<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
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( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from______________________to_________________________
Commission File No. 1-3560
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P. H. GLATFELTER COMPANY
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
228 South Main Street, Spring Grove, Pennsylvania 17362
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(Address of principal executive offices) (Zip Code)
(717) 225-4711
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
------ ------
Shares of Common Stock outstanding at November 9, 1998 were
42,045,092.
1
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P. H. GLATFELTER COMPANY
INDEX
Part I - Financial Information
------------------------------
Financial Statements:
Condensed Consolidated Statements of Income and Retained
Earnings - Three Months and Nine Months Ended September 30,
1998 and 1997 (Unaudited)................................. 3
Condensed Consolidated Balance Sheets - September 30, 1998
(Unaudited) and December 31, 1997......................... 4
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 (Unaudited)...... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
Independent Accountants' Report.............................. 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 13
Part II - Other Information..................................... 20
---------------------------
Signature....................................................... 21
---------
Index of Exhibits............................................... 22
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Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
2
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PART I - FINANCIAL INFORMATION
------------------------------
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues
Net sales $ 167,245 $ 139,192 $ 544,168 $ 423,312
Other income - net
Energy sales - net 2,543 2,361 7,091 7,076
Interest on investments and
other - net 569 1,951 2,029 5,031
Gain from property
dispositions, etc., - net 18 225 103 2,128
----------- ----------- ----------- -----------
3,130 4,537 9,223 14,235
Total revenues 170,375 143,729 553,391 437,547
Costs and expenses
Cost of products sold 143,204 118,120 440,918 344,960
Selling, general and
administrative expenses 11,161 8,576 37,941 27,453
Interest on debt - net 5,259 4,910 16,322 13,784
Unusual Item 5,577 - 5,577 -
----------- ----------- ----------- -----------
165,201 131,606 500,758 386,197
Income before income taxes 5,174 12,123 52,633 51,350
Income tax provision
Current taxes 2,258 3,494 15,960 19,929
Deferred taxes (290) 1,206 4,349 (47)
----------- ----------- ----------- -----------
Total 1,968 4,700 20,309 19,882
Net income 3,206 7,423 32,324 31,468
Retained earnings at beginning
of period 492,502 471,608 478,073 462,337
----------- ----------- ----------- -----------
Total 495,708 479,031 510,397 493,805
Common stock dividends declared 7,357 7,383 22,046 22,157
----------- ----------- ----------- -----------
Retained earnings at end
of period $ 488,351 $ 471,648 $ 488,351 $ 471,648
=========== =========== =========== ===========
Basic earnings per share $ 0.08 $ 0.18 $ 0.77 $ 0.75
=========== =========== =========== ===========
Diluted earnings per share $ 0.08 $ 0.17 $ 0.77 $ 0.74
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
------
<TABLE>
<CAPTION>
9/30/98 12/31/97
(unaudited)
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 32,940 $ 66,919
Marketable securities 3,608 155,174
Accounts receivable - net 81,533 50,187
Inventories:
Raw materials 38,776 35,980
In process and finished products 50,979 31,724
Supplies 32,137 33,528
----------- -----------
Total inventory 121,892 101,232
Prepaid expenses and other current asset 4,352 2,967
----------- -----------
Total current assets 244,325 376,479
Plant, equipment and timberlands - net 628,108 475,189
Other assets 134,991 85,915
----------- -----------
Total assets $ 1,007,424 $ 937,583
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,939 $ 150,000
Short-term debt 34,296 48,665
Accounts payable 36,559 37,276
Dividends payable 7,356 7,390
Federal, state and local taxes 7,971 5,106
Accrued compensation, other expenses
and deferred income taxes 48,015 41,506
----------- -----------
Total current liabilities 136,136 289,943
Long-term debt 324,408 150,000
Deferred income taxes 124,045 101,995
Other long-term liabilities 77,245 56,287
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,738 42,623
Cumulative translation adjustment (2,854) (1,058)
Retained earnings 488,351 478,073
----------- -----------
Total 528,779 520,182
Less cost of common stock in treasury (183,189) (180,824)
----------- -----------
Total shareholders' equity 345,590 339,358
Total liabilities and
shareholders' equity $ 1,007,424 $ 937,583
=========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Ended
9/30/98 9/30/97
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income $ 32,324 $ 31,468
Items included in net income not using
(providing) cash:
Depreciation and depletion 36,207 27,206
Loss (gain) on disposition of fixed assets 625 (2,161)
Expense related to employee stock purchase and
401(k) plans 1,261 996
Change in assets and liabilities:
Accounts receivable (2,296) (7,339)
Inventories 11,619 5,630
Prepaid expenses and other assets (8,276) (11,033)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities (7,431) 2,213
Federal, state and local taxes (5,227) 2,868
Deferred income taxes - non-current 5,270 407
--------- ---------
Net cash provided by operating activities 64,076 50,255
--------- ---------
Cash Flows from Investing Activities:
Sale/maturity of marketable securities and
long-term investments - net 154,870 377
Proceeds from disposal of fixed assets 34 3,682
Additions to plant, equipment and timberlands (30,290) (42,262)
Increase (decrease) in liabilities related to
fixed asset acquisitions 69 (2,272)
Acquisition of S&H - net of cash acquired (147,491) -
--------- ---------
Net cash used in investing activities (22,808) (40,475)
--------- ---------
Cash Flows from Financing Activities:
Proceeds of long-term debt issuance - 150,000
Net borrowing of short-term debt 16,384 -
Net payment of other long-term debt (17,791) -
Repayment of 5-7/8% Notes (150,000) -
Acquisition-related borrowings 101,500 -
Deposit into trust to defease certain covenants
of current portion of long-term debt - (150,351)
Dividends paid (22,080) (22,218)
Purchases of common stock (4,344) (9,857)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan 829 2,648
--------- ---------
Net cash used in financing activities (75,502) (29,778)
--------- ---------
Effect of exchange rate changes on cash 255 8
Net decrease in cash and cash equivalents (33,979) (19,990)
Cash and Cash Equivalents:
At beginning of period 66,919 31,802
--------- ---------
At end of period $ 32,940 $ 11,812
========= =========
Supplemental Disclosure of Cash Flow Information:
Cash paid for:
Interest $ 14,917 $ 9,929
Income taxes 21,041 17,481
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
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P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Effective January 2, 1998, the Registrant acquired all of the outstanding
common stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper
division of Schoeller and Hoesch Group from RQPO Beteiligungs GmbH & Co.
Papier KG ("RQPO") and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for
DM 270 million (approximately $150 million), subject to certain
adjustments, in cash. The principal partners in RQPO were Deutsche
Beteiligungs AG and S&H management. The Registrant accounted for the S&H
acquisition under the purchase method of accounting and S&H is consolidated
with the Registrant 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 papers, as well as tobacco papers, metalizing
papers and printing papers. S&H has an abaca pulpmill in the Philippines
and other facilities in France and the United States. S&H also has a 50%
ownership interest in a paper mill in Odet, France. As of September 30,
1998, a minority interest of $10,395,000 associated with this subsidiary is
classified as "Other long-term liabilities" on the Registrant's Condensed
Consolidated Balance Sheet.
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 excess of the purchase price
over the fair value of net assets acquired was recorded principally as
goodwill and will be amortized on a straight-line basis over 20 years.
The following summarized unaudited combined pro forma information of the
Registrant for the quarter and nine months ended September 30, 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 is not necessarily indicative
of what the results would have been had the Registrant operated S&H since
January 1, 1997. Pro forma combined net sales, net income and both basic
and diluted earnings per share of the Registrant would have been
$179,698,000,$8,540,000 and $0.20, respectively, for the quarter ended
September 30, 1997 and $553,647,000, $35,619,000 and $0.84, respectively,
for the nine months ended September 30, 1997.
2. A reconciliation between the income tax provision computed by applying the
statutory federal income tax rate of 35% to income before income taxes, and
the actual income tax provision follows (in thousands):
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Three Months Ended Nine Months Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- -------- -------
Federal income tax provision at
statutory rate $ 1,811 $ 4,243 $ 18,422 $17,973
State income taxes after deducting
federal income tax benefit 42 182 1,189 1,334
Non-US tax rate differences 162 36 955 73
Other (47) 239 (257) 502
------- ------- -------- -------
Actual income tax provision $ 1,968 $ 4,700 $ 20,309 $19,882
======= ======= ======== =======
</TABLE>
The deferred income tax provisions for the nine-month periods ended September
30, 1998 and 1997 result from the following temporary differences (in
thousands):
<TABLE>
<CAPTION>
Nine Months Ended
<S> <C> <C>
9/30/98 9/30/97
-------- --------
Depreciation $ 3,970 $ (1,469)
Pensions 2,568 3,308
Alternative minimum tax - 1,168
Other (2,189) (3,054)
-------- --------
Deferred income tax provision $ 4,349 $ (47)
======== ========
</TABLE>
6
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The provision for deferred income taxes is, in part, estimated based on an
allocation of the appropriate amount relative to the number of months
reported herein and in conformance with existing tax regulations. The
deferred income tax provisions reflect the impact of any audits by federal
and state authorities.
3. The number of shares of common stock outstanding decreased by 116,690 in
the first nine months of 1998. This decrease was due to the repurchase of
250,000 shares of common stock for the treasury, which more than offset the
delivery of 130,210 treasury shares pursuant to the various employee stock
purchase and 401(k) plans of the Registrant and the delivery of 3,100
treasury shares pursuant to the exercise of stock options under the
Registrant's 1992 Key Employee Long-Term Incentive Plan. At September 30,
1998, 12,329,062 shares of common stock were held in treasury.
4. In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
("SFAS No. 128"). SFAS No. 128 requires a dual presentation of basic and
diluted earnings per share on the face of the Registrant's consolidated
statement of income and a reconciliation of the computation of basic
earnings per share to diluted earnings per share. Basic earnings per share
excludes the dilutive impact of common stock equivalents and is computed by
dividing net income by the weighted-average number of shares of common
stock outstanding for the period. Diluted earnings per share includes the
effect of potential dilution from the exercise of outstanding common stock
equivalents into common stock using the treasury stock method. Concurrent
with the adoption, all prior years' earnings per share information has been
restated, resulting in no material differences. A reconciliation of the
Registrant's basic and diluted earnings per share follows, with dollar and
share amounts in thousands:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
----------------------- -----------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Shares Shares Shares Shares
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Basic earnings per
share factors 41,995 42,115 42,047 42,234
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 11 27 18 32
Performance stock
awards 126 96 126 96
Employee stock
options - 184 17 76
----------- ----------- ----------- -----------
Diluted earnings per
share factors 42,132 42,422 42,208 42,438
=========== =========== =========== ===========
Net Income $ 3,206 $ 7,423 $32,324 $31,468
Basic earnings per share $ 0.08 $ 0.18 $ 0.77 $ 0.75
Diluted earnings per share $ 0.08 $ 0.17 $ 0.77 $ 0.74
</TABLE>
5. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" ("SFAS No. 130"). This statement, which establishes standards for
reporting and disclosure of comprehensive income, is effective for interim
and annual periods beginning after December 15, 1997. Reclassification of
financial information for earlier periods presented for comparative
purposes is required under SFAS No. 130. As this statement only requires
additional disclosures in the Registrant's consolidated financial
statements, its adoption does not have any impact on the Registrant's
consolidated financial position or results of operations. The Registrant
adopted SFAS No. 130 effective January 1, 1998. As a result, due to
changes in certain foreign currencies relative to the US Dollar, total
comprehensive income would have been $1,568,000 and $7,336,000 for the
third quarter of 1998 and 1997,
7
<PAGE>
respectively, and $30,528,000 and $31,189,000 for the first nine months of
1998 and 1997, respectively.
6. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information" ("SFAS No. 131"). This statement,
which establishes standards for the reporting of information about
operating segments and requires the reporting of selected information about
operating segments in interim financial statements, was adopted by the
Registrant on January 1, 1998. Disclosure of segment and other related
information is not required in interim periods of the first year of the
Registrant's adoption. The Registrant will provide appropriate SFAS 131
disclosures for the year ending December 31, 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132"). This
statement, which revises certain disclosure requirements for the
Registrant's pension assets and obligations, is effective for fiscal
periods beginning after December 15, 1997. Restatement of prior years'
information is required, where available. As this statement only requires a
change in methods of disclosure and not any changes in accounting methods,
it will not have any impact on the Registrant's consolidated financial
position or results of operations. Interim reporting periods are not
affected by this statement. The Registrant adopted SFAS No. 132 effective
January 1, 1998 and will provide appropriate disclosures for the year
ending December 31, 1998.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). 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. It
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. This statement is effective for fiscal years
beginning after June 15, 1999, although early adoption is encouraged. The
Registrant does not believe that adoption will have a material impact on
its consolidated financial position or results of operation.
7. To finance the acquisition of S&H Papier-Holding GmbH ("S&H"), on December
22, 1997, the Registrant entered into a $200 million multi-currency
revolving credit facility ("Revolving Credit Facility") with a syndicate of
major lending institutions. The Revolving Credit Facility enables the
Registrant to borrow up to the equivalent of $200 million in certain
currencies in the form of revolving credit loans with a final maturity date
of December 22, 2002 and with interest periods determined, at the
Registrant's option, on a daily or one to six month basis. Interest on the
revolving credit loans is at variable rates based, at the Registrant's
option, on the Eurocurrency Rate or the Base Rate (lender's prime rate),
plus applicable margins. Margins are based on the higher of the
Registrant's debt ratings as published by Standard & Poor's and Moody's.
On December 30, 1997, the Registrant borrowed DM 87,500,000 (approximately
$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 in
order to facilitate the S&H acquisition and are included in "Cash and cash
equivalents" on the December 31, 1997 Condensed Consolidated Balance Sheet.
The borrowings are classified as "Short-term debt" on the Condensed
Consolidated Balance Sheet as of December 31, 1997.
On January 2, 1998, the Registrant borrowed an additional DM 182,500,000
(approximately $101,500,000) necessary to complete the acquisition and
classified the aggregate borrowings under the Revolving Credit Facility as
long-term. To offset some of the variable rate characteristics of the
total borrowing under the Revolving Credit Facility, effective in January
1998, the Registrant entered into two interest rate swap agreements, each
having total notional principal amounts of DM 52,600,000 (approximately
$31,400,000 as of September 30, 1998). Under the agreements, the
Registrant pays fixed rates of 4.18% and 4.45% for periods of two and three
years, respectively,
8
<PAGE>
and receives a floating rate of the six-month DM London Interbank Offered
Rate ("LIBOR"). The six-month DM LIBOR applicable for the first half of
1998 was approximately 3.8%. The six-month DM LIBOR applicable for the
second half of 1998 is approximately 3.7%.
8. During the third quarter of 1998, the Registrant recognized a pre-tax
charge of $5,577,000 relating to the accrual of pension and medical
benefits for certain salaried and hourly employees of the Registrant's
Ecusta mill, located in Pisgah Forest, North Carolina, who elected during
the third quarter to participate in a voluntary early retirement
enhancement program ("VEREP"). This pre-tax charge is classified as an
Unusual Item on the Registrant's Condensed Consolidated Statement of Income
and Retained Earnings. The after-tax effect of this charge was $3,402,000.
An additional pre-tax charge of an estimated $3,900,000 ($2,400,000 after-
tax) is expected in the fourth quarter of 1998 as additional Ecusta hourly
employees have elected, subsequent to September 30, 1998, to accept early
retirement. The fourth quarter charge will also cover Spring Grove,
Pennsylvania and Neenah, Wisconsin salaried employees who are expected to
participate in a VEREP offered in October 1998. The Registrant anticipates
that some layoffs of Spring Grove and Neenah salaried employees will be
necessary to achieve its cost-savings goals.
The intent of these programs is to generate annual payroll and benefits
cost savings through a reduction in the size of the Registrant's workforce.
The Registrant's aggregate restructuring is anticipated to result in the
elimination of between 160 and 165 salaried and hourly positions, with
associated annual cost savings of approximately $8,400,000.
9. The Registrant is subject to loss contingencies resulting from regulation
by various federal, state, local and foreign governmental authorities with
respect to the environmental impact of air and water emissions and noise
from its mills as well as its disposal of solid waste generated by its
operations. In order to comply with environmental laws and regulations,
the Registrant has incurred substantial capital and operating expenditures
over the past several years. The Registrant anticipates that environmental
regulation of the Registrant's operations will continue to become more
burdensome and that capital and operating expenditures will continue and
perhaps increase, in the future. In addition, the Registrant may incur
obligations to remove or mitigate any adverse effects on the environment
resulting from its operations, including the restoration of natural
resources, and liability for personal injury and damage to property,
including natural resources. Because other paper companies located in the
United States are generally subject to the same environmental regulations,
the Registrant does not believe that its competitive position in the United
States paper industry will be materially adversely affected by its capital
expenditures for, or operating costs of, pollution abatement facilities for
its present mills or the limitations which environmental compliance may
place on its operations.
The Pennsylvania Department of Environmental Protection ("DEP") has
proposed to reissue the Registrant's wastewater discharge permit for the
Spring Grove mill on terms unacceptable to the Registrant. The Registrant
cannot determine the impact that the new permit will have on the Registrant
if it contains objectionable terms because it is too soon to determine what
material terms will be in the permit's final form. In addition, the
Wisconsin Department of Natural Resources ("DNR") has reissued the
Registrant's wastewater discharge permit for the Neenah mill on terms which
are acceptable to the Registrant. The permit's term expires on September
30, 2002.
The Registrant, along with six other companies which operate or formerly
operated facilities along the Fox River in Wisconsin, has been in
discussions with the Wisconsin DNR and the United States Fish and Wildlife
Service ("USFWS") regarding 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.
9
<PAGE>
On January 30, 1997, the Registrant and six other companies entered into an
agreement with the State of Wisconsin (the "Wisconsin Agreement") which was
intended to establish a framework for the final resolution of claims for
natural resources damages and other relief which the State asserts against
the companies. Under the agreement, the companies will provide in the
aggregate $10 million in work and funds to facilitate natural resources
damages assessment activities, including, among other things, modeling and
risk assessment, as well as field scale demonstration of sediment dredging
and the enhancement of certain environmental amenities. The State has
indicated that the $10 million in work and funds is expected to be spent
over a four year period although the bulk of the amount may be spent in
1998 and 1999. The final allocated portion of the $10 million which the
Registrant is required to pay is unknown at present. The State has agreed
to act as "lead authorized official" under federal law for purposes of any
assessment of damages to natural resources within Wisconsin, except those
within the administrative jurisdiction of a federal agency. The USFWS,
together with the National Oceanic and Atmospheric Administration and two
Indian tribes, however, is conducting its own assessment despite the
State's status. In general, the parties to the Wisconsin Agreement have
agreed to toll all limitations periods and to forbear from litigation
during the term of the agreement. The parties intend to conclude a final
resolution of all of the State's claims during the course of, or after
completion of, the work called for by the agreement.
By letter dated January 31, 1997, and received by the Registrant on
February 3, 1997, the USFWS provided 60 days' notice of the intention of
the United States Departments of the Interior and Commerce to commence an
action for natural resources damages against the Registrant and the six
other companies referred to above similarly relating to the discharge of
hazardous substances into the lower Fox River. The Registrant does not
know the amount which the federal trustees will claim as natural resources
damages, but the Registrant believes that it will be substantial.
Beginning as of March 1, 1997, the Registrant and six other companies
entered into a series of agreements with the United States which provided
that all limitation periods were tolled and the parties would forbear from
litigation; the last tolling and forbearance period expired on December 2,
1997.
On July 11, 1997, the Wisconsin DNR, the United States Department of the
Interior, the Menominee Indian Tribe of Wisconsin, the Oneida Tribe of
Indians of Wisconsin, the National Oceanic and Atmospheric Administration
and the United States Environmental Protection Agency ("EPA") entered into
a Memorandum of Agreement (the "MOA") which provides for coordination and
cooperation among those parties in addressing the release or threat of
release of hazardous substances into the lower Fox River, Green Bay and
Lake Michigan environment. The MOA sets forth a mutual goal of remediating
and/or responding to hazardous substance releases and threats of releases,
and restoring injured and potentially injured natural resources. The MOA
further states that, based on current information, removal of the PCB
contaminated sediments in the lower Fox River is expected to be the
principal, but not exclusive, action undertaken to achieve restoration and
rehabilitation of injured natural resources. The MOA anticipates funding
from the Registrant and the six other companies, all of which are
identified as potentially responsible parties.
The EPA has proposed to include the Fox River/Green Bay site on the
National Priorities List maintained pursuant to the Comprehensive
Environmental Response, Compensation and Liability Act. EPA rejected the
potentially responsible parties' offer to perform a remedial investigation
and feasibility study ("RI/FS") for the site. The Wisconsin DNR presently
is performing the RI/FS. The Registrant believes that this development
increases the likelihood that this matter will end up in litigation. The
Registrant cannot now predict the cost of the remedy which will be selected
for the site because the Registrant cannot predict the remedy for the site
or its share of that cost.
The Registrant, with advice from its environmental consultants, continues
to believe that an aggressive effort, as currently proposed by the
governmental
10
<PAGE>
authorities, to remove PCB contaminated sediments, many of which are buried
under cleaner material or are otherwise unlikely to move, would be
environmentally detrimental and therefore inappropriate. Furthermore, the
Registrant's share of the cost of such removal, depending on the amount of
sediments to be removed, could exceed its available resources. The
Registrant believes it will be able to persuade the parties to the MOA or a
court against removal of a substantial amount of PCB contaminated
sediments. There can be no assurance, however, that the Registrant will be
successful in arguing that removal of PCB contaminated sediments is
inappropriate, that it would prevail in any resulting litigation or that
its share of the cost of any such removal would not have a material adverse
effect on the Registrant's consolidated financial condition, liquidity or
results of operation.
The amount and timing of future expenditures for environmental compliance,
clean up, remediation and personal injury and property damage liability,
including but not limited to those related to the lower Fox River and the
Bay of Green Bay, cannot be ascertained with any certainty due to among
other things, the unknown extent and nature of any contamination, the
extent and timing of any technological advances for pollution control, the
remedial actions which may be required and the number and financial
resources of any other responsible parties. The Registrant continues to
evaluate its exposure and the level of its reserves including, but not
limited to, its share of the agreement reached with the State regarding the
lower Fox River and the Bay of Green Bay, its negotiations with the State
concerning those areas and the unknown amount which could be claimed by the
federal trustees as natural resource damages related to the lower Fox
River. The Registrant believes that it is insured against certain losses
related to the lower Fox River, depending on the nature and amount thereof.
Coverage, which is currently being investigated under reservation of rights
by various insurance companies, is dependent upon the identity of the
plaintiff, the procedural posture of the claims asserted and how such
claims are characterized. The Registrant does not know when the insurers'
investigation as to coverage will be completed.
The Registrant's current assessment after consultation with legal counsel,
is that future expenditures for these matters are not likely to have a
material adverse impact on the Registrant's consolidated financial
condition or liquidity, but could have a material adverse effect on the
Registrant's consolidated results from operations in a given year; however,
there can be no assurances that the Registrant's reserves will be adequate
or that a material adverse effect on the Registrant's consolidated
financial condition or liquidity will not occur at some future time.
10. In the opinion of the Registrant, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which comprise
only normal recurring accruals) necessary for a fair presentation of the
financial information contained therein. These unaudited condensed
consolidated financial statements should be read in conjunction with the
more complete disclosures contained in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1997. Certain reclassifications
have been made of previously reported amounts in order to conform with
classifications used in the current year.
11
<PAGE>
INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
P. H. Glatfelter Company:
We have reviewed the accompanying condensed consolidated balance sheet of P. H.
Glatfelter Company and subsidiaries as of September 30, 1998, and the related
condensed consolidated statements of income and retained earnings for the three-
month and nine-month periods ended September 30, 1998 and 1997, and cash flows
for the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of P. H. Glatfelter Company and
subsidiaries as of December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated February 6, 1998, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1997 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 16, 1998
12
<PAGE>
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
This discussion and analysis contains forward-looking statements. See
"Cautionary Statement" set forth in Item 5.
Effective January 2, 1998, the Registrant acquired all of the outstanding common
stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper division of
Schoeller and Hoesch Group, from RQPO Beteiligungs GmbH & Co. Papier KG ("RQPO")
and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for approximately DM 270
million ($150 million), subject to certain adjustments, in cash. The principal
partners in RQPO were Deutsche Beteiligungs AG and S&H management. The
Registrant has accounted for the S&H acquisition under the purchase method of
accounting and S&H is consolidated with the Registrant beginning in January
1998. As a result, certain changes from year to year are a result of the
acquisition and not necessarily a change in comparable results of operations.
Where appropriate, those variances have been highlighted. The entities which
were owned by the Registrant during 1997 and whose results of operations can be
compared from year to year are referred to as "Non-S&H" operations.
RESULTS OF OPERATIONS
- - - ---------------------
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income and Retained Earnings is shown
below.
<TABLE>
<CAPTION>
Comparison of
------------------------------------------------
Three Months Ended Nine Months Ended
September 30, 1998 and September 30, 1998 and
September 30,1997 September 30, 1997
---------------------- ------------------------
Increase (Decrease)
(dollars in thousands)
<S> <C> <C>
Net sales 28,053 20.2 % 120,856 28.6 %
Other income - net (1,407) (31.0)% (5,012) (35.2)%
Cost of products sold 25,084 21.2 % 95,958 27.8 %
Selling, general and
administrative expenses 2,585 30.1 % 10,488 38.2 %
Interest on debt 349 7.1 % 2,538 18.4 %
Unusual item 5,577 N/C 5,577 N/C
Income tax provision (2,732) (58.1)% 427 2.1 %
Net income (4,217) (56.8)% 856 2.7 %
N/C - not calculable
</TABLE>
Net Sales
- - - ---------
Worldwide net sales increased $28,053,000, or 20.2%, for the third quarter of
1998 as compared to the third quarter of 1997. For the first nine months of
1998, total net sales increased by $120,856,000, or 28.6%, as compared to the
first nine months of 1997. The reason for this increase was S&H's net sales of
$40,143,000 and $124,807,000 during the third quarter and first nine months of
1998, respectively.
The Registrant classifies its product sales into two product groups: 1)
printing papers; and 2) tobacco and other specialty papers. Total printing
papers net sales decreased by $3,833,000 in the third quarter of 1998 as
compared to the like period in 1997 and increased by $11,889,000 during the
first nine months of 1998 relative to the first nine months of 1997. Non-S&H
operations' printing papers net sales decreased $7,123,000 in the third quarter
of 1998 versus the third quarter of 1997 as average net selling price and net
sales volume decreased by 2.9% and 5.6%, respectively. For the first nine
months of 1998, Non-S&H operations' printing papers net sales increased by
$5,524,000 versus the first
13
<PAGE>
nine months of 1997 as a 2.4% increase in average net selling prices was
partially offset by a 0.3% decrease in net sales volume.
Although Non-S&H operations printing paper net sales were higher for the first
nine months of 1998 versus the first nine months of 1997, the Registrant
experienced lower net sales from these operations in the third quarter of 1998
as compared to the same period in the prior year. The Registrant experienced
both declining prices and increased competition for orders for its Non-S&H
printing papers during the third quarter of 1998 as compared to earlier in the
year as well as the prior year. The lower volume was a result of several
factors. An increase in the volume of imported paper, particularly from Asia,
had an indirect negative impact on demand for the Registrant's Non-S&H printing
papers. In addition, the Registrant's third quarter sales volume is always
impacted by an annual maintenance shutdown at its Spring Grove facilities.
Non-S&H printing paper net sales were also negatively impacted by comparatively
low average net selling prices. Such prices decreased during the third quarter
in 1998. This pricing trend is expected to extend into the fourth quarter. As
of early November, order backlog levels are low. In addition, the Registrant
normally experiences shrinking backlogs during the holiday season and expects
this trend to occur this year. During 1998, the Registrant has experienced
approximately eight equivalent days of market-related downtime at its Spring
Grove and Neenah mills and expects that additional market-related downtime may
be necessary prior to the end of 1998.
Net sales of tobacco and other specialty papers for the three and nine months
ended September 30, 1998 were $31,886,0000 and $108,967,000 higher than in the
corresponding 1997 periods, respectively. These increases were the result of
incremental net sales of tobacco and other specialty papers by S&H operations
during 1998.
The Registrant's Non-S&H operations' tobacco and other specialty papers net
sales for the third quarter of 1998 decreased by 9.2% versus the corresponding
period of 1997 due to a 6.0% decrease in average net selling price and a 3.4%
decrease in net sales volume. For the first nine months of 1998, the decrease
in net sales of tobacco and other specialty papers of 5.8% in Non-S&H
operations, compared to the first nine months of 1997, was due to a decrease in
net sales volume of 3.5% and a decrease in average net selling price of 2.5%.
Net sales of other specialty papers for Non-S&H operations decreased by 5.8% in
the third quarter of 1998 compared to the third quarter of 1997 and 8.4% in the
nine months ended September 30, 1998 compared to the same period of 1997. This
decrease was due to a decrease in both net sales volume and average net selling
price of such products as a result of an unfavorable change in the Registrant's
mix of products sold. Through development of other technically engineered
papers, including those produced on the recently acquired gravure coater, the
Registrant is striving to improve its product mix and increase its sales volume
of other specialty papers. Third quarter sales of Non-S&H other specialty
papers saw an increase in volume of such products over the second quarter of
1998.
Non-S&H operations' net sales of tobacco papers were 10.7% lower in the third
quarter of 1998 versus the third quarter of 1997, as both sales volume and
average net selling prices decreased by 4.7% and 6.4%, respectively. The lower
volume and pricing were a result of continuing excess worldwide capacity of
tobacco papers as well as the strength of the US Dollar and the cost reduction
efforts of the multinational tobacco product manufacturers. Due to lack of
sufficient demand, the Registrant temporarily shutdown one of its tobacco paper-
producing machines at its Ecusta mill during the third quarter of 1998. The
idled machine represents approximately 10% of Ecusta's tobacco paper production
capacity. The Registrant does not expect to re-start this machine in the fourth
quarter of 1998. The Registrant's Ecusta Division remains in negotiations with
some of its key customers on the terms of certain long-term sales contracts.
Some of the negotiations are complete and have resulted in significant pricing
concessions by the Registrant. While the Ecusta Division will likely see an
increase in sales volume as a result of these negotiations, any increased volume
is expected to be more than offset by lower pricing. The Registrant expects
pricing for its tobacco papers at its Ecusta Division to remain at these levels
for the foreseeable
14
<PAGE>
future. As a result, the Registrant has implemented certain cost reduction
programs discussed below.
Sales of tobacco papers at S&H are under many of the same pressures as those at
its Ecusta mill. Demand and pricing for S&H's specialty papers have remained
strong although both have weakened slightly. This has resulted in a small
decline in average net selling prices, although average net selling prices for
these papers have not declined as significantly as for other papers that the
Registrant sells.
Other Income - Net
- - - ------------------
The Registrant's other income - net, including interest income, decreased
$1,407,000, or 31.0% for the third quarter of 1998 and $5,012,000, or 35.2%, for
the first nine months of 1998, compared to the corresponding periods of 1997.
Interest on investments and other - net was $1,382,000 lower in the third
quarter of this year versus the third quarter of 1997 and $3,002,000 lower in
the first nine months of this year versus the first nine months of 1997. In
1997, the Registrant established a trust to defease certain covenants of its
$150,000,000 principal amount of 5-7/8% Notes. All of the funds were paid out
of the trust on March 2, 1998. Because the trust was in place for a longer
period of time during the first nine months of 1997 versus the first nine months
of 1998, the Registrant recognized $2,104,000 more interest income during the
third quarter of 1997 compared to the third quarter of 1998 and $3,659,000 more
interest income during the first nine months of 1997 compared to the first nine
months of 1998.
Gain from property dispositions, etc. - net decreased $2,025,000 for the nine
months ending September 30, 1998 compared to the like period of 1997. During
the second quarter of 1997, the Registrant completed the sale of a parcel of
recreational property near its Pisgah Forest, North Carolina mill which resulted
in a pre-tax gain of approximately $2,200,000. No significant property
dispositions occurred during the first nine months of 1998.
Cost of Products Sold
- - - ---------------------
The Registrant's cost of products sold increased by $25,084,000, or 21.2% for
the third quarter of 1998 versus the second quarter of 1997 and increased by
$95,958,000, or 27.8% for the first nine months of 1998 versus the like period
of 1997. This increase was primarily due to S&H operations' incremental
production volume. Although the Registrant's Non-S&H cost of products sold have
decreased in the three and nine month periods ending September 30, 1998 versus
the prior year's like periods, the non-S&H cost of products sold per ton has
remained flat. Market pulp prices, a significant component of the Registrant's
non-S&H cost of production, have decreased over the past several months. In
addition, inflation continues to be minimal, causing the Registrant's overall
Non-S&H cost of products sold per ton to remain relatively flat.
The average net selling price for the Registrant's products has decreased. This
has resulted in a decrease in gross margin per ton of 20.4% in the third quarter
of 1998 as compared to the third quarter of 1997. Gross margin per ton for the
first nine months of 1998 as compared to the same period of 1997 is flat as
recent price declines offset higher prices realized the first six months of the
year.
The Registrant expects pricing for market pulp to remain at its current levels
or weaken slightly through the fourth quarter of 1998. Since pricing for certain
of the Registrant's products typically follows that of market pulp, the
Registrant does not expect to see pricing relief in the near term for such
products.
Selling, General and Administrative Expenses
- - - --------------------------------------------
The Registrant's selling, general and administrative expenses for the third
quarter of 1998 were $2,585,000 or 30.1% higher than for the comparable period
of 1997 and $10,488,000, or 38.2% higher in the first nine months of 1998 versus
the same period of 1997. This increase was principally due to the incremental
selling, general and administrative expenses of S&H included in the 1998
results.
15
<PAGE>
The S&H operations have higher selling, general and administrative expenses as a
percentage of sales than the Non-S&H operations. Selling, general and
administrative expenses for Non-S&H operations for the third quarter and first
nine months of 1998 were comparable to the corresponding periods of the prior
year.
Interest on debt - net
- - - ----------------------
The Registrant's interest on debt - net increased by $349,000, or 7.1% for the
three month period ended September 30, 1998 versus the comparable period of
1997. Although the average borrowings of the Registrant were higher in the
third quarter of 1998 than the third quarter of 1997, those borrowings were made
at somewhat lower rates, causing the change between the respective quarters to
be minimal. Interest on debt - net for the first nine months of 1998 versus the
same period of 1997 increased by $2,538,000, or 18.4%. The primary reason for
this increase was the Registrant'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 to finance the acquisition of S&H.
Unusual Item
- - - ------------
During the third quarter of 1998, the Registrant recognized a pre-tax charge of
$5,577,000 relating to the accrual of pension and medical benefits for certain
salaried and hourly employees of the Registrant's Ecusta mill, located in Pisgah
Forest, North Carolina, who elected during the third quarter to participate in a
voluntary early retirement enhancement program ("VEREP"). This pre-tax charge
is classified as an Unusual Item on the Registrant's Condensed Consolidated
Statement of Income and Retained Earnings. The after-tax effect of this charge
was $3,402,000.
An additional pre-tax charge of an estimated $3,900,000 ($2,400,000 after-tax)
is expected in the fourth quarter of 1998 as additional Ecusta hourly employees
have elected, subsequent to September 30, 1998, to accept early retirement. The
fourth quarter charge will also cover Spring Grove, Pennsylvania and Neenah,
Wisconsin salaried employees who are expected to participate in a VEREP offered
in October 1998. The Registrant anticipates that some layoffs of Spring Grove
and Neenah salaried employees will be necessary to achieve its cost-savings
goals.
The intent of this program is to generate annual payroll and benefits cost
savings through a reduction in the size of the Registrant's workforce. The
Registrant's aggregate restructuring is anticipated to result in the elimination
of between 160 and 165 salaried and hourly positions, with associated annual
cost savings of approximately $8,400,000.
Income Tax Provision
- - - --------------------
The Registrant's income tax provision decreased by $2,732,000, or 58.1% for the
third quarter of 1998 versus the third quarter of 1997 and increased by
$427,000, or 2.1% for the first nine months of 1998 compared to the first nine
months of 1997. The decrease for third quarter of 1998 versus the same period
of 1997 was primarily due to the impact of the recognition of a third quarter
1998 unusual item charge relating to restructuring on the Registrant's income
tax provision. The increase in the tax provision for the first nine months of
1998 versus the first nine months of 1997 was due to the increased earnings as a
result of the acquisition of S&H, which more than offset the third quarter 1998
restructuring charge.
FINANCIAL CONDITION
- - - -------------------
Liquidity
- - - ---------
The Registrant's cash and cash equivalents decreased by $33,979,000 during the
first nine months of 1998. Net cash provided by operating activities of
$64,076,000 was more than offset by cash used in investing and financing
16
<PAGE>
activities of $22,808,000 and $75,502,000, respectively. Significant cash
activities during the first nine months of 1998 included the liquidation of
$154,407,000 of securities held in trust to repay the principal amount of the
Registrant's 5-7/8% Notes and related interest on March 2, 1998 and the
borrowing of approximately $101,500,000 to finance part of the purchase price
for the Registrant's acquisition of S&H. Other significant cash payments
included dividends of $22,080,000, expenditure of $30,290,000 on plant,
equipment and timberlands and the repurchase of 250,000 shares of common stock
for the treasury at an aggregate purchase price of $4,344,000, the purpose of
which was to enhance shareholder value.
To finance the S&H acquisition, the Registrant entered into a $200 million
multi-currency revolving credit facility ("Revolving Credit Facility") with a
syndicate of major lending institutions. The Revolving Credit Facility enables
the Registrant to borrow up to the equivalent of $200 million in certain
currencies in the form of revolving credit loans with a final maturity date of
December 22, 2002 and with interest periods determined, at the Registrant's
option, on a daily or one to six month basis. Interest on the revolving credit
loans is at variable rates based, at the Registrant's option, on the
Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable
margins. Margins are based on the higher of the Registrant's debt ratings as
published by Standard & Poor's and Moody's. As of September 30, 1998 the
Registrant owed DM 276,200,000 (approximately $165,000,000) under this
agreement. The Registrant is in compliance with all covenants of the Revolving
Credit Agreement.
To offset some of the variable rate characteristics of the total borrowing under
the Revolving Credit Facility, effective in January 1998, the Registrant entered
into two interest rate swap agreements, each having total notional principal
amounts of DM 52,600,000 (approximately $31,400,000 as of September 30, 1998).
Under the agreements, the Registrant pays fixed rates of 4.18% and 4.45% for
periods of two and three years, respectively, and receives a floating rate based
on the six-month DM London Interbank Offered Rate ("LIBOR"). The six-month DM
LIBOR applicable for the first half of 1998 was approximately 3.8%. The six-
month DM LIBOR applicable for the second half of 1998 is approximately 3.7%.
Until the applicable six-month DM LIBOR rate is greater than the respective
fixed rate, the Registrant will be a net payer under each of these agreements.
The amount of interest expense incurred under these two swap agreements during
the first nine months of 1998 was approximately DM 409,000 (approximately
$228,000).
On July 22, 1997, the Registrant issued $150,000,000 principal amount of its 6-
7/8% Notes. These Notes will mature on July 15, 2007. The 6-7/8% Notes are
redeemable, in whole or in part, at the option of the Registrant at any time at
a calculated redemption price plus accrued and unpaid interest to the date of
redemption. The 6-7/8% Notes are unsecured and unsubordinated indebtedness of
the Registrant. Interest on the Notes is payable semiannually on January 15 and
July 15 of each year.
The Registrant expects to meet all its near-term cash needs from a combination
of internally generated funds, cash, cash equivalents, marketable securities and
the Revolving Credit Facility or other bank lines of credit.
Capital Resources
- - - -----------------
The Registrant has invested approximately $30,000,000 in capital expenditures
for the first nine months of 1998. One of the Registrant's short-term
objectives is to maximize cash generation to reduce its debt level. The
Registrant intends to critically evaluate its capital expenditure needs to help
meet this objective.
ENVIRONMENTAL MATTERS
- - - ---------------------
The Registrant is subject to loss contingencies resulting from regulation by
various federal, state, local and foreign governmental authorities with respect
to the environmental impact of air and water emissions and noise from its mills
as well as its disposal of solid waste generated by its operations. In order to
comply with environmental laws and regulations, the Registrant has incurred
substantial capital and operating expenditures over the past several years.
During 1997, 1996 and 1995, the Registrant incurred approximately $14,800,000,
$15,200,000 and $14,600,000, respectively, in operating costs related to
complying
17
<PAGE>
with environmental laws and regulations. The Registrant anticipates that
environmental regulation of the Registrant's operations will continue to become
more burdensome and that capital and operating expenditures will continue, and
perhaps increase, in the future. In addition, the Registrant may incur
obligations to remove or mitigate any adverse effects on the environment
resulting from its operations, including the restoration of natural resources,
and liability for personal injury and damage to property, including natural
resources. In particular, the Registrant continues to negotiate with the State
of Wisconsin regarding natural resources restoration and damages related to the
discharge of polychlorinated biphenyls (PCBs) and other hazardous substances in
the lower Fox River, on which the Registrant's Neenah mill is located. The cost
of such restoration and damages is presently unknown but could be substantial
and perhaps exceed the Registrant's available resources as discussed in Note 9
to the Registrant's condensed consolidated financial statements. Management's
current assessment, after consultation with legal counsel, is that such
expenditures are not likely to have a material adverse effect on the
Registrant's consolidated financial condition or liquidity, but could have a
material adverse effect on the Registrant's consolidated results from operations
in a given year; however, there can be no assurance that the Registrant's
reserves will be adequate or that a material adverse effect on the Registrant's
consolidated financial condition or liquidity will not occur at some future
time.
YEAR 2000
- - - ---------
The Registrant continues to make progress and is on schedule in its efforts to
achieve Year 2000 compliance by the end of the first quarter of 1999 for its
information technology systems and its non-information technology systems. The
Registrant's information technology systems include both internally and
externally developed business systems. Nearly all of the Registrant's business
systems have been developed internally. Non-information technology systems
include computer process control equipment as well as embedded technology, such
as micro-controllers, which are critical to the operation of production
equipment.
The Registrant's three-phase approach to achieve its Year 2000 compliance
includes an inventory phase, an assessment phase and a modifications and testing
phase. The Registrant has completed the inventory phase and assessment phase
for all of its information technology and non-information technology systems
with the exception of some isolated non-technological systems at its Neenah
mill. The Registrant has also completed a significant portion of the
modifications and testing phase for all of its systems. The remaining system
assessments, modifications and related testing will be completed by the end of
the first quarter of 1999.
The Registrant has used internal information technology personnel almost
exclusively to inventory, assess, modify, and test existing systems and has
primarily incurred only normal wage, benefit and related costs for its normal
complement of information technology personnel. To date, the Registrant has
made minor capital expenditures to replace certain systems or equipment which
were not Year 2000 compliant. The Registrant estimates between $500,000 -
$1,000,000 in capital related costs will be incurred by the end of the first
quarter of 1999 to ensure Year 2000 compliance of its information and non-
information technology systems.
The Registrant's use of its own information technology personnel to make its
systems Year 2000 compliant has and will continue to delay some other strategic
information systems development and implementation which would have otherwise
benefited the Registrant in various ways and to various extents. The Registrant
does not believe that it will be at a competitive disadvantage as a result of
these delays.
The Registrant also continues its efforts in addressing Year 2000 compliance by
key third parties including vendors, professional advisors, and customers.
These efforts include making inquiries to such third parties, assessing the
responses received and developing corrective actions or contingency plans in the
event of any identified unacceptable risk. Inquires have been sent to all
identified key third parties. To date, based upon limited responses, no
significant issues have been discovered. The Registrant hopes to have received
and assessed all responses by the end of the first quarter of 1999.
18
<PAGE>
The Registrant relies significantly on selected key vendors of raw materials,
energy, telecommunications and other vital services. The Registrant also has
significant revenues from various key customers. Should any of these key
vendors or customers experience operational interruptions as a result of non-
compliance of its information and/or non-information technology systems, the
Registrant may be forced to interrupt the operation of one or more of its mills
or be required to increase its costs or decrease its selling prices, to remain
operational.
Should the Registrant be notified of any significant issues through the
responses to its inquiries of key third parties, it intends to develop and
implement contingency plans to minimize the impact on its operations. The
Registrant intends to have any such plans in place by the end of the third
quarter of 1999. Despite such contingency plans, in the event that any of the
Registrant's significant suppliers or customers do not achieve Year 2000
compliance on a timely basis, the Registrant's business and results of
operations could be materially adversely affected.
19
<PAGE>
PART II - OTHER INFORMATION
- - - ---------------------------
Item 5. Other Information
- - - --------------------------
Cautionary Statement
Any statements set forth herein or otherwise made in writing or orally by the
Registrant with regard to its expectations as to industry conditions and its
financial results, demand for or pricing of its products and other aspects of
its business may constitute forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Although the Registrant makes
such statements based on assumptions which it believes to be reasonable, there
can be no assurance that actual results will not differ materially from the
Registrant's expectations. Accordingly, the Registrant hereby identifies the
following important factors among others, which could cause its results to
differ from any results which might be projected, forecasted or estimated by the
Registrant in any such forward-looking statements: (i) variations in demand for
or pricing of its products, (ii) changes in the cost or availability of raw
materials used by the Registrant, in particular market pulp, pulp substitutes
and wastepaper; (iii) changes in industry paper production capacity, including
the construction of new mills, the closing of mills and incremental changes due
to capital expenditures or productivity increases; (iv) the gain or loss of
significant customers; (v) cost and other effects of environmental compliance,
cleanup, damages, remediation or restoration, or personal injury or property
damage related thereto, such as the cost of natural resource restoration or
damages related to the presence of PCBs in the lower Fox River on which the
Registrant's Neenah mill is located; (vi) significant changes in cigarette
consumption, both domestically and internationally; (vii) enactment of adverse
state, federal or foreign legislation or changes in government policy or
regulation; (viii) adverse results in litigation; (ix) fluctuations in currency
exchange rates; (x) failure of third parties which are material to the
Registrant to become Year 2000 compliant thereby interrupting their and the
Registrant's business operations; and (xi) disruptions in production and/or
increased costs due to labor disputes.
Item 6. Exhibits
- - - -----------------
(a) Exhibits
--------
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
None
20
<PAGE>
SIGNATURE
- - - ---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
P. H. GLATFELTER COMPANY
Date: November 13, 1998 R. P. Newcomer
Executive Vice President
and Chief Financial Officer
21
<PAGE>
INDEX OF EXHIBITS
-----------------
Number Description of Documents
------ ------------------------
15 Letter in Lieu of Consent Regarding
Review Report of Unaudited Interim
Financial Information
27 Financial Data Schedule
22
<PAGE>
EXHIBIT 15
LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT OF UNAUDITED
--------------------------------------------------------------
INTERIM FINANCIAL INFORMATION
-----------------------------
P. H. Glatfelter Company:
We have reviewed, in accordance with standards established by the American
Institute of Certified Public Accountants, the unaudited condensed consolidated
financial statements of P. H. Glatfelter Company and subsidiaries for the three-
month and nine-month periods ended September 30, 1998 and 1997, as indicated in
our report dated October 16, 1998; because we did not perform an audit, we
expressed no opinion on that information.
We are aware that our report referred to above, which is included in your
Quarterly Report on Form 10-Q for the quarter ended September 30, 1998, is
incorporated by reference in Registration Statements Nos. 33-25884, 33-37198,
33-49660, 33-53338, 33-54409, 33-62331, 333-12089, 333-26587, 333-34797,
333-53977 and 333-66991 on Forms S-8.
We are also aware that the aforementioned report, pursuant to Rule 436(c) under
the Securities Act, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or certified by an
accountant within the meaning of Sections 7 and 11 of that Act.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
October 16, 1998
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30 OF
P. H. GLATFELTER CO. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 32,940
<SECURITIES> 3,608
<RECEIVABLES> 82,863
<ALLOWANCES> 1,330
<INVENTORY> 121,892
<CURRENT-ASSETS> 244,325
<PP&E> 1,273,826
<DEPRECIATION> 645,718
<TOTAL-ASSETS> 1,007,424
<CURRENT-LIABILITIES> 136,136
<BONDS> 324,408
544
0
<COMMON> 0
<OTHER-SE> 345,046
<TOTAL-LIABILITY-AND-EQUITY> 1,007,424
<SALES> 544,168
<TOTAL-REVENUES> 553,391
<CGS> 440,918
<TOTAL-COSTS> 478,859
<OTHER-EXPENSES> 5,577
<LOSS-PROVISION> 27
<INTEREST-EXPENSE> 16,322
<INCOME-PRETAX> 52,633
<INCOME-TAX> 20,309
<INCOME-CONTINUING> 32,324
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32,324
<EPS-PRIMARY> 0.77
<EPS-DILUTED> 0.77
</TABLE>
