by reference to Exhibit (10)(j) of Registrant's
Form 10-K for the year ended December 31, 1997).
(21) Subsidiaries of the Registrant
(23) Consent of Independent Certified Public Auditors
(27) Financial Data Schedule
(b) The Registrant did not file any reports on Form 8-K
during the quarter ended December 31, 1999.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
P. H. GLATFELTER COMPANY
(Registrant)
March 29, 2000
By /s/ G. H. Glatfelter II
----------------------------------
G. H. Glatfelter II
President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant in the capacities and on the dates indicated:
Date Signature Capacity
March 29, 2000 /s/ G. H. Glatfelter II Principal Executive
-------------------------------- Officer and Director
G. H. Glatfelter II
March 29, 2000 /s/ R. P. Newcomer Principal Financial
-------------------------------- Officer, Executive Vice
R. P. Newcomer President and Director
March 29, 2000 /s/ C. M. Smith Principal Accounting
-------------------------------- Officer and Vice
C. M. Smith President - Finance
March 29, 2000 /s/ R. E. Chappell Director
--------------------------------
R. E. Chappell
March 29, 2000 /s/ N. DeBenedictis Director
--------------------------------
N. DeBenedictis
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March 29, 2000 /s/ P. G. Foulkrod Director
--------------------------------
P. G. Foulkrod
March 29, 2000 /s/ G. H. Glatfelter Director
--------------------------------
G. H. Glatfelter
March 29, 2000 /s/ R. S Hillas Director
--------------------------------
R. S. Hillas
March 29, 2000 /s/ M. A. Johnson II Director
--------------------------------
M. A. Johnson II
March 29, 2000 /s/ T. C. Norris Director
--------------------------------
T. C. Norris
March 29, 2000 /s/ P. R. Roedel Director
--------------------------------
P. R. Roedel
March 29, 2000 /s/ J. M. Sanzo Director
--------------------------------
J. M. Sanzo
March 29, 2000 /s/ R. L. Smoot Director
--------------------------------
R. L. Smoot
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SCHEDULE II
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999
VALUATION AND QUALIFYING ACCOUNTS
Amounts in Thousands
Allowances for
- ---------------------------------------------------------------------------------------------------------------------------
Doubtful Accounts Sales Discounts & Deductions
------------------------------------------ ------------------------------------------
1999 1998 1997 1999 1998 1997
-------- -------- -------- -------- -------- --------
Balance, beginning of
year $ 1,532 $ 1,973 $ 1,913 $ 2,135 $ 542 $ 551
Other(1) -- 325 -- -- 1,126 --
Provision 111 90 160 15,076 14,995 12,882
Write-offs, recoveries
and discounts allowed (416) (856) (100) (15,059) (14,528) (12,891)
-------- -------- -------- -------- -------- --------
Balance,
end of year $ 1,227 $ 1,532 $ 1,973 $ 2,152 $ 2,135 $ 542
======== ======== ======== ======== ======== ========
The provision for doubtful accounts is included in administrative expense and
the provision for sales discounts and deductions is deducted from sales. The
related allowances are deducted from accounts receivable.
(1) Relates primarily to the acquisition of S&H.
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58
EXHIBIT INDEX
Number
- ------
(2) Stock Purchase Agreement dated as of November 14, 1997 by and among
certain subsidiaries of P. H. Glatfelter Company, the Stockholders of
S&H Papier-Holding GmbH, Deutsche Beteiligungs Aktiengesellschaft
Unternehmensbeteiligungsgesellschaft and P. H. Glatfelter Company
(incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K
dated January 2, 1998).
(3)(a) Articles of Amendment dated April 27, 1977, including restated Articles
of Incorporation (incorporated by reference to Exhibit 3(a) of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993) as amended by Articles of Merger dated January 30, 1979
(incorporated by reference to Exhibit 3(a) of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993); a Statement
of Reduction of Authorized Shares dated May 12, 1980 (incorporated by
reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K
for the year ended December 31, 1993); a Statement of Reduction of
Authorized Shares dated September 23, 1981 (incorporated by reference
to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year
ended December 31, 1993); a Statement of Reduction of Authorized Shares
dated August 2, 1982 (incorporated by reference to Exhibit 3(a) of
Registrant's Annual Report on Form 10-K for the year ended December 31,
1993); a Statement of Reduction of Authorized Shares dated July 29,
1983 (incorporated by reference to Exhibit 3(a) of Registrant's Annual
Report on Form 10-K for the year ended December 31, 1993); by Articles
of Amendment dated April 25, 1984 (incorporated by reference to Exhibit
3(a) of Registrant's Annual Report on Form 10-K for the year ended
December 31, 1994); a Statement of Reduction of Authorized Shares dated
October 15, 1984 (incorporated by reference to Exhibit (3)(b) of
Registrant's Form 10-K for the year ended December 31, 1984); a
Statement of Reduction of Authorized Shares dated December 24, 1985
(incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K
for the year ended December 31, 1985);
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59
by Articles of Amendment dated April 23, 1986 (incorporated by
reference to Exhibit (3) of Registrant's Quarterly Report on Form 10-Q
for the quarter ended March 31, 1986); a Statement of Reduction of
Authorized Shares dated July 11, 1986 (incorporated by reference to
Exhibit (3)(b) of Registrant's Form 10-K for the year ended December
31, 1986); a Statement of Reduction of Authorized Shares dated March
25, 1988 (incorporated by reference to Exhibit (3)(b) of Registrant's
Form 10-K for the year ended December 31, 1987); a Statement of
Reduction of Authorized Shares dated November 9, 1988 (incorporated by
reference to Exhibit (3)(b) of Registrant's Form 10-K for the year
ended December 31, 1988); a Statement of Reduction of Authorized Shares
dated April 24, 1989 (incorporated by reference to Exhibit 3(b) of
Registrant's Form 10-K for the year ended December 31, 1989); Articles
of Amendment dated November 29, 1990 (incorporated by reference to
Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31,
1990); Articles of Amendment dated June 26, 1991 (incorporated by
reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended
December 31, 1991); Articles of Amendment dated August 7, 1992
(incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K
for the year ended December 31, 1992); Articles of Amendment dated July
30, 1993 (incorporated by reference to Exhibit 3(b) of Registrant's
Form 10-K for the year ended December 31, 1993); and Articles of
Amendment dated January 26, 1994 (incorporated by reference to Exhibit
3(b) of Registrant's Form 10-K for the year ended December 31, 1993).
(3)(b) Articles of Incorporation, as amended through January 26, 1994
(restated for the purpose of filing on EDGAR) (incorporated by
reference to Exhibit 3(c) of Registrant's Form 10-K for the year ended
December 31, 1993).
(3)(c) By-Laws as amended through March 17, 1999 (incorporated by reference to
Exhibit 3(c) of Registrant's Form 10-K for the year ended December 31,
1998).
(4)(a) Escrow Agreement, dated as of February 24, 1997, between P. H.
Glatfelter Company and the Bank of New
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York relating to the 5-7/8% Notes due March 1, 1998 (incorporated by
reference to Exhibit (4)(c) of Registrant's Form 10-K for the year
ended December 31, 1996).
(4)(b) 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)(c) 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).
(9) P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993
(incorporated by reference to Exhibit 1 of the Schedule 13D filed by P.
H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993).
(10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted as of
January 1, 1994, as amended December 14, 1999 and effective January 1,
2000.
(10)(b) P. H. Glatfelter Company 1988 Restricted Common Stock Award Plan, as
amended and restated June 24, 1992 (incorporated by reference to
Exhibit (10)(c) of Registrant's Form 10-K for the year ended December
31, 1992).
(10)(c) P. H. Glatfelter Company Supplemental Executive Retirement Plan, as
amended and restated effective April 23, 1998 (incorporated by
reference to Exhibit 10(c) of Registrant's Form 10-K for the year ended
December 31, 1998).
(10)(d) Deferral Benefit Pension Plan of Ecusta Division, effective May 22,
1986 (incorporated by reference to Exhibit (10)(e) of Registrant's Form
10-K for the year ended December 31, 1987).
(10)(e) Description of Executive Salary Continuation Plan (incorporated by
reference to Exhibit (10)(g) of
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Registrant's Form 10-K for the year ended December 31, 1990).
(10)(f) P. H. Glatfelter Company Supplemental Management Pension Plan,
effective as of April 23, 1998 (incorporated by reference to Exhibit
10(f) of Registrant's Form 10-K for the year ended December 31, 1998).
(10)(g) P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, as
amended April 23, 1997 (incorporated by reference to Exhibit A of
Registrant's Proxy Statement dated March 14, 1997).
(10)(h) P. H. Glatfelter Company Deferred Compensation Plan for Directors,
effective as of April 22, 1998 (incorporated by reference to Exhibit
10(h) of Registrant's Form 10-K for the year ended December 31, 1998).
(10)(i) Loan Agreement, dated February 24, 1997, between P. H. Glatfelter
Company, as borrower, and GWS Valuch, Inc., as lender (incorporated by
reference to Exhibit (10)(h) of Registrant's Form 10-K for the year
ended December 31, 1996).
(10)(j) Agreement between the State of Wisconsin and Certain Companies
Concerning the Fox River, dated as of January 31, 1997, among P. H.
Glatfelter Company, Fort Howard Corporation, NCR Corporation, Appleton
Papers Inc., Riverside Paper Corporation, U.S. Paper Mills, Wisconsin
Tissue Mills Inc. and the State of Wisconsin (incorporated by reference
to Exhibit (10)(i) of Registrant's Form 10-K for the year ended
December 31, 1996).
(10)(k) Credit Agreement, dated as of December 22, 1997, among P. H. Glatfelter
Company, various subsidiary borrowers, Bankers Trust Company, as Agent,
and various lending institutions with Deutsche Bank AG, as
Documentation Agent, PNC Bank, National Association, as Syndication
Agent, and First National Bank of Maryland and Wachovia Bank, N.A., as
Managing Agents (incorporated by reference to Exhibit (10)(j) of
Registrant's Form 10-K for the year ended December 31, 1997).
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(21) Subsidiaries of the Registrant
(23) Consent of Independent Certified Public Auditors
(27) Financial Data Schedule
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