-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, G41CVmXVNsTTcxYyrb2l7PYOQGg9YNpoM0xW7rleo/EOzfmYlYnQktssE7c6eSC1 Vk9e80TzFjJ2rTAB95lGBQ== 0000893220-00-000371.txt : 20000411 0000893220-00-000371.hdr.sgml : 20000411 ACCESSION NUMBER: 0000893220-00-000371 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GLATFELTER P H CO CENTRAL INDEX KEY: 0000041719 STANDARD INDUSTRIAL CLASSIFICATION: PAPER MILLS [2621] IRS NUMBER: 230628360 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-03560 FILM NUMBER: 583839 BUSINESS ADDRESS: STREET 1: 228 S MAIN ST CITY: SPRING GROVE STATE: PA ZIP: 17362 BUSINESS PHONE: 7172254711 MAIL ADDRESS: STREET 2: 228 S MAIN ST CITY: SPRING GROVE STATE: PA ZIP: 17362 10-K 1 FORM 10-K P. H. GLATFELTER COMPANY 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED COMMISSION FILE NUMBER DECEMBER 31, 1999 1-3560 P. H. GLATFELTER COMPANY - ---------------------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) PENNSYLVANIA 23-0628360 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 96 SOUTH GEORGE STREET, SUITE 500 YORK, PENNSYLVANIA 17401 -------------------------------- ------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, (717) 225-4711 INCLUDING AREA CODE SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: COMMON STOCK NEW YORK STOCK EXCHANGE - --------------------------- ------------------------------------------ (TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED) SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE ---------------- (TITLE OF CLASS) INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES \X\ NO \ \ INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN THE DEFINITIVE PROXY STATEMENT INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [ ] THE AGGREGATE MARKET VALUE OF THE COMMON STOCK OF THE REGISTRANT HELD BY NON-AFFILIATES AT MARCH 1, 2000 WAS $304,433,934. COMMON STOCK OUTSTANDING AT MARCH 1, 2000: 42,411,000 SHARES DOCUMENTS INCORPORATED BY REFERENCE PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE IN THIS REPORT ON FORM 10-K. 1. PROXY STATEMENT DATED MARCH 24, 2000 (PART III) 2 PART I Item 1. Business. The Registrant, a paper manufacturing company, began operations in Spring Grove, Pennsylvania in 1864 and was incorporated as a Pennsylvania corporation in 1905. The Registrant has three paper mills located in the United States: Spring Grove, Pennsylvania, Pisgah Forest, North Carolina and Neenah, Wisconsin. The Registrant also has paper mills in Gernsbach, Germany and near Odet, France. The Registrant also owns and operates a research and development facility in Wisches, France and an abaca pulpmill in the Philippines. The Registrant manufactures engineered papers and specialized printing papers. The Registrant's engineered papers are used in the manufacture of a variety of products, including tea bags, cigarette papers, cigarette tipping and plug wrap papers, metalized beverage labels, decorative laminates, food product casings, stencil papers, photo-glossy ink jet papers, greeting cards, medical dressings, highway signs and striping, billboard graphics, decorative shopping bags, playing cards, postage stamps, filters, labels and surgical gowns. Sales of these papers are generally made directly to the converter of the paper. Engineered papers are manufactured in each of the Registrant's mills. Most of the Registrant's specialized printing paper products are directed at the uncoated free-sheet portion of the industry. The Registrant's specialized printing paper products are used principally for the printing of case bound and quality paperback books, commercial and financial printing and envelope converting. Specialized printing papers are manufactured in each of the Registrant's mills. In 1999, sales of paper for book publishing and commercial printing generally were made through wholesale paper merchants, whereas sales of paper to financial printers and converters generally were made directly. During 1997, a wholesale paper merchant, Central National-Gottesman Inc. ("CNGI") (which buys paper through its division, Lindenmeyr Book Publishing) accounted for 12% of the Registrant's net sales. Net sales to each of the Registrant's customers, including CNGI, were less than 10% of the Registrant's net sales during 1998 and 1999. 1 3 A significant portion of the Pisgah Forest mill's sales and a modest portion of the sales from the Gernsbach and Odet mills are made to a limited number of major tobacco companies. Legal, regulatory and competitive pressures on the tobacco industry in the United States and elsewhere could have a material adverse effect on future tobacco paper sales. The profitability of these mills has already been negatively affected by these pressures. In that regard, in December 1999, the Registrant announced that it would be reducing the capacity at its Pisgah Forest mill for certain of its less profitable tobacco papers. This action, together with announced price increases for certain tobacco papers, was designed to increase long-term profitability. Set forth below is the amount (in thousands) and percentage of net sales contributed by each of the Registrant's two classes of similar products during each of the years ended December 31, 1999, 1998 and 1997. Years Ended December 31,
1999 1998 1997 ---- ---- ---- Net Sales % Net Sales* % Net Sales % --------- - ---------- - --------- - Specialized Printing Papers ............. $325,240 48% $351,171 50% $354,076 62% Engineered Papers ............. 355,320 52 353,907 50 212,996 38 -------- -------- -------- -------- -------- -------- Total .............. $680,560 100% $705,078 100% $567,072 100% -------- -------- -------- -------- -------- --------
* Schoeller & Hoesch (S&H) was acquired on January 2, 1998. See Note 11 to the Registrant's 1999 consolidated financial statements in Item 8 for certain geographic disclosure. The competitiveness of the markets in which the Registrant sells its products varies. The necessity for technical expertise limits the number of competitors for the Registrant's engineered papers, excluding tobacco papers. Competition for tobacco papers currently is intense as a result of excess worldwide capacity. There are a number of companies 2 4 in the United States manufacturing specialized printing papers and no one company holds a dominant position. Capacity in the worldwide uncoated free-sheet industry, which includes uncoated specialized printing papers, is not expected to increase significantly for the next few years. Service, product performance and technological advances are important competitive factors in all of the Registrant's businesses. The Registrant believes its reputation in these areas continues to be excellent. Backlogs are generally not significant in the Registrant's business, as substantially all of the Registrant's customer orders are produced within 30 days of receipt. A backlog of unmade customer orders is monitored primarily for purposes of scheduling production to optimize paper machine performance. From time to time, the Registrant may determine that the backlog of unmade orders, along with high finished goods inventory levels, may be insufficient to warrant a full schedule of paper machine production. In these circumstances, certain paper machines may be temporarily shut down until backlog and inventory levels warrant a resumption of operations. The principal raw material used at the Spring Grove mill is pulpwood. In 1999, the Registrant acquired approximately 78% of its pulpwood from saw mills, purchased stumpage and independent logging contractors and 22% from Company-owned timberlands. Hardwood and softwood purchases constituted 51% and 49% of the pulpwood acquired, respectively. Hardwoods are available within a relatively short distance of the Registrant's Spring Grove mill. Softwood is obtained primarily from Maryland, Delaware and Virginia. To protect its sources of pulpwood, the Registrant actively promotes conservation and forest management among suppliers and woodland owners. In addition, its subsidiary, The Glatfelter Pulp Wood Company has acquired woodlands, particularly softwood growing land, with the objective of having a significant portion of the Registrant's softwood requirement available from Company-owned woodlands. The Spring Grove pulpmill converts pulpwood into wood pulp for use in its papermaking operations. In addition to the pulp it produces, the Spring Grove mill purchases market pulp from others. The principal raw material used by the Neenah mill is high-grade recycled wastepaper. The quality of different types 3 5 of high-grade wastepaper varies significantly depending on the amount of contamination. Wastepaper prices rose steadily throughout 1999 and early 2000, and the Registrant expects such prices to remain high for the remainder of 2000. It is anticipated that there will be an adequate supply of wastepaper in the future. The major raw materials used at the Ecusta mill are purchased wood pulp and processed flax straw, which is derived from linseed flax plants. The current supply of wood pulp and flax straw is sufficient for the present and anticipated future operations at the Ecusta mill. Ecusta receives a majority of its processed flax straw from the Registrant's Canadian operation. The principal raw materials used by the Gernsbach and Odet mills are purchased wood pulp and abaca pulp provided by S&H's Philippine pulpmill. The current supply of such materials is sufficient for the present and anticipated future operations of these mills. Wood pulp purchased from others comprised approximately 145,000 short tons or 29% of the total 1999 fiber requirements of the Registrant. The average cost of purchased pulp during 1999 was lower than in 1998. Major producers of market pulp have implemented price increases effective in January 2000. The Registrant expects additional price increases in the coming months. The Registrant's Spring Grove mill generates all of its steam requirements and is 100% self-sufficient in electrical energy generation. The mill also produces excess electricity which is sold to the local power company under a long-term co-generation contract. These net energy sales were $9,176,000 in 1999. Principal fuel sources used by the Spring Grove mill are coal, spent chemicals, bark and wood waste, and oil, which were used to produce approximately 57%, 35%, 7% and 1%, respectively, of the total energy internally generated at the Spring Grove mill in 1999. The Pisgah Forest mill generates all of its steam requirements and a majority of its electric power requirements (62% in 1999) and purchases the remainder of its electric power requirements. Coal was used to produce essentially all of the mill's internally generated energy during 1999. 4 6 During 1998, the Neenah mill began to purchase steam under a twenty-year contract from a facility of Minergy Corporation. The facility, which is located adjacent to the Neenah mill, processes paper mill sludge from the Neenah mill as well as other mills in the Neenah area. During 1999, the Neenah mill purchased 80% of its steam from Minergy Corporation and generated 20% of its steam requirements. The Registrant expects to purchase approximately 80% of its steam requirements from Minergy Corporation during 2000. The Neenah mill generates a portion of its electric power requirements (11% in 1999) and purchases the remainder of its electric power requirements. Gas was used to produce almost all of the mill's internally generated steam during 1999 with fuel oil being used to generate the remainder. The Gernsbach and Odet mills both generate all of their own steam requirements. The Gernsbach mill generated approximately 33% of its 1999 electric power requirements and purchased the balance. Gas was used to produce almost all of the mill's internally generated energy during 1999. The Odet mill purchased all of its 1999 electric power requirements. The Registrant has approximately 3,700 active full-time employees. Hourly employees at the Registrant's U.S. mills are represented by different locals of the Paper, Allied-Industrial, Chemical and Energy Workers International Union. In October 1996 a five-year labor agreement covering approximately 900 employees at the Pisgah Forest mill was ratified. A five-year labor agreement covering approximately 320 employees at the Neenah mill was ratified in August 1997. A five-year labor agreement covering approximately 740 employees in Spring Grove was ratified in January 1998. Under all of these agreements, wages increased by 3% in 1999 and will increase by 3% per year for the duration of the agreements. Approximately 775 hourly employees at the Registrant's S&H locations are represented by various unions. The labor agreement covering approximately 650 hourly employees at the Gernsbach mill expired on February 28, 2000. The terms and conditions of the expired agreement remain in effect until a new agreement is negotiated. The Registrant is not directly involved in these negotiations as the agreement is being negotiated by paper industry representatives. This situation is not unusual at the Gernsbach mill and the Registrant does not believe that the lack of an agreement will result in any significant operational interruptions. 5 7 ENVIRONMENTAL MATTERS The Registrant is subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of air and water emissions and noise from its mills, as well as the disposal of solid waste generated by its operations. To comply with environmental laws and regulations, the Registrant has incurred substantial capital and operating expenditures in past years. The Registrant anticipates that environmental regulation of its operations will continue to become more burdensome and that capital and operating expenditures will continue, and perhaps increase, in the future. In addition, the Registrant may incur obligations to remove or mitigate any adverse effects on the environment resulting from its operations, including the restoration of natural resources, and liability for personal injury and damage to property, including natural resources. Because environmental regulations are not consistent worldwide, the Registrant's ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. For further information with respect to such compliance, reference is made to Item 3 of this report. Subject to permit approval, the Registrant has undertaken an initiative under the Voluntary Advanced Technical Incentive Program of the United States Environmental Protection Agency ("EPA") to comply with new "Cluster Rule" regulations. This initiative is part of the Registrant's "New Century Project," which will require capital expenditures currently estimated at approximately $30,000,000 to be incurred before April 2004. Compliance with government environmental regulations is a matter of high priority to the Registrant. To meet environmental requirements, the Registrant has undertaken a variety of projects. During 1999, the Registrant expended approximately $2,633,000 on environmental capital projects. The Registrant estimates that projects requiring total expenditures of $2,908,000 and $426,000 for environmental-related capital will be initiated in 2000 and 2001, respectively. Since capital expenditures for pollution abatement generally do not increase the productivity or efficiency of the Registrant's mills, the Registrant's earnings have been and will be adversely affected to the extent that selling prices have not been and cannot be increased to offset additional incremental operating costs, 6 8 including depreciation, resulting from such capital expenditures and to offset additional interest expense on the amounts expended for environmental purposes. In 1999, EPA and the Pennsylvania Department of Environmental Protection ("DEP") issued to the Registrant separate Notices of Violation ("NOVs") alleging violations of the federal and state air pollution control laws, primarily for purportedly failing to obtain appropriate preconstruction air quality permits in conjunction with certain modifications to the Registrant's Spring Grove mill. EPA announced that the Registrant was one of seven pulp and paper mill operators to have received contemporaneously an NOV alleging this kind of violation. EPA and DEP alleged that the Registrant's modifications produced (1) significant net emissions increases in certain air pollutants which should have been covered by appropriate permits imposing new emissions limitations, and (2) certain other violations. For all but one of the modifications cited by EPA, the Registrant applied for and obtained from DEP the preconstruction permits which the Registrant concluded were required by applicable law. EPA reviewed those applications before the permits were issued. DEP's NOV only pertained to the modification for which the Registrant did not receive a preconstruction permit. The Registrant conducted an evaluation at the time of this modification, and determined that the preconstruction permit cited by EPA and DEP was not required. The Registrant has been informed that EPA and DEP will seek substantial emissions reductions, as well as civil penalties, to which the Registrant believes it has meritorious defenses. Nevertheless, the Registrant is unable to predict the ultimate outcome of these matters or the costs involved, and there can be no assurance that such costs would not have a material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. The Registrant, along with six other companies which operate or formerly operated facilities along the Fox River in Wisconsin, has been identified as a potentially responsible party ("PRP") under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other laws for (a) investigation and cleanup and (b) natural resources damages arising from the alleged discharge of polychlorinated biphenyls ("PCBs") and other hazardous substances to the Fox River below Lake Winnebago (the "lower Fox River") and the Bay of Green Bay. A dispute presently exists as to which sovereign controls which 7 9 claims concerning this matter. Accordingly, the Registrant has been in discussions with EPA, the Wisconsin Department of Natural Resources ("DNR"), the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), the Menominee Indian Tribe of Wisconsin, the Oneida Tribe of Indians of Wisconsin, and the state and federal Departments of Justice. On July 11, 1997, these agencies and tribes entered into a Memorandum of Agreement (the "MOA") which provides for coordination and cooperation among those parties in addressing the release or threat of release of hazardous substances into the lower Fox River, Green Bay and Lake Michigan environment. The MOA sets forth a mutual goal of remediating and/or responding to hazardous substance releases and threats of releases, and restoring injured and potentially injured natural resources. The MOA further states that, based on current information, removal of the PCB-contaminated sediments in the lower Fox River is expected to be the principal, but not exclusive, action undertaken to achieve restoration and rehabilitation of injured natural resources. The MOA anticipates funding from the Registrant and the six other companies. On February 26, 1999, DNR released a draft remedial investigation and feasibility study ("RI/FS") for the lower Fox River for public comment. In the draft RI/FS, DNR reviewed and summarized a number of possible remedial alternatives for the site estimated to cost in the range of $0 to $721,000,000, but did not select a preferred remedy. The Registrant does not believe that the no action remedy will be selected. The largest components of the costs of certain of the remedial alternatives are attributable to large-scale sediment removal and disposal. There is no assurance that the cost estimates in the draft RI/FS will not differ significantly from actual costs. The Registrant and the other six companies have submitted extensive technical comments to the draft RI/FS. In addition, the Registrant has submitted its individual comments to the draft RI/FS. DNR and EPA have announced that the RI/FS will be revised. The revision may add, delete or amend the remedial alternatives, and a final RI/FS and a proposed remedial action plan will be issued. The agencies have publicly stated that these documents may be issued in mid to late 2000. 8 10 Based on current information and advice from its environmental consultants, the Registrant continues to believe that an aggressive effort, as included in certain remedial alternatives in the draft RI/FS, to remove PCB-contaminated sediment, much of which is buried under cleaner material or is otherwise unlikely to move and which is abating naturally, would be environmentally detrimental and, therefore, inappropriate. Natural resources damages may be assessed in addition to cleanup costs. In November 1999, FWS announced a preliminary estimate of damages as the result of injury to recreational fishing. The range of damages announced is from $106 million to $150 million. The Registrant believes that this range is significantly overstated. FWS and the federal and tribal trustees have not yet announced estimates of certain other components of their natural resources damages claim. The Registrant believes DNR to be the lead agency for assessment of damages, and has been cooperatively assessing damages with DNR independent of the federal agencies. The Registrant currently is unable to predict the ultimate costs to the Registrant related to this matter, because the Registrant cannot predict which remedy will be selected for the site or its share of the cost of that remedy. The Registrant continues to believe it is likely that this matter will result in litigation; however, the Registrant believes it will be able to persuade a court that removal of a substantial amount of PCB-contaminated sediments is not an appropriate remedy. There can be no assurance, however, that the Registrant will be successful in arguing that removal of PCB-contaminated sediments is inappropriate, that it would prevail in any resulting litigation, that its share of the cost of any remedy selected would not have a material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations or result in a default under the Registrant's loan covenants or that the Registrant's share of such cost would not exceed its available resources. The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, natural resource damage and property damage liability, including but not limited to those related to the lower Fox River and the Bay of Green Bay, cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the extent and timing of any technological advances for pollution control, the remedial 9 11 actions which may be required and the number and financial resources of any other responsible parties. The Registrant continues to evaluate its exposure and the level of its reserves, including, but not limited to, its share of the costs and damages (if any) associated with the lower Fox River and the Bay of Green Bay. The Registrant believes that it is insured against certain losses related to the lower Fox River, depending on the nature and amount thereof. Coverage, which is currently being investigated under reservation of rights by various insurance companies, is dependent upon the identity of the plaintiff, the procedural posture of the claims asserted and how such claims are characterized. The Registrant does not know when the insurers' investigation as to coverage will be completed. The Registrant's current assessment, after consultation with legal counsel, is that ultimately it should be able to resolve these environmental matters without a long-term material adverse impact on the Registrant. In the meantime, however, these matters could, at any particular time or for any particular period, have a material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. Moreover, there can be no assurance that the Registrant's reserves will be adequate to provide for future obligations related to these matters or that such obligations will not have a long-term material adverse effect on the Registrant's consolidated financial condition, liquidity or results of operations. Item 2. Properties. The Registrant's executive offices are located in York, Pennsylvania. The Registrant's paper mills are located in Spring Grove, Pennsylvania; Pisgah Forest, North Carolina; Neenah, Wisconsin; Gernsbach, Germany; and near Odet, France. The Spring Grove facilities include seven uncoated paper machines with a daily capacity ranging from 12 to 308 tons and an aggregate annual capacity of about 302,000 tons of finished paper. The machines have been rebuilt and modernized from time to time. During 1997, the Spring Grove mill completed its Gravure Coater ("G-Coater") capital project. The Registrant views the G-Coater as an important long-term strategic project which will allow it to expand its more profitable engineered paper product group. The G-Coater, along with Spring Grove's off-line combi-blade coater, gives the Registrant a potential annual production capacity for coated paper of approximately 10 12 53,000 tons. Since uncoated paper is used in producing coated paper, this does not represent an increase in the Spring Grove mill capacity. The Spring Grove facilities also include a pulpmill, which has a production capacity of approximately 650 tons of bleached pulp per day. During the first quarter of 1998, the Registrant completed construction of a precipitated calcium carbonate ("PCC") plant at its Spring Grove mill. This plant reduced the cost of PCC at this mill as well as lowered the need for higher-priced raw materials used for increasing the opacity and brightness of certain papers. The Pisgah Forest facilities currently include twelve paper machines, stock preparation equipment, a modified kraft bleached flax pulpmill with thirteen rotary digesters, a PCC plant and a small recycled pulping operation. The annual lightweight paper capacity is approximately 99,000 tons. Nine paper machines are essentially identical while the newer, larger three remaining machines have design variations specific to the products produced. Converting equipment includes winders, calendars, slitters, perforators and printing presses. As explained in Item 7 of this report, in December 1999, the Registrant announced that it would begin reducing its tobacco paper manufacturing capacity at this facility during 2000. The Neenah facilities, consisting of a paper manufacturing mill, converting plant and offices, are located at two sites. The Neenah mill includes three paper machines, with an aggregate annual capacity of approximately 162,000 tons and a wastepaper de-inking and bleaching plant with an annual capacity of approximately 97,000 tons. The converting plant contains a paper processing area and warehouse space. The Registrant's subsidiary, S&H, currently owns and operates paper mills in Gernsbach, Germany and near Odet, France. S&H also owns a pulpmill in the Philippines which supplies abaca pulp to S&H's paper mills and owns and operates a research and development facility in Wisches, France. The Gernsbach facility includes five uncoated paper machines with an aggregate annual lightweight capacity of about 34,000 tons. In addition, the Gernsbach facility has the capacity to produce 7,700 tons of metalized papers annually, using a lacquering machine and two metalizers. The base paper used to manufacture the metalized paper is purchased. The Odet facility includes two paper machines with an aggregate annual 11 13 lightweight capacity of approximately 4,900 tons of finished paper. The Philippine pulpmill has an aggregate annual capacity of approximately 7,500 tons of abaca pulp. Of this amount, approximately 7,200 tons are supplied to the Gernsbach and Odet paper mills, with the remainder being sold to outside parties. The Gernsbach and Odet paper mills obtain substantially all of their abaca pulp from the Philippine pulpmill. The Glatfelter Pulp Wood Company, a subsidiary of the Registrant, owns and manages approximately 112,000 acres of land, most of which is timberland. The Registrant owns substantially all of the properties used in its papermaking operations, except for certain land leased from the City of Neenah under leases expiring in 2050, on which wastewater treatment, storage and other facilities and a parking lot are located. All of the Registrant's properties, other than those which are leased, are free from any material liens or encumbrances. In conjunction with a financing transaction between the Registrant and one of its subsidiaries completed in February 1997, however, the Registrant secured the indebtedness to the subsidiary incurred in the transaction with mortgages on real estate assets having a value of approximately $300 million. These mortgages have subsequently been assigned to another subsidiary of the Registrant. The Registrant considers that all of its buildings are in good structural condition and well-maintained and its properties are suitable and adequate for present operations. Item 3. Pending Legal Proceedings. For a discussion of the separate NOVs issued to the Registrant by EPA and DEP and the potential legal proceedings involving the lower Fox River, see "Environmental Matters" in Part I of this report. The Registrant does not believe that the other environmental matters discussed below will have a material adverse effect on its business or consolidated financial position, liquidity or results of operations. DEP has proposed to reissue the Registrant's wastewater discharge permit for the Spring Grove mill on terms unacceptable to the Registrant. DEP has concurrently publicly proposed terms for resolution of an anticipated appeal from the issuance of that permit which terms, subject to satisfaction of certain conditions, are acceptable to the Registrant. However, such terms may be unacceptable to EPA or certain third parties. 12 14 The Registrant cannot determine the impact that the new permit will have on the Registrant if it contains objectionable terms because the material terms of the final form of the permit are unknown. On May 16, 1989, the Pennsylvania Environmental Hearing Board approved and entered an Amended Consent Adjudication between the Registrant and DEP in connection with the Registrant's permit to discharge effluent into the West Branch of the Codorus Creek. The Amended Consent Adjudication establishes limitations on in-stream color, and requires the Registrant to conduct certain studies and to submit certain reports regarding internal and external measures to control the discharge of color and certain other adverse byproducts of chlorine bleaching to the West Branch of the Codorus Creek. Through June 1999, the Registrant has submitted these reports annually and met with representatives of DEP to discuss the reports, possible revisions to or rescission of the Amended Consent Adjudication, and whether to enter an agreement to install additional wastewater pollution controls which would be expected to reduce levels of color discharged. The Pennsylvania Public Interest Research Group ("Penn PIRG") and several other plaintiffs have brought a citizen suit under the Federal Clean Water Act and Pennsylvania Clean Streams Law seeking a reduction in the Spring Grove mill's discharge of color, civil penalties and costs of litigation. The Registrant believes Penn PIRG's lawsuit to be without merit, but the Registrant cannot predict the impact on the Registrant of any relief the court might award because the case is not yet at a state where the nature and extent of any relief can be predicted. 13 15 Item 4. Submission of Matters to a Vote of Security Holders. Not Applicable. Executive Officers of the Registrant.
Executive Officers Office Age - ------------------ ------ --- G. H. Glatfelter II President and Chief Executive Officer (a) 48 T. C. Norris Chairman (b) 61 R. P. Newcomer Executive Vice President and Chief Financial Officer (c) 51 R. S. Lawrence Vice President - General Manager, Ecusta Division 60 L. R. Hall Vice President - General Manager, Glatfelter Division (d) 62 R. L. Miller Vice President - International Business (e) 53 C. M. Smith Vice President - Finance and Assistant Secretary (f) 41 R. S. Wood Vice President - Administration (g) 42 J. R. Anke Treasurer (h) 54 T. D. D'Orazio Controller (i) 41 M. R. Mueller Associate Counsel and Secretary (j) 39
Officers are elected to serve at the pleasure of the Board of Directors. Except in the case of officers elected to fill a new position or a vacancy occurring at some other date, officers are generally elected at the annual meeting of the Board held immediately after the annual meeting of shareholders. 14 16 (a) Mr. Glatfelter became President and Chief Executive Officer in June 1998. From September 1995 to June 1998, he was Senior Vice President. Prior to September 1995, he was Vice President - General Manager, Glatfelter Paper Division. (b) Mr. Norris is expected to retire as Chairman in April 2000. Prior to June 1998, Mr. Norris was also President and Chief Executive Officer. (c) Mr. Newcomer became Executive Vice President in June 1998 and continued to serve as Chief Financial Officer at that time. From May 1997 to June 1998, he was Senior Vice President and Chief Financial Officer. From September 1995 to April 1997, he was Senior Vice President, Treasurer and Chief Financial Officer. From April 1995 to September 1995, he was Vice President, Treasurer and Chief Financial Officer. Prior to April 1995, he was Vice President and Treasurer. (d) Mr. Hall became Vice President - General Manager, Glatfelter Division in August 1998. From November 1995 to August 1998, he was Director of Operations - Glatfelter Division. Prior to November 1995, he was Spring Grove Mill Manager. (e) Mr. Miller became Vice President - International Business in August 1998. From September 1995 to August 1998, he was Vice President - Administration. From August 1994 to September 1995, he was Director of Planning, Acquisitions and Governmental Affairs. (f) Mr. Smith became Assistant Secretary in December 1999 and continued to serve as Vice President - Finance at that time. From August 1998 to December 1998, he was Vice President - Finance, Assistant Secretary and Controller. Prior to August 1998, he was Controller. (g) Mr. Wood ceased serving as Secretary in December 1999 and continued to serve as Vice President Administration at that time. From August 1998 to December 1999, he was Vice President - Administration and Secretary. From May 1997 to August 1998, he was Secretary and Treasurer. Prior to May 1997, he was Secretary and Assistant Treasurer. 15 17 (h) Mr. Anke became Treasurer in September 1998. From June 1997 to September 1998, he was Chief Financial Officer for the Senator John Heinz History Center. From September 1996 to June 1997, he was a consultant to AMSCO International, Inc. From April 1994 to September 1996, he was Vice President and Treasurer of AMSCO International, Inc., where he was responsible for treasury, insurance, retirement plan and international functions and supervised approximately forty employees. (i) Mr. D'Orazio became Controller in December 1998. Prior to December 1998, he was Assistant Corporate Controller of Mohawk Industries, Inc., where he was responsible for corporate accounting functions and supervised approximately twenty employees. (j) Mr. Mueller became Secretary and continued to serve as Associate Counsel in December 1999. From December 1998 to December 1999, he was Associate Counsel and Assistant Secretary. From June 1998 to December 1998, he was Associate Counsel. From September 1996 to June 1998, he was the owner and Vice President of Scheller, Inc., where he was responsible for the administration of the company. He was Legal Counsel with Credit Suisse prior to August 1995. PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters. Common Stock Prices and Dividends Paid Information The table below shows the high and low prices of the Registrant's common stock on the New York Stock Exchange and the American Stock Exchange (Ticket Symbol "GLT") and the dividends paid per share for each quarter during the past two years. Trading of the Registrant's common stock commenced on the New York Stock Exchange on November 12, 1998; prior to that date the Registrant's common stock traded on the American Stock Exchange. 16 18
1999 1998 ------------------------------------ ------------------------------------ Quarter High Low Dividends High Low Dividends 1st $12-1/2 $ 9-5/8 $ .175 $18-3/8 $ 16 $ .175 2nd 14-13/16 11 .175 19-1/8 15-1/8 .175 3rd 16-7/16 13-3/16 .175 16-5/8 11-3/16 .175 4th 15-3/4 12-3/8 .175 13-7/16 11-3/8 .175
As of December 31, 1999 the Registrant had 3,059 shareholders of record. A number of the shareholders of record are nominees. 17 19 Item 6. Selected Financial Data. Summary of Selected Consolidated Financial Data Years Ended December 31 (in thousands except per share amounts)
1999 1998 1997 1996 1995 1994 ---------- ---------- ---------- ----------- ---------- ---------- Net sales ........ $ 680,560 $ 705,078 $ 567,072 $ 566,084 $ 623,709 $ 478,302 Income (loss) before accounting changes ......... 41,425 36,133(a) 45,284 60,399 65,828 (118,251)(b) Basic earnings (loss) per share before accounting changes ......... .98 .86(a) 1.07 1.41 1.50 (2.67)(b) Diluted earnings (loss) per share before accounting changes ......... .98 .86(a) 1.07 1.41 1.49 (2.67)(b) Total assets ..... 1,003,780 990,738 937,583 715,310 673,107 650,810(c) Debt ............. 329,770 356,459 348,665 150,000 150,000 174,100 Cash dividends declared per common share .... $ .70 $ .70 $ .70 $ .70 $ .70 $ .70
1993 1992 1991 1990 1989 ---------- ---------- ------------ ------------ ---------- Net sales ........ $ 473,509 $ 540,057 $ 567,764 $ 625,429 $ 598,777 Income (loss) before accounting changes ......... 20,409(d) 56,544 76,049 88,332 92,864 Basic earnings (loss) per share before accounting changes ......... .46(d) 1.28 1.68 1.90 1.94 Diluted earnings (loss) per share before accounting changes ......... .46(d) 1.27 1.67 1.88 1.93 Total assets ..... 847,087(e) 648,464 630,115 598,842 550,105 Debt ............. 150,000 10,100 __ __ 1,100 Cash dividends declared per common share .... $ .70 $ .70 $ .60 $ .575 $ .50
(a) After impact of an after-tax charge for voluntary early retirement enhancement program (unusual item) of $5,988,000. (b) After impact of an after-tax charge for a writedown of impaired assets (unusual items) of $127,981,000. (c) After impact of a pre-tax charge for a writedown of impaired assets (unusual items) of $208,949,000. (d) After impact of an after-tax charge for rightsizing and restructuring (unusual items) of $8,430,000 and the effect of an increased federal corporate income tax rate of $3,587,000. (e) Includes an increase of $61,062,000 for the adoption of Statement of Financial Accounting Standards No. 109. 18 20 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. FORWARD-LOOKING STATEMENTS Any statements set forth in this annual report or otherwise made in writing or orally by the Company with regard to its goals for revenues, cost reductions and return on capital, expectations as to industry conditions and the Company's operating results, demand for or pricing of its products, development of new products, environmental matters, Year 2000 compliance and other aspects of its business may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company makes such statements based on assumptions that it believes to be reasonable, there can be no assurance that actual results will not differ materially from the Company's expectations. Accordingly, the Company identifies the following important factors, among others, which could cause its results to differ from any results which might be projected, forecasted or estimated by the Company in any such forward-looking statements: (i) variations in demand for or pricing of its products, including variations resulting from the Company's announced tobacco paper price increases; (ii) the Company's ability to identify, finance and consummate future alliances or acquisitions; (iii) the Company's ability to develop new, high value-added engineered products; (iv) the Company's ability to identify and implement its planned cost reductions; (v) changes in the cost or availability of raw materials used by the Company, in particular market pulp, pulp substitutes and wastepaper; (vi) changes in industry paper production capacity, including the construction of new mills, the closing of mills and incremental changes due to capital expenditures or productivity increases; (vii) the gain or loss of significant customers; (viii) cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damage related thereto, such as costs associated with the Notices of Violations ("NOVs") issued by the United States Environmental Protection Agency ("EPA") and the Pennsylvania Department of Environmental Protection ("DEP") and the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls ("PCBs") in the lower Fox River on which the Company's Neenah mill is located; (ix) significant changes in cigarette consumption, both domestically and internationally; (x) enactment of adverse state, federal or foreign legislation or changes in government policy or regulation; (xi) adverse results in litigation; (xii) fluctuations in currency exchange rates; (xiii) failure of third parties which are material to the Company to be Year 2000 compliant thereby interrupting their and the Company's business operations; and (xiv) disruptions in production and/or increased costs due to labor disputes. OVERVIEW The Company classifies its sales into two product groups: engineered papers (including tobacco papers) and specialized printing papers. The Glatfelter Division, which includes the Spring Grove, Pennsylvania and Neenah, Wisconsin paper mills, produces both specialized printing and engineered papers. The Ecusta Division is comprised of the Pisgah Forest, North Carolina paper mill ("Ecusta") as well as other various supporting facilities. Schoeller & Hoesch ("S&H") includes paper mills in Gernsbach, Germany and near Odet, France. Both Ecusta and S&H produce specialized printing papers and engineered papers (including tobacco papers). S&H was acquired on January 2, 1998. Overall, demand and pricing for the Company's products strengthened throughout 1999. After the first quarter of 1999, the Company experienced only normal seasonal downtime. Demand for the Company's tobacco papers, however, continued to be very weak during 1999. This portion of the Company's business has suffered from extremely low pricing in recent years as a result of industry overcapacity and declining domestic consumption. To combat such depressed pricing, the Company announced in September that it had notified its major tobacco paper customers that, effective January 1, 2000, prices would be increased for certain of its tobacco paper products. This initiative was required for the Company to remain a viable, high-quality supplier to its customers. As a result of this announcement, the Company expected that certain of its tobacco paper customers would seek other, lower-quality suppliers. In fact, this has happened. As a result, the Company announced in December 1999 that it would begin reducing its tobacco paper manufacturing capacity at its Ecusta Division during 2000. Although the extent of the reduction is uncertain, capacity could be reduced by up to one-third and the workforce reduced by approximately 300 people. Such workforce reductions will be realized through a combination of early retirements and layoffs. Because the extent of the sales volume losses could not be reliably estimated as of the balance sheet date, the Company has not recognized a one-time charge associated with the workforce reduction or a one-time charge, if any, associated with the idling of equipment. Such a charge, which will not materially adversely affect the Company's financial condition, will be recognized in the first half of 2000. 19 21 To offset the loss of such tobacco paper volume, the Company is planning to grow its specialized printing and engineered papers businesses and has invested resources into its new product development area. Despite this, the Company expects that the reduction of its tobacco paper producing capacity will reduce its total sales volume in the near term. The Company is making vigorous efforts to remove substantially all costs associated with this loss of business as capacity is reduced. Markets for the Company's other engineered papers, excluding tobacco papers, remained strong throughout 1999. Demand was stable and pricing was consistent. The Company's net sales volume of other engineered papers increased by 12% in the fourth quarter of 1999 versus the first quarter of 1999, a result of improved demand for the Company's existing products. Most of the Company's specialized printing paper products are directed at the uncoated free sheet portion of the industry. The demand for such products was relatively weak early in the year, with demand steadily improving thereafter. Concurrent with this improving demand, the Company was able to implement various price increases for its specialized printing paper products in 1999. The Company announced a price increase for a substantial number of its specialized printing papers effective in early February 2000. Early indications are that additional price increases may be forthcoming in 2000. Partially offsetting the positive financial impact of these price increases are increases in the cost of certain of the Company's raw materials, especially market pulp and wastepaper. Major producers of market pulp have implemented price increases effective in January 2000, and the Company expects additional price increases in the coming months. Since pricing for many of the Company's products typically follows that of market pulp, the Company also expects improved pricing for such products subsequent to any market pulp price increases. Furthermore, because certain of the Company's operations are not entirely dependent on external sources of pulp, especially its vertically integrated Spring Grove, Pennsylvania pulp and paper mill, such increases in fiber prices are generally favorable to the Company's results of operations. 1999 COMPARED TO 1998 Overall, net sales in 1999 decreased $24,518,000, or 3.5%, compared to 1998. Though net sales volume was higher in 1999 versus 1998, average net pricing was lower in 1999. Sales of specialized printing papers were lower in 1999 than 1998 by 5.9% as a result of weak demand and pricing for such products early in 1999. Throughout the remainder of 1999, the Company was able to implement several price increases as demand and pricing improved during the year. As a result of these price increases, average net pricing for such products was 7.2% higher in the fourth quarter of 1999 versus the fourth quarter of 1998. The Company announced additional price increases for many of these products early in 2000 and continues to maintain a healthy backlog of orders. The Company expects that pricing will continue to improve, though at a somewhat slower rate, in 2000 compared to 1999. Sales of engineered papers (including tobacco papers) increased by 3.5% in 1999 versus 1998, as an increase in net sales volume was partially offset by a decrease in average net selling price. The increase in volume was largely a result of successfully marketing certain of the Company's existing products. As mentioned above, the Company, along with much of the rest of the paper industry, experienced weakness in demand for many of its products early in 1999. As a result, the Company accepted orders for certain of its products with lower average net selling prices. The decrease in average net selling price for the year 1999, therefore, is almost entirely a result of a change in mix of products sold and not a weakening of prices for specific products. The cost of products sold decreased by 3.4% in 1999 compared to 1998. As the Company reported in 1998 (see "Unusual Item" below), it has taken aggressive steps to remove costs from its business which has led to the lower cost of products sold. Further, an increase in operational efficiency at many of the Company's operating locations was realized as a result of an improving and more stable order pattern for many of the Company's products. In addition, market pulp prices, a key raw material in the Company's business, were lower, on average, than in 1998. The increase in selling, general and administrative expenses of $4,457,000 in 1999 versus 1998 was primarily a result of additional spending on legal and professional services relating to certain environmental and other matters. 20 22 Profit from operations before interest income and expense and taxes was $81,582,000 in 1999 compared to $88,599,000 excluding the unusual item in 1998. This decrease was largely due to the decrease in net sales in 1999 versus 1998, partially offset by a decrease in cost of products sold. Interest on investments and other - net remained flat from 1998 to 1999. The Company's average cash holdings in 1999 were higher than in 1998, yielding higher interest income. Offsetting this was interest income realized in 1998 on a trust held to defease certain of the Company's debt. The defeasance trust was liquidated early in 1998 and no such income was realized in 1999. Gain from property dispositions, etc. - net increased from $1,019,000 in 1998 to $4,076,000 in 1999. In the first quarter of 1999, the Company sold a tract of timberland, realizing a gain of $976,000. During the remaining quarters of 1999, the Company sold various other fully-depreciated items, in addition to the rights to standing timber on select tracts of land. Subsequent to the first quarter of 1999, no single sale was material to the Company's results of operations. No significant sales of such property occurred in 1998. From time to time, the Company divests certain tracts of its timberlands when it is offered attractive prices. The Company does not actively solicit the sale of its timberlands as it intends to maintain its own sources of raw materials. Interest on debt was $18,424,000 in 1999 compared to $22,007,000 in 1998. This decrease was a result of lower average borrowings and generally lower interest rates experienced in 1999 versus 1998. Such lower average borrowings were partially a result of the Company's repayment of its $150,000,000 principal amount 5 7/8% Notes early in 1998 as well as strengthening of the U.S. dollar relative to the DM during 1999. 1998 COMPARED TO 1997 Net sales in 1998 increased $138,006,000, or 24.3%, compared to 1997. Net sales volume and average selling prices decreased at the Company's Glatfelter and Ecusta divisions. The resulting decrease in net sales at these divisions was more than offset by the net sales of S&H. Sales of engineered papers (including tobacco papers) increased by 65.7% in 1998 versus 1997. This increase was due to the inclusion of S&H in 1998's results. Overall, the sales volume of engineered papers increased by 34.6%. The average net selling price per ton for the Company's engineered papers increased significantly due to a shift in product mix. S&H produces and sells lightweight papers and, as a result, has higher average net selling prices per ton than those of the Glatfelter and Ecusta divisions. The average net selling price per ton of tobacco papers decreased in 1998 versus 1997. Overall, tobacco paper sales volume increased due to the inclusion of S&H's results in 1998. Specialized printing paper sales were down less than 1% in 1998 versus 1997. This decrease was due to lower printing paper sales volume. Average net selling prices per ton increased slightly. This increase was entirely due to a change in product mix. Average selling prices per ton for non-S&H printing papers decreased slightly in 1998 compared to 1997. The cost of products sold for the Glatfelter and Ecusta divisions decreased due to a decrease in sales volume and lower costs for certain raw materials in 1998 compared to 1997. Raw material costs had a slightly favorable effect on the Company's relative performance in 1998 compared to 1997 as cost per ton for the Company's principal raw materials, market pulp and wastepaper, decreased in 1998 versus 1997. The Company also benefited in 1998 from cost savings achieved through the start-up of the Spring Grove mill's precipitated calcium carbonate ("PCC") plant. This plant reduced the cost of PCC at this mill as well as lowered the need for higher priced raw materials used for increasing the opacity and brightness of certain papers. The cost of sales per unit decreased at the Glatfelter Division in 1998 versus 1997 due primarily to lower raw material costs. The cost of sales per unit at the Ecusta Division increased in 1998 as compared to 1997. This increase was mainly due to the amount of market-related down-time taken at the Ecusta Division and the resulting absorption of fixed costs over fewer units produced. Selling, general and administrative expenses increased by $14,990,000 in 1998 versus 1997. This increase was due to the selling, general and administrative expenses related to S&H, offset somewhat by a decrease in such expenses at the Glatfelter and Ecusta divisions. S&H has higher selling, general and administrative expenses as a percentage of sales primarily as a result of higher selling costs incurred in delivering product to its customers. Selling, general and 21 23 administrative expenses for the Company were 7.3% and 6.5% of net sales for 1998 and 1997, respectively. Profit from operations before the unusual item, interest income and expense and taxes was $88,599,000 in 1998 compared to $84,492,000 in 1997. This increase was due to the incremental operating results of S&H which more than offset decreases in profit from operations before the unusual item, interest income and expense and taxes at the Glatfelter and Ecusta divisions. The decreases at the Glatfelter and Ecusta divisions were the result of a decrease in net sales, offset somewhat by a decrease in cost of products sold and selling, general and administrative expenses. The decrease in net sales at these two divisions in 1998 as compared to 1997 was primarily due to reduced sales volumes, exacerbated somewhat by a decrease in average selling price per ton. Interest on investments and other - net decreased from $7,785,000 in 1997 to $1,956,000 in 1998. This decrease was primarily a result of a decrease in investment income in 1998 compared to 1997. In 1997, the proceeds from the issuance of $150,000,000 of step-down preferred stock by a subsidiary, GWS Valuch, Inc., were placed in trust and invested in interest-bearing marketable securities, resulting in a significant increase in interest income. The trust was liquidated in early 1998. This transaction is described in Note 6 to the Company's 1999 consolidated financial statements. Gain from property dispositions, etc. - net decreased from $3,166,000 in 1997 to $1,019,000 in 1998. During the second quarter of 1997, the Company completed the sale of a parcel of recreational property near its Ecusta mill resulting in a pre-tax gain of approximately $2,200,000. No property sales of this magnitude were included in the 1998 results. Interest on debt was $22,007,000 in 1998 compared to $18,700,000 in 1997. The primary reason for this increase was the Company's higher net borrowing level during the first quarter of 1998 as compared to the first quarter of 1997, in part due to the borrowings of approximately $150,000,000 under the Revolving Credit Facility to finance the acquisition of S&H. The Company repaid its $150,000,000 principal amount of its 5 7/8% Notes on March 1, 1998. UNUSUAL ITEM During 1998, the Company recognized a pre-tax charge of $9,816,000 related primarily to the accrual of pension and medical benefits for certain salaried and hourly employees of the Ecusta Division and certain salaried employees of the Glatfelter Division who elected to participate in a voluntary early retirement enhancement program. The pre-tax charge also included the cost of termination of several Glatfelter Division salaried employees which was necessary to achieve the Company's cost-savings goals. The total after-tax effect of the unusual item for the year was $5,988,000, or $.14 per share. ACQUISITION OF SCHOELLER & HOESCH On January 2, 1998, the Company acquired S&H which currently owns and operates paper mills in Gernsbach, Germany and near Odet, France. S&H also owns a pulpmill in the Philippines which supplies abaca pulp to S&H's paper mills and owns and operates a facility in Wisches, France. S&H primarily manufactures engineered papers and has the leading position in the world tea bag paper market. It also manufactures other engineered papers including tobacco, metalized, stencil, filter and casing papers, as well as some specialized printing papers. The acquisition of S&H provided the Company with a strong business position in the world tea bag paper market and a presence in other long fiber markets, such as stencil, filter and casing papers. It also strengthened the Company's tobacco papers business by providing a manufacturing presence in Europe and a significant share of the European tobacco papers market, plus the ability to manufacture and market ultraporous plug wrap, a growing segment of the world tobacco papers market. 22 24 FINANCIAL CONDITION LIQUIDITY During 1999, the Company's cash and cash equivalents increased by $25,128,000, principally due to cash provided from operations of $81,658,000. Such cash generation was partially offset by cash used in investing activities of $29,229,000, mainly for additions to plant, equipment and timberlands and the acquisition of the remaining 50% interest in Cascadec, and cash used in financing activities of $26,682,000, primarily for dividend payments. The Company expects to meet all its near- and long-term cash needs from a combination of internally generated funds, cash, cash equivalents and its existing Revolving Credit Facility or other bank lines of credit, and, if prudent, other long-term debt. The Company is subject to certain financial covenants under the Revolving Credit Facility. The Company is in compliance with all such covenants. INTEREST RATE RISK The Company uses its Revolving Credit Facility and 6 7/8% Notes to finance a significant portion of its operations. The Revolving Credit Facility provides for variable rates of interest and exposes the Company to interest rate risk resulting from changes in the DM London Interbank Offered Rate. The Company uses off-balance sheet interest rate swap agreements to hedge partially interest rate exposure associated with the Revolving Credit Facility. All of the Company's derivative financial instrument transactions are entered into for non-trading purposes. To the extent that the Company's financial instruments expose the Company to interest rate risk and market risk, they are presented in the table below. The table presents principal cash flows and related interest rates by year of maturity for the Company's Revolving Credit Facility and 6 7/8% Notes as of December 31, 1999. For interest rate swap agreements, the table presents notional amounts and the related reference interest rates by year of maturity. Fair values included herein have been determined based upon (1) rates currently available to the Company for debt with similar terms and remaining maturities, and (2) estimates obtained from dealers to settle interest rate swap agreements. The table should be read in conjunction with Notes 6 and 7 to the consolidated financial statements (dollar amounts in thousands).
Year of Maturity Total Fair Value ------------------------------------------------------------------ Due at at 2000 2001 2002 2003 2004 Thereafter Maturity 12/31/99 ------ -------- -------- ------- ------ ---------- -------- -------- Debt: Fixed rate-- $1,824 $ 1,532 $ 1,364 $ 1,197 $1,001 $150,741 $157,659 $151,399 Average interest rate 6.85% 6.85% 6.85% 6.86% 6.86% 6.87% Variable rate-- $ -- $ -- $145,545 $ -- $ -- $ -- $145,545 $145,545 Average interest rate 3.78% 3.60% 3.38% -- -- -- Interest rate swap agreements: Variable to fixed swaps-- $3,498 $ 29,011 $ 27,081 $51,485 $ -- $ -- $111,075 $ 1,567 Average pay rate 4.34% 3.75% 3.42% 3.42% -- -- Average receive rate 3.56% 3.37% 3.40% 3.40% -- --
CAPITAL RESOURCES During 1999, the Company expended $24,160,000 on capital projects. In an effort to reduce its net debt, the Company has made a chief goal of minimizing capital spending, allotting only sufficient funds to maintain existing operations and for modest, high-return capital improvements. The Company will remain in this highly discriminating spending mode at least through 2000 and possibly thereafter. Capital spending is expected to be approximately $40,000,000 in 2000. ENVIRONMENTAL MATTERS The Company is subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of air and water emissions and noise from its mills, as well as the disposal of solid waste generated by its operations. To comply with environmental laws and regulations, the Company has incurred substantial capital and operating expenditures in past years. During 1999, 1998 and 1997, the Company incurred approximately $15,800,000, $17,700,000 and $14,800,000, respectively, in operating costs related to complying with environmental laws and regulations. The Company anticipates 23 25 that environmental regulation of its operations will continue to become more burdensome and that capital and operating expenditures will continue, and perhaps increase, in the future. In addition, the Company may incur obligations to remove or mitigate any adverse effects on the environment resulting from its operations, including the restoration of natural resources, and liability for personal injury and damage to property, including natural resources. In particular, the Company continues to negotiate with EPA and DEP regarding the NOVs under the federal and state air pollution control laws and with the State of Wisconsin and the United States regarding natural resources damages and response costs related to the discharge of PCBs and other hazardous substances in the lower Fox River, on which the Company's Neenah mill is located. The costs associated with such matters are presently unknown but could be substantial and perhaps exceed the Company's available resources. The Company's current assessment, after consultation with legal counsel, is that ultimately it should be able to resolve these environmental matters without a long-term material adverse impact on the Company. In the meantime, however, these matters could, at any particular time or for any particular period, have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operations. Moreover, there can be no assurance that the Company's reserves will be adequate to provide for future obligations related to these matters or that such obligations will not have a long-term material adverse effect on the Company's consolidated financial condition, liquidity or results of operations. ENVIRONMENTAL ACHIEVEMENTS On April 20, 1999, the Company announced that its Spring Grove mill was the first pulp and paper mill in the United States to achieve ISO 14001 certification for its environmental management system and its commitment to environmental excellence. ISO 14001 requires that an organization have an environmental policy that includes commitments to prevention of pollution, compliance with environmental laws and regulations and continual improvements in its environmental management system. As a part of maintaining its certification, the mill's environmental management system will be assessed by a third party on an ongoing, periodic basis. The Company's Gernsbach, Germany facility is also ISO 14001 certified. The Company plans to achieve ISO 14001 certification at all of its other mills by the end of 2002. Also on April 20, 1999, the Company announced its "New Century Project." The New Century Project is a commitment by the Company to participate at its Spring Grove mill in EPA's Advanced Technology Incentive Program under the "Cluster Rules." As a result, the Company expects to spend approximately $30,000,000 prior to April 2004 to eliminate the use of elemental chlorine in its bleaching process, reduce odor emissions and improve water quality. The New Century Project demonstrates the Company's commitment to minimizing its impact on natural resources. YEAR 2000 The Company's efforts to achieve Year 2000 compliance for its information technology systems and non-information technology systems have been successful to date. The Company experienced essentially no problems as a result of the Year 2000 date change on December 31, 1999. Further, the Company was not negatively impacted by any noncompliance by its key vendors, suppliers or customers. The Company dedicated a substantial portion of the resources of its internal information technology employees to achieve Year 2000 compliance. Including primarily normal wage, benefit and related costs for its ordinary complement of information technology personnel, the Company expensed approximately $450,000, $634,000 and $125,000 during 1999, 1998 and 1997, respectively, on this project. The Company made only minor capital expenditures to replace certain systems or equipment that were not Year 2000 compliant. The Company incurred approximately $210,000 in capital-related costs during 1999 to achieve Year 2000 compliance. While the Company will continue to monitor its systems, as well as its interaction with vendors, suppliers and customers, for potential Year 2000 noncompliance through the remainder of 2000, the Company has redeployed the resources associated with its information technology employees to the development and implementation of strategic information systems. 24 26 Item 7A. Quantitative and Qualitative Disclosures About Market Risk. See the discussion under the heading "Interest Rate Risk" in Item 7 as well as Notes 6 and 7 to the Registrant's consolidated financial statements in Item 8. Item 8. Financial Statements and Supplementary Data. P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME For the Years Ended December 31, 1999, 1998 and 1997
(in thousands except per share amounts) 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- NET SALES $680,560 $705,078 $567,072 OTHER INCOME: Energy sales - net (Note 1(j)) 9,176 9,652 9,189 Interest on investments and other - net (Note 6) 1,994 1,956 7,785 Gain from property dispositions, etc. - net 4,076 1,019 3,166 -------- ------- ------- Total 695,806 717,705 587,212 -------- ------- ------- COSTS AND EXPENSES: Cost of products sold 555,974 575,351 458,126 Selling, general and administrative expenses 56,256 51,799 36,809 Interest on debt (Notes 6 and 7) 18,424 22,007 18,700 Unusual item (Note 3) -- 9,816 -- -------- ------- ------- Total costs and expenses 630,654 658,973 513,635 -------- ------- ------- INCOME BEFORE INCOME TAXES 65,152 58,732 73,577 -------- ------- ------- INCOME TAX PROVISION (Note 5): Current 10,973 14,488 25,453 Deferred 12,754 8,111 2,840 -------- ------- ------- Total 23,727 22,599 28,293 -------- ------- ------- NET INCOME $ 41,425 $ 36,133 $ 45,284 ======== ======= ======= BASIC AND DILUTED EARNINGS PER SHARE (Notes 4 and 8) $.98 $ .86 $ 1.07 COMPREHENSIVE INCOME, NET OF TAX: - --------------------------------- NET INCOME $ 41,425 $ 36,133 $ 45,284 FOREIGN CURRENCY TRANSLATION ADJUSTMENTS (Note 1(n)) 219 (553) (651) -------- ------- ------- COMPREHENSIVE INCOME $ 41,644 $ 35,580 $ 44,633 ======== ======= =======
The accompanying notes are an integral part of these consolidated financial statements. 25 27 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 1999 and 1998
(in thousands except share information) 1999 1998 - ------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 1(b)) $ 76,035 $ 50,907 Accounts receivable (less allowance for doubtful accounts: 1999, $1,227; 1998, $1,532) 74,638 70,076 Inventories (Note 1(c)) 115,100 117,852 Prepaid expenses and other current assets 2,354 3,073 ----------- ----------- Total current assets 268,127 241,908 PLANT, EQUIPMENT AND TIMBERLANDS - NET (Notes 1(d) and 10) 582,213 628,156 OTHER ASSETS (Notes 1(e) and 9) 153,440 120,674 ----------- ----------- Total assets $ 1,003,780 $ 990,738 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt (Note 6) $ 1,824 $ 2,088 Short-term debt 26,566 28,990 Accounts payable 40,047 34,293 Dividends payable 7,393 7,365 Income taxes payable 9,601 8,189 Accrued compensation and other expenses and deferred income taxes 47,200 45,951 ----------- ----------- Total current liabilities 132,631 126,876 LONG-TERM DEBT (Note 6) 301,380 325,381 DEFERRED INCOME TAXES (Notes 1(f) and 5) 147,698 123,321 OTHER LONG-TERM LIABILITIES (Notes 1(k), 2, 8 and 9) 63,947 71,231 ----------- ----------- Total liabilities 645,656 646,809 ----------- ----------- COMMITMENTS AND CONTINGENCIES (Note 10) SHAREHOLDERS' EQUITY (Note 8): Common stock, $.01 par value; authorized - 120,000,000 shares; issued (including shares in treasury: 1999, 12,115,725; 1998, 12,276,744) - 54,361,980 shares 544 544 Capital in excess of par value 42,296 42,612 Retained earnings 496,680 484,793 Accumulated other comprehensive income (1,392) (1,611) ----------- ----------- Total 538,128 526,338 Less cost of common stock in treasury (180,004) (182,409) ----------- ----------- Total shareholders' equity 358,124 343,929 ----------- ----------- Total liabilities and shareholders' equity $ 1,003,780 $ 990,738 =========== ===========
The accompanying notes are an integral part of these consolidated financial statements. 26 28 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 1999, 1998 and 1997
Accumulated Common Capital in Other Total (in thousands except Shares Common Excess of Retained Comprehensive Treasury Shareholders' shares outstanding) Outstanding Stock Par Value Earnings Income Stock Equity Balance, January 1, 1997 42,539,828 $544 $41,601 $462,337 $(407) $(173,452) $330,623 Net income 45,284 45,284 Foreign currency translation adjustments (651) (651) Cash dividends declared (29,548) (29,548) Delivery of treasury shares: Restricted stock awards 13,350 217 196 413 Employee stock purchase and 401(k) plans 150,940 545 2,219 2,764 Employee stock options exercised - net 103,690 260 1,517 1,777 Purchase of stock for treasury (658,200) (11,304) (11,304) ----------- ----- --------- -------- ------- -------- -------- Balance, December 31, 1997 42,149,608 544 42,623 478,073 (1,058) (180,824) 339,358 Net income 36,133 36,133 Foreign currency translation adjustments (553) (553) Cash dividends declared (29,413) (29,413) Delivery of treasury shares: Employee stock purchase and 401(k) plans 182,528 (13) 2,713 2,700 Employee stock options exercised - net 3,100 2 46 48 Purchase of stock for treasury (250,000) (4,344) (4,344) ----------- ----- --------- -------- ------- -------- -------- Balance, December 31, 1998 42,085,236 544 42,612 484,793 (1,611) (182,409) 343,929 Net income 41,425 41,425 Foreign currency translation adjustments 219 219 Cash dividends declared (29,538) (29,538) Delivery of treasury shares: Performance shares 11,440 (28) 170 142 401(k) plans 143,579 (273) 2,146 1,873 Employee stock options exercised - net 6,000 (15) 89 74 ----------- ----- --------- -------- ------- -------- -------- Balance, December 31, 1999 42,246,255 $544 $42,296 $496,680 $(1,392) $(180,004) $358,124 =========== ===== ========= ======== ======= ======== ========
The accompanying notes are an integral part of these consolidated financial statements. 27 29 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 1999, 1998 and 1997
(in thousands) 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 41,425 $ 36,133 $ 45,284 Items included in net income not using (providing) cash: Depreciation, depletion and amortization 47,766 47,738 35,796 Loss (gain) on disposition of fixed assets (1,339) 481 (2,121) Expense related to employee stock purchase and 401(k) plans 2,303 1,652 1,270 Changes in assets and liabilities, net of effect of acquisitions: Accounts receivable (7,170) 8,703 (484) Inventories (1,965) 16,437 (1) Other assets and prepaid expenses (20,886) (2,328) (12,309) Accounts payable, accrued compensation and other expenses, deferred income taxes and other long-term liabilities 13,147 (8,272) 14,111 Income taxes payable (1,994) (4,341) 801 Deferred income taxes - noncurrent 10,371 4,214 2,856 -------- --------- -------- Net cash provided by operating activities 81,658 100,417 85,203 -------- --------- -------- Cash flows from investing activities: Sale (purchase) or maturity of investments - net 401 158,475 (154,363) Proceeds from disposal of fixed assets 1,929 319 3,749 Additions to plant, equipment and timberlands (24,160) (40,531) (60,503) Acquisition of S&H - net of cash acquired -- (147,491) -- Acquisition of Cascadec (7,399) -- -- -------- --------- -------- Net cash used in investing activities (29,229) (29,228) (211,117) -------- --------- -------- Cash flows from financing activities: Proceeds from long-term debt issuance -- -- 150,000 Net borrowings of short-term debt 2,828 11,078 -- Net payment of other long-term debt -- (16,669) -- Repayment of 5 7/8% Notes -- (150,000) -- Acquisition-related borrowings -- 101,500 48,665 Dividends paid (29,510) (29,436) (29,601) Purchases of common stock -- (4,344) (11,304) Proceeds from issuance of common stock under employee stock purchase plans and key employee long-term incentive plan -- 1,088 3,271 -------- --------- -------- Net cash provided by (used in) financing activities (26,682) (86,783) 161,031 -------- --------- -------- Effect of exchange rate changes on cash (619) (418) -- -------- --------- -------- Net increase (decrease) in cash and cash equivalents 25,128 (16,012) 35,117 Cash and cash equivalents: At beginning of year 50,907 66,919 31,802 -------- --------- -------- At end of year $ 76,035 $ 50,907 $ 66,919 ======== ========= ======== Supplemental disclosure of cash flow information: Cash paid for: Interest $ 23,273 $ 22,722 $ 14,293 Income taxes 12,119 19,573 24,650
The accompanying notes are an integral part of these consolidated financial statements. 28 30 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the Years Ended December 31, 1999, 1998 and 1997 NOTE 1 Summary of Significant Accounting Policies (a) NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION P. H. Glatfelter Company and subsidiaries are manufacturers of engineered papers and specialized printing papers. Headquartered in York, Pennsylvania, the Company's paper mills are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Pisgah Forest, North Carolina; Gernsbach, Germany; and near Odet, France. The Company's products are marketed in most parts of the United States and in many foreign countries, either through wholesale paper merchants, brokers and agents or direct to customers. The accounts of the Company, and those of its subsidiaries, are included in the consolidated financial statements. All inter-company transactions have been eliminated. The Company's operating locations have been aggregated into a single reportable segment since they have similar economic characteristics, products, production processes, types of customers and distribution methods. Certain reclassifications have been made to the prior years' consolidated financial statements to conform to those classifications used in 1999. On January 2, 1998, the Company acquired S&H Papier - Holding GmbH ("S&H"), the specialty paper division of the Schoeller and Hoesch Group. The results of S&H, a German company, are included in the consolidated financial statements from the date of acquisition. See Note 2 for further discussion of the acquisition, including disclosure of pro forma information. (b) CASH AND CASH EQUIVALENTS The Company considers all highly liquid financial instruments with effective maturities at date of purchase of three months or less to be cash equivalents. (c) INVENTORIES Inventories are stated at the lower of cost or market. Raw materials and in-process and finished inventories of the Company's domestic operations are valued using the last-in, first out (LIFO) method, and the supplies inventories are valued principally using the average cost method. Certain of the Company's inventories are valued using a method which approximates average cost. Inventories at December 31 are summarized as follows:
1999 1998 -------- -------- (in thousands) Raw materials $ 41,013 $ 37,559 In-process and finished 42,463 49,901 Supplies 31,624 30,392 -------- -------- Total $115,100 $117,852 ======== ========
If the Company had valued all inventories using the average cost method, inventories would have been $3,790,000 and $4,143,000 higher than reported at December 31, 1999 and 1998, respectively. During 1998, the Company liquidated certain LIFO inventories. The effect of the liquidation did not have a significant impact on net income. At December 31, 1999 and 1998, the recorded value of the above inventories exceeded inventories for income tax purposes by approximately $22,200,000 and $22,100,000, respectively. (d) PLANT, EQUIPMENT AND TIMBERLANDS Depreciation is computed for financial reporting using the straight-line method over the estimated useful lives of the respective assets and for income taxes principally using accelerated methods over lives established by statute or Treasury Department procedures. Provision is made for deferred income taxes applicable to this difference. See Notes 1(f) and 5. The range of estimated service lives used to calculate financial reporting depreciation for principal items of property, plant and equipment are as follows: Buildings 10 - 45 Years Machinery and equipment 7 - 35 Years Other 4 - 40 Years Depletion of the cost of timber is computed on a unit rate of usage by growing area based on estimated quantities of recoverable material. Maintenance and repairs are charged to income and major renewals and betterments are capitalized. At the time property is retired or sold, the cost and related reserve are eliminated and any resultant gain or loss is included in income. Property, equipment and timberlands accounts, as of December 31, are summarized as follows:
1999 1998 ----------- ----------- (in thousands) Land and buildings $ 145,898 $ 148,079 Machinery and equipment 1,071,656 1,071,469 Other 37,745 36,562 Less accumulated depreciation (699,557) (657,581) ----------- ----------- Total 555,742 598,529 Construction in progress 7,893 10,962 Timberlands, less depletion 18,578 18,665 ----------- ----------- Plant, equipment and timberlands - net $ 582,213 $ 628,156 =========== ===========
29 31 (e) INVESTMENTS IN DEBT SECURITIES Long-term investments, which are due over a remaining 15-year period and are classified as held-to-maturity, are included in "Other assets" on the Consolidated Balance Sheets at December 31, 1999 and 1998. The investments consist of approximately $10,400,000 and $10,300,000 in U.S. Treasury and government obligations at December 31, 1999 and 1998, respectively. The fair market value of such investments approximated the amortized cost, and therefore, there were no significant unrealized gains or losses as of December 31, 1999 and 1998. (f) INCOME TAX ACCOUNTING The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities. The impact on deferred taxes of changes in tax rates and laws, if any, applied to the years during which temporary differences are expected to be settled, are reflected in the consolidated financial statements in the period of enactment. (g) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other assets, short-term debt and long-term debt approximate fair value. (h) VALUATION OF LONG-LIVED ASSETS The Company evaluates long-lived assets for impairment periodically or when a specific event indicates that the carrying value of an asset may not be recoverable. Recoverability is assessed based on estimates of future cash flows expected to result from the use and eventual disposition of the asset. If the sum of expected undiscounted cash flows is less than the carrying value of the asset, an impairment loss is recognized. The impairment loss is measured as the amount by which the carrying amount of the asset exceeds its fair value. (i) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires the use of management's estimates and assumptions. Management believes the estimates and assumptions used in the preparation of these consolidated financial statements are reasonable, based upon currently available facts and known circumstances, but recognizes that actual results may differ from those estimates and assumptions. See Note 10. (j) REVENUE RECOGNITION The Company recognizes revenue on product sales upon shipment and on energy sales when electricity is delivered to its customer. Certain costs associated with the production of electricity, such as fuel, labor, depreciation and maintenance are netted against the energy sales for presentation on the Consolidated Statements of Income and Comprehensive Income. The Company's current contract to sell electricity generated in excess of its own use expires in the year 2010 and requires that the customer purchase all of the Company's excess electricity up to a certain level. The price for the electricity is determined pursuant to a formula and varies depending upon the amount sold in any given year. (k) ENVIRONMENTAL LIABILITIES Accruals for losses associated with environmental obligations are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated based on existing legislation and remediation technologies. These accruals are adjusted periodically as assessment and remediation actions continue and/or further legal or technical information develops. Accrued environmental liabilities are classified as "Other long-term liabilities" on the Consolidated Balance Sheets. Such undiscounted liabilities are exclusive of any insurance or other claims against third parties. Costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs extend the life of the property, increase its capacity and/or mitigate or prevent contamination from future operations. (l) STOCK-BASED COMPENSATION The Company has adopted the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." SFAS No. 123 encourages, but does not require, companies to record compensation cost for stock-based compensation plans at fair value. The Company has elected to continue to account for stock-based compensation in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by SFAS No. 123. Compensation expense for stock options is measured as the excess, if any, of the average quoted market price of the Company's stock at the date of grant over the amount an employee must pay to acquire the stock. Compensation expense for restricted stock awards is equal to the average quoted market price of the Company's stock at the date of grant and is recorded ratably over the period in which forfeiture provisions lapse. Compensation expense for performance stock awards is recognized over the performance period based on changes in quoted market prices of the Company's stock and the likelihood of achieving the performance goals. See Note 8. 30 32 (m) DERIVATIVE FINANCIAL INSTRUMENTS The Company uses interest rate swap agreements to manage its exposure to fluctuations in interest rates. Amounts to be paid or received under interest rate swap agreements are recognized as interest expense or interest income during the period in which they accrue. The Company does not hold any derivative financial instruments for trading purposes. The credit risks associated with the Company's interest rate swap agreements are controlled through the evaluation and monitoring of creditworthiness of the counterparties. Although the Company may be exposed to losses in the event of nonperformance by counterparties, the Company does not expect such losses, if any, to be significant. See Note 7. (n) FOREIGN CURRENCY TRANSLATION The Company's subsidiaries outside the United States use their local foreign currency as the functional currency. Accordingly, translation gains and losses and the effect of exchange rate changes on transactions designated as hedges of net foreign investments are included as a separate component of shareholders' equity. Transaction gains and losses are included in income in the period in which they occur. (o) RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. SFAS No. 137, issued in July 1999, deferred the effective date of SFAS No. 133 until the beginning of the Company's first quarter of 2001. The Company is evaluating the effects that the adoption of SFAS No. 133 may have on its consolidated financial position and results of operations. NOTE 2 ACQUISITION OF THE SPECIALTY PAPER DIVISION OF THE SCHOELLER AND HOESCH GROUP Effective January 2, 1998, the Company acquired all of the outstanding common stock of S&H Papier-Holding GmbH ("S&H"), the specialty paper division of the Schoeller and Hoesch Group, from RQPO Beteiligungs GmbH & Co. Papier KG ("RQPO") and EVOBESTRA Vermogensverwaltungsgesellschaft mbH, for DM 268,900,000 (approximately $150,000,000) in cash. The purchase price was finalized in the fourth quarter of 1998. The principal partners in RQPO were Deutsche Beteiligungs AG and S&H management. The Company accounted for the S&H acquisition under the purchase method of accounting, and S&H was consolidated with the Company beginning in January 1998. S&H was founded in 1881 in Gernsbach, Germany, where its corporate offices and major paper production facilities are located. S&H produces a range of paper products, including tea bag and other long fiber products such as stencil, filter and casing paper, as well as tobacco papers and printing papers. S&H owns an abaca pulpmill in the Philippines and other facilities in France and the United States. The acquisition of S&H initially included a 50% controlling ownership interest in Papeteries de Cascadec S. A. ("Cascadec"), a French company, along with the option to acquire the remaining 50% at a future time. As of December 31, 1998, a minority interest of $10,032,000 associated with this subsidiary was classified as "Other long-term liabilities" on the Company's Consolidated Balance Sheet. For the year ended December 31, 1998, the Company recognized $886,000 of minority interest expense classified as "Gain from property dispositions, etc. - net" on the Company's Consolidated Statement of Income and Comprehensive Income. On April 9, 1999, the Company exercised its option and purchased the remaining 50% of Cascadec for FF 45,181,233 ($7,399,000) in cash. During 1999, the Company recognized $343,000 of minority interest expense through the acquisition date of the remaining 50% of Cascadec. The purchase price of S&H, including certain transaction costs, was allocated to the assets acquired and liabilities assumed based upon their fair values at the date of acquisition. The fair values allocated were approximately $238,000,000 for the assets acquired and approximately $101,000,000 for the liabilities assumed. The excess of the purchase price over the 31 33 fair value of net assets acquired of approximately $13,000,000 was recorded as goodwill and is being amortized on a straight-line basis over 20 years. To finance the acquisition, on December 22, 1997, the Company entered into a $200,000,000 multi-currency revolving credit facility ("Revolving Credit Facility") with a syndicate of major lending institutions. The Revolving Credit Facility enables the Company to borrow up to the equivalent of $200,000,000 in certain currencies in the form of revolving credit loans with a final maturity date of December 22, 2002, and with interest periods determined, at the Company's option, on a daily or one- to six-month basis. Interest on the revolving credit loans is at variable rates based, at the Company's option, on the Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable margins. Margins are based on the higher of the Company's debt ratings as published by Standard & Poor's and Moody's. The Company is subject to certain financial covenants under the Revolving Credit Facility and is in compliance with all such covenants as of December 31, 1999. The Company must pay an annual facility fee ranging from .065% to .13% of the total credit commitment, which is also based on the higher of the Company's debt ratings as published by Standard & Poor's and Moody's, under the Revolving Credit Facility. During 1999, the Company paid .10% of the total credit commitment for this facility fee. As of December 31, 1999, $54,455,000 of credit availability under the Revolving Credit Facility was unused. On December 30, 1997, the Company borrowed DM 87,500,000 ($48,665,000) under the Revolving Credit Facility at a three-day rate of 5.075%. These proceeds were used to capitalize two German subsidiaries to facilitate the S&H acquisition. On January 2, 1998, the Company borrowed an additional DM 182,500,000 (approximately $101,500,000) under the Revolving Credit Facility necessary to complete the acquisition. The following summarized unaudited combined pro forma information for the year ended December 31, 1997 is presented as if the S&H acquisition had occurred on January 1, 1997. This unaudited pro forma information is based on the historical results of operations adjusted for acquisition costs and, in the opinion of management, is not necessarily indicative of what the results would have been had the Company operated S&H since January 1, 1997 (in thousands except per share data).
Unaudited Pro Forma Information Year Ended December 31, 1997 --------------------- Net sales $738,547 Net income 50,452 Basic and diluted earnings per share 1.19
NOTE 3 UNUSUAL ITEM During 1998, the Company recognized a pre-tax charge of $9,816,000 ($5,988,000 after tax) related primarily to the accrual of pension and medical benefits for certain salaried and hourly employees of the Company's Ecusta Division and certain salaried employees of the Company's Glatfelter Division who elected to participate in a voluntary early retirement enhancement program. The pre-tax charge also included the cost of termination of several Glatfelter Division salaried employees which was necessary to achieve the Company's cost-savings goals. 32 34 NOTE 4 EARNINGS PER SHARE ("EPS") Basic EPS excludes the dilutive impact of common stock equivalents and is computed by dividing net income by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS includes the effect of potential dilution from the issuance of common stock, pursuant to common stock equivalents, using the treasury stock method. A reconciliation of the Company's basic and diluted EPS follows with the dollar and share amounts in thousands:
1999 1998 1997 ------- ------- ------- Basic EPS factors 42,173 42,047 42,220 Effect of potentially dilutive employee incentive plans: Restricted stock awards 3 16 31 Performance stock awards 131 126 96 Employee stock options 124 13 95 ------- ------- ------- Diluted EPS factors 42,431 42,202 42,442 ======= ======= ======= Net income $41,425 $36,133 $45,284 Basic and diluted EPS $ .98 $ .86 $ 1.07
The 1998 basic and diluted EPS of $.86, as presented on the Consolidated Statement of Income and Comprehensive Income, reflected the negative impact of an after-tax charge for a voluntary early retirement enhancement program (unusual item) of $.14 per share (see Note 3). NOTE 5 INCOME TAXES Income taxes are recognized for the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company's consolidated financial statements or tax returns. The effects of income taxes are measured based on effective tax law and rates. The following are domestic and foreign components of pre-tax income for the years ended December 31:
1999 1998 1997 ------- ------- ------- (in thousands) United States $55,911 $44,602 $69,331 Foreign 9,241 14,130 4,246 ------- ------- ------- Total pre-tax income $65,152 $58,732 $73,577 ======= ======= =======
The income tax provision for the years ended December 31 consists of the following:
1999 1998 1997 -------- -------- -------- (in thousands) Current: Federal $ 6,953 $ 10,789 $ 23,590 State 217 (106) 626 Foreign 3,803 3,805 1,237 -------- -------- -------- Total current tax provision 10,973 14,488 25,453 -------- -------- -------- Deferred: Federal 11,735 6,647 2,358 State 2,197 1,244 444 Foreign (1,178) 220 38 -------- -------- -------- Total deferred tax provision 12,754 8,111 2,840 -------- -------- -------- Total income tax provision $ 23,727 $ 22,599 $ 28,293 ======== ======== ========
33 35 The Company has provided deferred income taxes of $57,000 and $949,000 on undistributed earnings of foreign subsidiaries as of December 31, 1999 and 1998, respectively. The net deferred tax amounts reported on the Company's Consolidated Balance Sheets as of December 31 are as follows:
1999 1998 --------------------------------------------------- -------- FEDERAL STATE FOREIGN TOTAL Total ------- ------ ------- ------- ------ (in thousands) Current asset $ -- $ -- $ 1,225 $ 1,225 $ 1,302 Current liability 3,481 655 852 4,988 3,621 Long-term asset -- -- 27,666 27,666 15,194 Long-term liability 102,925 19,387 25,386 147,698 123,321
The following are components of the net deferred tax balances as of December 31:
1999 1998 ----------------------------------------------------- -------- FEDERAL STATE FOREIGN TOTAL Total -------- -------- -------- -------- -------- (in thousands) Deferred tax assets: Current $ 3,798 $ 714 $ 1,225 $ 5,737 $ 7,303 Long-term 21,205 3,988 27,666 52,859 47,958 -------- -------- -------- -------- -------- $ 25,003 $ 4,702 $ 28,891 $ 58,596 $ 55,261 ======== ======== ======== ======== ======== Deferred tax liabilities: Current $ 7,279 $ 1,369 $ 852 $ 9,500 $ 9,622 Long-term 124,130 23,375 25,386 172,891 156,085 -------- -------- -------- -------- -------- $131,409 $ 24,744 $ 26,238 $182,391 $165,707 ======== ======== ======== ======== ========
The tax effects of temporary differences as of December 31 are as follows:
1999 1998 --------- --------- (in thousands) Deferred tax assets: Reserves $ 13,469 $ 13,457 Compensation 7,068 8,124 Postretirement benefits 10,752 10,514 Property 16,104 14,528 Pension 3,164 3,209 Net operating loss carryforwards 7,947 3,361 Other 1,339 2,641 --------- --------- Subtotal 59,843 55,834 Valuation allowance (1,247) (573) --------- --------- Total deferred tax assets 58,596 55,261 --------- --------- Deferred tax liabilities: Property 131,873 122,422 Pension 39,450 31,171 Inventories 8,648 8,954 Other 2,420 3,160 --------- --------- Total deferred tax liabilities 182,391 165,707 --------- --------- Net deferred tax liabilities $ 123,795 $ 110,446 ========= =========
34 36 A reconciliation between the income tax provision, computed by applying the statutory federal income tax rate of 35% to income before income taxes, and the actual income tax provision for the years ended December 31 follows:
1999 1998 1997 -------- -------- -------- (in thousands) Federal income tax provision at statutory rate $ 22,803 $ 20,556 $ 25,752 State income taxes, net of federal income tax benefit 1,569 740 696 Tax effect of exempt earnings of foreign sales corporation (713) (1,313) (360) Other 68 2,616 2,205 -------- -------- -------- Actual income tax provision $ 23,727 $ 22,599 $ 28,293 ======== ======== ========
At December 31, 1999, the Company had net operating loss ("NOL") carryforwards for foreign and state income tax purposes of $28,572,000 and $14,126,000, respectively, which relate to foreign and state NOL deferred tax assets of $6,700,000 and $1,247,000, respectively. These foreign and state NOL carryforwards are available to offset future taxable income, if any. A valuation allowance of $1,247,000 has been recorded against the state deferred tax asset due to the uncertainty regarding the Company's ability to utilize the state NOL carryforwards. The foreign NOL carryforwards do not expire, and the state NOL carryforwards expire between 2004 and 2018. NOTE 6 BORROWINGS Long-term debt at December 31 is summarized as follows:
1999 1998 --------- --------- (in thousands) Revolving Credit Facility, due December 22, 2002 $ 145,545 $ 166,766 6 7/8% Notes, due July 15, 2007 150,000 150,000 Other Notes, various 7,659 10,703 --------- --------- Total long-term debt 303,204 327,469 Less current portion (1,824) (2,088) --------- --------- Long-term debt, excluding current portion $ 301,380 $ 325,381 ========= =========
The aggregate maturities of long-term debt as of December 31, 1999 are as follows (in thousands): 2000 $ 1,824 2001 1,532 2002 146,909 2003 1,197 2004 1,001 Thereafter 150,741 -------- $303,204 ========
In addition to the Revolving Credit Facility described in Note 2, the Company has an available line of credit from a bank aggregating $25,000,000 at interest rates approximating money market rates. The Company had no borrowings under this line of credit as of December 31, 1999 or 1998. The Company has $3,191,000 of letters of credit outstanding as of December 31, 1999. The Company bears the credit risk on this amount to the extent that it does not comply with the provisions of certain agreements. The letters of credit do not reduce the amount available under the Company's lines of credit. On July 22, 1997, the Company issued $150,000,000 principal amount of 6 7/8% Notes due July 15, 2007. Interest on the 6 7/8% Notes is payable semiannually on January 15 and July 15. The 6 7/8% Notes are redeemable, in whole or in part, at the option of the Company at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness of the Company. The net proceeds from the sale of the 6 7/8% Notes were used primarily to repay certain short-term unsecured debt and related interest. In February 1997, the Company formed GWS Valuch, Inc. ("GWS Valuch"), a corporation organized under the laws of the State of Delaware, with the intention that GWS Valuch would qualify as a real estate investment trust. The Company invested approxi- 35 37 mately $122,500,000 to acquire approximately 99.9% of the voting Class A common stock of GWS Valuch. GWS Valuch also issued shares of step-down preferred stock ("Step-Down Preferred Stock"), having a liquidation preference of $150,000,000 and an initial dividend of approximately 13.9%, to other investors. This dividend included an amortization component of the Step-Down Preferred Stock, resulting in an effective yield of approximately 8.1%. GWS Valuch was consolidated in the Company's financial statements. Immediately following the establishment and capitalization of GWS Valuch, the Company borrowed $270,000,000 from GWS Valuch under a note secured by certain real estate assets of the Company. Using the proceeds of the note and other available cash, the Company immediately repaid, with interest, an amount initially borrowed to purchase the Class A common stock of GWS Valuch. The Company also deposited $154,757,000, which included amounts to pay semiannual interest, into a trust to defease certain covenants under the Company's indenture dated as of January 15, 1993, under which the Company's $150,000,000 principal amount of 5 7/8% Notes due March 1, 1998, were outstanding. Approximately $153,000,000 of U.S. Treasury Notes in the trust, along with related interest, was held to maturity and used to pay the total amount of principal of and interest due on the 5 7/8% Notes on March 1, 1998. As a result of certain Internal Revenue Service regulatory announcements, on July 2, 1997, the Company purchased approximately 145,000 shares of Class A common stock of GWS Valuch. The funds received were used by GWS Valuch to redeem all 150,000 outstanding shares of the Step-Down Preferred Stock. "Interest on debt" on the Company's Consolidated Statement of Income and Comprehensive Income for the year ended December 31, 1997 included $4,235,000, representing a portion of the dividend paid relating to the Step-Down Preferred Stock. NOTE 7 INTEREST RATE SWAP AGREEMENTS In March 1993, the Company entered into an interest rate swap agreement having a total notional principal amount of $50,000,000. Under the agreement, the Company received a fixed rate of 5 7/8% and paid a floating rate (London Interbank Offered Rate (LIBOR) plus sixty basis points), as determined at six-month intervals. The agreement converted a portion of the Company's debt obligation from a fixed rate to a floating rate basis. Under the agreement, the Company recognized net interest expense of $151,000 and $275,000 in 1998 and 1997, respectively. These amounts were included in "Interest on debt" on the Company's Consolidated Statements of Income and Comprehensive Income. The Company held the swap agreement until its March 1, 1998 maturity. In January 1998, the Company entered into two interest rate swap agreements, each having a total notional principal amount of DM 52,600,000 ($27,000,000 as of December 31, 1999). Under the agreements, the Company pays fixed rates of 4.18% and 4.45% for periods of two and three years, respectively, and receives a floating rate of the six-month DM LIBOR. The six-month DM LIBOR applicable for the first and second half of 1999 was approximately 3.22% and 2.82%, respectively. The six-month DM LIBOR applicable for the first half of 2000 is approximately 3.6%. The Company recognized net interest expense of $2,148,000 in 1999 related to these agreements. As of December 31, 1999, the Company's cost to terminate these interest rate swap agreements would have been $353,000. In January 1999, the Company entered into two additional interest rate swap agreements, each having a total notional principal amount of DM 50,000,000 (approximately $25,600,000 as of December 31, 1999). Under one agreement, which was effective April 6, 1999, the Company receives a floating rate of the three-month DM LIBOR plus twenty basis points and pays a fixed rate of approximately 3.41% for the term of the agreement. Under the second agreement, which was effective July 6, 1999, the Company receives a floating rate, which is also the three-month DM LIBOR plus twenty basis points, and pays a fixed rate of approximately 3.43% for the term of the agreement. The Company recognized net interest expense of $299,000 in 1999 related to these agreements. As of December 31, 1999, the Company's proceeds from termination of these interest rate swap agreements would have been $2,025,000. The Company has other various interest rate swap agreements outstanding, which do not have a material impact on the Company's consolidated financial statements. All of the Company's interest rate swap agreements convert a portion of the Company's borrowings from a floating rate to a fixed rate basis. Although the Company can terminate any of its swap agreements at any time, the Company intends to hold all of its swap agreements until their maturities. 36 38 NOTE 8 KEY EMPLOYEE LONG-TERM INCENTIVE PLAN, RESTRICTED COMMON STOCK AWARD PLAN AND EMPLOYEE STOCK PURCHASE PLANS On April 23, 1997, the common shareholders amended the 1992 Key Employee Long-Term Incentive Plan ("1992 Plan") to authorize, among other things, the issuance of up to 5,000,000 shares of the Company's common stock to eligible participants. The 1992 Plan provides for incentive stock options, non-qualified stock options, restricted stock awards, performance shares and performance units. To date, there have been no grants of incentive stock options or performance units. The Company's 1988 Restricted Common Stock Award Plan ("1988 Plan") was amended in 1992 to provide that no further awards of common shares may be made thereunder. RESTRICTED STOCK AWARDS During December 1999 and December 1998, 101,730 and 60,465 shares, respectively, of common stock were awarded under the 1992 Plan. Awarded shares are subject to forfeiture, in whole or in part, if the recipient ceases to be an employee within a specified time period. The shares awarded under the 1992 Plan are also subject to forfeiture if defined minimum earnings levels are not met. The Company may reduce the number of shares otherwise required to be delivered by an amount that would have a fair market value equal to the taxes withheld by the Company on delivery. The Company may also, at its sole discretion, elect to pay to the recipients in cash an amount equal to the fair market value of the shares that would otherwise be required to be delivered. On May 1, 1997, 13,350 shares were delivered from treasury (after reduction of 6,650 shares for taxes). On May 1, 1998, in lieu of delivering 20,000 shares, the Company elected to pay in cash an amount equal to the fair value of such shares. The Company recognized expense of $262,000 in 1999, income of $64,000 in 1998 and expense of $166,000 in 1997 related to these restricted stock awards. During 1999, the remaining 20,000 shares awarded under the 1988 Plan ceased to be subject to forfeiture and were paid in cash. The shares awarded under the 1992 Plan all cease to be subject to forfeiture by the end of 2003. PERFORMANCE SHARES On May 1, 1995, January 1, 1996, January 1, 1997 and January 1, 1998, the Company awarded, under the 1992 Plan, 59,620, 44,860, 40,060 and 45,740 shares, respectively, subject to certain conditions, to certain key employees to be issued in whole or in part depending on the Company's degree of success in achieving certain financial performance goals during defined four-year performance periods. The May 1, 1995 award was for the four-year performance period ended December 31, 1998. Based upon the financial performance levels achieved during that period, 45,751 shares were earned for distribution. During February 1999, in lieu of delivering 45,751 shares of common stock, the Company elected to pay cash equal to the fair value of 34,311 shares as of December 31, 1998, and deliver 11,440 shares from treasury. During February 2000, in lieu of delivering 27,668 shares of common stock, the Company elected to pay cash equal to the fair value of 21,620 shares as of December 31, 1999, and deliver 6,048 shares from treasury. The January 1, 1996, January 1, 1997, January 1, 1998 awards are for the performance periods ending December 31, 1999, 2000 and 2001, respectively, and if earned will be distributed the following year. The Company recognized expense of $357,000 in 1999, income of $25,000 in 1998 and expense of $722,000 in 1997 related to these awards. The fair market value per share of the shares granted during 1998, 1997, 1996 and 1995 was $18.38, $17.88, $17.16 and $17.81, respectively. 37 39 NON-QUALIFIED STOCK OPTIONS The following summarizes the activity with respect to non-qualified options under the 1992 Plan to purchase shares of common stock for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ---------------------------- ------------------------------- -------------------------- WEIGHTED Weighted Weighted AVERAGE Average Average SHARES EXERCISE PRICE Shares Exercise Price Shares Exercise Price ---------- -------------- ---------- -------------- ---------- -------------- Outstanding at beginning of year 3,216,580 $ 15.32 1,621,165 $ 17.61 1,403,640 $ 17.42 Options granted 467,850 13.28 1,659,115 13.19 352,750 18.25 Options exercised (6,000) 12.40 (3,100) 15.44 (105,225) 17.20 Options canceled (385,215) 16.82 (60,600) 18.03 (30,000) 17.41 ---------- ---------- ---------- Outstanding at end of year 3,293,215 14.86 3,216,580 15.32 1,621,165 17.61 ========== ========== ========== Exercisable at end of year 1,293,709 17.54 1,264,973 17.54 1,001,813 17.49
The following table summarizes information about stock options outstanding at December 31, 1999:
Options Outstanding Options Exercisable --------------------------------------------------- -------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding as Remaining Average Exercisable as Average Exercise Price of 12/31/99 Contractual Life Exercise Price of 12/31/99 Exercise Price - ------------ ----------- --------------- -------------- -------------- --------------- $12.38 - $16.00 1,975,605 8.9 years $12.81 166,100 $14.94 $16.01 - $18.78 1,317,610 5.5 years 17.95 1,127,609 17.92 ----------- ----------- 3,293,215 7.5 years 14.86 1,293,709 17.54 =========== ===========
An additional 655,823 options became exercisable January 1, 2000, at a weighted average exercise price of $13.24. The weighted average fair value of options granted during 1999, 1998 and 1997 was $3.06, $3.12 and $4.92, respectively, on the date of grant. The fair value of each option on the date of grant is estimated using the Black-Scholes option pricing model with expected lives of ten years and the following weighted average assumptions:
1999 1998 1997 ------ ------ ------ Risk-free interest rate 6.26% 4.98% 6.43% Expected dividend yield 5.36% 4.44% 3.86% Expected volatility 30.0% 28.6% 24.7%
Options typically become exercisable for 25% of the shares of common stock issuable on exercise thereof, beginning January 1 of the year following the date of grant, assuming six months has passed, with options for an additional 25% of such shares becoming exercisable on January 1 of each of the next three years. Options not exercisable in this format are exercisable in full either six months or one year from the date of grant. All options expire on the earlier of termination or, in some instances, a defined period subsequent to termination of employment, or ten years from the date of grant. 38 40 The exercise price represents the average quoted market price of the Company's common stock on the date of grant, or the average quoted market prices of the Company's common stock on the first day before and after the date of grant for which quoted market price information was available if such information was not available on the date of grant. PRO FORMA INFORMATION The Company accounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized for the non-qualified stock options and for which compensation cost has been recognized for stock awards, as described in Note 1(I). Had compensation cost for these plans been determined consistent with SFAS No. 123, the Company's net income and EPS for the years ended December 31, 1999, 1998 and 1997 would have been reduced to the following pro forma amounts:
1999 1998 1997 ---------- ---------- ---------- (in thousands except per share information) Net income: As reported $ 41,425 $ 36,133 $ 45,284 Pro forma 39,960 35,554 45,195 EPS: Reported - basic and diluted $ .98 $ .86 $ 1.07 Pro forma - basic .95 .85 1.07 Pro forma - diluted .94 .84 1.06
EMPLOYEE STOCK PURCHASE PLANS Through 1998, under the employee stock purchase plans, eligible hourly employees could acquire shares of the Company's common stock at its fair market value. Employees could contribute up to 10% of their compensation, as defined. For employee contributions up to 6% of their compensation, the Company would contribute, as specified in the plans, 15% of the employee's contribution. As of January 1999, benefits offered to eligible hourly employees under such stock purchase plans were replaced with similar benefits under a 401(k) plan. See Note 9. NOTE 9 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS The Company has trusteed noncontributory defined benefit pension plans covering substantially all of its employees. The benefits are based, in the case of certain plans, on average salary and years of service and, in the case of other plans, on a fixed amount for each year of service. Plan provisions and funding meet the requirements of the Employee Retirement Income Security Act of 1974. Pension income of $20,490,000, $5,502,000 and $10,063,000 was recognized in 1999, 1998 and 1997, respectively. The 1998 pension income was after the impact of a pre-tax charge of $8,486,000 related to the unusual item discussed in Note 3. The Company provides certain health care benefits to eligible retired employees. These benefits include a comprehensive medical plan for retirees prior to age 65 and fixed supplemental premium payments to retirees over age 65 to help defray the costs of Medicare. The plan is not funded; claims are paid as incurred. 39 41 The following table sets forth the status of the Company's defined benefit pension plans and other postretirement benefit plans at December 31, 1999 and 1998 (in thousands):
Pension Benefits Other Benefits --------------------------- -------------------------- 1999 1998 1999 1998 --------- --------- --------- --------- CHANGE IN BENEFIT OBLIGATION: Benefit obligation at beginning of year $ 230,921 $ 191,589 $ 31,291 $ 27,450 Benefit obligation - S&H -- 6,340 -- -- Service cost 4,877 4,838 741 728 Interest cost 15,977 14,355 2,153 2,005 Plan amendments -- 6,156 -- (497) Actuarial loss 3,904 8,813 456 2,691 Benefits paid (14,116) (9,656) (2,420) (2,380) Unusual item (Note 3) -- 8,486 -- 1,294 --------- --------- --------- --------- Benefit obligation at end of year $ 241,563 $ 230,921 $ 32,221 $ 31,291 ========= ========= ========= ========= CHANGE IN PLAN ASSETS: Fair value of plan assets at beginning of year $ 504,185 $ 413,807 $ -- $ -- Actual return on plan assets 72,677 98,809 -- -- Employer contributions 1,525 1,225 2,420 2,380 Benefits paid (14,116) (9,656) (2,420) (2,380) --------- --------- --------- --------- Fair value of plan assets at end of year $ 564,271 $ 504,185 $ -- $ -- ========= ========= ========= ========= RECONCILIATION OF THE FUNDED STATUS: Funded status $ 322,708 $ 273,264 $ (32,221) $ (31,291) Unrecognized transition asset (7,477) (9,202) -- -- Unrecognized prior service cost 19,695 21,187 (1,634) (1,871) Unrecognized (gain) loss (239,733) (212,072) 6,297 6,217 --------- --------- --------- --------- Net amount recognized $ 95,193 $ 73,177 $ (27,558) $ (26,945) ========= ========= ========= ========= AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS CONSIST OF: Prepaid benefit cost $ 125,603 $ 89,603 $ -- $ -- Accrued benefit liability (30,410) (16,426) (27,558) (26,945) --------- --------- --------- --------- Prepaid (accrued) benefit cost $ 95,193 $ 73,177 $ (27,558) $ (26,945) ========= ========= ========= =========
The net prepaid pension cost is included in "Other assets," and accrued postretirement benefit costs are principally included in "Other long-term liabilities" on the Consolidated Balance Sheets at December 31, 1999 and 1998. 40 42 Net periodic benefit (income) cost includes the following components (in thousands):
Pension Benefits Other Benefits ------------------------------------ ---------------------------------------- 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Service cost $ 4,877 $ 4,838 $ 4,605 $ 741 $ 728 $ 732 Interest cost 15,977 14,355 13,008 2,152 2,005 2,036 Expected return on plan assets (35,735) (29,607) (25,553) -- -- Amortization of transition asset (1,724) (1,724) (1,725) -- -- Amortization of prior service cost 1,746 1,333 1,200 (212) (175) (149) Recognized actuarial (gain) loss (5,631) (3,183) (1,598) 352 123 203 -------- -------- -------- -------- -------- -------- Net periodic benefit (income) cost (20,490) (13,988) (10,063) 3,033 2,681 2,822 Unusual item (Note 3) -- 8,486 -- -- 1,294 -- -------- -------- -------- -------- -------- -------- Total net periodic benefit (income) cost $(20,490) $ (5,502) $(10,063) $ 3,033 $ 3,975 $ 2,822 ======== ======== ======== ======== ======== ========
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for the pension plans with accumulated benefit obligations in excess of plan assets were $20,602,000, $18,972,000 and $0, respectively, as of December 31, 1999 and $21,384,000, $20,211,000 and $0, respectively, as of December 31, 1998. The assumptions used in computing the information above were as follows:
Pension Benefits Other Benefits ------------------- --------------------- 1999 & 1998 1997 1999 & 1998 1997 ----------- ----- ----------- ---- Discount rate - benefit expense 7.5% 7.5% 7.5% 7.5% Expected long-term rate of return on plan assets 9.0% 9.0% -- -- Discount rate - benefit obligation 7.0% 7.5% 7.0% 7.5% Future compensation growth rate 3.5% 3.5% -- --
For measurement purposes, a 7% and 6% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1998 and 1999, respectively. The rate was assumed to decrease 1% per year to 5.5% for 2000 and remain at that level thereafter. A one percentage-point change in assumed health care cost trend rates would have the following effects:
1999 1998 --------------------------- ----------------------------- 1% Increase 1% Decrease 1% Increase 1% Decrease ---------- ------------- ------------ ---------- (in thousands) Effect on postretirement benefit obligation $2,295 $(1,999) $2,243 $(1,949) Effect on total of service and interest cost components 266 (226) 268 (228)
The Company maintains 401(k) plans for certain hourly and salaried employees. Employees may contribute up to 15% of their salary to these plans, subject to certain restrictions. The Company will match a portion of the employee's contribution, subject to certain limitations, in the form of shares of the Company's common stock into the Company stock fund maintained under the 401(k) plans. During 1999, 1998 and 1997, the Company contributed shares of its common stock valued at $1,626,000, $1,541,000 and $1,093,000, respectively, to these 401(k) plans. 41 43 NOTE 10 COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS The Company is subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of air and water emissions and noise from its mills, as well as the disposal of solid waste generated by its operations. To comply with environmental laws and regulations, the Company has incurred substantial capital and operating expenditures in past years. The Company anticipates that environmental regulation of its operations will continue to become more burdensome and that capital and operating expenditures will continue, and perhaps increase, in the future. In addition, the Company may incur obligations to remove or mitigate any adverse effects on the environment resulting from its operations, including the restoration of natural resources, and liability for personal injury and damage to property, including natural resources. Because environmental regulations are not consistent worldwide, the Company's ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. Subject to permit approval, the Company has undertaken an initiative under the Voluntary Advanced Technical Incentive Program of the United States Environmental Protection Agency ("EPA") to comply with new "Cluster Rule" regulations. This initiative, the Company's "New Century Project," will require capital expenditures currently estimated at approximately $30,000,000 to be incurred before April 2004. The Pennsylvania Department of Environmental Protection ("DEP") has proposed to reissue the Company's wastewater discharge permit for the Spring Grove mill on terms unacceptable to the Company. DEP has concurrently publicly proposed terms for resolution of an anticipated appeal from the issuance of that permit which terms, subject to the satisfaction of certain conditions, are acceptable to the Company. However, such terms may be unacceptable to EPA or certain third parties. The Company cannot determine the impact that the new permit will have on the Company if it contains objectionable terms because the material terms of the final form of the permit are unknown. The Pennsylvania Public Interest Research Group ("Penn PIRG") and several other plaintiffs have brought a citizen suit under the Federal Clean Water Act and Pennsylvania Clean Streams Law seeking a reduction in the Spring Grove mill's discharge of color, civil penalties and costs of litigation. The Company believes Penn PIRG's lawsuit to be without merit, but the Company cannot predict the impact on the Company of any relief the court might award because the case is not yet at a stage where the nature and extent of any relief can be predicted. In 1999, EPA and DEP issued to the Company separate Notices of Violation ("NOVs") alleging violations of the federal and state air pollution control laws, primarily for purportedly failing to obtain appropriate preconstruction air quality permits in conjunction with certain modifications to the Company's Spring Grove mill. EPA announced that the Company was one of seven pulp and paper mill operators to have received contemporaneously an NOV alleging this kind of violation. EPA and DEP alleged that the Company's modifications produced (1) significant net emissions increases in certain air pollutants which should have been covered by appropriate permits imposing new emissions limitations, and (2) certain other violations. For all but one of the modifications cited by EPA, the Company applied for and obtained from DEP the preconstruction permits which the Company concluded were required by applicable law. EPA reviewed those applications before the permits were issued. DEP's NOV only pertained to the modification for which the Company did not receive a preconstruction permit. The Company conducted an evaluation at the time of this modification, and determined that the preconstruction permit cited by EPA and DEP was not required. The Company has been informed that EPA and DEP will seek substantial emissions reductions, as well as civil penalties, to which the Company believes it has meritorious defenses. Nevertheless, the Company is unable to predict the ultimate outcome of these matters or the costs involved, and there can be no assurance that such costs would not have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operations. The Company, along with six other companies which operate or formerly operated facilities along the Fox River in Wisconsin, has been identified as a potentially responsible party ("PRP") under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other laws for (a) investigation and cleanup and (b) natural resources damages arising from the alleged discharge of polychlorinated biphenyls ("PCBs") and other hazardous substances to the Fox River below Lake Winnebago (the "lower Fox River") and the Bay of Green Bay. A dispute presently exists as to which 42 44 sovereign controls which claims concerning this matter. Accordingly, the Company has been in discussions with EPA, the Wisconsin Department of Natural Resources ("DNR"), the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), the Menominee Indian Tribe of Wisconsin, the Oneida Tribe of Indians of Wisconsin, and the state and federal Departments of Justice. On July 11, 1997, these agencies and tribes entered into a Memorandum of Agreement (the "MOA") which provides for coordination and cooperation among those parties in addressing the release or threat of release of hazardous substances into the lower Fox River, Green Bay and Lake Michigan environment. The MOA sets forth a mutual goal of remediating and/or responding to hazardous substance releases and threats of releases, and restoring injured and potentially injured natural resources. The MOA further states that, based on current information, removal of the PCB-contaminated sediments in the lower Fox River is expected to be the principal, but not exclusive, action undertaken to achieve restoration and rehabilitation of injured natural resources. The MOA anticipates funding from the Company and the six other companies. On February 26, 1999, DNR released a draft remedial investigation and feasibility study ("RI/FS") for the lower Fox River for public comment. In the draft RI/FS, DNR reviewed and summarized a number of possible remedial alternatives for the site estimated to cost in the range of $0 to $721,000,000, but did not select a preferred remedy. The Company does not believe that the no action remedy will be selected. The largest components of the costs of certain of the remedial alternatives are attributable to large-scale sediment removal and disposal. There is no assurance that the cost estimates in the draft RI/FS will not differ significantly from actual costs. The Company and the other six companies have submitted extensive technical comments to the draft RI/FS. In addition, the Company has submitted its individual comments to the draft RI/FS. DNR and EPA have announced that the RI/FS will be revised. The revision may add, delete or amend the remedial alternatives, and a final RI/FS and a proposed remedial action plan will be issued. The agencies have publicly stated that these documents may be issued in mid to late 2000. Based on current information and advice from its environmental consultants, the Company continues to believe that an aggressive effort, as included in certain remedial alternatives in the draft RI/FS, to remove PCB-contaminated sediment, much of which is buried under cleaner material or is otherwise unlikely to move and which is abating naturally, would be environmentally detrimental and, therefore, inappropriate. Natural resources damages may be assessed in addition to cleanup costs. In November 1999, FWS announced a preliminary estimate of damages as the result of injury to recreational fishing. The range of damages announced is from $106 million to $150 million. The Company believes that this range is significantly overstated. FWS and the federal and tribal trustees have not yet announced estimates of certain other components of their natural resources damages claim. The Company believes DNR to be the lead agency for assessment of damages, and has been cooperatively assessing damages with DNR independent of the federal agencies. The Company currently is unable to predict the ultimate costs to the Company related to this matter, because the Company cannot predict which remedy will be selected for the site or its share of the cost of that remedy. The Company continues to believe it is likely that this matter will result in litigation; however, the Company believes it will be able to persuade a court that removal of a substantial amount of PCB-contaminated sediments is not an appropriate remedy. There can be no assurance, however, that the Company will be successful in arguing that removal of PCB-contaminated sediments is inappropriate, that it would prevail in any resulting litigation, that its share of the cost of any remedy selected would not have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operations or result in a default under the Company's loan covenants or that the Company's share of such cost would not exceed its available resources. The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, natural resource damage and property damage liability, including but not limited to those related to the lower Fox River and the Bay of Green Bay, cannot be ascertained with any certainty due to, among other things, the unknown extent and nature of any contamination, the extent and timing of any technological advances for pollution control, the remedial actions which may be required and the number and financial resources of any other responsible parties. The Company continues to evaluate its exposure and the level of its reserves, including, but 43 45 not limited to, its share of the costs and damages (if any) associated with the lower Fox River and the Bay of Green Bay. The Company believes that it is insured against certain losses related to the lower Fox River, depending on the nature and amount thereof. Coverage, which is currently being investigated under reservation of rights by various insurance companies, is dependent upon the identity of the plaintiff, the procedural posture of the claims asserted and how such claims are characterized. The Company does not know when the insurers' investigation as to coverage will be completed. The Company's current assessment, after consultation with legal counsel, is that ultimately it should be able to resolve these environmental matters without a long-term material adverse impact on the Company. In the meantime, however, these matters could, at any particular time or for any particular period, have a material adverse effect on the Company's consolidated financial condition, liquidity or results of operation. Moreover, there can be no assurance that the Company's reserves will be adequate to provide for future obligations related to these matters or that such obligations will not have a long-term material adverse effect on the Company's consolidated financial condition, liquidity or results of operations. During 1999 and 1998, the Company expended approximately $2,633,000 and $4,900,000, respectively, on environmental capital projects. The Company estimates that projects requiring total expenditures of $2,908,000 and $426,000 for environmental-related capital will be initiated in 2000 and 2001, respectively. During 1999, 1998 and 1997, the Company incurred approximately $15,800,000, $17,700,000 and $14,800,000, respectively, in operating costs related to complying with environmental laws and regulations. The Company is also involved in various lawsuits. Although the ultimate outcome of these lawsuits cannot be predicted with certainty, the Company's management, after consultation with legal counsel, does not expect that such lawsuits will have a material adverse effect on the Company's consolidated financial position, results of operations or liquidity. NOTE 11 OTHER SALES AND GEOGRAPHIC INFORMATION The Company sells a significant portion of its specialized printing papers through wholesale paper merchants. During 1997, one wholesale paper merchant accounted for 11.6% of the Company's net sales. Net sales for this customer and all other individual customers was less than 10% of the Company's 1999 and 1998 net sales. The Company's 1999 and 1998 net sales to external customers and location of net plant, equipment and timberlands as of December 31, 1999 and 1998 are summarized below. Net sales are attributed to countries based upon origin of shipment. Such information is not presented for 1997, as sales originated primarily from the United States and net plant, equipment and timberlands assets were primarily located therein.
1999 1998 ------------------------------------- ----------------------------------- Plant, Equipment Plant, Equipment Net Sales and Timberlands - Net Net Sales and Timberlands - Net ----------- ------------------- ---------- --------------------- (in thousands) United States $524,084 $445,376 $535,425 $464,384 Germany 125,376 118,053 130,129 141,743 Other foreign countries 31,100 18,784 39,524 22,029 -------- -------- -------- -------- Total $680,560 $582,213 $705,078 $628,156 ======== ======== ======== ========
Net sales information by the Company's product groups for the years ended December 31 follows:
1999 1998 1997 --------------------- --------------------- --------------- (dollar amounts in thousands) Specialized printing papers $325,240 48% $351,171 50% $354,076 62% Engineered papers (including tobacco papers) 355,320 52 353,907 50 212,996 38 -------- ----- -------- ---- -------- ---- Total $680,560 100% $705,078 100% $567,072 100% ======== ===== ======== ==== ======== ====
44 46 P. H. GLATFELTER COMPANY AND SUBSIDIARIES MANAGEMENT'S RESPONSIBILITY REPORT For the Years Ended December 31, 1999, 1998, and 1997 The management of P. H. Glatfelter Company has prepared and is responsible for the Company's consolidated financial statements and other corroborating information contained herein. Management bears responsibility for the integrity of these statements which have been prepared in accordance with generally accepted accounting principles and include management's best judgments and estimates. All information in this annual report consistently reflects the data contained in the consolidated financial statements. The Company maintains a system of internal controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed and recorded in accordance with their authorizations, and financial records are maintained so as to permit the preparation of reliable financial statements. The system of internal controls is enhanced by written policies and procedures, an organizational structure providing appropriate segregation of duties, careful selection and training of qualified people, and periodic reviews performed by both its internal audit department and independent public auditors. The Audit Committee of the Board of Directors, consisting exclusively of directors who are not Company employees, provides oversight of financial reporting. The Company's internal audit department and independent auditors meet with the Audit Committee on a periodic basis to discuss financial reporting and internal control issues and have completely free access to the Audit Committee. /s/ George H. Glatfelter II /s/ Robert P. Newcomer GEORGE H. GLATFELTER II ROBERT P. NEWCOMER President and Executive Vice President Chief Executive Officer and Chief Financial Officer INDEPENDENT AUDITORS' REPORT P. H. Glatfelter Company, Its Shareholders and Directors: We have audited the accompanying consolidated balance sheets of P. H. Glatfelter Company and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of income and comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of P. H. Glatfelter Company and subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania February 11, 2000 45 47 P. H. GLATFELTER COMPANY AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION QUARTERLY FINANCIAL DATA
Net Sales Gross Profit Net Income Basic and Diluted In Thousands In Thousands In Thousands Earnings Per Share --------------------- --------------------- --------------------- ------------------ 1999 1998 1999 1998 1999 1998 1999 1998 -------- -------- -------- -------- ------- ------- ---- ---- First $165,846 $193,216 $ 27,683 $ 40,929 $ 8,140 $15,327 $.19 $.36 Second 167,234 183,707 34,456 38,280 12,543 13,791 .30 .33 Third 170,030 167,245 24,074 24,041 6,400 3,206(a) .15 .08(a) Fourth 177,450 160,910 38,373 26,477 14,342 3,809(b) .34 .09(b) -------- -------- -------- -------- ------- ------- ---- ---- Total $680,560 $705,078 $124,586 $129,727 $41,425 $36,133 $.98 $.86 ======== ======== ======== ======== ======= ======= ==== ====
(a) After impact of an after-tax charge for voluntary early retirement enhancement program (unusual item) of $3,402,000. (b) After impact of an after-tax charge for voluntary early retirement enhancement program (unusual item) of $2,586,000. 46 48 Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. Not Applicable. PART III Item 10. Directors and Executive Officers of the Registrant. (a) Directors. The information with respect to directors required under this item is incorporated herein by reference to pages 3, 4 and 20 of the Registrant's Proxy Statement, dated March 24, 2000. (b) Executive Officers of the Registrant. The information with respect to the executive officers required under this item is set forth in Part I of this report. Item 11. Executive Compensation. The information required under this item is incorporated herein by reference to pages 7 through 17 of the Registrant's Proxy Statement, dated March 24, 2000. 47 49 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information required under this item is incorporated herein by reference to pages 17 through 19 of the Registrant's Proxy Statement, dated March 24, 2000. Item 13. Certain Relationships and Related Transactions. The information required under this item is incorporated herein by reference to page 17 of the Registrant's Proxy Statement, dated March 24, 2000. PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. (a) 1. A. The following Consolidated Financial Statements of the Registrant are included in Part II, Item 8: Consolidated Statements of Income and Comprehensive Income for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Balance Sheets, December 31, 1999 and 1998 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements for the Years Ended December 31, 1999, 1998 and 1997 B. Supplemental Financial Information for each of the two years in the period ended December 31, 1999 is included in Part II, Item 8. 2. Financial Statement Schedules (Consolidated) are included in Part IV: For Each of the Three Years in the Period Ended December 31, 1999: 48 50 II - Valuation and Qualifying Accounts Schedules other than those listed above are omitted because of the absence of conditions under which they are required or because the required information is included in the Notes to the Consolidated Financial Statements. Individual financial statements of the Registrant are not presented inasmuch as the Registrant is primarily an operating company and its consolidated subsidiaries are essentially wholly-owned. 3. Executive Compensation Plans and Arrangements: see Exhibits 10(a) through 10(h), described below. Exhibits: Number Description of Documents - ------ ------------------------ (2) Stock Purchase Agreement dated as of November 14, 1997 by and among certain subsidiaries of P. H. Glatfelter Company, the Stockholders of S&H Papier-Holding GmbH, Deutsche Beteiligungs Aktiengesellschaft Unternehmensbeteiligungsgesellschaft and P. H. Glatfelter Company (incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K dated January 2, 1998). (3)(a) Articles of Amendment dated April 27, 1977, including restated Articles of Incorporation (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993) as amended by Articles of Merger dated January 30, 1979 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated May 12, 1980 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated September 23, 1981 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a 49 51 Statement of Reduction of Authorized Shares dated August 2, 1982 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated July 29, 1983 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); by Articles of Amendment dated April 25, 1984 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994); a Statement of Reduction of Authorized Shares dated October 15, 1984 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1984); a Statement of Reduction of Authorized Shares dated December 24, 1985 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1985); by Articles of Amendment dated April 23, 1986 (incorporated by reference to Exhibit (3) of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); a Statement of Reduction of Authorized Shares dated July 11, 1986 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1986); a Statement of Reduction of Authorized Shares dated March 25, 1988 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1987); a Statement of Reduction of Authorized Shares dated November 9, 1988 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1988); a Statement of Reduction of Authorized Shares dated April 24, 1989 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1989); Articles of Amendment dated November 29, 1990 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1990); Articles of Amendment dated June 26, 1991 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1991); Articles of Amendment dated August 7, 1992 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1992); Articles of Amendment dated July 30, 1993 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K 50 52 for the year ended December 31, 1993); and Articles of Amendment dated January 26, 1994 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1993). (3)(b) Articles of Incorporation, as amended through January 26, 1994 (restated for the purpose of filing on EDGAR) (incorporated by reference to Exhibit 3(c) of Registrant's Form 10-K for the year ended December 31, 1993). (3)(c) By-Laws as amended through March 17, 1999 (incorporated by reference to Exhibit 3(c) of Registrant's Form 10-K for the year ended December 31, 1998). (4)(a) Escrow Agreement, dated as of February 24, 1997, between P. H. Glatfelter Company and the Bank of New York relating to the 5-7/8% Notes due March 1, 1998 (incorporated by reference to Exhibit (4)(c) of Registrant's Form 10-K for the year ended December 31, 1996). (4)(b) Indenture, dated as of July 22, 1997, between P. H. Glatfelter Company and The Bank of New York, relating to the 6-7/8% Notes due 2007 (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-4 Registration Statement, Reg. No. 333-36395). (4)(c) Registration Rights Agreement, dated as of July 22, 1997, among P. H. Glatfelter Company, Bear, Stearns & Co. Inc. and BT Securities Corporation, relating to the 6-7/8% Notes due 2007 (incorporated by reference to Exhibit 4.3 to the Registrant's Form S-4 Registration Statement, Reg. No. 333-36395). (9) P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993 (incorporated by reference to Exhibit 1 of the Schedule 13D filed by P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993). (10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted as of January 1, 1994, as amended December 14, 1999 and effective January 1, 2000. 51 53 (10)(b) P. H. Glatfelter Company 1988 Restricted Common Stock Award Plan, as amended and restated June 24, 1992 (incorporated by reference to Exhibit (10)(c) of Registrant's Form 10-K for the year ended December 31, 1992). (10)(c) P. H. Glatfelter Company Supplemental Executive Retirement Plan, as amended and restated effective April 23, 1998 (incorporated by reference to Exhibit 10(c) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(d) Deferral Benefit Pension Plan of Ecusta Division, effective May 22, 1986 (incorporated by reference to Exhibit (10)(e) of Registrant's Form 10-K for the year ended December 31, 1987). (10)(e) Description of Executive Salary Continuation Plan (incorporated by reference to Exhibit (10)(g) of Registrant's Form 10-K for the year ended December 31, 1990). (10)(f) P. H. Glatfelter Company Supplemental Management Pension Plan, effective as of April 23, 1998 (incorporated by reference to Exhibit 10(f) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(g) P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, as amended April 23, 1997 (incorporated by reference to Exhibit A of Registrant's Proxy Statement, dated March 14, 1997). (10)(h) P. H. Glatfelter Company Deferred Compensation Plan for Directors, effective as of April 22, 1998 (incorporated by reference to Exhibit 10(h) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(i) Loan Agreement, dated February 24, 1997, between P. H. Glatfelter Company, as borrower, and GWS Valuch, Inc., as lender (incorporated by reference to Exhibit (10)(h) of Registrant's Form 10-K for the year ended December 31, 1996). (10)(j) Agreement between the State of Wisconsin and Certain Companies Concerning the Fox River, dated as of 52 54 January 31, 1997, among P. H. Glatfelter Company, Fort Howard Corporation, NCR Corporation, Appleton Papers Inc., Riverside Paper Corporation, U.S. Paper Mills, Wisconsin Tissue Mills Inc. and the State of Wisconsin (incorporated by reference to Exhibit (10)(i) of Registrant's Form 10-K for the year ended December 31, 1996). (10)(k) Credit Agreement, dated as of December 22, 1997, among P. H. Glatfelter Company, various subsidiary borrowers, Bankers Trust Company, as Agent, and various lending institutions with Deutsche Bank AG, as Documentation Agent, PNC Bank, National Association, as Syndication Agent, and First National Bank of Maryland and Wachovia Bank, N.A., as Managing Agents (incorporated by reference to Exhibit (10)(j) of Registrant's Form 10-K for the year ended December 31, 1997). (21) Subsidiaries of the Registrant (23) Consent of Independent Certified Public Auditors (27) Financial Data Schedule (b) The Registrant did not file any reports on Form 8-K during the quarter ended December 31, 1999. 53 55 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. P. H. GLATFELTER COMPANY (Registrant) March 29, 2000 By /s/ G. H. Glatfelter II ---------------------------------- G. H. Glatfelter II President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities and on the dates indicated: Date Signature Capacity March 29, 2000 /s/ G. H. Glatfelter II Principal Executive -------------------------------- Officer and Director G. H. Glatfelter II March 29, 2000 /s/ R. P. Newcomer Principal Financial -------------------------------- Officer, Executive Vice R. P. Newcomer President and Director March 29, 2000 /s/ C. M. Smith Principal Accounting -------------------------------- Officer and Vice C. M. Smith President - Finance March 29, 2000 /s/ R. E. Chappell Director -------------------------------- R. E. Chappell March 29, 2000 /s/ N. DeBenedictis Director -------------------------------- N. DeBenedictis 54 56 March 29, 2000 /s/ P. G. Foulkrod Director -------------------------------- P. G. Foulkrod March 29, 2000 /s/ G. H. Glatfelter Director -------------------------------- G. H. Glatfelter March 29, 2000 /s/ R. S Hillas Director -------------------------------- R. S. Hillas March 29, 2000 /s/ M. A. Johnson II Director -------------------------------- M. A. Johnson II March 29, 2000 /s/ T. C. Norris Director -------------------------------- T. C. Norris March 29, 2000 /s/ P. R. Roedel Director -------------------------------- P. R. Roedel March 29, 2000 /s/ J. M. Sanzo Director -------------------------------- J. M. Sanzo March 29, 2000 /s/ R. L. Smoot Director -------------------------------- R. L. Smoot 55 57 SCHEDULE II P. H. GLATFELTER COMPANY AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1999 VALUATION AND QUALIFYING ACCOUNTS Amounts in Thousands
Allowances for - --------------------------------------------------------------------------------------------------------------------------- Doubtful Accounts Sales Discounts & Deductions ------------------------------------------ ------------------------------------------ 1999 1998 1997 1999 1998 1997 -------- -------- -------- -------- -------- -------- Balance, beginning of year $ 1,532 $ 1,973 $ 1,913 $ 2,135 $ 542 $ 551 Other(1) -- 325 -- -- 1,126 -- Provision 111 90 160 15,076 14,995 12,882 Write-offs, recoveries and discounts allowed (416) (856) (100) (15,059) (14,528) (12,891) -------- -------- -------- -------- -------- -------- Balance, end of year $ 1,227 $ 1,532 $ 1,973 $ 2,152 $ 2,135 $ 542 ======== ======== ======== ======== ======== ========
The provision for doubtful accounts is included in administrative expense and the provision for sales discounts and deductions is deducted from sales. The related allowances are deducted from accounts receivable. (1) Relates primarily to the acquisition of S&H. 56 58 EXHIBIT INDEX Number - ------ (2) Stock Purchase Agreement dated as of November 14, 1997 by and among certain subsidiaries of P. H. Glatfelter Company, the Stockholders of S&H Papier-Holding GmbH, Deutsche Beteiligungs Aktiengesellschaft Unternehmensbeteiligungsgesellschaft and P. H. Glatfelter Company (incorporated by reference to Exhibit 2.1 of Registrant's Form 8-K dated January 2, 1998). (3)(a) Articles of Amendment dated April 27, 1977, including restated Articles of Incorporation (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993) as amended by Articles of Merger dated January 30, 1979 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated May 12, 1980 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated September 23, 1981 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated August 2, 1982 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); a Statement of Reduction of Authorized Shares dated July 29, 1983 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1993); by Articles of Amendment dated April 25, 1984 (incorporated by reference to Exhibit 3(a) of Registrant's Annual Report on Form 10-K for the year ended December 31, 1994); a Statement of Reduction of Authorized Shares dated October 15, 1984 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1984); a Statement of Reduction of Authorized Shares dated December 24, 1985 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1985); 57 59 by Articles of Amendment dated April 23, 1986 (incorporated by reference to Exhibit (3) of Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); a Statement of Reduction of Authorized Shares dated July 11, 1986 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1986); a Statement of Reduction of Authorized Shares dated March 25, 1988 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1987); a Statement of Reduction of Authorized Shares dated November 9, 1988 (incorporated by reference to Exhibit (3)(b) of Registrant's Form 10-K for the year ended December 31, 1988); a Statement of Reduction of Authorized Shares dated April 24, 1989 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1989); Articles of Amendment dated November 29, 1990 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1990); Articles of Amendment dated June 26, 1991 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1991); Articles of Amendment dated August 7, 1992 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1992); Articles of Amendment dated July 30, 1993 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1993); and Articles of Amendment dated January 26, 1994 (incorporated by reference to Exhibit 3(b) of Registrant's Form 10-K for the year ended December 31, 1993). (3)(b) Articles of Incorporation, as amended through January 26, 1994 (restated for the purpose of filing on EDGAR) (incorporated by reference to Exhibit 3(c) of Registrant's Form 10-K for the year ended December 31, 1993). (3)(c) By-Laws as amended through March 17, 1999 (incorporated by reference to Exhibit 3(c) of Registrant's Form 10-K for the year ended December 31, 1998). (4)(a) Escrow Agreement, dated as of February 24, 1997, between P. H. Glatfelter Company and the Bank of New 58 60 York relating to the 5-7/8% Notes due March 1, 1998 (incorporated by reference to Exhibit (4)(c) of Registrant's Form 10-K for the year ended December 31, 1996). (4)(b) Indenture, dated as of July 22, 1997, between P. H. Glatfelter Company and The Bank of New York, relating to the 6-7/8% Notes due 2007 (incorporated by reference to Exhibit 4.1 to the Registrant's Form S-4 Registration Statement, Reg. No. 333-36395). (4)(c) Registration Rights Agreement, dated as of July 22, 1997, among P. H. Glatfelter Company, Bear, Stearns & Co. Inc. and BT Securities Corporation, relating to the 6-7/8% Notes due 2007 (incorporated by reference to Exhibit 4.3 to the Registrant's Form S-4 Registration Statement, Reg. No. 333-36395). (9) P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993 (incorporated by reference to Exhibit 1 of the Schedule 13D filed by P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993). (10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted as of January 1, 1994, as amended December 14, 1999 and effective January 1, 2000. (10)(b) P. H. Glatfelter Company 1988 Restricted Common Stock Award Plan, as amended and restated June 24, 1992 (incorporated by reference to Exhibit (10)(c) of Registrant's Form 10-K for the year ended December 31, 1992). (10)(c) P. H. Glatfelter Company Supplemental Executive Retirement Plan, as amended and restated effective April 23, 1998 (incorporated by reference to Exhibit 10(c) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(d) Deferral Benefit Pension Plan of Ecusta Division, effective May 22, 1986 (incorporated by reference to Exhibit (10)(e) of Registrant's Form 10-K for the year ended December 31, 1987). (10)(e) Description of Executive Salary Continuation Plan (incorporated by reference to Exhibit (10)(g) of 59 61 Registrant's Form 10-K for the year ended December 31, 1990). (10)(f) P. H. Glatfelter Company Supplemental Management Pension Plan, effective as of April 23, 1998 (incorporated by reference to Exhibit 10(f) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(g) P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, as amended April 23, 1997 (incorporated by reference to Exhibit A of Registrant's Proxy Statement dated March 14, 1997). (10)(h) P. H. Glatfelter Company Deferred Compensation Plan for Directors, effective as of April 22, 1998 (incorporated by reference to Exhibit 10(h) of Registrant's Form 10-K for the year ended December 31, 1998). (10)(i) Loan Agreement, dated February 24, 1997, between P. H. Glatfelter Company, as borrower, and GWS Valuch, Inc., as lender (incorporated by reference to Exhibit (10)(h) of Registrant's Form 10-K for the year ended December 31, 1996). (10)(j) Agreement between the State of Wisconsin and Certain Companies Concerning the Fox River, dated as of January 31, 1997, among P. H. Glatfelter Company, Fort Howard Corporation, NCR Corporation, Appleton Papers Inc., Riverside Paper Corporation, U.S. Paper Mills, Wisconsin Tissue Mills Inc. and the State of Wisconsin (incorporated by reference to Exhibit (10)(i) of Registrant's Form 10-K for the year ended December 31, 1996). (10)(k) Credit Agreement, dated as of December 22, 1997, among P. H. Glatfelter Company, various subsidiary borrowers, Bankers Trust Company, as Agent, and various lending institutions with Deutsche Bank AG, as Documentation Agent, PNC Bank, National Association, as Syndication Agent, and First National Bank of Maryland and Wachovia Bank, N.A., as Managing Agents (incorporated by reference to Exhibit (10)(j) of Registrant's Form 10-K for the year ended December 31, 1997). 60 62 (21) Subsidiaries of the Registrant (23) Consent of Independent Certified Public Auditors (27) Financial Data Schedule 61 EX-10.(A) 2 P. H. GLATFELTER COMPANY MANAGEMENT INCENTIVE PLAN 1 Exhibit 10(a) P. H. GLATFELTER COMPANY MANAGEMENT INCENTIVE PLAN (ADOPTED AS OF JANUARY 1, 1994) (AMENDED AND RESTATED DECEMBER 18, 1997) (EFFECTIVE JANUARY 1, 1998) (AMENDED DECEMBER 17, 1998 (EFFECTIVE JANUARY 1, 1999) AND DECEMBER 14, 1999 (EFFECTIVE JANUARY 1, 2000)) 1. PURPOSE OF THE PLAN The purpose of the Management Incentive Plan (hereinafter called the "Plan") is to provide an incentive to greater efforts on the part of key salaried employees to increase profits of P. H. Glatfelter Company, hereinafter, together with its subsidiaries, called the "Company". The underlying objectives of the Plan are as follows: (a) Maximize the annual return on shareholders' equity. (b) Promote and reward management teamwork at both corporate and mill levels. (c) Enable the Company to attract and retain a talented management team. (d) Assure that Plan awards are at risk annually. (e) Reward key corporate, divisional and mill management personnel and managing directors on the basis of both mill and corporate financial results. 2. PROFIT CENTERS OF THE PLAN In order to accomplish the objectives of the Plan, the Company, its Glatfelter Division, its Schoeller & Hoesch operations, and each of its U. S. mills shall be treated as a separate profit center for the purpose of rewarding those employees, who through the exercise of their responsibilities, are in a position to have a significant bearing on the success 2 and profitability of their profit center, and therefore on the profitability of the Company. In addition, a Glatfelter Division profit center shall represent a combination of the Spring Grove and Neenah mill profit centers. The profit centers are identified as follows: Global Profit Center Schoeller & Hoesch Profit Center Glatfelter Division Profit Center Spring Grove Mill Profit Center Neenah Mill Profit Center Ecusta Mill Profit Center 3. AMENDMENT OR TERMINATION OF THE PLAN This Plan is an amendment and restatement of the P. H. Glatfelter Company Management Incentive Plan and shall continue in force from year to year until amended, modified or terminated. The Company reserves the right by action of its Board of Directors or the Compensation Committee thereof (hereinafter called the "Committee") at any time to amend or modify the Plan in any respect, or to terminate the Plan in its entirety, provided that, if the Plan is in effect at the beginning of a fiscal year, it may not be terminated or amended for such year. The Company will seek the approval of the Company's shareholders for an amendment if such approval is necessary to comply with the Internal Revenue Code, Federal or state securities law or any other applicable rules or regulations. 4. ADMINISTRATION OF THE PLAN The management of the Plan shall be vested in the Committee, which shall be comprised solely of two or more "outside directors" (as defined in regulations promulgated under Section 162(m) of the Internal Revenue Code). The majority of the members of the Committee at any time in office shall constitute a quorum for the transaction of business at any meeting. Any determination or action of the Committee may be made or taken by a majority of its members present at any meeting at which a quorum is present or without a meeting by unanimous written consent executed by all the members then in office. 2 3 5. PARTICIPANTS IN THE PLAN (a) The participants in the Plan and the profit center to which they are assigned for each fiscal year shall be proposed by the Chief Executive Officer and approved by the Committee on or before the December 31 immediately preceding such fiscal year. In this respect, the action of the Committee shall be final. Participation is limited to selected management and highly compensated salaried employees of the Company. Nothing herein contained shall be construed as giving any salaried employee the right to participate in the Plan, except after approval by the Committee, and then his/her participation shall be subject to all the provisions of the Plan. (b) The criteria that will be considered by the Committee in approving a participant shall include position responsibilities, organizational reporting relationship, current salary grade and/or rate, individual performance expectations, and competitive practices. (c) If participants transfer from one profit center to another during the year, their incentive award shall be determined on the basis of the financial results of each profit center for such fiscal year, prorated based on service to each profit center during such fiscal year. A participant's salary grade at the time he/she is approved by the Committee as a participant in the Plan for such year shall be such participant's salary grade for purposes of determining the maximum, target and minimum awards for each profit center. (d) If a participant's employment by the Company should terminate during the fiscal year by reason of death, retirement or permanent disability, his/her incentive award shall be determined on the basis of the financial results of his/her profit center for such fiscal year and his/her base salary midpoint for such fiscal year, prorated to reflect the period of service prior to his/her death, retirement or permanent disability, and shall be paid either to him/her or, as appropriate, the beneficiary specifically designated by the participant on the applicable form, or, if no such specific designation is made, to such beneficiary as is designated under the Company's Group Life Insurance Plan. Participants who have been removed from the payroll of the Company during the fiscal year for any reason, other than death, retirement or permanent disability, shall not participate in the Plan for such fiscal year, unless the Committee, in its sole discretion, determines 3 4 that they shall so participate. The decision of the Committee in this regard shall be final. (e) In consideration of the payments to be made in accordance with the provisions of the Plan, the participants may not be participants in the Company's Conference Group award program. 6. DETERMINATION OF INCENTIVE COMPENSATION AWARDS (a) The Plan shall provide incentive awards based on achievement of specified performance goals. Such performance goals shall be based on certain measurements of profitability in each of the Company's profit centers. Initially, such profitability shall be measured by earnings per share (EPS) in the case of the Global Profit Center, and by both Operating Profit and the Return on Capital Employed (ROCE) for the other profit centers. In the case of the Glatfelter Division Profit Center, the financial results of the Spring Grove and Neenah mill profit centers will be combined for purposes of calculating Return on Capital Employed (ROCE). The determination of profit center profitability shall be based on the audited consolidated financial statements of the Company and on the Company's internal financial statements for Schoeller & Hoesch and for each mill after the audit adjustments have been applied. (b) The amount of an individual's award shall be based on a percentage of such individual's base salary midpoint for the salary grade approved for him by the Committee. If such salary midpoints are revised at any time during a fiscal year, the Committee will revise the midpoints applicable to such year. Salary midpoints for Schoeller & Hoesch participants shall be established in DM based on the DM/USD conversion rate at the close of business on December 30, 1999. Such midpoints shall be maintained in DM, to be adjusted only by structural increases for the domestic grade equivalent. The incentive award as a percentage of base salary midpoint will vary based on the applicable EPS, Operating Profit and ROCE levels achieved for the Plan Year. In no event may the incentive award paid to any participant for any plan year exceed USD 1,000,000. 4 5 (c) The EPS, Operating Profit and ROCE factors are a measure of profitability and will be established in the operating rules for each profit center, adopted annually by the Committee in accordance with Paragraph 9. The incentive award shall equal the base salary midpoint multiplied by the Incentive Award Factor which will vary in relationship to the actual EPS, Operating Profit and ROCE levels achieved for the year. (d) The Committee may, from time to time, establish performance goals based on business criteria other than EPS, Operating Profit and ROCE, such as stock price, return on assets, earnings, total shareholder return, sales or costs. 7. PAYMENT OF INDIVIDUAL INCENTIVE AWARDS (a) Each year after the Committee has approved the participants in the Plan for the following year in accordance with Paragraph 5(a), participants (other than employees of Schoeller & Hoesch) shall make an election by February 1 of such following year to receive their incentive award in cash or to defer the receipt of 25%, 50%, 75% or 100% of the award to a future period, specifying irrevocably the timing of the future payment(s) in accordance with the deferred options established by the Committee. Schoeller & Hoesch employees must receive awards in cash. The amount of deferred awards shall be adjusted at the end of each calendar quarter by crediting the cumulative deferred awards with interest for the quarter (i) based on the prime rate of interest on the last business day of the quarter at Morgan Guaranty Trust Company of New York (or such comparable rate as is determined by the Committee if such prime rate is unavailable or, if in the opinion of the Committee it no longer reflects the rate of interest on such bank's demand loans to its most credit-worthy customers) for awards deferred pursuant to plan years prior to 1999 and (ii) based on six-month LIBOR (as it appears in the Wall Street Journal) plus 100 basis points on the last day of the quarter for awards deferred pursuant to plan years beginning with 1999. The interest credit shall be earned from the date when the award would have been paid if not deferred and shall be compounded on the accumulated award and accrued interest. Should a deferred award be paid during a quarter, interest on the amount of such payment shall be accrued at the rate used for the immediately preceding quarter. (b) Cash incentive awards shall be paid annually as promptly as practicable after the Company's certified public accountants have completed their examination of the Company's 5 6 year-end consolidated financial statements and the Committee has certified that the applicable performance goals have been met. (c) Deferred incentive awards shall be paid on the first Monday in April of each year pursuant to participants' elections to defer receipt of their awards. In the event participants who have deferred awards determine that they have a financial hardship which necessitates the acceleration of the payment of the deferred award, they shall submit their request to release the funds to the Committee which shall consider the circumstances and, in its sole discretion, determine whether the request shall be approved. (d) If participants separate from the Company before age 55, or after age 55 without being vested under the terms of the Company's Retirement Plan for Salaried Employees, including the Supplemental Executive Retirement Plan (collectively, the "Pension Plans"), such participants shall receive the unpaid amount of their cumulative deferred award(s) in a lump sum within 30 days of their separation date or, at the sole discretion and option of the Committee, as stipulated on their election form. If participants separate after age 55 and are vested under the terms of the Company's Pension Plans, their deferred award(s) shall be paid as stipulated on their election form(s). If participants should die before their deferred awards have been completely paid out, the unpaid amount will be paid in a lump sum to the beneficiary specifically designated by the participant on the applicable form, or, if no such specific designation is made, to such beneficiary as is designated under the Company's Group Life Insurance Plan. 8. MANAGEMENT INCENTIVE PLAN ADJUSTMENT SUPPLEMENT The Company will supplement the basic monthly pension payable under the Company's Pension Plans, with respect to an employee who is a participant in the Plan and elected to defer incentive awards in accordance with Paragraph 7 of the Plan, as provided in the Plan of Supplemental Retirement Benefits for the Management Committee. 9. MANAGEMENT INCENTIVE PLAN OPERATING RULES On or prior to December 31 immediately preceding each fiscal year, the Committee shall adopt operating rules for each of the profit centers for such fiscal year to be based on the operating budget for such fiscal year and estimated financial results for the then current fiscal year, both as presented at 6 7 the December Board of Directors' meeting. These operating rules will establish maximum, target and minimum Incentive Award Factors for each salary grade and the corresponding maximum, target and levels of EPS, Operating Profit and rates of ROCE for each of the individual profit centers based on historical and anticipated EPS and Operating Profit levels and rates of return for the profit centers (or maximum, target and minimum goals based on such other business criteria as the Committee may establish pursuant to Paragraph 6(d)), and such other administrative and procedural rules which the Committee considers appropriate. 10. DEFINITIONS For the purpose of determining the incentive awards under the Plan, the following definitions shall apply: (a) Earnings per share (EPS) shall mean basic earnings per share as reported for the applicable period in the Company's consolidated financial statements. (b) The "Incentive Award Factor" shall be the percentage of base salary midpoint for each salary grade corresponding to the maximum, target and minimum performance goals established for each profit center in the operating rules. (c) Return on Capital Employed (ROCE) shall mean Operating Profit divided by Average Capital Employed. ROCE shall be based on the Company's internal financial reports for each of the Spring Grove, Neenah, and Ecusta mills, and the Schoeller & Hoesch profit center after the year-end audit adjustments by the Company's independent certified public accountants have been applied to the accounting records and related reports. In the case of the Spring Grove mill profit center, the Return on Capital Employed (ROCE) shall be based on the consolidated financial reports for the Spring Grove mill and The Glatfelter Pulp Wood Company. In the case of the Glatfelter Division profit center, the Return on Capital Employed (ROCE) shall be based on the consolidated financial reports for the Spring Grove mill, The Glatfelter Pulp Wood Company, and the Neenah mill. (d) Operating Profit shall mean operating profit as reported for the fiscal year in the Company's internal financial statements by mill and for The Glatfelter Pulp Wood Company. . . (i) before provision is made for the amounts paid or payable under the Plan, the Employees' Profit Sharing Plans, and the 7 8 Spring Grove Conference Group award program, and (ii) after such adjustment, if any, as shall be made to exclude, to the extent that the Committee in its sole discretion may determine, the whole or any part of any item which is both unusual in nature and infrequent in occurrence. (e) Average Capital Employed shall mean the sum of the average of inventories and net property, plant, and equipment as shown in the Company's monthly internal financial statements by mill and for The Glatfelter Pulp Wood Company during the fiscal year. (f) Retirement shall mean voluntary separation from service by participants who have achieved an age whereby they are eligible for and have elected to receive early retirement under the Company's Pension Plans. (g) Disability shall mean a disability due to any medically determinable physical or mental impairment that prevents a participant from fulfilling the duties that such participant was performing at the time of the occurrence of such disability and which can be expected to result in death or which has lasted or can be expected to last for a continuous period of more than twelve months, as determined by the Committee in its sole discretion. 11. RIGHTS NOT TRANSFERABLE Rights to incentive cash awards and deferred incentive awards are not transferable by a participant except upon the death of the participant by operation of will or the laws of intestacy. 12. FUNDING The Plan is not funded. All awards that are not received in cash shall remain as part of the general assets of the Company and shall not be deemed held in trust for the benefit of the participant. 13. WITHHOLDING OF APPLICABLE TAXES 8 9 The Company shall have the right to withhold amounts from incentive cash awards and deferred incentive awards as shall be required to be withheld by the Company pursuant to any statute or other governmental regulation or ruling. 14. CONCLUSION The interpretation of the Plan or any provision thereof or the operating rules made by the Committee shall be binding upon both the Company and every participant in the Plan. While it is the intention of the Company to provide a fair and reasonable basis for the determination of incentive compensation awards and the selection of the participants, the Plan is not an employment contract between the Company and the salaried employees or any participants and shall not constitute an agreement by the Company to continue any participant in its employ for any period of time notwithstanding that the termination of the employment of a participant during a fiscal year will preclude an incentive award to such participant for such year. 9 EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 LIST OF SUBSIDIARIES
State or Country of Incorporation ---------------- Balo-I Industrial, Inc. Philippines Ecusta Australia Pty. Limited Australia Ecusta Export Trading Corp. Barbados Ecusta Fibres Ltd. Canada Glatfelter of Nevada, Inc. Nevada Glenn-Wolfe, Inc. Delaware Mollanvick, Inc. Delaware Newtech Pulp Inc. Philippines Papcel-Kiew Ukraine Papcel-Papier und Cellulose, Germany Technologie und Handels-GmbH Papeteries de Cascadec S.A. France Papierfabrik Schoeller & Hoesch Germany Auslandsbeteiligungen GmbH Papierfabrik Schoeller & Hoesch Germany GmbH & Co. KG PHG Tea Leaves, Inc. Delaware PHG Verwaltungsgesellschaft mbH Germany S&H Verwaltungsgesellschaft mbH Germany Schoeller & Hoesch N.A., Inc. Delaware Schoeller & Hoesch S.A.R.L. France Spring Grove Water Company Pennsylvania The Glatfelter Pulp Wood Company Maryland Transwelt, Inc. Pennsylvania Unicon-Papier-und Kunststoffhandels GmbH Germany
EX-23 4 CONSENT OF INDEPENDENT CERTIFIED PUBLIC AUDITORS 1 Exhibit 23 INDEPENDENT AUDITORS' CONSENT P. H. Glatfelter Company: We consent to the incorporation by reference in the Registration Statements of P. H. Glatfelter Company on Form S-8 (Registration Nos. 33-25884, 33-37198, 33-49660, 33-53338, 33-54409, 33-62331, 333-12089, 333-26587, 333-34797, 333-53977 and 333-66991) of our report dated February 11, 2000, appearing in this Annual Report on Form 10-K of P. H. Glatfelter Company for the year ended December 31, 1999. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 27, 2000 EX-27 5 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE TWELVE MONTHS ENDED DECEMBER 31 OF P. H. GLATFELTER COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1999 DEC-31-1999 76,035 0 75,865 1,227 115,100 268,127 1,281,770 699,557 1,003,780 132,631 301,380 0 0 544 357,580 1,003,780 680,560 695,806 555,974 555,974 0 111 18,424 65,152 23,727 41,425 0 0 0 41,425 0.98 0.98
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