-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MKiVvwm7j+uiI+1VNwKk0dPZxRmOrYNdpN6Q3Gh16yDacQPz4chgiXOZ65K3S3Dx YuI2N44bj7Zb5ZIZ0QQk9Q== 0000788983-99-000012.txt : 19990409 0000788983-99-000012.hdr.sgml : 19990409 ACCESSION NUMBER: 0000788983-99-000012 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990228 FILED AS OF DATE: 19990408 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PORTOLA PACKAGING INC CENTRAL INDEX KEY: 0000788983 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS PRODUCTS, NEC [3089] IRS NUMBER: 941582719 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 033-95318 FILM NUMBER: 99589112 BUSINESS ADDRESS: STREET 1: 890 FAULSTICH CT CITY: SAN JOSE STATE: CA ZIP: 95112 BUSINESS PHONE: 4084538840 MAIL ADDRESS: STREET 1: 890 FAULSTICH COURT CITY: SAN JOSE STATE: CA ZIP: 95112 10-Q 1 FORM 10-Q FOR PERIOD ENDED FEBRUARY 28, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED FEBRUARY 28, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from ______ to ______ COMMISSION FILE NO. 33-95318 PORTOLA PACKAGING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 94-1582719 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 890 FAULSTICH COURT SAN JOSE, CALIFORNIA 95112 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE) (408) 453-8840 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO. --- --- 11,947,886 shares of Registrant's $.001 par value Common Stock, consisting of 2,134,992 shares of nonvoting Class A Common Stock and 9,812,894 shares in the aggregate of voting Class B Common Stock, Series 1 and 2 combined, were outstanding at March 31, 1999 PORTOLA PACKAGING, INC. AND SUBSIDIARIES INDEX Part I - Financial Information - ------------------------------- Item 1. Financial Statements Condensed Consolidated Balance Sheets as of February 28, 1999 and August 31, 1998 Condensed Consolidated Statements of Operations for the Three and Six Months Ended February 28, 1999 and 1998 Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended February 28, 1999 and 1998 Notes to Condensed Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information - ---------------------------- Item 6. Exhibits and Reports on Form 8-K Signatures Exhibit Index PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data)
February 28, August 31, 1999 1998 ------------ ---------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents....................... $2,857 $3,570 Accounts receivable, net........................ 22,495 22,887 Inventories..................................... 12,702 11,260 Other current assets............................ 1,219 1,356 Deferred income taxes........................... 2,516 2,516 ------------ ---------- Total current assets........................ 41,789 41,589 Property, plant and equipment, net.............. 90,402 85,874 Goodwill, net................................... 11,660 12,086 Patents, net.................................... 2,458 1,814 Covenants not to compete, net................... 243 607 Debt financing costs, net....................... 2,753 2,982 Other assets.................................... 2,244 3,908 ------------ ---------- Total assets.................................... $151,549 $148,860 ============ ========== LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK AND OTHER SHAREHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES: Current portion of long-term debt............... $4,917 $2,772 Accounts payable................................ 10,843 8,138 Accrued liabilities............................. 10,025 10,793 Accrued interest................................ 5,082 5,224 ------------ ---------- Total current liabilities..................... 30,867 26,927 Long-term debt, less current portion............ 127,793 127,936 Other long term obligations..................... 924 777 Deferred income taxes........................... 6,592 6,666 ------------ ---------- Total liabilities........................... 166,176 162,306 Commitments and contingencies (Note 4) Minority interest............................... 982 -- Redeemable warrants to purchase Class A Common Stock.................................. 9,188 7,959 ------------ ---------- Common stock and other shareholders' equity (deficit): Class A convertible common stock of $.001 par value: Authorized: 5,203 shares; Issued and outstanding 2,135 shares in both periods.... 2 2 Class B, Series 1, common stock of $.001 par value: Authorized: 17,715 shares; Issued and outstanding 8,645 shares in 1999 and 8,636 shares in 1998.............................. 8 8 Class B, Series 2, convertible common stock of $.001 par value: Authorized: 2,571 shares; Issued and outstanding 1,171 shares in both periods.... 1 1 Additional paid-in capital...................... 7,797 7,797 Notes receivable from shareholders.............. (463) (463) Cumulative foreign currency translation adjustments................................... (2,189) (1,039) Accumulated deficit............................. (29,953) (27,711) ------------ ---------- Total common stock and other shareholders' deficit................... (24,797) (21,405) ------------ ---------- Total liabilities, redeemable warrants, common stock and other shareholders' deficit................... $151,549 $148,860 ============ ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
For the Three Months For the Six Months Ended February 28, Ended February 28, --------------------- --------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (unaudited) (unaudited) Sales........................... $43,275 $39,267 $88,034 $81,243 Cost of sales................... 33,527 30,485 66,791 63,372 ---------- ---------- ---------- ---------- Gross profit.................... 9,748 8,782 21,243 17,871 ---------- ---------- ---------- ---------- Selling, general and administrative................ 6,970 5,403 13,144 10,867 Research and development........ 611 779 1,399 1,647 Amortization of intangibles..... 582 831 1,167 1,665 ---------- ---------- ---------- ---------- 8,163 7,013 15,710 14,179 ---------- ---------- ---------- ---------- Income from operations.......... 1,585 1,769 5,533 3,692 ---------- ---------- ---------- ---------- Other (income) expense: Interest income............... (89) (120) (169) (250) Interest expense.............. 3,597 3,389 7,119 6,704 Amortization of debt financing costs............. 120 130 240 257 Minority interest............. (194) -- (194) -- Other expense (income), net... 300 150 121 (894) ---------- ---------- ---------- ---------- 3,734 3,549 7,117 5,817 ---------- ---------- ---------- ---------- Loss before income taxes. ...... (2,149) (1,780) (1,584) (2,125) Income tax benefit.............. (772) (1,173) (571) (1,380) ---------- ---------- ---------- ---------- Net loss........................ ($1,377) ($607) ($1,013) ($745) ========== ========== ========== ========== Number of shares used in computing basic per share amounts....................... 11,949 11,772 11,946 11,777 ========== ========== ========== ========== Basic loss per share.......... ($0.12) ($0.05) ($0.09) ($0.06) Number of shares used in computing diluted per share amounts....................... 11,949 11,772 11,946 11,777 ========== ========== ========== ========== Diluted loss per share........ ($0.12) ($0.05) ($0.09) ($0.06)
The accompanying notes are an integral part of the condensed consolidated financial statements. PORTOLA PACKAGING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Six Months Ended February 28, --------------------- 1999 1998 ---------- ---------- (unaudited) Cash flows from operating activities: Net loss............................................... ($1,013) ($745) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization........................ 8,306 7,625 Deferred income taxes................................ (74) (1,319) Loss (gain) on property and equipment dispositions... 47 (834) Provision for doubtful accounts...................... 183 162 Provision for excess and obsolete inventories........ 168 162 Minority interest income............................. (194) -- Changes in working capital: Accounts receivable.................................. 1,691 4,006 Inventories.......................................... (1,027) (525) Other current assets................................. (524) 236 Accounts payable..................................... 926 (4,050) Accrued liabilities.................................. (378) 309 Accrued interest..................................... (142) 86 ---------- ---------- Net cash provided by operating activities............ 7,969 5,113 ---------- ---------- Cash flows from investing activities: Additions to property, plant and equipment............. (8,244) (8,832) Proceeds from sale of property, plant and equipment.... 863 1,154 (Increase) decrease in other assets.................... (563) 625 ---------- ---------- Net cash used in investing activities................ (7,944) (7,053) ---------- ---------- Cash flows from financing activities: Borrowings under long-term debt arrangements, net...... (693) 1,569 Increase in notes receivable from shareholders......... -- (10) Payments on covenant not to compete agreements......... -- (417) Issuance of common stock............................... -- 59 Repurchase of common stock............................. -- (132) ---------- ---------- Net cash (used in) provided by financing activities.. (693) 1,069 ---------- ---------- Effect of exchange rate changes on cash.................. (45) 56 ---------- ---------- Decrease in cash and cash equivalents................ (713) (815) Cash and cash equivalents at beginning of period......... 3,570 3,242 ---------- ---------- Cash and cash equivalents at end of period............... $2,857 $2,427 ========== ==========
The accompanying notes are an integral part of the condensed consolidated financial statements. Portola Packaging, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation: The unaudited condensed consolidated financial statements included herein have been prepared by Portola Packaging, Inc. and its subsidiaries (the "Company") without audit and in the opinion of management include all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation. The accompanying condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Form 10-K previously filed with the Securities and Exchange Commission. The August 31, 1998 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by generally accepted accounting principles. Interim results are subject to seasonal variations and the results of operations for the three and six-month periods ended February 28, 1999 are not necessarily indicative of the results to be expected for the full fiscal year ending August 31, 1999. Effective December 1, 1998, the Company increased its existing equity interest in its Mexican joint venture (PPI Mexico) to 75% and has consolidated PPI Mexico into the Company's February 28, 1999 unaudited condensed consolidated financial statements (Note 4). All material intercompany accounts and transactions have been eliminated. Certain prior period balances have been reclassified to conform to current period financial statement presentation. These reclassifications had no effect on net loss for the three and six-month periods ended February 28, 1998. 2. Computation of Earnings (Loss) Per Common Share: Effective for the quarter ended February 28, 1998, the Company adopted Financial Accounting Standards Board No. 128 "Earnings Per Share" (EPS). Basic EPS is computed as net income (loss) divided by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur from common shares issuable through stock options, warrants and other convertible securities. Common equivalent shares are excluded from the February 28, 1999 computations of net loss per share as their effect is antidilutive. Portola Packaging, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) (Unaudited) 3. Inventories: Inventory balances as of February 28, 1999 and August 31, 1998 were as follows (in thousands): February 28, August 31, 1999 1998 ----------- ----------- (unaudited) Raw materials.................... $6,370 $5,429 Work in process.................. 1,022 1,606 Finished goods................... 5,310 4,225 ----------- ----------- $12,702 $11,260 =========== =========== 4. Commitments and Contingencies: As of November 30, 1998 and August 31, 1998, the Company maintained $3.0 million in a United States Bank to collateralize a bank loan by a Mexican bank to PPI Mexico. The Company's joint venture partner (Partner) guaranteed the repayment of 50% of the loan balance ($1.5 million) to the Company in the event PPI Mexico was unable to repay the loan and collateralized this guarantee by pledging 25% of its stock interest in PPI Mexico. The loan matured on November 6, 1998 and was not repaid by PPI Mexico. In December 1998, the $3 million collateral maintained by the Company was used to settle PPI Mexico's debt to the bank. Based on the collateral agreement, the Company has asserted its right to the Partner's 25% stock interest in satisfaction of the $1.5 million loan guarantee and has thereby increased its ownership in PPI Mexico to 75% (Note 1). The Partner has not agreed to the collateral claim to his 25% stock interest. The Company has subsequently entered into negotiations with the Partner to settle any issues related to the collateral agreement and to pursue the purchase of his remaining interests in PPI Mexico. The Company is currently engaged in patent infringement litigation with three separate parties who are seeking to have the court declare certain patents owned by the Company invalid. Two of these parties have also included allegations of anti-trust violations in their complaints. The Company believes its patents are valid, and is contesting these allegations vigorously. However, there can be no assurance that the Company will be successful in its defense of these matters. In addition, the Company is also a party to a number of other lawsuits and claims arising out of the normal course of business. While there can be no assurances, management does not believe the final disposition of these matters will have a material adverse effect on the financial position, results of operations or cash flows of the Company. 5. Recent Accounting Pronouncements: In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting. The Company will implement SFAS No. 130 and 131, which require the reporting and display of certain information related to comprehensive income and segment reporting, as required for the fiscal year ending 1999. Portola Packaging, Inc. and Subsidiaries Notes to Condensed Consolidated Financial Statements (continued) (Unaudited) 5. Recent Accounting Pronouncements (continued): In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits". SFAS No. 132 revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition related to the Company's benefit plans. It is effective for the Company in fiscal year 1999. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires the recognition of all derivatives in the balance sheet at their fair market values. It is effective for the Company in fiscal year 2000. The Company is currently studying the implications of these statements and except as noted above, has not yet determined the impact of adopting such statements on the Company's financial statements. 6. Subsequent Event: On March 31, 1999, the Company acquired certain operating and intangible assets of Allied Tool, Inc. (Allied) for a cash payment and the assumption of certain debt and liabilities. The acquisition agreement provides for additional cash payments to the former owners for non-compete agreements, sign-on bonuses and contingent consideration based on the achievement of future sales growth targets. The acquisition agreement also calls for payments to a third party for Allied stock purchase warrants, a non-compete agreement and to satisfy certain debt obligations of Allied. The acquisition will be accounted for as a purchase and accordingly, the purchase price will be allocated to the underlying assets and liabilities based on their respective estimated fair values at March 31, 1999. Any excess purchase price over the estimated fair values will be recorded as goodwill. Allied is a Michigan based company engaged primarily in the manufacture and sale of tooling used in the blowmolding industry. The acquired company will be known as Portola Allied Tool, Inc. and will be operated as a separate subsidiary of the Company. Unaudited pro-forma information related to this acquisition has not been included as the impact of the acquisition is not deemed to be material. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Disclosures Regarding Forward-Looking Statements This report includes "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain statements included in this Form 10-Q, including, without limitation, statements related to the impact of the final disposition of legal matters in the "Commitments and Contingencies" footnote to the condensed consolidated financial statements, anticipated cash flow sources and uses under "Liquidity and Capital Resources", the mitigation of the Year 2000 issue under "Impact of the Year 2000 Issue" and other statements contained in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding the Company's financing alternatives, financial position, business strategy, plans and objectives of management of the Company for future operations, and industry conditions, are forward-looking statements. Although the Company believes that the expectations reflected in any such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Any forward-looking statements herein are subject to certain risks and uncertainties in the Company's business, including, but not limited to, competition in its markets and reliance on key customers, all of which may be beyond the control of the Company. Any one or more of these factors could cause actual results to differ materially from those expressed in any forward-looking statement. All subsequent written and oral forward-looking statements attributable to the Company or any person acting on its behalf are expressly qualified in their entirety by the cautionary statements disclosed in this paragraph and elsewhere in this report. Results of Operations Sales increased $4.0 million, or 10.2%, from $39.3 million for the three months ended February 28, 1998 to $43.3 million for the three months ended February 28, 1999. For the first six months of fiscal year 1999 sales were $88.0 million compared to $81.3 million for the first six months of fiscal year 1998, an 8.4% increase. This increase in sales for the three and six month periods ended February 28, 1999 as compared to the same periods in fiscal year 1998 was primarily due to the addition of sales from the consolidation of our Mexico operations, an increase in sales in Canada, and an increase in sales in the United Kingdom. The increases in Canada and the United Kingdom sales resulted mainly from increased unit shipments. These increases were partially offset by a decrease in domestic closure sales due mainly to decreased prices. Gross profit increased $1.0 million to $9.8 million, or 11.4%, for the second quarter of fiscal 1999 as compared to $8.8 million for the second quarter of fiscal 1998 and increased $3.3 million, or 18.4%, to $21.2 million for the six months ended February 28, 1999, from $17.9 million for the same period in fiscal year 1998. Gross profit as a percentage of sales increased from 22.4% for the three months ended February 28, 1998 to 22.6% for the same period in fiscal year 1999, and from 22.0% for the six months ended February 28, 1998 to 24.1% for the same period in fiscal year 1999. Most of the increases for the three and six month periods ended February 28, 1999 were attributable to margin improvements in domestic closures, the United Kingdom and Canada. These increases were offset by a decrease in equipment margins. The margin increase in domestic closures and Canada is primarily the result of improved cost control efforts and the benefits of a recent restructuring. The United Kingdom operations margins continue to improve due to a shift from using expensive subcontractors and imported closures during their start-up phase in fiscal year 1998 to producing more closures in their own facility in fiscal year 1999. Selling, general and administrative expenses increased $1.6 million, or 30.0%, to $7.0 million for the three months ended February 28, 1999 as compared to $5.4 million for the same period in fiscal year 1998, and increased as a percentage of sales from 13.7% for the three months ended February 28, 1998 to 16.2% for the three months ended February 28, 1999. For the six months ended February 28, 1999, selling, general and administrative expenses were $13.1 million, an increase of $2.2 million, or 20.2%, from $10.9 million for the same period in fiscal year 1998. As a percentage of sales selling, general and administrative expenses were 14.9% for the six months ended February 28, 1999 as compared to 13.4% for the same period in fiscal year 1998. These increases are primarily due to increased personnel in the United Kingdom operations, additional expenses related to the China and Mexico operations, increased expenses for bonus costs and increased legal expenses. Research and development expense decreased $.2 million, or 25.0%, to $.6 million for the three months ended February 28, 1999 as compared to $.8 million for the three months ended February 28, 1998 and decreased as a percentage of sales from 2.0% in the three months ended February 28, 1998 to 1.4% in the three months ended February 28, 1999. For the six months ended February 28, 1999, research and development expense was $1.4 million, a decrease of $.2 million, or 12.5%, from $1.6 million for the same period in fiscal 1998. As a percentage of sales, research and development expense was 1.6% for the six months ended February 28, 1999 as compared to 2.0% for the same period in fiscal 1998. The decreases in research and development expense for the three and six months ended February 28, 1999 as compared to the same periods in fiscal year 1998 were due primarily to a reduction in consulting expenses and prototype costs. Amortization of intangibles (consisting of amortization of patents, goodwill and covenants not to compete) decreased $.2 million, or 25.0%, to $.6 million for the three months ended February 28, 1999 as compared to $.8 million for the three months ended February 28, 1998 and decreased $.5 million, or 29.4%, to $1.2 million for the six months ended February 28, 1999. The decrease was primarily a result of certain covenants of the Canadian operations becoming fully amortized in June 1998. Interest income remained stable at $.1 million for the three months ended February 28, 1999 as compared to the same period in fiscal year 1998 and decreased $.1 million to $.2 million for the six months ended February 28, 1999 as compared to $.3 million for the same period in fiscal 1998. The interest income balances fluctuated based on the levels of invested cash. Interest expense increased $.2 million to $3.6 million for the three months ended February 28, 1999 as compared to $3.4 million for the three months ended February 28, 1998 and increased $.4 million to $7.1 million for the six months ended February 28, 1999 as compared to $6.7 million for the same period in fiscal 1998. These increases were primarily due to an increase in the Company's outstanding line of credit balance for the three and six months ended February 28, 1999 as compared to the same period in fiscal year 1998 and the addition of the Mexican operations interest expense. Other expense increased $.1 million to $.3 million for the three months ended February 28, 1999 as compared to other expense of $.2 million for the same period in fiscal year 1998, and totaled $.1 million for the six months ended February 28, 1999 as compared to other income of $.9 million for the same period in fiscal 1998. The expense in fiscal year 1999 is due primarily to exchange losses on intercompany transactions. Other income for the first six months of fiscal 1998 reflects gains from the sale of the Portland, Oregon facility. The Company recorded a benefit for income taxes of $.6 million for the six months ended February 28, 1999 based on its pre-tax loss using an effective tax rate of 36%. The actual effective tax rate for the entire fiscal year could vary substantially depending on actual results achieved. The Company recorded a benefit from income taxes of $1.4 million for the six-month period ending February 28, 1998. Liquidity and Capital Resources The Company has relied primarily upon cash from operations, borrowings from financial institutions and sales of common stock to finance its operations, repay long-term indebtedness and fund capital expenditures and acquisitions. At February 28, 1999, the Company had cash and cash equivalents of $2.9 million, a decrease of $.7 million from August 31, 1998. Cash provided by operations totaled $8.0 million for the six months ended February 28, 1999, a $2.9 million increase from the $5.1 million provided by operations for the six months ended February 28, 1998. Accounts receivable provided funds of $1.7 million for the first six months of fiscal year 1999 as compared to providing funds of $4.0 million for the same period in fiscal year 1998. Accounts payable provided funds of $.9 million in the first six months of fiscal 1999 compared to using funds of $4.1 million in the first six months of fiscal year 1998, and accrued expenses used funds of $.4 million in the first six months of fiscal 1999 as compared to providing funds of $.3 million in the same period of fiscal year 1998. Accrued interest expense used funds of $.1 million in the first six months of fiscal 1999 compared to providing funds of $.1 million in the same period of fiscal year 1998. Cash used in investing activities was $7.9 million for the six months ended February 28, 1999 as compared to using $7.1 million for the same period in fiscal year 1998. In both periods the use of cash consisted primarily of additions to property, plant and equipment. Proceeds from the sale of property, plant and equipment in the first six months of fiscal year 1999 included $.9 million from the sale of the Company's Bettendorf, Iowa facility as compared to $1.2 million in proceeds related to the sale of the Portland, Oregon facility in the first six months of fiscal 1998. Cash used by financing activities was $.7 million for the six month period ended February 28, 1999 as compared to cash provided by financing activities of $1.1 million for the first six months of fiscal year 1998. The decrease was principally due to a decrease in borrowings under the line of credit for the six-month period ended February 28, 1999 as compared to the same period in fiscal year 1998. At February 28, 1999, the Company had $2.9 million in cash and cash equivalents as well as borrowing capacity under the revolving credit line (of which $19.6 million was available for draw as of February 28, 1999). While there can be no assurances, management believes that these resources, together with anticipated cash flow from operations, will be adequate to fund the Company's operations, debt service requirements and capital expenditures into fiscal year 2000. Recent Accounting Pronouncements In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income", and SFAS No. 131 "Disclosure About Segments of an Enterprise and Related Information". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. SFAS No. 131 changes current practice under SFAS No. 14 by establishing a new framework on which to base segment reporting. The Company will implement SFAS No. 130 and 131, which require the reporting and display of certain information related to comprehensive income and segment reporting, as required for the fiscal year ending 1999. In February 1998, the Financial Accounting Standards Board issued SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits". SFAS No. 132 revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition related to the Company's benefit plans. It is effective for the Company in fiscal year 1999. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities and requires the recognition of all derivatives in the balance sheet at their fair market values. It is effective for the Company in fiscal year 2000. The Company is currently studying the implications of these statements and except as noted above, has not yet determined the impact of adopting such statements on the Company's financial statements. Impact of the Year 2000 Issue The year 2000 issue is the result of computer programs being written using two digits, rather than four, to define the applicable year. Software programs, hardware and machinery that have date-sensitive software or embedded chips may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure or miscalculations causing disruptions of operations, including a temporary inability to engage in normal business activities. As a result of ongoing assessments, the Company has determined it will be required to modify or replace portions of hardware, software and machinery so that those systems properly utilize dates beyond December 31, 1999. The Company believes that with these modifications and replacements, the year 2000 issue will be mitigated. However, if such modifications are not completed in a timely manner the effects of the year 2000 issue could have a material impact on the operations and financial condition of the Company. The Company's plan to resolve the year 2000 issue involves four phases; inventory and assessment, remediation, implementation and testing. To date, the Company has completed its inventory and assessment of all material software systems, including: order entry, sales, accounting, payroll, costing, shipping/receiving and purchasing; and concluded that those systems are year 2000 ready. The Company's inventory and assessment of hardware, certain communications systems and machinery used in the production process has been substantially completed. The remediation of these items is ongoing and is expected to be completed in July 1999. The testing and implementation phase should be completed as scheduled by August 1999. In addition to the hardware and software directly owned and operated by the Company, a significant portion of the Company's business is conducted through systems that interact directly with independent sales representatives. The software systems through which the sales representatives interact with the Company are year 2000 compliant and an inventory and assessment of the hardware used by the various sales representatives is almost complete. Remediation, implementation and testing of the sales representatives' hardware has been performed as the equipment is inventoried and is expected to be completed in April 1999. Systems that interface directly with outside parties other than sales representatives are limited to certain payroll functions. The Company has completed its inventory and assessment process of these systems and has concluded that they are year 2000 ready. The Company has also queried its other important suppliers, service providers and customers and expects this assessment to be completed by May 1999. After this assessment is completed, preliminary contingency plans should be finalized and implemented in June 1999. These contingency plans will include, among other things, the Company's strategy to meet any unusual changes in demand from customers towards the end of calendar year 1999 which could lead to distortions in normal quarterly sales activity. Currently, the Company is not aware of any other issues at these entities that may materially impact its results of operations, liquidity, or capital resources. However, the Company has no means of ensuring that these entities will be year 2000 ready and their inability to complete the year 2000 resolution process could materially affect the Company, its operations and financial condition. The Company will use mainly internal resources to resolve its year 2000 issues and expects to fund the costs through operating cash flows. External costs incurred to date by the Company, all of which have been capitalized, approximate $150,000. Of the total remaining project costs, approximately $200,000 is attributable to the purchase of new software and equipment, which will be capitalized. Approximately $50,000 of the Company's total year 2000 cost relates to the repair of hardware and software, which will be expensed as incurred. The Company's plans to complete the year 2000 modifications are based on management's best estimates and are predicated on the continued availability of skilled resources and the delivery of compliant systems and components from its third party hardware and software manufacturers. Estimates on the status of completion and the expected completion dates are based on planned timetables and costs incurred to date. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those plans. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes and similar uncertainties. PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed herewith or incorporated by reference herein. EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 27.01 Financial Data Schedule. (b) The Company did not file any reports on Form 8-K during the period ended February 28, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PORTOLA PACKAGING, INC. (Registrant) Date: April 7, 1999 /s/ James A. Taylor -------------------- James A. Taylor Vice-President and Chief Financial Officer (Principal Financial Officer and Duly Authorized Officer) EXHIBIT INDEX EXHIBIT NUMBER EXHIBIT TITLE - ------ ------------- 27.01 Financial Data Schedule. EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 6-MOS AUG-31-1999 SEP-01-1998 FEB-28-1999 2,857 0 22,495 0 12,702 41,789 90,402 0 151,549 30,867 0 0 0 11 (24,808) 151,549 88,034 88,034 66,791 66,791 15,710 0 7,119 (1,584) (571) (1,013) 0 0 0 (1,013) ($0.09) ($0.09) Shown net of allowance Shown net of depreciation
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