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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSACTION 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
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(Exact name of registrant as specified in its charter)
Virginia 54-1497771
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 Boulders Parkway, Richmond, Virginia 23225
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-330-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------------------- ---------------------------------------------
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
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 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 at least 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 registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Aggregate market value of voting stock held by non-affiliates of the registrant
as of March 10, 2000: *
$768,435,366
Number of shares of Common Stock outstanding as of March 10, 2000: 37,814,461
* In determining this figure, an aggregate of 12,411,639 shares of Common Stock
beneficially owned by Floyd D. Gottwald, Jr., Bruce C. Gottwald, John D.
Gottwald, William M. Gottwald and the members of their immediate families has
been excluded because the shares are held by affiliates. The aggregate market
value has been computed based on the closing price in the New York Stock
Exchange Composite Transactions on March 10, 2000, as reported by The Wall
Street Journal.
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Documents Incorporated By Reference
Portions of the Tredegar Corporation ("Tredegar") Proxy Statement for
the 2000 Annual Meeting of Shareholders (the "Proxy Statement") are incorporated
by reference into Part III of this Form 10-K. We expect to file our Proxy
Statement with the Securities and Exchange Commission and mail it to
shareholders around March 31.
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Index to Annual Report on Form 10-K
Year Ended December 31, 1999
Part I Page
Item 1. Business 1-7
Item 2. Properties 7-8
Item 3. Legal Proceedings None
Item 4. Submission of Matters to a Vote of Security Holders None
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Part II
Item 5. Market for Tredegar's Common Equity and Related 9-10
Stockholder Matters
Item 6. Selected Financial Data 10-17
Item 7. Management's Discussion and Analysis of Financial Condition 18-31
and Results of Operations
Item 8. Financial Statements and Supplementary Data 34-66
Item 9. Changes In and Disagreements With Accountants on Accounting None
and Financial Disclosures
Part III
Item 10. Directors and Executive Officers of Tredegar * 32-33
Item 11. Executive Compensation *
Item 12. Security Ownership of Certain Beneficial Owners and Management *
Item 13. Certain Relationships and Related Transactions None
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on 34
Form 8-K
* Items 11 and 12 and portions of Item 10 are incorporated by reference from the
Proxy Statement.
The Securities and Exchange Commission has not approved or disapproved of this
report or passed upon its accuracy or adequacy.
PART I
Item 1. BUSINESS
Description of Business
Tredegar is engaged directly or through subsidiaries in the
manufacture of plastic films, vinyl extrusions and aluminum extrusions. We also
have interests in a variety of technology-based businesses.
Film Products
Film Products manufactures plastic films for disposable personal
hygiene products (primarily feminine hygiene and diaper products) and packaging,
medical, industrial and agricultural products. These products are produced at
various locations throughout the United States and are sold both directly and
through distributors. Film Products also has plants in the Netherlands, Hungary,
Brazil, Argentina and China where it produces films for European, Latin American
and Asian markets. On May 17, 1999, Film Products acquired Exxon Chemical
Company's plastic film business ("Exxon Films") for $205 million (including
transaction costs). The acquisition included 350 employees and two plants. The
plants are located in Lake Zurich, Illinois and in Pottsville, Pennsylvania, and
manufacture films used primarily in packaging, personal hygiene and medical
markets. Film Products competes in all of its markets on the basis of product
quality, price and service.
Film Products produces film for several major market categories:
hygiene, packaging and industrial.
Hygiene. Film Products is one of the largest U.S. suppliers of permeable,
breathable, elastomeric and embossed films for disposable personal hygiene
products. In each of the last three years, this class of products accounted for
more than 30% of Tredegar's consolidated revenues.
Film Products supplies permeable films for use as liners in feminine
hygiene products and adult incontinent products. Film Products also supplies
breathable, embossed and elastomeric films and nonwoven film laminates for use
as backsheet and other components for hygienic products such as baby diapers,
adult incontinent products and feminine hygiene products. Film Products' primary
customer for permeable, breathable and elastomeric films and nonwoven film
laminates is The Procter & Gamble Company ("P&G"), the leading global personal
hygiene product manufacturer. Net sales to P&G totaled $250 million in 1999,
$233.5 million in 1998 and $242.2 million in 1997 (these amounts include plastic
film sold to others that converted the film into materials used in products
manufactured by P&G).
P&G and Tredegar have had a successful long-term relationship based
on cooperation, product innovation and continuous process improvement. The loss
or significant reduction of sales associated with P&G would have a material
adverse effect on our business.
Packaging & Industrial. Film Products produces a broad line of packaging films
with an emphasis on paper and industrial packaging, as well as laminating films.
These are both coextruded and monolayer films produced by either the blown or
cast processes. They give our customers a competitive advantage by providing a
thin gauge film that is readily printable and convertible on conventional
processing equipment. Packaging and industrial films sold directly or indirectly
to P&G constitutes about 35% of overall packaging and industrial films sales
volume and somewhat less of related revenue.
Coextruded and monolayer permeable films under the VisPore(R) name
are also sold by Film Products. These films are used to regulate fluid and vapor
transmission in many industrial, medical, agricultural and packaging markets.
Specific examples include filter plies for surgical masks and other medical
applications, permeable ground cover, natural cheese mold release cloths and
rubber bale wrap.
Film Products also produces differentially embossed monolayer and
coextruded films. Some of these films are extruded in a Class 10,000 clean room
and act as a disposable, protective coversheet for photopolymers used in the
manufacture of circuit boards. Other films sold under the ULTRAMASK(R) name are
used as masking films to protect polycarbonate, acrylics and glass from damage
during fabrication, shipping and handling.
Film Products produces a line of oriented films for food packaging,
in-mold labels and other applications under the name Monax(R)Plus. These are
high-strength, high moisture barrier films that provide cost and source
reduction benefits over competing packaging materials.
Raw Materials. The primary raw materials used by Film Products are low-density
and linear low-density polyethylene resins, which are obtained from domestic and
foreign suppliers at competitive prices. We believe there will be an adequate
supply of polyethylene resins in the immediate future.
Research and Development. Film Products has technical centers in Terre Haute,
Indiana, and Lake Zurich, Illinois, and holds 42 U.S. patents and 14 U.S.
trademarks. Expenditures for research and development have averaged $6.3 million
per year during the past three years.
Fiberlux
Fiberlux is a U.S. producer of rigid vinyl extrusions for windows and
patio doors. Fiberlux products are sold to fabricators and directly to end-
users. The primary raw material, polyvinyl chloride resin, is purchased in the
open market and under contract. No critical shortages of polyvinyl chloride
resins are expected. Fiberlux competes in all of its markets on the basis of
product quality, price and service. Fiberlux holds one U.S. patent and three
U.S. trademarks. Fiberlux is currently not material to Tredegar's consolidated
results of operations.
Aluminum Extrusions
Aluminum Extrusions is composed of The William L. Bonnell Company,
Inc., Capitol Products Corporation, Bon L Campo Limited Partnership and Bon L
Canada Inc. (together, "Aluminum Extrusions"), which produce soft alloy aluminum
extrusions primarily for the building and construction, distribution,
transportation, electrical and consumer durables markets. The operations
associated with Bon L Campo Limited Partnership were acquired in 1997 and the
operations associated with Bon L Canada Inc. were acquired in 1998 (see Note 2
on page 46).
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Aluminum Extrusions manufactures mill (unfinished), anodized and
painted aluminum extrusions for sale directly to fabricators and distributors
that use aluminum extrusions to produce curtain walls, architectural shapes, tub
and shower doors, window components, ladders, running boards, boat windshields,
bus bars, tractor-trailer shapes, snowmobiles and furniture, among other
products. Sales are made primarily in the United States and Canada, principally
east of the Rocky Mountains.
The percentage concentration of aluminum extrusions shipped to the
building and construction market has declined over the past several years due
primarily to acquisitions (48% in 1999 compared to 71% in 1995). A breakdown of
1999 and 1998 aluminum extrusion sales volume by market segment is shown below:
------------------------------------------------------
% of Aluminum
Extrusion Sales Volume
by Market Segment
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1999 1998
Building and construction 48 51
Distribution 18 9
Transportation 14 15
Electrical 7 7
Consumer durables 5 7
Other 8 11
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Total 100 100
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Raw materials for Aluminum Extrusions, consisting of aluminum ingot,
aluminum scrap and various alloys, are purchased from domestic and foreign
producers in open-market purchases and under short-term contracts. We do not
expect critical shortages of aluminum or other required raw materials and
supplies.
Aluminum Extrusions competes primarily on the basis of product
quality, service and price.
Aluminum Extrusions holds two U.S. patents and nine U.S. trademarks.
Technology
Our technology interests include Tredegar Investments, Inc.,
Molecumetics, Ltd., and Therics, Inc.
Tredegar Investments. Tredegar Investments is our venture capital subsidiary.
Its investments represent high-risk stakes in technology start-up companies,
primarily in the areas of Internet and information technologies, communications
and life sciences. Its primary objective is to generate high after-tax internal
rates of return commensurate with the level of risk involved. More information,
including a schedule of investments, is provided in the business segment review
on pages 29-31, and in Note 7 on page 51.
Molecumetics. Molecumetics operates a drug discovery research laboratory in
Bellevue, Washington, where it uses patented chemistry to develop new drug
3
candidates for licensing to pharmaceutical and biotechnology companies.
Molecumetics has entered into a number of research collaboration and license
agreements, which are described below. Each of these agreements, except for the
agreement with ChoongWae Pharma Corporation ("ChoongWae"; see below), provides
for research and development ("R&D") support funding. Each of these agreements,
again except for the ChoongWae agreement, also provides for additional payments
if Molecumetics achieves certain milestones based on the clinical progression of
program compounds, as well as future royalties if sales of products from the
programs occur. Revenues recognized to date relate entirely to payments received
for R&D support, including revenues of $7.6 million in 1999, $5.7 million in
1998 and $2.6 million in 1997. See Note 1 on page 40 for more information on
revenue recognition.
To date, Molecumetics has not achieved any defined milestones nor
does it have licensed products for which royalties are received. Any discussion
of the possibility of achieving milestones or realizing future royalties would
be speculative at this time. Molecumetics' operating losses were $3.4 million in
1999, $3.5 million in 1998 and $4.5 million in 1997.
In 1999, Molecumetics entered into a research collaboration agreement
with Pharmacia & Upjohn Company ("Pharmacia") to identify and develop orally
active modulators of Cysteinyl aspartate-specific proteinases ("Caspases").
Caspases play a central role in apoptosis, the inappropriate control of which
contributes to the underlying pathology in many human diseases. Under the
agreement, Molecumetics uses its SMART Library(R) technology to optimize lead
compounds, and Pharmacia is responsible for in-vivo testing and all pre-clinical
and clinical development activities. Pharmacia also has worldwide exclusive
rights to develop and commercialize the resulting compounds.
In 1999, Molecumetics expanded its existing relationship with Asahi
Chemical Industry Co., Ltd. (Asahi) by signing a multi-year research
collaboration agreement for the discovery and development of new drugs for
treatment of central nervous system, cardiovascular, inflammation and metabolism
therapeutic areas. The new agreement replaces a 1997 collaboration agreement
between the two companies that focused solely on cardiovascular disorders. Under
the terms of the current agreement, the companies mutually select multiple
molecular targets to pursue in the agreed-upon therapeutic areas. Molecumetics
is responsible for providing libraries of compounds for identifying lead
compounds. The two companies share the screening responsibilities and the
optimization of lead compounds. Asahi is responsible for the pre-clinical
development of the compounds in Japan and other Asian countries. Molecumetics
retains all rights to the compounds in North America and Europe.
In 1998, Molecumetics and Bristol-Myers Squibb Company ("BMS")
entered into a three-year research alliance aimed at developing new drugs for
the treatment of inflammatory and immunological diseases. The collaborative
research is focused on the identification of small-molecule transcription factor
inhibitors. Molecumetics also is supplying BMS with 150,000 of its proprietary
MolecuSet(R) compounds for broad-based screening against a wide variety of
disease targets.
In 1998, Molecumetics signed a two-year license and supply agreement
with ChoongWae, a Korean pharmaceutical company. Under terms of the agreement,
ChoongWae synthesizes and delivers certain key chemical intermediates to
Molecumetics in exchange for licensing rights to the jointly developed tryptase
inhibitors in certain Asian countries. Molecumetics retains the rights to these
4
compounds in all other countries. Tryptase inhibitors could be used to treat
asthma, inflammatory bowel disease and psoriasis. The intermediates supplied by
ChoongWae are not commercially available, and Molecumetics uses them in the
tryptase inhibitors and other programs, and for synthesis of proprietary
compounds using its SMART Library technology. Under the agreement, no cash
settlement is involved. No revenue has been recognized, and Molecumetics
expenses the costs associated with the jointly developed tryptase inhibitors
program as incurred.
In September 1997, Molecumetics signed a research and licensing
collaboration agreement with Teijin Limited ("Teijin") for the optimization and
development of Molecumetics' orally active inhibitors of thrombin, a key
protease in the blood coagulation cascade. The resulting therapeutic drugs would
be useful for treating a variety of blood-clotting disorders. Under the terms of
the agreement, Molecumetics is responsible for the optimization of its lead
compounds using its SMART Library technology. The two companies collaborate on
preclinical studies. Teijin is responsible for the clinical development,
approval and marketing of the compounds in Japan and other Asian countries.
Molecumetics retains all rights to the compounds in North America and Europe.
Molecumetics holds 14 U.S. patents and three U.S. trademarks, and has
filed a number of other patent applications with respect to its technology.
Molecumetics spent approximately $10.8 million in 1999, $8.5 million in 1998 and
$6.7 million in 1997 on research and development activities.
Therics. On April 8, 1999, Tredegar acquired the assets of Therics for cash
consideration of $13.6 million (including transaction costs). Before the
acquisition, Tredegar owned approximately 19% of Therics. Upon the final
liquidation of the former Therics, Tredegar paid approximately $10.2 million to
effectively acquire the remaining 81% ownership interest. Based in Princeton,
New Jersey, Therics is developing new microfabrication technology that has
potential applications in drug delivery and a variety of other medical markets.
Its primary focus is on commercializing the TheriForm(TM) process, a new and
unique process for manufacturing oral and implantable drugs and bioimplantable
reconstructive body parts. Among other things, this technology enables drug
companies to build precise amounts of active drugs and excipients in specific
locations within each tablet. As a result, the internal architecture of each
tablet can be designed to provide unique release profiles that are tailored to
meet medical needs.
In connection with the acquisition, Tredegar recognized a charge of
$3.5 million (classified as an unusual item in the consolidated statement of
income) in the second quarter of 1999 related to the write-off of acquired
in-process research and development (primarily the TheriForm process). The
amount of the charge was determined through an independent third-party analysis
using the income approach. At the date of acquisition, the TheriForm process was
90% complete and will be considered technologically feasible upon the successful
manufacture of an FDA-validated product. The uncertainties involved include the
ability to:
- - Meet machine performance objectives in a sustainable manufacturing environment
- - Produce machines for large-scale commercial production
- - Meet customer requirements with regard to price and performance objectives
- - Achieve technological and commercial feasibility within the anticipated cost
structure and timetable
5
The technology has no alternative future use for which technological
feasibility has been achieved. The estimated cost to complete the development at
the acquisition date was $4.6 million, over 70% of which was projected for 1999
and 2000. Therics had revenues of $161,000 and an operating loss of $5.2 million
for the period from the acquisition date (April 8, 1999) through December 31,
1999.
In 1999, Therics signed a five-year collaboration agreement with
Warner-Lambert Company aimed at developing formulations of several model
compounds to be chosen by the parties, which formulations could then be used as
templates for the development of the same or different compounds. Therics will
receive R&D support funding for its work under this agreement.
Revenues recognized by Therics in 1999 relate entirely to payments
received for R&D support. See Note 1 on page 40 for more information on revenue
recognition.
The immediate challenges at Therics are to enter into additional
collaborations and to advance internal product development efforts.
Therics is exclusively licensed in the healthcare field under 10 U.S.
patents, owns 1 U.S. patent, has applied for 7 U.S. trademarks, and has filed a
number of other patent applications with respect to its technology. For the
period from the acquisition date to the end of 1999, Therics spent approximately
$4.5 million on research and development activities.
Miscellaneous
Patents, Licenses and Trademarks. Tredegar considers patents, licenses and
trademarks to be of significance for Film Products, Molecumetics and Therics. We
routinely apply for patents on significant developments with respect to all of
our businesses. Our patents have remaining terms ranging from 1 to 17 years. We
also have licenses under patents owned by third parties.
Research and Development. Tredegar spent approximately $22.3 million in 1999,
$14.5 million in 1998 and $13.2 million in 1997 on research and development
activities.
Backlog. Backlogs are not material to our operations.
6
Government Regulation. Laws concerning the environment that affect or could
affect our domestic operations include, among others, the Clean Water Act, the
Clean Air Act, the Resource Conservation Recovery Act, the Occupational Safety
and Health Act, the National Environmental Policy Act, the Toxic Substances
Control Act, the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), regulations promulgated under these acts, and any
other federal, state or local laws or regulations governing environmental
matters. We are in substantial compliance with all applicable laws, regulations
and permits. In order to maintain substantial compliance with such standards, we
may be required to incur expenditures, the amounts and timing of which are not
presently determinable but which could be significant, in constructing new
facilities or in modifying existing facilities.
From time to time the Environmental Protection Agency may identify us
as a potentially responsible party with respect to a Superfund site under
CERCLA. To date, we are indirectly potentially responsible with respect to three
Superfund sites. As a result, we may be required to expend amounts on remedial
investigations and actions at such Superfund sites. Responsible parties under
CERCLA may be jointly and severally liable for costs at a site, although
typically costs are allocated among the responsible parties.
In addition, we are indirectly potentially responsible for one New
Jersey Spill Site Act location. Another New Jersey site is being investigated
pursuant to the New Jersey Industrial Site Recovery Act.
Employees. Tredegar employed approximately 3,700 people at December 31, 1999.
Item 2. PROPERTIES
General
Most of the improved real property and the other assets used in our
operations are owned, and none of the owned property is subject to an
encumbrance that is material to our consolidated operations. We consider the
condition of the plants, warehouses and other properties and assets owned or
leased by us to be generally good. We also consider the geographical
distribution of our plants to be well-suited to satisfying the needs of our
customers.
We believe that the capacity of our plants is adequate to meet our
immediate needs. Our plants generally have operated at 65-95 percent of
capacity. Our corporate headquarters offices are located at 1100 Boulders
Parkway, Richmond, Virginia 23225.
7
Our principal plants and facilities are listed below:
Film Products Principal Operations
Locations in the United States Locations in Foreign Countries
Carbondale, Pennsylvania Budapest, Hungary Production of plastic films
LaGrange, Georgia Guangzhou, China (leased)
Lake Zurich, Illinois Kerkrade, the Netherlands
Manchester, Iowa San Juan, Argentina
New Bern, North Carolina Sao Paulo, Brazil
Pottsville, Pennsylvania
Tacoma, Washington (leased)
Terre Haute, Indiana (2)
(technical center and
production facility)
Fiberlux Locations Principal Operations
Pawling, New York Production of vinyl extrusions
for windows and patio doors
Aluminum Extrusions Principal Operations
Locations in the United States Locations in Canada
Carthage, Tennessee Aurora, Ontario Production of aluminum
El Campo, Texas Pickering, Ontario extrusions, fabrication and
Kentland, Indiana Richmond Hill, Ontario finishing
Newnan, Georgia Ste. Therese, Quebec
Technology
Tredegar Investments leases office space in Seattle, Washington, and
Palo Alto, California. Molecumetics leases its laboratory space in Bellevue,
Washington. Therics leases space in Princeton, New Jersey.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
8
PART II
Item 5. MARKET FOR TREDEGAR'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Market Prices of Common Stock and Shareholder Data
Our common stock is traded on the New York Stock Exchange under the
ticker symbol TG. We have no preferred stock outstanding. There were 37,661,140
shares of common stock held by 6,057 shareholders of record on December 31,
1999.
The following table shows the reported high and low closing prices of
our common stock by quarter for the past two years.
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1999 1998
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High Low High Low
First quarter $ 32.38 $22.50 $24.70 $19.00
Second quarter 32.94 20.50 30.67 23.81
Third quarter 23.69 20.38 29.94 16.13
Fourth quarter 23.19 16.06 26.25 19.00
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Dividend Information
On May 20, 1998, we declared a three-for-one stock split payable on
July 1, 1998, to shareholders of record on June 15, 1998. Accordingly, all
historical references to per-share amounts, shares repurchased and the shares
used to compute earnings per share have been restated to reflect the split.
The quarterly dividend rate was increased to:
- - 2.67 cents per share effective January 1, 1997
- - 3 cents per share effective October 1, 1997
- - 4 cents per share effective July 1, 1998
All decisions with respect to payment of dividends will be made by
the Board of Directors based upon earnings, financial condition, anticipated
cash needs and such other considerations as the Board deems relevant. See Note 9
on page 54 for restriction on minimum shareholders' equity required.
Annual Meeting
Our annual meeting of shareholders will be held on May 24, 2000,
beginning at 9:30 a.m. EDT at The Jefferson Hotel in Richmond, Virginia. Formal
notices of the annual meeting, proxies and proxy statements will be mailed to
shareholders around March 31.
9
Inquiries
Inquiries concerning stock transfers, dividends, dividend
reinvestment, consolidating accounts, changes of address, or lost or stolen
stock certificates should be directed to:
American Stock Transfer & Trust Company
Shareholder Services Department
40 Wall Street - 46th Floor
New York, New York 10005
Phone: 800-937-5449
Web site: http://www.amstock.com
All other inquiries should be directed to:
Tredegar Corporation
Corporate Communications Department
1100 Boulders Parkway
Richmond, Virginia 23225
Phone: 804-330-1044
E-mail: invest@tredegar.com
Web site: http://www.tredegar.com
Quarterly Information
We do not generate or distribute quarterly reports to shareholders.
Information on quarterly results can be obtained from our Web site and from
quarterly Form 10-Qs filed with the Securities and Exchange Commission.
Counsel Independent Accountants
Hunton & Williams PricewaterhouseCoopers LLP
Richmond, Virginia Richmond, Virginia
Item 6. SELECTED FINANCIAL DATA
The tables that follow on pages 11-17 present certain selected
financial and segment information for the eight years ended December 31, 1999.
10
EIGHT-YEAR SUMMARY
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Tredegar Corporation and Subsidiaries
Years Ended December 31 1999 1998 1997 1996 1995 1994 1993 1992
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(In thousands, except per-share data)
Results of Operations (a):
Net sales $820,411 $699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229
Other income (expense), net (4,362) 4,015 17,015 4,248 (669) (296) (387) 226
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816,049 703,811 598,019 527,799 588,785 501,912 448,821 445,455
- ---------------------------------------------------------------------------------------------------------------------------------
Cost of goods sold 648,254 553,184 457,896 417,014 489,931 418,469 376,580 369,738
Selling, general & administrative
expenses 47,357 39,493 37,035 39,719 48,229 47,978 47,973 48,130
Research and development expenses 22,313 14,502 13,170 11,066 8,763 8,275 9,141 5,026
Amortization of intangibles 3,430 205 50 256 579 1,354 2,706 914
Interest expense (b) 9,088 1,318 1,952 2,176 3,039 4,008 5,044 5,615
Unusual items 4,065 (c) (101)(d) (2,250)(e) (11,427)(f) (78)(g) 16,494 (h) 452 (i) 90(j)
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734,507 608,601 507,853 458,804 550,463 496,578 441,896 429,513
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations
before income taxes 81,542 95,210 90,166 68,995 38,322 5,334 6,925 15,942
Income taxes 28,894 31,054 (d) 31,720 23,960 14,269 3,917 3,202 (i) 6,425
- ---------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations (a) 52,648 64,156 58,446 45,035 24,053 1,417 3,723 9,517
Income from discontinued Energy
segment operations (a) - 4,713 - - - 37,218 6,784 5,795
- ---------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary item
and cumulative effect of
accounting changes 52,648 68,869 58,446 45,035 24,053 38,635 10,507 15,312
Extraordinary item - prepayment
premium on extinguishment
of debt (net of tax) - - - - - - (1,115) -
Cumulative effect of accounting
changes - - - - - - 150 -
- ---------------------------------------------------------------------------------------------------------------------------------
Net income $52,648 $68,869 $58,446 $45,035 $24,053 $38,635 $ 9,542 $15,312
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted earnings per share:
Continuing operations (a) 1.36 1.66 1.48 1.15 .60 .03 .08 .19
Discontinued Energy segment
operations (a) - .12 - - - .79 .14 .12
- ---------------------------------------------------------------------------------------------------------------------------------
Before extraordinary item and
cumulative effect of accounting
changes 1.36 1.78 1.48 1.15 .60 .82 .22 .31
Net income 1.36 1.78 1.48 1.15 .60 .82 .19 .31
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Refer to notes to financial tables on page 17.
11
EIGHT-YEAR SUMMARY
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Tredegar Corporation and Subsidiaries
Years Ended December 31 1999 1998 1997 1996 1995 1994 1993 1992
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(In thousands, except per-share data)
Share Data:
Equity per share $ 9.88 $ 8.46 $ 7.34 $ 5.79 $ 4.67 $ 4.25 $ 3.45 $ 3.31
Cash dividends declared per share .16 .15 .11 .09 .06 .05 .05 .05
Weighted average common shares outstanding
during the period 36,992 36,286 36,861 36,624 38,748 46,572 49,029 49,023
Shares used to compute diluted earnings
per share during the period 38,739 38,670 39,534 39,315 40,110 46,842 49,182 49,176
Shares outstanding at end of period 37,661 36,661 37,113 36,714 36,528 40,464 49,029 49,023
Closing market price per share:
High 32.94 30.67 24.65 15.13 7.72 4.14 4.00 4.14
Low 16.06 16.13 12.54 6.83 3.86 3.11 2.78 2.22
End of year 20.69 22.50 21.96 13.38 7.17 3.86 3.33 3.44
Total return to shareholders (k) (7.3)% 3.1% 65.0% 87.8% 87.2% 17.4% (1.7)% 57.4%
Financial Position:
Total assets 792,487 457,178 410,937 341,077 314,052 318,345 353,383 354,910
Working capital excluding cash and
cash equivalents 80,594 52,050 30,279 31,860 54,504 53,087 62,064 56,365
Current ratio 2.0:1 1.9:1 3.1:1 3.2:1 1.8:1 1.9:1 2.1:1 2.0:1
Cash and cash equivalents 25,752 25,409 120,065 101,261 2,145 9,036 - -
Venture capital investments:
Cost basis 135,469 60,617 25,826 6,048 3,410 2,200 800 200
Carrying value 140,698 60,024 33,513 6,048 3,410 2,200 800 200
Estimated fair value 205,363 70,841 40,757 15,000 5,700 2,300 800 200
Net asset value 180,201 67,160 35,382 11,777 4,876 2,264 800 200
Ending consolidated capital employed(l) 616,476 309,886 182,481 146,284 203,376 200,842 266,088 263,897
Capital employed of divested and
discontinued operations (Molded
Products, Brudi and the Energy
segment) (a) - - - - 60,144 59,267 98,903 96,830
Debt 270,000 25,000 30,000 35,000 35,000 38,000 97,000 101,500
Shareholders' equity (net book value) 372,228 310,295 272,546 212,545 170,521 171,878 169,088 162,397
Equity market capitalization (m) 779,112 824,873 814,940 491,050 261,784 156,236 163,430 168,857
Net debt (cash) (debt less cash and cash
equivalents) as a % of net capitalization 39.6% (0.1)% (49.4)% (45.3)% 16.2% 14.4% 36.5% 38.5%
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on page 17.
12
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Net Sales
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1999 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 342,300 $ 286,965 $ 298,862 $ 257,306 $ 237,770 $ 188,672 $ 177,052 $ 183,117
Fiberlux 9,092 11,629 10,596 10,564 11,329 11,479 10,239 10,655
Aluminum Extrusions 461,241 395,455 266,585 219,044 221,657 193,870 166,465 150,524
Technology:
Molecumetics 7,617 5,718 2,583 36 - 200 - -
Therics 161 - - - - - - -
Other - 29 2,378 2,090 1,953 2,517 2,994 -
- ------------------------------------------------------------------------------------------------------------------------------------
Total ongoing operations (n) 820,411 699,796 581,004 489,040 472,709 396,738 356,750 344,296
Divested operations (a):
Molded Products - - - 21,131 84,911 76,579 68,233 80,834
Brudi - - - 13,380 31,834 28,891 24,225 20,099
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 820,411 $ 699,796 $ 581,004 $ 523,551 $ 589,454 $ 502,208 $ 449,208 $ 445,229
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on page 17.
13
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Operating Profit
- --------------------------------------------------------------------------------------------------------------------------------
Segment 1999 1998 1997 1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products:
Ongoing operations $ 59,554 $ 53,786 $ 50,463 $ 43,158 $ 36,019 $ 34,726 $ 22,320 $ 26,700
Unusual items (1,170)(c) - - 680 (f) 1,750 (g) - (1,815)(i) -
- --------------------------------------------------------------------------------------------------------------------------------
58,384 53,786 50,463 43,838 37,769 34,726 20,505 26,700
- --------------------------------------------------------------------------------------------------------------------------------
Fiberlux:
Ongoing operations 57 1,433 845 1,220 452 950 557 (127)
Unusual items - - - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
57 1,433 845 1,220 452 950 557 (127)
- --------------------------------------------------------------------------------------------------------------------------------
Aluminum Extrusions:
Ongoing operations 56,501 47,091 32,057 23,371 16,777 11,311 7,964 4,180
Unusual items - (664)(d) - - - - - -
- --------------------------------------------------------------------------------------------------------------------------------
56,501 46,427 32,057 23,371 16,777 11,311 7,964 4,180
- --------------------------------------------------------------------------------------------------------------------------------
Technology:
Molecumetics (3,421) (3,504) (4,488) (6,564) (4,769) (3,534) (3,324) (1,031)
Therics (5,235) - - - - - - -
Venture capital investments (7,079) 615 13,880 2,139 (695) - - -
Other - (428) (267) (118) (566) (5,354) (6,380) (834)
Unusual items (3,607)(c) 765 (d) - - (1,672)(g) (9,521)(h) 2,263 (i) 1,092 (j)
- --------------------------------------------------------------------------------------------------------------------------------
(19,342) (2,552) 9,125 (4,543) (7,702) (18,409) (7,441) (773)
- --------------------------------------------------------------------------------------------------------------------------------
Divested operations (a):
Molded Products - - - 1,011 2,718 (2,484) (228) 1,176
Brudi - - - 231 222 (356) 177 513
Unusual items - - 2,250 (e) 10,747 (f) - (6,973)(h) - (1,182)(j)
- --------------------------------------------------------------------------------------------------------------------------------
- - 2,250 11,989 2,940 (9,813) (51) 507
- --------------------------------------------------------------------------------------------------------------------------------
Total operating profit 95,600 99,094 94,740 75,875 50,236 18,765 21,534 30,487
Interest income (p) 1,419 2,279 4,959 2,956 333 544 - -
Interest expense (b) 9,088 1,318 1,952 2,176 3,039 4,008 5,044 5,615
Corporate expenses, net 6,389 4,845 7,581 7,660 9,208 9,967 9,565 (i) 8,930
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing
operations before
income taxes 81,542 95,210 90,166 68,995 38,322 5,334 6,925 15,942
Income taxes 28,894 31,054 (d) 31,720 23,960 14,269 3,917 3,202 6,425
- --------------------------------------------------------------------------------------------------------------------------------
Income from continuing operations 52,648 64,156 58,446 45,035 24,053 1,417 3,723 9,517
Income from discontinued Energy
segment operations (a) - 4,713 - - - 37,218 6,784 5,795
- --------------------------------------------------------------------------------------------------------------------------------
Net income before extraordinary
item and cumulative effect
of accounting changes $ 52,648 $ 68,869 $ 58,446 $ 45,035 $ 24,053 $ 38,635 $ 10,507 $ 15,312
- --------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on page 17.
14
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Identifiable Assets
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1999 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 360,517 $ 132,241 $ 123,613 $ 116,520 $ 118,096 $ 108,862 $ 109,916 $ 112,153
Fiberlux 7,859 7,811 6,886 6,203 6,330 6,448 6,667 7,762
Aluminum Extrusions 216,258 201,518 101,855 83,814 80,955 89,406 89,498 93,365
Technology:
Molecumetics 4,749 5,196 2,550 2,911 2,018 1,536 1,926 1,415
Therics 9,905 - - - - - - -
Investments and other (o) 145,028 61,098 34,611 7,760 5,442 5,780 13,321 15,441
- ------------------------------------------------------------------------------------------------------------------------------------
Identifiable assets for ongoing
operations 744,316 407,864 269,515 217,208 212,841 212,032 221,328 230,136
Nonoperating assets held for sale - - - - 6,057 5,018 3,605 4,330
General corporate 22,419 23,905 21,357 22,608 20,326 12,789 12,031 11,745
Cash and cash equivalents 25,752 25,409 120,065 101,261 2,145 9,036 - -
Divested operations (a):
Molded Products - - - - 44,173 48,932 54,487 50,151
Brudi - - - - 28,510 30,538 30,956 28,744
Net assets of discontinued Energy
segment operations (a) - - - - - - 30,976 29,804
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 792,487 $ 457,178 $ 410,937 $ 341,077 $ 314,052 $ 318,345 $ 353,383 $ 354,910
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on page 17.
15
SEGMENT TABLES
Tredegar Corporation and Subsidiaries
Depreciation and Amortization
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1999 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 18,751 $ 11,993 $ 10,947 $ 11,262 $ 9,766 $ 9,097 $ 9,200 $ 7,697
Fiberlux 498 544 515 507 577 644 826 883
Aluminum Extrusions 9,484 8,393 5,508 5,407 5,966 5,948 6,240 7,093
Technology:
Molecumetics 1,490 1,260 996 780 592 573 443 -
Therics 1,195 - - - - - - -
Investments and other 22 21 135 161 197 720 1,868 -
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 31,440 22,211 18,101 18,117 17,098 16,982 18,577 15,673
General corporate 253 254 313 390 481 570 685 703
- ------------------------------------------------------------------------------------------------------------------------------------
Total ongoing operations 31,693 22,465 18,414 18,507 17,579 17,552 19,262 16,376
Divested operations (a):
Molded Products - - - 1,261 5,055 5,956 5,289 5,416
Brudi - - - 550 1,201 1,337 1,272 1,085
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 31,693 $ 22,465 $ 18,414 $ 20,318 $ 23,835 $ 24,845 $ 25,823 $ 22,877
- ------------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures,
Acquisitions and Investments
- ------------------------------------------------------------------------------------------------------------------------------------
Segment 1999 1998 1997 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
Film Products $ 25,296 $ 18,456 $ 15,354 $ 11,932 $ 10,734 $ 6,710 $ 6,561 $ 12,931
Fiberlux 812 1,477 530 417 465 416 14 283
Aluminum Extrusions 16,388 10,407 6,372 8,598 5,454 4,391 1,870 2,487
Technology:
Molecumetics 1,362 3,561 366 1,594 894 178 939 1,414
Therics 757 - - - - - - -
Investments and other - 54 5 14 - 99 905 -
- ------------------------------------------------------------------------------------------------------------------------------------
Subtotal 44,615 33,955 22,627 22,555 17,547 11,794 10,289 17,115
General corporate 606 115 28 143 231 191 2,440 316
- ------------------------------------------------------------------------------------------------------------------------------------
Capital expenditures for ongoing
operations 45,221 34,070 22,655 22,698 17,778 11,985 12,729 17,431
Divested operations (a):
Molded Products - - - 1,158 6,553 2,988 3,235 2,441
Brudi - - - 104 807 606 516 833
- ------------------------------------------------------------------------------------------------------------------------------------
Total capital expenditures 45,221 34,070 22,655 23,960 25,138 15,579 16,480 20,705
Acquisitions and other 215,227 72,102 13,469 - 3,637 - 5,099 17,422
Venture capital investments 81,747 35,399 20,801 3,138 1,904 1,400 600 200
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ 342,195 $ 141,571 $ 56,925 $ 27,098 $ 30,679 $ 16,979 $ 22,179 $ 38,327
- ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on page 17.
16
NOTES TO FINANCIAL TABLES
-----------------------------
(In thousands, except per-share amounts)
(a) On August 16, 1994, Tredegar completed the divestiture of its coal
subsidiary, The Elk Horn Coal Corporation. On February 4, 1994, we sold
our remaining oil and gas properties. As a result of these events, we
report the Energy segment as discontinued operations. In 1998,
discontinued operations includes gains for the reimbursement of payments
made by us to the United Mine Workers of America Combined Benefit Fund
(the "Fund") and the reversal of a related accrued liability established
to cover future payments to the Fund (see Note 18 on page 65). On March
29, 1996, we sold Molded Products. During the second quarter of 1996, we
completed the sale of Brudi. The operating results for Molded Products
were historically reported as part of the Plastics segment on a combined
basis with Film Products and Fiberlux. Likewise, results for Brudi were
combined with Aluminum Extrusions and reported as part of the Metal
Products segment. Accordingly, results for Molded Products and Brudi have
been included in continuing operations. We began reporting Molded Products
and Brudi separately in our segment disclosures in 1995 after announcing
our intent to divest these businesses.
(b) Interest expense has been allocated between continuing and discontinued
operations based on relative capital employed (see (a)).
(c) Unusual items for 1999 include a charge for costs associated with the
evaluation of financing and structural options for the Technology Group
($149), a gain on the sale of corporate real estate ($712), a charge
related to a write-off of in-process research and development expenses
associated with the Therics acquisition ($3,458, see Note 2 on page 46)
and a charge for the write-off of excess packaging film capacity ($1,170).
(d) Unusual items for 1998 include a charge related to the shutdown of the
powder-coat paint line in the production facility in Newnan, Georgia
($664) and a gain on the sale of APPX Software ($765). Income taxes
include a tax benefit of $2,001 related to the sale, including a tax
benefit for the excess of APPX Software's income tax basis over its
financial reporting basis.
(e) Unusual items for 1997 include a gain of $2,250 related to the redemption
of preferred stock received in connection with the 1996 divestiture of
Molded Products.
(f) Unusual items for 1996 include a gain on the sale of Molded Products
($19,893), a gain on the sale of a former plastic films manufacturing site
site in Fremont, California ($1,968), a charge related to the loss on the
divestiture of Brudi ($9,146) and a charge related to the write-off of
specialized machinery and equipment due to excess capacity in certain
industrial packaging films ($1,288).
(g) Unusual items in 1995 include a gain on the sale of Regal Cinema shares
($728), a charge related to the restructuring of APPX Software ($2,400)
and a recovery in connection with a Film Products product liability
lawsuit ($1,750).
(h) Unusual items in 1994 include the write-off of certain goodwill and
intangibles in APPX Software ($9,521), the write-off of certain goodwill
in Molded Products ($4,873) and the estimated costs related to the closing
of a Molded Products plant in Alsip, Illinois ($2,100).
(i) Unusual items in 1993 include estimated costs related to the sale of a
Film Products plant in Flemington, New Jersey ($1,815), and the
reorganization of corporate functions ($900), partially offset by the gain
on the sale of our remaining investment in Emisphere Technologies, Inc.
($2,263). Income taxes includes a tax charge of $348 for the impact on
deferred taxes of a one percent increase in the federal income tax rate.
(j) Unusual items in 1992 include the write-off of certain goodwill in Molded
Products ($1,182), partially offset by the gain on the sale of a portion
of an investment in Emisphere Technologies, Inc. ($1,092).
(k) Total return to shareholders is computed as the sum of the change in stock
price during the year plus dividends per share, divided by the stock price
at the beginning of the year.
(l) Consolidated capital employed is debt plus shareholders' equity minus cash
and cash equivalents.
(m) Equity market capitalization is the closing market price per share for
the period times the shares outstanding at the end of the period.
(n) Net sales include sales to P&G totaling $250,020 in 1999, $233,493 in 1998
and $242,229 in 1997. These amounts include plastic film sold to others
that converted the film into materials used in products manufactured by
P&G.
(o) Included in the investments and other category of the Technology segment
are APPX Software (sold in 1998 - see (d)) and venture capital investments
in which our ownership is less than 20% (see Note 7 on page 51).
(p) Interest income was insignificant prior to 1994.
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Tredegar is a manufacturer of plastic film, aluminum extrusions and
vinyl extrusions. We also have interests in a variety of technology-based
businesses. Descriptions of our businesses and interests are provided on pages
1-7.
Our manufacturing businesses are quite different from our technology
interests. Our manufacturing businesses can be analyzed and valued by
traditional measures of earnings and cash flow, and because they generate
positive ongoing cash flow, they can be leveraged with borrowed funds.
Our technology operating companies, Molecumetics and Therics, are
drug research and delivery start-up companies. Each generates operating losses
and negative cash flow in the form of net R&D expenditures. Neither has licensed
products to-date, and revenues consist entirely of collaboration revenues (R&D
support payments). They may never generate profits or positive cash flow. If
they were stand-alone, independent operations they would typically be financed
by private venture capital.
Our venture capital investments represent high-risk stakes in
technology start-up companies, primarily in the areas of Internet and
information technologies, communications and life sciences. Our primary
objective in the venture capital area is to generate high after-tax internal
rates of return commensurate with the level of risk involved.
In summary, we have a variety of business interests with dramatically
different risk profiles, which makes the communication of operating results more
difficult, especially since we only have one class of stock. As a result, the
segment information presented on pages 13-17, and the business segment review on
pages 26-31, is critical to the understanding of our operating results and
business risks.
On September 24, 1999, we announced that our board of directors is
evaluating alternative financing and structural options for the Technology Group
(Tredegar Investments, Molecumetics and Therics). These options are still being
studied.
Results of Operations
1999 versus 1998
Revenues. Net sales in 1999 increased by 17% over 1998 due primarily to
acquisitions. Pro forma net sales were up 1.4% for the year ($863.7 million in
1999 versus $851.6 million in 1998) as higher pro forma sales in Aluminum
Extrusions (up 4.5%) and higher R&D support revenues at Molecumetics were offset
by lower pro forma sales in Film Products (down 1.9%). Pro forma sales assume
that acquisitions occurred at the beginning of 1998 (see Note 2 on page 46). Net
losses from venture capital investment activities totaled $7.1 million ($4.5
million after income taxes) in 1999. Net gains from venture capital investment
activities totaled $615,000 ($394,000 after income taxes) in 1998.
18
Venture capital investment gains and losses recognized are included
in "Other income (expense), net" in the consolidated statements of income on
page 36 and "Venture capital investments" in the operating profit table on page
14. Beginning April 1, 1998, we began classifying the stand-alone operating
expenses (primarily employee compensation and benefits and leased office space
and equipment) for our venture capital investment activities with gains and
losses in "Venture capital investments" in the operating profit table. Prior to
that time they were classified in the "Other" category of the technology
segment. These expenses, which continue to be reported in selling, general and
administrative expenses in the consolidated statements of income, totaled $2.5
million in 1999, $2.1 million in 1998, $1.7 million for the nine months ended
December 31, 1998, and $1 million in 1997.
For more information on net sales and venture capital investment
activities, see the business segment review on pages 26-31.
Operating Costs and Expenses. The gross profit margin during 1999 remained
unchanged at 21%, as a decline in the gross profit margin at Film Products was
offset by an increase in margins at Aluminum Extrusions. Lower gross profit
margins in Film Products were due mainly to lower volume and weakness in
international markets. Higher margins in Aluminum Extrusions were due primarily
to strong demand and higher volume.
Selling, general and administrative expenses ("SG&A") expenses in
1999 were $47.4 million, up from $39.5 million in 1998 due primarily to:
- - The acquisition of Exxon Films (impact of approximately $4 million)
- - A full year of SG&A for the aluminum extrusion plants acquired in Canada last
year (impact of approximately $1.5 million)
- - Increases in SG&A salaries and wages (up approximately 4%)
As a percentage of sales, SG&A expenses increased to 5.8% in 1999 compared with
5.6% in 1998.
R&D expenses increased to $22.3 million in 1999 from $14.5 million in
1998 due to the acquisition of Therics (impact of $4.5 million), higher spending
at Molecumetics in support of collaboration programs (up $2.3 million) and
higher product development spending at Film Products (up $1 million).
Unusual charges (net) in 1999 totaled $4.1 million ($2.6 million
after income taxes) and included:
- - A fourth-quarter charge of $149,000 ($95,000 after taxes) for costs associated
with the evaluation of financing and structural options for the Technology
Group
- - A third-quarter gain of $712,000 ($456,000 after taxes) on the sale of
corporate real estate (included in "Corporate expenses, net" in the operating
profit table on page 14)
- - A second-quarter charge of $3.5 million ($2.2 million after taxes) related to
the write-off of in-process R&D expenses associated with the Therics
acquisition (see page 5 for more information)
- - A second-quarter charge of $1.2 million ($749,000 after taxes) for the write-
off of excess packaging film capacity
19
For more information on costs and expenses, see the business segment
review on pages 26-31.
Interest Income and Expense. Interest income, which is included in "Other income
(expense), net" in the consolidated statements of income, decreased to $1.4
million in 1999 from $2.3 million in 1998 due to a lower average cash
equivalents balance (see "Cash Flows" on page 23 for more information) and
yields. The average tax-equivalent yield earned on cash equivalents was
approximately 5.1% in 1999 and 5.6% in 1998. 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 $9.1 million in 1999 from $1.3 million
in 1998 due to higher average debt outstanding of $165.3 million ($143 million
of average variable-rate debt and $22.3 million of average fixed-rate debt) in
1999 compared to $27.3 million in 1998 (all fixed-rate debt). The impact on
interest expense of higher average debt (see "Cash Flows" on page 23 for more
information) was partially offset by:
- - Lower average interest cost of 6.2% in 1999 (6.1% average on variable-rate
debt and 7.2% on fixed-rate debt) versus 7.2% in 1998 (all fixed-rate debt)
- - Higher capitalized interest from higher capital expenditures ($1.6 million in
1999 versus $915,000 in 1998)
Income Taxes. The effective tax rate, excluding unusual items and venture
capital investment activities, was approximately 35.5% in 1999 compared to 35%
in 1998. The increase during 1999 was due to a higher effective state income tax
rate and lower tax-exempt interest income, partially offset by a higher R&D tax
credit from higher R&D expenses. See Note 15 on page 62 for additional tax rate
information.
1998 versus 1997
Revenues. Net sales in 1998 increased by 20% over 1997 due primarily to
acquisitions. Pro forma net sales were flat for the year as higher pro forma
sales in Aluminum Extrusions (up 3%), higher collaboration revenues at
Molecumetics and higher sales at Fiberlux were offset by lower sales in Film
Products (down 4%). Net gains realized from venture capital investment
activities totaled $615,000 ($394,000 after income taxes) in 1998 and $13.9
million ($8.9 million after income taxes) in 1997. For more information on net
sales and venture capital investment activities, see the business segment review
on pages 26-31.
Operating Costs and Expenses. The gross profit margin during 1998 decreased to
21% from 21.2% in 1997 due primarily to acquisitions in Aluminum Extrusions. The
acquired businesses generally have lower margins than those realized in Film
Products. Higher contract research revenues had a positive impact on margins.
SG&A expenses in 1998 were $39.5 million, up from $37 million in 1997
due to acquisitions, partially offset by lower charges for the savings
restoration plan and higher pension income. As a percentage of sales, SG&A
expenses declined to 5.6% in 1998 compared with 6.4% in 1997.
20
Research and development expenses increased to $14.5 million in 1998
from $13.2 million in 1997 due to higher spending at Molecumetics in support of
collaboration programs. Research and development spending at Film Products in
1998 was about the same as 1997, with primary focus on breathable and
elastomeric film technologies, which were commercialized in 1998.
Unusual income (net) in 1998 totaled $101,000 ($2.4 million after
income tax benefits) and included:
- - A fourth-quarter charge of $664,000 ($425,000 after taxes) related to the
shutdown of the powder-coat paint line at the aluminum extrusion facility in
Newnan, Georgia
- - A first-quarter gain of $765,000 ($2.8 million after tax benefits) on the
sale of APPX Software
Income taxes for continuing operations in 1998 include a tax benefit
of $2 million related to the sale of APPX Software, reflecting a tax benefit for
the excess of its income tax basis over its financial reporting basis.
For more information on costs and expenses, see the business segment
review on pages 26-31.
Interest Income and Expense. Interest income decreased to $2.3 million in 1998
from $5 million in 1997 due to a lower average cash equivalents balance (see
"Cash Flows" on page 23 for more information). The average tax-equivalent yield
earned on cash equivalents was approximately 5.6% in 1998 and 5.7% in 1997.
Interest expense decreased to $1.3 million in 1998 from $2 million in
1997 due to higher capitalized interest from higher capital expenditures, the
1997 write-off of deferred financing costs related to the refinancing of our
revolving credit facility, and lower average debt outstanding.
Income Taxes. The effective tax rate, excluding unusual items and venture
capital investment activities, was approximately 35% in 1998 and 1997, as the
impact of a decline in average tax-exempt investments was offset by a lower
effective state income tax rate. See Note 15 on page 62 for additional tax rate
information.
Discontinued Operations. Gains recognized in 1998 related to our discontinued
coal operations include:
- - A third-quarter after-tax gain of $3.4 million for the reversal of an
accrued liability established to cover future payments to the United Mine
Workers of America Combined Benefit Fund (the "UMWA Fund")
- - A fourth-quarter after-tax gain of $1.2 million for the reimbursement of
payments made by us to the UMWA Fund
We were relieved of any liability to the UMWA Fund as the result of a 1998
Supreme Court ruling.
21
Financial Condition
Assets
Total assets increased to $792.5 million at December 31, 1999, from
$457.2 million at December 31, 1998, due mainly to:
- - The acquisition of Exxon Films on May 17, 1999 (total assets acquired of $210
million)
- - New venture capital investments ($77.8 million, net of proceeds from invest-
ments sold)
- - Higher receivables and inventories supporting manufacturing operations (up
$15.4 million)
- - Capital expenditures in excess of depreciation and amortization($13.5 million)
- - An increase in unrealized appreciation from available-for-sale securities (up
$10.9 million)
- - The acquisition of Therics on April 8, 1999 (total assets acquired of $10.1
million net of the in-process R&D write-off of $3.5 million)
Liabilities and Available Credit
Total liabilities were $420.3 million at December 31, 1999, up from
$146.9 million at December 31, 1998, due primarily to:
- - Higher debt (net increase of $245 million - see "Cash Flows" on page 23 for
more information)
- - Higher accounts payable primarily in support of manufacturing operations (up
$11.4 million)
- - Liabilities assumed from the acquisition of Exxon Films ($5 million)
- - An increase in the deferred income tax liability of $8.3 million, including an
increase due to higher unrealized appreciation from available-for-sale
securities ($3.9 million)
Debt outstanding of $270 million at December 31, 1999, consisted of a
$250 million term loan and a note payable with a remaining balance $20 million.
We also have a revolving credit facility that permits borrowings of up to $275
million (no amounts borrowed at December 31, 1999). The facility matures on July
9, 2002, with an annual extension of one year permitted subject to the approval
of participating banks. See Note 9 on page 54 for more information on debt and
credit agreements.
Shareholders' Equity
At December 31, 1999, Tredegar had 37,661,140 shares of common stock
outstanding and a total market capitalization of $779.1 million, compared with
36,660,751 shares outstanding and a total market capitalization of $824.9
million at December 31, 1998.
We did not purchase any shares of our common stock during 1999. During
1998, we purchased 1,667,054 shares of our common stock for $36.8 million
($22.06 per share). During 1997, we purchased 166,989 shares of our common stock
for $2.5 million ($15.15 per share). Since becoming an independent company in
1989, we have purchased a total of 20.2 million shares, or 35% of our issued and
outstanding common stock, for $115.5 million ($5.70 per share). Under a standing
authorization from our board of directors, we may purchase an additional four
million shares in the open market or in privately negotiated transactions at
prices management deems appropriate.
22
Cash Flows
The reasons for the changes in cash and cash equivalents during 1999,
1998 and 1997, are summarized below:
- ------------------------------------------------------------------------------------------------
(In Millions)
1999 1998 1997
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, beginning of year $ 25.4 $120.1 $101.3
- ------------------------------------------------------------------------------------------------
Cash provided by continuing operating activities
in excess of capital expenditures and dividends 40.8 33.2 39.5
Cash used by discontinued operations - (1.9) -
Proceeds from the exercise of stock options (including
related income tax benefits realized by Tredegar) 7.4 6.2 4.8
Acquisitions (see Note 2 on page 46) (215.2) (60.9) (13.5)
Repurchases of Tredegar common stock - (36.8) (2.5)
New venture capital investments, net of proceeds
from disposals (see Note 7 on page 51) (77.8) (29.9) (5.7)
Other, net .2 .4 1.2
Net increase (decrease) in borrowings 245.0 (5.0) (5.0)
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents .4 (94.7) 18.8
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 25.8 $ 25.4 $120.1
- ------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends increased $7.6 million in 1999 due primarily
to higher cash flow from operating activities, partially offset by higher
capital expenditures (up $11.2 million).
Capital expenditures in 1999 reflect the normal replacement of
machinery and equipment and:
- - Machinery and equipment purchased for the Hungary facility, which produces
disposable films for hygiene products marketed in Eastern Europe
- - 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)
- - Further expansion of diaper backsheet film capacity in Brazil
- - Commercial production capacity for new film products
- - Expenditures for the second phase of a modernization program at the
aluminum extrusion plant in Newnan, Georgia (the first phase was completed
in 1996)
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends decreased $6.3 million in 1998 due primarily
to higher capital expenditures for manufacturing and research operations and
higher dividends, partially offset by improved operating results. Cash used by
discontinued operations of $1.9 million was due to the recapture of tax
deductions previously taken on the UMWA Fund liability, partially offset by
reimbursements received from the UMWA Fund.
23
Capital expenditures increased $11.4 million in 1998. Capital
expenditures in 1998 reflect the normal replacement of machinery and equipment
and:
- - The new facility in Hungary
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films
- - Expansion of diaper backsheet film capacity in Brazil
- - The second phase of a modernization program at the aluminum extrusion plant
in Newnan, Georgia
- - Expansion of Molecumetics' research lab in Bellevue, Washington
Net cash provided by continuing operating activities in excess of
capital expenditures and dividends was $39.5 million in 1997, up from $18.1
million in 1996 due primarily to:
- - Improved operating results
- - Lower capital expenditures in Aluminum Extrusions due to the completion of
the first phase of the modernization project at the Newnan plant in late 1996
- - Lower capital expenditures due to the 1996 Molded Products and Brudi
divestitures (Molded Products and Brudi had combined capital expenditures
of $1.3 million in 1996)
These items were partially offset in 1997 by:
- - Income taxes paid on venture capital investment net gains
- - Higher capital expenditures in Film Products reflecting normal replacement of
machinery and equipment and permeable film additions, including expansion
into China and Eastern Europe
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. See Note 9 on page
54 regarding credit agreements and interest rate exposures.
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. See Note 6 on page 50 for more information.
24
We sell to customers in foreign markets through our foreign
operations and through exports from U.S. plants. The percentage of sales, income
and total assets related to foreign markets for 1999 and 1998 are presented
below:
- ---------------------------------------------------------------------------------------------
Tredegar Corporation
Percentage of Net Sales, Pretax Income and Total Assets Related to Foreign Markets
- ---------------------------------------------------------------------------------------------
1999 1998
-------------------------------------------------------------------------------
% of Total % of Total % Total % of Total % of Total % Total
Net Sales Pretax Income* Assets - Net Sales Pretax Income* Assets -
--------- --------------- --------- ---------------
Exports Foreign ExportsForeign Foreign ExportsForeign ExportsForeign Foreign
From Oper- From Oper- Oper- From Oper- From Oper- Oper-
U.S. ations U.S. ations ations U.S. ations U.S. ations ations
---- ------ ---- ------ ------ ---- ------ ---- ------ ------
Canada 3 19 6 12 12 3 15 6 7 20
Europe 1 4 3 7 3 1 4 1 10 3
Latin America 3 2 7 3 2 3 4 4 5 4
Asia 4 1 5 2 1 4 - 6 (1) 1
- ---------------------------------------------------------------------------------------------
Total % exposure
to foreign
markets 11 26 21 24 18 11 23 17 21 28
- ---------------------------------------------------------------------------------------------
* The percentages of pretax income for foreign markets are relative to
Tredegar's total pretax income from manufacturing and technology operations
(consolidated pretax income from continuing operations excluding venture
capital investment 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 the business segment review on page 29 and Note 7 on page 51 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
25
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.
Business Segment Review
Film Products
Sales. Film Products sales increased by 19% in 1999 due to the acquisition of
Exxon Films on May 17, 1999 (see Note 2 on page 46), partially offset by lower
volume in existing operations. Lower volume from existing operations (down 4.6%)
was due to:
- - The transition to breathable and elastomeric films (these films are
replacing conventional diaper backsheet and other diaper components in
order to improve comfort and fit)
- - Lower volume due to decline in the market share of a major customer
- - Weakness in international markets (volume was down 3.7% for European
operations and down 13.3% for Latin American operations)
On a pro forma basis (assuming the acquisition of Exxon Films occurred at the
beginning of 1998), Film Products sales declined by almost 2% to $386 million in
1999 from $393 million in 1998.
Film Products sales decreased by 4% in 1998 due to lower selling
prices reflecting lower average plastic resin costs and lower volume of plastic
film in Asia (primarily supplied to P&G), partially offset by:
- - Sales of breathable backsheet and other new products to P&G
- - Higher volume of VisPore(R) film (primarily used for ground cover applica-
tions)
- - Higher volume of permeable film supplied to P&G in Europe
- - Higher sales to new customers
Operating Profit. Film Products operating profit (excluding unusual items) was
$59.6 million in 1999, up from $53.8 million in 1998 due to the acquisition of
Exxon Films, partially offset by lower profit from existing operations. Lower
profit from existing operations (down $6.9 million or 12.8%) was due to:
- - Lower volume from the transition to new products and lower customer market
share as noted above
- - Weakness in international markets (profits down $2.3 million for foreign
operations), including a decline in profits in Brazil (down $2 million due
primarily to the economic impact of the devaluation of the Real) and lower
profits from European operations (down $2.8 million due mainly to lower
volume and higher losses of $900,000 from start-up of the new plant in
Hungary), partially offset by higher profits in China (up $2.6 million)
- - Higher product development spending (up $1 million)
Tredegar expects that, by 2001, the annual ongoing benefits from
synergies (cost reductions, efficiencies and technology enhancements expected
from the integration of Exxon Films into existing operations) will range from $7
- - $9 million.
26
Film Products operating profit was $53.8 million in 1998, up from
$50.5 million in 1997 due to higher volume in the areas noted above and material
efficiencies in nonwoven film laminates, partially offset by:
- - Lower volume and operating profits relating to Asia (profits down $3 million)
- - Higher costs related to new product introductions
- - Start-up costs for the new permeable film production sites in China and
Hungary
Identifiable Assets. Identifiable assets in Film Products were $360.5
million in 1999, up from $132.2 million in 1998 due primarily to:
- - The acquisition of Exxon Films (assets acquired totaled $210 million,
including goodwill of $115 million)
- - Higher receivables and inventories (up $9 million) reflecting primarily higher
raw material costs from higher plastic resin prices at the end of the year
- - Capital expenditures in excess of depreciation and amortization ($6.5 million)
Identifiable assets in Film Products were $132.2 million in 1998, up
from $123.6 million in 1997 due primarily to capital expenditures in excess of
depreciation and amortization.
Depreciation, Amortization and Capital Expenditures. Depreciation and
amortization for Film Products was $18.8 million in 1999, up from $12 million in
1998 due to the acquisition of Exxon Films. Depreciation and amortization for
Film Products was $12 million in 1998, up from $10.9 million in 1997 due to
higher capital expenditures.
Capital expenditures in Film Products in 1999 reflect the normal
replacement of machinery and equipment and:
- - Machinery and equipment purchased for the Hungary facility, which produces
disposable films for hygiene products marketed in Eastern Europe
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films
- - Further expansion of diaper backsheet film capacity in Brazil
- - Commercial production capacity for new products
Capital expenditures in Film Products for 1998 reflect the normal
replacement of machinery and equipment and:
- - The new facility in Hungary
- - Machinery and equipment purchased for the manufacture of breathable and
elastomeric films
- - Expansion of diaper backsheet film capacity in Brazil
Fiberlux
Fiberlux is currently not material to the consolidated results of
operations.
Aluminum Extrusions
Sales. Sales in Aluminum Extrusions increased by 17% in 1999 due to acquisitions
27
in 1998 (there were no acquisitions in Aluminum Extrusions in 1999 - see Note 2
on page 46) and higher volume from strong demand (see our market segments in the
table on page 3), partially offset by lower average selling prices. Volume was
up 10.6% on a comparable basis excluding acquisitions. Lower average selling
prices (down about 6 cents per pound or 4%) were due primarily to lower average
raw material (aluminum) costs. On a pro forma basis, assuming acquisitions in
Aluminum Extrusions in 1997 and 1998 occurred at the beginning of 1997, sales
increased by 4.5% in 1999.
Sales in Aluminum Extrusions increased by 48% in 1998 due to
acquisitions and strength in all building and construction markets and higher
sales to distributors. Pro forma sales in Aluminum Extrusions increased by 3% in
1998.
Operating Profit. Operating profit increased by 20% in 1999 due to higher volume
and acquisitions as noted above. Operating results were adversely affected by
press and furnace repairs and resulting downtime at the El Campo, Texas
facility, and expenses and disruptions associated with the second phase of the
press modernization project at the Newnan, Georgia plant (the first phase was
completed in 1996).
Operating profit increased by 47% in 1998 due to higher volume,
related lower unit conversion costs and acquisitions. Conversion costs were also
reduced by an insurance recovery of $791,000 related to expenses incurred in
1997 for repairs to the casting furnaces at the Newnan, Georgia, plant.
Identifiable Assets. Identifiable assets in Aluminum Extrusions were $216.3
million in 1999, up from $201.5 million in 1998, due primarily to:
- - Capital expenditures in excess of depreciation and amortization ($6.9 million)
- - Higher accounts receivable (up $7 million) from higher sales in the fourth
quarter of 1999 compared to the fourth quarter of 1998
Identifiable assets in Aluminum Extrusions were $201.5 million in
1998, up from $101.9 million in 1997, due to acquisitions (assets related to
acquisitions in 1998 totaled $97 million, including goodwill of $13.1 million)
and capital expenditures in excess of depreciation and amortization ($2
million).
Depreciation, Amortization and Capital Expenditures. Depreciation and
amortization for Aluminum Extrusions was $9.5 million in 1999, up from $8.4
million in 1998 due to acquisitions. Depreciation and amortization for Aluminum
Extrusions was $8.4 million in 1998, up from $5.5 million in 1997 due to
acquisitions, partially offset by the full depreciation of certain assets in
1997.
Capital expenditures in 1999 and 1998 reflect the normal replacement
of machinery and equipment, and expenditures for the second phase of the press
modernization project at the Newnan plant. Total capital outlays for this
project are expected to be $10 million, of which $6.2 million was spent in 1999
and $1.3 million was spent in 1998.
28
Technology
Revenues recognized to date for technology operating companies,
Molecumetics and Therics (Therics was acquired on April 8, 1999), relate
entirely to payments received for R&D support, including revenues of $7.8
million in 1999, $5.7 million in 1998 and $2.6 million in 1997. Operating losses
(excluding unusual items) from technology operating companies increased by $5.2
million in 1999 due to the acquisition of Therics. R&D support revenues from
collaboration arrangements increased at Molecumetics in 1999, but were offset by
related higher R&D expenses. Operating losses at Molecumetics declined to $3.5
million in 1998 from $4.5 million in 1997 due to R&D support revenues from
collaborations. See pages 3-6 for more information on Molecumetics and Therics.
Changes in Technology segment identifiable assets over the last three
years are summarized below:
- -----------------------------------------------------------------------------------------------
(In Millions)
1999 1998 1997
- -----------------------------------------------------------------------------------------------
Technology segment identifiable assets,
beginning of year $ 66.3 $ 37.2 $ 10.7
- -----------------------------------------------------------------------------------------------
Molecumetics:
Capital expenditures, primarily expansion of its
research lab in Bellevue, Washington 1.4 3.6 .4
Depreciation (1.5) (1.3) (1.1)
Therics:
Assets acquired (see Note 2 on page 46) 13.6 - -
Write-off of in-process R&D (unusual item, see
pages 5-6) (3.5) - -
Capital expenditures .8 - -
Depreciation (.5) - -
Amortization of intangibles (.7) - -
Tredegar Investments (see Note 7 on page 51):
New investments 81.7 35.4 20.8
Proceeds from the sale of investments (3.9) (5.5) (15.1)
Realized gains 3.1 4.6 14.3
Realized losses, write-offs and write-downs (7.7) (2.3) (.4)
Transfer of carrying value of Therics out of
portfolio (acquired by Tredegar) (3.4) - -
Increase (decrease) in unrealized gain on
available-for-sale securities 10.9 (5.7) 7.8
Other (primarily increase in deferred income tax
asset in 1999) 3.0 .3 (.2)
- -----------------------------------------------------------------------------------------------
Net increase in Technology segment identifiable
assets 93.3 29.1 26.5
- -----------------------------------------------------------------------------------------------
Technology segment identifiable assets,
end of year $ 159.6 $ 66.3 $ 37.2
- -----------------------------------------------------------------------------------------------
Tredegar Investments is our venture capital subsidiary. A schedule of
investments is provided in Note 7 on page 51. Information on how we account for
and value our venture capital investments is provided in Note 1 on page 41.
29
The appreciation (depreciation) in net asset value ("NAV") related to
venture capital investment activities for the last three years is summarized
below:
- --------------------------------------------------------------------------------------------
(In Millions)
1999 1998 1997
- --------------------------------------------------------------------------------------------
Net realized gains, losses, writedowns and related
operating expenses for venture capital
investments reflected in consolidated
statements of income (net of tax) $ (4.5) $ .4 $ 8.2
Change in unrealized appreciation of venture
capital investments (net of tax) 41.4 (1.4) 4.0
- --------------------------------------------------------------------------------------------
Appreciation (depreciation) in net asset value
related to venture capital investment activities $ 36.9 $ (1.0) $ 12.2
- --------------------------------------------------------------------------------------------
The substantial increase in the net asset value in 1999 was due to a
strong market for technology investments, IPOs and mergers, especially in the
fourth quarter of 1999, and further maturity of the companies in the portfolio.
The following companies held directly in the portfolio, or held indirectly
through our interests in other venture capital funds, accounted for more than
half of the net asset value appreciation in 1999:
- - Caliper Technologies Corporation, IPO ($4.4 million NAV appreciation in
1999)
- - Monterey Networks, acquired by Cisco Systems through merger (indirectly
held through our interest in Communications Ventures II, L.P.) ($4.4
million NAV appreciation in 1999)
- - Digital Island, IPO (indirectly held through our interest in Vanguard V,
L.P.) ($3.4 million NAV appreciation in 1999)
- - Cobalt Networks, Inc., IPO (indirectly held through our interest in
Vanguard V, L.P.) ($2.8 million NAV appreciation in 1999)
- - V-Bits, Inc., acquired by Cisco Systems through merger ($2.7 million NAV
appreciation in 1999)
- - Superconductor Technologies, Inc. ($1 million NAV appreciation in 1999 on
common stock equivalent basis)
- - Lightspeed International, acquired by Cisco Systems through merger
(indirectly held through our interest in Vanguard V, L.P.) ($1.3 million
NAV appreciation in 1999)
Higher valuations (net of writedowns) of private securities in the
portfolio (direct and indirect) accounted for most of the remaining appreciation
in NAV. The cost basis, carrying value and net asset value of the venture
capital portfolio is reconciled on the next page.
30
- --------------------------------------------------------------------------------------------------
(In Millions)
December 31
--------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------
Cost basis of venture capital investments $ 135.5 $ 60.6 $ 25.9
Writedowns taken on securities held (charged to
earnings) (7.8) (2.7) (.2)
Unrealized appreciation on public securities held
by Tredegar (reflected directly in equity net of
deferred income taxes) 13.0 2.1 7.8
- --------------------------------------------------------------------------------------------------
Carrying value of venture capital investments
reflected in the balance sheet 140.7 60.0 33.5
Unrealized appreciation in private securities held by
Tredegar and in its indirect interest in all securities
held by venture capital funds 64.7 10.8 7.3
- --------------------------------------------------------------------------------------------------
Estimated fair value of venture capital investments 205.4 70.8 40.8
Estimated income taxes on assumed disposal at
fair value (25.2) (3.7) (5.4)
- --------------------------------------------------------------------------------------------------
Estimated NAV of venture capital investments $ 180.2 $ 67.1 $ 35.4
- --------------------------------------------------------------------------------------------------
Our internal rate of return ("IRR") since inception in 1992 through
December 31, 1999, is estimated at 51% (34% after income taxes), but is not
necessarily indicative of the IRR that we will generate in the future. The
pooled IRR for the venture capital industry reported by Venture
Economics/Thomson Financial Securities Data ("Venture Economics") was 35.2% for
the five years ended September 30, 1999, 20.8% for the 10 years ended September
30, 1999, and 16.3% for the 20 years ended September 30, 1999.
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). The
pooled IRR for the venture capital industry was computed by Venture Economics
from the combined cash flows and net asset values of all venture capital funds
in their database as if the funds were one portfolio. These are pre-tax returns
and computed on the same basis as Tredegar's pre-tax IRR. However, it is
important to note that the predominant structure for private venture capital
funds is the limited partnership, which, unlike corporations, is not subject to
income taxes. As a result, the after-tax IRR for most private venture capital
funds is equal to the funds' pre-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.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index on page 34 for references to the report of independent
accountants, management's report on the financial statements, the consolidated
financial statements and selected quarterly financial data.
31
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF TREDEGAR
The information concerning directors and persons nominated to become
directors of Tredegar included in the Proxy Statement under the heading
"Election of Directors" is incorporated herein by reference.
The information included in the Proxy Statement under the heading
"Stock Ownership" is incorporated herein by reference.
Set forth below are the names, ages and titles of our executive
officers:
Name Age Title
John D. Gottwald 45 President and Chief Executive Officer
Douglas R. Monk 54 Executive Vice President and Chief Operating Officer
Norman A. Scher 62 Executive Vice President and Chief Financial Officer
D. Andrew Edwards 41 Vice President, Treasurer and Controller
Michael W. Giancaspro 44 Vice President, Corporate Development
Nancy M. Taylor 40 Vice President, General Counsel and Secretary
Except as described below, each of these officers has served in such
capacity since July 10, 1989. Each will hold office until his successor is
elected or until his earlier removal or resignation.
Douglas R. Monk. Mr. Monk was elected Executive Vice President and Chief
Operating Officer on November 18, 1998, and is responsible for our manufacturing
operations. Mr. Monk has served as a Vice President since August 29, 1994, and
served as President of The William L. Bonnell Company, Inc. and Capitol Products
Corporation since February 23, 1993. He also served as Director of Operations
for our Aluminum Division.
D. Andrew Edwards. Mr. Edwards was elected Vice President on November 18, 1998.
Mr. Edwards served as Controller from October 19, 1992, until May 22, 1997, when
he was elected Treasurer and Controller.
32
Nancy M. Taylor. Ms. Taylor was elected Vice President on November 18, 1998. Ms.
Taylor has served as General Counsel and Secretary since May 22, 1997. From
February 25, 1994 until May 22, 1997, Ms. Taylor served as Corporate Counsel and
Secretary. She served as Assistant General Counsel from September 1, 1991 until
February 25, 1994.
Michael W. Giancaspro. Mr. Giancaspro served as Director of Corporate Planning
from March 31, 1989, until February 27, 1992, when he was elected Vice
President, Corporate Planning. On January 1, 1998, his position was changed to
Vice President, Corporate Development. Mr. Giancaspro has submitted his
resignation effective as of April 30, 2000.
Item 11. EXECUTIVE COMPENSATION
The information included in the Proxy Statement under the heading
"Compensation of Executive Officers and Directors" is incorporated herein by
reference.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information included in the Proxy Statement under the heading
"Stock Ownership" is incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
33
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
REPORTS ON FORM 8-K
(a) List of documents filed as a part of the report:
(1) Financial statements:
Tredegar Corporation
Index to Financial Statements and Supplementary Data
Page
Report of Independent Accountants 35
Management's Report on the Financial Statements 35
Financial Statements (Audited):
Consolidated Statements of Income for the Years Ended 36
December 31, 1999, 1998 and 1997
Consolidated Balance Sheets as of December 31, 37
1999 and 1998
Consolidated Statements of Cash Flows for the Years Ended 38
December 31, 1999, 1998 and 1997
Consolidated Statements of Shareholder's Equity for the 39
Years Ended December 31, 1999, 1998 and 1997
Notes to Financial Statements 40-65
Selected Quarterly Financial Data (Unaudited) 66
(2) Financial statement schedules:
None
(3) Exhibits:
See Exhibit Index on page 69.
(b) Reports on Form 8-K
We did not file or amend any reports on Form 8-K during the
last quarter of the year ended December 31, 1999.
34
INDEPENDENT ACCOUNTANTS' AND MANAGEMENT'S REPORTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Tredegar Corporation:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, cash flows and shareholders' equity
present fairly, in all material respects, the financial position of Tredegar
Corporation and Subsidiaries ("Tredegar") at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of