-----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, JAqnJeeSXpA+7WAMOVrlPMd10hzMisoNwJ4MCkVW1mPW0E/urCDTrfHSH5/oC20w EVmrot63PiE1N4bnuQAk7A== 0000893220-03-000312.txt : 20030318 0000893220-03-000312.hdr.sgml : 20030318 20030318132140 ACCESSION NUMBER: 0000893220-03-000312 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030318 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: 1934 Act SEC FILE NUMBER: 001-03560 FILM NUMBER: 03607408 BUSINESS ADDRESS: STREET 1: 96 S GEORGE ST STREET 2: STE 500 CITY: YORK STATE: PA ZIP: 17401 BUSINESS PHONE: 7172252709 MAIL ADDRESS: STREET 2: 228 S MAIN ST CITY: SPRING GROVE STATE: PA ZIP: 17362 10-K 1 w84319e10vk.txt FORM 10-K FOR P. H. GLATFELTER COMPANY - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 2002 1-3560
P. H. GLATFELTER COMPANY (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-0628360 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 96 SOUTH GEORGE STREET, SUITE 500, 17401 YORK, PENNSYLVANIA (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (717) 225-4711 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 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. [X] Based the closing price, as of June 28, 2002, the aggregate market value of the Common Stock of the Registrant held by non-affiliates on February 26, 2003 was $533,695,277. COMMON STOCK OUTSTANDING AT MARCH 6, 2003 WAS 43,697,855 SHARES. DOCUMENTS INCORPORATED BY REFERENCE Portions of the following documents are incorporated by reference in this Annual Report on Form 10-K: Proxy Statement dated March 28, 2003 (Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- P. H. GLATFELTER COMPANY FORM 10-K YEAR ENDED DECEMBER 31, 2002 TABLE OF CONTENTS
PAGE ---- PART I Item 1 Business.................................................... 1 Item 2 Properties.................................................. 5 Item 3 Legal Proceedings........................................... 6 Item 4 Submission of Matters to a Vote of Security Holders......... 6 Executive Officers.......................................... 6 PART II Item 5 Market for the Registrant's Common Stock and Related Stockholder Matters......................................... 8 Item 6 Selected Financial Data..................................... 8 Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 9 Item 7A Quantitative and Qualitative Disclosures about Market Risk........................................................ 24 Item 8 Financial Statements and Supplementary Data................. 25 Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 41 PART III Item 10 Directors and Executive Officers of the Registrant.......... 42 Item 11 Executive Compensation...................................... 43 Item 12 Security Ownership of Certain Beneficial Owners and Management.................................................. 44 Item 13 Certain Relationships and Related Transactions.............. 46 Item 14 Controls and Procedures..................................... 52 PART IV Item 15 Exhibits, Financial Statement Schedules, and Reports on Form 8-K......................................................... 53 SIGNATURES............................................................ 59 CERTIFICATIONS........................................................ 60 SCHEDULE II........................................................... S-1
PART I This Annual Report on Form 10-K and the documents incorporated herein by reference contain forward-looking statements based on expectations, estimates and projections as of the date of this filing. Actual results may differ materially from those expressed in forward-looking statements. See Item 7 of Part II -- "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Forward-Looking Statements". ITEM 1. BUSINESS OVERVIEW Glatfelter began operations in 1864 in Spring Grove, Pennsylvania and in 1905 incorporated under the laws of the Commonwealth of Pennsylvania. Today we are one of the world's leading manufacturers of specialized printing papers and engineered products. Headquartered in York, Pennsylvania, we own and operate paper mills located in Spring Grove, Pennsylvania and Neenah, Wisconsin. In 1998 we expanded our global reach with the acquisition of Schoeller & Hoesch GmbH & Co. ("S&H"). Based in Gernsbach, Germany, S&H operates paper mills in Gernsbach and in Scaer, France and an abaca pulp mill in the Philippines. Our products are marketed worldwide either through wholesale paper merchants, brokers and agents, or directly to our customers. In August 2001, we completed the divestiture of our Ecusta Division, a supplier of paper primarily to the tobacco and financial printing industries. Product sales for the Ecusta Division totaled approximately $90.8 million in 2001. Our common stock is listed on the New York Stock Exchange under the symbol "GLT". As used herein, "Glatfelter," "we," "our" and similar terms include P. H. Glatfelter Company and its subsidiaries unless the context indicates otherwise. OUR BUSINESS STRATEGY Our business strategy is to be the global supplier of choice in two key product areas -- specialized printing papers and engineered products. As discussed below, we have aligned our organization along business units focused to understand and meet the needs of our customers. The financial information presented within the Business Unit discussion excludes the Ecusta Division. BUSINESS UNITS Beginning in 2001, we organized our company into three business units: Engineered Products, Long-Fiber & Overlay Paper, and Printing and Converting Papers. In addition, we supply tobacco papers to fulfill obligations of a supply agreement entered into in connection with the sale of our Ecusta Division. Engineered Products accounted for approximately 23%, 21% and 19% of total product sales in 2002, 2001 and 2000, respectively. The Engineered Products unit is focused on highly technical "engineered" paper products designed for multiple end uses, such as papers for pressure sensitive postage stamps, disposable medical garments, playing cards and digital inkjet applications. This business unit comprises an array of products in distinct business niches that are in a continual state of evolution. Some are high growth; others are further along on the development curve. Because the products are technically complex and require substantial "development capital" generated through the customer-supplier relationship, product pricing in this business unit remains relatively constant. Long-Fiber & Overlay Papers represented approximately 20%, 18% and 17% of total product sales in 2002, 2001 and 2000, respectively. Long-fiber is the generic term we use to describe products primarily made from abaca pulp. This business unit focuses on products such as paper for tea bags and decorative laminates used for furniture, flooring and other commercial applications. Long-fiber papers, primarily tea bags and related papers, accounted for 70%, 72% and 64% of this business unit's sales in 2002, 2001 and 2000, respectively. Similar to engineered products, long-fiber and overlay papers are technically sophisticated. We believe we are uniquely positioned to produce these extremely lightweight papers 1 because we understand their complexities, which require the use of highly specialized fiber and specifically designed papermaking equipment. Printing and Converting Papers accounted for approximately 53%, 54% and 58% of total product sales in 2002, 2001 and 2000, respectively. Its products include papers for the production of high-quality hardbound books. Book publishing papers represented 73%, 74% and 67% of this business unit's sales in 2002, 2001 and 2000, respectively. We believe we are acknowledged as the leading supplier of papers for this market in the United States. In addition to book paper, this business unit also produces other papers, including paper that is converted into specialized envelopes in a wide array of colors, finishes and capabilities. These markets are in more mature phases of their lifecycles, exhibiting modest growth characteristics that normally parallel the U.S. Gross Domestic Product. Tobacco Papers represented approximately 4%, 6% and 6% of our product sales in 2002, 2001 and 2000, respectively. Sales in 2002 were made almost entirely pursuant to a supply agreement between S&H and Purico (IOM) Limited, et al ("Purico"), the buyers of the Ecusta Division. Under the supply agreement we will sell tobacco papers to Purico through mid-2004, although at significantly lower levels each year (See Item 8 -- Financial Statements and Supplementary Data -- Note 14). We are continuously developing and refining strategies to position our business for the future, in addition to improving the efficiency of our operations. Execution of these strategies is intended to capitalize on our strength in customer relationships, technology and people and on our leadership position in certain markets. In 2002, no single customer represented more than 10% of consolidated net sales. Net sales to one customer, Central National Gottesman, Inc. (which buys paper through its division, Lindenmeyr Book Publishing), in 2001 were approximately 11% of net sales, excluding the Ecusta Division. RAW MATERIAL The following table provides an overview of the principal raw materials of each of our manufacturing facilities:
ESTIMATED ANNUAL QUANTITY (SHORT % OF PRM LOCATION COUNTRY PRINCIPAL RAW MATERIAL (PRM) TONS) OF PRM PURCHASED - -------- ------- ---------------------------- ---------------- --------- Spring Grove U.S. Pulpwood 997,000 75 Wood and other pulps (external 38,000 100 sources) Neenah U.S. Wood and other pulps 27,000 100 High-grade wastepaper 124,000 100 Gernsbach Germany Wood pulp 29,000 100 Abaca pulp 6,800 0 Scaer France Abaca pulp 1,600 0 Wood pulp 1,700 100 Philippines Philippines Abaca fiber 14,000 100
Our Spring Grove mill is a vertically integrated operation producing in excess of 85% of the annual pulp required for paper production. The balance of our pulp needs is acquired from third-party suppliers. The principal raw material used to produce this pulp is pulpwood, of which both hardwoods and softwoods are used. At December 31, 2002, we owned 114,000 acres of woodlands. In addition to these sources, hardwoods are available within a relatively short distance of our Spring Grove mill. Softwoods are obtained primarily from Maryland, Delaware and Virginia. To protect our sources of pulpwood, we actively promote conservation and forest management among suppliers and woodland owners. On December 18, 2002, we signed a definitive agreement to sell approximately 25,000 acres of our Maryland forestland to a subsidiary of The Conservation Fund, a national nonprofit land conservation fund. The agreement is contingent upon certain conditions, including, but not limited to, the successful negotiation 2 of an agreement to supply us with pulpwood, and other financing and legal contingencies and is expected to close by the end of March 2003. The Neenah mill is a recycled-paper mill that uses high-grade wastepaper as its primary raw material. During 2002, approximately 83% of the Neenah mill's fiber requirements were met with pulp made at Neenah from high-grade wastepaper. The quality of different types of high-grade wastepaper varies significantly depending on the amount of contamination. It is anticipated that there will be an adequate supply of wastepaper in the future. The Neenah mill supplements the pulp it produces with purchases of off-quality wood pulp and pulp substitutes. Our Philippine mill processes abaca fiber into abaca pulp. This abaca pulp production provides a unique competitive advantage by supplying a key raw material used by our Long Fiber & Overlay business unit in Germany and France. As part of our ongoing business planning processes, we have reevaluated our previously announced intentions to expand the production capabilities of the abaca pulpmill. We do not expect to initiate these plans in the foreseeable future. Events may arise from the relatively unstable geopolitical environment in which the Philippine facility operates that could interrupt the production of abaca pulp. Management periodically evaluates the supply chain, including the supply of abaca pulp to our Gernsbach and Scaer facilities. Any extended interruption of the Philippine operation could have a material impact on our consolidated financial position and/or results of operations. We believe we have approximately three months of abaca pulp in the pipeline. The Spring Grove facility generates 100% of the steam and electricity required for its operations. Principal fuel sources used by the Spring Grove facility are coal, recycled pulping chemicals, bark and wood waste, and oil (#2 and #6). This facility also produces excess electricity that is sold to the local power company under a long-term co-generation contract expiring in 2010. Net energy sales were $9.8 million and $9.7 million in 2002 and 2001, respectively. During 1998, the Neenah facility began purchasing steam under a twenty-year contract from a facility of Minergy Corporation ("Minergy"). This facility, which is located adjacent to our Neenah facility, processes paper mill sludge from our Neenah facility as well as from other mills in the Neenah area. During 2002, the Neenah facility generated 24% of its required steam and purchased the balance from Minergy. The Neenah facility generates a portion of its electric power requirements (14% in 2002) and purchases the remainder. Natural gas was used to produce almost all of the facility's internally generated steam during 2002; fuel oil was used to generate the remainder. The Gernsbach and Scaer facilities both generate all the steam required for their operations. The Gernsbach facility generated approximately 30% of its 2002 electricity needs and purchased the balance. Natural gas was used to produce substantially all of Gernsbach's internally generated energy during 2002. The Scaer facility purchased all of its 2002 electric power requirements. Costs to operate our facilities, including natural gas, are subject to price variations determined in the marketplace. In the first quarter of 2003, we experienced significant fluctuations in the price of natural gas. Continued increases in prices could have a significant adverse effect on our consolidated financial position and/or results of operations. Management continuously evaluates the most effective and efficient sources for steam generation. Based on information currently available, we believe that we will continue to have ready access to all principal raw materials used in the production of our products. The cost of our raw material is subject to change, including, but not limited to, costs of wood and pulp products, wastepaper and gas and oil energy costs. BACKLOG Backlogs are generally not significant in our U.S.-based business, as substantially all of our customer orders are filled within 30 days of receipt. Backlogs at our S&H operation generally are 60-90 days. A backlog of unmade customer orders is monitored primarily for purposes of scheduling production to optimize paper machine performance. From time to time, we 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 production. In 3 these circumstances, certain paper machines may be temporarily shut down until backlog and inventory levels justify a resumption of operations. COMPETITION The competitiveness of the markets in which we sell our products varies. The necessity for technical expertise and specialized manufacturing equipment limits the number of companies competing with us in the engineered product and long-fiber and overlay paper markets. Service, product performance and technological advances are important competitive factors with respect to all our products. We believe our reputation in these areas continues to be excellent. There are a number of companies in the United States that manufacture printing and converting papers. We believe we are the recognized leader in book publishing papers and compete with, among others, Domtar and Weyerhaeuser. In the envelope sector we compete with, among others, International Paper, Weyerhaeuser and Blue Ridge. Capacity in the worldwide uncoated free-sheet industry, which includes specialized printing papers, has declined in recent years and is not expected to increase significantly for the next few years. EMPLOYEES As of December 31, 2002, we had approximately 2,375 active full-time employees. Our recent restructuring will reduce our workforce by approximately 2%. We consider the overall relationship with our employees to be satisfactory. Hourly employees at our U.S. facilities are represented by different locals of the Paper, Allied-Industrial, Chemical and Energy Workers International Union (PACE). On October 22, 2002, hourly employees at our Neenah, Wisconsin facility ratified a five-year labor agreement covering approximately 285 workers with an expiration date of August 1, 2007. Under this agreement, wages increased 3% effective August 1, 2002 and will increase 3% per year for the duration of the agreement. A five-year labor agreement that covers approximately 725 employees in Spring Grove was ratified in November 2002 effective for the five-year period ending January 2008. Among other changes, the contract provides for wage increases of 2.5% in each of the first two years of the contract and 3% for the remaining years. The early ratification of the contract was the first in our history; wage increases were effective in November 2002. Various unions represent approximately 830 of our S&H employees. One-year labor agreements covering approximately 600 employees at the Gernsbach, Germany facility and 150 employees at the Scaer, France facility were entered into during 2002 with terms retroactive to the expiration dates of the respective agreements. These expire in the first quarter of 2003. The terms and conditions of the agreements will remain in effect until new agreements are negotiated, although any wage increase negotiated in the new agreements will be retroactive to the respective expiration dates of the old agreements. We are not directly involved in these negotiations as paper industry representatives are negotiating the agreements. Negotiations began in March 2003. This situation is not unusual in Germany and France, and we do not believe that the lack of an agreement will result in any significant operational interruptions. Approximately 80 employees at our abaca pulpmill in the Philippines are covered by a five-year labor agreement, which was negotiated at the end of 2002. Under this agreement, employees received a wage increase of approximately 57 Philippine Pesos per day. ENVIRONMENTAL MATTERS We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. Because environmental regulations are 4 not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. Additional information is included in Item 7 -- Management's Discussion & Analysis of Results of Operations and Financial Condition and in Item 8 - -- Financial Statements and Supplementary Data -- Notes 3 and 13. AVAILABLE INFORMATION Our investor relations website is www.glatfelter.com/e/invesrelations.htm. We make available on our site free of charge our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as reasonably practical after they are filed with the Securities and Exchange Commission. ITEM 2. PROPERTIES Our leased executive offices are located in York, Pennsylvania. We own and operate paper mills located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; and Scaer, France. In addition, we own and operate a pulp mill in the Philippines. We own substantially all of the properties used in our 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. The leases with the City of Neenah cover approximately seven acres of land at an annual rent of approximately $3,500. We own our operating equipment with the exception of some leased vehicles. All our properties, other than those that are leased, are free from any material liens or encumbrances, except for the agreement to sell 25,000 acres of timberland discussed below. We consider all our buildings to be in good structural condition and well maintained and our properties to be suitable and adequate for present operations. The Spring Grove facility includes six uncoated paper machines with daily capacities ranging from 18 to 305 tons and an aggregate annual capacity of 315,000 tons of finished paper. The machines have been rebuilt and modernized from time to time. The Spring Grove facility has a Specialty Coater ("S-Coater") and an off-line combi-blade coater, which yield a potential annual production capacity for coated paper of approximately 66,000 tons. Since uncoated paper is used in producing coated paper, this does not represent an increase in the Spring Grove mill capacity. We view the S-Coater as an important asset which allows us to expand our more profitable engineered paper products business. During 2002, we produced a total of 63,585 tons of coated paper. The Spring Grove facility also includes a pulpmill which has a production capacity of approximately 650 tons of bleached pulp per day. We also have a precipitated calcium carbonate ("PCC") plant at our Spring Grove facility. This plant produces PCC at a lower cost than could be purchased from others and lowers the need for higher-priced raw material typically used for increasing the opacity and brightness of certain papers. The Neenah facility, consisting of a paper mill and a warehouse is located at two sites. The Neenah mill includes three paper machines, with an aggregate annual capacity of approximately 161,000 tons and a wastepaper de-inking and bleaching plant with an annual capacity of approximately 86,000 tons. Our wholly-owned subsidiary, S&H, owns and operates paper mills in Gernsbach, Germany and Scaer, France. S&H also owns a pulpmill in the Philippines which supplies substantially all of the abaca pulp requirements of the S&H paper mills. The Gernsbach facility includes five uncoated paper machines with an aggregate annual lightweight capacity of about 38,000 tons. As discussed in Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations, we are installing a new long fiber & overlay paper machine. We expect the installation of this machine to take approximately four months, during which time production will be interrupted. The Gernsbach facility also has the capacity to produce 8,300 tons of metalized papers annually, using a lacquering machine and two metalizers. The base paper used to manufacture the metalized paper is 5 purchased. The Scaer facility includes two paper machines with an aggregate annual lightweight capacity of approximately 4,400 tons of finished paper. The Philippine pulpmill has an aggregate annual capacity of approximately 9,300 tons of abaca pulp. The Glatfelter Pulp Wood Company, a wholly-owned subsidiary of ours, owns and manages approximately 114,000 acres of land, most of which is timberland. On December 18, 2002, we signed a definitive agreement to sell approximately 25,000 acres of our Maryland forestland to a subsidiary of The Conservation Fund, a national nonprofit land conservation fund. The agreement is contingent upon certain conditions, including, but not limited to, the successful negotiation of an agreement to supply us with pulpwood, and other financing and legal contingencies and is expected to close by the end of March 2003. ITEM 3. LEGAL PROCEEDINGS For a discussion of the separate Notices of Violation ("NOVs") issued to Glatfelter by the United States Environmental Protection Agency ("EPA") and the Pennsylvania Department of Environmental Protection ("Pennsylvania DEP") and the potential legal proceedings involving the lower Fox River and the Bay of Green Bay, see "Environmental Matters" in Item 7 -- Management's Discussion and Analysis of Financial Condition and Results of Operations and in Item 8 -- Financial Statements and Supplementary Data -- Note 13. We are voluntarily cooperating with an investigation by the Pennsylvania DEP, which commenced in February 2002, of our Spring Grove facility related to certain discharges, which are alleged to be unpermitted, to the Codorus Creek. There is no indication that these discharges had an impact on human health or the environment. We are currently engaged in negotiations with the Pennsylvania DEP regarding these matters. The accompanying consolidated financial statements (see Item 8 -- Financial Statements and Supplementary Data -- Notes 3 and 13) include accruals as of December 31, 2002, associated with probable costs to settle this matter. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable EXECUTIVE OFFICERS The following table sets forth certain information with respect to executive officers of Glatfelter as of March 2003.
EXECUTIVE OFFICERS OFFICE AGE - ------------------ ------ --- G. H. Glatfelter II........ Chairman and Chief Executive Officer 51 R. P. Newcomer............. President, Chief Operating Officer and Acting Chief Financial Officer 54 C. M. Smith................ Corporate Controller 44 J. R. Anke................. Treasurer 57 R. L. Inners II............ Vice President -- Operations & Supply Chain 44 C. L. Missimer............. Corporate Director -- Environmental Affairs 51 M. R. Mueller.............. Corporate Counsel and Secretary; Director of Policy and Compliance 42 D. C. Parrini.............. Senior Vice President and General Manager 38 P. M. Yaffe................ Vice President -- Government Affairs 54 W. T. Yanavitch............ Vice President -- Human Resources 42
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 organizational meeting of the Board of Directors held immediately after the annual meeting of shareholders. 6 MR. GLATFELTER currently serves as Chairman and Chief Executive Officer. From April 2000 to February 2001, he was Chairman, President and Chief Executive Officer. From June 1998 to April 2000, he was Chief Executive Officer and President. From September 1995 to June 1998, he was Senior Vice President. MR. NEWCOMER currently serves as President, Chief Operating Officer and Acting Chief Financial Officer. From June 2000 to February 2001, he was Executive Vice President. From June 1998 to June 2000, he was Executive Vice President and Chief Financial Officer. From May 1997 to June 1998, he was Senior Vice President and Chief Financial Officer. In January 2003, Mr. Newcomer announced his plans to retire effective June 30, 2003. MR. SMITH became Corporate Controller in September 2001. From June 2000 to September 2001 he was Chief Financial Officer and continued to serve as Assistant Secretary. From December 1999 to June 2000, he was Assistant Secretary and Vice President -- Finance. From December 1998 to December 1999, he was Vice President -- Finance. From August 1998 to December 1998, he was Vice President -- Finance, Assistant Secretary and Controller. From May 1993 to August 1998, he was Controller. MR. ANKE became Treasurer in September 1998. From June 1997 to September 1998, he was Chief Financial Officer for the Senator John Heinz Pittsburgh Regional History Center. MR. INNERS became Vice President -- Operations and Supply Chain in June 2000. From August 1998 to June 2000, he was Director of Operations, Glatfelter Division. From October 1995 to August 1998, he was Spring Grove Mill Manager. MR. MISSIMER became Corporate Director -- Environmental Affairs in January 2003. From February 2001 to December 2002 he was Vice President -- Environment, Health and Safety. From July 2000 to February 2001 he was Vice President -- Environmental Affairs. From January 1999 to July 2000, he was Corporate Environmental Director. From November 1990 to January 1999, he was Assistant Corporate Environmental Manager. MR. MUELLER became Corporate Counsel and Director of Policy and Compliance in June 2000 and has served as Secretary since December 1999. He was Associate Counsel from June 1998 to June 2000. From September 1996 to June 1998, he was a co-owner and Vice President of Scheller, Inc., where he was responsible for the administration of the company. MR. PARRINI became Senior Vice President and General Manager in January 2003. From December 2000 to January 2003, he served as Vice President -- Sales and Marketing. From July 2000 to December 2000, he was Vice President -- Sales and Marketing, Glatfelter Division and Corporate Strategic Marketing. From June 1999 to July 2000, he was Vice President -- Sales and Marketing, Glatfelter Division. From August 1998 to June 1999, he was National Sales and Marketing Manager, Glatfelter Division. From December 1997 to August 1998, he was National Sales Manager, Glatfelter Division. MR. YAFFE became Vice President -- Governmental Affairs in January 2003. From September 2000 to December 2002 he was Vice President -- Government and Public Affairs. From March 1997 to September 2000, he was Vice President -- Public Policy of Philadelphia Gas Works, where he was responsible for establishing advocacy communications and corporate responsibility programs and supervised approximately ten employees. MR. YANAVITCH became Vice President -- Human Resources in July 2000. From October 1998 to July 2000, he was Director of Human Resources for the Ceramco and Trubyte Divisions of Dentsply. From December 1993 to October 1998, he was Director of Human Resources for the Trubyte Division of Dentsply. 7 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS COMMON STOCK PRICES AND DIVIDENDS DECLARED INFORMATION The table below shows the high and low prices of our common stock traded on the New York Stock Exchange under the symbol "GLT" and the dividend declared per share for each quarter during the past two years.
2002 2001 --------------------------- --------------------------- QUARTER HIGH LOW DIVIDEND HIGH LOW DIVIDEND - ------- ------ ------ --------- ------ ------ --------- 1st............................ $18.84 $14.65 $.175 $13.22 $11.30 $.175 2nd............................ 19.35 16.32 .175 16.10 12.21 .175 3rd............................ 18.94 11.50 .175 16.37 12.25 .175 4th............................ 14.05 10.22 .175 15.98 13.95 .175
As of February 26, 2003, we had 2,489 shareholders of record. A number of the shareholders of record are nominees. ITEM 6. SELECTED FINANCIAL DATA SUMMARY OF SELECTED CONSOLIDATED FINANCIAL DATA
AS OF OR FOR THE YEAR ENDED DECEMBER 31 ------------------------------------------------------------ 2002(A) 2001(A) 2000 1999 1998 -------- -------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE) Net sales.................................. $543,823 $635,691 $ 724,720 $ 705,491 $727,312 Net income................................. 37,595(B) 6,958(c) 44,000(d) 41,425 36,133(e) Basic earnings per share................... .87(B) .16(c) 1.04(d) .98 .86(e) Diluted earnings per share................. .86(B) .16(c) 1.04(d) .98 .86(e) Total assets............................... 957,028 966,604 1,023,325 1,003,780 990,738 Long-term debt (including current portion)................................. 219,504 276,302 301,664 303,204 327,469 Cash dividends declared per common share... .70 .70 .70 .70 .70
- --------------- (a) The Ecusta Division was sold in August 2001. (b) After impact of restructuring and contingent liability charges partially offset by one-time gain from settlement of escrow claims in connection with acquisition of S&H (unusual items, net -- $1.9 million after tax). (c) After impact of charge primarily related to a loss on disposition of the Ecusta Division (unusual item) of $39.7 million after tax. (d) After impact of restructuring charge (unusual item) of $2.1 million after tax. (e) After impact of charge for voluntary early retirement enhancement program (unusual item) of $6.0 million after tax. OTHER FINANCIAL DATA AS OF OR FOR THE YEAR ENDED DECEMBER 31
2002 2001 2000 1999 1998 ------- ------- ------- ------- ------- (IN THOUSANDS, EXCEPT PERCENTAGES) Percent income before income taxes to net sales.... 10.9% 1.8% 9.5% 9.2% 8.1% Cash dividends declared on common stock............ $30,467 $29,827 $29,661 $29,538 $29,413 Current assets..................................... 176,380 241,809 286,624 268,127 241,908 Current liabilities................................ 97,948 211,054 119,184 132,631 126,876 Working capital.................................... 78,432 30,755 167,440 135,496 115,032 Shareholders' equity............................... 373,833 353,469 372,703 358,124 343,929 Common shares outstanding.......................... 43,644 42,750 42,391 42,246 42,085
8 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, including statements regarding industry prospects and future consolidated financial position or results of operations, made in this Annual Report on Form 10-K are forward looking. We use words such as anticipates, believes, expects, future, intends and similar expressions to identify forward-looking statements. Forward-looking statements reflect management's current expectations and are inherently uncertain. Our actual results may differ significantly from management's expectations. The following discussion includes forward-looking statements regarding expectations of, among others, net sales, cost of products sold, pension costs, environmental costs and liquidity, all of which are inherently difficult to predict. Although we make such statements based on assumptions that we believe to be reasonable, there can be no assurance that actual results will not differ materially from our expectations. Accordingly, we identify the following important factors, among others, which could cause our results to differ from any results that might be projected, forecasted or estimated in any such forward-looking statements: i. variations in demand for, or pricing of, our products; ii. changes in the cost or availability of raw materials we use, in particular market pulp, pulp substitutes and wastepaper; abaca fiber, and changes in energy-related costs; iii. our ability to develop new, high value-added engineered products; iv. 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; v. cost and other effects of environmental compliance, cleanup, damages, remediation or restoration, or personal injury or property damage related thereto, such as costs associated with the NOVs issued by the EPA and the Pennsylvania DEP, the costs of natural resource restoration or damages related to the presence of polychlorinated biphenyls ("PCBs") in the lower Fox River on which our Neenah mill is located; and the effect of complying with the wastewater discharge limitations of the Spring Grove mill permits; vi. the gain or loss of significant customers and/or on-going viability of such customers; vii. risks associated with our international operations, including local economic and political environments and fluctuations in currency exchange rates; viii. geopolitical events, including war and terrorism; ix. enactment of adverse state, federal or foreign legislation or changes in government policy or regulation; x. our ability to identify, finance and consummate future alliances or acquisitions; xi. adverse results in litigation; xii. disruptions in production and/or increased costs due to labor disputes; xiii. the effect on us, if any, associated with the financial condition of the buyers of the Ecusta Division; and, xiv. our ability to realize the value of our timberlands. CRITICAL ACCOUNTING POLICIES The following discussion and analysis of our consolidated financial position and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial 9 statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to sales returns, doubtful accounts, inventories, investments and financial derivative instruments, long-lived assets and contingencies, including environmental matters. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances; the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following represent the most significant and subjective estimates used in the preparation of our consolidated financial statements. i. We maintain reserves for expected sales returns and allowances based principally on our return practices and our historical experience. If actual sales returns differ from the estimated return rates projected, we may need to increase or decrease our reserves for sales returns and allowances, which could affect our reported income. ii. We maintain allowances for doubtful accounts for estimated losses resulting from our customers' failure to make required payments. If actual customer payments differ from our estimates, we may need to increase or decrease our allowances for doubtful accounts, which could affect our reported income. iii. We evaluate the recoverability of our long-lived assets, including property, equipment and intangible assets periodically or whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. Our evaluations include analyses based on the cash flows generated by the underlying assets, profitability information, including estimated future operating results, trends or other determinants of fair value. If the value of an asset determined by these evaluations is less than its carrying amount, a loss is recognized for the difference between the fair value and the carrying value of the asset. Future adverse changes in market conditions or poor operating results of the related business may indicate an inability to recover the carrying value of the assets, thereby possibly requiring an impairment charge in the future. iv. Accounting for defined-benefit pension plans requires various assumptions, including, but not limited to, discount rates, expected rates of return on plan assets and future compensation growth rates. Accounting for our retiree medical plans also requires various assumptions, which include, but are not limited to, discount rates and annual rates of increase in the per capita costs of health care benefits. We evaluate these assumptions at least once each year and make changes as conditions warrant. Changes to these assumptions will increase or decrease our reported income, which will result in changes to the recorded benefit plan assets and liabilities. v. We maintain accruals for losses associated with environmental obligations 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. Such undiscounted liabilities are exclusive of any insurance or other claims against third parties. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt. vi. We have made estimates and accrued for liabilities assumed by the buyers of the Ecusta Division. In addition, we have recorded receivables due from the buyers to reimburse us for such liabilities as well as for other expenses we were to pay on the buyers' behalf. We continue to evaluate the collectibility of the receivables due from the buyers and, at December 31, 2002, have determined that no reserves are necessary for such receivables. However, reserves may be necessary in future periods. Refer to Item 8 -- Financial Statements and Supplementary Data -- Note 2 for a discussion of our accounting policies with respect to these and other items. 10 OVERVIEW We are one of the world's leading manufacturers of specialized printing papers and engineered products. The Glatfelter Division, which includes the Spring Grove, Pennsylvania and Neenah, Wisconsin paper mills, produces both specialized printing papers and engineered products. The S&H Division includes paper mills in Gernsbach, Germany and Scaer, France. S&H produces specialized printing papers and engineered products (including tobacco papers). During 2002 we completed the reorganization of the way we manage our business. We now operate three business units: Engineered Products, Long-Fiber & Overlay Papers and Printing and Converting Papers. We also completed our IMPACT project, which included the installation of a worldwide enterprise resource planning information system. This system will provide more complete financial results by business unit beginning in 2003. RESULTS OF OPERATIONS 2002 COMPARED TO 2001 The following table sets forth summarized results of operations.
YEAR ENDED DECEMBER 31 --------------- 2002 2001 CHANGE ------ ------ ------ (DOLLARS IN MILLIONS) Net sales................................................... $543.8 $635.7 $(91.9) Energy sales, net........................................... 9.8 9.7 .1 ------ ------ ------ Total revenue.......................................... 553.6 645.4 (91.8) Cost of products sold....................................... 426.8 503.6 (76.8) ------ ------ ------ Gross profit........................................... 126.8 141.8 (15.0) Operating expenses Selling, general and administrative expenses.............. 54.3 60.7 (6.4) Loss (gain) on sales of plant, equipment and timberlands............................................ .2 (2.0) 2.2 Unusual items............................................. 2.2 60.9 (58.7) ------ ------ ------ Total operating expense................................ 56.7 119.6 (62.9) ------ ------ ------ Operating income.......................................... 70.1 22.2 47.9 Interest expense, net....................................... (13.5) (12.1) (1.4) Other income, net........................................... 2.5 1.6 .9 ------ ------ ------ Income before income taxes................................ 59.1 11.7 47.4 Income taxes................................................ (21.5) (4.7) (16.8) ------ ------ ------ Net income................................................ $ 37.6 $ 7.0 $ 30.6 ====== ====== ======
For the year ended December 31, 2002, net income totaled $37.6 million, or $.86 per diluted share, compared with $7.0 million and $.16 per diluted share in 2001. The comparison of reported results is affected by unusual items that are discussed in detail below. Excluding the unusual items from each period, 2002 net income and diluted earnings per share were $39.5 million and $.90, respectively, compared with $46.7 million and $1.09, respectively, in 2001. NET SALES Net sales decreased $91.9 million in 2002 compared with 2001. The decline was substantially due to the Ecusta divestiture in 2001. Excluding Ecusta Division net sales in 2001, net sales declined $1.0 million, or 0.2%. On this basis, the decline was primarily due to the effect of a 3.5% decrease in average net selling price partially offset by the effect of a 2.1% increase in net sales volume. The decline in average net selling price was 11 also mitigated by the effect of a stronger Euro relative to the U.S. Dollar resulting in an increase of approximately $6.4 million in translated net sales in 2002 versus 2001. We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Paper, and Printing and Converting Papers, as well as Tobacco Papers, which is being exited. In 2002, we completed the implementation of a new information system to provide, among other things, more complete business unit reporting. However, we are currently unable to provide detail business unit profitability reporting for periods prior to the system implementation. The following table sets forth information with respect to net sales by business unit, excluding Ecusta:
YEAR ENDED DECEMBER 31 PERCENT OF TOTAL ----------------------- ----------------- 2002 2001 CHANGE 2002 2001 ---------- ---------- ------- ------- ------- (DOLLARS IN THOUSANDS) BUSINESS UNIT Engineered Products............................ $127,086 $116,622 $10,464 23.4% 21.4% Long-Fiber & Overlay Papers.................... 110,461 99,816 10,645 20.3 18.3 Printing and Converting Papers................. 286,428 295,681 (9,253) 52.7 54.3 Tobacco Papers................................. 19,848 32,736 (12,888) 3.6 6.0 -------- -------- ------- ----- ----- Total..................................... $543,823 $544,855 $(1,032) 100.0% 100.0% ======== ======== ======= ===== =====
During 2002, sales volume for our Engineered Products increased by approximately 12% compared to 2001, offset somewhat by lower average selling prices. Our Long-Fiber & Overlay Papers business unit experienced increased sales volume for its products that more than offset adverse pricing pressures it experienced during the year. In the Printing and Converting Papers business unit, our net sales volume was substantially the same as the prior year at lower average selling prices. During the fourth quarter of 2002, Printing and Converting Papers experienced declining prices, reversing favorable pricing trends that were seen during the third quarter of 2002. Tobacco Papers represent a business unit that we are exiting pending completion of our agreement to provide tobacco papers to the buyer of our Ecusta Division. We expect sales from this unit to approximate $5.0 million to $10.0 million in 2003; however, the lower proportion of tobacco papers sales relative to our total sales is expected to have a favorable impact on our gross margin. Thus far in 2003, demand for printing and converting papers has remained sluggish. Recently announced increases in pulp costs indicate a possibility of increasing selling prices for Printing and Converting Papers during the year. Historically, pulp price increases have preceded selling price increases for this business unit by several months. The outlook for the Engineered Products and Long-Fiber & Overlay Papers business units is relatively stable. We anticipate a loss in sales volume during 2003 for Long-Fiber & Overlay Papers due to downtime associated with the rebuild of a paper machine in Gernsbach. ENERGY SALES, NET Energy sales, net totaled $9.8 million in 2002 compared with $9.7 million in 2001. Energy sales represent net revenue earned from the sale of excess power generated by certain of our paper mills. COST OF PRODUCTS SOLD AND GROSS PROFIT Cost of products sold declined $76.8 million, or 15.2%, in the year-to-year comparison. Excluding the Ecusta Division, cost of products sold increased $1.3 million, or 0.3%. The increase in cost of products sold is primarily due to the increase in net sales volume. Cost of products sold is approximately $4.3 million higher in 2002 than in 2001 due to the weakening of the U.S. Dollar compared to the Euro and the resulting impact on translated U.S. Dollar results. These factors more than offset the effect of a decrease in the unit cost of pulp and the benefits of our 2002 cost control initiatives. We expect the cost of market pulp and wastepaper to be higher in 2003 based on recent announcements of price increases in the pulp market. As a percent of sales, our gross margin increased to 22.9% for the full year 2002 from 22.0% in 2001. Excluding the Ecusta Division, our gross margin was slightly lower in 2002 than in 2001. 12 Our gross margin includes net non-cash pension income resulting from the overfunded status of our defined benefit pension plans. Cost of products sold was reduced for such income by $26.9 million in 2002 and by $24.4 million in 2001. Partially offsetting this benefit was expense attributable to other post-retirement benefits totaling $4.6 million and $2.9 million in 2002 and 2001, respectively. The primary cause of the increase in other-post retirement benefits was a change in our estimate of liability based upon recent claims history. The following table is presented to provide additional analysis of the changes in cost of products sold, eliminating the benefit of net non-cash pension income and the cost of products sold at Ecusta in 2001.
YEAR ENDED DECEMBER 31 --------------- 2002 2001 CHANGE ------ ------ ------ (DOLLARS IN MILLIONS) Cost of products sold as reported........................... $426.8 $503.6 $(76.8) Eliminate benefit of pension income......................... 26.9 24.4 2.5 ------ ------ ------ Cost of products sold excluding net pension income........ 453.7 528.0 (74.3) Ecusta cost of products sold................................ -- (77.6) (77.6) ------ ------ ------ Cost of products sold excluding net pension income and Ecusta................................................. $453.7 $450.4 $ 3.3 ====== ====== ======
Our net non-cash pension income allocable to cost of products sold is expected to be $18.6 million in 2003. Non-cash pension income is estimated each year using certain actuarial assumptions and certain other factors, including the fair value of our pension assets as of the first date of the calendar year. The fair value of our pension assets has decreased significantly since January 1, 2002. See Item 8 -- Financial Statements and Supplementary Data -- Note 12. The cost of natural gas is a significant component of our Neenah and Gernsbach facilities' production costs. Thus far during the first quarter of 2003, we experienced adverse price increases in the cost of natural gas used by Neenah. The Neenah and Gernsbach facilities require approximately 1.4 million decatherms and .9 million decatherms of heat, respectively, annually. The cost of Neenah's natural gas usage is dependent on market prices. Based on expected production levels, a $1 per decatherm increase in the cost of gas is expected to increase the cost of operating our Neenah facility by approximately $1.4 million per year. In some instances, we can partially mitigate the effects of price increases in natural gas by internally generating a portion of our steam needs at the Neenah facility. Under a supply contract, the cost of gas consumed by Gernsbach is based on the price of oil. Thus far during 2003, Gernsbach has experienced much less volatility in its cost of natural gas. Pennsylvania Drought Conditions Pulp and paper manufacturing operations rely upon an adequate supply of water to sustain production. Our Spring Grove, Pennsylvania facility is located in an area that was under drought warning conditions throughout much of 2002. The drought warning and drought emergency proclamation were lifted in the fourth quarter of 2002. The drought-imposed restrictions did not have a material impact on our results of operations. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES SG&A expenses declined $6.4 million, or 10.5%, in the year to year comparison due to the Ecusta divestiture together with disciplined cost control initiatives. Excluding the Ecusta Division, SG&A expenses declined 1.4%. SG&A is approximately $.7 million higher in 2002 than in 2001 due to the weakening of the U.S. Dollar compared to the Euro, and the resulting impact on translated U.S. Dollar results. Costs incurred in 2002 include resources dedicated to implementing our strategic initiatives, including depreciation expense and increased service fees related to implementing information technology. 13 Net non-cash pension income reduced reported SG&A expenses $5.7 million in 2002 and $6.3 million in 2001. The following table is presented to provide additional analysis of SG&A expenses eliminating the benefit of net non-cash pension income and SG&A of Ecusta in 2001.
YEAR ENDED DECEMBER 31 ------------- 2002 2001 CHANGE ----- ----- ------ (DOLLARS IN MILLIONS) SG&A expenses as reported................................... $54.3 $60.7 $(6.4) Eliminate benefit of net pension income..................... 5.7 6.3 (0.6) ----- ----- ----- SG&A expenses excluding net pension income.................. 60.0 67.0 (7.0) Ecusta SG&A................................................. -- (5.6) 5.6 ----- ----- ----- SG&A expenses excluding net pension income and Ecusta..... $60.0 $61.4 $(1.4) ===== ===== =====
Post-retirement expense included in SG&A expenses was $ 1.0 million and $.5 million in 2002 and 2001, respectively. The primary cause of the increase in post-retirement expense was a change in our estimate of liability based upon recent claims history. SG&A expenses were lower in 2002 compared with 2001 primarily due to a decrease in compensation expense related to certain stock awards that varies with the price of our common stock. Our common stock price declined during 2002. The fair value of our pension assets has decreased significantly since January 1, 2002. For 2003, non-cash pension income allocable to SG&A expenses is projected to be $2.6 million. LOSS (GAIN) ON SALES OF PLANT, EQUIPMENT AND TIMBERLANDS During 2002, we recorded $.2 million loss from the sale of certain fixed assets compared with a gain of $2.0 million in 2001. The gain in 2001 primarily resulted from the sale of a 413-acre tract of land from which we recognized a $1.7 million gain. There were no significant sales of properties completed in 2002. On December 18, 2002, we signed a definitive agreement to sell approximately 25,000 acres of our Maryland forestland to a subsidiary of The Conservation Fund, a national nonprofit land conservation fund. The agreement is contingent upon certain conditions, including, but, not limited to, the successful negotiation of an agreement to supply us with pulpwood, and other financing and legal contingencies and is expected to close by the end of March 2003. UNUSUAL ITEMS Unusual items totaled $2.2 million and $60.9 million in 2002 and 2001, respectively. Amounts recorded in 2002 included a $4.2 million restructuring charge related to severance and related benefit costs and a $1.5 million contingent liability related to on-going negotiations with the Pennsylvania DEP. These charges were partially offset by a $3.5 million one-time, pretax gain for the settlement of certain escrow claims, including interest and associated liabilities related to the 1998 acquisition of our S&H subsidiary. On August 9, 2001, we completed the sale of the Ecusta Division, consisting of our Ecusta paper-making facility and two of its operating subsidiaries, including plant and equipment, inventory, accounts receivable and essentially all other operating assets and certain other receivables related to our Tobacco Papers business. As part of this transaction, the buyer assumed certain liabilities related to the operation of the Ecusta Division. Our total charge to earnings associated with the sale was $58.4 million, including a $50.0 million impairment charge recognized during the second quarter of 2001. We also recognized a $2.5 million pretax charge in the second quarter of 2001 due to the settlement of an environmental matter in connection with the Spring Grove, Pennsylvania facility's wastewater discharge permit. 14 INTEREST EXPENSE, NET Interest expense, net consisted of the following:
YEAR ENDED DECEMBER 31 --------------- 2002 2001 CHANGE ------ ------ ------ (DOLLARS IN MILLIONS) Interest expense on debt.................................... $(15.1) $(15.7) $ .6 Interest income on investments and other -- net............. 1.6 3.6 (2.0) ------ ------ ----- Interest expense, net..................................... $(13.5) $(12.1) $(1.4) ====== ====== =====
Interest expense declined in the year-to-year comparison primarily due to lower debt outstanding, together with lower effective interest rates. During 2002, approximately $71.8 million was used to repay debt. Interest expense is approximately $0.2 million higher in 2002 than in 2001 due to the weakening of the U.S. Dollar compared to the Euro, and the resulting impact on translated U.S. Dollar results. Interest income declined in the comparison due to lower interest earning funds. OTHER INCOME, NET Other income, net increased $.9 million in the year-to-year comparison. Other income, net consists of gains from the disposition of miscellaneous non-operating assets, none of which were material. INCOME TAXES Income taxes increased $16.8 million to $21.5 million for the year ended December 31, 2002. The change in the income tax provision for 2002 compared to 2001 is primarily due to a $47.4 million increase in earnings before income taxes. The effective tax rate decreased to 36.3% in 2002 compared with 40.6% in 2001 primarily due to the lower proportion of nondeductible items relative to pretax income in 2002 compared to 2001. 2001 COMPARED TO 2000 Overall, net sales in 2001 decreased $89.0 million, or 12.3%, compared to 2000. Excluding the Ecusta Division, net sales in 2001 decreased $10.0 million, or 1.8%, compared to 2000 due to a 2.1% decrease in average net selling prices, which were slightly offset by a net sales volume increase of 0.3%. Average net selling prices decreased primarily due to lower prices because of weaker economic conditions, as well as a weaker mix of products sold and the unfavorable impact of foreign currency translation. The cost of products sold decreased $87.6 million, or 14.8%, in 2001 compared to 2000. Excluding the Ecusta Division, cost of products sold decreased by $5.7 million, or 1.3%. Cost of products sold was lower in 2001 versus 2000 primarily due to lower market pulp prices, savings from our cost reduction initiatives and increased pension income. Pension income, which is non-cash, reduced cost of products sold by $24.4 million in 2001 compared to $22.9 million in 2000. Partially offsetting such cost reductions were higher energy costs for 2001. See Item 8 -- Financial Statements and Supplementary Data -- Note 12 for disclosure related to our retirement plans, including pension income. SG&A expenses increased by $386,000 in 2001 over 2000. Excluding the Ecusta Division, SG&A expenses net of changes in non-cash pension income, increased by $5.7 million, or 11.5%, from 2000 to 2001, which was due primarily to increased salaries and professional fees related to building our capabilities to effectively implement our strategic initiatives. Pension income reduced SG&A expense by $6.3 million in 2001 versus $5.2 million in 2000. See Item 8 -- Financial Statements and Supplementary Data -- Note 12. Gain on sales of plant, equipment and timberlands for 2001 increased to $2.0 million from a loss of $.5 million in 2000. In 2001, we sold a 413-acre tract of land for which we received $1.73 million in net cash proceeds resulting in a realized pre-tax gain of approximately $1.70 million. No significant sales of such properties occurred in 2000. 15 Interest expense on debt was $15.7 million in 2001 compared to $16.4 million in 2000. This decrease was a result of lower average borrowings. Additionally, a stronger U.S. Dollar relative to the Deutsche Mark ("DM") during 2001 caused lower reported interest expense from DM-denominated debt. During the first quarter of 2000, we finalized a restructuring plan and shortly thereafter began to reduce the workforce at Ecusta. The workforce reduction was completed during the first quarter of 2001 and resulted in the reduction of over 200 salaried and hourly jobs associated with our tobacco paper production capacity. We accrued and charged to expense $3.3 million ($2.1 million after tax) in the first quarter of 2000 primarily as a result of the voluntary portion of this restructuring, specifically 42 salaried employees. Of this amount, $2.2 million related to enhanced pension benefits to be paid out of our retirement plans as discussed in our disclosure of retirement and other post-retirement benefits. The remaining $1.1 million of this charge related to severance and other employee benefits to be paid using our assets. Approximately $800,000 of these liabilities were transferred to the buyer of the Ecusta Division. Unpaid amounts as of December 31, 2001, are expected to be paid by the end of 2005. FINANCIAL CONDITION CAPITAL RESOURCES AND LIQUIDITY Total assets were $957.0 million and $966.6 million at December 31, 2002 and 2001, respectively, and shareholders' equity was $373.8 million and $353.5 million, in the year to year comparison. The following table summarizes cash flow information for 2002 and 2001 (See Item 8 -- Financial Statements and Supplementary Data).
YEAR ENDED DECEMBER 31 -------------- 2002 2001 CHANGE ----- ------ ------ (DOLLARS IN MILLIONS) Cash and cash equivalents at beginning of year.............. $95.5 $110.6 $(15.1) Cash provided by (used for) Operating activities...................................... 74.3 63.9 10.4 Investing activities...................................... (49.6) (30.6) (19.0) Financing activities...................................... (84.6) (48.7) (35.9) Effect of exchange rate changes on cash................... .5 .3 .2 ----- ------ ------ Net cash provided (used)............................... (59.4) (15.1) (44.3) ----- ------ ------ Cash and cash equivalents at end of year.................. $36.1 $ 95.5 $(59.4) ===== ====== ======
Cash and cash equivalents decreased $59.4 million in the year to year comparison primarily due to debt reduction activities, capital expenditures related to the IMPACT and New Century Projects, and dividends paid on common stock. On June 24, 2002, we entered into a new unsecured $102.5 million multi-currency revolving credit facility ("Facility") with a syndicate of three major banks. An additional $22.5 million was added to the Facility on September 24, 2002 with a fourth major bank. The Facility, which replaced the old facility, enables us to borrow up to the equivalent of $125.0 million in certain currencies. Borrowings incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. Borrowings can be made for any time period from one day to six months. The margin and a facility fee on the commitment balance are based on the higher of our debt ratings as published by Standard & Poor's and Moody's. The Facility requires Glatfelter to meet certain leverage and interest coverage ratios, with both of which we are in compliance. The Facility also provides an additional source of liquidity in the form of a $50.0 million accounts receivable securitization program. Should we elect to do so, we have the ability to securitize certain eligible domestic accounts receivable. Although the Facility provides this financing vehicle, we have no plans to use it in the foreseeable future. 16 As the Facility matures on June 24, 2006, it has been classified on the Balance Sheet as "Long-term debt." As of December 31, 2002, we had $67.7 million (E64.6 million) of borrowings under the Facility. As of December 31, 2002, an additional $57.3 million was available under the Facility. On June 24, 2002, we repaid $133.0 million in borrowings under the previously existing $200.0 million multi-currency revolving credit agreement. This repayment was made using $71.1 million of our existing cash and a borrowing of $62.0 million under the Facility. In conjunction with our refinancing, we entered into a cross-currency swap transaction with a major financial institution, effective June 24, 2002, with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately E73 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate, plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency swap effectively hedges exposure to foreign currency risk associated with certain intercompany borrowings through 2006. Also in conjunction with the refinancing, we terminated two existing interest rate swap agreements on June 24, 2002, each having a total notional principal amount of DM 50.0 million (approximately $25.0 million as of June 24, 2002). We recognized a $100,000 gain in connection with the early termination of these swap arrangements and the repayment of the outstanding debt under the previously existing $200.0 million multi-currency revolving credit agreement. PNC Financial Services Group, Inc. ("PNC") beneficially owns approximately 35% of our common stock, primarily as a trustee for numerous trusts for the benefit of Glatfelter family members. PNC Bank, National Association, a subsidiary of PNC, is a member of a syndicate of banks under the Facility. One member of our Board of Directors is the retired Regional Chairman of PNC Bank, National Association, Philadelphia/South Jersey markets. In 1997, we issued $150.0 million 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 our option at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness. 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. CAPITAL SPENDING During 2002 capital expenditures totaled $51.2 million compared with $47.8 million in 2001. Capital expenditures are expected to be $75.2 million in 2003. The following table summarizes capital spending by major project, by year:
L&OP IMPACT NEW CENTURY GERNSBACH ------ ----------- --------- (DOLLARS IN MILLIONS) Prior to 2002........................................ $23.6 $ 2.4 $ -- During 2002.......................................... 19.9 9.9 5.6 ----- ----- ----- To date............................................ 43.5 12.3 5.6 Forecast: 2003............................................... -- 22.8 24.4 After 2003......................................... -- 1.9 -- ----- ----- ----- Project total................................... $43.5 $37.0 $30.0 ===== ===== =====
IMPACT Project -- Our IMPACT project was focused on identifying and implementing changes in our organization and business processes. In 2002, we successfully completed the implementation of an enterprise resource planning system. This system provides a common platform for purchasing, accounts payable, sales orders, cost accounting and general ledgers, among other things. New Century Project -- The New Century Project is an initiative underway at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program as set forth by the EPA's "Cluster Rule". This 17 project includes new hardwood brownstock washing, installation of hardwood oxygen delignification, 100% chlorine dioxide substitution on both the hardwood and softwood fiber lines, and a hardwood ozone bleaching system. To comply with the Cluster Rule, we will also install equipment to reduce air emissions of air pollutants and odorous compounds. Long-Fiber & Overlay Papers ("L&OP") Gernsbach -- During 2002, we began our project to expand long-fiber and overlay papers capacity in Gernsbach, Germany. The rebuild of our #9 paper machine is expected to allow us to produce new and advanced products and achieve greater cost efficiency. The following table summarizes costs related to environmental capital projects and operating costs incurred to comply with environmental rules and regulations:
YEAR ENDED DECEMBER 31 ------------------------ 2002 2001 2000 ------ ------ ------ (IN MILLIONS) Capital expenditures........................................ $10.4 $ 1.7 $ 2.6 Operating expenses.......................................... 16.1 15.6 16.7 ----- ----- ----- Total.................................................. $26.5 $17.3 $19.3 ===== ===== =====
On December 18, 2002, we signed a definitive agreement to sell approximately 25,000 acres of our Maryland forestland to a subsidiary of The Conservation Fund, a national nonprofit land conservation fund. The agreement is contingent upon certain conditions, including, but not limited to, the successful negotiation of an agreement to supply us with pulpwood and other financing and legal contingencies and is expected to close by the end of March 2003. Based on the agreement, we will receive a 10-year installment note from a subsidiary of The Conservation Fund for approximately $38.0 million, representing the full amount of the consideration for the property. The 10-year note will be secured by a letter of credit. We intend to pledge the installment note and the letter of credit as collateral for a term loan from a financial institution for approximately $34.0 million. Upon closing of the transaction, we expect to recognize a pretax gain for book purposes of approximately $30.0 million. DIVIDEND PAYMENTS During 2002 and 2001, cash dividends paid on common stock totaled $30.3 million and $29.9 million, respectively. Our Board of Directors determines what, if any, dividend will be paid to our shareholders. Dividend payment decisions are based upon then existing factors and conditions and, therefore, historical trends of dividend payments are not necessarily indicative of future payments. We expect to meet all our near- and longer-term cash needs from a combination of operating cash flow, cash and cash equivalents, sale of timberlands, our existing credit facility or other bank lines of credit and other long-term debt. However, as discussed in Item 8 -- Financial Statements and Supplementary Data -- Note 13, an unfavorable outcome of various environmental matters could have a material adverse impact on our consolidated financial position, liquidity and/or results of operations. ENVIRONMENTAL MATTERS We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources, and liability for personal injury and for damages to property and natural resources. Because environmental regulations are not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. 18 SPRING GROVE, PENNSYLVANIA We are subject to the "Cluster Rule," a 1998 federal regulation in which the EPA aims to regulate air and water emissions from certain pulp and paper mills, including kraft pulp mills such as our Spring Grove facility. Issued under both the Clean Air Act and the Clean Water Act, the Cluster Rule establishes baseline emissions limits for toxic and conventional pollutant releases to both water and air. Subject to permit approvals, we have undertaken an initiative at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program set forth by the EPA in the Cluster Rule. This initiative, the "New Century Project," will require capital expenditures currently estimated to be approximately $37.0 million to be incurred before April 2004. The New Century Project includes improvements in brownstock washing, installation of an oxygen delignification bleaching process, 100 percent chlorine dioxide substitution, and a hardwood ozone bleaching system. Through December 31, 2002, we have invested approximately $12.3 million in this project. We expect to commit $22.8 million in 2003 and $1.9 million in 2004. We presently do not anticipate difficulties in implementing the New Century Project; however, we have not yet received all the required governmental approvals, nor have we installed all the necessary equipment. We are voluntarily cooperating with an investigation by the Pennsylvania DEP, which commenced in February 2002, of our Spring Grove facility related to certain discharges, which are alleged to be unpermitted, to the Codorus Creek. There is no indication that these discharges had an impact on human health or the environment. We are currently engaged in negotiations with the Pennsylvania DEP regarding these matters. (See Item 8 -- Financial Statements and Supplementary Data -- Notes 3 and 13). In 1999, EPA and the Pennsylvania DEP issued us separate NOVs alleging violations of air pollution control laws, primarily for purportedly failing to obtain appropriate pre-construction air quality permits in conjunction with certain modifications to our Spring Grove facility. For all but one of the modifications cited by EPA, we applied for and obtained from the Pennsylvania DEP the pre-construction permits that we concluded were required by applicable law. EPA reviewed those applications before the permits were issued. The Pennsylvania DEP's NOV pertained only to the modification for which we did not receive a pre-construction permit. We conducted an evaluation at the time of this modification and determined that the pre-construction permit cited by EPA and the Pennsylvania DEP was not required. We have been informed that EPA and the Pennsylvania DEP will seek substantial emissions reductions, as well as civil penalties, to which we believe we have meritorious defenses. Nevertheless, we are unable to predict the ultimate outcome of these matters or the costs, if any, involved. NEENAH, WISCONSIN We have previously reported with respect to potential environmental claims arising out of the presence of PCBs in sediments in the lower Fox River and in the Bay of Green Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In part, this facility uses wastepaper as a source of fiber. At no time did the Neenah facility utilize PCBs in the pulp and paper making process, but discharges from the facility containing PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into the Fox River resulted from the presence of NCR(R)-brand carbonless copy paper in the wastepaper that was received from others and recycled. As described below, various state and federal governmental agencies have formally notified seven potentially responsible parties ("PRPs"), including Glatfelter, that they are potentially responsible for response costs and "natural resource damages" ("NRDs") arising from PCB contamination in the lower Fox River and in the Bay of Green Bay, under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other statutes. The six other identified PRPs are NCR Corporation, Appleton Papers Inc., Georgia Pacific Corp. (successor to Fort Howard Corp. and Fort James Corp.), WTM I Co. (a subsidiary of Chesapeake Corp.), Riverside Paper Company, and U.S. Paper Mills Corp. (a subsidiary of Sonoco Products Company). We believe some of these PRPs may have corporate or contractual relationships with unidentified entities that may shift monetary obligations arising from the lower Fox River and Bay of Green Bay. CERCLA establishes a two-part liability structure that makes responsible parties liable for (1) "response costs" associated with the remediation of a release of hazardous substances and (2) NRDs related to that 19 release. Courts have interpreted CERCLA to impose joint and several liability on responsible parties for response costs, subject to equitable allocation in certain instances. Prior to a final settlement by all responsible parties and the final cleanup of the contamination, uncertainty regarding the application of such liability will persist. On January 7, 2003, the Wisconsin Department of Natural Resources (the "Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the cleanup of reaches of the lower Fox River known as Operable Unit 1 ("OU1") (which consists of Little Lake Butte des Morts, the portion of the river that is closest to our Neenah facility) and Operable Unit 2 ("OU2") (which is the portion of the river between dams at Appleton and Little Rapids). This ROD does not address the entire lower Fox River or the Bay of Green Bay nor does it place any value on claims for NRDs associated with this matter. The environmental agencies have stated that the Record of Decision related to the remainder of the river and the Bay of Green Bay is expected to be issued during mid-2003. Subject to extenuating circumstances and alternative solutions arising during the cleanup, the ROD requires the removal of approximately 784,000 cubic yards of sediment from Little Lake Butte des Morts. The ROD also requires the monitoring of the two operable units. Wisconsin DNR and EPA estimate that the remedy for these two reaches will cost approximately $75 million but could cost within a range from approximately $52 million to $112 million. The $75 million estimate is approximately the same amount estimated for these sections of the river in the Proposed Remedial Action Plan ("PRAP") issued in October, 2001 related to this matter. We are continuing to analyze the ROD to determine the viability of the remedy set forth therein and its potential impact on us. The total cost estimate of the PRAP, including OU1 and OU2, was $307.6 million (without a contingency factor) over a 7-18 year time period. The most significant component of the estimated costs is attributable to large-scale sediment removal by dredging. Based on cost estimates of large-scale dredging response actions at other sites, we believe the PRAP's cost projections may underestimate actual costs of the proposed remedy by approximately $450 million. As noted above, NRD claims are theoretically distinct from costs related to the primary remediation of a Superfund site. Calculating the value of NRD claims is difficult, especially in the absence of a completed remedy for the underlying contamination. The State of Wisconsin, the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), four Indian tribes and the Michigan Attorney General have asserted that they possess NRD claims related to the lower Fox River and the Bay of Green Bay. In June 1994, FWS notified the seven identified PRPs that it considered them potentially responsible for NRDs. The federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded with the preparation of an NRD assessment. While the final assessment will be delayed until after the selection of a remedy, the federal trustees released a plan on October 25, 2000 that values their NRDs for injured natural resources between $176 million and $333 million. We believe that the federal NRD assessment is technically and procedurally flawed. We also believe that the NRD claims alleged by the various alleged trustees are legally and factually without merit. On June 20, 2002, the United States, the State of Wisconsin and the Fort James Operating Company ("Fort James") lodged a consent decree with the U.S. District Court for the Eastern District of Wisconsin. If entered, that consent decree would resolve certain outstanding claims, primarily NRD claims, against Fort James and a related entity. Under the terms of the proposed consent decree, Fort James would pay $6.2 million in cash to the United States and the State of Wisconsin in settlement of various claims related to NRDs and cost recovery related to dredging of sediments at Deposits 56/57. Fort James also agrees to convey 1,063 acres of land to the State and to perform delineated NRD "restoration" projects at a cost of up to $3.9 million. We submitted comments on the proposed consent decree to the U.S. Department of Justice. These comments suggest that the United States, the State of Wisconsin and certain alleged natural resource trustees not move to enter this proposed consent decree, due to various procedural and substantive infirmities. We 20 cannot predict whether the governments will ultimately make such a motion or whether the Court will enter the proposed consent decree as it is written. Because the plaintiffs have yet to provide a factual or legal justification for the settlement, we are not able to extrapolate an estimated settlement amount for Glatfelter from the proposed consent decree. We are seeking settlement with the Wisconsin agencies and with the federal government for all of our potential liabilities for response costs and NRDs associated with the contamination. The Wisconsin DNR and FWS have published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports estimate our Neenah facility's share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because the studies themselves disclose that they are not accurate and are based on assumptions for which there is no evidence. We believe that our volumetric contribution is significantly lower than the estimates. Further, we do not believe that a volumetric allocation would constitute an equitable distribution of the potential liability for the contamination. Other factors, such as the location of contamination, location of discharge and a party's role in causing discharge must be considered in order for the allocation to be equitable. We have entered into interim cost-sharing agreements with four of the other six PRPs, pursuant to which such PRPs have agreed to share both defense costs and costs for scientific studies relating to PCBs discharged into the lower Fox River. These interim cost-sharing agreements have no bearing on the final allocation of costs related to this matter. Based upon our evaluation of the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination, we believe our share of any liability among the seven identified PRPs is much less than one-seventh of the whole. We also believe that additional potentially responsible parties exist other than the seven identified PRPs. For instance, certain of the identified PRPs discharged their wastewater through public wastewater treatment facilities, which we believe makes the owners of such facilities potentially responsible in this matter. We also believe that entities providing wastepaper-containing PCBs to each of the recycling mills, including our Neenah facility, are also potentially responsible for this matter. We continue to believe that this matter will likely result in litigation, but cannot predict the timing, nature, extent or magnitude of such litigation. We currently are unable to predict our ultimate cost related to this matter. RESERVES FOR ENVIRONMENTAL LIABILITIES The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs 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 abatement, the response actions that may be required, the availability of qualified remediation contractors, equipment and landfill space and the number and financial resources of any other PRPs. We have established reserves relating to unasserted claims for environmental liabilities for those matters for which it is probable that a claim will be made, that an obligation may exist and for which the amount of the obligation is reasonably estimable. As of December 31, 2002, and December 31, 2001, we had accrued reserves for all contingent liabilities related to environmental matters of approximately $30.3 million and $28.8 million, respectively. These accruals are primarily included in "other long-term liabilities" on the Consolidated Balance Sheets. During the fourth quarter of 2002, we accrued and charged $1.5 million as an unusual item.(See Item 8 -- Financial Statements and Supplementary Data -- Notes 3 and 13.) We accrued and charged $2.4 million to pretax earnings each year in 2001 and 2000 related to the lower Fox River and the Bay of Green Bay. NEENAH, WISCONSIN -- RANGE OF REASONABLY POSSIBLE OUTCOMES Based on analysis of currently available information and experience regarding the cleanup of hazardous substances, we believe that it is reasonably possible that our costs associated with the lower Fox River and the Bay of Green Bay may exceed current reserves by amounts that may prove to be insignificant or that could range, in the aggregate, up to approximately $125 million, over a period that is undeterminable but could range beyond 20 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other 21 possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote. We have reduced the upper end of the monetary range previously disclosed due to our belief that technological advances and improved remediation techniques would result in lower costs to remediate. In our estimate of the upper end of the range, we have assumed full-scale dredging as set forth in the ROD for Operable Unit 1 and 2. We have also assumed full-scale dredging for the remainder of the river and the Bay of Green Bay, as set forth in the PRAP, at a significantly higher cost than estimated in the PRAP. We have also assumed our share of the ultimate liability to be 18%, which is significantly higher than we believe is appropriate or will occur and a level of NRD claims and claims for reimbursement of expenses from other parties that, although reasonably possible, is unlikely. In estimating both our current reserve for environmental remediation and other environmental liabilities and the possible range of additional costs, we have not assumed that we will bear the entire cost of remediation and damages to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on their financial condition and probable contribution. Our evaluation of the other PRPs' financial condition included the review of publicly disclosed financial information. The relative probable contribution is based upon our knowledge that at least two PRPs manufactured the paper that included the PCBs and as such, in our opinion, bear a higher level of responsibility. In addition, our assessment is based upon the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We have also considered that over a number of years, certain PRPs were under the ownership of large multinational companies, which appear to retain some liability for this matter. We continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs (if any) associated with the lower Fox River and the Bay of Green Bay. We believe that we are insured against certain losses related to the lower Fox River and the Bay of Green Bay, depending on the nature and amount of the losses. Insurance coverage, which is currently being investigated under reservations 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. We do not know when the insurers' investigations as to coverage will be completed and we are uncertain as to what the ultimate recovery will be and whether it will be significant in relation to the losses for which we have accrued. SUMMARY Our current assessment is that we should be able to manage these environmental matters without a long-term, material adverse impact on us. These matters could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. With regard to the lower Fox River and the Bay of Green Bay, if we are not successful in managing the matter and are ordered to implement the remedy proposed in the ROD and the PRAP, such an order would have a material adverse effect on our consolidated financial position, liquidity and results of operations and would result in a default under our loan covenants. ENVIRONMENTAL ACHIEVEMENTS We continue to strive for ISO 14001 certification for our environmental management system as a component of our 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 systems. Our Spring Grove, Pennsylvania, Neenah, Wisconsin and Gernsbach, Germany facilities are already ISO 14001 certified. As a part of maintaining our certification, each facility's environmental management system is audited by an independent third party on an ongoing, periodic basis. We plan to have our Scaer, France facility ISO 14001 certified by the middle of 2004. 22 On April 20, 1999, we announced our "New Century Project." The New Century Project is our commitment to participate at our Spring Grove facility in EPA's Voluntary Advanced Technology Incentive Program under the "Cluster Rules." As described in the Capital Spending section above, we expect to spend approximately $37.0 million prior to April 2004 to eliminate the use of elemental chlorine in our bleaching process, reduce odor emissions and improve water quality. The New Century Project demonstrates our commitment to minimizing our impact on natural resources. RECENT ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001 effective for fiscal years beginning after December 15, 2001, and establishes revised reporting requirements for goodwill and other intangible assets. We adopted SFAS No. 142 on January 1, 2002 and, therefore, we no longer amortize goodwill unless evidence of impairment exists; goodwill will be evaluated on at least an annual basis (Item 8 -- Financial Statements and Supplementary Data -- Note 6). SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June 2001 and applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. We adopted SFAS No. 143 on January 1, 2003, and it did not impact our consolidated financial position or results of operation. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," was effective for fiscal years beginning after December 15, 2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and establishes new guidelines for the valuation of long-lived assets. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not impact our consolidated financial position or results of operations. SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections," was issued April 2002 and is effective for fiscal years beginning after May 15, 2002. This statement, among other things, rescinds the requirement to classify a gain or loss upon the extinguishment of debt as an extraordinary item on the income statement. It also requires lessees to account for certain modifications to lease agreements in a manner consistent with sale-leaseback transaction accounting. We adopted SFAS No. 145 on January 1, 2003, and it did not impact our consolidated financial position or results of operations. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", was issued in June 2002 and requires recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and, as such, has no impact on our consolidated financial position or results of operations. SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment to SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of December 31, 2002, we have elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25. In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. The accounting requirements of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We do not expect the 23 adoption of FIN No. 45 to have any significant accounting implications as all of our commitments and guarantees are on behalf of our subsidiaries. We have adopted the disclosure requirements of FIN No. 45. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our market risk exposure primarily results from changes in interest rates and currency exchange rates. At December 31, 2002, we had debt outstanding of approximately $219.5 million, of which $67.7 million, or 31%, was variable rate. The table below presents average principal outstanding and related interest rates for the next five years. Fair values included herein have been determined based upon rates currently available to us for debt with similar terms and remaining maturities. The table should be read in conjunction with Item 8 -- Financial Statements and Supplementary Data -- Notes 9 and 10.
YEAR ENDED DECEMBER 31 AT DECEMBER 31 --------------------------------------------------- --------------------------- 2003 2004 2005 2006 2007 CARRYING VALUE FAIR VALUE -------- -------- -------- -------- ------- -------------- ---------- (DOLLARS IN THOUSANDS) LONG-TERM DEBT Average principal outstanding At fixed interest rates... $151,403 $150,670 $150,168 $150,000 $81,250 $151,800 $166,415 At variable interest rates................... 67,704 67,704 67,704 67,704 67,704 67,704 Weighted-average interest rate On fixed interest rate debt.................... 6.87% 6.87% 6.87% 6.87% 6.87% On variable interest rate debt.................... 4.02% 4.02% 4.02% 4.02% CROSS-CURRENCY SWAP Pay variable -- EURIBOR... E 72,985 E 72,985 E 72,985 E 72,985 $ (6,464) $ (6,464) Variable rate paid...... 3.69% 3.69% 3.69% 3.69% Receive variable -- US$ LIBOR................... $ 70,000 $ 70,000 $ 70,000 $ 70,000 Variable rate received.............. 2.05% 2.05% 2.05% 2.05%
Variable rate debt outstanding represents borrowing under our revolving credit facility. Borrowings incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin. At December 31, 2002, the interest rate paid was 4.02%. An instantaneous 100 basis point increase or decrease in the interest rate on variable rate debt would increase or decrease interest expense by $0.7 million. At December 31, 2002, all of our variable-rate debt was recorded at S&H, our wholly-owned subsidiary in Gernsbach, Germany, where the functional currency is the Euro. At December 31, 2002, we had outstanding a cross-currency swap agreement with a termination date of June 24, 2006. Under this transaction, we swapped $70.0 million for approximately E73 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate (EURIBOR), plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR rate, plus applicable margins. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. Dollar-denominated debt obligations recorded at our S&H subsidiary in Gernsbach, Germany. The cross currency swaps are recorded at fair value on the Consolidated Balance Sheet and changes in fair value are recognized in current earnings in the Consolidated Statements of Income. Changes in fair value of the cross-currency swap transaction are substantially offset by changes in the value of US Dollar denominated obligations when they are remeasured in Euros, the functional currency of S&H. (See Item 8 -- Financial Statements and Supplementary Data -- Note 10). We are subject to certain risks associated with changes in foreign currency exchange rates to the extent our operations are conducted in currencies other than the U.S. dollar. At December 31, 2002, approximately 71% of our net sales shipped from the United States, 24% from Germany, and 5% from other international locations. 24 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA P. H. GLATFELTER COMPANY AND SUBSIDIARIES MANAGEMENT'S RESPONSIBILITY REPORT 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 accounting principles generally accepted in the United States of America 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, audit and internal control issues and have completely free access to the Audit Committee. GEORGE H. GLATFELTER II Chairman and Chief Executive Officer ROBERT P. NEWCOMER President and Chief Operating Officer and Acting Chief Financial Officer 25 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, 2002 and 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. 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. As discussed in Note 6 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Deloitte & Touche LLP Philadelphia, Pennsylvania February 28, 2003 26 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31 --------------------------------------- 2002 2001 2000 ----------- ----------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) NET SALES................................................... $543,823 $635,691 $724,720 ENERGY SALES -- NET......................................... 9,814 9,661 9,243 -------- -------- -------- Total revenues......................................... 553,637 645,352 733,963 COST OF PRODUCTS SOLD....................................... 426,840 503,569 591,201 -------- -------- -------- Gross profit........................................... 126,797 141,783 142,762 OPERATING EXPENSES Selling, general and administrative expenses.............. 54,259 60,653 60,267 Loss (gain) on sales of plant, equipment and timberlands............................................ 158 (2,015) 467 Unusual items............................................. 2,241 60,908 3,336 -------- -------- -------- Total operating expenses............................... 56,658 119,546 64,070 -------- -------- -------- Operating income..................................... 70,139 22,237 78,692 OTHER NONOPERATING INCOME (EXPENSE) Interest expense on debt.................................. (15,143) (15,689) (16,405) Interest income on investments and other -- net........... 1,571 3,589 3,820 Other -- net.............................................. 2,498 1,583 2,496 -------- -------- -------- Total other income (expense)........................... (11,074) (10,517) (10,089) -------- -------- -------- Income before income taxes........................... 59,065 11,720 68,603 INCOME TAX PROVISION (BENEFIT) Current................................................... 3,579 (8,861) 11,366 Deferred.................................................. 17,891 13,623 13,237 -------- -------- -------- Total income tax provision (benefit)................... 21,470 4,762 24,603 -------- -------- -------- NET INCOME.................................................. $ 37,595 $ 6,958 $ 44,000 ======== ======== ======== EARNINGS PER SHARE Basic..................................................... $ .87 $ .16 $ 1.04 Diluted................................................... .86 .16 1.04 -------- -------- --------
The accompanying notes are an integral part of these Consolidated Financial Statements. 27 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
DECEMBER 31 ----------------------- 2002 2001 --------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PAR VALUE) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 36,074 $ 95,501 Accounts receivable (less allowance for doubtful accounts: 2002 -- $2,211; 2001 -- $1,551)........................ 60,377 60,157 Inventories............................................... 70,456 62,815 Refundable income taxes................................... -- 17,522 Prepaid expenses and other current assets................. 9,473 5,814 -------- ---------- Total current assets................................... 176,380 241,809 PLANT, EQUIPMENT AND TIMBERLANDS -- NET..................... 518,913 497,228 OTHER ASSETS................................................ 261,735 227,567 -------- ---------- Total assets........................................... $957,028 $ 966,604 ======== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Current portion of long-term debt......................... $ 795 $ 123,709 Short-term debt........................................... 1,080 1,453 Accounts payable.......................................... 31,608 36,155 Dividends payable......................................... 7,638 7,481 Income taxes payable...................................... 1,918 1,853 Accrued compensation and other expenses and deferred income taxes........................................... 54,909 40,403 -------- ---------- Total current liabilities.............................. 97,948 211,054 LONG-TERM DEBT.............................................. 218,709 152,593 DEFERRED INCOME TAXES....................................... 184,180 167,623 OTHER LONG-TERM LIABILITIES................................. 82,358 81,865 -------- ---------- Total liabilities...................................... 583,195 613,135 COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, $.01 par value; authorized -- 120,000,000 shares; issued -- 54,361,980 shares (including shares in treasury: 2002 -- 10,717,824; 2001 -- 11,611,559)... 544 544 Capital in excess of par value............................ 40,798 40,968 Retained earnings......................................... 495,278 488,150 Accumulated other comprehensive loss...................... (3,708) (3,849) -------- ---------- Total.................................................. 532,912 525,813 Less cost of common stock in treasury..................... (159,079) (172,344) -------- ---------- Total shareholders' equity............................. 373,833 353,469 -------- ---------- Total liabilities and shareholders' equity........... $957,028 $ 966,604 ======== ==========
The accompanying notes are an integral part of these Consolidated Financial Statements. 28 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------- 2002 2001 2000 --------- -------- -------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income.................................................. $ 37,595 $ 6,958 $ 44,000 Items included in net income not using (providing) cash Depreciation, depletion and amortization.................. 45,190 44,988 46,106 Pension income............................................ (32,648) (30,678) (28,109) Deferred income tax provision............................. 17,891 13,623 13,237 Unusual items............................................. 2,241 60,908 3,336 Loss (gain) on dispositions of fixed assets............... 158 (2,015) 467 Expense related to 401(k) plans and other................. 1,235 1,681 1,980 Change in assets and liabilities, net of effect of unusual items Accounts receivable....................................... 5,738 (14,350) 483 Inventories............................................... (2,612) 3,801 11,351 Other assets and prepaid expenses......................... (5,618) (4,703) (5,530) Accounts payable, accrued compensation and other expenses, deferred income taxes and other long-term liabilities............................................ (8,017) (8,558) 17,729 Income taxes payable...................................... 13,189 (7,756) (1,735) --------- -------- -------- Net cash provided by operating activities................... 74,342 63,899 103,315 CASH FLOWS FROM INVESTING ACTIVITIES Purchases of plant, equipment and timberlands............. (51,152) (47,845) (29,215) Proceeds from disposal of fixed assets.................... 1,498 2,764 143 Net proceeds from sale of Ecusta Division................. -- 14,505 -- --------- -------- -------- Net cash used in investing activities....................... (49,654) (30,576) (29,072) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of credit facility................. 61,958 -- -- Repayment of old revolving credit facility................ (133,027) -- -- Net borrowings (payment) of debt.......................... 6,280 (21,794) (10,136) Dividends paid............................................ (30,307) (29,876) (29,624) Purchases of common stock................................. -- -- (382) Proceeds from stock option exercises...................... 10,491 2,960 93 --------- -------- -------- Net cash used in financing activities....................... (84,605) (48,710) (40,049) Effect of exchange rate changes on cash..................... 490 336 323 --------- -------- -------- Net increase (decrease) in cash and cash equivalents........ (59,427) (15,051) 34,517 CASH AND CASH EQUIVALENTS At beginning of year...................................... 95,501 110,552 76,035 --------- -------- -------- At end of year............................................ $ 36,074 $ 95,501 $110,552 ========= ======== ======== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid (received) for Interest.................................................. $ 16,420 $ 16,455 $ 16,848 Income taxes.............................................. (12,419) 13,385 12,626 --------- -------- --------
The accompanying notes are an integral part of these Consolidated Financial Statements. 29 P. H. GLATFELTER COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ACCUMULATED COMMON CAPITAL IN OTHER TOTAL SHARES COMMON EXCESS OF RETAINED COMPREHENSIVE TREASURY SHAREHOLDERS' OUTSTANDING STOCK PAR VALUE EARNINGS INCOME (LOSS) STOCK EQUITY ----------- ------ ---------- -------- ------------- --------- ------------- (IN THOUSANDS EXCEPT SHARES OUTSTANDING) BALANCE, JANUARY 1, 2000............... 42,246,255 $544 $42,296 $496,680 $(1,392) $(180,004) $358,124 Comprehensive income Net income........................... 44,000 44,000 Other comprehensive income Foreign currency translation adjustments........................ (1,451) ------- Other comprehensive income........... (1,451) (1,451) -------- Comprehensive income................... 42,549 Cash dividends declared................ (29,661) (29,661) Delivery of treasury shares Performance shares................... 6,048 (2) 90 88 401(k) plans......................... 167,769 (606) 2,498 1,892 Employee stock options exercised -- net................... 7,500 (19) 112 93 Purchase of stock for treasury......... (36,800) (382) (382) ---------- ---- ------- -------- ------- --------- -------- BALANCE, DECEMBER 31, 2000............. 42,390,772 544 41,669 511,019 (2,843) (177,686) 372,703 Comprehensive income: Net income........................... 6,958 6,958 Other comprehensive income Reclassification adjustment for Ecusta sale included in net income........................... 1,936 Foreign currency translation adjustments...................... (2,963) Transition adjustment for interest rate swaps....................... 845 Change in market value of interest rate swaps....................... (824) ------- Other comprehensive income........... (1,006) (1,006) -------- Comprehensive income................... 5,952 Cash dividends declared................ (29,827) (29,827) Delivery of treasury shares Performance shares................... 3,489 (9) 52 43 401(k) plans......................... 118,389 (108) 1,746 1,638 Employee stock options exercised -- net................... 237,771 (584) 3,544 2,960 ---------- ---- ------- -------- ------- --------- -------- BALANCE, DECEMBER 31, 2001............. 42,750,421 544 40,968 488,150 (3,849) (172,344) 353,469 Comprehensive income: Net income........................... 37,595 37,595 Other comprehensive income Foreign currency translation adjustments...................... 162 Change in market value of interest rate swaps....................... (21) ------- Other comprehensive income......... 141 141 -------- Comprehensive income................... 37,736 Tax effect on employee stock options exercised............................ 1,071 1,071 Cash dividends declared................ (30,467) (30,467) Delivery of treasury shares Performance shares................... 4,726 3 70 73 401(k) plans......................... 92,504 19 1,373 1,392 Director compensation................ 5,705 (1) 69 68 Employee stock options exercised -- net................... 790,800 (1,262) 11,753 10,491 ---------- ---- ------- -------- ------- --------- -------- BALANCE, DECEMBER 31, 2002............. 43,644,156 $544 $40,798 $495,278 $(3,708) $(159,079) $373,833 ========== ==== ======= ======== ======= ========= ========
The accompanying notes are an integral part of these Consolidated Financial Statements. 30 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. ORGANIZATION P. H. Glatfelter Company and subsidiaries (d/b/a Glatfelter) is a manufacturer of specialized printing papers and engineered products. Headquartered in York, Pennsylvania, our manufacturing facilities are located in Spring Grove, Pennsylvania; Neenah, Wisconsin; Gernsbach, Germany; Scaer, France and the Philippines. Our products are marketed throughout the United States and in many foreign countries, either through wholesale paper merchants, brokers and agents or directly to customers. NOTE 2. ACCOUNTING POLICIES (A) PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Glatfelter and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated. (B) ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. (C) RECLASSIFICATIONS Certain reclassifications have been made to the prior years' consolidated financial statements and notes thereto to conform to those classifications used in the current year. (D) CASH AND CASH EQUIVALENTS We classify all highly liquid instruments with an original maturity of three months or less at the time of purchase as cash equivalents. (E) INVENTORIES Inventories are stated at the lower of cost or market. Raw materials and in-process and finished inventories of our domestic manufacturing operations are valued using the last-in, first-out (LIFO) method, and the supplies inventories are valued principally using the average-cost method. Inventories at our foreign operations are valued using a method which approximates average cost. See Note 4. (F) PLANT, EQUIPMENT AND TIMBERLANDS For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. For income taxes purposes, depreciation is primarily calculated using accelerated methods over lives established by statute or U. S. Treasury Department procedures. Provision is made for deferred income taxes applicable to this difference. See Notes 2(i) and 5. The range of estimated service lives used to calculate financial reporting depreciation for principal items of plant and equipment are as follows: Buildings................................................... 10-45 Years Machinery and equipment..................................... 7-35 Years Other....................................................... 4-40 Years
All timber costs related to the reforestation process, including interest, taxes, site preparation, planting, fertilization, herbicide application and thinning, are capitalized. After 20 years, the timber is considered merchantable and depletion is computed on a unit rate of usage by growing area based on estimated quantities of recoverable material. For purchases of land tracts with existing timber, inventoried merchantable timber is subject to immediate depletion based upon usage. Costs related to the purchase of pre-merchantable timber are transferred to merchantable timber over a 10-year period, whereupon it is eligible for depletion. Estimated timber volume is based upon its current stage in the growth cycle. Growth and yield data is developed through the use of published growth and yield studies as well as our own historical experience. This data is used to calculate volumes for established timber stands. Timber is depleted on an actual usage basis. 31 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) For purchased timber tracts, a systematic timber inventory is completed and volume is estimated for merchantable timber. Pre-merchantable timber of purchased tracts is estimated based upon its current stage in the growth cycle using growth and yield data. 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. (G) INVESTMENT SECURITIES Investments in debt securities are classified as held-to-maturity and recorded at amortized cost in the Consolidated Balance Sheets when we have the positive intent and ability to hold until maturity. At December 31, 2002 and 2001, investments in debt securities classified as held-to-maturity totaled $10.1 million and $10.3 million, respectively, and the noncurrent portion is included in "Other assets" on the Consolidated Balance Sheets. The corresponding fair market values were $11.9 million and $11.4 million, as of December 31, 2002 and 2001, respectively. (H) VALUATION OF LONG-LIVED ASSETS We evaluate 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) INCOME TAXES Income taxes are accounted for under the liability method. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances, if any, are provided when a portion or all of a deferred tax asset may not be realized. See Note 8. (J) TREASURY STOCK Common stock purchased for treasury is recorded at cost. At the date of subsequent reissue, the treasury stock account is reduced by the cost of such stock on the weighted-average cost basis. (K) FOREIGN CURRENCY TRANSLATION Our subsidiaries outside the United States use their local 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 component of other comprehensive income (loss). Transaction gains and losses are included in income in the period in which they occur. (L) REVENUE RECOGNITION We recognize revenue on product sales upon shipment and on energy sales when electricity is delivered to our customers. Certain costs associated with the production of electricity, such as fuel, labor, depreciation and maintenance are netted against energy sales for presentation on the Consolidated Statements of Income. Costs netted against energy sales totaled $7.1 million, $6.4 million and $5.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. Our current contract to sell electricity generated in excess of our own use expires in the year 2010 and requires that the customer purchase all of our 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. (M) 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 principally classified as "Other long-term liabilities" on the Consolidated Balance Sheets. Such undiscounted liabilities are exclusive of any insurance or other claims against third 32 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) parties. Recoveries of environmental remediation costs from other parties, including insurance carriers, are recorded as assets when their receipt is assured beyond a reasonable doubt. We have not recorded any such recoveries. Costs related to environmental remediation are charged to expense. Environmental costs are capitalized if the costs extend the life of the asset, increase its capacity and/or mitigate or prevent contamination from future operations. See Note 13. (N) STOCK-BASED COMPENSATION Stock-based compensation is accounted for in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations, as permitted by Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation." Compensation expense for both restricted stock and performance stock awards is recognized ratably over the performance period based on changes in quoted market prices of Glatfelter stock and the likelihood of achieving the performance goals. This variable plan accounting recognition is due to the uncertainty of achieving performance goals and determining the resulting number of shares to ultimately be issued. No compensation expense is recorded for stock options granted to employees. PRO FORMA INFORMATION No compensation expense has been recognized for non-qualified stock options issued. The weighted-average grant date fair value of options granted during 2002, 2001 and 2000 was $2.48, $3.84 and $2.60, respectively. The fair value of each option on the date of grant was estimated using the Black-Scholes option pricing using the following assumptions:
2002 2001 2000 ------- ------ ------ Risk-free interest rate..................................... 4.13% 5.57% 5.61% Expected dividend yield..................................... 5.15% 4.58% 7.61% Expected volatility......................................... 27.8% 29.7% 42.0% Expected life............................................... 6.5 YRS 10 yrs 10 yrs
Had compensation cost for non-qualified stock options been determined consistent with SFAS No. 123, our net income and earnings per share would have been reduced to the following pro forma amounts:
YEAR ENDED DECEMBER 31 -------------------------- 2002 2001 2000 ------- ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income: As reported........................................... $37,595 $6,958 $44,000 Stock-based compensation expense, after tax........... (1,185) (1,514) (1,344) ------- ------ ------- Pro forma............................................. $36,410 $5,444 $42,656 ======= ====== ======= Earnings per share: Reported -- basic..................................... $ 0.87 $ 0.16 $ 1.04 Pro forma -- basic.................................... 0.84 0.13 1.01 Reported -- diluted................................... 0.86 0.16 1.04 Pro forma -- diluted.................................. 0.83 0.13 1.00
(O) FINANCIAL DERIVATIVES On January 1, 2001, we adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires the recognition of the fair value of any derivative financial instrument on the balance sheet. Changes in fair value of the derivative and, in certain instances, changes in the fair value of an underlying hedged asset or liability, are recognized either through income or as a component of other comprehensive income. The adoption of this statement did not have a material impact on our consolidated financial position or results of operations. 33 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (P) EARNINGS PER SHARE Basic earnings per share are computed by dividing net income by the weighted-average common shares outstanding during the respective periods. Diluted earnings per share are computed by dividing net income by the weighted-average common shares and common share equivalents outstanding during the period. The dilutive effect of common share equivalents is considered in the diluted earnings per share computation using the treasury stock method. (Q) FAIR VALUE OF FINANCIAL INSTRUMENTS The amounts reported on the Consolidated Balance Sheets for cash and cash equivalents, accounts receivable, other assets, and short-term debt approximate fair value. Financial derivatives are recorded at fair value. The following table sets forth carrying value and fair value for investment securities and long-term debt:
2002 2001 --------------------------- --------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- (IN THOUSANDS) Investment securities................ $10,124 $11,934 $10,287 $11,423 Long-term debt....................... 219,504 234,119 276,302 275,181
(R) RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 142, "Goodwill and Other Intangible Assets," was issued in June 2001, effective for fiscal years beginning after December 15, 2001, and establishes revised reporting requirements for goodwill and other intangible assets. We adopted SFAS No. 142 on January 1, 2002 and, therefore, we no longer amortize goodwill unless evidence of impairment exists; goodwill will be evaluated on at least an annual basis (Note 6). The statement requires that goodwill be evaluated on at least an annual basis. We performed the first step of the transitional goodwill impairment test as of January 1, 2002 and determined that no impairment to our goodwill existed. We performed our first annual impairment test as of September 30, 2002 and determined that no impairment to our goodwill existed. SFAS No. 143, "Accounting for Asset Retirement Obligations," was issued in June 2001 and applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. We adopted SFAS No. 143 on January 1, 2003, and it did not impact our consolidated financial position or results of operations. SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," was effective for fiscal years beginning after December 15, 2001. This statement supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and establishes new guidelines for the valuation of long-lived assets. We adopted SFAS No. 144 on January 1, 2002. The adoption of SFAS No. 144 did not impact our consolidated financial position or results of operations. SFAS No. 145, "Recission of SFAS No. 4, 44 and 64, Amendment of SFAS No. 13, and Technical Corrections," was issued April 2002 and is effective for fiscal years beginning after May 15, 2002. This statement, among other things, rescinds the requirement to classify a gain or loss upon the extinguishment of debt as an extraordinary item on the income statement. It also requires lessees to account for certain modifications to lease agreements in a manner consistent with sale-leaseback transaction accounting. We adopted SFAS No. 145 on January 1, 2003, and it did not impact our consolidated financial position or results of operations. SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," was issued in June 2002 and requires recognition of costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. This statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002, and, as such, has no impact on our consolidated financial position or results of operations. SFAS No. 148, "Accounting for Stock-Based Compensation Transition and Disclosure, an Amendment to SFAS No. 123." This statement amends SFAS No. 123, "Accounting for Stock-Based Compensation," to 34 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. As of December 31, 2002, we have elected to continue accounting for stock-based compensation in accordance with APB Opinion No. 25. In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of the Indebtedness of Others" ("FIN No. 45"). FIN No. 45 requires entities to establish liabilities for certain types of guarantees, and expands financial statement disclosures for others. The accounting requirements of FIN No. 45 are effective for guarantees issued or modified after December 31, 2002, and the disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. We do not expect the adoption of FIN No. 45 to have any significant accounting implications as all of our commitments and guarantees are on behalf of our subsidiaries. We have adopted the disclosure requirements of FIN No. 45. NOTE 3. UNUSUAL ITEMS 2002 Unusual items totaled $2.2 million, $60.9 million and $3.3 million in 2002, 2001 and 2000, respectively. Amounts recorded in 2002 included a $4.2 million restructuring charge and a $1.5 million contingent liability related to on-going negotiations with the Pennsylvania Department of Environmental Protection ("Pennsylvania DEP") (see Note 13). These charges were partially offset by a $3.5 million gain for the settlement of certain escrow claims, including interest and associated liabilities related to the 1998 acquisition of our Schoeller & Hoesch ("S&H") subsidiary. The $4.2 million restructuring charge related to the reduction of our workforce by 76 positions, including 36 positions eliminated through attrition. The workforce reduction was substantially completed in the first quarter of 2003. Of the $4.2 million restructuring charge, $1.6 million related to enhanced pension benefits to be paid out of our retirement plans as discussed in our disclosure of Retirement Plans and Other Post-Retirement Benefits (see Note 12). The remaining $2.6 million of this charge related to severance and other employee benefits to be paid using our assets. 2001 On May 16, 2001, we announced that we had entered into an agreement to sell our Ecusta facility and two of its operating subsidiaries ("Ecusta Division"). Because our Board of Directors had committed to a plan to dispose of the Ecusta Division by accepting an offer to sell the Division, subject to certain closing conditions, at a loss, on that date the assets of the Ecusta Division were reclassified as assets held-for-disposal, and thus the carrying amount of these assets was reduced to fair value. The decision to sell the Ecusta Division was made due to the determination that the business of the Ecusta Division, principally tobacco papers, did not fit with our long-term, strategic plans. On August 9, 2001, we completed the sale of the Ecusta Division, including plant and equipment, inventory, accounts receivable and essentially all other operating assets and certain other receivables related to our tobacco papers business. The carrying value of the Ecusta Division totaled $61.5 million after we recorded an impairment write down of $50.0 million in the second quarter to reflect the fair value of the Ecusta Division. These assets were sold for $22.7 million plus the assumption by the buyer of certain liabilities totaling $21.4 million related to the Ecusta Division's business. The liabilities assumed by the buyer included accounts payable, accrued expenses and other liabilities related to the operation of the Ecusta Division's business. Our total charge to earnings associated with the sale was $58.4 million, including the $50.0 million impairment charge recognized during the second quarter of 2001. 35 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The $58.4 million pretax charge included $6.1 million in transaction and other costs incurred upon sale of the Ecusta Division. Of this amount, approximately $1.9 million related to transaction costs. The remainder related to certain liabilities accrued related to the transaction. Under the terms of the sale agreement, we are obligated to incur costs in the future related to certain long-term liabilities related to employee benefits ($2.0 million) and facility maintenance ($.9 million) which would not have been necessary had we retained ownership interest in the Ecusta Division but were agreed to in order to consummate the transaction. The $58.4 million pretax charge was net of a $15.0 million pretax gain related to the curtailment and settlement of pension obligations and other retiree benefits related to employees who transferred to the buyer. The Ecusta Division contributed approximately $7.2 million in operating profit during 2001 until its sale in August and had an operating loss of approximately $1.0 million during 2000. A calculation of the unusual item related to the 2001 sale of the Ecusta Division is as follows (in thousands): Asset impairment recognized................................. $(50,000) Loss recognized upon sale Consideration received.................................... $44,166 Book value of net assets sold............................. (61,467) ------- (17,301) Transaction and other costs............................... (6,095) Gain on retiree benefit plans............................. 14,988 ------- Loss on disposition excluding impairment charge........ (8,408) (8,408) ------- -------- Total loss on disposition.............................. $(58,408) ========
We also recognized a $2.5 million pretax charge during the second quarter of 2001 related to the settlement of an environmental matter in connection with the Spring Grove facility's wastewater discharge permit. The total unusual items recorded in 2001 were $60.9 million. 2000 During the first quarter of 2000, we finalized a restructuring plan and shortly thereafter began to reduce the workforce at Ecusta. The workforce reduction was completed during the first quarter of 2001 and resulted in the reduction of over 200 salaried and hourly jobs associated with our tobacco paper production capacity. We accrued and charged to expense $3.3 million ($2.1 million after tax) in the first quarter of 2000 primarily as a result of the voluntary portion of this restructuring, specifically 42 salaried employees. Of this amount, $2.2 million related to enhanced pension benefits to be paid out of our retirement plans as discussed in our disclosure of Retirement Plans and Other Post-Retirement Benefits (see Note 12). The remaining $1.1 million of this charge related to severance and other employee benefits to be paid using our assets. Approximately $800,000 of these liabilities were transferred to the buyer of the Ecusta Division. 36 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following schedule summarizes the activity of our restructuring reserve:
YEAR ENDED DECEMBER 31 ------------------------ 2002 2001 2000 ------ ------ ------ (IN THOUSANDS) Beginning Balance.......................................... $ 172 $1,072 $ 0 Amount accrued............................................. 2,572 -- 1,154 Payments made.............................................. (172) (93) (82) Amount transferred to buyer of Ecusta Division............. -- (807) -- ------ ------ ------ Ending Balance............................................. $2,572 $ 172 $1,072 ====== ====== ======
NOTE 4. INVENTORY Inventories at December 31 were as follows:
2002 2001 ------- ------- (IN THOUSANDS) Raw materials............................................... $12,909 $13,404 In-process and finished..................................... 35,621 27,376 Supplies.................................................... 21,926 22,035 ------- ------- Total....................................................... $70,456 $62,815 ======= =======
If we had valued all inventories using the average-cost method, inventories would have been $9.3 million and $11.3 million higher than reported at December 31, 2002 and 2001, respectively. During 2001 and 2000 we liquidated certain LIFO inventories. The effect of the liquidations did not have a significant impact on net income. At December 31, 2002 and 2001, the recorded value of the above inventories was approximately $1.3 million and $.3 million, respectively, lower than inventories for income tax purposes. NOTE 5. PLANT, EQUIPMENT AND TIMBERLANDS Plant, equipment and timberlands at December 31 were as follows:
2002 2001 -------- -------- (IN THOUSANDS) Land and buildings.......................................... $108,192 $104,098 Machinery and equipment..................................... 814,598 785,871 Other....................................................... 86,987 36,526 Less accumulated depreciation............................... (523,124) (477,511) -------- -------- 486,653 448,984 Construction in progress.................................... 17,045 29,592 Timberlands, less depletion................................. 15,215 18,652 -------- -------- Plant, equipment and timberlands -- net..................... $518,913 $497,228 ======== ========
On December 18, 2002, we signed a definitive agreement to sell approximately 25,000 acres of our Maryland forestland to a subsidiary of The Conservation Fund, a national nonprofit land conservation fund. The agreement is contingent upon certain conditions, including, but not limited to, the successful negotiation 37 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) of an agreement to supply us with pulpwood, and other financing and legal contingencies and is expected to close by the end of March 2003. Based on the agreement, we will receive a 10-year installment note from a subsidiary of The Conservation Fund for approximately $38.0 million, representing the full amount of the consideration for the property. The 10-year note will be secured by a letter of credit. We intend to pledge the installment note and the letter of credit as collateral for a term loan from a financial institution for approximately $34.0 million. Upon closing of the transaction, we expect to recognize a pretax gain for book purposes of approximately $30.0 million. NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS We adopted SFAS 142 on January 1, 2001 and discontinued the amortization of goodwill. The following table adjusts reported net income and related earnings per share to exclude expense related to the amortization of goodwill, including any related tax effects, for all periods presented:
YEAR ENDED DECEMBER 31 -------------------------- 2002 2001 2000 ------- ------ ------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income............................................... $37,595 $6,958 $44,000 Goodwill amortization (net of taxes)..................... -- 272 283 ------- ------ ------- Adjusted net income...................................... $37,595 $7,230 $44,283 ======= ====== ======= Adjusted earnings per share: Basic.................................................. $ 0.87 $ 0.17 $ 1.05 Diluted................................................ 0.86 0.17 1.04
NOTE 7. EARNINGS PER SHARE The following table sets forth the details of basic and diluted earnings per share:
YEAR ENDED DECEMBER 31 --------------------------------- 2002 2001 2000 --------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income.............................................. $37,595 $ 6,958 $44,000 ======= ======= ======= Weighted-average common shares outstanding used in computing basic earnings per share.................... 43,396 42,577 42,342 Common shares issuable upon exercise of dilutive stock options, restricted stock awards and performance awards................................................ 395 269 141 ------- ------- ------- Weighted-average common shares outstanding and common share equivalents used in computing diluted earnings per share............................................. 43,791 42,846 42,483 ======= ======= ======= Earnings per share: Basic................................................. $ 0.87 $ 0.16 $ 1.04 Diluted............................................... 0.86 0.16 1.04
NOTE 8. 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 our 38 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 pretax income for the years ended December 31:
2002 2001 2000 ------- ------- ------- (IN THOUSANDS) United States........................................... $38,742 $ (525) $59,653 Foreign................................................. 20,323 12,245 8,950 ------- ------- ------- Total pretax income..................................... $59,065 $11,720 $68,603 ======= ======= =======
The income tax provision (benefit) for the years ended December 31 consists of the following:
2002 2001 2000 ------- ------- ------- (IN THOUSANDS) Current: Federal............................................... $ 1,135 $(8,893) $ 9,939 State................................................. 18 -- -- Foreign............................................... 2,426 32 1,427 ------- ------- ------- Total current tax provision (benefit)................... 3,579 (8,861) 11,366 ------- ------- ------- Deferred: Federal............................................... 12,653 7,777 9,729 State................................................. 167 1,604 1,822 Foreign............................................... 5,071 4,242 1,686 ------- ------- ------- Total deferred tax provision....................... 17,891 13,623 13,237 ------- ------- ------- Total income tax provision.............................. $21,470 $ 4,762 $24,603 ======= ======= =======
At December 31, 2002, and December 31, 2001, unremitted earnings of subsidiaries outside the United States totaled $37.0 million and $18.8 million, respectively, and were deemed to be permanently reinvested. No deferred tax liability has been recognized with regard to the remittance of such earnings. It is not practicable to estimate the income tax liability that might be incurred if such earnings were remitted to the United States. The net deferred tax amounts reported on our Consolidated Balance Sheets as of December 31 are as follows:
2002 2001 --------------------------------------- -------- FEDERAL STATE FOREIGN TOTAL TOTAL -------- ------- ------- -------- -------- (IN THOUSANDS) Current asset..................... $ 4,878 $ 847 $ 1,259 $ 6,984 $ 3,467 Current liability................. -- -- 975 975 381 Long-term asset................... -- -- 9,284 9,284 13,666 Long-term liability............... 141,416 24,552 18,212 184,180 167,623
39 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following are components of the net deferred tax balances as of December 31:
2002 2001 --------------------------------------- -------- FEDERAL STATE FOREIGN TOTAL TOTAL -------- ------- ------- -------- -------- (IN THOUSANDS) Deferred tax assets: Current......................... $ 4,878 $ 847 $ 1,259 $ 6,984 $ 3,467 Long-term....................... 22,733 3,946 9,284 35,963 39,601 -------- ------- ------- -------- -------- $ 27,611 $ 4,793 $10,543 $ 42,947 $ 43,068 ======== ======= ======= ======== ======== Deferred tax liabilities: Current......................... $ -- $ -- $ 975 $ 975 $ 381 Long-term....................... 164,149 28,498 18,212 210,859 193,558 -------- ------- ------- -------- -------- $164,149 $28,498 $19,187 $211,834 $193,939 ======== ======= ======= ======== ========
The tax effects of temporary differences as of December 31 are as follows:
2002 2001 -------- -------- (IN THOUSANDS) Deferred tax assets: Reserves.................................................. $ 14,145 $ 13,390 Compensation.............................................. 6,648 5,496 Post-retirement benefits.................................. 11,008 9,974 Property.................................................. 606 6,527 Pension................................................... 757 804 Inventories............................................... 505 136 Net operating loss carryforwards.......................... 8,364 9,100 Other..................................................... 9,352 992 -------- -------- Subtotal.................................................... 51,385 46,419 Valuation allowance....................................... (8,438) (3,351) -------- -------- Total deferred tax assets................................... 42,947 43,068 -------- -------- Deferred tax liabilities: Property.................................................. 124,439 122,994 Pension................................................... 82,022 69,275 Other..................................................... 5,373 1,670 -------- -------- Total deferred tax liabilities.............................. 211,834 193,939 -------- -------- Net deferred tax liabilities................................ $168,887 $150,871 ======== ========
At December 31, 2002, we had federal, state and foreign tax net operating loss ("NOL") carryforwards of $.6 million, $50.8 million and $12.6 million, respectively. These NOL carryforwards are available to offset future taxable income, if any. A valuation allowance of $8.4 million has been recorded against the net deferred tax assets primarily due to the uncertainty regarding our ability to utilize state NOL carryforwards and certain foreign deferred tax assets. The federal NOL carryforward expires in 2022; state NOL carryforwards expire between 2004 and 2017, and the foreign NOL carryforwards do not expire. 40 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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:
2002 2001 2000 ------- ------ ------- (IN THOUSANDS) Federal income tax provision at statutory rate.............. $20,673 $4,102 $24,011 State income taxes, net of federal income tax benefit....... 120 1,043 1,185 Tax effect of exempt earnings of foreign sales corporation............................................... -- (33) (90) Other....................................................... 677 (350) (503) ------- ------ ------- Income tax provision........................................ $21,470 $4,762 $24,603 ======= ====== =======
NOTE 9. LONG-TERM DEBT Long-term debt at December 31 is summarized as follows:
2002 2001 ---------------- --------- (IN THOUSANDS) Revolving credit facility, due June 24, 2006................ $ 67,681 $ -- Revolving credit facility, due December 22, 2002............ -- 122,515 6 7/8% Notes, due July 15, 2007............................. 150,000 150,000 Other notes, various........................................ 1,823 3,787 ---------------- --------- Total long-term debt........................................ 219,504 276,302 Less current portion........................................ (795) (123,709) ---------------- --------- Long-term debt, excluding current portion................... $ 218,709 $ 152,593 ================ =========
The aggregate maturities of long-term debt as of December 31, 2002 are as follows (in thousands): 2003........................................................ $ 795 2004........................................................ 670 2005........................................................ 335 2006........................................................ 67,704 2007........................................................ 150,000 Thereafter.................................................. -- -------- $219,504 ========
On June 24, 2002, we entered into a new unsecured $102.5 million multi-currency revolving credit facility ("Facility") with a syndicate of three major banks. An additional $22.5 million was added to the Facility on September 24, 2002 with a fourth major bank. The Facility, which replaced an old facility, enables Glatfelter or its subsidiaries to borrow up to the equivalent of $125.0 million in certain currencies. Borrowings can be made for any time period from one day to six months and incur interest based on the domestic prime rate or a Eurocurrency rate, at our option, plus a margin ranging from .525% to 1.05%. The margin and a facility fee on the commitment balance are based on the higher of our debt ratings as published by Standard & Poor's and Moody's. The Facility requires us to meet certain leverage and interest coverage ratios, with both of which we are in compliance. Prior to entering into the Facility, borrowings were made under a $200.0 million multi-currency revolving credit facility ("Old Facility") with a syndicate of major lending institutions. Interest paid the Old Facility 41 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) borrowings were variable rates based, at our option, on the Eurocurrency Rate or the Base Rate (lender's prime rate), plus applicable margins. Margins were based on the higher of our debt ratings as published by Standard & Poor's and Moody's. This agreement was to mature in December 2002. On June 24, 2002, we repaid all amounts outstanding under the Old Facility using $71.1 million of our existing cash and a borrowing of $62.0 million under the Facility. On July 22, 1997, we issued $150.0 million principal amount of 6 7/8% Notes due July 15, 2007. Interest on the Notes is payable semiannually on January 15 and July 15. The Notes are redeemable, in whole or in part, at our option at any time at a calculated redemption price plus accrued and unpaid interest to the date of redemption, and constitute unsecured and unsubordinated indebtedness. The net proceeds from the sale of the Notes were used primarily to repay certain short-term unsecured debt and related interest. P. H. Glatfelter Company guarantees debt obligations of all its subsidiaries. All such obligations are recorded in these consolidated financial statements. At December 31, 2002 and 2001, we had $3.0 million of letters of credit issued to us by a financial institution. The letters of credit are for the benefit of certain state workers compensation insurance agencies in conjunction with our self-insurance program. At December 31, 2002 and 2001, no amounts were outstanding under the letters of credit. We bear the credit risk on this amount to the extent that we do not comply with the provisions of certain agreements. The letters of credit do not reduce the amount available under our lines of credit. NOTE 10. FINANCIAL DERIVATIVES In conjunction with our 2002 refinancing, we entered into a cross-currency swap transaction effective June 24, 2002. Under this transaction, we swapped $70.0 million for approximately E73.0 million and will pay interest on the Euro portion of the swap at a floating Eurocurrency Rate, plus applicable margins and will receive interest on the dollar portion of the swap at a floating U.S. Dollar LIBOR, plus applicable margins. The contract matures on June 24, 2006. The cross-currency swap is designed to provide protection from the impact that changes in currency rates have on certain U.S. Dollar-denominated debt obligations recorded at our subsidiary in Gernsbach, Germany. The cross-currency swap is recorded at fair value of $(6.5) million in the Consolidated Balance Sheets and changes in fair value are recognized in current earnings in the Consolidated Statements of Income. The mark-to-market adjustment was offset by a gain on the related remeasurement of the US Dollar denominated debt obligations. The credit risks associated with our financial derivatives are controlled through the evaluation and monitoring of creditworthiness of the counterparties. Although we may be exposed to losses in the event of nonperformance by counterparties, we do not expect such losses, if any, to be significant. In January 1999, we entered into two interest rate swap agreements, each having a total notional principal amount of DM 50.0 million. Under these agreements, which were to expire December 22, 2002, we received a floating rate based on the three-month DM/Euro LIBOR plus twenty basis points and paid a fixed rate of 3.41% and 3.43%, respectively, for the term of the agreements. We recognized net interest income of $.8 million and $.5 million in, 2001 and 2000, respectively, related to these agreements. This amount is included as a reduction to interest expense in the accompanying Consolidated Statements of Income. Both of our interest rate swap agreements converted a portion of our borrowings from a floating-rate to fixed-rate basis. In conjunction with the refinancing, we terminated the two existing interest rate swap agreements on June 24, 2002. We recognized a $100,000 gain in connection with the early termination of these swap arrangements and the repayment of the outstanding debt under the previously existing $200.0 million multi-currency revolving credit agreement. 42 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 11. KEY EMPLOYEE LONG-TERM INCENTIVE PLAN 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 Glatfelter common stock to eligible participants. The 1992 Plan provides for restricted stock awards, non-qualified stock options, performance shares, incentive stock options and performance units. To date, there have been no grants of incentive stock options or performance units. RESTRICTED STOCK AWARDS During December 2002, December 2001 and December 2000, 29,926, 64,430 and 81,780, 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 in 2001 and 2000 under the 1992 Plan are also subject to forfeiture if defined minimum earnings levels are not met. Awards made in 2002 are subject to forfeiture if targeted shareholder return measures are not met. We 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 we withhold on delivery. We may also, at our 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. We recognized expense of $362,000 in 2002, $856,000 in 2001 and $936,000 in 2000, related to these awards. Restricted Stock Awards issued in 2002 vest ratably over a three-year period. The Restricted Stock Awards issued in 2001 and 2000 vest ratably over a four-year period. Shares awarded in December 2002 under the 1992 Plan cease to be subject to forfeiture by the end of 2005. PERFORMANCE SHARES Grants of Performance Shares under the 1992 Plan of 44,060, 40,060 and 45,740 shares, were made during each of the three years ended 1998, 1997 and 1996, respectively. We recognized income of $127,000 and $169,000 in 2001 and 2000, respectively, related to these awards. NON-QUALIFIED STOCK OPTIONS The following table summarizes the activity with respect to non-qualified options to purchase shares of common stock granted under the 1992 Plan:
2002 2001 2000 -------------------------- -------------------------- -------------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE --------- -------------- --------- -------------- --------- -------------- Outstanding at beginning of year....................... 3,736,182 $14.79 3,650,682 $14.49 3,293,215 $14.86 Options granted............ 309,450 13.98 569,100 15.45 636,600 12.90 Options exercised.......... (790,800) 13.26 (237,771) 12.40 (7,500) 12.34 Options canceled........... (426,303) 15.60 (245,829) 14.26 (271,633) 15.37 --------- --------- --------- Outstanding at end of year... 2,828,529 15.00 3,736,182 14.79 3,650,682 14.49 ========= ========= ========= Exercisable at end of year... 1,436,681 15.94 1,982,233 15.72 1,921,332 15.82
The following table summarizes information about stock options outstanding at December 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------- ------------------------------- NUMBER WEIGHTED AVERAGE WEIGHTED NUMBER WEIGHTED RANGE OF OUTSTANDING AS REMAINING AVERAGE EXERCISABLE AS AVERAGE EXERCISE PRICE OF 12/31/02 CONTRACTUAL LIFE EXERCISE PRICE OF 12/31/02 EXERCISE PRICE - -------------- -------------- ---------------- -------------- -------------- -------------- $10.78 to $12.40......... 468,207 6.0yrs $12.31 326,809 $12.29 12.95 to 14.40......... 918,912 8.3 13.28 180,912 13.21 15.44 to 17.16......... 675,540 7.2 15.70 185,590 16.32 17.54 to 18.78......... 765,870 3.1 18.09 743,370 18.11 --------- --------- 2,828,529 6.3 1,436,681 ========= =========
43 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) An additional 456,398 options became exercisable January 1, 2003 at a weighted-average exercise price of $13.60. Options granted prior to 2002 become exercisable for 25% of the grant amount, beginning January 1 of the year following the date of grant, assuming six months has passed. An additional 25% become 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. Stock options granted in 2002 vest ratably over three years beginning January 1 of the year following 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. The exercise price represents the average quoted market price of Glatfelter common stock on the date of grant, or the average quoted market prices of Glatfelter 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. The 1992 plan, as amended, expires in 2007. As of December 31, 2002, 749,314 shares of common stock were available for future issuance under the 1992 Plan. NOTE 12. RETIREMENT PLANS AND OTHER POST-RETIREMENT BENEFITS We have trusteed noncontributory defined-benefit pension plans covering substantially all our 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 $31.0 million, $44.7 million and $25.9 was recognized in 2002, 2001, and 2000, respectively. Before the impact of unusual items discussed in Note 3, a portion of which were attributable to and recorded as pension expense, net pension income for 2002, 2001 and 2000 was $32.6 million, $30.7 million and $28.1 million, respectively. We provide 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 reported. The following table sets forth the status of our defined-benefit pension plans and other post-retirement benefit plans at December 31, 2002 and 2001:
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (IN THOUSANDS) CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year............ $223,770 $246,023 $ 33,260 $ 38,291 Service cost....................................... 4,300 4,630 1,429 854 Interest cost...................................... 15,527 16,084 3,164 2,320 Plan amendments.................................... 16,222 1,175 (4,252) -- Actuarial loss..................................... 4,538 6,827 20,055 1,080 Benefits paid...................................... (16,277) (15,557) (4,208) (3,319) Unusual items (Note 3)............................. 1,676 (35,412) -- (5,966) -------- -------- -------- -------- Benefit obligation at end of year.................. $249,756 $223,770 $ 49,448 $ 33,260 ======== ======== ======== ========
44 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION BENEFITS OTHER BENEFITS ------------------- ------------------- 2002 2001 2002 2001 -------- -------- -------- -------- (IN THOUSANDS) CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year..... $458,598 $557,910 $ -- $ -- Actual return on plan assets....................... (58,786) (40,826) -- -- Employer contributions............................. 2,394 2,483 4,208 3,319 Benefits paid...................................... (16,278) (15,557) (4,208) (3,319) Unusual items (Note 3)............................. -- (45,412) -- -- -------- -------- -------- -------- Fair value of plan assets at end of year........... $385,928 $458,598 $ -- $ -- ======== ======== ======== ======== RECONCILIATION OF THE FUNDED STATUS Funded status...................................... $136,172 $234,828 $(49,448) $(33,260) Unrecognized transition asset...................... (2,115) (4,029) -- -- Unrecognized prior service cost.................... 26,787 13,077 (4,733) (882) Unrecognized (gain) loss........................... 43,164 (72,187) 26,044 8,455 -------- -------- -------- -------- Net amount recognized.............................. $204,008 $171,689 $(28,137) $(25,687) ======== ======== ======== ======== AMOUNTS RECOGNIZED ON THE CONSOLIDATED BALANCE SHEETS CONSIST OF Prepaid benefit cost............................... $221,605 $187,023 $ -- $ -- Accrued benefit liability.......................... (17,597) (15,334) (28,137) (25,687) -------- -------- -------- -------- Prepaid (accrued) benefit cost..................... $204,008 $171,689 $(28,137) $(25,687) ======== ======== ======== ========
The weighted-average assumptions used in computing the information above were as follows:
PENSION BENEFITS OTHER BENEFITS ------------------ ------------------ 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Discount rate -- benefit obligation.................... 6.75% 7.0% 7.0% 6.75% 7.0% 7.0% Future compensation growth rate........................ 4.5% 3.5% 3.5% -- -- -- Expected long-term rate of return on plan assets....... 8.5% 9.0% 9.0% -- -- --
The net prepaid pension cost for qualified pension plans is primarily included in "Other assets," and the accrued pension cost for non-qualified pension plans and accrued post-retirement benefit costs are primarily included in "Other long-term liabilities" on the Consolidated Balance Sheets at December 31, 2002 and 2001. 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 $25.7 million, $23.1 million and $0, respectively, as of December 31, 2002, and $25.1 million, $22.1 million and $0, respectively, as of December 31, 2001. 45 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Net periodic benefit (income) cost includes the following components:
PENSION BENEFITS OTHER BENEFITS ------------------------------ ------------------------ 2002 2001 2000 2002 2001 2000 -------- -------- -------- ------ ------ ------ (IN THOUSANDS) Service cost........................ $ 4,300 $ 4,630 $ 5,254 $1,429 $ 854 $ 806 Interest cost....................... 15,527 16,084 16,016 3,164 2,320 2,140 Expected return on plan assets...... (46,718) (45,806) (42,350) -- -- -- Amortization of transition asset.... (1,914) (1,725) (1,724) -- -- -- Amortization of prior service cost.............................. 1,410 1,540 1,829 (401) (169) (212) Recognized actuarial (gain) loss.... (5,253) (5,401) (7,134) 1,366 445 280 -------- -------- -------- ------ ------ ------ Net periodic benefit (income) cost.............................. (32,648) (30,678) (28,109) 5,558 3,450 3,014 Unusual item (Note 3)............... 1,676 (14,024) 2,182 -- (964) -- -------- -------- -------- ------ ------ ------ Total net periodic benefit (income) cost.............................. $(30,972) $(44,702) $(25,927) $5,558 $2,486 $3,014 ======== ======== ======== ====== ====== ======
The weighted-average assumptions used in computing the net periodic benefit (income) cost information above were as follows:
PENSION BENEFITS OTHER BENEFITS ------------------ ------------------ 2002 2001 2000 2002 2001 2000 ---- ---- ---- ---- ---- ---- Discount rate -- benefit expense....................... 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Future compensation growth rate........................ 3.5% 3.5% 3.5% -- -- -- Expected long-term rate of return on plan assets....... 9.0% 9.0% 9.0% -- -- --
For measurement purposes, a 12% increase in the per capita cost of covered health care benefits was assumed in 2002 and graded down by .5% per year to an ultimate level of 5%. A one percentage-point change in assumed health care cost trend rates would have the following effects:
2002 2001 ------------------------- ------------------------- 1% INCREASE 1% DECREASE 1% INCREASE 1% DECREASE ----------- ----------- ----------- ----------- (IN THOUSANDS) Effect on post-retirement benefit obligation... $4,509 (3,926) $2,822 $(2,465) Effect on total of service and interest cost components................................... 507 (437) 330 (282)
We maintain 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. We will match a portion of the employee's contribution, subject to certain limitations, in the form of shares of Glatfelter common stock. The expense associated with our 401(k) match was $1.2 million, $1.4 million and $1.7 million in 2002, 2001 and 2000, respectively. NOTE 13. COMMITMENTS, CONTINGENCIES AND LEGAL PROCEEDINGS ECUSTA DIVISION In connection with the Ecusta Division sale (Note 3), the buyers assumed certain liabilities related to the operation of the Ecusta Division. In July 2002, we received notice from the buyers' legal counsel asserting claims for indemnification, without estimates of value, pursuant to the sale agreement. We are currently investigating these claims and have not yet determined the validity or value of these claims. As such, we cannot ascertain at this time what effect, if any, these claims will have on our consolidated financial position and/or results of operations. 46 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) During August 2002, the buyers of the Ecusta Division shut down the paper manufacturing operation of the paper mill in Pisgah Forest, North Carolina, which was the most significant operation of the Ecusta Division. On October 23, 2002, two of the four related buyers of the Ecusta Division filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code. We do not expect to receive any proceeds from the bankruptcy proceedings. As of December 31, 2002, we had recorded liabilities totaling $2.6 million related to post-retirement benefits, workers compensation and vendor payables. These liabilities were to be assumed by the buyers or they have agreed to indemnify and hold us harmless. We also recorded a corresponding receivable of $2.6 million for amounts due from the buyers. In addition to the workers compensation benefits included in the accrual discussed above, we received notice from State of North Carolina indicating we may be liable for $1.6 million in additional workers compensation benefits. While we disagree with this position, if we are held liable, we are entitled to indemnification by the buyers under terms of the sales agreement. In addition to these amounts, as of December 31, 2002, our trade accounts receivable include $2.3 million for products sold by our S&H subsidiary to one of the buyers who has not filed for bankruptcy. Subsequent to year end, we have been paid the full amount of the trade accounts receivable by the one buyer. We are uncertain as to what additional claims, if any, resulting from the bankruptcy filing may be asserted against us for other liabilities that were assumed, or with respect to which we are indemnified, by the buyers or related to our former operation of the paper mill. At this time, no reserves have been recorded related to the receivables due from the buyers, as we are unable to ascertain the financial condition and intention of all of the buyers. Accordingly, we cannot ascertain at this time what effect, if any, these matters will have on our consolidated financial position and/or results of operations. ENVIRONMENTAL MATTERS We are subject to loss contingencies resulting from regulation by various federal, state, local and foreign governmental authorities with respect to the environmental impact of our mills. To comply with environmental laws and regulations, we have incurred substantial capital and operating expenditures in past years. We anticipate that environmental regulation of our operations will continue to become more burdensome and that capital and operating expenditures necessary to comply with environmental regulations will continue, and perhaps increase, in the future. In addition, we may incur obligations to remove or mitigate any adverse effects on the environment resulting from our operations, including the restoration of natural resources and liability for personal injury and for damages to property and natural resources. Because environmental regulations are not consistent worldwide, our ability to compete in the world marketplace may be adversely affected by capital and operating expenditures required for environmental compliance. SPRING GROVE, PENNSYLVANIA We are subject to the "Cluster Rule," a 1998 federal regulation in which the United States Environmental Protection Agency ("EPA") aims to regulate air and water emissions from certain pulp and paper mills, including kraft pulp mills, such as our Spring Grove facility. Issued under both the Clean Air Act and the Clean Water Act, the Cluster Rule establishes baseline emissions limits for toxic and conventional pollutant releases to both water and air. Subject to permit approvals, we have undertaken an initiative at our Spring Grove facility under the Voluntary Advanced Technical Incentive Program set forth by the EPA in the Cluster Rule. This initiative, the "New Century Project," will require capital expenditures currently estimated to be approximately $37.0 million to be incurred before April 2004. The New Century Project includes improvements in brownstock washing, installation of an oxygen delignification bleaching process, 100 percent chlorine dioxide substitution and a hardwood ozone bleaching system. Through December 31, 2002, we have invested approximately $12.3 million in this project. We presently do not anticipate difficulties in implementing the 47 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) New Century Project; however, we have not yet received all the required governmental approvals, nor have we installed all the necessary equipment. We are voluntarily cooperating with an investigation by the Pennsylvania DEP which commenced in February 2002, of our Spring Grove facility related to certain discharges, which are alleged to be unpermitted, to the Codorus Creek. There is no indication that these discharges had an impact on human health or the environment. We are currently engaged in negotiations with the Pennsylvania DEP regarding these matters (see Note 3). In 1999, EPA and the Pennsylvania DEP issued us separate Notices of Violation ("NOVs") alleging violations of air pollution control laws, primarily for purportedly failing to obtain appropriate pre-construction air quality permits in conjunction with certain modifications to our Spring Grove facility. For all but one of the modifications cited by EPA, we applied for and obtained from the Pennsylvania DEP the pre-construction permits that we concluded were required by applicable law. EPA reviewed those applications before the permits were issued. The Pennsylvania DEP's NOV pertained only to the modification for which we did not receive a pre-construction permit. We conducted an evaluation at the time of this modification and determined that the pre-construction permit cited by EPA and the Pennsylvania DEP was not required. We have been informed that EPA and the Pennsylvania DEP will seek substantial emissions reductions, as well as civil penalties, to which we believe we have meritorious defenses. Nevertheless, we are unable to predict the ultimate outcome of these matters or the costs, if any, involved. NEENAH, WISCONSIN We have previously reported with respect to potential environmental claims arising out of the presence of polychlorinated biphenyls ("PCBs") in sediments in the lower Fox River and in the Bay of Green Bay, downstream of our Neenah, Wisconsin facility. We acquired the Neenah facility in 1979 as part of the acquisition of the Bergstrom Paper Company. In part, this facility uses wastepaper as a source of fiber. At no time did the Neenah facility utilize PCBs in the pulp and paper making process, but discharges from the facility containing PCBs from wastepaper may have occurred from 1954 to the late 1970s. Any PCBs that the Neenah facility discharged into the Fox River resulted from the presence of NCR(R)-brand carbonless copy paper in the wastepaper that was received from others and recycled. As described below, various state and federal governmental agencies have formally notified seven potentially responsible parties ("PRPs"), including Glatfelter, that they are potentially responsible for response costs and "natural resource damages" ("NRDs") arising from PCB contamination in the lower Fox River and in the Bay of Green Bay, under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") and other statutes. The six other identified PRPs are NCR Corporation, Appleton Papers Inc., Georgia Pacific Corp. (successor to Fort Howard Corp. and Fort James Corp.), WTM I Co. (a subsidiary of Chesapeake Corp.), Riverside Paper Company, and U.S. Paper Mills Corp. (a subsidiary of Sonoco Products Company). We believe some of these PRPs may have corporate or contractual relationships with unidentified entities that may shift monetary obligations arising from the lower Fox River and Bay of Green Bay. CERCLA establishes a two-part liability structure that makes responsible parties liable for (1) "response costs" associated with the remediation of a release of hazardous substances and (2) NRDs related to that release. Courts have interpreted CERCLA to impose joint and several liability on responsible parties for response costs, subject to equitable allocation in certain instances. Prior to a final settlement by all responsible parties and the final cleanup of the contamination, uncertainty regarding the application of such liability will persist. On January 7, 2003, the Wisconsin Department of Natural Resources (the "Wisconsin DNR") and EPA issued a Record of Decision ("ROD") for the cleanup of reaches of the lower Fox River known as Operable Unit 1 ("OU1") (which consists of Little Lake Butte des Morts, the portion of the river that is closest to our Neenah facility) and Operable Unit 2 ("OU2") (which is the portion of the river between dams at Appleton 48 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) and Little Rapids). This ROD does not address the entire lower Fox River or the Bay of Green Bay nor does it place any value on claims for NRDs associated with this matter. The environmental agencies have stated that the Record of Decision related to the remainder of the river and the Bay of Green Bay is expected to be issued during mid-2003. Subject to extenuating circumstances and alternative solutions arising during the cleanup, the ROD requires the removal of approximately 784,000 cubic yards of sediment from Little Lake Butte des Morts. The ROD also requires the monitoring of the two operable units. Wisconsin DNR and EPA estimate that the remedy for these two reaches will cost approximately $75 million but could cost within a range from approximately $52 million to $112 million. The $75 million estimate is approximately the same amount estimated for these sections of the river in the Proposed Remedial Action Plan ("PRAP") issued in October, 2001 related to this matter. We are continuing to analyze the ROD to determine the viability of the remedy set forth therein and its potential impact on us. The total cost estimate of the PRAP, including OU1 and OU2, was $307.6 million (without a contingency factor) over a 7-18 year time period. The most significant component of the estimated costs is attributable to large-scale sediment removal by dredging. Based on cost estimates of large-scale dredging response actions at other sites, we believe the PRAP's cost projections may underestimate actual costs of the proposed remedy by approximately $450 million. As noted above, NRD claims are theoretically distinct from costs related to the primary remediation of a Superfund site. Calculating the value of NRD claims is difficult, especially in the absence of a completed remedy for the underlying contamination. The State of Wisconsin, the United States Fish and Wildlife Service ("FWS"), the National Oceanic and Atmospheric Administration ("NOAA"), four Indian tribes and the Michigan Attorney General have asserted that they possess NRD claims related to the lower Fox River and the Bay of Green Bay. In June 1994, FWS notified the seven identified PRPs that it considered them potentially responsible for NRDs. The federal, tribal and Michigan agencies claiming to be NRD trustees have proceeded with the preparation of an NRD assessment. While the final assessment will be delayed until after the selection of a remedy, the federal trustees released a plan on October 25, 2000 that values their NRDs for injured natural resources between $176 million and $333 million. We believe that the federal NRD assessment is technically and procedurally flawed. We also believe that the NRD claims alleged by the various alleged trustees are legally and factually without merit. On June 20, 2002, the United States, the State of Wisconsin and the Fort James Operating Company ("Fort James") lodged a consent decree with the U.S. District Court for the Eastern District of Wisconsin. If entered, that consent decree would resolve certain outstanding claims, primarily NRD claims, against Fort James and a related entity. Under the terms of the proposed consent decree, Fort James would pay $6.2 million in cash to the United States and the State of Wisconsin in settlement of various claims related to NRDs and cost recovery related to dredging of sediments at Deposits 56/57. Fort James also agrees to convey 1,063 acres of land to the State and to perform delineated NRD "restoration" projects at a cost of up to $3.9 million. We submitted comments on the proposed consent decree to the U.S. Department of Justice. These comments suggest that the United States, the State of Wisconsin and certain alleged natural resource trustees not move to enter this proposed consent decree, due to various procedural and substantive infirmities. We cannot predict whether the governments will ultimately make such a motion or whether the Court will enter the proposed consent decree as it is written. Because the plaintiffs have yet to provide a factual or legal justification for the settlement, we are not able to extrapolate an estimated settlement amount for Glatfelter from the proposed consent decree. 49 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) We are seeking settlement with the Wisconsin agencies and with the federal government for all of our potential liabilities for response costs and NRDs associated with the contamination. The Wisconsin DNR and FWS have published studies, the latter in draft form, estimating the amount of PCBs discharged by each identified PRP to the lower Fox River and the Bay of Green Bay. These reports estimate our Neenah facility's share of the volumetric discharge to be as high as 27%. We do not believe the volumetric estimates used in these studies are accurate because the studies themselves disclose that they are not accurate and are based on assumptions for which there is no evidence. We believe that our volumetric contribution is significantly lower than the estimates. Further, we do not believe that a volumetric allocation would constitute an equitable distribution of the potential liability for the contamination. Other factors, such as the location of contamination, location of discharge and a party's role in causing discharge must be considered in order for the allocation to be equitable. We have entered into interim cost-sharing agreements with four of the other six PRPs, pursuant to which such PRPs have agreed to share both defense costs and costs for scientific studies relating to PCBs discharged into the lower Fox River. These interim cost-sharing agreements have no bearing on the final allocation of costs related to this matter. Based upon our evaluation of the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination, we believe our share of any liability among the seven identified PRPs is much less than one-seventh of the whole. We also believe that additional potentially responsible parties exist other than the seven identified PRPs. For instance, certain of the identified PRPs discharged their wastewater through public wastewater treatment facilities, which we believe makes the owners of such facilities potentially responsible in this matter. We also believe that entities providing wastepaper-containing PCBs to each of the recycling mills, including our Neenah facility, are also potentially responsible for this matter. We continue to believe that this matter will likely result in litigation, but cannot predict the timing, nature, extent or magnitude of such litigation. We currently are unable to predict our ultimate cost related to this matter. RESERVES FOR ENVIRONMENTAL LIABILITIES. The amount and timing of future expenditures for environmental compliance, cleanup, remediation and personal injury, NRDs 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 abatement, the response actions that may be required, the availability of qualified remediation contractors, equipment and landfill space and the number and financial resources of any other PRPs. We have established reserves relating to unasserted claims for environmental liabilities for those matters for which it is probable that a claim will be made, that an obligation may exist and for which the amount of the obligation is reasonably estimable. As of December 31, 2002, and December 31, 2001, we had accrued reserves for all contingent liabilities related to environmental matters of approximately $30.3 million and $28.8 million, respectively. These accruals are primarily included in "other long-term liabilities" on the Consolidated Balance Sheets. During the fourth quarter of 2002, we accrued and charged $1.5 million as an unusual item (see Note 3). We accrued and charged $2.4 million to pretax earnings each year in 2001 and 2000 related to the lower Fox River and the Bay of Green Bay. NEENAH, WISCONSIN -- RANGE OF REASONABLY POSSIBLE OUTCOMES. Based on analysis of currently available information and experience regarding the cleanup of hazardous substances, we believe that it is reasonably possible that our costs associated with the lower Fox River and the Bay of Green Bay may exceed current reserves by amounts that may prove to be insignificant or that could range, in the aggregate, up to approximately $125 million, over a period that is undeterminable but could range beyond 20 years. We believe that the likelihood of an outcome in the upper end of the monetary range is significantly less than other possible outcomes within the range and that the possibility of an outcome in excess of the upper end of the monetary range is remote. We have reduced the upper end of the monetary range previously disclosed due to 50 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) our belief that technological advance and improved remediation techniques would result in lower costs to remediate. In our estimate of the upper end of the range, we have assumed full-scale dredging as set forth in the ROD for Operable Unit 1 and 2. We have also assumed full-scale dredging for the remainder of the river and the Bay of Green Bay, as set forth in the PRAP, at a significantly higher cost than estimated in the PRAP. We have also assumed our share of the ultimate liability to be 18%, which is significantly higher than we believe is appropriate or will occur and a level of NRD claims and claims for reimbursement of expenses from other parties that, although reasonably possible, is unlikely. In estimating both our current reserve for environmental remediation and other environmental liabilities and the possible range of additional costs, we have not assumed that we will bear the entire cost of remediation and damages to the exclusion of other known PRPs who may be jointly and severally liable. The ability of other PRPs to participate has been taken into account, based generally on their financial condition and probable contribution. Our evaluation of the other PRPs' financial condition included the review of publicly disclosed financial information. The relative probable contribution is based upon our knowledge that at least two PRPs manufactured the paper that included the PCBs and as such, in our opinion, bear a higher level of responsibility. In addition, our assessment is based upon the magnitude, nature and location of the various discharges of PCBs to the river and the relationship of those discharges to identified contamination. We have also considered that over a number of years, certain PRPs were under the ownership of large multinational companies, which appear to retain some liability for this matter. We continue to evaluate our exposure and the level of our reserves, including, but not limited to, our potential share of the costs and NRDs (if any) associated with the lower Fox River and the Bay of Green Bay. We believe that we are insured against certain losses related to the lower Fox River and the Bay of Green Bay, depending on the nature and amount of the losses. Insurance coverage, which is currently being investigated under reservations 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. We do not know when the insurers' investigations as to coverage will be completed and we are uncertain as to what the ultimate recovery will be and whether it will be significant in relation to the losses for which we have accrued. SUMMARY Our current assessment is that we should be able to manage these environmental matters without a long-term, material adverse impact on us. These matters could, however, at any particular time or for any particular year or years, have a material adverse effect on our consolidated financial position, liquidity and/or results of operations or could result in a default under our loan covenants. Moreover, there can be no assurance that our reserves will be adequate to provide for future obligations related to these matters, that our share of costs and/or damages for these matters will not exceed our available resources, or that such obligations will not have a long-term, material adverse effect on our consolidated financial position, liquidity or results of operations. With regard to the lower Fox River and the Bay of Green Bay, if we are not successful in managing the matter and are ordered to implement the remedies proposed in the ROD and the PRAP, such orders would have a material adverse effect on our consolidated financial position, liquidity and results of operations and would result in a default under our loan covenants. We are also involved in other lawsuits that are ordinary and incidental to our business. The ultimate outcome of these lawsuits cannot be predicted with certainty, however, we do not expect that such lawsuits in the aggregate or individually will have a material adverse effect on our consolidated financial position, liquidity or results of operations. 51 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 14. OTHER SALES AND GEOGRAPHIC INFORMATION We sell a significant portion of our specialized printing papers through wholesale paper merchants. No individual customer accounted for more than 10% of our net sales in 2002, 2001 or 2000. Excluding the net sales of the Ecusta Division, net sales to one customer in 2001 were approximately 11% of total net sales. We manage our organization along separate business units: Engineered Products, Long-Fiber & Overlay Paper, and Printing and Converting Papers, as well as Tobacco Papers, which is being exited. In 2002, we completed the implementation of a new information system to provide, among other things, more complete business unit reporting. However, we are currently unable to provide all of the financial information identified in SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information". The following table sets forth information with respect to net sales for each business unit, excluding the net sales of the Ecusta division, which was sold in August 2001:
YEAR ENDED DECEMBER 31 ------------------------------ 2002 2001 2000 -------- -------- -------- (DOLLARS IN THOUSANDS) BUSINESS UNIT Engineered Products.................................. $127,086 $116,622 $108,009 Long-Fiber & Overlay Papers.......................... 110,461 99,816 95,888 Printing and Converting Papers....................... 286,428 295,681 319,079 Tobacco Papers....................................... 19,848 32,736 31,923 -------- -------- -------- Total, excluding Ecusta......................... 543,823 544,855 554,899 Ecusta Division................................. -- 90,836 169,821 -------- -------- -------- Total........................................... $543,823 $635,691 $724,720 ======== ======== ========
Our 2002, 2001 and 2000 net sales to external customers and location of net plant, equipment and timberlands as of December 31, 2002, 2001 and 2000 are summarized below. Net sales are attributed to countries based upon origin of shipment. The net sales information below includes the results of the Ecusta Division through August 9, 2001. Plant and equipment -- net of the Ecusta Division at December 31, 2000 was $52.6 million (see Note 3).
2002 2001 2000 ------------------------------ ------------------------------ ------------------------------ PLANT, EQUIPMENT PLANT, EQUIPMENT PLANT, EQUIPMENT AND AND AND NET SALES TIMBERLANDS -- NET NET SALES TIMBERLANDS -- NET NET SALES TIMBERLANDS -- NET --------- ------------------ --------- ------------------ --------- ------------------ (IN THOUSANDS) United States........ $386,458 $396,160 $477,437 $391,510 $567,520 $424,429 Germany.............. 128,574 104,477 129,228 89,473 121,352 103,286 Other foreign countries.......... 28,791 18,276 29,026 16,245 35,848 25,053 -------- -------- -------- -------- -------- -------- Total........... $543,823 $518,913 $635,691 $497,228 $724,720 $552,768 ======== ======== ======== ======== ======== ========
52 P. H. GLATFELTER COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 15. QUARTERLY RESULTS (UNAUDITED)
DILUTED EARNINGS NET SALES GROSS PROFIT NET INCOME PER SHARE ------------------- ------------------- ------------------ ---------------- 2002 2001 2002 2001 2002 2001 2002 2001 -------- -------- -------- -------- ------- -------- ------ ------- (IN THOUSANDS, EXCEPT PER SHARE) First................ $131,998 $185,646 $ 34,507 $ 42,037 $11,124 $ 15,364 $0.26 $ 0.36 Second............... 137,473 170,287 28,934 34,629 7,576 (22,472)(c) 0.17 (0.53)(c) Third................ 136,044 145,301 33,673 31,631 13,311(A) 4,541(d) 0.30 0.11(d) Fourth............... 138,308 134,457 29,683 33,486 5,584(B) 9,525 0.13 .22 -------- -------- -------- -------- ------- -------- ----- ------ Total................ $543,823 $635,691 $126,797 $141,783 $37,595 $ 6,958(e) $0.86 $ 0.16(e) ======== ======== ======== ======== ======= ======== ===== ======
- --------------- (a) After impact of an after-tax gain from settlement of certain escrow claims, including interest and associated liabilities related to the 1998 acquisition of our S&H subsidiary (unusual items) of $2.3 million. (b) After impact of an after-tax restructuring charge related to severance and related costs and a contingent liability related to on-going state regulatory negotiations (unusual item) of $4.1 million. (c) After impact of an after-tax charge primarily for the impairment of Ecusta assets (unusual item) of $33.6 million. (d) After impact of an after-tax charge for the loss on the sale of Ecusta (unusual item) of $6.1 million. (e) After impact of an after-tax charge primarily for the loss on the sale of Ecusta (unusual item) of $39.7 million. 53 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 through 5 of our Proxy Statement, dated March 28, 2003. (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 9 through 18 of our Proxy Statement, dated March 28, 2003. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required under this Item is incorporated herein by reference to pages 20 through 22 of our Proxy Statement, dated March 28, 2003. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required under this Item is incorporated herein by reference pages 19 through 20 of our Proxy Statement, dated March 28, 2003. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Our chief executive officer and our acting chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)), within 90 days of the filing of this Annual Report on Form 10-K, have concluded that, as of the evaluation date, our disclosure controls and procedures were adequate and effective to ensure that material information relating to P. H. Glatfelter Company and its consolidated subsidiaries would be made known to them by others within those entities. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls or in other factors that could significantly affect our internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in our internal controls. As a result, no corrective actions were required or undertaken. 54 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. Our Consolidated Financial Statements as follows are included in Part II, Item 8: i. Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 ii. Consolidated Balance Sheets as of December 31, 2002 and 2001 iii. Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 iv. Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 v. Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000
2. Financial Statement Schedules (Consolidated) are included in Part IV: i. Schedule II -- Valuation and Qualifying Accounts -- For Each of the Three Years in the Period Ended December 31, 2002 (see S-1) 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. Our individual financial statements are not presented inasmuch as we are primarily an operating company and our consolidated subsidiaries are essentially wholly owned.
EXHIBIT INDEX
NUMBER DESCRIPTION OF DOCUMENTS - ------ ------------------------ (2) Amended and Restated Acquisition Agreement dated as of August 9, 2001 by and among Purico (IOM) Limited, RF & Son Inc., RFS US Inc. and RFS Ecusta Inc., as Buyers, and P. H. Glatfelter Company and Mollanvick, Inc., as Sellers (incorporated herein by reference to Exhibit 2 of our Current Report on Form 8-K dated August 24, 2001). (3)(a) Articles of Amendment dated April 27, 1977, including restated Articles of Incorporation (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993) as amended by: i. Articles of Merger dated January 30, 1979 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993); ii. a Statement of Reduction of Authorized Shares dated May 12, 1980 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993); iii. a Statement of Reduction of Authorized Shares dated September 23, 1981 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993); iv. a Statement of Reduction of Authorized Shares dated August 2, 1982 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993); v. a Statement of Reduction of Authorized Shares dated July 29, 1983 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1993); vi. Articles of Amendment dated April 25, 1984 (incorporated herein by reference to Exhibit (3)(a) of our Annual Report on Form 10-K for the year ended December 31, 1994);
55
NUMBER DESCRIPTION OF DOCUMENTS - ------ ------------------------ vii. a Statement of Reduction of Authorized Shares dated October 15, 1984 (incorporated herein by reference to Exhibit (3)(b) of our Form 10-K for the year ended December 31, 1984); viii. a Statement of Reduction of Authorized Shares dated December 24, 1985 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1985); ix. Articles of Amendment dated April 23, 1986 (incorporated herein by reference to Exhibit (3) of our Quarterly Report on Form 10-Q for the quarter ended March 31, 1986); x. a Statement of Reduction of Authorized Shares dated July 11, 1986 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1986); xi. a Statement of Reduction of Authorized Shares dated March 25, 1988 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1987); xii. a Statement of Reduction of Authorized Shares dated November 9, 1988 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1988); xiii. a Statement of Reduction of Authorized Shares dated April 24, 1989 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1989); xiv. Articles of Amendment dated November 29, 1990 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1990); xv. Articles of Amendment dated June 26, 1991 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1991); xvi. Articles of Amendment dated August 7, 1992 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1992); xvii. Articles of Amendment dated July 30, 1993 (incorporated herein by reference to Exhibit (3)(b) of our Form 10-K for the year ended December 31, 1993); and xviii. Articles of Amendment dated January 26, 1994 (incorporated herein by reference to Exhibit (3)(b) of our Annual Report on Form 10-K for the year ended December 31, 1993). (b) Articles of Incorporation, as amended through January 26, 1994 (restated for the purpose of filing on EDGAR) (incorporated herein by reference to Exhibit (3)(c) of our Annual Report on Form 10-K for the year ended December 31, 1993). (c) By-Laws as amended through March 14, 2003, filed herewith. (4)(a) 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 herein by reference to Exhibit 4.1 to our Form S-4 Registration Statement, Reg. No. 333-36395). Registration Rights Agreement, dated as of July 22, 1997, among P. (4)(b) H. Glatfelter Company, Bear, Stearns & Co. Inc. and BT Securities Corporation, relating to the 6 7/8% Notes due 2007 (incorporated herein by reference to Exhibit 4.3 to our Form S-4 Registration Statement, Reg. No. 333-36395). (9) P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993 (incorporated herein by reference to Exhibit 1 of the Schedule 13D filed by P. H. Glatfelter Family Shareholders' Voting Trust dated July 1, 1993).
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NUMBER DESCRIPTION OF DOCUMENTS - ------ ------------------------ (10)(a) P. H. Glatfelter Company Management Incentive Plan, adopted as of January 1, 1994, as amended and restated December 19, 2000 and effective January 1, 2001 (incorporated herein by reference to Exhibit (10)(a) of our Annual Report on Form 10-K for the year ended December 31, 2000).** P. H. Glatfelter Company Supplemental Executive Retirement Plan, as (b) amended and restated effective April 23, 1998 and further amended December 20, 2000 (incorporated herein by reference to Exhibit (10)(c) of our Form 10-K for the year ended December 31, 2000).** Description of Executive Salary Continuation Plan (incorporated (c) herein by reference to Exhibit (10)(g) of our Annual Report on Form 10-K for the year ended December 31, 1990).** P. H. Glatfelter Company Supplemental Management Pension Plan, (d) effective as of April 23, 1998 (incorporated herein by reference to Exhibit (10)(f) of our Annual Report on Form 10-K for the year ended December 31, 1998).** P. H. Glatfelter Company 1992 Key Employee Long-Term Incentive Plan, (e) as amended December 20, 2000 (incorporated herein by reference to Exhibit (10)(g) of our Annual Report on Form 10-K for the year ended December 31, 2000).** P. H. Glatfelter Company Deferred Compensation Plan for Directors, (f) effective as of April 22, 1998 (incorporated herein by reference to Exhibit (10)(h) of our Annual Report on Form 10-K for the year ended December 31, 1998).** Change in Control Employment Agreement by and between P. H. (g) Glatfelter Company and George H. Glatfelter II, dated as of December 31, 2000 (incorporated herein by reference to Exhibit (10)(i) of our Annual Report on Form 10-K for the year ended December 31, 2000).** Change in Control Employment Agreement by and between P. H. (h) Glatfelter Company and Robert P. Newcomer, dated as of December 31, 2000 (incorporated by reference to Exhibit (10)(j) of our Annual Report on Form 10-K for the year ended December 31, 2000). (A) Schedule of Change in Control Employment Agreements, filed herewith. Employment Agreement by and between P. H. Glatfelter Company and (i) Gerhard K. Federer, dated as of January 31, 2001 (incorporated herein by reference to Exhibit 10(k) of our Annual Report on Form 10-K for the year ended December 31, 2001).** Loan Agreement, dated February 24, 1997, between P. H. Glatfelter (j) Company, as borrower, and GWS Valuch, Inc., as lender (incorporated herein by reference to Exhibit (10)(h) of our Annual Report on Form 10-K for the year ended December 31, 1996). Agreement between the State of Wisconsin and Certain Companies Concerning the Fox River, dated as of January 31, 1997, among P. H. (k) 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 herein by reference to Exhibit (10)(i) of our Annual Report on Form 10-K for the year ended December 31, 1996). Credit Agreement, dated as of June 24, 2002, among P. H. Glatfelter Company, various subsidiary borrowers, Deutsche Bank AG New York (l) Branch, as Agent, and various lending institutions with Deutsche Bank Securities Inc., as Lead Arranger and Book Runner (incorporated herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the period ending June 30, 2002). Increase in Commitments and Lender Addition Agreement (incorporated (m) herein by reference to Exhibit 10.1 of our Quarterly Report on Form 10-Q for the period ending September 30, 2002). Supply and Service Agreement dated as of August 1, 2001 by and among (n) Purico GmbH, Purico (IOM) Limited and Papierfabrik Schoeller & Hoesch GmbH & Co. (incorporated herein by reference to Exhibit 10(s) of our Annual Report on Form 10-K for the year ended December 31, 2001). Contract for the Purchase and Bargain Sale of Property, filed (o) herewith (exhibits omitted). (21) Subsidiaries of the Registrant, filed herewith.
57
NUMBER DESCRIPTION OF DOCUMENTS - ------ ------------------------ (23) Consent of Independent Auditors, filed herewith. (99.1) Certification of George H. Glatfelter II, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 -- Chief Executive Officer. (99.2) Certification of Robert Newcomer, Chairman and Chief Executive Officer of Glatfelter, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 -- Acting Chief Financial Officer. (b) The following Current Reports on Form 8-K were filed during the quarter ended December 31, 2002 or thereafter i. Form 8-K dated as of December 20, 2002, announcing our agreement to sell approximately 25,000 acres of land to The Conservation Fund, filed pursuant to Item 5. ii. Form 8-K dated as of December 23, 2002 to announce plans to implement cost reduction initiatives, filed pursuant to Item 5. iii. Form 8-K dated as of January 13, 2003 announcing certain developments involving environmental matters involving our facility in Neenah, Wisconsin filed pursuant to Item 5. iv. Form 8-K dated as of January 16, 2003 announcing the retirement, effective June 30, 2003 of Robert P. Newcomer, President and Chief Operating Officer filed pursuant to Item 5.
- --------------- ** Management contract or compensatory plan 58 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 14, 2003 By /s/ G. H. GLATFELTER II ------------------------------------ G. H. Glatfelter II Chairman 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 14, 2003 /s/ G. H. GLATFELTER II Principal Executive Officer and Director ------------------------------------------ G. H. Glatfelter II March 14, 2003 /s/ R. P. NEWCOMER Principal Financial Officer and Director ------------------------------------------ R. P. Newcomer March 14, 2003 /s/ C. M. SMITH Principal Accounting Officer ------------------------------------------ C. M. Smith March 14, 2003 /s/ R. E. CHAPPELL Director ------------------------------------------ R. E. Chappell March 14, 2003 /s/ K. DAHLBERG Director ------------------------------------------ K. Dahlberg March 14, 2003 /s/ N. DEBENEDICTIS Director ------------------------------------------ N. DeBenedictis March 14, 2003 /s/ P. G. FOULKROD Director ------------------------------------------ P. G. Foulkrod March 14, 2003 /s/ J. R. HALL Director ------------------------------------------ J. R. Hall March 14, 2003 /s/ M. A. JOHNSON II Director ------------------------------------------ M. A. Johnson II March 14, 2003 /s/ R. J. NAPLES Director ------------------------------------------ R. J. Naples March 14, 2003 /s/ R. L. SMOOT Director ------------------------------------------ R. L. Smoot March 14, 2003 /s/ L. C. STEWART Director ------------------------------------------ L. C. Stewart
59 CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 I, George H. Glatfelter II, Chief Executive Officer of P. H. Glatfelter Company, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2002 of P. H. Glatfelter Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Glatfelter as of, and for the periods presented in this Annual Report; 4. Glatfelter's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; (b) evaluated the effectiveness of Glatfelter's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and (c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Glatfelter's other certifying officer and I have disclosed, based on our most recent evaluation, to Glatfelter's auditors and the audit committee of the board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect Glatfelter's ability to record, process, summarize and report financial data and have identified for Glatfelter's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter's internal controls; and 6. Glatfelter's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ GEORGE H. GLATFELTER II -------------------------------------- George H. Glatfelter II Chief Executive Officer 60 CERTIFICATION PURSUANT TO SECTION 302 (A) OF THE SARBANES-OXLEY ACT OF 2002 I, Robert P. Newcomer, Acting Chief Financial Officer of P. H. Glatfelter Company, certify that: 1. I have reviewed this Annual Report on Form 10-K for the year ended December 31, 2002 of P. H. Glatfelter Company; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this Annual Report; 3. Based on my knowledge, the financial statements, and other financial information included in this Annual Report, fairly present in all material respects the financial condition, results of operations and cash flows of Glatfelter as of, and for the periods presented in this Annual Report; 4. Glatfelter's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for Glatfelter and we have: (a) designed such disclosure controls and procedures to ensure that material information relating to Glatfelter, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this Annual Report is being prepared; (b) evaluated the effectiveness of Glatfelter's disclosure controls and procedures as of a date within 90 days prior to the filing date of this Annual Report (the "Evaluation Date"); and (c) presented in this Annual Report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. Glatfelter's other certifying officer and I have disclosed, based on our most recent evaluation, to Glatfelter's auditors and the audit committee of the board of directors: (a) all significant deficiencies in the design or operation of internal controls which could adversely affect Glatfelter's ability to record, process, summarize and report financial data and have identified for Glatfelter's auditors any material weaknesses in internal controls; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in Glatfelter's internal controls; and 6. Glatfelter's other certifying officer and I have indicated in this Annual Report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ ROBERT P. NEWCOMER -------------------------------------- Robert P. Newcomer Acting Chief Financial Officer 61 SCHEDULE II P. H. GLATFELTER COMPANY AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULE FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 2002 VALUATION AND QUALIFYING ACCOUNTS
ALLOWANCES FOR ---------------------------------------------------------------- DOUBTFUL ACCOUNTS SALES DISCOUNTS AND DEDUCTIONS --------------------------- --------------------------------- 2002 2001 2000 2002 2001 2000 ------ ------ ------ -------- -------- -------- Balance, beginning of year......... $1,551 $1,515 $1,227 $ 1,624 $ 1,069 $ 2,152 Other.............................. 157(A) (240)(a) 199(A) (70)(b) Provision.......................... 732 861 809 12,172 11,499 17,845 Write-offs, recoveries and discounts allowed................ (229) (585) (521) (12,333) (10,874) (18,928) ------ ------ ------ -------- -------- -------- Balance, end of year............... $2,211 $1,551 $1,515 $ 1,662 $ 1,624 $ 1,069 ====== ====== ====== ======== ======== ========
- --------------- (a) Relates primarily to changes in currency exchange rates (b) Relates primarily to the sale of the Ecusta Division 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. S-1 EX-3.C 3 w84319exv3wc.txt AMENDED BY-LAWS DATED MARCH 14, 2003 Exhibit 3(c) As amended by the Board of Directors at a meeting held March 14, 2003 P. H. GLATFELTER COMPANY BY-LAWS ARTICLE I MEETINGS OF SHAREHOLDERS AND RECORD DATE 1.1 ANNUAL MEETING. An annual meeting of shareholders for the election of directors and the transaction of such other business as may properly come before the meeting shall be held on the fourth Wednesday in April of each year at 10:00 A.M. If the day fixed for the meeting is a legal holiday, the meeting shall be held at the same hour on the next succeeding full business day which is not a legal holiday. 1.2 SPECIAL MEETINGS. Special meetings of the shareholders may be called at any time by the Board of Directors, the Chairman of the Board, the Chief Executive Officer or the President. 1.3 PLACE. The annual meeting of shareholders shall be held at the principal office of the Company or at such other place as designated by the Board of Directors. Other meetings of shareholders may be held at such place in Pennsylvania or elsewhere as the Board of Directors may designate. 1.4 NOTICE. Written notice stating the place, day and hour of each meeting of shareholders and, in the case of a special meeting, the general nature of the business to be transacted shall be given by the Secretary at least ten days before the meeting to each shareholder of record entitled to vote at the meeting. 1.5 QUORUM. Except as otherwise provided in the Articles of Incorporation, the presence in person or by proxy of shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast on a particular matter shall constitute a quorum for the purpose of considering such matter at a meeting of shareholders, but less than a quorum may adjourn from time to time to reconvene at such time and place as they may determine. When a quorum is present, except as may be otherwise specified in the Articles of Incorporation or provided by law, all matters shall be decided by the vote of the holders of a majority of the votes entitled to be cast at the meeting, in person or by proxy. 1.6 RECORD DATES. The Board of Directors may fix a time not more than ninety days prior to the date of any meeting of shareholders, or the date fixed for the payment of any dividend or distribution, or the date for the allotment of rights, or the date when any change or conversion or exchange of shares will be made or go into effect, as a record date for the determination of the shareholders entitled to notice of or to vote at any such meeting, or to receive payment of any such dividend or distribution, or to receive any such allotment of rights, or to exercise the rights in respect to any such change, conversion or exchange of shares. In such case, only such shareholders as shall be shareholders of record at the close of business on the date so fixed shall be entitled to notice of or to vote at such meeting, or to receive payment of such dividend or distribution, or to receive such allotment of rights, or to exercise such rights in respect to any change, conversion or exchange of shares, as the case may be, notwithstanding any transfer of any shares on the books of the Company after the record date so fixed. 1.7 NOMINATIONS AND NOTICE OF BUSINESS AT MEETINGS. At any annual meeting of shareholders only persons who are nominated or business that is proposed in accordance with the procedures set forth in this Section 1.7 shall be eligible for election as directors or considered for action by shareholders. Nominations of persons for election to the Board of Directors of the Company may be made or business proposed at a meeting of shareholders (i) by or at the direction of the Board of Directors or (ii) by any shareholder of the Company entitled to vote at the meeting who complies with the notice and other procedures set forth in this Section 1.7. Such nominations or business proposals, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the 2 Secretary of the Company and such proposals must, under applicable law, be a proper matter for shareholder action. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal office of the Company not less than 120 days in advance of the date which is the anniversary of the date the Company's proxy statement was released to shareholders in connection with the previous year's annual meeting or if the date of the applicable annual meeting has been changed by more than 30 days from the date contemplated at the time of the previous year's proxy statement, not less than 90 days before the date of the applicable annual meeting. Such shareholder's notice shall set forth (i) as to each person who such shareholder proposes to nominate for election or reelection as a director, all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected); (ii) as to any other business that the shareholder proposes to bring before the meeting, a brief description of the business desired to be brought before the annual meeting, the reasons for conducting such business at the annual meeting and any material interest in such business of such person on whose behalf such proposal is made; and (iii) as to the shareholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (a) the name and address of such shareholder and beneficial owner, if any, (b) the class and number of shares of the Company which are beneficially owned, (c) a description of all arrangements or understandings between such shareholder and each proposed nominee and any other person or persons (including their names) with respect to any such nomination(s) or proposal(s) and (d) a representation that such shareholder intends to appear in person or by proxy at the meeting to nominate the person(s) named, or move the proposal identified, in its notice. The Company may require any proposed nominee to furnish such other information as may reasonably be required by the Company to determine the eligibility of such proposed nominee to serve as a director of the Company. No person shall be eligible for election as a director of the Company and no business shall be 3 conducted at the annual meeting of shareholders, other than those made by or at the direction of the Board of Directors, unless nominated or proposed in accordance with the procedures set forth in this Section 1.7. The Chairman of the meeting may, if the facts warrant, determine and declare to the meeting that a nomination or proposal was not made in accordance with the provisions this Section 1.7 and, if he should so determine, he shall so declare to the meeting and the defective nomination or proposal shall be disregarded. ARTICLE II DIRECTORS 2.1 NUMBER AND TERM. The Board of Directors shall consist of 11 persons, comprising three classes of directors of which two classes shall consist of four directors each and one class shall consist of three directors. 2.2 AGE QUALIFICATION. No person, other than an officer or employee of the Company, shall be elected or reelected a director after reaching 72 years of age. When the term of any director, other than an officer or employee of the Company, extends beyond the date when the director reaches 72 years of age, such director shall resign from the Board of Directors effective at the annual meeting of shareholders next succeeding his 72nd birthday. 2.3 VACANCIES. In the case of any vacancy in the Board of Directors by death, resignation or for any other cause, including an increase in the number of directors, the Board may fill the vacancy by choosing a director to serve until the next selection of the class for which such director has been chosen and until his successor has been selected and qualified or until his earlier death, resignation or removal. 2.4 ANNUAL MEETING. An annual meeting of the Board of Directors shall be held each year as soon as practicable after the annual meeting of shareholders, at the place where such meeting of shareholders was held or at such other place as the Board of Directors 4 may determine, for the purposes of organization, election of officers and the transaction of such other business as shall come before the meeting. No notice of the meeting need be given. 2.5 REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such times and at such places as the Board of Directors may determine. 2.6 SPECIAL MEETINGS. Special meetings of the Board of Directors may be called by the Chairman of the Board, the Chief Executive Officer or the President. Notice of every special meeting shall be given to each director not later than the second day immediately preceding the day of such meeting in the case of notice by mail, telegram or courier service, and not later than the day immediately preceding the day of such meeting in the case of notice delivered personally or by telephone, telex, TWX or facsimile transmission. Such notice shall state the time and place of the meeting, but, except as otherwise provided in the by-laws, neither the business to be transacted at, nor the purpose of, any special meeting of the Board of Directors need be specified in the notice, or waiver of notice, of such meeting. 2.7 QUORUM. A majority of the directors in office shall constitute a quorum for the transaction of business but less than a quorum may adjourn from time to time to reconvene at such time and place as they may determine. 2.8 COMPENSATION. Directors shall receive such compensation for their services as shall be fixed by the Board of Directors. 2.9 COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the whole Board, designate one or more committees, each committee to consist of two or more of the directors of the Company. The Board may designate one or more directors as alternate members of any Committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee to the extent provided in such resolution shall have and exercise the authority of the Board of Directors in the management of the business and affairs of the Company. 5 2.10 PARTICIPATION IN MEETINGS BY COMMUNICATIONS EQUIPMENT. One or more directors may participate in a meeting of the Board of Directors or a committee of the Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. 2.11 LIABILITY OF DIRECTORS. A director of the Company shall not be personally liable for monetary damages for any action taken, or any failure to take any action, on or after January 27, 1987 unless he has breached or failed to perform the duties of his office as provided for under Section 1713 of the Pennsylvania Business Corporation Law of 1988, as amended, and the breach or failure to perform constitutes self-dealing, willful misconduct or recklessness. Any repeal, amendment, or modification of this Paragraph shall be prospective only and shall not increase, but may decrease, the liability of a director with respect to actions or failures to act occurring prior to such change. 2.12 OFFICERS. The officers of the Company shall be a Chairman of the Board, a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, a Treasurer, a Controller and such other officers as the Board of Directors may deem advisable. In the absence or disability of the Chairman of the Board and the Chief Executive Officer, the President, a Director designated by the Board or the officer or officers in the order designated by the Board of Directors shall have the authority and perform the duties of the Chairman of the Board and Chief Executive Officer. Any two or more offices may be held by the same person. 2.13 TERM. Each officer shall hold office until his successor is elected or appointed and qualified or until his death, resignation or removal by the Board of Directors. 2.14 AUTHORITY, DUTIES AND COMPENSATION. All officers shall have such authority, perform such duties and receive such compensation as may be provided in the by-laws or as may be determined by the Board of Directors. 2.15 CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside 6 at all meetings of the Board of Directors and of the Executive Committee and shall perform such other duties as may be assigned by the Board of Directors. 2.16 CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall be the chief executive officer of the Company and shall preside at all meetings of the shareholders and, if a director of the Company, in the absence or disability of the Chairman of the Board, or if that office is vacant, shall preside at all meetings of the Board of Directors and of the Executive Committee. He or she shall be responsible for the general management of the business of the Company, subject to the control of the Board of Directors. In the absence or disability of the President, or if that office is vacant, the Chief Executive Officer shall have the authority and perform the duties of the President. 2.17 PRESIDENT. The President shall perform such duties as may be assigned by the Board of Directors and, in the absence or disability of the Chief Executive Officer, or if that office is vacant, shall have the authority and perform the duties of the Chief Executive Officer. 2.18 VICE PRESIDENT. In the absence or disability of the Chief Executive Officer and the President, or any other officer or officers, the Vice Presidents in the order designated by the Board of Directors shall have the authority and perform the duties of the Chief Executive Officer, the President or other officer as the case may be. 2.19 SECRETARY. The Secretary shall give notice of meetings of the shareholders, of the Board of Directors and of the Executive Committee, attend all such meetings and record the proceedings thereof. In the absence or disability of the Secretary, an Assistant Secretary or any other person designated by the Board of Directors or the Chief Executive Officer shall have the authority and perform the duties of the Secretary. 7 2.20 TREASURER. The Treasurer shall have charge of the securities of Company and the deposit and disbursement of its funds, subject to the control of the Board of Directors. In the absence or disability of the Treasurer, as Assistant Treasurer or any other person designated by the Board of Directors of the Chief Executive Officer shall have the authority and perform the duties of the Treasurer. 2.21 CONTROLLER. The Controller shall be the principal accounting officer and shall keep books recording the business transactions of the Company. He shall be in charge of the accounts of all of its offices and shall promptly report and properly record in the books of the Company all relevant date relating to the Company's business. ARTICLE III INDEMNIFICATION 3.1 INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER PERSONS. The Company shall indemnify any director or officer of the Company or any of its subsidiaries who was or is an "authorized representative" of the Company (which shall mean for the purposes of Paragraphs 3.1. through 3.7, a director or officer of the Company, or a person serving at the request of the Company as a director, officer, partner, fiduciary or trustee of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise) and who was or is a "party" (which shall include for purposes of Paragraphs 3.1 through 3.7 the giving of testimony or similar involvement) or is threatened to be made a party to any "proceeding" (which shall mean for purposes of Paragraphs 3.1 through 3.7 any threatened, pending or completed action, suit, appeal or other proceeding of any nature, whether civil, criminal, administrative or investigative, whether formal or informal, and whether brought by or in the right of the Company, its shareholders or otherwise) by reason of the fact that such person was or is an authorized representative of the Company to the fullest extent permitted by law, 8 including without limitation indemnification against expenses (which shall include for purposes of Paragraphs 3.1 through 3.7 attorneys' fees and disbursements), damages, punitive damages, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such proceeding unless the act or failure to act giving rise to the claim is finally determined by a court to have constituted willful misconduct or recklessness. If an authorized representative is not entitled to indemnification in respect of a portion of any liabilities to which such person may be subject, the Company shall nonetheless indemnify such person to the maximum extent for the remaining portion of the liabilities. 3.2 ADVANCEMENT OF EXPENSES. The Company shall pay the expenses (including attorneys' fees and disbursements) actually and reasonably incurred in defending a proceeding on behalf of any person entitled to indemnification under Paragraph 3.1 in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such person to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Company as authorized in Paragraphs 3.1 through 3.7 and may pay such expenses in advance on behalf of any employee or agent on receipt of a similar undertaking. The financial ability of such authorized representative to make such repayment shall not be prerequisite to the making of an advance. 3.3 EMPLOYEE BENEFIT PLANS. For purposes of Paragraphs 3.1 through 3.7, the Company shall be deemed to have requested an officer or director to serve as fiduciary with respect to an employee benefit plan where the performance by such person of duties to the Company also imposes duties on, or otherwise involves services by, such person as a fiduciary with respect to the plan; excise taxes assessed on an authorized representative with respect to any transaction with an employee benefit plan shall be deemed "fines"; and action taken or omitted by such person with respect to an employee benefit plan in the performance of duties for a purpose reasonably believed to be in the interest of the participants and beneficiaries of the plan shall be deemed to be for a purpose which is not opposed to the best interests of the Company. 9 3.4 SECURITY FOR INDEMNIFICATION OBLIGATIONS. To further effect, satisfy or secure the indemnification obligations provided herein or otherwise, the Company may maintain insurance, obtain a letter of credit, act as self-insurer, create a reserve, trust, escrow, cash collateral or other fund or account, enter into indemnification agreements, pledge or grant a security interest in any assets or properties of the Company, or use any other mechanism or arrangement whatsoever in such amounts, at such costs, and upon such other terms and conditions as the Board of Directors shall deem appropriate. 3.5 RELIANCE UPON PROVISIONS. Each person who shall act as an authorized representative of the Company shall be deemed to be doing so in reliance upon the rights of indemnification provided by these Paragraphs 3.1 through 3.7. 3.6 AMENDMENT OR REPEAL. All rights of indemnification under Paragraphs 3.1 through 3.7 shall be deemed a contract between the Company and the person entitled to indemnification under these Paragraphs 3.1 through 3.7 pursuant to which the Company and each such person intend to be legally bound. Any repeal, amendment or modification hereof shall be prospective only and shall not limit, but may expand, any rights or obligations in respect of any proceeding whether commenced prior to or after such change to the extent such proceeding pertains to actions or failures to act occurring prior to such change. 3.7 SCOPE. The indemnification, as authorized by these Paragraphs 3.1 through 3.7, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in any other capacity while holding such office. The indemnification and advancement of expenses provided by or granted pursuant to these Paragraphs 3.1 through 3.7 shall continue as to a person who has ceased to be an officer or director in respect of matters arising prior to such time, and shall inure to the benefit of the heirs and personal representatives of such person. ARTICLE IV 10 STOCK CERTIFICATES AND CORPORATE SEAL 4.1 EXECUTION. Certificates of shares of capital stock of the Company shall be signed by the Chairman of the Board, the Chief Executive Officer, the President or a Vice President and by the Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer, but where a certificate is signed by a transfer agent or a registrar, the signature of any corporate officer may be facsimile, engraved or printed. 4.2 SEAL. The Company shall have a corporate seal which shall bear the name of the Company and State and year of its incorporation. The seal shall be in the custody of the Secretary and may be used by causing it or a facsimile to be impressed or reproduced upon or affixed to any document. ARTICLE V NOTICES 5.1 FORM OF NOTICE. Whenever written notice is required to be given to any person by law, the Articles of Incorporation or these by-laws, it may be given to such person either personally or by telephone or by sending a copy thereof by first class or express mail, postage prepaid, or by telegram (with messenger service specified), telex or TWX (with answerback received) or courier service, charges prepaid, or by facsimile transmission, to the address (or the telex, TWX or facsimile number) appearing on the books of the Company or, in the case of a director, to the address supplied by the director to the Company for the purpose of notice. If the notice is sent by mail, telegraph or courier service, it shall be deemed to have been given to the person entitled thereto when deposited in the United States mail or with a telegraph office or courier service for delivery to that person or, in the case of telex or TWX, when dispatched or, in the case of facsimile transmission, when received. A notice of meeting shall specify the place, day and hour of the meeting. 5.2 WAIVER OF NOTICE. Any notice required to be given under these by-laws may be effectively waived by the person entitled thereto by written waiver signed 11 before or after the meeting to which such notice would relate or by attendance at such meeting otherwise than for the purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting was not lawfully called or convened. ARTICLE VI AMENDMENTS 6.1 AMENDMENTS. These by-laws may be amended or repealed and new by-laws may be adopted by the affirmative vote of a majority of the directors of the Company or by the affirmative vote of shareholders entitled to cast a majority of the votes which all shareholders are entitled to cast at any annual, regular or special meeting of directors or shareholders, as the case may be; provided, however, that new by-laws may not be adopted and these by-laws may not be amended or repealed in any way that limits indemnification rights, increases the liability of directors or changes the manner or vote required for any such adoption, amendment or repeal, except by the affirmative vote of the shareholders entitled to cast at least a majority of the votes which all shareholders are entitled to cast thereon. In the case of a meeting of shareholders, written notice shall be given to each shareholder entitled to vote thereat that the purpose, or one of the purposes, of the meeting is to consider the adoption, amendment or repeal of the by-laws. ARTICLE VII EMERGENCY BY-LAWS 7.1 WHEN OPERATIVE. The emergency by-laws provided by the following Paragraphs shall be operative during any emergency resulting from warlike damage or an attack on the United States or any nuclear or atomic disaster, notwithstanding any different provision in the preceding Paragraphs of the by-laws or in the Articles of Incorporation of the Company or in the Pennsylvania Business Corporation Law. To the extent not inconsistent with these 12 emergency by-laws, the by-laws provided in the preceding Paragraphs shall remain in effect during such emergency and upon the termination of such emergency the emergency by-laws shall cease to be operative unless and until another such emergency shall occur. 7.2 MEETINGS. During any such emergency: (a) Any meeting of the Board of Directors may be called by any director. Whenever any officer of the Company who is not a director has reason to believe that no director is available to participate in a meeting, such officer may call a meeting to be held under the provisions of this Paragraph. (b) Notice of each meeting called under the provisions of this Paragraph shall be given by the person calling the meeting or at his request by any officer of the Company. The notice shall specify the time and the place of the meeting, which shall be the head office of the Company at the time if feasible and otherwise any other place specified in the notice. Notice need be given only to such of the directors as it may be feasible to reach at the time and may be given by such means as may be feasible at the time, including publication or radio. If given by mail, messenger, telephone or telegram, the notice shall be addressed to the director at his residence or business address or such other place as the person giving the notice shall deem suitable. In the case of meetings called by an officer who is not a director, notice shall also be given similarly, to the extent feasible, to the persons named on the list referred to in part (c) of this Paragraph. Notice shall be given at least two days before the meeting if feasible in the judgment of the person giving the notice and otherwise the meeting may be held on any shorter notice he shall deem suitable. (c) At any meeting called under the provisions of this Paragraph, the director or directors present shall constitute a quorum for the transaction of business. If no director attends a meeting called by an officer who is not a director and if there are present at least three of the persons named on a numbered list of personnel approved by the Board of Directors before the emergency, those present (but not more than the seven appearing highest in 13 priority on such list) shall be deemed directors for such meeting and shall constitute a quorum for the transaction of business. 7.3 LINES OF SUCCESSION. The Board of Directors, during as well as before any such emergency, may provide, and from time to time modify, lines of succession in the event that during such an emergency any or all officers or agents of the Company shall for any reason be rendered incapable of discharging their duties. 7.4 OFFICES. The Board of Directors, during as well as before any such emergency, may, effective in the emergency, change the head office or designate several alternative head offices or regional offices, or authorize the officers so to do. 7.5 LIABILITY. No officer, director or employee acting in accordance with these emergency by-laws shall be liable except for willful misconduct. 7.6 REPEAL OR CHANGE. These emergency by-laws shall be subject to repeal or change by further action of the Board of Directors or by action of the shareholders, except that no such repeal or change shall modify the provisions of the next preceding Paragraph with regard to action or inaction prior to the time of such repeal or change. ARTICLE VIII PENNSYLVANIA ACT 36 OF 1990 8.1 FIDUCIARY DUTY. Subsections (a) through (d) of Section 1715 of the Pennsylvania Business Corporation Law of 1988, as amended, shall not be applicable to the Company. 8.2 CONTROL-SHARE ACQUISITIONS. Subchapter G of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended, (relating to control-share acquisitions), shall not be applicable to the Company. 8.3 DISGORGEMENT. Subchapter H of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, as amended, (relating to disgorgement by certain controlling shareholders following attempts to acquire control), shall not be applicable to the Company. 14 EX-10.H.A 4 w84319exv10whwa.txt SCHEDULE OF CHANGE IN CONTROL Exhibit 10(h)(a) SCHEDULE OF CHANGE IN CONTROL EMPLOYMENT AGREEMENTS In accordance with Instructions to Item 601 of Regulation S-K, the Registrant has omitted filing Change in Control Employment Agreements by and between P. H. Glatfelter Company and the following employees as exhibits to this Form 10-K because they are identical to the Change in Control Employment Agreement by and between P. H. Glatfelter Company and Robert P. Newcomer, dated as of December 31, 2000, which is incorporated herein by reference to Exhibit 10(j) to our Annual Report on Form 10-K for the year ended December 31, 2001: John R. Anke, dated as of December 31, 2000. Robert L. Inners II, dated as of December 31, 2000. Carroll L. Missimer, dated as of December 31, 2000. Markus R. Mueller, dated as of December 31, 2000. Dante C. Parrini, dated as of December 31, 2000. Mark W. Pitts, dated as of December 31, 2000. Werner Ruckenbrod, dated as of December 31, 2000. C. Matthew Smith, dated as of December 31, 2000. William T. Yanavitch, dated as of December 31, 2000. Peter M. Yaffe, dated as of December 31, 2001. EX-10.O 5 w84319exv10wo.txt CONTRACT FOR PURCHASE AND BARGAIN SALE OF PROPERTY Exhibit 10(o) CONTRACT FOR THE PURCHASE AND BARGAIN SALE OF PROPERTY THIS AGREEMENT, made as of the 16th day of December, 2002, by and among GLATFELTER PULP WOOD COMPANY, formerly known as The Glatfelter Pulp Wood Company, a Maryland corporation (hereinafter referred to as "Seller"), THE CONSERVATION FUND, A NON-PROFIT CORPORATION (hereinafter referred to as "TCF"), and FIDELITY NATIONAL TITLE INSURANCE COMPANY (hereinafter referred to as "Escrow Agent "). W I T N E S S E T H: WHEREAS, Seller is the owner of the Property (as hereinafter defined); and has determined that it wishes to bargain sale same to TCF; WHEREAS, TCF desires to purchase and Seller desires to bargain sell the Property as an installment sale (the "Installment Sale"); NOW, THEREFORE, the parties have agreed and do hereby agree as follows: 1. Agreement of Purchase and Bargain Sale. Subject to the provisions of this Agreement, and for the consideration herein stated, Seller agrees to bargain sell to TCF and TCF agrees to buy from Seller all of the following described property (collectively, the "Property"): (a) fee simple interest in and to those certain tracts or parcels of land in Charles, Caroline, Dorchester, Somerset, St. Mary's, Wicomico and Worcester Counties, Maryland, containing approximately 25,568 acres, all of which tracts or parcels are more fully described in Exhibit A attached hereto, together with all buildings, structure and other improvements located thereon, all tenements: hereditaments, easements, appurtenances and 1 privileges thereto belonging, all trees, timber, sand, gravel and crops now located thereon or thereunder (said land, together with said buildings, structures, improvements, tenements, hereditaments, easements, appurtenances, privileges, trees, timber, sand, gravel and crops being hereinafter referred to as the "Real Property"); (b) to the extent Seller has the right to assign the same, all of Seller's right, title and interest in and to the leases, subleases, contracts, licenses and permits described on Exhibit B attached hereto and any renewals thereof (collectively, the "Leases"); (c) all of Seller's non-proprietary files and records relating to the Real Property (excluding any financial records) (the "Books and Records"), The parties agree that if any portion of the Real Property is deleted or taken pursuant to either of paragraphs 5(b)(iii), 7, 8(a) or 8(c) below, then the term "Red Property" shall no longer include such deleted portion. 2. Purchase Price: Earnest Money. (a) Subject to adjustment as provided in paragraphs 4, 5(b)(ii), 7, 8(b), 8(c) and 11 hereof, the purchase price for the Property (the "Purchase Price") shall be Thirty-Seven Million Eight Hundred Fifty Thousand and No/100 Dollars ($37,850,000.00). The Purchase Price will be payable on the Closing Date (as hereinafter defined) by delivery by TCF to Seller or its assignee of an installment promissory note (the "Installment Note") for the Purchase Price secured by a letter of credit and issued in conformity with the requirements of and subject to the terms and provisions set forth on Exhibit D attached hereto (the "Installment Sale Terms"). The forms of all documents to be executed by Seller and/or TCF in connection with the Installment Sale, including, without limitation, the Installment Note shall be in form reasonably acceptable to the parties. Seller acknowledges and agrees that Seller shall be solely responsible for all of TCF's additional fees, costs, and expenses incurred in connection with the Installment Sale 2 structure of this transaction including but not limited to costs incurred in connection with obtaining the letter of credit, documenting the transaction as an installment sale and preparing the installment promissory note. Seller further acknowledges that TCF is making no representation or warranty concerning the Seller's use of the Installment Sale structure, including but not limited to the tax consequences thereof. TCF agrees to reasonably cooperate with Seller in structuring and documenting the Installment Sale including, without limitation, providing all reasonable information requested by Seller's structuring agent; provided, however, TCF shall not be required to incur any additional cost or assume any additional liabilities or obligations not expressly contemplated under the Agreement. (b) Within five (5) business days after the effective date of this Agreement, TCF will deliver to Escrow Agent the sum of $200,000 (said sum, together with all interest earned thereon, is referred to herein as the "Earnest Money"), which sum shall be held by Escrow Agent in an interest bearing account and shall be disbursed in accordance with the further provisions of this Agreement. At Closing, Escrow Agent shall return the Earnest Money to TCF. 3. Closing. (a) The execution and delivery of the documents and instruments for the consummation of the purchase and sale of the Property pursuant hereto (herein referred to as the "Closing") will take place at 1O:OO a.m. on or before the date which is twenty (20) days after the expiration of the Inspection Period, as that term is defined below in Section 5 (the "Closing Date") at the offices of Seller's Title Company In Maryland, subject to extension as provided in paragraphs 5(b), 6, 7, 8 and 29 hereof, or such other date and time, and/or such other location, as may be mutually agreeable to Seller and TCF. Notwithstanding the foregoing, the parties will use reasonable efforts to close on or before January 15, 2003, provided that TCF is able to 3 successfully complete all of its due diligence of the Real Property, as contemplated herein, prior to January 15,2003 and Seller has sufficient time to complete transaction documents required for the Closing. Seller may elect not to attend the Closing so long as all documents to be executed by Seller in connection with the consummation of the transactions contemplated herein are delivered to Escrow Agent not later than two (2)days prior to Closing. (b) At the Closing, Seller will execute and deliver to TCF (i) seven or more special warranty deeds conveying the Real Property to TCF subject only to the Permitted Encumbrances (as hereinafter defined), (ii) a bill of sale with respect to the Books and Records, (iii) an affidavit as to the non-foreign status of Seller (or, if Seller is a foreign person, Seller will deliver to TCF a withholding exemption certificate pursuant to Section 1445 of the Internal Revenue Code of 1954, as amended), (iv) an assignment of the applicable Leases (as hereinafter defined) (the "Assignment of Leases"); if any, with rents to be pro-rated at Closing (v) an owner's affidavit in form satisfactory to TCF's title insurer, (vi) such assignments and other documents as are necessary to assign unto TCF any Forest Management Conservation Agreements, and (vii) such other deeds, assignments, certificates, affidavits and instruments as may be reasonably necessary or desirable to consummate the purchase and sale contemplated hereby and to obtain the issuance of the title insurance policy insuring TCF's fee simple title to the Real Property as of the date of the Closing. All of the foregoing documents shall be in form and content reasonably satisfactory to Seller and TCF. (c) At the Closing, TCF will execute and deliver to Seller (i) the Assignment of Leases, and (ii) such other deeds, assignments, certificates, affidavits and instruments as may be reasonably necessary or desirable to consummate the purchase and sale contemplated hereby, including the Installment Note, the TSA (as described below in Section 13) and such other instruments as are required pursuant to Exhibit D hereof to consummate the installment sale in 4 accordance therewith, which documents shall be in form reasonably satisfactory to Seller and TCF. (d) The parties agree to do such other acts and execute and deliver such other documents and instruments as are reasonably necessary or desirable for the consummation of the transactions contemplated hereby. 4. Acreage Verification. TCF shall have the right at any time prior to Closing to independently verify the number of acres contained within the Real Property. In the event TCF determines that the Real Property contains less than 25,312 acres, the Purchase Price shall be reduced by an amount equal to the product of (a) the difference between 25,312 minus the number of acres contained within the Real Property as verified by TCF multiplied by (b) $1,480.37. In the event TCF determines that the Real Property contains more than 25,823 acres, the Purchase Price shall be increased by an amount equal to the product of the difference between the number of acres contained within the Real Property, as verified by TCF, minus 25,823 multiplied by $1,480.37, provided however, that if the Purchase Price is increased by more than $500,000 TCF may elect to terminate this Agreement, in which event the Earnest Money shall be returned to TCF and neither party shall have any further rights or obligations hereunder. If Seller disputes the acreage verification, the dispute will be resolved pursuant to Paragraph 29 hereof. 5. Title. (a) Seller agrees to convey to TCF or a supporting organization thereof qualifying for bargain sale treatment under the Internal Revenue Code good and marketable fee simple title to the Real Property at the Closing by special warranty deed. (b) TCF shall have the right to obtain, at its sole cost and expense, a commitment for an owner's policy of title insurance issued by Fidelity National Title Insurance 5 Company (the "Title Company") having an insured amount equal to the Purchase Price (the "Title Commitment"). TCF will have from the date of this Agreement until 5:00 p.m. EDT on January 31, 2003 (as the same may be extended pursuant to paragraph 6 below, the "Inspection Period") to examine the title to the Real Property and furnish to Seller written notice of any objections to Seller's title to the Real Property, other than the matters set forth on Exhibit E attached hereto (the "Permitted Encumbrances"). Upon full execution this Agreement, Seller will make available to TCF, its contractors, agents and representatives copies of all maps and surveys in Seller's possession that relate to the Real Property. TCF shall also have the right to object to any title exceptions created or suffered between the date of the Title Commitment and the date of the Closing which do not constitute Permitted Encumbrances. Any title objections raised by TCF shall be provided on or before the expiration of the Inspection Period by written notice to Seller accompanied with a copy of that portion of the Title Commitment and all supplemental title documents evidencing and describing the nature of the title objection. Seller will have the right, but not the obligation, to cure or remove at or prior to the Closing all objections to Seller's title to the Real Property. In the event that TCF fails to give notice to Seller on or before the expiration of the Inspection Period of TCF's objection to any exception to Seller's title to the Real Property, such exception will be deemed to be a Permitted Encumbrance. In the event that TCF gives such notice of objection to any such exception and Seller fails or elects not to cure or remove such exception at or prior to the Closing, TCF, at its sole option, may elect either of the following: (i) waive the objection and proceed to Closing; or (ii) subject to the conditions set forth in Section 5(e) below, delete the portion of the Real Property subject to any such uncured or unremoved exception from the real property conveyed by Seller to TCF at Closing, and the Purchase Price will be reduced by 6 an amount equal to the product of the number of acres contained within such deleted portion multiplied by the quotient of the Purchase Price divided by the acreage contained in the Real Property as determined in accordance with paragraph 4 above. Notwithstanding the foregoing, in the event TCF timely delivers its notice of objection to any matter pursuant to this paragraph 5(b), the Closing, at Seller's election, shall be adjourned to the date which is twenty (20) days after the scheduled Closing Date to allow the parties adequate time to properly document the transactions contemplated hereunder. (c) So long as this contract remains in force, Seller will not enter into any new lease, modify or renew any existing lease or encumber or convey all or part of the Real Property or any interest therein, or enter into any agreement granting to any person any right with respect to the Real Property or any portion thereof, without the prior written consent of TCF, which consent shall not be unreasonably withheld or delayed so long as such action by Seller does not materially impair the value or TCF's contemplated use of the Property. (d) In the event the aggregate acres of those portions of the Property, if any, deleted from the transactions pursuant to this paragraph 5 or paragraph 7 below, together with the acres of the Property destroyed or damaged prior to Closing, as determined in accordance with paragraph 8(b) below exceeds 256 acres, then either party may terminate this Agreement, whereupon Escrow Agent shall return the Earnest Money to TCF and no party hereto will have any further rights, duties or obligations hereunder, other than those which expressly survive a termination hereof. (e) The parties acknowledge that the deletion by TCF from the transaction of any real property pursuant to Paragraphs 5(b) or 7 hereof (the "Excluded Acres") may require a subdivision of such Excluded Acres from certain other tracts TCF intends to acquire at Closing. Seller shall retain at Closing such Excluded Acres and the least amount of acreage contiguous 7 with such Excluded Acres as is necessary to create a legal parcel for which no subdivision is required (the "Additional Acres") and subject to the provisions of Paragraph 5(d), the Purchase Price will be reduced on account of Seller's retention of the Additional Acres by an amount equal to the product of the number of acres contained within the Additional Acres multiplied by the quotient of the Purchase Price divided by the acreage contained in the Real Property as determined in accordance with Paragraph 4 above. 6. Inspection. TCF will have from the date of this Agreement until the expiration of the Inspection Period to inspect the Real Property and, among other things, to perform timber cruises, environmental evaluations and verify compliance with applicable laws, ordinances and regulations. TCF and its agents, representatives, employees, engineers and contractors will have the right to enter upon the Real Property to inspect, examine, survey and make test borings, soil bearing tests, timber cruises and other engineering tests or surveys which it may deem necessary or advisable. Prior to entering upon the Property to conduct such activities, TCF shall deliver to Seller certificates of commercial general liability insurance with coverage amounts not less than $l,000,000 on an occurrence basis showing Seller as an additional insured thereunder. TCF hereby agrees to return the Real Property to substantially the same condition that existed prior to Purchaser's activities. TCF further agrees to indemnify and hold Seller harmless for any and all cost and expense resulting from claims or damages caused by said inspections, examinations and tests. Upon full execution of this Agreement, Seller will make available to TCF, its agents, contractors and representatives, at Seller's offices all non-privileged, non-proprietary materials relating to the Real Property in the possession of Seller or its agents or attorneys, including without limitation, all aerial photographs, maps, charts, existing surveys, timber cruises, previous deeds, leases, reports, timber type maps, timber inventories, soil maps, growth and yield information, harvest schedules, and timber bid customer lists relating 8 to the Real Property. In the event TCF, after using commercially reasonable efforts, is not able to complete its due diligence inspections of the Property prior to the expiration of the Inspection Period, TCF shall have the right, upon written notice to Seller delivered prior to the expiration of the Inspection Period to extend the Inspection Period for an additional ten (10) days. In such event, the Closing Date shall be postponed to a mutually acceptable date not later than the date which is twenty (20) days after the expiration of the Inspection Period, as extended hereunder. In the event TCF in its sole and absolute discretion is not satisfied for any reason whatsoever with the Property, then TCF may terminate this Agreement by delivering written notice to Seller at my time prior to the expiration of the Inspection Period, whereupon Escrow Agent shall return the Earnest Money to TCF and no party will have any further rights, duties or obligations under this Agreement other than those which expressly survive a termination hereof. In such event, TCF shall promptly deliver to Seller, without representation or warranty, all title materials, environmental reports and other third party reports (other than any appraisal or cruise results) obtained by TCF in connection with its inspections or investigations of the Property. 7. Environmental Audit. TCF will have the right at any time before the expiration of the Inspection Period to perform or cause to be performed, at TCF's expense, a non-invasive environmental audit or assessment of the Real Property. In the event that such audit or assessment reveals that (i) any portion of the Real Property has ever been used as a landfill to receive solid wastes; (ii) has been affected by or contains any underground storage tank or storage facility; (iii) has ever been used for dumping, discharge, treatment, storage of hazardous wastes or hazardous substances; (iv) is in violation of any law, ordinance, notice requirement, rule or regulation because of its environmental and/or ecological condition; or (v) is identified by TCF's consultant as a "high risk" parcel or acre (in each instance, an "Environmental Defect"), TCF shall promptly notify Seller and, subject to the provisions of paragraph 5(d) and (e) above, 9 TCF may delete the portion of the Real Property subject to such Environmental Defect from the real property conveyed by Seller to TCF at the Closing, and the Purchase Price will be reduced by an amount equal to the product of the number of acres contained within such deleted portion multiplied by the quotient of the Purchase Price divided by the acreage contained in the Real Property as determined in accordance with paragraph 4 hereof. In the event TCF notifies Seller of any Environmental Defect, Seller, at its election, may adjourn the Closing until the date which is twenty (20) days after the scheduled Closing Date to allow the parties adequate time to properly document the transactions contemplated herein. In the event TCF objects to any Environmental Defect, TCF shall provide Seller with a copy of any environmental audit, assessment or report forming the basis for TCF's objection. 8. Condition of Property; Damage; Condemnation. (a) Seller agrees that at the Closing the Property will be in substantially the same condition as exists on the date hereof, subject to condemnation and casualties beyond Seller's control and Seller's harvest of timber in the ordinary course of business. During the pendency of this Agreement, Seller shall not materially accelerate the volume of timber or the species harvested relative to Seller's past practices. All risk of loss to the Property or any part thereof prior to the Closing will be borne entirely by Seller. Except for timber harvesting conducted in the ordinary course of Seller's business, Seller will neither cut or remove nor permit the cutting or removal of any timber or trees or the mining of any oil, gas, gravel or other minerals located on the Real Property without the prior consent of TCF, which consent shall not be unreasonably withheld or delayed so long as such action by Seller does not materially impair the value or TCF's contemplated use of the Property. Seller shall keep detailed records on a load by load basis by species and category of the volume of timber harvested after the effective date of this Agreement and prior to Closing. Five (5) days prior to Closing (the "Adjustment Date"), 10 an officer of Seller with knowledge of such matters shall deliver a certificate setting forth the total volume by species harvested by Seller during the pendency of this Agreement. The Purchase Price shall be reduced on account of such harvested timber by an amount equal to the sum of the products of the volume of each species and category of timber harvested multiplied by the applicable unit value for such species and category set forth on Exhibit F attached hereto and hereby made a part hereof. Within five (5) days after Closing, the Seller shall deliver to TCF another certificate setting forth the total volume by species harvested by Seller between the Adjustment Date and the Closing date, and shall deliver to TCF, or its assignee a check for the value of the timber harvested during such period, calculated in the same manner as described above. (b) If at my time prior to the Closing, the Property or any material part thereof (including, but not limited to, any timber or trees which are included as part of the Property) is destroyed or damaged by fire or other casualty, then TCF, subject to the provisions of paragraph 5(d) above, shall purchase the Property, whereupon the Purchase Price will be reduced as mutually agreed by Seller and TCF, or, in the event such parties are unable to agree within fifteen (15) days after TCF's receipt of notice of the occurrence of such damage or destruction, the Purchase Price will be reduced by an mount determined in accordance with the procedures set forth in paragraph 29 hereof. TCF's option under this paragraph 8(b) will be exercisable at any time on or before fifteen (15) days after TCF's receipt of notice of the occurrence of such damage or destruction and the date of Closing will be extended to the extent necessary to permit the exercise of such option by TCF and the determination of the Purchase Price reduction. For purposes of this paragraph 8(b), a "material" part of the Property shall mean damage to the Property prior to Closing having an aggregate value, in TCF's good faith estimate, equal to or exceeding $50,000. 11 (c) If at any time prior to the Closing, any action or proceeding is filed or threatened under which the Real Property or any part thereof may be taken pursuant to any law, ordinance or regulation by condemnation or the right of eminent domain, then TCF shall purchase the Real Property pursuant to this Agreement, notwithstanding such action or proceeding, and receive a credit against the Purchase Price in the amount of all proceeds of any awards paid to Seller with respect to the Real Property, or if such amounts have not been paid to Seller as of the Closing, Seller shall assign all of its rights to any such proceeds or awards. 9. Warranties and Representations. (a) Seller hereby warrants and represents to TCF as follows: (i) Seller owns good and marketable fee simple title to the Real Property, and will convey such title at the Closing by special warranty deed subject only to the Permitted Encumbrances. (ii) Attached hereto as Exhibit B and hereby made a part hereof is a true and accurate summary of all leases, timber service agreements, licenses, permits, contracts and agreements affecting the Real Property; the Leases remain in full force and effect, and have not been modified or amended, and except as set forth on Exhibit B, no consent is required to be obtained to assign Seller's right, title and interest in, under and to the Leases to TCF and to Seller's actual knowledge neither party thereto is in default in the observance or performance of any of its duties or obligations thereunder. (iii) There are no outstanding mineral leases affecting the Real Property and, to Seller's actual knowledge there are no current commercial mining activities occurring on the Red Property and no mining permits are currently issued and outstanding with respect to the Real Property or any portion thereof. 12 (iv) There is no pending or, to Seller's actual knowledge, threatened action or proceeding (including, but not limited to, any condemnation or eminent domain action or proceeding) before any court, governmental agency or arbitrator which may adversely affect Seller's ability to perform this Agreement or which may affect the Real Property. (v) To Seller's actual knowledge, the Real Property is in compliance with all statutes, ordinances, rules, regulations, orders and requirements of all federal, state and local authorities and any other governmental entity having jurisdiction over the Real Property; and Seller has not received any notice from any such governmental entity of any violation of any of the aforesaid statutes, ordinances, rules, regulations, orders and requirements. (vi) Seller has the full capacity, power and authority to enter into this Agreement and fully perform its obligations hereunder, subject however to the final approval by its Board of Directors at its next regularly scheduled meeting currently planned to be held on December 17, 2002, and the final approval of its parent corporation's Board of Directors at its next regularly scheduled meeting, currently planned to be held on December 18, 2002. (vii) This Agreement and the performance hereof by Seller will not contravene any law or contractual restriction binding on Seller. (viii) Subject to subparagraphs (vi) and (ix) herein, Seller has the full right, power, and authority to enter into and perform this Agreement; and no consent, approval, order or authorization of any court or other governmental entity is required to be obtained by Seller in connection with the execution and delivery of this Agreement or the performance hereof by Seller. 13 (ix) This Agreement has been duly executed and delivered by Seller and is subject to approval by Seller's Board of Directors and P. H. Glatfelter's Board of Directors, which, if granted; constitutes the valid and binding obligation of Seller, enforceable against Seller in accordance with its terms subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally and the discretion of the courts with respect to equitable remedies. (x) No portion of the Real Property has ever been used by Seller or by any third party with the affirmative consent of Seller as a land fill or as a dump to receive garbage, refuse, or waste, whether or not hazardous, and to Seller's actual knowledge there is and has been no Hazardous Waste stored, handled, installed or disposed in, on or about the Real Property. For purposes of this warranty, the term "Hazardous Waste" means any such materials, waste, contaminates, petroleum, crude oil or any fraction thereof or other substances as defined by cumulative reference to the following sources as amended from time to time: (i) the Resource Conservation and Recovery Act of 1976, 42 USC Section 6901 et. seq. (RCRA); (ii) the Comprehensive Environmental Response, Compensation and Liability Act of 1980, 42 USC Section 9601 et. seq. (CERCLA); (iii) the Hazardous Materials Transportation Act, 49 USC Section 1801, et. seq.; (iv) applicable laws of the State of Maryland; and (v) any federal, state or local regulations, rules or orders issued or promulgated under or pursuant to any of the foregoing or otherwise by any department, agency or other administrative, regulatory or judicial body. To Seller's actual knowledge there are no underground storage tanks situated in the Property nor have such tanks been previously situated thereon. 14 (xi) To Seller's actual knowledge, the Real Property is in substantially the same condition as existed on the date TCF inspected the Real Property. Since such date, there has been no material destruction or damage to the Real Property or any part thereof or any improvements, timber or trees thereon by fire or other casualty. (xii) The Property does not constitute an asset of an employee benefit plan affiliated with Seller, as defined in Section 3(3) of ERISA. (xiii) No party other than Seller has any right to conduct timbering operations on the Real Property or any right, title or interest in and to any timber located on the Real Property. (xiv) To Seller's actual knowledge, the present use of the Real Property for the purpose of harvesting timber or any related purpose does not pose a danger to any Endangered Species, Critical Habitat or Habitat that would expose TCF to any liability under any applicable federal, state or local laws. For purposes of this warranty, the terms "Endangered Species", "Critical Habitat" and "Habitat" mean any such animal, vegetation, flora, fauna, other wildlife, ecosystem or geographic region as defined by cumulative reference to the following sources as amended from time to time: (i) the Endangered Species Act of 1973, 16 USC Section 1531, et. seq.; (ii) the applicable law of the State of Maryland, and (iii) any federal, state or local regulations, rules, or orders issued or promulgated under or pursuant to any of the foregoing or otherwise by any department, agency or other administrative, regulatory or judicial body. (xv) Seller hereby certifies that the sale of the Property does not represent a transfer of all or substantially all of the assets of Seller. 15 All warranties and representations will be true as of the date of this Agreement and, as of the date of the Closing. As used herein, the term "Seller's actual knowledge" means the actual knowledge of Peter Alexander and Thomas V. Bosky, the individual officers or employees of Seller having day-to-day responsibility for the oversight, management and operation of the Property. The foregoing representations and warranties shall survive the Closing for a period of twelve (12) months from and after the Closing Date. (xvi) Except for the foregoing representations and warranties, the Property is being conveyed hereunder as-is, where-is, without any representations or warranties, express or implied. (b) Seller hereby agrees to indemnify and hold harmless TCF from and against any liability, cost, damage, loss, claim, expense or cause of action (including but not limited to reasonable attorneys' fees and court costs) incurred by or filed against TCF as a direct result of any breach of any of the warranties or representations by Seller contained in this paragraph 9. The foregoing indemnity shall survive the Closing for a period of twelve (12) months after the Closing Date; provided, however, such indemnity shall continue with respect to any breach of warranty or representation by Seller for which TCF has brought a claim against Seller during such twelve (12) month period. (c) TCF hereby warrants and represents to Seller as follows: (i) TCF is a non-profit corporation organized in accordance with Section 501(c)(3) of the Internal Revenue Code and is existing and in good standing under the laws of the State of Maryland; (ii) TCF has the full right, power and authority to enter into this Agreement; and, with the exception of approval of this transaction by TCF's Board of Directors, no consent, approval, order or authorization is required to be 16 obtained by TCF in connection with the execution and delivery of this Agreement or the performance hereof by TCF; and (iii) This Agreement has been duly executed by TCF and constitutes the valid and binding obligation of TCF, enforceable against TCF in accordance with its terms, subject to applicable bankruptcy, insolvency and other similar laws affecting the enforceability of creditors' rights generally and the discretion of the courts with respect to equitable remedies. 10. Brokerage Commission. Seller and TCF each warrant and represent to the other that neither has incurred any liability for any brokerage fee or commission in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby. Seller and TCF each agree to indemnify and hold harmless the other from any and all damage, loss, liability, expense and claim (including but not limited to attorneys' fees and court costs) arising with respect to any such fee or commission which may be suffered by the indemnified party by reason of any action or agreement of the indemnifying party. 11. Taxes: Expenses. (a) Ad valorem real property taxes on the Real Property, special assessments, utility charges (if any) and all rental payments with respect to the Leases will be prorated as of the date of Closing. If actual tax bills for the calendar year of Closing are not available, said taxes will be prorated based on tax bills for the previous calendar year and the parties hereto agree to cause a reproration of said taxes upon the receipt of tax bills for the calendar year of Closing. Seller will pay all timber taxes, severance taxes and any other taxes imposed with respect to timbering operations on the Real Property prior to the date of Closing and all income and/or capital gains taxes attributable to the sale of the Real Property, if any. Seller shall be responsible for any "roll back" taxes or similar taxes that relate to periods prior to the Closing 17 and arise as a direct result of the consummation of the transactions contemplated hereunder. TCF shall be responsible for any "roll back" taxes or similar taxes imposed due to a change in the use of the Real Property by TCF after the Closing. (b) TCF will pay the cost of TCF's inspection of the Real Property, the costs of the title examination and preparation of the Title Commitment, the title insurance premium with respect to any owner's policy of title insurance obtained by TCF and recording fees in connection with the recordation of the deeds delivered at Closing. TCF will also pay one-half of all transfer taxes and/or recordation taxes imposed in connection with the recordation of the deeds delivered at Closing. (c) Seller will provide for and pay the costs associated with the preparation of Seller's special warranty deeds and will pay one-half of all transfer taxes in connection with the transfer of the Property and/or recordation taxes and the recordation of the deeds delivered at Closing. Seller shall pay all other taxes assessed in connection with the transfer of the Property. Seller shall pay all additional costs, fees and expenses incurred by TCF that would not otherwise have arisen in connection with Seller's sale of the Property to TCF on a non-installment sale basis, including reasonable attorneys fees not to exceed $25,000, incurred by TCF in connection with the installment sale structure of the transaction. (d) Each party will pay its respective costs and expenses of legal representation. 12. Conditions. Unless waived by TCF, the obligations of TCF under this Agreement are expressly made subject to the fulfillment in all respects of the following conditions precedent: (i) the truth and accuracy in all material respects as of the date of the Closing of each and every warranty and representation herein made by Seller; 18 (ii) Seller's timely performance of and compliance with each and every term, condition, agreement, restriction and obligation to be performed and complied with by Seller under this Agreement; (iii) TCF's receipt at Closing of an owner's policy of title insurance in the amount of the Purchase Price and otherwise in form and substance reasonably satisfactory to TCF; (iv) TCF shall have received prior to Closing the Maryland Board of Public Works approval of the transactions contemplated herein and public funds will be available at Closing; and (v) TCF's Board of Directors will have approved the transaction at its regularly scheduled meeting on December 16, 2002. (vi) The approval of this transaction by Seller's Board of Directors at its regularly scheduled meeting on December 17, 2002 and the approval of this transaction by the Board of Directors of Seller's parent, P. H. Glatfelter, at its regularly scheduled meeting on December 18, 2002. [CONTINUED ON NEXT PAGE] 19 In the event any of the above conditions are not satisfied on or before Closing, TCF will have the right, exercisable at TCF's sole election, to cancel this Agreement whereupon Escrow Agent shall return the Earnest Money to TCF and neither party hereto will have any further rights or obligations hereunder. Notwithstanding the foregoing, if the condition set forth in subparagraph (iv) above is not satisfied, or if TCF is otherwise unable for any other reason to raise by the Closing $37,850,000 for acquisition of the Real Property as contemplated herein, this Agreement shall be terminated, the Earnest Money Deposit shall be paid to the Seller and neither party hereto will have any further rights or obligation hereunder. 13. Mutual Condition. Unless waived by Seller and TCF, the obligations of Seller and TCF under this Agreement are expressly made subject to Seller and TCF negotiating and agreeing to the terms of: 1) a timber supply agreement ("TSA") to be granted to Seller at Closing and 2) completing Exhibit B, Exhibit D and Exhibit E of this Agreement; and 3) favorable opinions from both parties' tax advisors or counsel regarding the structuring of this transaction as a bargain sale and installment sale. The TSA shall commence at Closing and terminate on December 31, 2010. The TSA shall be subject and subordinate to any conservation easement granted by TCF contemporaneously with Closing, which conservation easement is subject to Seller's prior written approval, which approval shall not be unreasonably withheld or delayed so long as such conservation easement does not materially interfere with Seller's rights to harvest timber pursuant to the TSA. 14. Default; Remedies; Escrow Agent. (a) If the purchase and sale of the Real Property is not consummated because of a breach by TCF in the performance or observance by TCF of any of its material covenants or obligations under this Agreement, then Escrow Agent shall pay the Earnest Money to Seller as full liquidated damages (the parties hereto acknowledging that Seller's damages as a result of 20 such default are not capable of exact ascertainment and that said liquidated damages are fair and reasonable), said remedy being Seller's sole and exclusive remedy hereunder on account of any default by TCF, whereupon this Agreement will terminate and neither party will have any further rights, duties or obligations hereunder, other than those which expressly survive a termination hereof. (b) If the purchase and sale of the Property contemplated hereby is not consummated because of a breach by Seller in the performance or observance by Seller of any of its material covenants or obligations under this Agreement, then TCF shall be entitled to damages in an amount equal to TCF's actual out of pocket expenses incurred in connection with the transactions contemplated by this Agreement, which amount shall not exceed $200,000. (c) The duties of Escrow Agent will be as follows: (i) During the term of this Agreement, Escrow Agent will hold the Earnest Money, upon the delivery by TCF to Escrow Agent of the same, in an interest bearing account approved by TCF and will deliver the Earnest Money in accordance with the terms and provisions of this Agreement. (ii) If this Agreement is terminated without the mutual written agreement of Seller and TCF, or if Escrow Agent is unable to determine at any time to whom the Earnest Money should be delivered, or if a dispute develops between Seller and TCF concerning to whom the Earnest Money should be delivered, then in any such event, Escrow Agent will request joint written instructions from Seller and TCF and will deliver the Earnest Money in accordance with such joint written instructions. In the event that such written instructions are not received by Escrow Agent within ten (10) days after Escrow Agent has served a written request for instructions upon Seller and TCF, Escrow 21 Agent will have the right to pay the Earnest Money into a court of competent jurisdiction and interplead Seller and TCF in respect thereof, and thereafter Escrow Agent will be discharged of any obligations in connection with this Agreement. (iii) If costs or expenses are incurred by Escrow Agent because of litigation or a dispute between Seller and TCF arising out of the holding of the Earnest Money in escrow, Seller and TCF will each pay Escrow Agent one-half of such reasonable and direct costs and expenses. Except for such costs and expenses, no fee or charge will be due or payable to Escrow Agent for its services as escrow holder. (iv) By joining herein, Escrow Agent undertakes only to perform the duties and obligations imposed upon it under the terms of this contract and expressly does not undertake to perform any of the other covenants, terms and provisions incumbent upon Seller and TCF hereunder. (v) TCF and Seller hereby agree and acknowledge that Escrow Agent assumes no liability in connection herewith except for gross negligence or willful misconduct; that Escrow Agent will never be responsible for the validity, correctness or genuineness of any document or notice referred to under this Agreement; and that Escrow Agent may seek advice from its own counsel and will be fully protected in any action taken by it in good faith in accordance with the opinion of its counsel. 15. Assignment. Prior to Closing, TCF will have the right to assign its rights under this Agreement, in whole or in part, but only to an organization or entity which would allow Seller to claim bargain sale treatment of this transaction under the Internal Revenue Code, 22 would not cause Seller to incur any "roll back" taxes or increased transfer taxes, and is previously approved by Seller in its reasonable discretion. Upon such assignment TCF will be relieved of liability hereunder. Contemporaneously with the Closing, TCF shall have the right to assign the provisions of this Agreement which survive the Closing, in whole or in part, to the ultimate title holders of the Property including, without limitation, an entity of the State of Maryland and The Forestland Group, LLC or an affiliate thereof, provided that the ultimate title holders assume said provisions which survive Closing and such assignment does not cause Seller to incur any "roll back" taxes or increased transfer tax, nor adversely impact bargain or Installment Sale considerations herein. 16. No Waiver. No action or failure to act by any party hereto will constitute a waiver of any right or duty afforded to such party under this Agreement, nor will any such action or failure to act constitute an approval of or acquiescence in any breach of this Agreement except as may be specifically agreed in writing. 17. Governing Law. This Agreement will be governed by the laws of the State of Maryland. 18. Notice. Any and all notices, elections and communications required or permitted by this Agreement will be made or given in writing and will be delivered in person, sent by facsimile with confirmed electronic receipt, sent by reputable overnight courier or sent by postage prepaid United States mail, certified or registered, return receipt requested, to the other parties at the addresses set forth below, or such other address or facsimile as may be furnished by notice in accordance with this paragraph. The date of notice given by personal delivery will be the date of such delivery. The effective date of notice by overnight courier or mail will be the date such notice is mailed. 23 Seller: Glatfelter Pulp Wood Company Attn: Vice President and General Manager 228 S. Main Street Spring Grove, PA 17362 Fax: (717) 225-2850 With copies to: Glatfelter Attn: Legal Department 96 South George Street, Suite 500 York, PA 17401-1434 Fax: (717) 846-2419 And: Glatfelter Attn: John R. Anke, Treasurer 96 South George Street, Suite 500 York, PA 17401-1434 Fax: (717) 846-7208 TCF: The Conservation Fund 584 Bellerive Drive Suite 3-D Annapolis, Maryland 21401 Attention: Jodi R. O'Day Fax: (410) 757-0370 with a copy to: The Conservation Fund 1800 North Kent Street Suite 1120 Arlington, Virginia 22209-2156 Attention: Richard Erdmann Fax: (703) 525-4610 with a copy to: Sutherland Asbill & Brennan LLP 999 Peachtree Street, N.E. Atlanta, Georgia 30309 Attention: Victor P. Haley Fax: (404) 853-8806 Escrow Agent: Fidelity National Title Insurance Company 200 Galleria Parkway, Suite 1695 24 Atlanta, GA 30339 Attention: Kevin Wood Fax: (770) 850-8222 19. Entire Agreement. This Agreement contains the entire agreement among the parties hereto With respect to the subject matter hereof and cannot be amended or supplemented except by a written agreement signed by all parties. 20. Captions, The captions of paragraphs in this Agreement are for convenience and reference only and are not part of the substance hereof. 21. Severability. In the event that any one or more of the provisions, paragraphs, words, clauses, phrases or sentences contained in this Agreement, or the application thereof in any circumstance is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision, paragraph, word, clause, phrase or sentence in every other respect and of the remaining provisions, paragraphs, words, clauses, phrases or sentences of this contract, will not be in any way impaired, it being the intention of the parties that this contract will be enforceable to the fullest extent permitted by 1aw. 22. Duplicate Originals. This Agreement shall be executed in duplicate originals, both of which will be construed as original documents. 23. Binding Effect. This Agreement will bind the parties hereto and their respective heirs, legal representatives, successors and assigns. 24. Time of Essence. Time is of the essence of this Agreement. 25. Bargain Sale. Purchaser acknowledges that it is Seller's intent to effectuate a "bargain sale" of the Property, i.e., a sale to a charitable organization at a price below fair market value wherein the difference is considered a charitable contribution under applicable sections of the Internal Revenue Code. Seller acknowledges that the substantiation of a 25 charitable contribution deduction rests exclusively with Seller but for Purchaser's execution of Internal Revenue Service Form 8283. 26. Survival. With the exception of the indemnity set forth in paragraph 9(b), she indemnities set forth herein will survive the Closing or any termination of this Agreement indefinitely. The warranties and representations set forth herein will survive the Closing for a period of twelve (12) months. 27. Waivers of Application of Title 42 U.S.C.A. Section 4601 and/or Just Compensation Under Applicable State Statutes. Purchaser may assign this Agreement and its rights as Purchaser hereunder including the Earnest Money by written assignment to a governmental agency or entity which assumes the obligations of Purchaser hereunder, provided such entity is a qualified entity for purposes of ensuring that the transactions contemplated hereunder qualify under the Internal Revenue Code for bargain and Installment sale treatment and do not cause Seller to incur any "roll-back" taxes or increased transfer tax. Seller hereby waives any right to demand fair market value for the Property. In addition, recognizing that this Agreement is made in order to procure lands for public ownership and that condemnation will not be used in any way as part of this transaction or in securing the Property, Seller hereby knowingly waives any potential right to receive compensation for the Property consistent with the requirements of either (i) Title II and Title III of the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970, Title 42 U.S.C.A. Section 4601, et seq. (Public Law 91-646, as amended) including those provisions relating to incidental expenses incurred by Seller and/or (ii) applicable state statutes and regulations. Seller makes this waiver knowing that a governmental agency or entity may ultimately own the Property and/or that a governmental agency or entity may be an assignee of this Agreement. 26 28. Saturdays, Sundays, Holidays. If the final date of any time period of limitation set out in any provision of this agreement falls on a Saturday, Sunday or a legal holiday under the laws of the state in which the Property is situated, then the time of such period shall be extended to the next day which is not a Saturday, Sunday or legal holiday. 29. Resolution of Disputes. In the event Seller and TCF are unable to agree as to the reduction of the Purchase Price set forth in paragraph 8(b) hereof, Seller and TCF will each appoint an independent forestry consultant, each of which may be a consultant previously engaged by the appointing party with respect to the Real Property, and such two consultants will in turn select a third independent forestry consultant to act with them in a panel to determine the appropriate reduction of the Purchase Price. The panel of consultants will reach a binding decision within thirty (30) days of the selection of the third consultant, and the decision of the panel of consultants as to the reduction of the Purchase Price will be final. Seller and TCF will each bear the cost of its respective consultant and one-half (1/2) of the cost of the third consultant. The date of Closing will be extended to the extent necessary to permit the final decision of the panel of consultants. 30. Effective Date. The effective date of this Agreement will be the date all parties hereto have executed this contract. 31. Incorporation of Exhibits. All exhibits referred to herein are hereby incorporated in this Agreement by this reference. 27 IN WITNESS WHEREOF, this contract has been duly executed, sealed and delivered by the parties hereto the day and year first above written. SELLER: GLATFELTER PULP WOOD COMPANY By: /s/ R.P. Newcomer --------------------------------------- Name: ROBERT P. NEWCOMER Title: Vice President & Treasurer TCF: THE CONSERVATION FUND By: /s/ Jodi R. O'Day --------------------------------------- Name: Jodi R. O'Day Title: Vice President & Regional Counsel 28 EX-21 6 w84319exv21.txt LIST OF SUBSIDIARIES Exhibit 21 LIST OF SUBSIDIARIES State or Country of Incorporation ---------------- Balo-I Industrial, Inc. Philippines Glenn-Wolfe, Inc. Delaware GLT International Finance LLC Delaware Mollanvick, Inc. Delaware Newtech Pulp Inc. Philippines Papcel-Kiew Ukraine Papcel-Papier und Cellulose, Technologie und Handels-GmbH Germany Papeteries de Cascadec S.A.S. France Papierfabrik Schoeller & Hoesch Auslandsbeteiligungen GmbH Germany Papierfabrik Schoeller & Hoesch GmbH & Co. KG Germany 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 7 w84319exv23.txt INDEPENDENT AUDITORS' CONSENT 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, and 333-53977) of our report dated February 28, 2003, (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets") appearing in this Annual Report on Form 10-K of P. H. Glatfelter Company for the year ended December 31, 2002. /s/ Deloitte & Touche LLP Philadelphia, Pennsylvania March 14, 2003 EX-99.1 8 w84319exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER Exhibit 99.1 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 18 U.S.C. SECTION 1350 In connection with the Annual Report on Form 10-K for the year ended December 31, 2002 of P. H. Glatfelter Company (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, George H. Glatfelter II, Chief Executive Officer of the Company, certify to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. P. H. GLATFELTER COMPANY Date: March 14, 2003 /s/ George H. Glatfelter II - --------------------------- George H. Glatfelter II Chief Executive Officer EX-99.2 9 w84319exv99w2.txt CERTIFICATION OF ACTING CHIEF FINANCIAL OFFICER Exhibit 99.2 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 18 U.S.C. SECTION 1350 In connection with the Annual Report on Form 10-K for the year ended December 31, 2002 of P. H. Glatfelter Company (the "Company") as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert P. Newcomer, Acting Chief Financial Officer of the Company, certify to the best of my knowledge, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that: 1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2). The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. P. H. GLATFELTER COMPANY Date: March 14, 2003 /s/ Robert P. Newcomer - ------------------------------ Robert P. Newcomer Acting Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----