<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 June 30, 1999
-------------
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to ________________________
Commission File No. 1-3560
------
P. H. GLATFELTER COMPANY
- -------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-0628360
- -------------------------------------------------------------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
228 South Main Street, Spring Grove, Pennsylvania 17362
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(717) 225-4711
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
----- -----
Shares of Common Stock outstanding at August 11, 1999 were
42,193,652.
1
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P. H. GLATFELTER COMPANY
INDEX
<TABLE>
<S> <C>
Part I - Financial Information
------------------------------
Financial Statements:
Condensed Consolidated Statements of Income -
Three Months and Six Months Ended June 30,
1999 and 1998 (Unaudited).................................. 3
Condensed Consolidated Balance Sheets - June 30, 1999
(Unaudited) and December 31, 1998.......................... 4
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 (Unaudited)........... 5
Notes to Condensed Consolidated Financial Statements
(Unaudited)............................................... 6
Independent Accountants' Report.............................. 11
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 12
Quantitative and Qualitative Disclosures About Market Risk... 19
Part II - Other Information..................................... 19
---------------------------
Signature....................................................... 20
---------
Index of Exhibits............................................... 21
-----------------
Exhibit 15 - Letter in Lieu of Consent Regarding Review
Report of Unaudited Interim Financial
Information
Exhibit 27 - Financial Data Schedule
</TABLE>
2
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PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
6/30/99 6/30/98 6/30/99 6/30/98
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues
Net sales $ 167,234 $ 183,707 $ 333,080 $ 376,923
Other income (expense) - net
Energy sales - net 2,706 2,379 4,944 4,548
Interest on investments and
other - net 428 (68) 798 1,460
Gain from property
dispositions, etc. - net 1,163 189 2,083 85
------------ ------------ ------------ ------------
4,297 2,500 7,825 6,093
Total revenues 171,531 186,207 340,905 383,016
Costs and expenses
Cost of products sold 132,778 145,427 270,941 297,714
Selling, general and
administrative expenses 14,293 13,634 27,802 26,780
Interest on debt - net 4,601 4,640 9,391 11,063
------------ ------------ ------------ ------------
151,672 163,701 308,134 335,557
Income before income taxes 19,859 22,506 32,771 47,459
Income tax provision
Current taxes 3,408 6,513 7,534 13,702
Deferred taxes 3,908 2,202 4,554 4,639
------------ ------------ ------------ -----------
Total 7,316 8,715 12,088 18,341
Net income $ 12,543 $ 13,791 $ 20,683 $ 29,118
============ ============ ============ ==========
Basic and diluted earnings per share $ 0.30 $ 0.33 $ 0.49 $ 0.69
============ ============ ============ ==========
</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)
<TABLE>
<CAPTION>
ASSETS
------
6/30/99 12/31/98
(unaudited)
---------------- ----------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54,147 $ 50,907
Accounts receivable - net 80,204 70,076
Inventories:
Raw materials 35,309 37,559
In process and finished 49,620 49,901
Supplies 29,904 30,392
---------------- ----------------
Total inventories 114,833 117,852
Prepaid expenses and other current assets 1,702 3,073
---------------- ----------------
Total current assets 250,886 241,908
Plant, equipment and timberlands - net 597,657 628,156
Other assets 125,622 120,674
---------------- ----------------
Total assets $ 974,165 $ 990,738
================ ================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 1,904 $ 2,088
Short-term debt 25,765 28,990
Accounts payable 39,865 34,293
Dividends payable 7,380 7,365
Income taxes payable 8,785 8,189
Accrued compensation and other expenses
and deferred income taxes 41,295 45,951
---------------- ----------------
Total current liabilities 124,994 126,876
Long-term debt 306,286 325,381
Deferred income taxes 127,875 123,321
Other long-term liabilities 62,677 71,231
---------------- ----------------
Total liabilities 621,832 646,809
Commitments and contingencies
Shareholders' equity:
Common stock 544 544
Capital in excess of par value 42,338 42,612
Retained earnings 490,720 484,793
Accumulated other comprehensive income (268) (1,611)
---------------- ----------------
Total 533,334 526,338
Less cost of common stock in treasury (181,001) (182,409)
---------------- ----------------
Total shareholders' equity 352,333 343,929
---------------- ----------------
Total liabilities and
shareholders' equity $ 974,165 $ 990,738
================ ================
</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>
Six Months Ended
6/30/99 6/30/98
---------------- ----------------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 20,683 $ 29,118
Items included in net income not using
(providing) cash:
Depreciation, depletion and amortization 24,488 23,688
Loss (gain) on disposition of fixed assets (1,005) 92
Expense related to employee stock purchase and
401(k) plans 1,140 865
Change in assets and liabilities, net of effect
of acquisition:
Accounts receivable (13,206) (7,140)
Inventories (557) 12,798
Other assets and prepaid expenses (8,312) (8,756)
Accounts payable, accrued compensation and
other expenses, deferred income taxes
and other long-term liabilities 6,830 (6,349)
Income taxes payable 163 (5,719)
Deferred income taxes - noncurrent 4,554 4,718
--------------- ----------------
Net cash provided by operating activities 34,778 43,315
--------------- ----------------
Cash flows from investing activities:
Sale or maturity of investments - net 6 155,033
Proceeds from disposal of fixed assets 1,059 32
Additions to plant, equipment and timberlands (11,659) (19,029)
Acquisition of S&H - net of cash acquired - (147,491)
Acquisition of Cascadec (7,399) -
--------------- ----------------
Net cash used in investing activities (17,993) (11,455)
--------------- ----------------
Cash flows from financing activities:
Net borrowing of short-term debt 1,429 22,669
Net payment of other long-term debt - (21,993)
Repayment of 5-7/8% Notes - (150,000)
Acquisition-related borrowings - 101,500
Dividends paid (14,740) (14,733)
Purchases of common stock - (4,344)
Proceeds from issuance of common stock under
employee stock purchase plans and key
employee long-term incentive plan - 575
--------------- ----------------
Net cash used in financing activities (13,311) (66,326)
--------------- ----------------
Effect of exchange rate changes on cash (234) 215
Net increase (decrease) in cash and cash equivalents 3,240 (34,251)
Cash and cash equivalents:
At beginning of year 50,907 66,919
--------------- ----------------
At end of period $ 54,147 $ 32,668
=============== ================
Supplemental disclosure of cash flow information:
Cash paid for:
Interest $ 11,907 $ 12,303
Income taxes 5,425 19,262
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
P. H. GLATFELTER COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ACQUISITIONS
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 the Schoeller and Hoesch Group, for DM 268,900,000
(approximately $150,000,000) in cash. The purchase price was finalized in
the fourth quarter of 1998. The Registrant accounted for the S&H
acquisition under the purchase method of accounting, and S&H was
consolidated with the Registrant beginning in January 1998.
The acquisition of S&H 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. On April 9, 1999, the
Registrant exercised its option and purchased the remaining 50% of Cascadec
for FF 45,181,233 (approximately $7,400,000).
2. EARNINGS PER SHARE ("EPS")
Basic EPS excludes the dilutive impact of common stock equivalents and is
computed by dividing net income by the weighted-average number of shares of
common stock outstanding for the period. Diluted EPS includes the effect of
potential dilution from the issuance of common stock, pursuant to common
stock equivalents, using the treasury stock method. A reconciliation of the
Registrant's basic and diluted EPS follows with the dollar and share
amounts in thousands:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------------- --------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Shares Shares Shares Shares
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS 42,158 41,998 42,134 42,073
Effect of potentially
dilutive employee
incentive plans:
Restricted stock
awards 4 16 7 21
Performance stock
awards 127 126 135 126
Employee stock
options 96 22 48 27
---------- ---------- ---------- ----------
Diluted EPS 42,385 42,162 42,324 42,247
========== ========== ========== ==========
Net income $ 12,543 $ 13,791 $ 20,683 $ 29,118
Basic and diluted EPS $ 0.30 $ $0.33 $ 0.49 $ 0.69
</TABLE>
3. ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB 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
6
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statement of financial position and measure those instruments at fair
value. SFAS No. 137, issued in July 1999, deferred the effective date of
SFAS No. 133 until the beginning of the Registrant's third quarter of 2000.
The Registrant is evaluating the effects that the adoption of SFAS No. 133
may have on its consolidated financial position and results of operations.
4. INTEREST RATE SWAP AGREEMENTS
In January 1998, the Registrant entered into two interest rate swap
agreements, each having a total notional principal amount of DM 52,600,000
(approximately $27,760,000 as of June 30, 1999). 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 of the six-month DM
London Interbank Offered Rate ("LIBOR").
In January 1999, the Registrant entered into two additional interest rate
swap agreements, each having a total notional principal amount of DM
50,000,000 (approximately $26,388,000 as of June 30, 1999). Under one
agreement, which was effective April 6, 1999, the Registrant receives a
floating rate of the three-month DM LIBOR plus twenty basis points and pays
a fixed rate of 3.4075% for the term of the agreement. Under the second
agreement, which was effective July 6, 1999, the Registrant will receive a
floating rate, which is also the three-month DM LIBOR plus twenty basis
points, and will pay a fixed rate of 3.425% for the term of the agreement.
The Registrant has other various interest rate swap agreements outstanding,
which do not have a material impact on the Registrant's consolidated
financial statements. All of the Registrant's interest rate swap agreements
convert a portion of the Registrant's borrowings from a floating rate to a
fixed rate basis. Although the Registrant can pay to terminate any of its
swap agreements at any time, the Registrant intends to hold all of its swap
agreements until their maturities.
5. COMPREHENSIVE INCOME
Comprehensive income was $14,435,000 and $12,395,000 for the second quarter
of 1999 and 1998, respectively, and $22,026,000 and $28,960,000 for the
first six months of 1999 and 1998, respectively. Comprehensive income
includes the effects of changes in certain currency exchange rates relative
to the U.S. dollar.
6. DIRECTORS' COMPENSATION
On May 1, 1999, the Registrant granted to each non-employee member of its
Board of Directors options to purchase 1,500 shares of common stock, for an
aggregate of 13,500 shares for all such directors. Such options become
exercisable on May 1, 2000 at an exercise price of $13.1718 and expire on
April 30, 2009.
7. COMMITMENTS AND CONTINGENCIES
The Registrant is subject to loss contingencies resulting from regulation
by various federal, state, local and foreign governmental authorities with
respect to the environmental impact of air and water emissions and noise
from its mills, as well as the disposal of solid waste generated by its
operations. To comply with environmental laws and regulations, the
Registrant has incurred substantial capital and operating expenditures over
the past several years. The Registrant anticipates that environmental
regulation of its operations will continue to become more burdensome and
that capital and operating expenditures will continue, and perhaps
increase, in the future. In addition, the Registrant may incur obligations
to remove or mitigate any adverse effects on the environment resulting from
its operations, including the restoration of natural resources, and
liability for personal injury and damage to property, including natural
resources. Since environmental regulations are not consistent worldwide,
the Registrant's ability to compete in the world marketplace may be
adversely
7
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affected by capital and operating expenditures required for environmental
compliance.
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 the material terms of the final
form of the permit are unknown.
On or about April 16, 1999, the United States Environmental Protection
Agency ("EPA") issued to the Registrant a Notice of Violation ("NOV")
alleging violations of the federal Clean Air Act, primarily for purportedly
failing to obtain appropriate preconstruction air quality permits in
conjunction with certain modifications to its 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 alleged that the Registrant's modifications produced
significant net emissions increases in certain air pollutants which should
have been covered by appropriate permits.
For all but one of the modifications cited by EPA, the Registrant applied
for and obtained from the Pennsylvania DEP the preconstruction permits
which the Registrant concluded were required by applicable law. EPA
reviewed those applications before the permits were issued. The Registrant
conducted an evaluation at the time of the other modification, and
concluded that the preconstruction permit cited by EPA was not required.
EPA has not fully informed the Registrant as to the source or amount of the
emissions increases which EPA believes have occurred, nor has EPA made any
formal demand for action or relief from the Registrant.
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 Department of Natural Resources ("DNR") and
the United States 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.
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 are required to provide
in the aggregate $10,000,000 in work and funds to facilitate natural
resources damages assessment activities, including, among other things,
modeling and risk assessment work, as well as field scale demonstration of
sediment dredging and the enhancement of certain environmental amenities.
The actual cost to be incurred by the companies for such activities will
substantially exceed $10,000,000. Such costs are expected to be incurred
over a four-year period, although the bulk of the amount should be spent by
the end of 1999. The Registrant's final allocated portion of such costs is
unknown.
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 United States Fish and Wildlife Service ("USFWS"), together
with the National Oceanic and Atmospheric Administration and at least one
Indian tribe, 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 this agreement. The parties hope 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, 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 relating to the discharge of PCBs
and other hazardous substances into the lower Fox River. No such action has
commenced and the Registrant does not know the amount which the federal
8
<PAGE>
trustees will claim as natural resources damages, but the Registrant
believes that it will be substantial.
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 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. The EPA rejected
the potentially responsible parties' offer to perform a remedial
investigation and feasibility study ("RI/FS") for the site and the
Wisconsin DNR commenced preparation of the RI/FS.
On February 26, 1999, Wisconsin DNR released a draft RI/FS for the lower
Fox River for public comment. In the draft RI/FS, Wisconsin 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. After consideration of public comments, the
draft RI/FS may be revised to add, delete or amend the remedial
alternatives, and a final RI/FS and a proposed remedial action plan will be
issued. The Registrant understands these documents may be issued later this
year.
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, would be environmentally detrimental and,
therefore, inappropriate.
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 and results of operations 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,
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
9
<PAGE>
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 associated with the agreement reached with the State
regarding the lower Fox River and the Bay of Green Bay, its negotiations
with the State and the United States 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 of 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.
8. DISCLOSURE STATEMENT
In the opinion of the Registrant, the accompanying unaudited condensed
consolidated financial statements contain all adjustments (which comprise
only normal recurring accruals) necessary for a fair presentation of the
financial information contained therein. These unaudited condensed
consolidated financial statements should be read in conjunction with the
more complete disclosures contained in the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1998. Certain reclassifications
have been made of previously reported amounts to conform with
classifications used in the current year.
10
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INDEPENDENT ACCOUNTANTS' REPORT
-------------------------------
P. H. Glatfelter Company:
We have reviewed the accompanying condensed consolidated balance sheet of P. H.
Glatfelter Company and subsidiaries as of June 30, 1999, and the related
condensed consolidated statements of income and cash flows for the three months
and six months ended June 30, 1999 and 1998. 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, 1998, and the related consolidated statements of
income and comprehensive income, shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated February 26,
1999, 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, 1998 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Deloitte & Touche LLP
Philadelphia, Pennsylvania
July 16, 1999
11
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This discussion and analysis contains forward-looking statements. See
"Cautionary Statement" set forth in Item 5.
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 the
Schoeller and Hoesch Group, for DM 268,900,000 (approximately $150,000,000) in
cash. The purchase price was finalized in the fourth quarter of 1998. The
Registrant accounted for the S&H acquisition under the purchase method of
accounting, and S&H was consolidated with the Registrant beginning in January
1998.
The acquisition of S&H 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. On April 9, 1999, the
Registrant exercised its option and purchased the remaining 50% of Cascadec for
FF 45,181,233 (approximately $7,400,000).
RESULTS OF OPERATIONS
- ---------------------
A summary of the period-to-period changes in the principal items included in the
Condensed Consolidated Statements of Income is shown below.
<TABLE>
<CAPTION>
Comparison of
------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30, 1999 and 1998 June 30, 1999 and 1998
------------------------------ -------------------------
Increase (Decrease)
(dollars in thousands)
<S> <C> <C> <C> <C>
Net sales (16,473) (9.0)% (43,843) (11.6)%
Other income - net 1,797 71.9 % 1,732 28.4 %
Cost of products sold (12,649) (8.7)% (26,773) (9.0)%
Selling, general and
administrative expenses 659 4.8 % 1,022 3.8 %
Interest on debt - net (39) (0.8)% (1,672) (15.1)%
Income tax provision (1,399) (16.1)% (6,253) (34.1)%
Net income (1,248) (9.0)% (8,435) (29.0)%
</TABLE>
Net Sales
- ---------
Worldwide net sales decreased $16,473,000, or 9.0%, for the second quarter of
1999 compared to the second quarter of 1998 and $43,843,000, or 11.6%, for the
first six months of 1999 compared to the corresponding period of 1998. These
decreases were a result of a decreased average net selling price per ton as well
as lower sales volume due to weak demand in the first quarter of 1999. Demand
increased steadily in the second quarter of 1999, and sales volume for this
period marginally exceeded the second quarter of 1998.
The Registrant classifies its sales into two product groups: specialized
printing papers and engineered papers. Total net sales of specialized printing
papers decreased by 12.4% in the second quarter of 1999 and 15.9% during the
first six months of 1999 compared to the same periods of 1998. Sales volume was
relatively flat in the second quarter of 1999 versus the second quarter of 1998
and decreased by 4.3% in the first six months of 1999 compared to the first six
months of 1998. These changes in sales volume for specialized printing papers
were exacerbated by a decrease in average net selling prices of 12.5% versus the
second quarter of 1998 and a decrease of 12.2% versus the first six months of
1998.
The lower sales volume of specialized printing papers for the six months ended
June 30, 1999 was largely due to weaker demand for such papers in the first
quarter of 1999 compared to the first quarter of 1998. During the second
quarter of 1999, demand for the Registrant's specialized printing paper products
recovered to second quarter 1998 levels. During the first quarter of 1999, the
Registrant
12
<PAGE>
completed the installation of inclined wire technology on an existing paper
machine in Gernsbach, Germany. This installation allowed the Registrant to
transfer some of its production capacity previously dedicated to specialized
printing papers to more profitable engineered papers.
Pricing for the Registrant's specialized printing papers was lower for the three
months and six months ended on June 30, 1999 compared to the like periods of
1998 as a result of an overall decrease in pricing for such products late in
1998. Since that time, pricing has improved as described below but on average is
still lower for the second quarter and first half of 1999 compared to the same
periods of 1998.
Demand for the Registrant's specialized printing papers improved throughout the
first and second quarters of 1999 as incoming orders were increasingly strong.
As a result of this improved demand, the Registrant implemented price increases
for its envelope papers in both April and July 1999. The Registrant has also
announced a price increase for most of its book publishing papers effective
September 1, 1999 as well as a price increase for most of its financial printing
papers effective October 1, 1999. The Registrant expects that the market for
its specialized printing papers will remain strong over the balance of the year.
Net sales of engineered papers for the three months and six months ended June
30, 1999 were $4,192,000 and $13,597,000, respectively, lower than in the
corresponding periods of 1998. While volume improved slightly for both periods,
lower pricing for certain of the Registrant's tobacco papers and an unfavorable
change in the mix of products sold more than offset this increase.
Net sales of the Registrant's engineered papers, excluding tobacco papers,
increased modestly in the first three months and six months of 1999 compared to
corresponding periods of 1998. An improvement in sales volume of approximately
9% was nearly offset by an unfavorable change in the average net selling price
of approximately 7% for each comparative period due to a change in the mix of
products sold. Volume improved in part as a result of the paper machine rebuild
at the Registrant's Gernsbach, Germany facility which completed the conversion
of the facility's production capacity from specialized printing papers to
engineered papers. Sales volume also improved as a result of the successful
development and marketing of new grades of engineered papers. The Registrant
continues to strive to improve its overall product mix by concentrating its
efforts on maximizing sales of more profitable engineered papers. The
installation of inclined wire technology allows it to produce more profitable
engineered papers, including tea bag, porous plug wrap and overlay papers. In
addition, the Registrant's Spring Grove, Pennsylvania facility continues to
pursue aggressively the development and marketing of new engineered paper
products produced with its gravure coater and expects that this piece of
equipment will have an increasingly positive impact on its future results of
operations.
Net sales of tobacco papers declined by 12.4% and 17.2% for the three months and
six months ended June 30, 1999, respectively, compared to the same periods of
1998. Volume and pricing for tobacco papers were lower during these periods in
the U.S. and international markets compared to the first half of 1998. During
the second quarter of 1999, the Registrant benefited from modestly increased
demand from international markets while domestic markets remained relatively
stable. Such domestic demand for the Registrant's tobacco papers continues to
result, in part, from the discounting of cigarette prices by tobacco companies.
The Registrant does not expect such discounting to end in the near term, but
there is no assurance that the tobacco companies' practice will continue long
term.
Due to the decreasing domestic demand for tobacco products and worldwide
production overcapacity, the Registrant does not expect its tobacco papers
business to show significant recovery in the foreseeable future. Over the next
several months, contracts with certain key customers will be negotiated. The
Registrant expects continued price pressure as the competition for orders of
these papers remains intense. Any lost sales dollars realized as a result of
these contract negotiations are expected to be offset partially by continued
cost reductions from its tobacco operations. As a result of the downward
pricing pressure, profit margins will also remain under pressure and may be
lower than those in the first half of 1999.
13
<PAGE>
Other Income - Net
- ------------------
The Registrant's other income - net was $1,797,000, or 71.9%, higher for the
three months ended June 30,1999 versus the second quarter of 1998 and
$1,732,000, or 28.4%, higher for the first six months of 1999 compared to the
first six months of 1998. Interest on investments and other - net was $496,000
higher in the second quarter of 1999 compared to the second quarter of 1998 due
primarily to higher average cash balances. Interest on investments and other -
net was $662,000 lower for the first half of 1999 compared to the first half of
1998 because, during the first quarter of 1998, the Registrant recognized
interest income on $150,000,000 held in a defeasance trust which was ultimately
used to repay in full the principal of and interest on its 5-7/8% Notes on March
1, 1998. No such trust interest income was recognized in 1999 or in the second
quarter of 1998. The Registrant's gain from property dispositions, etc. - net
increased by $974,000 and $1,998,000 for the three months and six months ended
June 30, 1999, respectively, versus the like periods of 1998. In the first
quarter of 1999, the Registrant sold a tract of timberland located in Delaware.
From time to time the Registrant divests certain tracts of its timberlands such
as this when it is offered attractive prices. The Registrant does not actively
solicit the sale of its timberlands as it intends to maintain its own sources of
raw materials. In the second quarter of 1999, the Registrant sold various other
fully-depreciated items, in addition to the rights to standing timber on select
tracts of land. No single sale was material to the Registrant's results of
operations, and these sales did not represent a change in the Registrant's
policy regarding the sale of its property. No significant sales of such
property occurred in the first half of 1998.
Cost of Products Sold and Gross Profit
- --------------------------------------
The Registrant's cost of products sold decreased by 8.7% for the second quarter
of 1999 compared to the second quarter of 1998 and decreased by 9.0% for the
first half of 1999 versus the first half of 1998. While sales volumes were
relatively flat for the second quarter of 1999 versus the second quarter last
year, they were slightly lower for the six-month period. The Registrant's cost
of products sold per ton, therefore, was lower by 9.1% and 6.2%, respectively,
compared to the same periods in 1998. This decrease was due, in part, to a
lower cost for its principal raw material, market pulp. In addition, as
outlined below under the heading, "Early Retirement Program and Other Cost
Control Measures," the Registrant has taken initiatives to remove costs from its
business which have also had a positive impact in reducing its cost of products
sold per ton.
As described above, average net selling prices per ton decreased during the
three months and six months ended June 30, 1999 compared to the like periods in
1998. This decrease in net sales per ton more than offset the decrease in cost
of products sold per ton, resulting in a decrease in gross profit per ton of
10.4% and 19.2%, respectively, versus those same periods last year.
During the second quarter of 1999, market pulp prices increased modestly, and
the Registrant expects further increases to occur in the last half of 1999.
Since pricing for certain of the Registrant's products typically follows that of
market pulp, the Registrant also expects improved pricing for such products
subsequent to any market pulp price increases.
Selling, General and Administrative Expenses
- --------------------------------------------
The Registrant's selling, general and administrative expenses for the second
quarter of 1999 were $659,000, or 4.8%, higher than for the second quarter of
1998 and for the first half of 1999 were $1,022,000, or 3.8%, higher than for
the like period of 1998. While the Registrant has taken aggressive steps to
remove costs from its business (see the section entitled "Early Retirement
Program and Other Cost Control Measures" below), more than offsetting these cost
savings was increased legal and professional expenses.
Interest on Debt - Net
- ----------------------
The Registrant's interest on debt - net decreased by $39,000, or 0.8%, for the
quarter ended June 30, 1999 versus the same period of 1998 and decreased by
$1,672,000, or 15.1%, for the first six months of 1999 as compared to the first
14
<PAGE>
six months of 1998. On March 1, 1998, $150,000,000 principal amount of the
Registrant's 5-7/8% Notes matured and were retired. As a result, the average
borrowings in the first quarter of 1999 were lower than the first quarter of
1998, resulting in the lower interest on debt - net for the six-month period of
1999 compared to the six-month period of 1998.
Income Tax Provision
- --------------------
The Registrant's income tax provision decreased by $1,399,000, or 16.1%, for the
first quarter of 1999 versus the first quarter of 1998 and decreased by
$6,253,000, or 34.1%, for the first half of 1999 compared to the first half of
1998. The decreases were almost entirely due to the reduction of net income in
1999 versus 1998.
FINANCIAL CONDITION
- -------------------
Liquidity
- ---------
Cash and cash equivalents increased by $3,240,000 during the first six months of
1999. Net cash provided by operating activities of $34,778,000 more than offset
cash used in investing activities of $17,993,000 and financing activities of
$13,311,000. Significant cash activities during the first six months of 1999
included the payment of $14,740,000 of dividends, $11,659,000 for plant,
equipment and timberlands and $7,399,000 for the purchase of the remaining 50%
ownership interest in Cascadec.
To finance the acquisition of S&H, on December 22, 1997, the Registrant entered
into a $200,000,000 multi-currency revolving credit facility ("Revolving Credit
Facility") with a syndicate of major lending institutions. The Revolving Credit
Facility enables the Registrant to borrow up to the equivalent of $200,000,000
in certain currencies in the form of revolving credit loans with a final
maturity date of December 22, 2002 and with interest periods determined, at the
Registrant's option, on a daily or one to six-month basis. Interest on the
revolving credit loans is at variable rates based, at the Registrant's option,
on the Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable
margins. Margins are based on the higher of the Registrant's debt ratings as
published by Standard & Poor's and Moody's. As of June 30, 1999, the
Registrant's outstanding borrowings were DM 282,600,000 (approximately
$149,100,000) under the Revolving Credit Facility.
In January 1998, the Registrant entered into two interest rate swap agreements,
each having a total notional principal amount of DM 52,600,000 (approximately
$27,760,000 as of June 30, 1999). 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 of the six-month DM London Interbank Offered Rate
("LIBOR").
In January 1999, the Registrant entered into two additional interest rate swap
agreements, each having a total notional principal amount of DM 50,000,000
(approximately $26,388,000 as of June 30, 1999). Under one agreement, which was
effective April 6, 1999, the Registrant receives a floating rate of the three-
month DM LIBOR plus twenty basis points and pays a fixed rate of 3.4075% for the
term of the agreement. Under the second agreement, which was effective July 6,
1999, the Registrant will receive a floating rate, which is also the three-month
DM LIBOR plus twenty basis points, and will pay a fixed rate of 3.425% for the
term of the agreement.
The Registrant has other various interest rate swap agreements outstanding,
which do not have a material impact on the Registrant's consolidated financial
statements. All of the Registrant's interest rate swap agreements convert a
portion of the Registrant's borrowings from a floating rate to a fixed rate
basis. Although the Registrant can pay to terminate any of its swap agreements
at any time, the Registrant intends to hold all of its swap agreements until
their maturities.
On July 22, 1997, the Registrant issued $150,000,000 principal amount of 6-7/8%
15
<PAGE>
Notes due 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.
The Registrant expects to meet all its near and long-term cash needs from a
combination of internally generated funds, cash, cash equivalents, marketable
securities, the Revolving Credit Facility or other bank lines of credit and, if
prudent, other long-term debt.
Interest Rate Risk
- ------------------
The Registrant uses its Revolving Credit Facility and 6-7/8% Notes to finance a
significant portion of its operations. These on-balance sheet financial
instruments, to the extent they provide for variable rates of interest, expose
the Registrant to interest rate risk resulting from changes in the DM LIBOR.
The Registrant uses off-balance sheet interest rate swap agreements to hedge
partially interest rate exposure associated with on-balance sheet financial
instruments. All of the Registrant's derivative financial instrument
transactions are entered into for non-trading purposes.
To the extent that the Registrant's financial instruments expose the Registrant
to interest rate risk and market risk, they are presented in the table below.
The table presents principal cash flows and related interest rates by year of
maturity for the Registrant's Revolving Credit Facility and 6-7/8% Notes as of
June 30, 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 Registrant for debt with similar terms and remaining
maturities, and (2) estimates obtained from dealers to settle interest rate swap
agreements.
<TABLE>
<CAPTION>
Year of Maturity
----------------------------------------------------------------
(dollar amounts in thousands) Total Fair Value
Due at at
1999 2000 2001 2002 2003 Thereafter Maturity 6/30/99
-------- --------- --------- --------- --------- ------------ -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Debt:
Fixed rate principal $1,528 $ 1,569 $ 1,569 $ 1,397 $ 1,225 $151,757 $159,045 $153,554
Average interest rate 6.84% 6.85% 6.85% 6.86% 6.86% 6.87%
Variable rate principal $ - $ - $ - $149,145 $ - $ - $149,145 $149,145
Average interest rate 3.70% 3.52% 3.29% 3.29% - -
Interest rate swap agreements:
Variable to fixed swaps
principal amount $ 752 $33,233 $ 27,760 $ 52,776 $ - $ - $114,521 $ (222)
Average pay rate 4.38% 3.84% 3.42% 3.42% - -
Average receive rate 3.15% 3.01% 3.08% 3.08% - -
</TABLE>
Capital Resources
- -----------------
The Registrant invested $11,659,000 in capital expenditures for the first six
months of 1999 compared to $19,029,000 for the first six months of 1998. The
Registrant estimates a total of approximately $32,000,000 will be spent on
capital projects during 1999, or 21% less than in 1998.
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. To comply
with environmental laws and regulations, the Registrant has incurred substantial
capital and operating expenditures over the past several years. During 1998,
1997 and 1996, the Registrant incurred approximately $17,700,000, $14,800,000
and $15,200,000, respectively, in operating costs related to complying 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
16
<PAGE>
mitigate any adverse effects on the environment resulting from its operations,
including the restoration of natural resources, and liability for personal
injury and damage to property, including natural resources. In particular, the
Registrant continues to negotiate with the State of Wisconsin and the United
States regarding natural resources damages and response costs 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 damages and response costs is presently unknown but could be
substantial and perhaps exceed the Registrant's available resources as discussed
in Note 7 to the Registrant's condensed consolidated financial statements. The
Registrant's current assessment, after consultation with legal counsel, is that
such expenditures are not likely to have a material adverse effect on the
Registrant's consolidated financial condition or liquidity, but could have a
material adverse effect on the Registrant's consolidated results of operations
in a given year; however, there can be no assurance that the Registrant's
reserves will be adequate or that a material adverse effect on the Registrant's
consolidated financial condition or liquidity will not occur at some future
time.
ENVIRONMENTAL ACHIEVEMENTS
- --------------------------
On April 20, 1999, the Registrant 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 audited by a
third party on an ongoing, periodic basis. The Registrant's Gernsbach, Germany
facility is also ISO 14001 certified. The Registrant plans to achieve ISO 14001
certification at all of its other mills by 2001.
Also on April 20, 1999, the Registrant announced its New Century Project. The
New Century Project is a commitment by the Registrant to participate in the
EPA's Advanced Technology Incentive Program under the Cluster Rules at its
Spring Grove mill. The Registrant expects to spend approximately $32,000,000
over the next six years. As a result of this capital investment, the Registrant
expects to eliminate the use of elemental chlorine in its bleaching process,
reduce odor emissions and improve water quality. The New Century Project
demonstrates the Registrant's commitment to minimizing its impact on natural
resources.
EARLY RETIREMENT PROGRAM AND OTHER COST CONTROL MEASURES
- --------------------------------------------------------
During the second quarter of 1998, the Registrant announced a Voluntary Early
Retirement Enhancement Program ("VEREP") for certain of its salaried employees.
The Registrant recognized one-time charges for this VEREP in the third and
fourth quarters of 1998. As of the end of the second quarter of 1999, these
measures were fully implemented. Starting in the third quarter of 1999, the
Registrant expects to realize approximately $2,100,000 of pre-tax cost savings
per quarter.
Early in 1999, the Registrant announced its intention to eliminate approximately
45 hourly positions by the end of 1999 at its Spring Grove mill. When these job
eliminations are completed, the Registrant expects to realize annual pre-tax
cost savings of approximately $2,500,000. The Registrant currently employs
approximately 750 hourly employees at this location.
The Registrant's procurement function has undertaken initiatives to reduce costs
for certain purchased products and services. In addition, the Registrant is
reevaluating its target inventory levels for maintenance supplies and raw
materials, renegotiating certain freight contracts and critically reviewing its
needs for routine outside contracting work. The Registrant has achieved
significant cost savings as a result of these initiatives.
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Registrant has achieved Year 2000 compliance for its mission critical and
non-critical information technology systems and non-information technology
systems.
17
<PAGE>
The Registrant's three-phase approach to achieve its internal Year 2000
compliance included an inventory phase, an assessment phase and a modifications
and testing phase. The Registrant has completed all phases for all of its
information technology and non-information technology systems. 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 and facilities.
The Registrant's information technology systems include both internally and
externally developed business systems, although nearly all have been developed
internally. Accordingly, the Registrant used internal information technology
personnel almost exclusively to inventory, assess, modify and test existing
systems and primarily incurred only normal wage, benefit and related costs for
its normal complement of information technology personnel. The Registrant
expensed approximately $634,000 and $125,000 during 1998 and 1997, respectively,
in such costs supporting its Year 2000 compliance efforts. The Registrant has
incurred approximately $350,000 of expenses through the second quarter of 1999
for these internal costs and estimates it will incur additional expenses of
$350,000 during the final half of the year to complete its Year 2000 efforts,
especially for contingency planning.
The Registrant's use of its own information technology personnel to make its
systems Year 2000 compliant delayed some other strategic information systems
development and implementation which would have benefited the Registrant in
various ways and to various extents. The Registrant does not believe that it is
at a competitive disadvantage as a result of these delays and has now resumed
development of such strategic systems.
The Registrant has made minor capital expenditures to replace certain systems or
equipment which were not Year 2000 compliant. The Registrant incurred
approximately $190,000 in capital-related costs during the first half of 1999 to
achieve Year 2000 compliance of its information and non-information technology
systems. The Registrant does not expect to incur significant additional
capital-related costs during the balance of 1999 related to Year 2000
compliance.
The Registrant relies significantly on selected key vendors of raw materials,
energy, telecommunications and other vital services. The Registrant also
generates significant revenues from various key customers. The Registrant
continues its efforts in addressing Year 2000 compliance by key third parties by
making inquiries to all such third parties and assessing the responses received.
Inquiries have been sent to all identified key third parties. The Registrant
has received and analyzed responses from all critical vendors. The vast
majority of responses from non-critical vendors have been received and analyzed.
To date, no significant issues have been discovered. The Registrant is still
collecting the remaining few responses from non-critical vendors and hopes to
have received and assessed all responses by the end of the third quarter of 1999
but cannot guarantee all such non-critical vendors will respond timely.
A contingency planning team, made up of key personnel from its corporate
operations as well as its operating locations, is meeting regularly to assess
current disaster recovery procedures as well as to assess and prioritize risks
relating to Year 2000 noncompliance by its key vendors and customers. This team
expects to have a complete plan in place by November 1999. Contingency planning
for those critical systems of the Registrant which are subject to higher risk
will be addressed prior to this date. Despite such contingency plans, it is
reasonably possible that, in the worst case, some of the Registrant's key
vendors or customers could experience operational interruptions as a result of
non-compliance of their systems. As a result, 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. In such an
event, the Registrant's business and results of operations could be materially
adversely affected.
18
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See the discussion under the headings "Liquidity" and "Interest Rate Risk" in
Item 2 as well as Note 4 to the Registrant's condensed consolidated financial
statements.
PART II - OTHER INFORMATION
- ---------------------------
ITEM 5. OTHER INFORMATION
Cautionary Statement
Any statements set forth herein or otherwise made in writing or orally by the
Registrant with regard to its expectations as to industry conditions and its
financial results, demand for or pricing of its products, environmental matters,
Year 2000 compliance and other aspects of its business may constitute forward
looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995. Although the Registrant makes such statements based on
assumptions 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 AND REPORTS ON FORM 8-K
(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
19
<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: August 16, 1999
R. P. Newcomer
Executive Vice President
and Chief Financial Officer
20
<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
21
<PAGE>
EXHIBIT 15
LETTER IN LIEU OF CONSENT REGARDING REVIEW REPORT OF UNAUDITED
--------------------------------------------------------------
INTERIM FINANCIAL INFORMATION
-----------------------------
P. H. Glatfelter Company:
We have made a review, in accordance with standards established by the
American Institute of Certified Public Accountants, of the unaudited
condensed consolidated financial statements of P. H. Glatfelter Company and
subsidiaries for the three months and six months ended June 30, 1999 and
1998, as indicated in our report dated July 16, 1999; 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 June 30, 1999, 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 of 1933, 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
July 16, 1999
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30 OF P. H.
GLATFELTER COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<CASH> 54,147
<SECURITIES> 0
<RECEIVABLES> 81,860
<ALLOWANCES> 1,656
<INVENTORY> 114,833
<CURRENT-ASSETS> 250,886
<PP&E> 1,277,045
<DEPRECIATION> 679,388
<TOTAL-ASSETS> 974,165
<CURRENT-LIABILITIES> 124,994
<BONDS> 306,286
0
0
<COMMON> 544
<OTHER-SE> 351,789
<TOTAL-LIABILITY-AND-EQUITY> 974,165
<SALES> 333,080
<TOTAL-REVENUES> 340,905
<CGS> 270,941
<TOTAL-COSTS> 270,941
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 9,391
<INCOME-PRETAX> 32,771
<INCOME-TAX> 12,088
<INCOME-CONTINUING> 20,683
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,683
<EPS-BASIC> 0.49
<EPS-DILUTED> 0.49
</TABLE>
