SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) ___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) / X / OF THE SECURITIES EXCHANGE ACT OF 1934 - ---- For the quarterly period ended March 31, 2000 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) / / OF THE SECURITIES EXCHANGE ACT OF 1934 - --- For the transition period from to ------------------ ------------------- Commission file number 1-10258 ------- Tredegar Corporation - ------------------------------------------------------------------------------ (Exact Name of Registrant as Specified in its Charter) Virginia 54-1497771 - --------------------------------------------- ------------------------------ (State or Other Jurisdiction of Incorporation (I.R.S. Employer or Organization) Identification No.) 1100 Boulders Parkway Richmond, Virginia 23225 - ---------------------------------------- ----------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (804) 330-1000 -------------- Indicate by check 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 ---- ----- The number of shares of Common Stock, no par value, outstanding as of April 30, 2000: 37,954,136.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. <TABLE> Tredegar Corporation Consolidated Balance Sheets (In Thousands) (Unaudited) <CAPTION> March 31, Dec. 31, 2000 1999 ------------- ------------ <S> <C> <C> Assets Current assets: Cash and cash equivalents $ 13,709 $ 25,752 Receivable from securities brokers 17,790 - Accounts and notes receivable 119,246 121,820 Inventories 53,238 53,129 Deferred income taxes 11,855 11,230 Prepaid expenses and other 1,826 2,657 ------------- ------------ Total current assets 217,664 214,588 ------------- ------------ Property, plant and equipment, at cost 481,146 467,565 Less accumulated depreciation and amortization 234,593 224,158 ------------- ------------ Net property, plant and equipment 246,553 243,407 ------------- ------------ Venture capital investments 224,980 140,698 Other assets and deferred charges 45,305 41,250 Goodwill and other intangibles 151,268 152,544 ------------- ------------ Total assets $ 885,770 $ 792,487 ------------- ------------ Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 62,783 $ 61,476 Accrued expenses 43,530 45,030 Income taxes payable 9,879 1,736 ------------- ------------ Total current liabilities 116,192 108,242 Long-term debt 270,000 270,000 Deferred income taxes 56,584 33,205 Other noncurrent liabilities 9,264 8,812 ------------- ------------ Total liabilities 452,040 420,259 ------------- ------------ Shareholders' equity: Common stock, no par value 104,886 103,327 Common stock held in trust for savings restoration plan (1,212) (1,212) Unrealized gain on available-for-sale securities 51,784 8,330 Foreign currency translation adjustment (2,132) (1,672) Retained earnings 280,404 263,455 ------------- ------------ Total shareholders' equity 433,730 372,228 ------------- ------------ Total liabilities and shareholders' equity $ 885,770 $ 792,487 ------------- ------------ </TABLE> See accompanying notes to financial statements.
<TABLE> Tredegar Corporation Consolidated Statements of Income (In Thousands) (Unaudited) <CAPTION> First Quarter Ended March 31 ------------------------------------- 2000 1999 ------------ ------------- <S> <C> <C> Revenues: Net sales $232,228 $ 179,541 Other income (expense), net 13,232 259 ------------ ------------- Total 245,460 179,800 ------------ ------------- Costs and expenses: Cost of goods sold 186,394 140,326 Selling, general and administrative 12,602 11,286 Research and development 6,290 4,097 Amortization of intangibles 1,276 87 Interest 4,295 289 Unusual items 5,484 - ------------ ------------- Total 216,341 156,085 ------------ ------------- Income before income taxes 29,119 23,715 Income taxes 10,656 8,417 ------------ ------------- Net income $18,463 $ 15,298 ============ ============= Earnings per share: Basic $ .49 $ .42 Diluted .47 .39 Shares used to compute earnings per share: Basic 37,718 36,724 Diluted 38,970 38,800 Dividends per share $ .04 $ .04 </TABLE> See accompanying notes to financial statements.
<TABLE> Tredegar Corporation Consolidated Statements of Cash Flows (In Thousands) (Unaudited) <CAPTION> First Quarter Ended March 31 ----------------------- 2000 1999 --------- -------- <S> <C> <C> Cash flows from operating activities: Net income $18,463 $15,298 Adjustments for noncash items: Depreciation 8,062 5,754 Amortization of intangibles 1,276 87 Deferred income taxes (1,441) (156) Accrued pension income and postretirement benefits (1,673) (919) Gain on sale of venture capital investments (13,105) (168) Loss on plant shutdowns and divestitures 5,293 - Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts and notes receivable 2,387 (639) Inventories (168) 980 Income taxes recoverable - - Prepaid expenses and other 830 650 Accounts payable 1,409 677 Accrued expenses and income taxes payable 4,957 5,716 Other, net (2,678) (766) --------- -------- Net cash provided by operating activities 23,612 26,514 --------- -------- Cash flows from investing activities: Capital expenditures (15,843) (10,075) Investments (21,603) (15,410) Proceeds from the sale of investments 533 2,189 Proceeds from property disposals and divestitures 679 52 Other, net 534 (102) --------- -------- Net cash used in investing activities (35,700) (23,346) --------- -------- Cash flows from financing activities: Dividends paid (1,514) (1,456) Proceeds from exercise of stock options 1,559 870 --------- -------- Net cash provided by (used in) financing activities 45 (586) --------- -------- (Decrease) increase in cash and cash equivalents (12,043) 2,582 Cash and cash equivalents at beginning of period 25,752 25,409 --------- -------- Cash and cash equivalents at end of period $13,709 $27,991 ========= ======== </TABLE> See accompanying notes to financial statements.
TREDEGAR CORPORATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and Subsidiaries ("Tredegar") contain all adjustments necessary to present fairly, in all material respects, Tredegar's consolidated financial position as of March 31, 2000, and the consolidated results of operations and cash flows for the three months ended March 31, 2000 and 1999. All such adjustments are deemed to be of a normal recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Tredegar's Annual Report on Form 10-K for the year ended December 31, 1999. The results of operations for the three months ended March 31, 2000, are not necessarily indicative of the results to be expected for the full year. 2. See page 11 for information on unusual items recognized in the first quarter of 2000. There were no unusual items in the first quarter of 1999. On April 10, 2000, we announced the completion of the sale of Fiberlux, a U.S. producer of rigid vinyl extrusions for windows and patio doors, to Westech Windows, Inc., an affiliate of the Westlake Group based in Houston, Texas. While terms of the sale were not disclosed, we expect to realize a minor gain on the transaction in the second quarter. Fiberlux had sales of $9.1 million in 1999, operating profit of $57,000 in 1999 and net assets of $7.2 million at March 31, 2000. On September 24, 1999, we announced that our board of directors was evaluating alternative financing and structural options for the Technology Group (Tredegar Investments, Molecumetics and Therics). On April 25, 2000, we announced that our board of directors had decided that no financing or structural changes would be made at this time.
3. A summary of our venture capital activities for the three months ended March 31, 2000 and 1999, is provided below: <TABLE> - -------------------------------------------------------------------------------- <CAPTION> (In Thousands) First Quarter Ended March 31 ----------------------- 2000 1999 - -------------------------------------------------------------------------------- <S> <C> <C> Carrying value of venture capital investments, beginning of period $ 140,698 $ 60,024 Venture capital investment activity for period (pre-tax amounts): New investments 21,603 15,410 Proceeds from the sale of investments, including receivable from securities brokers (18,323) (2,189) Realized gains 16,259 1,926 Realized losses, write-offs and write-downs (3,154) (1,758) Increase (decrease) in net unrealized gain on available-for-sale securities 67,897 (102) - -------------------------------------------------------------------------------- Carrying value of venture capital investments, end of period $ 224,980 $ 73,311 - -------------------------------------------------------------------------------- </TABLE> Our remaining unfunded commitments to private venture capital funds totaled approximately $35 million at March 31, 2000, and $30 million at December 31, 1999. A schedule of investments is provided on the next two pages.
<TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- <CAPTION> Tredegar Corporation Schedule of Investments at March 31, 2000 and December 31, 1999 (In Thousands, Except Per-Share Amounts) Yrs. Web Site Investment Symbol Held (a) Description (www.) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Securities of Public Companies Held: Superconductor Tech, Inc. SCON .8 Manufactures filters for wireless networks suptech.com Eprise Corporation EPRS 2.3 Web site maintenance & development tool eprise.com Copper Mountain Networks CMTN .4 Digital subscriber line communication products coppermountain.com Caliper Technologies Corp. CALP 2.9 Lab on a chip calipertech.com Eclipse Surgical Tech., Inc. ESTI 5.8 Coronary revascularization eclipsesurg.com Cisco Systems CSCO .8 Networking for the Internet cisco.com InterVU, Inc. ITVU 1.5 Service provider of Internet and audio delivery sintervu.com - ----------------------------------------------------------------------------------------------------------------------------------- Total securities of public companies held - ----------------------------------------------------------------------------------------------------------------------------------- Securities of Private Companies Held: CyroGen 4.5 Micro-cryogenic catheters for medical applicationcyrogen-inc.com Sensitech Inc. 3.1 Perishable product management solutions sensitech.com Rosetta Inpharmatics, Inc. 2.8 Gene function/drug screening on a chip rii.com Bell Geospace 2.8 Presentation of 3D data to the oil & gas industrybellgeo.com Songbird Medical, Inc. 2.7 Disposable hearing aids RedCreek Communications 2.6 Internet and intranet security redcreek.com Appliant, Inc. 2.5 Software tools for managing executable software appliant.com Ellipsys Technologies, Inc. 2.4 Telephone system error detection ellipsystech.com HemoSense 2.4 Point of care blood coagulation time test device hemosense.com Moai Technologies, Inc. 2.3 System for holding auctions on the Internet moai.com Vascular Solutions 2.3 Vascular access site closure system vascularsolutions.com Babycare, Ltd. 2.1 Direct retailing of baby care products in China SignalSoft Corporation 2.1 Wireless caller location detection software signalsoftcorp.com EPiCON 2.0 Network software manager epicon.com NovaLux, Inc. 1.9 Blue-green light lasers novalux.com IRSI 1.8 Optical inspection systems irsinc.com Xycte Therapies, Inc. 1.7 Develops drugs to treat cancer & other disorders xcytetherapies.com Illumina, Inc. 1.4 Fiber optic sensor technology for drug screening illumina.com Advanced Diagnostics, Inc. 1.4 3-D medical imaging equipment Adolor Corporation 1.3 Develops pain-management therapeutic drugs adolor.com Praxon, Inc. 1.3 Integrated business communications equipment praxon.com AdiCom Wireless, Inc. 1.2 Wireless local loop technology adicomwireless.com EndoVasix, Inc. 1.2 Device for treatment of ischemic strokes endovasix.com eWireless, inc. 1.2 Technology linking cell phone users & advertisingewireless.com Cooking.com, Inc. 1.0 Sales of cooking-related items over the Internet cooking.com MediaFlex.com 1.0 Internet-based printing & publishing mediaflex.com eBabyCare Ltd. .8 Sales of babycare products over the Internet in China Kodiak Technologies, Inc. .8 Cooling products for organ & pharma transport kodiaktech.com Genesis Medical, Inc. .7 Medical devices for breast cancer surgery CEPTYR, Inc. .7 Develops small molecule drugs ceptyr.com GreaterGood.com .7 Internet marketing targeted at donors to charitiegreatergood.com Etera Corporation .6 Sales of branded perennial plants over the Internetera.com - ----------------------------------------------------------------------------------------------------------------------------------- Subtotal securities of private companies held - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes on page 8. <TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- <CAPTION> Tredegar Corporation Schedule of Investments at March 31, 2000 and December 31, 1999 (In Thousands, Except Per-Share Amounts) Yrs. Web Site Investment Held (a) Description (www.) - ----------------------------------------------------------------------------------------------------------------------------------- Total securities of public companies held (from page 7) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Subtotal securities of private companies held (from page 7) ThinkFree.com .5 Java-based software complementary to Microsoft Ofthinkfree.com @mobile.com, Inc. (d) .4 Server solutions to increase wireless-carrier proatmobile.com PurePacket Communications, Inc. .4 Next generation packet-based CLEC (phone carrier)purepacket.com Quarry Technologies, Inc. .4 Technology for delivery of differentiated servicequarrytech.com Norborn Medical, Inc. .3 Device for treatment of cardiovascular disease FastTrack Systems, Inc. .2 Clinical trial data management information systems Querist Technologies, Inc. .1 Web-based data mining software for business managers - ----------------------------------------------------------------------------------------------------------------------------------- Total securities of private companies held - ----------------------------------------------------------------------------------------------------------------------------------- Limited partnership interests in private venture capital funds (period held of .1 - 7.5 years) (e) - ----------------------------------------------------------------------------------------------------------------------------------- Total investments Estimated income taxes on assumed disposal at fair value - ----------------------------------------------------------------------------------------------------------------------------------- Estimated net asset value ("NAV") - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE>
<TABLE> - ----------------------------------------------------------------------------------------------------------------------------------- <CAPTION> Tredegar Coporation Public Common Stock or Schedule of Investments at March 31, 2000 Equivalents at 3/31/00 3/31/00 12/31/99 and December 31, 1999 ---------------------------------------------------------------------------- (In Thousands, Except Per-Share Amounts) Estimated Restricted Estimated Estimated Shares Closing Stock Dis- Fair Carrying Cost Fair Carrying Cost Investment Held (b) Price count (c) Value (b) Value (b) Basis Value (b) Value (b) Basis - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Securities of Public Companies Held: Superconductor Tech, Inc. 1,221 $ 41.94 20% $ 40,953 $ 40,953 $ 3,360 $ 4,613 $ 3,000 $ 3,000 Eprise Corporation 1,836 15.75 20% 23,133 23,133 2,900 7,309 2,900 2,900 Copper Mountain Networks 197 81.94 20% 12,906 12,906 1,460 1,460 1,460 1,460 Caliper Technologies Corp. 155 80.88 20% 10,023 10,023 1,000 8,386 8,386 1,000 Eclipse Surgical Tech., Inc. 453 7.44 n/a 3,371 3,371 2,464 3,342 3,342 2,464 Cisco Systems 23 77.31 11% 1,605 1,605 298 6,276 6,276 2,000 InterVU, Inc. 5 90.00 n/a 459 459 57 536 536 57 - ---------------------------------------------------------------------------------------------------------------------------------- Total securities of public companies held 92,450 92,450 11,539 31,922 25,900 12,881 - ---------------------------------------------------------------------------------------------------------------------------------- Securities of Private Companies Held: CyroGen 3,836 2,673 2,673 3,759 2,553 2,553 Sensitech Inc. 2,000 2,000 2,000 2,000 2,000 2,000 Rosetta Inpharmatics, Inc. 9,690 4,688 4,688 4,558 3,000 3,000 Bell Geospace - - 3,500 - - 3,500 Songbird Medical, Inc. 5,842 3,960 3,960 5,922 3,960 3,960 RedCreek Communications 549 549 2,256 2,071 2,071 2,256 Appliant, Inc. 4,968 2,599 2,599 5,036 2,599 2,599 Ellipsys Technologies, Inc. 663 663 2,737 1,987 1,987 2,737 HemoSense 1,711 1,485 1,485 1,735 1,485 1,485 Moai Technologies, Inc. 30,726 2,021 2,021 7,389 2,021 2,021 Vascular Solutions 4,398 2,450 2,450 4,409 2,450 2,450 Babycare, Ltd. 1,009 1,009 1,009 1,009 1,009 1,009 SignalSoft Corporation 5,611 2,996 2,996 5,624 2,996 2,996 EPiCON 2,938 750 750 2,945 750 750 NovaLux, Inc. 5,181 3,183 3,183 5,193 3,183 3,183 IRSI 8,013 3,325 4,200 2,848 2,825 3,700 Xycte Therapies, Inc. 3,000 3,000 3,000 3,000 3,000 3,000 Illumina, Inc. 6,837 3,925 3,925 6,853 3,925 3,925 Advanced Diagnostics, Inc. 705 705 705 705 705 705 Adolor Corporation 3,584 3,000 3,000 2,613 2,000 2,000 Praxon, Inc. 2,654 2,309 2,309 2,661 2,309 2,309 AdiCom Wireless, Inc. 3,254 3,254 3,254 3,000 3,000 3,000 EndoVasix, Inc. 2,500 2,500 2,500 2,500 2,500 2,500 eWireless, inc. 2,205 2,250 2,250 2,250 2,250 2,250 Cooking.com, Inc. 7,005 4,500 4,500 7,021 4,500 4,500 MediaFlex.com 3,856 3,500 3,500 1,500 1,500 1,500 eBabyCare Ltd. 314 314 314 120 120 120 Kodiak Technologies, Inc. 1,194 1,194 1,194 1,194 1,194 1,194 Genesis Medical, Inc. 800 800 800 800 800 800 CEPTYR, Inc. 1,750 1,750 1,750 1,750 1,750 1,750 GreaterGood.com 3,588 3,588 3,588 3,200 3,200 3,200 Etera Corporation 4,000 4,000 4,000 3,000 3,000 3,000 - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal securities of private companies held 134,381 74,940 83,096 98,652 70,642 75,952 - ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> See notes on page 8.
<TABLE> <CAPTION> Tredegar Corporation Schedule of Investments at March 31, 2000 and December 31, 1999 3/31/00 12/31/99 (In Thousands, Except Per-Share Amounts) -------------------------------------------------------- Estimated Estimated Fair Carrying Cost Fair Carrying Cost Investment Value (b) Value (b) Basis Value (b) Value (b) Basis - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Total securities of public companies held (from page 7) 92,450 92,450 11,539 31,922 25,900 12,881 - ---------------------------------------------------------------------------------------------------------------------------------- Subtotal securities of private companies held (from page 7) 134,381 74,940 83,096 98,652 70,642 75,952 ThinkFree.com 1,001 1,001 1,001 1,001 1,001 1,001 @mobile.com, Inc. (d) 10,875 3,000 3,000 2,000 2,000 2,000 PurePacket Communications, Inc. 1,797 1,797 1,797 1,797 1,797 1,797 Quarry Technologies, Inc. 3,000 3,000 3,000 3,000 3,000 3,000 Norborn Medical, Inc. 188 188 188 188 188 188 FastTrack Systems, Inc. 3,000 3,000 3,000 - - - Querist Technologies, Inc. 600 600 600 - - - - ---------------------------------------------------------------------------------------------------------------------------------- Total securities of private companies held 154,842 87,526 95,682 106,638 78,628 83,938 - ---------------------------------------------------------------------------------------------------------------------------------- Limited partnership interests in private venture capital funds (period held of .1-7.5 years)(e) 97,835 45,004 47,785 66,803 36,170 38,650 - ---------------------------------------------------------------------------------------------------------------------------------- Total investments 345,127 $ 224,980 $155,006 205,363 $140,698 $135,469 Estimated income taxes on assumed disposal at fair value 68,443 25,162 Estimated net asset value ("NAV") $ 276,684 $180,201 </TABLE> Notes: (a) The period held for an investment in a company or a venture capital fund is computed using the initial investment date and the current valuation date. If a company has merged with another company, then the initial investment date is the date of the investment in the predecessor company. (b) Amounts are shown net of carried interest estimated using realized and unrealized net gains to date. Amounts may change due to changes in estimated carried interest, and such changes are not expected to be material. Carried interest is the portion of value payable to portfolio managers based on realized net gains and is a customary incentive in the venture capital industry. (c) Restricted securities are securities for which an agreement exists not to sell shares for a specified period of time, usually 180 days. Also included within the category of restricted securities are unregistered securities, the sale of which must comply with an exemption to the Securities Act of 1933 (usually SEC Rule 144). These unregistered securities are either the same class of stock that is registered and publicly traded or are convertible into a class of stock that is registered and publicly traded. (d) On April 12, 2000, @Mobile.com, Inc., merged with Software.com, Inc. (symbol: SWCM). We now own approximately 405,000 shares of Software.com common stock. The share are restricted, and we estimate fair value by applying a 20% restricted stock discount to publicly traded price quotes. (e) At March 31, 2000, Tredegar had ownership interests in 25 venture capital funds, including an indirect interest in the following public companies, among others (disposition of shares held by venture funds, including distributions to limited partners, is at the sole discretion of the general partner of the fund): <TABLE> <CAPTION> Indirect Average Indirect Interest in Restricted Estimated Common Closing Stock Dis- Fair Cost Indirect Investment Shares Price count Value Basis -------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> Universal Access, Inc. 593 $ 33.50 20% $ 15,883 $ 521 Watchguard Tech., Inc. 56 90.00 15% 4,303 111 Loudeye Technologies, Inc. 148 34.88 20% 4,119 373 Digital Island 68 60.94 20% 3,309 138 Telaxis Communications 44 60.11 20% 2,101 207 Cobalt Networks, Inc. 52 47.00 20% 1,962 98 Tut Systems, Inc. 29 59.56 n/a 1,721 145 Apropos Technology, Inc. 55 37.00 20% 1,633 263 Cisco Systems 25 77.31 15% 1,643 - DSL Net Inc. 92 22.06 20% 1,624 170 Avenue A, Inc. 44 30.50 20% 1,066 104 -------------------------------------------------------------------------------------------------------- Total $ 39,364 $ 2,130 -------------------------------------------------------------------------------------------------------- </TABLE>
4. Comprehensive income, defined as net income and other comprehensive income, was $61.5 million for the first quarter of 2000 and $15.3 million for the first quarter of 1999. Other comprehensive income includes changes in unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments recorded net of deferred income taxes directly in shareholders' equity. 5. The components of inventories are as follows: (In Thousands) March 31 Dec. 31 2000 1999 -------------- -------------- Finished goods $11,094 $9,928 Work-in-process 4,434 4,322 Raw materials 27,954 29,174 Stores, supplies and other 9,756 9,705 -------------- -------------- Total $53,238 $53,129 ============== ============== 6. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows: <TABLE> <CAPTION> (In Thousands) First Quarter Ended March 31 --------------------- 2000 1999 --------- --------- <S> <C> <C> Weighted average shares outstanding used to compute basic earnings per share 37,718 36,724 Incremental shares issuable upon the assumed exercise of stock options 1,252 2,076 --------- --------- Shares used to compute diluted earnings per share 38,970 38,800 --------- --------- </TABLE> Incremental shares issuable upon the assumed exercise of outstanding stock options are computed using the average market price during the related period. 7. The Financial Accounting Standards Board has issued a new standard affecting the accounting for derivative instruments and hedging activities. This standard is not expected to significantly change our operating results, financial condition or disclosures. The new standard will be adopted in the first quarter of 2001.
Item 2. Management's Discussion and Analysis of FinancialCondition and Results of Operations. Results of Operations --------------------- First Quarter 2000 Compared with First Quarter 1999 Net income for the first quarter of 2000 was $18.5 million, up from $15.3 million in 1999 (47 cents per share versus 39 cents per share). Results in 2000 include $7.8 million (20 cents per share) of realized after-tax gains from venture capital investments, compared to a loss of $250,000 (one cent per share) in the first quarter of 1999. Results in 2000 also include a net after-tax charge of $3.5 million (nine cents per share) related primarily to the planned shut down of a plastic films plant in Manchester, Iowa. Pretax realized gains and losses from venture capital investment activities are included in "Other income (expense), net" in the consolidated statements of income on page 3 and "Venture capital investments" in the operating profit table on page 12. Operating expenses (primarily employee compensation and benefits and leased office space and equipment) for our venture capital investment activities are classified in "Selling, general and administrative expenses" ("SG&A") in the consolidated statements of income and "Venture capital investments" in the operating profit table. After-tax appreciation in the net asset value ("NAV") of the venture capital investment portfolio was $86.8 million during the quarter. At March 31, 2000, the NAV of the portfolio was $276.7 million. Since the end of the quarter, the NAV of the public securities held in the portfolio through May 10 had declined by $26 million. For more information on our venture capital investment activities, see pages 13-14 and Note 3 on page 6. Net sales in the first quarter of 2000 increased by 29% over 1999 due primarily to: o The acquisition of Exxon Chemical Company's plastic film business ("Exxon Films") on May 17, 1999 o Higher volume in Aluminum Extrusions (up 9%) o Higher selling prices driven by higher raw material costs Pro forma net sales ($232.2 million in the first quarter of 2000 versus $209.1 million in 1999) were up 11%. Pro forma net sales assume that the acquisition of Exxon Films occurred at the beginning of 1999. Net sales for existing operations of Film Products were up 2.7% due to higher selling prices resulting from higher plastic resin costs, partially offset by lower volume. For more information on net sales, see the business segment review on pages 12-14. The gross profit margin declined to 19.7% from 21.8% due to lower margins at the plastic film plants acquired from the Exxon Chemical Company, and lower margins for the existing operations of Film Products and Aluminum Extrusions. In existing operations, increases in selling prices due to higher raw material costs helped maintain a relatively constant gross profit per unit, but still resulted in a decline in the overall gross profit percentage.
SG&A expenses in the first quarter of 2000 were $12.6 million, up from $11.3 million in 1999 due primarily to the acquisition of Exxon Films. As a percentage of sales, SG&A expenses decreased to 5.4% in the first quarter of 2000 compared with 6.3% in 1999, due to higher sales from raw material-driven price increases. R&D expenses increased to $6.3 million in the first quarter of 2000 from $4.1 million in 1999 due to the acquisition of Therics (impact of $1.8 million), higher spending at Molecumetics in support of collaboration programs (up $219,000) and higher product development spending at Film Products (up $158,000). Unusual charges in the first quarter of 2000 totaled $5.5 million ($3.5 million after income taxes) and included: o A charge of $5.3 million for the planned shut down of a plastic films manufacturing facility in Manchester, Iowa, including an impairment loss for building and equipment ($4.1 million), severance costs ($700,000), and excess inventory and other items ($450,000) o A pretax charge of $191,000 for costs associated with the evaluation of financing and structural options for the Technology Group There were no unusual items in the first quarter of 1999. For more information on costs and expenses, see the business segment review on pages 12-14. Interest income, which is included in "Other income (expense), net" in the consolidated statements of income, was $394,000 in the first quarter of 2000 and $325,000 in 1999. The average tax-equivalent yield earned on cash equivalents was approximately 5.7% in the first quarter of 2000 and 4.9% in the first quarter of last year. Our policy permits investment of excess cash in marketable securities that have the highest credit ratings and maturities of less than one year. The primary objectives of our policy are safety of principal and liquidity. Interest expense increased to $4.3 million in the first quarter of 2000 from $289,000 in 1999 due to higher average debt outstanding (up $245 million) from acquisitions and investments made in 1999. The average rate on variable-rate debt ($250 million) was 6.8% in the first quarter of 2000. There was no variable-rate debt outstanding in the first quarter of 1999. The average rate on fixed-rate debt ($20 million in the first quarter of 2000 and $25 million in the first quarter of 1999) was 7.2% in both periods. The effective tax rate, excluding unusual items, increased to 36.5% in the first quarter of 2000 from 35.5% in 1999 due to higher taxes accrued on income from foreign operations.
Business Segment Review ----------------------- The following tables present Tredegar's net sales and operating profit by segment for the first quarter ended March 31, 2000 and 1999. <TABLE> Net Sales by Segment (In Thousands) (Unaudited) <CAPTION> First Quarter Ended March 31 ------------------- 2000 1999 --------- --------- <S> <C> <C> Film Products $ 99,486 $ 67,752 Fiberlux 1,782 2,260 Aluminum Extrusions 129,240 107,684 Technology: Molecumetics 1,626 1,845 Other 94 - --------- --------- Total net sales $ 232,228 $ 179,541 ========= ========= </TABLE> <TABLE> Operating Profit by Segment (In Thousands) (Unaudited) <CAPTION> First Quarter Ended March 31 ------------------- 2000 1999 --------- --------- <S> <C> <C> Film Products: Ongoing operations $ 15,750 $13,204 Unusual items (5,293) - --------- --------- Total Film Products 10,457 13,204 --------- --------- Fiberlux (209) (88) Aluminum Extrusions 15,714 13,846 Technology: Molecumetics (1,229) (854) Therics (1,799) - Venture capital investments 12,143 (391) Unusual items (191) - --------- --------- Total Technology 8,924 (1,245) --------- --------- Total operating profit 34,886 25,717 Interest income 394 325 Interest expense 4,295 289 Corporate expenses, net 1,866 2,038 --------- --------- Income before income taxes 29,119 23,715 Income taxes 10,656 8,417 --------- --------- Net income $ 18,463 $15,298 ========= ========= </TABLE>
First-quarter sales in Film Products rose 47 percent to $99.5 million while operating profit (excluding unusual items) was $15.8 million, up 19 percent versus the year-ago period. The increase in sales and profits was due to the mid-1999 acquisition of Exxon Films. On a pro forma basis (i.e., assuming the acquisition had occurred at the beginning of 1999), first-quarter sales in films were up two percent due to raw material-driven price increases. Operating profit for existing operations declined $1.9 million (14%) due to lower volume, continued delays in new product introductions, and higher spending on new product development and commercialization. In Aluminum Extrusions, higher volume (up 9%) and selling prices boosted sales to $129.2 million for the quarter, an increase of 20 percent versus last year. Operating profit rose 13 percent to $15.7 million, despite a rapid rise in raw material costs. Demand continues to be strong in all markets. The first-quarter operating loss from technology operations was $3 million versus a loss of $854,000 in the year-ago period. The higher losses were due primarily to the inclusion of results from Therics, which was acquired in April 1999. The appreciation in NAV related to venture capital investment activities for the first quarter of 2000 and 1999 is summarized below: <TABLE> - ---------------------------------------------------------------------------- <CAPTION> (In Millions) First Quarter Ended March 31 ------------------ 2000 1999 - --------------------------------------------------------------------------- <S> <C> <C> Net realized gains, losses, writedowns and related operating expenses for venture capital investments reflected in consolidated statements of income (net of tax) $ 7.8 $ (.3) Change in unrealized appreciation of venture capital investments (net of tax) 79.0 1.0 - --------------------------------------------------------------------------- Appreciation (depreciation) in net asset value related to venture capital investment activities $ 86.8 $ .7 - --------------------------------------------------------------------------- </TABLE> The following companies held directly in the portfolio, or indirectly through our interests in other venture capital funds, accounted for most of the net appreciation in NAV during the current period: o Superconductor Technologies, Inc. - public security, higher stock price ($23 million NAV appreciation) o Moai Technologies, Inc. - new round of financing at higher valuation ($15 million NAV appreciation) o Eprise Corporation - IPO ($10 million NAV appreciation) o Copper Mountain Networks - bought Onprem Networks, Inc. ($7 million NAV appreciation) o @mobile.com, Inc. - new round of financing at higher valuation ($5 million NAV appreciation) o IRSI - new round of financing at higher valuation ($3 million NAV appreciation) o Rosetta Inpharmatics - new round of financing at higher valuation ($2 million NAV appreciation)
o Indirect ownership of companies through our interest in other venture capital funds ($21 million NAV appreciation, primarily higher valuations due to IPOs and mergers) o Write-down of RedCreek Communications ($974,000 NAV depreciation) o Write-down of Ellipsys Technologies, Inc. ($847,000 NAV depreciation) Since March 31, 2000, the NAV of public securities held in the portfolio through May 10 had declined by $26 million. The cost basis, carrying value and NAV of the venture capital portfolio is reconciled below: <TABLE> - --------------------------------------------------------------------------- <CAPTION> (In Millions) March 31 Dec. 31 2000 1999 - --------------------------------------------------------------------------- <S> <C> <C> Cost basis of venture capital investments $ 155.0 $ 135.5 Writedowns taken on securities held (charged to earnings) (10.9) (7.8) Unrealized appreciation on public securities held by Tredegar (reflected directly in equity net of deferred income taxes) 80.9 13.0 - --------------------------------------------------------------------------- Carrying value of venture capital investments reflected in the balance sheet 225.0 140.7 Unrealized appreciation in private securities held by Tredegar and in its indirect interest in all securities held by venture capital funds 120.1 64.7 - --------------------------------------------------------------------------- Estimated fair value of venture capital investments 345.1 205.4 Estimated income taxes on assumed disposal at fair value (68.4) (25.2) - --------------------------------------------------------------------------- Estimated NAV of venture capital investments $ 276.7 $ 180.2 - --------------------------------------------------------------------------- </TABLE> Our internal rate of return ("IRR") since inception in 1992 through May 10, 2000, is estimated at 69% (49% after income taxes), but is not necessarily indicative of the IRR that we will generate in the future. IRR is the discount rate that equates the net present value of investment cash inflows with investment cash outflows. The IRR is calculated as an annualized compounded rate of return using actual investment cash flows, modified to incorporate our share of the current valuation of unliquidated holdings and operating expenses (and taxes in case of the after-tax IRR). Our portfolio is subject to risks typically associated with investments in technology start-up companies, which include business failure, illiquidity and stock market volatility.
Liquidity and Capital Resources ------------------------------- Tredegar's total assets increased to $885.8 million at March 31, 2000, from $792.5 million at December 31, 1999, due primarily to: o An increase in unrealized gains on available-for-sale securities (up $68 million) o Higher receivable from securities brokers from the sale of securities (up $17.8 million) Net cash provided by operating activities in excess of capital expenditures and dividends decreased to $6.3 million in the first quarter of 2000 from $15 million in 1999 due primarily to higher capital expenditures. Capital expenditures in the first quarter of 2000 reflect the normal replacement of machinery and equipment and: o A new feminine pad topsheet film production line at the plant in Terre Haute, Indiana o Machinery and equipment purchased for the manufacture of breathable and elastomeric films (these films are replacing conventional diaper backsheet and other components in order to improve comfort and fit) o Continued expansion of capacity at the Hungary facility, which produces disposable films for hygiene products marketed in Europe o The second phase of a modernization program at the aluminum extrusion plant in Newnan, Georgia The reasons for the decrease in cash and cash equivalents to $13.7 million at March 31, 2000, from $25.8 million at December 31, 1999, are summarized below: <TABLE> <CAPTION> (In Thousands) First Quarter Ended March 31 ------------------ 2000 1999 --------- -------- <S> <C> <C> Cash and cash equivalents, beginning of period $25,752 $25,409 --------- -------- Cash provided by operating activities in excess of capital expenditures and dividends 6,255 14,983 Proceeds from the exercise of stock options 1,559 870 New venture capital investments, net of proceeds from disposals (21,070) (13,221) Other, net 1,213 (50) --------- -------- Net (decrease) increase in cash and cash equivalents (12,043) 2,582 --------- -------- Cash and cash equivalents, end of period $13,709 $27,991 ========= ======== </TABLE> Quantitative and Qualitative Disclosures About Market Risk ---------------------------------------------------------- Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, foreign currencies, emerging markets and technology stocks. Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products; however, those changes are generally followed by a corresponding change in selling prices. Profit
margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices but are also generally followed by a corresponding change in selling prices; however, there is no assurance that higher ingot costs can be passed along to customers. In the normal course of business, we enter into fixed-price forward sales contracts with certain customers for the sale of fixed quantities of aluminum extrusions at scheduled intervals. In order to hedge our exposure to aluminum price volatility under these fixed-price arrangements, which generally have a duration of not more than 12 months, we enter into a combination of forward purchase commitments and futures contracts to acquire aluminum, based on the scheduled deliveries. We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of consolidated pretax income earned by geographic area for the first quarter of 2000 and 1999 are presented below: <TABLE> Estimated % of Consolidated Pretax Income Earned by Geographic Area* --------------------------------- <CAPTION> First Quarter Ended March 31 ------------------- 2000 1999 ------------------- <S> <C> <C> United States 51 % 63 % Canada 22 14 Latin America 14 7 Europe 10 10 Asia 3 6 -------- -------- Total 100 % 100 % ======== ======== </TABLE> * Based on consolidated pretax income from continuing operations excluding venture capital activities and unusual items. We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign operations in emerging markets have agreements with certain customers that index the pricing of our products to the U.S. Dollar, the German Mark or the Euro. Our foreign currency exposure on income from foreign operations in Europe primarily relates to the German Mark and the Euro. We believe that our exposure to the Canadian Dollar has been substantially neutralized by the U.S. Dollar-based spread (the difference between selling prices and aluminum costs) generated from Canadian casting operations and exports from Canada to the U.S. The acquisition of Exxon Films on May 17, 1999, has increased the proportion of assets located in the U.S. It has also increased the amount of operating profit earned in the U.S., partially offset by higher U.S. Dollar interest expense on higher debt related to the acquisition. We have investments in private venture capital fund limited partnerships and early-stage technology companies, including the stock of privately-held companies and the restricted and unrestricted stock of companies that have recently registered shares in initial public offerings. The portfolio
is subject to risks typically associated with investments in technology start-up companies, which include business failure, illiquidity and stock market volatility. Furthermore, publicly traded stocks of emerging, technology-based companies have higher volatility and risk than the U.S. stock market as a whole. See pages 13-14 and Note 3 on page 6 for more information. New Accounting Standards ------------------------ The Financial Accounting Standards Board has issued a new standard affecting the accounting for derivative instruments and hedging activities. This standard is not expected to significantly change our operating results, financial condition or disclosures. The new standard will be adopted in the first quarter of 2001.
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. ----------- 3 Amended By-laws 27 Financial Data Schedule (b) Reports on Form 8-K. No reports on Form 8-K have been filed for the quarter ended March 31, 2000.
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Tredegar Corporation (Registrant) Date: May 12, 2000 /s/ N. A. Scher -------------------------- ------------------------------------------ Norman A. Scher Executive Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 12, 2000 /s/ D. Andrew Edwards --------------------------- ------------------------------------------ D. Andrew Edwards Vice President Treasurer and Controller (Principal Accounting Officer)
EXHIBIT INDEX Exhibit No. Description - ----------- ----------- 3 Amended By-laws 27 Financial Data Schedule