-----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, LN4Hpbd2oK+F9OsEIyCJPaiGdIRtykt38iqs/LcFbExowpATcV/+YqLSdFggZQBK VGUOdzpjVWpXsX/+5Ihf2g== 0000850429-99-000002.txt : 19990202 0000850429-99-000002.hdr.sgml : 19990202 ACCESSION NUMBER: 0000850429-99-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990201 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TREDEGAR INDUSTRIES INC CENTRAL INDEX KEY: 0000850429 STANDARD INDUSTRIAL CLASSIFICATION: UNSUPPORTED PLASTICS FILM & SHEET [3081] IRS NUMBER: 541497771 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10258 FILM NUMBER: 99518325 BUSINESS ADDRESS: STREET 1: 1100 BOULDERS PKWY CITY: RICHMOND STATE: VA ZIP: 23225 BUSINESS PHONE: 8043301000 10-K 1 ANNUAL REPORT 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, 1998 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 INDUSTRIES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Virginia 54-1497771 - -------------------------------------------------------------------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1100 Boulders Parkway, Richmond, Virginia 23225 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 804-330-1000 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 January 27, 1999: $668,845,570* Number of shares of Common Stock outstanding as of January 27, 1999: 36,762,981 * In determining this figure, an aggregate of 11,875,704 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 January 27, 1999, as reported by The Wall Street Journal. - -------------------------------------------------------------------------------- Documents Incorporated By Reference Portions of the "Tredegar Industries, Inc., ("Tredegar") Proxy Statement for the 1999 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. - -------------------------------------------------------------------------------- Index to Annual Report on Form 10-K Year Ended December 31, 1998 Part I Page Item 1. Business 1-5 Item 2. Properties 5-6 Item 3. Legal Proceedings None Item 4. Submission of Matters to a Vote of Security Holders None Part II Item 5. Market for Tredegar's Common Equity and Related 7-8 Stockholder Matters Item 6. Selected Financial Data 8-17 Item 7. Management's Discussion and Analysis of Financial Condition 8-30 and Results of Operations Item 8. Financial Statements and Supplementary Data 33-60 Item 9. Changes In and Disagreements With Accountants on Accounting None and Financial Disclosures Part III Item 10. Directors and Executive Officers of Tredegar * 31-32 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 Statements Schedules and Reports on 33 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 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, Brazil and Argentina, where it produces films for the European and Latin American markets. During 1998, Film Products began operating a production facility near Guangzhou, China. The China facility manufactures disposable films for hygiene products marketed in the Far East. Film Products has begun construction of a new production site near Budapest, Hungary, which should be operational in mid-1999. The Hungary facility will produce disposable films for hygiene products marketed in Eastern Europe. Film Products competes in all of its markets on the basis of product quality, price and service. Film Products produces films for two major market categories: disposables and industrial. Disposables. Film Products is one of the largest U.S. suppliers of permeable, embossed and breathable films for disposable personal 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 embossed, breathable 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, embossed, breathable and elastomeric films and nonwoven film laminates is The Procter & Gamble Company ("P&G"), the leading global personal hygiene product manufacturer. Net sales by Tredegar's ongoing operations to P&G totaled $233.5 million in 1998, $242.2 million in 1997 and $206.9 million in 1996. 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. Industrial. Film Products produces coextruded and monolayer permeable films under the VisPore(R) name. 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 a technical center in Terre Haute, Indiana, and holds 42 U.S. patents and 14 U.S. trademarks. Expenditures for research and development have averaged $5.4 million per year during the past three years. Fiberlux Fiberlux is a leading 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. 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, transportation, consumer durables, electrical and distribution 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 43). 2 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, 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 (51% in 1998 compared to 71% in 1995). A breakdown of 1998 aluminum extrusion sales volume by market segment is shown below: ------------------------------------------- % of 1998 Aluminum Extrusion Sales Volume by Market Segment ------------------------------------------- Building and construction 51 Transportation 15 Consumer durables 7 Electrical 7 Distribution 9 Other 11 ------------------------------------------- Total 100 ------------------------------------------- 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, price and service. Aluminum Extrusions holds two U.S. patents and nine U.S. trademarks. Technology Our technology interests include Molecumetics, Ltd., and Tredegar Investments, Inc. See Note 7 on page 46 for more information on Tredegar Investments. Also, see Note 17 on page 58 regarding the sale of APPX Software, Inc., in early 1998. Our Molecumetics subsidiary operates its drug discovery research laboratory in Bellevue, Washington, where it uses patented chemistry to develop new drug candidates for licensing to pharmaceutical and biotech companies in exchange for up-front fees, research and development support payments, milestone-driven success payments and future royalties. 3 In 1998, Molecumetics entered into a research alliance with Bristol-Myers Squibb Company 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 that interact with novel molecular targets identified by Molecumetics. Molecumetics also will supply MolecuSet(R), a collection of 150,000 of its proprietary compounds, to Bristol-Myers Squibb for broad-based screening against a wide variety of disease targets. Under terms of the agreement, Bristol-Myers Squibb provides Molecumetics with research funding, milestone payments and royalties on any resulting marketed products. In 1998, Molecumetics also announced the signing of a two-year license and supply agreement with Choongwae Pharma Corporation, a Korean pharmaceutical company. Under the terms of the agreement, Choongwae will synthesize and deliver certain key chemical intermediates to Molecumetics. In exchange for supplying these intermediates, Choongwae will receive licensing rights to the jointly developed tryptase inhibitors in certain Asian countries. Molecumetics will retain rights to these compounds in all other countries. Tryptase inhibitors could be used to treat asthma, inflammatory bowel disease and psoriasis. In 1997, Molecumetics signed research and marketing partnerships with two large Japanese pharmaceutical companies, Asahi Chemical Industry Co., Ltd. ("Asahi"), and Teijin Limited ("Teijin"). Both collaborations are aimed at developing therapeutics for treatment of blood-clotting disorders. Molecumetics is separately developing and optimizing drug lead compounds for each partner. In turn, Asahi and Teijin are responsible for preclinical and clinical development in Japan and other Asian countries. In each case, Molecumetics retains U.S. and European rights to any compounds developed under the agreement. The terms of the agreements provide Molecumetics with research funding, milestone payments and royalties on any resulting marketed products. Molecumetics holds 11 U.S. patents and three U.S. trademarks, and has filed a number of other patent applications with respect to its technology. Businesses included in the Technology segment (primarily Molecumetics) spent $8.5 million in 1998, $7.2 million in 1997 and $6.8 million in 1996 for research and development. Miscellaneous Patents, Licenses and Trademarks. Tredegar considers patents, licenses and trademarks to be of significance for Film Products and Molecumetics. 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 $14.5 million in 1998, $13.2 million in 1997 and $11.1 million in 1996 on research and development activities. Backlog. Backlogs are not material to our operations. 4 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 3,400 people at December 31, 1998. 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. 5 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 (operational in 1999) Manchester, Iowa Guangzhou, China (leased) New Bern, North Carolina Kerkrade, the Netherlands Tacoma, Washington (leased) San Juan, Argentina Terre Haute, Indiana (2) Sao Paulo, Brazil (technical center and production facility) Fiberlux Locations Principal Operations Pawling, New York Production of vinyl extrusions Purchase, New York for windows and patio doors (headquarters) (leased) 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 Molecumetics leases its laboratory space in Bellevue, Washington. Tredegar Investments leases office space in Seattle, Washington. Item 3. LEGAL PROCEEDINGS None Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 6 PART II Item 5. MARKET FOR THE REGISTRANT'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 36,660,751 shares of common stock held by 6,246 shareholders of record on December 31, 1998. The following table shows the reported high and low closing prices of our common stock by quarter for the past two years. ------------------------------------------------------------------- 1998 1997 -------------------- ---------------------- High Low High Low First quarter $24.70 $19.00 $14.17 $12.54 Second quarter 30.67 23.81 18.79 13.42 Third quarter 29.94 16.13 24.08 17.54 Fourth quarter 26.25 19.00 24.65 21.06 ------------------------------------------------------------------- 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. During 1996, we paid a quarterly dividend of 2 cents per share. The quarterly dividend 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 our earnings, financial condition, anticipated cash needs and such other considerations as the Board deems relevant. See Note 10 on page 48 for restriction on minimum shareholders' equity required. Annual Meeting Our annual meeting of shareholders will be held on May 20, 1999, beginning at 9:30 a.m. E.D.T. 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. 7 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 Industries, Inc. 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 Report Distribution We do not distribute quarterly reports through brokerages or banks. If your Tredegar shares are held through a third party, such as a bank or brokerage, and you would like to receive quarterly reports, please write or call Corporate Communications at the above address. Counsel Independent Accountants Hunton & Williams PricewaterhouseCoopers LLP Richmond, Virginia Richmond, Virginia Item 6. SELECTED FINANCIAL DATA The tables that follow on pages 9-17 present certain selected financial and segment information for the eight years ended December 31, 1998. 8 EIGHT-YEAR SUMMARY - ---------------------------------------------------------------------------------------------------------------------------------- Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996 1995 1994 1993 1992 1991 - ---------------------------------------------------------------------------------------------------------------------------------- (In thousands, except per-share data) Results of Operations (a)(b): Net sales $699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229 $439,186 Other income (expense), net 4,015 17,015 4,248 (669) (296) (387) 226 745 - ---------------------------------------------------------------------------------------------------------------------------------- 703,811 598,019 527,799 588,785 501,912 448,821 445,455 439,931 - ---------------------------------------------------------------------------------------------------------------------------------- Cost of goods sold 553,389 457,946 417,270 490,510 419,823 379,286 370,652 373,429 Selling, general & administrative expenses 39,493 37,035 39,719 48,229 47,978 47,973 48,130 49,764 Research and development expenses 14,502 13,170 11,066 8,763 8,275 9,141 5,026 4,541 Interest expense (c) 1,318 1,952 2,176 3,039 4,008 5,044 5,615 7,489 Unusual items (101)(d) (2,250)(e)(11,427)(f) (78)(g) 16,494(h) 452(i) 90(j) 721(k - ---------------------------------------------------------------------------------------------------------------------------------- 608,601 507,853 458,804 550,463 496,578 441,896 429,513 435,944 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes 95,210 90,166 68,995 38,322 5,334 6,925 15,942 3,987 Income taxes 31,054(d) 31,720 23,960 14,269 3,917 3,202 6,425 1,468 - ---------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations (a)(b) 64,156 58,446 45,035 24,053 1,417 3,723 9,517 2,519 Income from discontinued Energy segment operations (b) 4,713 - - - 37,218 6,784 5,795 3,104 - ---------------------------------------------------------------------------------------------------------------------------------- Net income before extraordinary item and cumulative effect of accounting changes 68,869 58,446 45,035 24,053 38,635 10,507 15,312 5,623 Extraordinary item - prepayment premium on extinguishment of debt (net of tax) - - - - - (1,115) - - Cumulative effect of accounting changes - - - - - 150 - - - ---------------------------------------------------------------------------------------------------------------------------------- Net income $68,869 $58,446 $45,035 $24,053 $38,635 $ 9,542 $15,312 5,623 - ---------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share: Continuing operations (a)(b) 1.66 1.48 1.15 .60 .03 .08 .19 .05 Discontinued Energy segment operations (b) .12 - - - .79 .14 .12 .06 - ---------------------------------------------------------------------------------------------------------------------------------- Before extraordinary item and cumulative effect of accounting changes 1.78 1.48 1.15 .60 .82 .22 .31 .11 Net income 1.78 1.48 1.15 .60 .82 .19 .31 .11 - ---------------------------------------------------------------------------------------------------------------------------------- Refer to notes to financial tables on pages 16-17. 9 Share Data: Equity per share $ 8.46 $ 7.34 $ 5.79 $ 4.67 $ 4.25 $ 3.45 $ 3.31 $ 3.06 Cash dividends declared per share .15 .11 .09 .06 .05 .05 .05 .05 Weighted average common shares outstanding during the period 36,286 36,861 36,624 38,748 46,572 49,029 49,023 49,023 Shares used to compute diluted earnings per share during the period 38,670 39,534 39,315 40,110 46,842 49,182 49,176 49,023 Shares outstanding at end of period 36,661 37,113 36,714 36,528 40,464 49,029 49,023 49,023 Closing market price per share: High 30.67 24.65 15.13 7.72 4.14 4.00 4.14 2.39 Low 16.13 12.54 6.83 3.86 3.11 2.78 2.22 1.42 End of year 22.50 21.96 13.38 7.17 3.86 3.33 3.44 2.22 Total return to shareholders (l) 3.1% 65.0% 87.8% 87.2% 17.4% (1.7)% 57.4% 38.8% Financial Position: Total assets 457,178 410,937 341,077 314,052 318,345 353,383 354,910 335,415 Working capital excluding cash and cash equivalents 52,050 30,279 31,860 54,504 53,087 62,064 56,365 60,341 Ending consolidated capital employed (m) 309,886 182,481 146,284 203,376 200,842 266,088 263,897 249,723 Current ratio 1.9:1 3.1:1 3.2:1 1.8:1 1.9:1 2.1:1 2.0:1 2.1:1 Cash and cash equivalents 25,409 120,065 101,261 2,145 9,036 - - 500 Technology investments: Cost basis 60,617 25,826 6,048 3,410 2,200 800 200 - Carrying value 60,024 33,513 6,048 3,410 2,200 800 200 - Estimated fair value 70,841 40,757 15,000 5,700 2,300 800 200 - Capital employed of divested and discontinued operations (Molded Products, Brudi and the Energy segment) (b)(m) - - - 60,144 59,267 98,903 96,830 92,365 Debt 25,000 30,000 35,000 35,000 38,000 97,000 101,500 100,000 Shareholders' equity (net book value) 310,295 272,546 212,545 170,521 171,878 169,088 162,397 150,223 Equity market capitalization (n) 824,873 814,940 491,050 261,784 156,236 163,430 168,857 108,940 Net debt (cash) (debt less cash and cash equivalents) as a % of net capitalization (0.1)% (49.4)% (45.3)% 16.2% 14.4% 36.5% 38.5% 39.8% Refer to notes to financial tables on pages 16-17. 10 Other financial data excluding unusual items, technology-related investment activities and divested and discontinued operations (a)(b): Net sales $699,796 $581,004 $489,040 $472,709 $396,738 $356,750 $344,296 $337,151 EBITDA (o) 115,977 89,443 71,914 56,283 45,684 31,734 36,334 36,203 Depreciation 22,239 18,364 18,451 17,553 17,089 17,550 16,373 16,566 Amortization of intangibles 205 50 56 26 463 1,712 3 3 Capital expenditures 34,016 22,655 22,698 17,778 11,985 12,729 17,431 18,072 Acquisitions 72,102 13,469 - 3,637 - - 13,884 - Ending capital employed (m) 249,649 151,734 140,236 139,822 138,625 165,635 163,117 154,208 Average capital employed (m) 214,846 145,985 140,029 139,224 152,130 164,376 158,663 157,964 Unleveraged after-tax earnings (p) 60,624 45,105 33,913 24,498 17,603 7,544 12,558 12,397 Return on average capital employed (q) 28.2% 30.9% 24.2% 17.6% 11.6% 4.6% 7.9% 7.8% EBITDA as % of net sales 16.6% 15.4% 14.7% 11.9% 11.5% 8.9% 10.6% 10.7% Effective income tax rate (excluding the effects of tax-exempt interest income) 35.2% 36.4% 36.5% 36.6% 37.1% 39.5% 36.7% 36.3% - ----------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17. 11 SEGMENT TABLES Tredegar Industries, Inc., and Subsidiaries Net Sales - ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Film Products $ 286,965 $298,862 $257,306 $237,770 $188,672 $177,052 $183,117 $184,448 Fiberlux 11,629 10,596 10,564 11,329 11,479 10,239 10,655 9,305 Aluminum Extrusions 395,455 266,585 219,044 221,657 193,870 166,465 150,524 143,398 Technology: Molecumetics 5,718 2,583 36 - 200 - - - Other 29 2,378 2,090 1,953 2,517 2,994 - - - ------------------------------------------------------------------------------------------------------------------------------------ Total ongoing operations (r) 699,796 581,004 489,040 472,709 396,738 356,750 344,296 337,151 Divested operations (b): Molded Products - - 21,131 84,911 76,579 68,233 80,834 87,860 Brudi - - 13,380 31,834 28,891 24,225 20,099 14,175 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229 $439,186 - ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17. 12 Operating Profit - ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Film Products: Ongoing operations $ 53,786 $ 50,463 $ 43,158 $ 36,019 $ 34,726 $ 22,320 $ 26,700 $ 32,189 Unusual items - - 680(f) 1,750(g) - (1,815) (i) - - - ------------------------------------------------------------------------------------------------------------------------------------ 53,786 50,463 43,838 37,769 34,726 20,505 26,700 32,189 - ------------------------------------------------------------------------------------------------------------------------------------ Fiberlux: Ongoing operations 1,433 845 1,220 452 950 557 (127) 756 Unusual items - - - - - - - 2,797(k) - ------------------------------------------------------------------------------------------------------------------------------------ 1,433 845 1,220 452 950 557 (127) 3,553 - ------------------------------------------------------------------------------------------------------------------------------------ Aluminum Extrusions: Ongoing operations 47,091 32,057 23,371 16,777 11,311 7,964 4,180 (4,247) Unusual items (664)(d) - - - - - - - - ------------------------------------------------------------------------------------------------------------------------------------ 46,427 32,057 23,371 16,777 11,311 7,964 4,180 (4,247) - ------------------------------------------------------------------------------------------------------------------------------------ Technology: Molecumetics (3,504) (4,488) (6,564) (4,769) (3,534) (3,324) (1,031) - Investments 615 13,880 2,139 (695) - - - - Other (428) (267) (118) (566) (5,354) (6,380) (834) - Unusual items 765(d) - - (1,672)(g) (9,521)(h) 2,263(i) (1,092)(j) - - ------------------------------------------------------------------------------------------------------------------------------------ (2,552) 9,125 (4,543) (7,702) (18,409) (7,441) (773) - - ------------------------------------------------------------------------------------------------------------------------------------ Divested operations (b): Molded Products - - 1,011 2,718 (2,484) (228) 1,176 (9,307) Brudi - - 231 222 (356) 177 513 1,870 Unusual items - 2,250(e) 10,747(f) - (6,973)(h) - (1,182)(j) (3,518)(k - ------------------------------------------------------------------------------------------------------------------------------------ - 2,250 11,989 2,940 (9,813) (51) 507 (10,955) - ------------------------------------------------------------------------------------------------------------------------------------ Total operating profit 99,094 94,740 75,875 50,236 18,765 21,534 30,487 20,540 Interest income (t) 2,279 4,959 2,956 333 544 - - - Interest expense (c) 1,318 1,952 2,176 3,039 4,008 5,044 5,615 7,489 Corporate expenses, net 4,845 7,581 7,660 9,208 9,967 9,565(i) 8,930 9,064 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations before income taxes 95,210 90,166 68,995 38,322 5,334 6,925 15,942 3,987 Income taxes 31,054(d) 31,720 23,960 14,269 3,917 3,202 6,425 1,468 - ------------------------------------------------------------------------------------------------------------------------------------ Income from continuing operations (a) 64,156 58,446 45,035 24,053 1,417 3,723 9,517 2,519 Income from discontinued Energy segment operations (b) 4,713 - - - 37,218 6,784 5,795 3,104 - ------------------------------------------------------------------------------------------------------------------------------------ Net income before extraordinary item and cumulative effect of accounting changes $ 68,869 $ 58,446 $ 45,035 $ 24,053 $ 38,635 $ 10,507 $ 15,312 $ 5,623 - ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17. 13 Identifiable Assets - ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Film Products $ 132,241 $123,613 $116,520 $118,096 $108,862 $109,916 $112,153 $102,453 Fiberlux 7,811 6,886 6,203 6,330 6,448 6,667 7,762 8,177 Aluminum Extrusions 201,518 101,855 83,814 80,955 89,406 89,498 93,365 95,000 Technology: Molecumetics 5,196 2,550 2,911 2,018 1,536 1,926 1,415 - Investments and other (s) 61,098 34,611 7,760 5,442 5,780 13,321 15,441 3,334 - ------------------------------------------------------------------------------------------------------------------------------------ Identifiable assets for ongoing operations 407,864 269,515 217,208 212,841 212,032 221,328 230,136 208,964 Nonoperating assets held for sale - - - 6,057 5,018 3,605 4,330 13,600 General corporate 23,905 21,357 22,608 20,326 12,789 12,031 11,745 9,447 Cash and cash equivalents 25,409 120,065 101,261 2,145 9,036 - - 500 Divested operations (b): Molded Products - - - 44,173 48,932 54,487 50,151 52,132 Brudi - - - 28,510 30,538 30,956 28,744 26,416 Net assets of discontinued Energy segment operations (b) - - - - - 30,976 29,804 24,356 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 457,178 $410,937 $341,077 $314,052 $318,345 $353,383 $354,910 $335,415 - ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17. 14 Depreciation and Amortization - ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Film Products $ 11,993 $ 10,947 $ 11,262 $ 9,766 $ 9,097 $ 9,200 $ 7,697 $ 6,837 Fiberlux 544 515 507 577 644 826 883 1,010 Aluminum Extrusions 8,393 5,508 5,407 5,966 5,948 6,240 7,093 8,033 Technology: Molecumetics 1,260 996 780 592 573 443 - - Investments and other 21 135 161 197 720 1,868 - - - ------------------------------------------------------------------------------------------------------------------------------------ Subtotal 22,211 18,101 18,117 17,098 16,982 18,577 15,673 15,880 General corporate 254 313 390 481 570 685 703 689 - ------------------------------------------------------------------------------------------------------------------------------------ Total ongoing operations 22,465 18,414 18,507 17,579 17,552 19,262 16,376 16,569 Divested operations (b): Molded Products - - 1,261 5,055 5,956 5,289 5,416 7,835 Brudi - - 550 1,201 1,337 1,272 1,085 798 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 22,465 $ 18,414 $ 20,318 $ 23,835 $ 24,845 $ 25,823 $ 22,877 $ 25,202 - ------------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures, Acquisitions and Investments - ------------------------------------------------------------------------------------------------------------------------------------
Segment 1998 1997 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands) Film Products $ 18,456 $ 15,354 $ 11,932 $ 10,734 $ 6,710 $ 6,561 $ 12,931 $ 9,996 Fiberlux 1,477 530 417 465 416 14 283 59 Aluminum Extrusions 10,407 6,372 8,598 5,454 4,391 1,870 2,487 7,594 Technology: Molecumetics 3,561 366 1,594 894 178 939 1,414 - Investments and other 54 5 14 - 99 905 - - - ------------------------------------------------------------------------------------------------------------------------------------ Subtotal 33,955 22,627 22,555 17,547 11,794 10,289 17,115 17,649 General corporate 115 28 143 231 191 2,440 316 423 - ------------------------------------------------------------------------------------------------------------------------------------ Capital expenditures for ongoing operations 34,070 22,655 22,698 17,778 11,985 12,729 17,431 18,072 Divested operations (b): Molded Products - - 1,158 6,553 2,988 3,235 2,441 2,897 Brudi - - 104 807 606 516 833 391 - ------------------------------------------------------------------------------------------------------------------------------------ Total capital expenditures 34,070 22,655 23,960 25,138 15,579 16,480 20,705 21,360 Acquisitions and other 72,102 13,469 - 3,637 - 5,099 17,422 25,654 Technology-related investments 35,399 20,801 3,138 1,904 1,400 600 200 - - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 141,571 $ 56,925 $ 27,098 $ 30,679 $ 16,979 $ 22,179 $ 38,327 $ 47,014 - ------------------------------------------------------------------------------------------------------------------------------------
Refer to notes to financial tables on pages 16-17. 15 (a) Income and diluted earnings per share from continuing operations, adjusted for unusual items and technology-related investment gains/losses affecting the comparability of operating results between years, are presented below:
1998 1997 1996 1995 1994 1993 1992 1991 - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations as reported (b) $64,156 $58,446 $45,035 $24,053 $ 1,417 $ 3,723 $ 9,517 $ 2,519 After-tax effects of unusual items related to continuing operations: Unusual (income) charge, net (d-k) (2,341) (1,440) (8,479) 41 12,051 246 502 447 Impact on deferred taxes of 1% increase in federal income tax rate - - - - - 348 - - - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations as adjusted for unusual items 61,815 57,006 36,556 24,094 13,468 4,317 10,019 2,966 After-tax effect of technology-related investment (gains) losses (394) (8,882) (1,369) 444 - - - - - --------------------------------------------------------------------------------------------------------------------------------- Income from continuing operations as adjusted for unusual items and technology-related investment gains/losses (b) $61,421 $48,124 $35,187 $24,538 $13,468 $ 4,317 $10,019 $ 2,966 - --------------------------------------------------------------------------------------------------------------------------------- Diluted earnings per share from continuing operations (b): As reported $ 1.66 $ 1.48 $ 1.15 $ .60 $ .03 $ .08 $ .19 $ .05 As adjusted for unusual items 1.60 1.44 .93 .60 .29 .09 .20 .06 As adjusted for unusual items and technology-related investment gains/losses 1.59 1.22 .90 .61 .29 .09 .20 .06
(b) 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 payment 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 19 on page 59). 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. (c) Interest expense has been allocated between continuing and discontinued operations based on relative capital employed (see (b)). (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 (see Note 19 on page 59). 16 (f) Unusual items for 1996 include a gain on the sale of Molded Products ($19,893, see Note 19 on page 59), a gain on the sale of a former plastic films manufacturing site in Fremont, California ($1,968), a charge related to the loss on the divestiture of Brudi ($9,146, see Note 19 on page 59) 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). (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) Unusual items in 1991 include costs related to plant closings in Molded Products ($4,412) offset by a credit ($2,797) related to our decision to continue operating the vinyl extrusions business (Fiberlux), and the gain on the sale of Molded Products' beverage closure business ($894). (l) 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. (m) Consolidated capital employed is debt plus shareholders' equity minus cash and cash equivalents. Capital employed excluding technology-related investments (see Note 7 on page 46) and divested and discontinued operations (see (b)) is consolidated capital employed minus the carrying value of technology-related investments (net of related deferred income taxes) minus the capital employed of Molded Products, Brudi and the Energy segment. (n) Equity market capitalization is the closing market price per share for the period times the shares outstanding at the end of the period. (o) EBITDA excluding unusual items (see (d)-(k)), technology-related gains/losses and divested and discontinued operations (see (b)) is income before income taxes from operations plus depreciation and amortization plus interest expense minus interest income minus/plus unusual income/charges minus/plus technology-related investment gains/losses minus the EBITDA (excluding unusual items) for Molded Products and Brudi. EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be considered as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity. (p) Unleveraged after-tax earnings excluding unusual items (see (d)-(k)), technology-related investment gains/losses and divested and discontinued operations (see (b)) is net income (loss) from continuing operations plus after-tax interest expense minus after-tax interest income minus/plus after-tax unusual income/charges minus/plus after-tax technology-related investment gains/losses minus the unleveraged after-tax earnings (excluding unusual items) for Molded Products and Brudi. Unleveraged after-tax earnings should not be considered as an alternative to net income as defined by generally accepted accounting principles. (q) Return on average capital employed is unleveraged after-tax earnings divided by average capital employed. (r) Net sales for ongoing operations include sales to P&G totaling $233,493 in 1998, $242,229 in 1997 and $206,926 in 1996. (s) Included in the investments and other category of the Technology segment are APPX Software (sold in 1998 - see (d)) and technology-related investments in which our ownership is less than 20% (see Note 7 on page 46). (t) Interest income was insignificant prior to 1994. 17 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations 1998 Summary Tredegar's net income, diluted earnings per share and EBITDA for 1998 and 1997 are summarized below: - -----------------------------------------------------------------------------------
(In Millions, Except Per Share Data) Percent 1998 1997 Change - ----------------------------------------------------------------------------------- Net sales $ 699.8 $581.0 20 Net income: Manufacturing and research operations $ 61.4 $ 48.1 28 Technology investments, net .4 8.9 (96) Unusual items 2.4 1.4 71 Discontinued operations 4.7 - - - ----------------------------------------------------------------------------------- Net income $ 68.9 $ 58.4 18 - ----------------------------------------------------------------------------------- Diluted earnings per share: Manufacturing and research operations $ 1.59 $ 1.22 30 Technology investments, net .01 .22 (95) Unusual items .06 .04 50 Discontinued operations .12 - - - ----------------------------------------------------------------------------------- Net income $ 1.78 $ 1.48 20 - ----------------------------------------------------------------------------------- EBITDA (see Note (o) on page 17) $ 116.0 $ 89.4 30 As a % of net sales 16.6% 15.4% Pro forma information (assumes acquisitions occurred at the beginning of 1997 - see Note 2 on page 43) Net sales $ 745.6 $743.2 - Manufacturing and research operations: Net income 61.7 48.6 27 Diluted earnings per share 1.59 1.22 30 EBITDA 118.7 98.9 20 As a % of pro forma net sales 15.9% 13.3% - -----------------------------------------------------------------------------------
Results for both years include technology-related investment activities, unusual items and discontinued operations that affect comparability between periods. Excluding the after-tax effects of these items, net income was up 28% and pro forma EBITDA was up 20% in 1998. The improvement in operating earnings and EBITDA was driven by: - - Continued volume growth and acquisitions in Aluminum Extrusions - - Higher profits in Film Products in most markets except Asia (profits in Asia declined by $3 million) 18 - - Higher pension income and lower costs for certain other employee benefits - - Higher contract research revenues resulting in lower losses at Molecumetics 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%). For more discussion, see the business segment review on pages 26-30. Unusual Items. Unusual income (net) affecting operations 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 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. Unusual income affecting operations in 1997 included a second-quarter gain of $2.3 million ($1.4 million after income taxes) related to the redemption of preferred stock received in connection with the 1996 divestiture of our molded plastics subsidiary. Technology-Related Investment Activities. Net gains realized from technology-related investment activities totaled $615,000 ($394,000 after income taxes) in 1998 and $13.9 million ($8.9 million after income taxes) in 1997. These gains are included in "Other income (expense), net" in the consolidated statements of income on page 35 and "Investments" in the operating profit table on page 13. Beginning April 1, 1998, we began classifying the stand-alone operating expenses for our technology-related investment activities with gains and losses in "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 (SG&A) in the consolidated statements of income, totaled $2.1 million for all of 1998, $1.7 million for the nine months ended December 31, 1998, and $1 million in 1997. More information on our technology-related investments is provided in Note 7 on page 46. 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. 19 1998 versus 1997 Revenues. 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%). For more information, see the business segment review on pages 26-30. Operating Costs and Expenses. The gross profit margin during 1998 decreased to 20.9% 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. On a pro forma basis, including the impact of acquisitions, SG&A expenses were down by $2 million or 5%, due primarily to lower charges for the savings restoration plan and higher pension income. As a percentage of pro forma sales, pro forma SG&A expenses declined to 5.5% in 1998 compared with 5.8% in 1997. 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 last year, with primary focus on breathable and elastomeric film technologies, which were commercialized in 1998. Unusual income of $101,000 in 1998 is explained on page 19 under "Unusual Items". Interest Income and Expense. Interest income, which is included in "Other income (expense), net" in the consolidated statements of 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. 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 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 technology-related 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 16 on page 56 for additional tax rate information. 20 1997 versus 1996 Revenues. Excluding the effects of the Molded Products and Brudi divestitures, net sales increased 18.8% in 1997 due primarily to higher sales in Film Products and Aluminum Extrusions. The increase in Film Products was driven by higher volume of nonwoven film laminates, higher volume for foreign operations and higher selling prices (reflecting higher average plastic resin costs). Higher sales in Aluminum Extrusions reflected strength in residential and commercial windows and curtain walls and higher volume to distributors, as well as the acquisition of the aluminum extrusion and fabrication facility in El Campo, Texas. Contract research revenues at Molecumetics also increased. For more information, see the business segment review on pages 26-30. Operating Costs and Expenses. The gross profit margin increased to 21.2% in 1997 from 20.3% in 1996 due primarily to higher volume and efficiencies in Film Products (particularly nonwoven film laminates) and Aluminum Extrusions, and contract research revenues supporting research and development projects at Molecumetics. SG&A expenses decreased by $2.7 million or 6.8% due primarily to the Molded Products and Brudi divestitures and lower corporate overhead, partially offset by higher SG&A expenses supporting higher sales at Film Products and Aluminum Extrusions (including the acquisition of the El Campo facility). SG&A expenses, as a percentage of sales, declined to 6.4% in 1997 compared with 7.6% in 1996. Research and development expenses increased by $2.1 million or 19% due to higher product development spending at Film Products and higher spending at Molecumetics. Unusual income of $2.3 million in 1997 is explained on page 19 under "Unusual Items". Interest Income and Expense. Interest income increased to $5 million in 1997 from $3 million in 1996 due to the investment of divestiture proceeds for a full year and cash generated from operations. The average tax-equivalent yield earned on cash equivalents was 5.7% in 1997 and 5.5% in 1996. Interest expense decreased slightly due to lower average debt outstanding, partially offset by the second-quarter write-off of deferred financing costs related to the refinancing of our revolving credit facility. The average interest rate on debt was 7.2% in 1997 and 1996 (primarily fixed-rate debt). Income Taxes. The effective tax rate increased to 35.2% from 34.7% due primarily to: - - Slightly lower income on export sales in the tax-advantaged Foreign Sales Corporation relative to significantly higher consolidated pre-tax income - - A higher effective state income tax rate due to an increase in income in states with higher tax rates See Note 16 on page 56 for additional tax rate information. 21 Financial Condition Assets Total assets increased to $457.2 million at December 31, 1998, from $410.9 million at December 31, 1997, due mainly to: - - The aluminum extrusion acquisitions in Canada - - New technology-related investments - - Capital expenditures in excess of depreciation The increase in assets related to these items was partially offset by a decrease in cash and cash equivalents (see discussion below). Liabilities and Available Credit Total liabilities were $146.9 million at December 31, 1998, up from $138.4 million at December 31, 1997, due primarily to acquisitions, partially offset by lower debt outstanding and the reversal of an accrued liability related to discontinued coal operations (see Note 19 on page 59). Debt outstanding consisted of a note payable with a remaining balance at December 31, 1998 of $25 million ($30 million at December 31, 1997). Interest is payable on the note semi-annually at 7.2% per year. Annual principal payments of $5 million are due each June through 2003 (the $5 million due in June 1999 has been classified as long-term in accordance with our ability to refinance such obligation on a long-term basis). We also have a revolving credit facility that permits borrowings of up to $275 million (no amounts borrowed at December 31, 1998 and 1997). The facility matures on July 9, 2002, with an annual extension of one year permitted subject to the approval of participating banks. See Note 10 on page 48 for more information on debt and credit agreements. Shareholders' Equity At December 31, 1998, Tredegar had 36,660,751 shares of common stock outstanding and a total market capitalization of $824.9 million, compared with 37,113,735 shares outstanding and a total market capitalization of $814.9 million at December 31, 1997. 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 36% 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 1998, 1997 and 1996, are summarized below: - ---------------------------------------------------------------------------------------------
(In Millions) 1998 1997 1996 - --------------------------------------------------------------------------------------------- Cash and cash equivalents, beginning of year $ 120.1 $101.3 $ 2.1 - --------------------------------------------------------------------------------------------- Cash provided by continuing operating activities in excess of capital expenditures and dividends 33.2 39.5 18.1 Cash used by discontinued operations (1.9) - - Proceeds from the exercise of stock options (including related income tax benefits realized by Tredegar) 6.2 4.8 2.1 Acquisitions (all related to Aluminum Extrusions - see Note 2 on page 43) (60.9) (13.5) - Repurchases of Tredegar common stock (36.8) (2.5) (2.0) New technology-related investments, net of proceeds from disposals (see Note 7 on page 46) (29.9) (5.7) (.5) Repayments of debt (5.0) (5.0) - Proceeds from property disposals and divestitures .7 2.6 81.5 Other, net (.3) (1.4) - - --------------------------------------------------------------------------------------------- Net (decrease) increase in cash and cash equivalents (94.7) 18.8 99.2 - --------------------------------------------------------------------------------------------- Cash and cash equivalents, end of year $ 25.4 $120.1 $101.3 - ---------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities in excess of capital expenditures and dividends was $33.2 million in 1998, down from $39.5 million in 1997 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. Higher capital expenditures in 1998 are related to: - - A new facility near Budapest, Hungary, which will produce disposable films for hygiene products marketed in Eastern Europe (this facility should be operational in mid-1999) - - Machinery and equipment purchased for the manufacture of breathable and elastomeric films (these films are replacing conventional diaper backsheet and other diaper components in order to improve comfort and fit) - - Expansion of diaper backsheet film capacity in Brazil - - The second phase of a modernization program at the aluminum extrusion plant in Newnan, Georgia (the first phase was completed in 1996) - - Expansion of Molecumetics' research lab in Bellevue, Washington. 23 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 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 technology-related net investment gains - - Higher capital expenditures in Film Products reflecting normal replace- ment of machinery and equipment and permeable film additions, including expansion into China and Eastern Europe. Net cash provided by continuing operating activities in excess of capital expenditures and dividends was $18.1 million in 1996, down from $22.2 million in 1995 due primarily to: - - Higher working capital for ongoing operations to support higher sales volume - - Income taxes paid on net gains realized from divestitures, property disposals and the sale of a technology-related investment Normal operating cash requirements over the next three to five years are expected to be met from ongoing operations. Excess cash will be invested on a short-term basis, with the primary objectives of safety of principal and liquidity, until other opportunities are identified. Quantitative and Qualitative Disclosures about Market Risk Tredegar has exposure to the volatility of polyethylene resin prices, aluminum ingot and scrap prices, foreign currencies, emerging markets and technology stocks. At December 31, 1998, and during the last several years, we have been in a net cash position (cash and cash equivalents in excess of debt), and therefore our earnings have not been materially affected by interest rate volatility. See Note 10 on page 48 for information on debt and credit agreements. 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 45 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 1998 and 1997 are presented below: - ------------------------------------------------------------------------------------------------- Tredegar Industries, Inc. Percentage of Net Sales, Pretax Income and Total Assets Related to Foreign Markets - ---------------------------------------------------------------------------------------------------------- 1998 1997 ----------------------------------------------------------------------------------------
% of Total % of Total % Total % of Total % of Total % Total Net Sales Pretax Income* Assets - Net Sales Pretax Income* Assets - Exports Foreign Exports Foreign Foreign Exports Foreign Exports Foreign 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 15 6 7 20 4 - 7 - - Europe 1 4 1 10 3 1 5 1 11 2 Latin America 3 4 4 5 4 3 4 5 6 4 Asia 4 - 6 (1) 1 7 - 11 (1) 1 - ---------------------------------------------------------------------------------------------------------- Total % exposure to foreign markets 11 23 17 21 28 15 9 24 16 7 - ----------------------------------------------------------------------------------------------------------
* The percentages of pretax income for foreign markets are relative to Tredegar's total pretax income from manufacturing and research operations (consolidated pretax income from continuing operations excluding technology-related 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 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 or the German mark and 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 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. 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. Investments in non-public companies are illiquid and the investments in public companies are subject to the volatility of equity markets and technology stocks. See Note 7 on page 46 for more information. Year 2000 Information Technology Issues The century date compliance problem, which is commonly referred to as the "Year 2000" problem, will affect many computers and other electronic devices that are not programmed to properly recognize dates starting with January 1, 2000. This could result in system failures or miscalculations. The potential impact of such failures include, among others, an inability to secure raw materials, manufacture products, ship products and be paid for products on a timely basis. Since 1996, we have been actively planning and responding to the Year 2000 problem. Year 2000 reviews have been and will continue to be made to our Executive Committee and senior management. Periodic reviews with the Board of Directors began in August 1998. 25 Our Year 2000 compliance efforts are focused on internal computer-based information systems, external electronic interfaces and communication equipment, shop floor machines and other manufacturing and research process control devices. Remediation of systems requiring changes was completed at the end of 1998, except for revisions to a small portion of certain software programs and the replacement of certain software for the four aluminum extrusion plants recently acquired in Canada (see Note 2 on page 43). Remediation efforts for the exceptions will extend into 1999. Testing of systems began in mid-1998 and will continue through 1999. We do not believe contingency plans are necessary for internal systems at this time. We are also actively evaluating the Year 2000 capabilities of parties with whom we have key business relationships (suppliers, customers and banks, for example). Contingency plans will be developed for these relationships as needed. Work to fix the Year 2000 problem is being performed largely by internal personnel and we do not track those costs. The incremental costs associated with correcting the problem are not expected to have a material adverse effect on our operating results, financial condition or cash flows. While we believe that we are taking the necessary steps to resolve our Year 2000 issues in a timely manner, there can be no assurance that there will be no Year 2000 problems. If any such problems occur, we will work to solve them as quickly as possible. At present, we do not expect that any such problems will have a material adverse effect on our businesses. The failure, however, of a major customer or supplier to be Year 2000-compliant could have a material adverse effect on our businesses. New Accounting Standards The Financial Accounting Standards Board has issued a new standard affecting the accounting for derivative instruments and hedging activities. This standard is not expected to significantly change our operating results, financial condition or disclosures. The new standard will be adopted in the first quarter of 2000. Business Segment Review Film Products Sales. Film Products sales decreased by 4% to $287 million 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 applications) - - Higher volume of permeable film supplied to P&G in Europe - - Higher sales to new customers 26 Film Products sales were almost $300 million in 1997, up from $257 million in 1996 due to: - - Higher volume of nonwoven film laminates supplied to P&G for diapers - - Higher volume of permeable film supplied to P&G in Europe - - Higher diaper backsheet and packaging film volume in South America - - Higher selling prices, which reflected higher average plastic resin costs Operating Profit. 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 Film Products operating profit was $50.5 million in 1997, up from $43.2 million in 1996 due mainly to improved production efficiencies for nonwoven film laminates and higher volume in the areas noted in the sales discussion above. These positive factors were partially offset by higher new product development expenses and start-up costs for the new permeable film production site in China. Identifiable Assets. 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. Identifiable assets in Film Products were $123.6 million in 1997, up from $116.5 million in 1996 due mainly to higher accounts receivable supporting higher sales, capital expenditures in excess of depreciation and an increase in prepaid pension expense. Depreciation, Amortization and Capital Expenditures. Depreciation and amortization for Film Products was $12 million in 1998, up from $10.9 million in 1997 due to higher capital expenditures. Depreciation and amortization for Film Products decreased slightly in 1997. Capital expenditures in Film Products for 1998 reflect the normal replacement of machinery and equipment and: - - A new facility near Budapest, Hungary, which will produce disposable films for hygiene products marketed in Eastern Europe (this facility should be operational in mid-1999) - - 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) - - Expansion of diaper backsheet film capacity in Brazil Capital expenditures in Film Products for 1997 reflect the normal replacement of machinery and equipment and permeable film additions, including the expansion into China and machinery and equipment purchased for the Hungary facility. 27 Fiberlux Fiberlux operating results improved during 1998, but are currently not material to the consolidated results of operations. Aluminum Extrusions Acquisitions and Related Pro Forma Results. On June 11, 1998, Tredegar acquired Canadian-based Exal Aluminum Inc. ("Exal"). Exal operates two aluminum extrusion plants in Pickering, Ontario and Aurora, Ontario. Both facilities manufacture extrusions for distribution, transportation, electrical, machinery and equipment, and building and construction markets. The Pickering facility also produces aluminum logs and billet for internal use and for sale to customers. On February 6, 1998, we acquired two Canadian-based aluminum extrusion and fabrication plants from Reynolds Metals Company ("Reynolds"). The plants are located in Ste-Therese, Quebec, and Richmond Hill, Ontario. Both facilities manufacture products used primarily in building and construction, transportation, electrical, machinery and equipment, and consumer durables markets. On May 30, 1997, we acquired an aluminum extrusion and fabrication plant in El Campo, Texas, from Reynolds. The El Campo facility extrudes and fabricates products used primarily in transportation, electrical and consumer durables markets. The operating results for the five plants have been included in the consolidated statements of income since the dates acquired. Pro forma financial information with respect to these acquisitions for the first six months of 1998 and all of 1997 was filed on Form 8-K on August 19, 1998. The cost of these acquisitions and selected pro forma and historical results on a consolidated basis for Tredegar are provided in Note 2 on page 43. Selected historical and pro forma results for Aluminum Extrusions for 1998 and 1997, which assume the acquisitions occurred at the beginning of 1997, are summarized below: - ----------------------------------------------------------------------------------- Aluminum Extrusions Selected Historical and Pro Forma Financial Information - -----------------------------------------------------------------------------------
(In Millions) Historical Pro Forma ---------------------- --------------------- 1998 1997 1998 1997 - ----------------------------------------------------------------------------------- Net sales $ 395.5 $ 266.6 $ 441.3 $ 428.8 Operating profit (excluding unusual items) 47.1 32.1 48.6 36.9 Identifiable assets 201.5 101.9 201.5 198.9 Depreciation 8.2 5.5 9.3 9.8 Amortization of intangibles .2 - .3 .3 Capital expenditures 10.4 6.4 10.8 7.3 - -----------------------------------------------------------------------------------
Sales. Pro forma sales in Aluminum Extrusions increased by 3% in 1998 due to strength in all building and construction markets and higher sales to distributors. 28 Aluminum Extrusions sales in 1997 increased 21.7% due primarily to higher volume, reflecting continued strength in residential and commercial windows and curtain walls and higher volume to distributors. The acquisition of the El Campo facility also had a positive impact on volume. Excluding the acquisition, sales were up 10% and volume was up 12% for the year. Operating Profit. Pro forma operating profit increased by 32% in 1998 due to higher volume, related lower unit conversion costs and improved performance by recently acquired operations. 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. Aluminum Extrusions operating profit increased 37.2% in 1997 due to higher volume, related lower unit conversion costs and the acquisition of the El Campo facility, partially offset by expenses associated with repairs to the casting furnaces at the Newnan plant. Conversion costs also improved due to a modernization program completed late in 1996 at the Newnan facility. This capital project cost $4.8 million, most of which was spent in 1996. Improvements in productivity, scrap rates and sales returns are currently being realized as a result of this project. Identifiable Assets. Identifiable assets in Aluminum Extrusions were $201.5 million in 1998, up from pro forma assets of $198.9 million in 1997, due primarily to capital expenditures in excess of depreciation and amortization. Identifiable assets in Aluminum Extrusions were $101.9 million in 1997, up from $83.8 million in 1996 due primarily to the acquisition of the El Campo facility, higher accounts receivable supporting higher sales and capital expenditures in excess of depreciation. Depreciation, Amortization and Capital Expenditures. Pro forma depreciation and amortization for Aluminum Extrusions was $9.6 million in 1998, down from $10.1 million in 1997 due to the full depreciation of certain assets in 1997. Depreciation and amortization for Aluminum Extrusions increased in 1997 due to the acquisition of the El Campo facility and the modernization program completed in late 1996 at the Newnan plant, partially offset by the full depreciation of certain assets in 1996. Capital expenditures in 1998 reflect the normal replacement of machinery and equipment, and expenditures for the second phase of a modernization program at the aluminum extrusion plant in Newnan, Georgia (the first phase was completed in 1996). Like the first phase, improvements in productivity, scrap rates and sales returns are anticipated. Total capital outlays for this project are expected to be $10 million, of which $1.3 million was spent in 1998. Capital expenditures in 1997 reflect the normal replacement of machinery and equipment and costs capitalized for rebuilding the casting furnaces at the Newnan plant. 29 Technology Excluding net investment gains (see below), technology segment losses decreased by $823,000 in 1998 and by $1.9 million in 1997 due to revenues generated at Molecumetics from drug development partnerships, partially offset by higher research and development spending. Changes in Technology segment identifiable assets over the last three years are summarized below: - --------------------------------------------------------------------------------------
(In Millions) 1998 1997 1996 - -------------------------------------------------------------------------------------- Technology segment identifiable assets, beginning of year $ 37.2 $ 10.7 $ 7.5 - -------------------------------------------------------------------------------------- Molecumetics: Capital expenditures, primarily expansion of its research lab in Bellevue, Washington 3.6 .4 1.6 Depreciation (1.3) (1.1) (.9) Tredegar Investments (see Note 7 on page 46): New investments 35.4 20.8 3.1 Proceeds from the sale of investments (5.5) (15.1) (2.6) Realized gains 4.6 14.3 2.1 Realized losses, write-offs and write-downs (2.3) (.4) - (Decrease) increase in unrealized gain on available-for-sale securities (5.7) 7.8 - Other .3 (.2) (.1) - -------------------------------------------------------------------------------------- Net increase in Technology segment identifiable assets 29.1 26.5 3.2 - -------------------------------------------------------------------------------------- Technology segment identifiable assets, end of year $ 66.3 $ 37.2 $ 10.7 - --------------------------------------------------------------------------------------
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See the index on page 33 for references to the report of independent accountants, management's report on the financial statements, the consolidated financial statements and selected quarterly financial data. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 30 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 44 President and Chief Executive Officer Douglas R. Monk 53 Executive Vice President and Chief Operating Officer Norman A. Scher 61 Executive Vice President and Chief Financial Officer Anthony J. Rinaldi 60 Senior Vice President and President, Film Products D. Andrew Edwards 39 Vice President, Treasurer and Controller Michael W. Giancaspro 43 Vice President, Corporate Development Nancy M. Taylor 38 Vice President, General Counsel and Secretary Frederick P. Woods 54 Vice President, Personnel 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. Anthony J. Rinaldi. Mr. Rinaldi was elected Senior Vice President on November 18, 1998. Mr. Rinaldi continues to serve as President of Film Products, a position he has held since April 23, 1993. Mr. Rinaldi has served as a Vice President since February 27, 1992. Mr. Rinaldi also served as General Manager of Tredegar Film Products and as Managing Director of European operations. Mr. Rinaldi served as Director of Sales and Marketing for Tredegar Film Products from July 10, 1989 to June, 1991. 31 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. 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. Frederick P. Woods. Mr. Woods served as Vice President, Employee Relations from July 10, 1989 until December, 1993, when his position was changed to Vice President, Personnel. 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. 32 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 Industries, Inc. Index to Financial Statements and Supplementary Data Page ------------------------------------------------------------------- ----------- Report of Independent Accountants 34 ------------------------------------------------------------------- ----------- Management's Report on the Financial Statements 34 ------------------------------------------------------------------- ----------- Financial Statements (Audited): - -------------------------------------------------------------------- ----------- Consolidated Statements of Income for the Years Ended 35 December 31, 1998, 1997 and 1996 ------------------------------------------------------------------- ----------- Consolidated Balance Sheets as of December 31, 36 1998 and 1997 ------------------------------------------------------------------- ----------- Consolidated Statements of Cash Flows for the Years Ended 37 December 31, 1998, 1997 and 1996 ------------------------------------------------------------------- ----------- Consolidated Statement of Shareholder's Equity for the Years 38 Ended December 31, 1998, 1997 and 1996 ------------------------------------------------------------------- ----------- Notes to Financial Statements 39-59 ------------------------------------------------------------------- ----------- Selected Quarterly Financial Data (Unaudited) 60 ------------------------------------------------------------------- ----------- (2) Financial statement schedules: None (3) Exhibits: See Exhibit Index on page 63. (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, 1998. 33 INDEPENDENT ACCOUNTANTS' AND MANAGEMENT'S REPORTS - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- To the Board of Directors and Shareholders of Tredegar Industries, Inc.: 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 Industries, Inc., and Subsidiaries ("Tredegar") at December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. PricewaterhouseCoopers LLP Richmond, Virginia January 12, 1999 MANAGEMENT'S REPORT ON THE FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Tredegar's management has prepared the financial statements and related notes appearing on pages 35-59 in conformity with generally accepted accounting principles. In so doing, management makes informed judgments and estimates of the expected effects of events and transactions. Financial data appearing elsewhere in this report are consistent with these financial statements. Tredegar maintains a system of internal controls to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written policies and procedures, careful selection and training of qualified personnel and an extensive internal audit program. These financial statements have been audited by PricewaterhouseCoopers LLP, independent certified public accountants. Their audit was made in accordance with generally accepted auditing standards and included a review of Tredegar's internal accounting controls to the extent considered necessary to determine audit procedures. The Audit Committee of the Board of Directors, composed of outside directors only, meets with management, internal auditors and the independent accountants to review accounting, auditing and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Committee, subject to shareholder approval. 34 CONSOLIDATED STATEMENTS OF INCOME - --------------------------------------------------------------------------- Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996 - --------------------------------------------------------------------------- (In thousands, except per-share amounts) Revenues: Net sales $ 699,796 $ 581,004 $523,551 Other income (expense), net 4,015 17,015 4,248 - --------------------------------------------------------------------------- Total 703,811 598,019 527,799 - --------------------------------------------------------------------------- Costs and expenses: Cost of goods sold 553,389 457,946 417,270 Selling, general and administrative 39,493 37,035 39,719 Research and development 14,502 13,170 11,066 Interest 1,318 1,952 2,176 Unusual items (101) (2,250) (11,427) - --------------------------------------------------------------------------- Total 608,601 507,853 458,804 - --------------------------------------------------------------------------- Income from continuing operations before income taxes 95,210 90,166 68,995 Income taxes 31,054 31,720 23,960 - --------------------------------------------------------------------------- Income from continuing operations 64,156 58,446 45,035 Income from discontinued operations 4,713 0 0 - --------------------------------------------------------------------------- Net income $ 68,869 $ 58,446 $ 45,035 - --------------------------------------------------------------------------- Earnings per share: Basic: Continuing operations $ 1.77 $ 1.59 $ 1.23 Discontinued operations .13 - - - --------------------------------------------------------------------------- Net income $ 1.90 $ 1.59 $ 1.23 - --------------------------------------------------------------------------- Diluted: Continuing operations $ 1.66 $ 1.48 $ 1.15 Discontinued operations .12 - - - --------------------------------------------------------------------------- Net income $ 1.78 $ 1.48 $ 1.15 - ---------------------------------------------------------------------------
See accompanying notes to financial statements. 35 CONSOLIDATED BALANCE SHEETS - ----------------------------------------------------------------------------- Tredegar Industries, Inc., and Subsidiaries
December 31 1998 1997 - ----------------------------------------------------------------------------- (In thousands, except share amounts) Assets Current assets: Cash and cash equivalents $ 25,409 $ 120,065 Accounts and notes receivable 94,341 69,672 Inventories 34,276 20,008 Income taxes recoverable - 294 Deferred income taxes 8,762 8,722 Prepaid expenses and other 3,536 4,369 - ----------------------------------------------------------------------------- Total current assets 166,324 223,130 - ----------------------------------------------------------------------------- Property, plant and equipment, at cost: Land and land improvements 9,162 5,001 Buildings 51,633 35,366 Machinery and equipment 295,616 243,628 - ----------------------------------------------------------------------------- Total property, plant and equipment 356,411 283,995 Less accumulated depreciation 200,380 183,397 - ----------------------------------------------------------------------------- Net property, plant and equipment 156,031 100,598 Other assets and deferred charges 101,910 67,134 Goodwill and other intangibles 32,913 20,075 - ----------------------------------------------------------------------------- Total assets $457,178 $ 410,937 - ----------------------------------------------------------------------------- Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 47,551 $ 33,168 Accrued expenses 41,071 39,618 Income taxes payable 243 - - ----------------------------------------------------------------------------- Total current liabilities 88,865 72,786 Long-term debt 25,000 30,000 Deferred income taxes 24,914 22,108 Other noncurrent liabilities 8,104 13,497 - ----------------------------------------------------------------------------- Total liabilities 146,883 138,391 - ----------------------------------------------------------------------------- Commitments and contingencies (Notes 7, 13 and 18) Shareholders' equity: Common stock (no par value): Authorized 150,000,000 shares; Issued and outstanding - 36,660,751 shares in 1998 and 37,113,735 in 1997 95,893 115,291 Common stock held in trust for savings restoration plan (53,871 shares in 1998 and 46,671 in 1997) (1,212) (1,020) Accumulated other comprehensive income (loss): Unrealized gain on available-for-sale securities 1,376 5,020 Foreign currency translation adjustment (2,519) (37) Retained earnings 216,757 153,292 - ----------------------------------------------------------------------------- Total shareholders' equity 310,295 272,546 - ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $457,178 $ 410,937 - -----------------------------------------------------------------------------
See accompanying notes to financial statements. 36 CONSOLIDATED STATEMENTS OF CASH FLOWS - --------------------------------------------------------------------------------------------------- Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996 - --------------------------------------------------------------------------------------------------- (In thousands) Cash flows from operating activities: Net income from continuing operations $64,156 $58,446 $45,035 Adjustments for noncash items: Depreciation 22,260 18,364 20,062 Amortization of intangibles 205 50 256 Write-off of intangibles - 7 - Deferred income taxes 431 3,341 1,771 Accrued pension income and postretirement benefits (3,931) (2,975) (2,582) Gains on technology-related investments, net (2,267) (13,880) (2,139) Gains on divestitures, net (101) (2,250) (11,427) Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts and notes receivable (4,271) (1,937) (4,894) Inventories (4,035) 994 1,257 Income taxes recoverable and other prepaid expenses 1,263 280 (763) Accounts payable and accrued expenses 665 8,010 (471) Other, net (1,691) (2,130) (840) - --------------------------------------------------------------------------------------------------- Net cash provided by continuing operating activities 72,684 66,320 45,265 Net cash used by discontinued operating activities (1,910) - - - -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 70,774 66,320 45,265 - --------------------------------------------------------------------------------------------------- Cash flows from investing activities: Capital expenditures (34,070) (22,655) (23,960) Acquisitions (net of cash acquired of $1,097 in 1998; excludes equity issued of $11,219 in 1998) (60,883) (13,469) - Technology-related investments (35,399) (20,801) (3,138) Proceeds from the sale of technology-related investments 5,462 15,060 2,639 Proceeds from property disposals and divestitures 747 2,637 81,478 Other, net (74) (359) (74) - --------------------------------------------------------------------------------------------------- Net cash (used) provided by investing activities (124,217) (39,587) 56,945 - --------------------------------------------------------------------------------------------------- Cash flows from financing activities: Dividends paid (5,404) (4,181) (3,176) Repayments of debt (5,000) (5,000) - Repurchases of Tredegar common stock (36,774) (2,531) (2,034) Tredegar common stock purchased by trust for savings restoration plan (192) (1,020) - Proceeds from exercise of stock options (including related income tax benefits realized) 6,157 4,803 2,145 Other, net - - (29) - --------------------------------------------------------------------------------------------------- Net cash used in financing activities (41,213) (7,929) (3,094) - --------------------------------------------------------------------------------------------------- (Decrease) increase in cash and cash equivalents (94,656) 18,804 99,116 Cash and cash equivalents at beginning of period 120,065 101,261 2,145 - --------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of period $25,409 $120,065 $101,261 - --------------------------------------------------------------------------------------------------- Supplemental cash flow information: Interest payments (net of amount capitalized) $ 1,333 $ 1,968 $ 2,178 Income tax payments, net $34,464 $24,485 $19,399 - ---------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 37 CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Tredegar Industries, Inc., and Subsidiaries
Accumulated Other Comprehensive Income (Loss) ----------------------- Unrealized Trust for Gain on Total Savings Available- Foreign Share- Common Stock Retained Restora- for-Sale Currency holders' Shares Amount Earnings tion Plan Securities Translation Equity - ------------------------------------------------------------------------------------------------------------------------------------ (In thousands, except share and per-share data) Balance December 31, 1995 36,528,885 $ 112,908 $ 57,168 $ - $ - $ 445 $ 170,521 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 45,035 - - - 45,035 Other comprehensive income: Foreign currency translation adjustment (net of tax provision of $29) - - - - - 54 54 -------- Comprehensive income 45,089 Cash dividends declared ($.087 per share) - - (3,176) - - - (3,176) Repurchases of Tredegar common stock (206,841) (2,034) - - - - (2,034) Issued upon exercise of stock options (including related income tax benefits realized by Tredegar of $800) 392,115 2,145 - - - - 2,145 - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1996 36,714,159 113,019 99,027 - - 499 212,545 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 58,446 - - - 58,446 Other comprehensive income (loss): Available-for-sale securities adjustment, net of reclassification adjustment (net of tax provision of $2,824) - - - - 5,020 - 5,020 Foreign currency translation adjustment (net of tax benefit of $289) - - - - - (536) (536) -------- Comprehensive income 62,930 Cash dividends declared ($.113 per share) - - (4,181) - - - (4,181) Repurchases of Tredegar common stock (166,989) (2,531) - - - - (2,531) Issued upon exercise of stock options (including related income tax benefits realized by Tredegar of $2,042) 566,565 4,803 - - - - 4,803 Tredegar common stock purchased by trust for savings restoration plan - - - (1,020) - - (1,020) - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1997 37,113,735 115,291 153,292 (1,020) 5,020 (37) 272,546 - ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income: Net income - - 68,869 - - - 68,869 Other comprehensive loss: Available-for-sale securities adjustment, net of reclassification adjustment (net of tax benefit of $2,049) - - - - (3,644) - (3,644) Foreign currency translation adjustment (net of tax benefit of $1,336) - - - - - (2,482) (2,482) -------- Comprehensive income 62,743 Cash dividends declared ($.15 per share) - - (5,404) - - - (5,404) Shares issued for acquisition 380,172 11,219 - - - - 11,219 Repurchases of Tredegar common stock (1,667,054) (36,774) - - - - (36,774) Issued upon exercise of stock options (including related income tax benefits realized by Tredegar of $2,470) 833,898 6,157 - - - - 6,157 Tredegar common stock purchased by trust for savings restoration plan - - - (192) - - (192) - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1998 36,660,751 $ 95,893 $216,757 $ (1,212) $ 1,376 $ (2,519) $ 310,295 - ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to financial statements. 38 NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Tredegar Industries, Inc., and Subsidiaries (In thousands, except share and per-share amounts) 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - -------------------------------------------------------------------------------- Organization and Nature of Operations. Tredegar Industries, Inc. and subsidiaries ("Tredegar") is engaged in the manufacture of plastic films, vinyl extrusions and aluminum extrusions. We also have interests in a variety of technology-based businesses. For more information on our products, principal markets and customers, see the "Description of Business" on pages 1-4 and the segment tables on pages 12-17. During 1996-1998, we made several acquisitions (see Note 2) and completed several divestitures (see Note 19). Basis of Presentation. The consolidated financial statements include the accounts and operations of Tredegar and all of its subsidiaries. Intercompany accounts and transactions within Tredegar have been eliminated. Certain previously reported amounts have been reclassified to conform to the 1998 presentation. 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. All historical references to shares, per-share amounts, stock option data and market prices of our common stock have been restated to reflect the split. The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates. The Financial Accounting Standards Board has issued a new standard affecting the accounting for derivative instruments and hedging activities. This standard is not expected to significantly change our operating results, financial condition or disclosures. The new standard will be adopted in the first quarter of 2000. Revenue Recognition. Revenue from the sale of products is recognized when title and risk of loss have transferred to the buyer, which is generally when product is shipped. Contract research programs at Molecumetics are accounted for under the percentage-of-completion method based on costs incurred relative to total estimated costs. Full provision is made for anticipated losses. Cash and Cash Equivalents. Cash and cash equivalents consist of cash on hand in excess of daily operating requirements and highly liquid investments with maturities of three months or less when purchased. At December 31, 1998 and 1997, Tredegar had approximately $25,000 and $120,000, respectively, invested in securities with maturities of two months or less. 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 the policy are safety of principal and liquidity. 39 Inventories. Inventories are stated at the lower of cost or market, with cost principally determined on the last-in, first-out ("LIFO") basis. Other inventories are stated on either the weighted average cost or the first-in, first-out basis. Cost elements included in work-in-process and finished goods inventories are raw materials, direct labor and manufacturing overhead. Aluminum Forward Sales, Purchase and Futures Contracts. In the normal course of business, we enter into a combination of forward purchase commitments and futures contracts to acquire aluminum. Gains and losses on these contracts are designated and effective as hedges of aluminum price and margin exposure on forward sales contracts and, accordingly, are recorded as adjustments to the cost of inventory (see Note 6). Property, Plant and Equipment. Accounts include costs of assets constructed or purchased, related delivery and installation costs and interest incurred on significant capital projects during their construction periods. Expenditures for renewals and betterments also are capitalized, but expenditures for repairs and maintenance are expensed as incurred. The cost and accumulated depreciation applicable to assets retired or sold are removed from the respective accounts, and gains or losses thereon are included in income. Property, plant and equipment includes capitalized interest of $915 in 1998, $751 in 1997 and $730 in 1996. Depreciation is computed primarily by the straight-line method based on the estimated useful lives of the assets. Investments. See Note 7. Goodwill and Other Intangibles. Goodwill acquired prior to November 1, 1970 ($19,484 at December 31, 1998 and 1997), is not being amortized and relates to our aluminum extrusion business. Goodwill subject to amortization was $12,899 at December 31, 1998, and arose from the acquisition of Exal Aluminum Inc. in 1998 (see Note 2). This goodwill is being amortized over 40 years. There was no goodwill subject to amortization at December 31, 1997. Other intangibles ($530 at December 31, 1998 and $591 at December 31, 1997, net of accumulated amortization) consist primarily of patent rights and licenses acquired which are being amortized on a straight-line basis over a period of not more than 17 years. Impairment of Long-Lived Assets. We review long-lived tangible and intangible assets for possible impairment on a quarterly basis. For assets to be held and used in operations, if events indicate that an asset may be impaired, we estimate the future unlevered cash flows expected to result from the use of the asset and its eventual disposition. Assets are grouped for this purpose at the lowest level for which there are identifiable and independent cash flows. If the sum of these undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recognized. Measurement of the impairment loss is based on the estimated fair value of the asset. Assets to be disposed of are reported at the lower of their carrying amount or estimated fair value less cost to sell, with an impairment loss recognized for any write-downs required. 40 Pension Costs and Postretirement Benefit Costs Other Than Pensions. Pension costs and postretirement benefit costs other than pensions are accrued over the period employees provide service to the company. Our policy is to fund our pension plans at amounts not less than the minimum requirements of the Employee Retirement Income Security Act of 1974 and to fund postretirement benefits other than pensions when claims are incurred. Postemployment Benefits. We periodically provide certain postemployment benefits purely on a discretionary basis. Related costs for these programs are accrued when it is probable that benefits will be paid. All other postemployment benefits are either accrued under current benefit plans or are not material to our financial position or results of operations. Income Taxes. Income taxes are recognized during the period in which transactions enter into the determination of income for financial reporting purposes, with deferred income taxes being provided at enacted statutory tax rates on the differences between the financial reporting and tax bases of assets and liabilities (see Note 16). We accrue U.S. federal income taxes on undistributed earnings of our foreign subsidiaries. Foreign Currency Translation. The financial statements of foreign subsidiaries, where the local currency is the functional currency, are translated into U.S. dollars using exchange rates in effect at the period end for assets and liabilities and average exchange rates during each reporting period for results of operations. Adjustments resulting from the translation of these financial statements are reflected as a separate component of shareholders' equity. The financial statements of foreign subsidiaries where the U.S. dollar is the functional currency, and which have certain transactions in a local currency, are remeasured as if the functional currency were the U.S. dollar. The remeasurement of local currencies into U.S. dollars creates translation adjustments which are included in income. Transaction and remeasurement exchange gains or losses included in income were not material in 1998, 1997 and 1996. Earnings Per Share. Basic earnings per share is computed using the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed using the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Weighted average shares outstanding used to compute basic earnings per share 36,286,476 36,862,917 36,622,848 Incremental shares issuable upon the assumed exercise of stock options 2,383,147 2,672,469 2,692,221 - ----------------------------------------------------------------------------------- Shares used to compute diluted earnings per share 38,669,623 39,535,386 39,315,069 - -----------------------------------------------------------------------------------
Incremental shares issuable upon the assumed exercise of outstanding stock options are computed using the average market price during the related period. 41 Stock Options. Stock options, stock appreciation rights ("SARs") and restricted stock grants are accounted for under APB Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations whereby: - - No compensation cost is recognized for fixed stock option or restricted stock grants unless the quoted market price of the stock at the measurement date (ordinarily the date of grant or award) is in excess of the amount the employee is required to pay - - Compensation cost for SARs is recognized and adjusted up through the date of exercise or forfeiture based on the estimated number of SARs expected to be exercised multiplied by the difference between the market price of our stock and the amount the employee is required to pay The company provides additional pro forma disclosures of the fair value based method (see Note 12). Comprehensive Income. Comprehensive income, which is included in the consolidated statement of shareholders' equity, is defined as net income and other comprehensive income. Other comprehensive income includes changes in unrealized gains and losses on available-for-sale securities and foreign currency translation adjustments recorded net of deferred income taxes directly in shareholders' equity. The available-for-sale securities adjustment included in the consolidated statement of shareholders' equity is comprised of the following components:
- ----------------------------------------------------------------------------------- 1998 1997 1996 - ----------------------------------------------------------------------------------- Available-for-sale securities adjustment: Unrealized holding gains arising during the period $ (3,426) $ 21,724 $ 2,139 Income taxes 1,233 (7,822) (770) Reclassification adjustment for net gains realized in income (2,267) (13,880) (2,139) Income taxes 816 4,998 770 - ----------------------------------------------------------------------------------- Available-for-sale securities adjustment $ (3,644) $ 5,020 $ - - -----------------------------------------------------------------------------------
42 2 ACQUISITIONS - -------------------------------------------------------------------------------- On June 11, 1998, Tredegar acquired Canadian-based Exal Aluminum Inc. ("Exal") for $44,106 (including transaction costs), which was comprised of: - - Cash consideration of $32,887 ($31,790 net of cash acquired) - - 380,172 shares of Class I non-voting preferred shares of Tredegar's Bon L Canada subsidiary (the "Class I Shares") The Class I Shares are exchangeable into shares of Tredegar common stock on a one-for-one basis. Each Class I Share is economically equivalent to one share of Tredegar common stock and accordingly accounted for in the same manner. Exal operates aluminum extrusion plants in Pickering, Ontario and Aurora, Ontario. Both facilities manufacture extrusions for distribution, transportation, electrical, machinery and equipment, and building and construction markets. The Pickering facility also produces aluminum logs and billet for internal use and for sale to customers. On February 6, 1998, we acquired two Canadian-based aluminum extrusion and fabrication plants from Reynolds Metals Company ("Reynolds") for cash consideration of $29,093 (including transaction costs). The plants are located in Ste-Therese, Quebec, and Richmond Hill, Ontario. Both facilities manufacture products used primarily in building and construction, transportation, electrical, machinery and equipment, and consumer durables markets. On May 30, 1997, we acquired an aluminum extrusion and fabrication plant in El Campo, Texas, from Reynolds for cash consideration of $13,469 (including transaction costs). The El Campo facility extrudes and fabricates products used primarily in transportation, electrical and consumer durables markets. These acquisitions were accounted for using the purchase method. No goodwill arose from the acquisitions of the former Reynolds plants since the estimated fair value of the identifiable net assets acquired equaled the purchase price. Goodwill (the excess of the purchase price over the estimated fair value of identifiable net assets acquired) of $13,074 was recorded on the acquisition of Exal and is being amortized on a straight-line basis over 40 years. The operating results for the five plants have been included in the consolidated statements of income since the dates acquired. 43 Pro forma financial information with respect to these acquisitions for the first six months of 1998 and all of 1997 was filed on Form 8-K on August 19, 1998. Selected pro forma and historical results for our aluminum extrusion business are provided in on page 28. Selected historical and pro forma results for Tredegar for 1998 and 1997, which assume the acquisitions occurred at the beginning of 1997, are summarized below: - --------------------------------------------------------------------------------------------------------------- Tredegar Industries, Inc. Selected Historical and Pro Forma Financial Information - ---------------------------------------------------------------------------------------------------------------
Historical Pro Forma (Unaudited) ------------------------- ------------------------- 1998 1997 1998 1997 - --------------------------------------------------------------------------------------------------------------- Net sales $699,796 $581,004 $745,595 $743,226 EBITDA (unaudited) (see Note (o) on page 17) 115,977 89,443 118,738 98,881 Depreciation 22,260 18,364 23,347 22,635 Amortization of intangibles 205 50 349 377 Capital expenditures 34,070 22,655 34,423 23,559 Income from continuing operations (see Note (a) on page 16): As reported 64,156 58,446 64,446 58,935 As adjusted for unusual items 61,815 57,006 62,105 57,495 As adjusted for unusual items and technology-related investment activities 61,421 48,124 61,711 48,613 Diluted earnings per share from continuing operations (see Note (a) on page 16): As reported 1.66 1.48 1.66 1.48 As adjusted for unusual items 1.60 1.44 1.60 1.44 As adjusted for unusual items and technology-related investment activities 1.59 1.22 1.59 1.22 - ---------------------------------------------------------------------------------------------------------------
3 BUSINESS SEGMENTS - -------------------------------------------------------------------------------- See pages 12-15 and the related Notes to Financial Tables on pages 16-17 for net sales, operating profit, identifiable assets and other information about our businesses that is presented for the years 1991-1998. The discussion of segment information is unaudited. 4 ACCOUNTS AND NOTES RECEIVABLE - -------------------------------------------------------------------------------- Accounts and notes receivable consist of the following: - --------------------------------------------------------------- December 31 1998 1997 - --------------------------------------------------------------- Trade, less allowance for doubtful accounts and sales returns of $3,699 in 1998 and $3,363 in 1997 $ 90,761 $ 66,249 Other 3,580 3,423 - --------------------------------------------------------------- Total $ 94,341 $ 69,672 - --------------------------------------------------------------- 44 5 INVENTORIES - -------------------------------------------------------------------------------- Inventories consist of the following: - --------------------------------------------------------------- December 31 1998 1997 - --------------------------------------------------------------- Finished goods $ 4,805 $ 1,865 Work-in-process 3,751 2,340 Raw materials 17,690 9,297 Stores, supplies and other 8,030 6,506 - --------------------------------------------------------------- Total $ 34,276 $ 20,008 - --------------------------------------------------------------- Inventories stated on the LIFO basis amounted to $13,701 at December 31, 1998 and $11,990 at December 31, 1997, which are below replacement costs by approximately $9,678 at December 31, 1998 and $13,141 at December 31, 1997. 6 ALUMINUM FORWARD SALES, PURCHASE AND FUTURES CONTRACTS - -------------------------------------------------------------------------------- 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. These contracts involve elements of credit and market risk that are not reflected on our balance sheet, including the risk of dealing with counterparties and their ability to meet the terms of the contracts. Our open and matching positions at December 31, 1998, were as follows: - - We had open fixed-price forward sales contracts, representing commitments to sell 60.8 million pounds of aluminum in the form of finished product, that were matched with open aluminum forward purchase and futures contracts - - The weighted average cost per pound of aluminum on the commitment dates for open fixed-price forward sales contracts was approximately 66.1 cents per pound in 1998, compared with a market cost of 59.9 cents per pound at December 31, 1998 - - The unrealized gain of more than six cents per pound at December 31, 1998, was substantially hedged or offset by an unrealized loss of approximately the same amount on the matching open forward purchase commitments and futures contracts to acquire aluminum Our open and matching positions at December 31, 1997, were as follows: - - We had open fixed-price forward sales contracts, representing commitments to sell 40.8 million pounds of aluminum in the form of finished product, that were matched with open aluminum forward purchase and futures contracts - - The weighted average cost per pound of aluminum on the commitment dates for open fixed-price forward sales contracts was approximately 75.1 cents per pound in 1997, compared with a market cost of 75.2 cents per pound at December 31, 1997 - - The unrealized loss of less than one cent per pound at December 31, 1997, was substantially hedged or offset by an unrealized gain of approximately the same amount on the matching open forward purchase commitments and futures contracts to acquire aluminum 45 7 INVESTMENTS - -------------------------------------------------------------------------------- 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. These investments, which individually represent ownership interests of less than 20%, are included in "Other assets and deferred charges." A summary of our technology-related investment activities and values is summarized below: - ----------------------------------------------------------------------------------
1998 1997 1996 - ---------------------------------------------------------------------------------- Carrying value of technology-related investments, beginning of period $33,513 $6,048 $3,410 Technology-related investment activity for period (pre-tax amounts): New investments 35,399 20,801 3,138 Proceeds from the sale of investments (5,462) (15,060) (2,639) Realized gains 4,582 14,309 2,139 Realized losses, write-offs and write-downs (2,315) (429) - (Decrease) increase in unrealized net gain on available-for-sale securities (5,693) 7,844 - - ---------------------------------------------------------------------------------- Carrying value of technology-related investments, end of period $60,024 $33,513 $6,048 - ----------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ December 31 1998 1997 - ------------------------------------------------------------------------------------------------------------------
Carry- Est. Carry- Est. Cost ing Fair Cost ing Fair Basis Value Value Basis Value Value - ------------------------------------------------------------------------------------------------------------------ Limited partnership interests in private venture capital funds $16,201 $15,250 $17,890 $5,678 $5,521 $12,496 Equity interests in private companies 41,098 39,425 47,602 18,265 18,265 18,534 Common stock of public companies (available-for-sale securities): CardioGenesis Corporation (CGCP) 2,464 3,187 3,187 1,366 2,290 2,290 Cisco Systems, Inc. (CSCO) 250 1,895 1,895 3D Labs, Inc. (TDDDF) 604 267 267 Ciena Corporation (CIEN) - - - 457 6,530 6,530 Advance Fibre Communications (AFCI) - - - 60 907 907 - ------------------------------------------------------------------------------------------------------------------ Total $60,617 $60,024 $70,841 $25,826 $33,513 $40,757 - ------------------------------------------------------------------------------------------------------------------
Our remaining unfunded commitments to private venture capital funds totaled approximately $30,000 at December 31, 1998, which we expect to fund over the next two years. 46 Beginning in 1997, the securities of public companies held by us (common stock listed on NASDAQ) are classified as available-for-sale and stated at fair value, with unrealized holding gains or losses excluded from earnings and reported net of deferred income taxes in a separate component of shareholders' equity until realized. Prior to 1997, such securities were stated at the lower of cost or fair value, and the differences were immaterial. The securities of private companies held by us (primarily convertible preferred stock) are accounted for at the lower of cost or estimated fair value. Ownership interests of less than or equal to 5% in private venture capital funds are accounted for at the lower of cost or estimated fair value, while ownership interests in excess of 5% in such funds are accounted for under the equity method. We write-down or write-off an investment and recognize a loss when events indicate that the investment is impaired. The fair value of securities of public companies is determined based on closing price quotations. We estimate the fair value of securities of private companies using the indicative value from the latest round of financing, and reduce this amount if events subsequent to the financing imply a lower valuation. The fair value of ownership interests in private venture capital funds is based on our estimate of our distributable share of fund net assets using, among other information: - - The general partners' estimate of the fair value of nonmarketable securities held by the funds (which is usually the indicative value from the latest round of financing or a reduced amount if events subsequent to the financing imply a lower valuation) - - Closing bid prices of publicly traded securities held by the funds - - Fund formulas for allocating profits, losses and distributions Because of the inherent uncertainty associated with the valuations of restricted securities or securities for which there is no public market, estimates of fair value may differ significantly from the values that would have been used had a ready market for the securities existed. Furthermore, publicly traded stocks of emerging, technology-based companies usually have higher volatility and risk than the U.S. stock market as a whole. Gains and losses recognized are included in "Other income (expense), net" in the consolidated statements of income on page 35 and "Investments" in the operating profit table on page 13. Beginning April 1, 1998, we began classifying the stand-alone operating expenses for our technology-related investment activities with gains and losses in "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 $2,073 for all of 1998, $1,651 for the nine months ended December 31, 1998, and $1,033 in 1997. 47 8 GOODWILL AND OTHER INTANGIBLES - -------------------------------------------------------------------------------- Goodwill and other intangibles, and related accumulated amortization, are as follows: - --------------------------------------------------------------- December 31 1998 1997 - --------------------------------------------------------------- Goodwill and other intangibles $ 20,325 $ 20,332 Divestitures (see Note 19) (31) - Write-offs - (7) Acquisitions (see Note 2) 13,074 - - --------------------------------------------------------------- Subtotal 33,368 20,325 Accumulated amortization (455) (250) - --------------------------------------------------------------- Net $ 32,913 $ 20,075 - --------------------------------------------------------------- 9 ACCRUED EXPENSES - -------------------------------------------------------------------------------- Accrued expenses consist of the following: - --------------------------------------------------------------- December 31 1998 1997 - --------------------------------------------------------------- Payrolls, related taxes and medical and other benefits $ 16,114 $ 14,014 Workmen's compensation and disabilities 5,625 5,021 Vacation 5,855 4,813 Contract research revenues received in advance 833 2,917 Plant shutdowns and divestitures 204 1,097 Environmental 322 448 Other 12,118 11,308 - --------------------------------------------------------------- Total $ 41,071 $ 39,618 - --------------------------------------------------------------- 10 DEBT AND CREDIT AGREEMENTS - -------------------------------------------------------------------------------- Debt outstanding consisted of a note payable with a remaining balance of $25,000 at December 31, 1998 and $30,000 at December 31, 1997. Interest is payable on the note semi-annually at 7.2% per year. Annual principal payments of $5,000 are due each June through 2003 (the $5,000 due in June 1999 has been classified as long-term in accordance with our ability to refinance such obligation on a long-term basis). At December 31, 1998, the prepayment value of the note was $26,200 and we estimate that an equivalent rate on similar debt would be 6.5%. 48 We also have a revolving credit facility that permits borrowings of up to $275,000 (no amounts borrowed at December 31, 1998 and 1997). The facility matures on July 9, 2002, with an annual extension of one year permitted subject to the approval of participating banks. The facility provides for interest to be charged at a base rate (generally the London Interbank Offered Rate ("LIBOR")) plus a spread that is dependent on our quarterly debt-to-total capitalization ratio. A facility fee is also charged on the $275,000 commitment. The spread and facility fee that are charged at various debt-to-total capitalization levels are as follows: - ----------------------------------------------------- -------------------------- (Basis Points) -------------------------- LIBOR Facility Debt-to-Total Capitalization Ratio Spread Fee - ---------------------------------- ------ --- Less than or equal to 35% 16.50 8.50 Greater than 35% and less than or equal to 50% 22.50 10.00 Greater than 50% 30.00 15.00 In addition, a utilization fee of five basis points is charged on the outstanding principal amount when more than $137,500 is borrowed under the agreement. There were no variable-rate loans outstanding during the last three years. Our loan agreements contain restrictions, among others, on the minimum shareholders' equity required and the maximum debt-to-total capitalization ratio permitted (60%). At December 31, 1998, shareholders' equity was in excess of the minimum required by $148,411, and $275,000 was available to borrow under the 60% debt-to-total capitalization ratio restriction. 11 SHAREHOLDER RIGHTS AGREEMENT - -------------------------------------------------------------------------------- Pursuant to a Rights Agreement dated as of June 15, 1989 (as amended), between Tredegar and American Stock Transfer and Trust Company as Rights Agent (the "Rights Agreement"), two-ninths of one Right is attendant to each share of our common stock. Each Right entitles the registered holder to purchase from Tredegar one one-hundredth of a share of Participating Cumulative Preferred Stock, Series A (the "Preferred Stock"), at an exercise price of $50 (the "Purchase Price"). The Rights will become exercisable, if not earlier redeemed, only if a person or group acquires 10% or more of the outstanding shares of our common stock or announces a tender offer which would result in ownership by a person or group of 10% or more of our common stock. Any action by a person who, together with his associates and affiliates, owned 10% or more of the outstanding shares of our common stock on July 10, 1989, cannot cause the Rights to become exercisable. Each holder of a Right, upon the occurrence of certain events, will become entitled to receive, upon exercise and payment of the Purchase Price, Preferred Stock (or in certain circumstances, cash, property or other securities of Tredegar or a potential acquirer) having a value equal to twice the amount of the Purchase Price. The Rights will expire on June 30, 1999. We expect our Board of Directors to approve a new rights agreement concurrent with the expiration of the existing agreement. 49 12 STOCK OPTION PLANS - -------------------------------------------------------------------------------- We have four stock option plans whereby stock options may be granted to purchase a specified number of shares of common stock at a price no lower than the fair market value on the date of grant and for a term not to exceed 10 years. Options ordinarily vest one to two years from the date of grant. In addition to stock options, recipients may also be granted SARs and restricted stock. SARs, when granted, have been in tandem with stock options; however, no SARs have been granted since 1992. Generally, the share appreciation that can be realized upon the exercise of SARs is limited to the fair market value at the date of grant. As a result, it is more likely that related stock options will be exercised rather than SARs when the price of our common stock is in excess of $7.42 per share (our closing stock price on December 31, 1998, was $22.50 per share). Had compensation cost for our stock-based compensation plans been determined in 1998, 1997 and 1996 based on the fair value at the grant dates, our income and diluted earnings per share from continuing operations would have been reduced to the pro forma amounts indicated below: - ---------------------------------------------------------------------------------------
1998 1997 1996 - --------------------------------------------------------------------------------------- Income from continuing operations: As reported $64,156 $ 58,446 $ 45,035 Pro forma 62,696 56,412 43,814 Diluted earnings per share from continuing operations: As reported 1.66 1.48 1.15 Pro forma 1.62 1.43 1.11 - ---------------------------------------------------------------------------------------
The fair value of each option was estimated as of the grant date using the Black-Scholes option-pricing model. The assumptions used in this model for valuing stock options granted during 1998, 1997 and 1996 are provided below: - -----------------------------------------------------------------------------------
1998 1997 1996 - ----------------------------------------------------------------------------------- Dividend yield .6% .6% 1.0% Volatility percentage 28.0% 30.0% 23.5% Weighted average risk-free interest rate 5.5% 6.7% 5.7% Holding period (years): Officers n/a 8.3 9.4 Management 5.0 4.6 4.7 Others 3.6 2.4 3.2 Market price at date of grant: Officers and management (management only in 1998) $ 29.94 $ 16.54 $ 8.38 Others 29.82 17.31 7.38 Exercise price for options granted where exercise price exceeds market price (applicable to officers in 1997 and officers and management in 1996) n/a 21.00 9.67 - -----------------------------------------------------------------------------------
50 Stock options granted during 1998, 1997 and 1996, and their estimated fair value at the date of grant, are provided below: - -----------------------------------------------------------------------------------
1998 1997 1996 - ----------------------------------------------------------------------------------- Stock options granted (number of shares): Where exercise price equals market price: Officers n/a 144,000 120,000 Management 59,985 261,750 258,900 Others 28,590 64,350 159,900 Where exercise price exceeds market price: Officers n/a 141,000 60,000 Management n/a 0 9,000 - ----------------------------------------------------------------------------------- Total 88,575 611,100 607,800 - ----------------------------------------------------------------------------------- Estimated fair value of options per share at date of grant: Where exercise price equals market price: Officers n/a $ 8.02 $ 3.56 Management $ 10.06 5.80 2.36 Others 8.16 4.14 1.63 Where exercise price exceeds market price: - Officers n/a 6.74 3.14 Management n/a n/a 1.85 - ----------------------------------------------------------------------------------- Total estimated fair value of stock options granted $ 837 $ 3,889 $ 1,502 - -----------------------------------------------------------------------------------
A summary of our stock options outstanding at December 31, 1998, 1997 and 1996, and changes during those years, is presented below: - -----------------------------------------------------------------------------------------------------------------
Exercise Price Per Share -------------------------------------- Number of Shares Wgted. Aggre- ------------------------- Options SARs Range Ave. gate - ----------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/95 3,568,725 1,560,825 $ 2.70 to $ 5.33 $ 3.66 $ 13,068 Granted in 1996 607,800 - 7.38 to 9.67 8.26 5,020 Lapsed in 1996 (45,450) - 3.36 to 8.38 5.04 (229) Options exercised in 1996 (392,115) (182,865) 2.70 to 4.17 3.43 (1,345) - ----------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/96 3,738,960 1,377,960 2.70 to 9.67 4.42 16,514 Granted in 1997 611,100 - 16.54 to 21.00 17.67 10,798 Lapsed in 1997 (5,400) - 3.36 to 18.75 9.44 (51) Options exercised in 1997 (566,565) (287,925) 2.70 to 9.67 4.87 (2,761) - ----------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/97 3,778,095 1,090,035 2.70 to 21.00 6.48 24,500 Granted in 1998 88,575 - 28.61 to 29.94 29.82 2,641 Lapsed in 1998 - - - to - - 0 Options exercised in 1998 (833,898) (494,550) 2.70 to 21.00 4.36 (3,636) - ----------------------------------------------------------------------------------------------------------------- Outstanding at 12/31/98 3,032,772 595,485 $ 2.70 to $29.94 $7.75 $ 23,505 - -----------------------------------------------------------------------------------------------------------------
51 The following table summarizes additional information about stock options outstanding and exercisable at December 31, 1998: - ------------------------------------------------------------------------------------------------
Options Outstanding at Options Exercisable at December 31, 1998 December 31, 1998 ----------------------------------------------------------------- Weighted Average ------------------------- Remaining Wgted. Contract- Exer- Ave. Range of ual Life cise Exercise Exercise Prices Shares (Years) Price Shares Price - ------------------------------------------------------------------------------------------------ $ 3.72 222,400 .5 $ 3.72 222,400 $ 3.72 $ 2.70 to 3.73 385,835 3.2 2.73 385,835 2.73 3.36 to 5.33 929,950 5.2 4.10 929,950 4.10 3.86 to 4.17 474,200 6.2 4.17 474,200 4.17 7.38 to 9.67 355,967 7.1 8.49 355,967 8.49 16.55 to 21.00 575,845 8.4 17.67 575,845 17.67 28.61 to 29.94 88,575 9.5 29.82 - - - ------------------------------------------------------------------------------------------------ $ 2.70 to $ 29.94 3,032,772 5.7 $ 7.75 2,944,197 $ 7.09 - ------------------------------------------------------------------------------------------------
Stock options exercisable totaled 3,169,245 shares at December 31, 1997 and 3,023,154 shares at December 31, 1996. Stock options available for grant totaled 1,338,825 shares at December 31, 1998, 1,375,650 shares at December 31, 1997 and 1,981,800 shares at December 31, 1996. 13 RENTAL EXPENSE AND CONTRACTUAL COMMITMENTS - -------------------------------------------------------------------------------- Rental expense was $3,517 in 1998, $2,746 in 1997 and $2,760 in 1996. Rental commitments under all noncancelable operating leases as of December 31, 1998, are as follows: 1999 $ 1,955 2000 1,880 2001 1,871 2002 1,407 2003 641 Remainder 162 - ----------------------------------- Total $ 7,916 - ----------------------------------- Contractual obligations for plant construction and purchases of real property and equipment amounted to $9,512 at December 31, 1998 and $4,452 at December 31, 1997. 52 14 RETIREMENT PLANS AND OTHER POSTRETIREMENT BENEFITS - -------------------------------------------------------------------------------- We have noncontributory and contributory defined benefit (pension) plans covering most employees. The plans for salaried and hourly employees currently in effect are based on a formula using the participant's years of service and compensation or using the participant's years of service and a dollar amount. Pension plan assets consist principally of domestic and international common stocks and domestic and international government and corporate obligations. In addition to providing pension benefits, we provide postretirement life insurance and health care benefits for certain groups of employees. Tredegar and retirees share in the cost of postretirement health care benefits, with employees retiring after July 1, 1993, receiving a fixed subsidy to cover a portion of their health care premiums. Assumptions used for financial reporting purposes to compute net benefit income or cost and benefit obligations, and the components of net periodic benefit income or cost, are as follows: - ----------------------------------------------------------------------------------------------------------------
Other Post- Pension Benefits Retirement Benefits 1998 1997 1996 1998 1997 1996 - ---------------------------------------------------------------------------------------------------------------- Weighted-average assumptions: Discount rate, end of year 6.75% 7.25% 7.50% 6.75% 7.25% 7.50% Rate of compensation increases, end of year 5.00% 5.00% 5.00% 5.00% 5.00% 5.00% Expected long-term return on plan assets, during the year 9.00% 9.00% 9.00% n/a n/a n/a Rate of increase in per-capita cost of covered health care benefits: Indemnity plans, end of year n/a n/a n/a 9.00% 10.00% 11.00% Managed care plans, end of year n/a n/a n/a 7.40% 8.10% 8.90% Components of net periodic benefit income (cost): Service cost $(2,725) $(2,235) $(2,116) $(137) $(113) $(117) Interest cost (8,960) (8,002) (7,631) (494) (467) (448) Expected return on plan assets 15,684 13,395 12,324 - - - Amortization of: Net transition asset 899 899 1,251 - - - Prior service costs and gains or losses (393) (578) (782) 57 76 101 - ---------------------------------------------------------------------------------------------------------------- Net periodic benefit income (cost) $4,505 $3,479 $3,046 $(574) $(504) $(464) - ----------------------------------------------------------------------------------------------------------------
53 The following tables reconcile the changes in benefit obligations and plan assets in 1998 and 1997, and reconcile the funded status to prepaid or accrued cost at December 31, 1998 and 1997: - --------------------------------------------------------------------------------------------------------------
Other Post- Pension Benefits Retirement Benefits 1998 1997 1998 1997 - -------------------------------------------------------------------------------------------------------------- Change in benefit obligation: Benefit obligation, beginning of year $117,864 $ 108,895 $ 6,543 $ 6,305 Acquisition 8,614 - 355 - Service cost 2,725 2,235 137 113 Interest cost 8,960 8,002 494 467 Plan amendments 1,245 179 - - Effect of discount rate change 9,000 3,912 426 179 Employee contributions 295 - - - Other 470 88 71 33 Benefits paid (6,877) (5,447) (384) (554) - -------------------------------------------------------------------------------------------------------------- Benefit obligation, end of year $142,296 $ 117,864 $ 7,642 $ 6,543 - -------------------------------------------------------------------------------------------------------------- Change in plan assets: Plan assets at fair value, beginning of year $191,922 $ 166,582 $ - $ - Acquisition 11,908 - - - Actual return on plan assets 24,065 30,338 - - Employee contributions 295 - - - Employer contributions 505 449 384 554 Benefits paid (6,877) (5,447) (384) (554) - -------------------------------------------------------------------------------------------------------------- Plan assets at fair value, end of year $221,818 $ 191,922 $ - $ - - -------------------------------------------------------------------------------------------------------------- Reconciliation of prepaid (accrued) cost: Funded status of the plans $ 79,522 $ 74,058 $ (7,642) $ (6,543) Unrecognized net transition (asset) obligation (1,178) (2,077) - - Unrecognized prior service cost 3,567 3,084 - - Unrecognized net (gain) loss (43,039) (44,253) (448) (1,029) - -------------------------------------------------------------------------------------------------------------- Prepaid (accrued) cost, end of year $ 38,872 $ 30,812 $ (8,090) $ (7,572) - --------------------------------------------------------------------------------------------------------------
Net benefit income or cost is determined using assumptions at the beginning of each year. Funded status is determined using assumptions at the end of each year. The rates for the per-capita cost of covered health care benefits were assumed to decrease gradually to 6% for the indemnity plan and 5% for the managed care plan in 2002, and remain at that level thereafter. At December 31, 1998, the effect of a 1% change in the health care cost trend rate assumptions would be immaterial. Prepaid pension cost of $38,872 at December 31, 1998, and $30,812 at December 31, 1997, is included in "Other assets and deferred charges" in the consolidated balance sheets. Accrued postretirement benefit cost of $8,090 at December 31, 1998, and $7,572 at December 31, 1997, is included in "Other noncurrent liabilities" in the consolidated balance sheets. 54 We also have a non-qualified supplemental pension plan covering certain employees. The plan is designed to restore all or a part of the pension benefits that would have been payable to designated participants from our principal pension plans if it were not for limitations imposed by income tax regulations. The projected benefit obligation relating to this unfunded plan was $1,931 at December 31, 1998, and $889 at December 31, 1997, and pension expense recognized averaged $150 annually from 1996-1998. This information has been included in the preceding pension benefit tables. 15 SAVINGS PLAN - -------------------------------------------------------------------------------- We have a savings plan that allows eligible employees to voluntarily contribute a percentage (generally 10%) of their compensation. Under the provisions of the plan, we match (generally 50%) a portion of the employee's contribution to the plan with shares of our common stock. We also have a non-qualified plan that restores matching benefits for employees suspended from the savings plan due to certain limitations imposed by income tax regulations. Charges recognized for these plans were $2,255 in 1998, $2,564 in 1997 and $2,348 in 1996. Our liability under the restoration plan was $1,887 at December 31, 1998 (consisting of 83,862 phantom shares of our common stock) and $1,974 at December 31, 1997 (consisting of 89,898 phantom shares of our common stock), valued at the closing market price on that date. The Tredegar Industries, Inc. Benefits Plan Trust (the "Trust") purchased 7,200 shares of our common stock in 1998 for $192 and 46,671 shares of our common stock in 1997 for $1,020, as a partial hedge against the phantom shares held in the restoration plan. The cost of the shares held by the Trust is shown as a reduction to shareholders' equity in the consolidated balance sheets. 55 16 INCOME TAXES - -------------------------------------------------------------------------------- Income from continuing operations before income taxes and income taxes are as follows: - ---------------------------------------------------------------------------------------------------
1998 1997 1996 - --------------------------------------------------------------------------------------------------- Income from continuing operations before income taxes: Domestic $ 83,882 $ 84,356 $ 63,612 Foreign 11,328 5,810 5,383 - --------------------------------------------------------------------------------------------------- Total $ 95,210 $ 90,166 $ 68,995 - --------------------------------------------------------------------------------------------------- Current income taxes: Federal $ 23,824 $ 22,769 $ 17,916 State 1,803 3,700 2,608 Foreign 4,996 1,910 1,665 - --------------------------------------------------------------------------------------------------- Total 30,623 28,379 22,189 - --------------------------------------------------------------------------------------------------- Deferred income taxes: Federal 692 2,576 1,105 State 147 310 2 Foreign (408) 455 664 - --------------------------------------------------------------------------------------------------- Total 431 3,341 1,771 - --------------------------------------------------------------------------------------------------- Total income taxes $ 31,054 $ 31,720 $ 23,960 - ---------------------------------------------------------------------------------------------------
The significant differences between the U.S. federal statutory rate and the effective income tax rate for continuing operations are as follows: - ---------------------------------------------------------------------------------------
Percent of Income Before Income Taxes ---------------------------------- 1998 1997 1996 - --------------------------------------------------------------------------------------- Income tax expense at federal statutory rate 35.0 35.0 35.0 State taxes, net of federal income tax benefit 1.3 2.9 2.5 Excess of income tax basis over financial reporting basis for APPX Software (see Note 17) (2.4) - - Foreign Sales Corporation (1.1) (1.1) (1.6) Research and development tax credit (.3) (.3) (.3) Tax-exempt interest income (.2) (1.1) (.9) Goodwill amortization .1 - .1 Other items, net .2 (.2) (.1) - --------------------------------------------------------------------------------------- Effective income tax rate 32.6 35.2 34.7 - ---------------------------------------------------------------------------------------
56 Deferred income taxes result from temporary differences between financial and income tax reporting of various items. The source of these differences and the tax effects for continuing operations are as follows: - -------------------------------------------------------------------------------
1998 1997 1996 - ------------------------------------------------------------------------------- Employee benefits $ 1,617 $ 1,912 $ 2,591 Plant shutdowns, divestitures and environmental accruals 497 (459) 409 Depreciation 72 553 (2,179) Tax benefit on NOL carryforwards of certain foreign subsidiaries (755) (310) - Allowance for doubtful accounts and sales returns (130) 868 699 Other items, net (870) 777 251 - ------------------------------------------------------------------------------- Total $ 431 $ 3,341 $ 1,771 - -------------------------------------------------------------------------------
Deferred tax liabilities and deferred tax assets at December 31, 1998 and 1997, are as follows: - ----------------------------------------------------------------------------------
December 31 1998 1997 - ---------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation $ 17,548 $ 8,773 Pensions 14,556 11,824 Unrealized gain on available-for-sale securities 775 2,824 UMWA Fund liability (see Note 19) - 1,120 Other 265 531 - ---------------------------------------------------------------------------------- Total deferred tax liabilities 33,144 25,072 - ---------------------------------------------------------------------------------- Deferred tax assets: Employee benefits 9,156 8,534 Deductible tax goodwill in excess of book goodwill 2,073 - Foreign currency translation adjustment 1,356 20 Inventory 1,233 1,281 Tax benefit on NOL carryforwards of certain foreign subsidiaries 1,065 310 Allowance for doubtful accounts and sales returns 568 438 Environmental accruals 119 170 Plant shutdowns and divestitures 75 417 Other 1,347 516 - ---------------------------------------------------------------------------------- Total deferred tax assets 16,992 11,686 - ---------------------------------------------------------------------------------- Net deferred tax liability $ 16,152 $ 13,386 - ---------------------------------------------------------------------------------- Included in the balance sheet: Noncurrent deferred tax liabilities in excess of assets $ 24,914 $ 22,108 Current deferred tax assets in excess of liabilities 8,762 8,722 - ---------------------------------------------------------------------------------- Net deferred tax liability $ 16,152 $ 13,386 - ----------------------------------------------------------------------------------
57 17 UNUSUAL ITEMS - -------------------------------------------------------------------------------- In 1998, unusual income (net) totaling $101 ($2,341 after income tax benefits) included: - - A fourth-quarter charge of $664 ($425 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 ($2,766 after tax benefits)on the sale of APPX Software on January 16, 1998 Income taxes for continuing operations includes a tax benefit of $2,001 related to the sale of APPX Software, reflecting a tax benefit for the excess of its income tax basis over its financial reporting basis. In 1997, unusual income included a gain of $2,250 (net of transaction costs of $250 and $1,440 after income taxes) related to the redemption of preferred stock received in connection with the 1996 divestiture of Molded Products (see Note 19). In 1996, unusual income (net) totaling $11,427 ($8,479 after income taxes) included: - - A third-quarter gain of $1,968 ($1,215 after taxes) on the sale of a former plastic films manufacturing site in Fremont, California - - A third-quarter charge of $1,288 ($795 after taxes) related to the write-off of specialized machinery and equipment due to excess capacity in certain industrial packaging films - - A first-quarter gain of $19,893 ($13,725 after taxes) on the sale of Molded Products (see Note 19) - - A first-quarter charge of $9,146 ($5,666 after taxes) related to the loss on the divestiture of Brudi (see Note 19) 18 CONTINGENCIES - -------------------------------------------------------------------------------- We are involved in various stages of investigation and cleanup relating to environmental matters at certain plant locations. Where we have determined the nature and scope of any required environmental cleanup activity, estimates of cleanup costs have been obtained and accrued. As we continue efforts to assure compliance with environmental laws and regulations, additional contingencies may be identified. If additional contingencies are identified, our practice is to determine the nature and scope of those contingencies, obtain and accrue estimates of the cost of remediation, and perform remediation. While it is not possible to predict the course of ongoing environmental compliance activities, we do not believe that additional costs that could arise from those activities will have a material adverse effect on our financial position. However, those costs could have a material adverse effect on quarterly or annual operating results at that time. We are involved in various other legal actions arising in the normal course of business. After taking into consideration legal counsels' evaluation of these actions, we believe that we have sufficiently accrued for possible losses and that the actions will not have a material adverse effect on our financial position. However, the resolution of the actions in a future period could have a material adverse effect on quarterly or annual operating results at that time. 58 19 DIVESTED AND DISCONTINUED OPERATIONS - -------------------------------------------------------------------------------- On August 16, 1994, the Elk Horn Coal Corporation ("Elk Horn"), our former 97% owned coal subsidiary, was acquired by Pen Holdings, Inc. In accor- dance with applicable accounting pronouncements, a $6,194 charge ($3,964 after income tax benefits) was recognized as a reduction to the gain on the disposal of Elk Horn for the estimated present value of the portion of the unfunded obligation under the Coal Industry Retiree Health Benefit Act of 1992 (the "Act") assumed by us in the divestiture transaction. Under the Act, former employers were responsible for a portion of the funding of medical and death benefits of certain retired miners and dependents of the United Mine Workers of America ("UMWA"). The remaining accrued obligation under the Act was $5,300 at December 31, 1997, and was reflected in our consolidated balance sheet in "Other noncurrent liabilities." We were relieved of any liability under the Act as the result of a 1998 Supreme Court ruling. Accordingly, in 1998 we recognized: - - A third-quarter gain of $5,300 ($3,421 after taxes) for the reversal of the remaining accrued obligation established to cover future payments to the UMWA Combined Benefit Fund (the "UMWA Fund") - - A fourth-quarter gain of $2,019 ($1,292 after taxes) for the reimbursement of payments made by us to the UMWA Fund These gains were reported net of income taxes in discontinued operations consistent with the treatment of Elk Horn when sold. During the first quarter of 1998, we sold all of the outstanding capital stock of APPX Software (see Note 17). On March 29, 1996, we sold all of the outstanding capital stock of our injection molding subsidiary, Tredegar Molded Products Company, including Polestar Plastics Manufacturing Company (together "Molded Products"), to Precise Technology, Inc. ("Precise") for cash consideration of $57,500 ($53,973 after transaction costs). In addition, we received unregistered cumulative preferred stock of Precise with a face amount of $2,500, which was fully redeemed in 1997 (see Note 17). We assigned no value to the preferred stock in 1996 due to the uncertainty of redemption at that time. During the second quarter of 1996, we completed the sale of Brudi, Inc. and its subsidiaries (together "Brudi") for cash consideration of $18,066 ($17,625 after transaction costs). Tredegar recognized a gain of $19,893 ($13,725 after income taxes) on the sale of Molded Products in the first quarter of 1996. The gain was partially offset by a first-quarter charge of $9,146 ($5,666 after income tax benefits) related to the loss on the divestiture of Brudi. The Molded Products gain included a gain of $2,039 ($1,243 after income taxes) on the curtailment of participation by Molded Products employees in our benefit plans. The Brudi charge included a loss accrued of $1,000 ($640 after income tax benefits) for remaining payments under a noncompetition and secrecy agreement entered into when we acquired Brudi on April 1, 1991. 59 - ------------------------------------------------------------------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter Year - ------------------------------------------------------------------------------------------------------ 1998 - ------------------------------------------------------------------------------------------------------ Net sales $156,660 $169,946 $186,638 $186,552 $699,796 Gross profit 33,564 35,471 38,329 39,043 146,407 Operating profit before unusual items 23,656 24,898 25,075 25,364 98,993 Income from continuing operations 17,296 15,161 15,960 15,739 64,156 Income from discontinued operations - - 3,421 1,292 4,713 - ------------------------------------------------------------------------------------------------------ Net income * 17,296 15,161 19,381 17,031 68,869 Earnings per share:* Basic: Continuing operations .48 .42 .44 .43 1.77 Discontinued operations - - .09 .04 .13 - ------------------------------------------------------------------------------------------------------ Net income .48 .42 .53 .47 1.90 Diluted: Continuing operations .44 .39 .41 .41 1.66 Discontinued operations - - .09 .03 .12 - ------------------------------------------------------------------------------------------------------ Net income .44 .39 .50 .44 1.78 Shares used to compute earnings per share: Basic 36,396 35,904 36,351 36,528 36,286 Diluted 39,000 38,557 38,582 38,577 38,670 - ------------------------------------------------------------------------------------------------------ 1997 - ------------------------------------------------------------------------------------------------------ Net sales $133,345 $144,969 $155,058 $147,632 $581,004 Gross profit 26,385 30,674 32,655 33,344 123,058 Operating profit before unusual items 17,848 24,571 25,174 24,897 92,490 Net income * 10,954 16,347 15,137 16,008 58,446 Earnings per share:* Basic .30 .44 .41 .43 1.59 Diluted .28 .42 .38 .40 1.48 Shares used to compute earnings per share: Basic 36,729 36,789 36,918 37,014 36,861 Diluted 39,534 39,387 39,762 39,780 39,534 - ------------------------------------------------------------------------------------------------------
* Quarterly net income and diluted earnings per share from continuing operations, adjusted for unusual items and technology-related net investment gains affecting the comparability of operating results between quarters, are presented below: ----------------------------------------------------------------------------------------------
Continuing Operations Excluding Unusual Items and Technology-Related Net First Second Third Fourth Investment Gains Quarter Quarter Quarter Quarter Year ---------------------------------------------------------------------------------------------- 1998 Net income $14,098 $14,490 $16,355 $16,478 $61,421 Diluted earnings per share .36 .37 .42 .43 1.59 ---------------------------------------------------------------------------------------------- 1997 Net income $9,748 $12,044 $13,020 $13,313 $48,124 Diluted earnings per share .25 .31 .33 .33 1.22 ----------------------------------------------------------------------------------------------
60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TREDEGAR INDUSTRIES, INC. (Registrant) Dated: January 29, 1999 By /s/ John D. Gottwald --------------------------------- John D. Gottwald President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on January 29, 1999. Signature Title /s/ John D. Gottwald - ------------------------------------- President and Director (John D. Gottwald) (Principal Executive Officer) /s/ N. A. Scher - ------------------------------------- Executive Vice President and Director (Norman A. Scher) (Principal Financial Officer) /s/ D. Andrew Edwards Vice President, Treasurer - ------------------------------------- and Controller (D. Andrew Edwards) (Principal Accounting Officer) /s/ Austin Brockenbrough, III Director - ------------------------------------- (Austin Brockenbrough, III) /s/ Phyllis Cothran Director - ------------------------------------- (Phyllis Cothran) /s/ R. W. Goodrum Director - ------------------------------------- (Richard W. Goodrum) /s/ Floyd D. Gottwald, Jr. Director - ------------------------------------- (Floyd D. Gottwald, Jr.) 61 /s/ William M. Gottwald Director - ------------------------------------- (William M. Gottwald) /s/ Andre B. Lacy Director - ------------------------------------- (Andre B. Lacy) /s/ Richard L. Morrill Director - ------------------------------------- (Richard L. Morrill) /s/ Emmett J. Rice Director - ------------------------------------- (Emmett J. Rice) /s/ Thomas G. Slater, Jr. Director - ------------------------------------- (Thomas G. Slater, Jr.) 62 EXHIBIT INDEX 3.1 Amended and Restated Articles of Incorporation of Tredegar (filed as Exhibit 3.1 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1989, and incorporated herein by reference) 3.2 Amended By-laws of Tredegar (filed as Exhibit 3 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998, and incorporated herein by reference) 4.1 Form of Common Stock Certificate (filed as Exhibit 4.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) 4.2 Rights Agreement dated as of June 15, 1989, between Tredegar and NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.), as Rights Agent (filed as Exhibit 4.4 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) 4.2.1 Amendment and Substitution Agreement (Rights Agreement) dated as of July 1, 1992, by and among Tredegar, NationsBank of Virginia, N.A. (formerly Sovran Bank, N.A.) and American Stock Transfer & Trust Company (filed as Exhibit 4.2.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference) 4.3 Loan Agreement dated June 16, 1993 between Tredegar and Metropolitan Life Insurance Company (filed as Exhibit 4 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993, and incorporated herein by reference) 4.3.1 Consent and Agreement dated September 26, 1995, between Tredegar Industries, Inc. and Metropolitan Life Insurance Company (filed as Exhibit 4.2 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended September 30, 1995, and incorporated herein by reference) 4.3.2 First Amendment to Loan Agreement dated as of October 31, 1997 between Tredegar and Metropolitan Life Insurance Company (filed as Exhibit 4.3.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference) 4.4 Revolving Credit Facility Agreement dated as of July 9, 1997 among Tredegar Industries, Inc., the banks named therein, The Chase Manhattan Bank as Administrative Agent, NationsBank, N.A. as Documentation Agent and Long-Term Credit Bank of Japan, Limited as Co-Agent (filed as Exhibit 4.1 to Tredegar's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997, and incorporated herein by reference) 4.4.1 First Amendment to Revolving Credit Facility Agreement dated as of October 31, 1997 among Tredegar Industries, Inc., the banks named therein, The Chase Manhattan Bank as Administrative Agent, NationsBank, N.A. as Documentation Agent and Long-Term Credit Bank of Japan, Limited as Co-Agent (filed as Exhibit 4.4.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference) 10.1 Reorganization and Distribution Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) *10.2 Employee Benefits Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.2 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) 10.3 Tax Sharing Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.3 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) 10.4 Indemnification Agreement dated as of June 1, 1989, between Tredegar and Ethyl (filed as Exhibit 10.5 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) *10.5 Tredegar 1989 Incentive Stock Option Plan (included as Exhibit A to the Prospectus contained in the Form S-8 Registration Statement No. 33-31047, and incorporated herein by reference) *10.5.1 Amendment to the Tredegar 1989 Incentive Stock Option Plan (filed herewith) *10.6 Tredegar Bonus Plan (filed as Exhibit 10.7 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference) *10.7 Tredegar 1992 Omnibus Stock Incentive Plan (filed as Exhibit 10.12 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1991, and incorporated herein by reference) *10.7.1 Amendment to the Tredegar 1992 Omnibus Incentive Plan (filed herewith) *10.8 Tredegar Industries, Inc. Retirement Benefit Restoration Plan (filed as Exhibit 10.13 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference) *10.8.1 Amendment to the Tredegar Retirement Benefit Restoration Plan (filed herewith) *10.9 Tredegar Industries, Inc. Savings Plan Benefit Restoration Plan (filed as Exhibit 10.14 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1993, and incorporated herein by reference) *10.10 Tredegar Industries, Inc. 1996 Incentive Plan (filed as Exhibit 10.14 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1996, and incorporated herein by reference) *10.10.1 Amendment to the Tredegar 1996 Incentive Plan (filed herewith) *10.11 Consulting Agreement made as of March 31, 1996 between Tredegar and Richard W. Goodrum (filed as Exhibit 10.14 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference) *10.11.1 First Amendment to Consulting Agreement made as of July 1, 1997 between Tredegar and Richard W. Goodrum (filed as Exhibit 10.14.1 to Tredegar's Annual Report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference) *10.12 Tredegar Industries, Inc. Directors' Stock Plan (filed herewith) 21 Subsidiaries of Tredegar 23.1 Consent of Independent Accountants 27 Financial Data Schedule * The marked items are management contracts or compensatory plans, contracts or arrangements required to be filed as exhibits to this Form 10-K. EX-10.5.1 2 AMENDMENT TO PLAN Exhibit 10.5.1 Tredegar Industries, Inc. Amendment to 1989 Incentive Stock Option Plan (Effective November 19, 1997) 1. Article VII, Section 7.02 Nontransferability shall be amended by deleting the word "Any" at the beginning of the first sentence of Section 7.02 and inserting in its place the phrase "Except as provided in Section 7.04, any". 2. The following shall be added as a new Section 7.04 to Article VII: 7.04 Transferable Options. Section 7.02 to the contrary notwithstanding, if the applicable Agreement provides, an Option that is not an incentive stock option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners; provided, however, that such Participant may not receive any consideration for the transfer. In addition to transfers described in the preceding sentence, the Committee may grant Options that are not incentive stock options that are transferable on other terms and conditions as may be permitted under Securities Exchange Commission Rule 16b-3, as in effect from time to time. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant, and may not subsequently transfer the Option, except by will or the laws of descent and distribution. In the event of a transfer pursuant to this section, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. 3. Article XII hereby is amended by deleting it in its entirety and substituting therefor the following language: ARTICLE XII AMENDMENT The Board may terminate this Plan from time to time. The Committee may amend this Plan from time to time; provided, however, that the approval of the Board shall be required to amend Section 4.01 or Article V or VI hereof; and provided, further, that no amendment may become effective until shareholder approval is obtained if the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, or the amendment changes the class of individuals eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, SAR or Incentive Award outstanding at the time such amendment is made. EX-10.7.1 3 AMENDMENT TO PLAN Exhibit 10.7.1 Tredegar Industries, Inc. Amendment to 1992 Omnibus Stock Incentive Plan (Effective November 19, 1997) 1. Article VII, Section 7.02 Nontransferability shall be amended by deleting the word "Any" at the beginning of the first sentence of Section 7.02 and inserting in its place the phrase "Except as provided in Section 7.04, any". 2. The following shall be added as a new Section 7.04 to Article VII: 7.04 Transferable Options. Section 7.02 to the contrary notwithstanding, if the applicable Agreement provides, an Option that is not an incentive stock option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners; provided, however, that such Participant may not receive any consideration for the transfer. In addition to transfers described in the preceding sentence, the Administrator may grant Options that are not incentive stock options that are transferable on other terms and conditions as may be permitted under Securities Exchange Commission Rule 16b-3, as in effect from time to time. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant, and may not subsequently transfer the Option, except by will or the laws of descent and distribution. In the event of a transfer pursuant to this section, the Option and any Corresponding SAR that relates to such Option must be transferred to the same person or persons or entity or entities. 3. Article XIII hereby is amended by deleting it in its entirety and substituting therefor the following language: ARTICLE XIII AMENDMENT The Board may terminate this Plan from time to time. The Committee may amend this Plan from time to time; provided, however, that the approval of the Board shall be required to amend Section 4.01 or Article V or VI hereof; and provided, further, that no amendment may become effective until shareholder approval is obtained if the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, or the amendment changes the class of individuals eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, SAR or Incentive Award outstanding at the time such amendment is made. EX-10.8.1 4 AMENDMENT TO PLAN Exhibit 10.8.1 Tredegar Industries, Inc. Amendment to Tredegar Industries, Inc. Retirement Benefit Restoration Plan (Effective January 1, 1999) 1. Section 1.08 is amended by deleting it in its entirety and substituting therefor the following: Section 1.08. Eligible Employee means an individual who is employed by the Company or an Affiliate and who is a member of a "select group of management or highly compensated employees" (as such phrase is used in the Employee Retirement Income Security Act of 1974, as amended). 2. Section 7.01 shall be amended by deleting the last sentence thereof and substituting therefor the following: Such right to amend or modify the Plan shall be exercised by the Company by the Committee and such right to terminate the Plan shall be exercised by the Company by its Board of Directors. EX-10.10.1 5 AMENDMENT TO PLAN Exhibit 10.10.1 Tredegar Industries, Inc. Amendment to 1996 Incentive Plan (Effective November 19, 1997) Article XIII hereby is amended by deleting it in its entirety and substituting therefor the following language: ARTICLE XIII AMENDMENT The Board may terminate this Plan from time to time. The Committee may amend this Plan from time to time; provided, however, that the approval of the Board shall be required to amend Article IV or Sections 5.02 or 6.02 hereof; and provided, further, that no amendment may become effective until shareholder approval is obtained if the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan, or the amendment changes the class of individuals eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any outstanding Stock Award, Option, SAR or Incentive Award outstanding at the time such amendment is made. EX-10.12 6 DIRECTORS' STOCK PLAN Exhibit 10.12 TREDEGAR INDUSTRIES, INC. DIRECTORS' STOCK PLAN TABLE OF CONTENTS ARTICLE I DEFINITIONS..........................................................1 1.01. Affiliate.......................................................1 1.02. Agreement.......................................................1 1.03. Board...........................................................1 1.04. Code............................................................1 1.05. Committee.......................................................1 1.06. Common Stock....................................................1 1.07. Company.........................................................1 1.08. Fair Market Value...............................................1 1.09. Option..........................................................2 1.10. Participant.....................................................2 1.11. Plan............................................................2 1.12. Stock Award.....................................................2 ARTICLE II PURPOSES............................................................2 ARTICLE III ADMINISTRATION.....................................................2 ARTICLE IV ELIGIBILITY.........................................................3 ARTICLE V STOCK SUBJECT TO PLAN................................................3 5.01. Shares Issued...................................................3 5.02. Aggregate Limit.................................................4 5.03. Reallocation of Shares..........................................4 ARTICLE VI OPTIONS.............................................................4 6.01. Award...........................................................4 6.02. Option Price....................................................4 6.03. Maximum Option Period...........................................4 6.04. Nontransferability..............................................4 6.05. Transferable Options............................................5 6.06. Director Status.................................................5 6.07. Exercise........................................................5 6.08. Payment.........................................................5 6.09. Shareholder Rights..............................................6 i ARTICLE VII STOCK AWARDS.......................................................6 7.01. Award...........................................................6 7.02. Vesting.........................................................6 7.03. Director Status.................................................6 7.04. Shareholder Rights..............................................6 ARTICLE VIII ADJUSTMENT UPON CHANGE IN COMMON STOCK............................7 ARTICLE IX COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES...............7 ARTICLE X GENERAL PROVISIONS...................................................8 10.01. Effect on Service..............................................8 10.02. Unfunded Plan..................................................8 10.03. Rules of Construction..........................................8 ARTICLE XI AMENDMENT...........................................................9 ARTICLE XII DURATION OF PLAN...................................................9 ARTICLE XIII EFFECTIVE DATE OF PLAN............................................9 ii ARTICLE I DEFINITIONS 1.01. Affiliate Affiliate means any "subsidiary" or "parent" corporation (within the meaning of Section 424 of the Code) of the Corporation. 1.02. Agreement Agreement means a written agreement (including any amendment or supplement thereto) between the Company and a Participant specifying the terms and conditions of an Option or Stock Award granted to such Participant. 1.03. Board Board means the Board of Directors of the Company. 1.04. Code Code means the Internal Revenue Code of 1986, and any amendments thereto. 1.05. Committee Committee means the Executive Committee of the Board. 1.06. Common Stock Common Stock means the common stock of the Company. 1.07. Company Company means Tredegar Industries, Inc. 1.08. Fair Market Value Fair Market Value means, on any given date, the closing price of a share of Common Stock as reported on the New York Stock Exchange composite tape on such date, or if the Common Stock was not traded on the New York Stock Exchange on such day, then on the next preceding day that the Common Stock was traded on such exchange, all as reported by such source as the Committee may select. 1.09. Option Option means a stock option that entitles the holder to purchase from the Company a stated number of shares of Common Stock at the price set forth in an Agreement. 1.10. Participant Participant means a member of the Board who is not an employee of the Company or an Affiliate of the Company, who is selected to receive an Option, a Stock Award, or both. 1.11. Plan Plan means the Tredegar Industries, Inc. Directors' Stock Plan. 1.12. Stock Award Stock Award means Common Stock awarded to a Participant under Article VII. ARTICLE II PURPOSES The Plan is intended to assist the Company in recruiting and retaining as members of the Board individuals with ability and initiative by enabling such persons to participate in the future success of the Company and to associate their interests with those of the Company and its shareholders. The Plan is intended to permit the grant of Options and Stock Awards. The proceeds received by the Company from the sale of Common Stock pursuant to this Plan shall be used for general corporate purposes. ARTICLE III ADMINISTRATION The Plan shall be administered by the Committee; provided, however, that all awards under the Plan shall be subject to the final approval of the Board. Subject to the preceding sentence, the Committee shall have authority to grant Options and Stock Awards upon such terms (not inconsistent with the provisions of this Plan), as the Committee may consider appropriate. Such terms may include conditions (in addition to those contained in this Plan), on the exercisability of all or any part of an Option or on the vesting or 2 transferability or both of Stock Awards. Notwithstanding any such conditions, the Committee may, in its discretion (but subject to the approval of the Board), accelerate the time at which any Option may be exercised or the time at which any Stock Award may become nonforfeitable, exercisable, or both. In addition, the Committee shall have complete authority to interpret all provisions of this Plan; to prescribe the form of Agreements; to adopt, amend, and rescind rules and regulations pertaining to the administration of the Plan; and to make all other determinations necessary or advisable for the administration of this Plan. The express grant in the Plan of any specific power to the Committee shall not be construed as limiting any power or authority of the Committee (other than the requirement that all awards under the Plan must be approved by the Board). Any decision made, or action taken, by the Committee or the Board or in connection with the administration of this Plan shall be final and conclusive. No member of the Committee or the Board shall be liable for any act done in good faith with respect to this Plan or any Agreement, Option or Stock Award. All expenses of administering this Plan shall be borne by the Company. ARTICLE IV ELIGIBILITY Any member of the Board who is not an employee of the Company or an Affiliate (including a corporation that becomes an Affiliate after the adoption of this Plan), is eligible to participate in this Plan if the Committee, with the approval of the Board, determines that such person has contributed significantly or can be expected to contribute significantly to the profits or growth of the Company. ARTICLE V STOCK SUBJECT TO PLAN 5.01. Shares Issued. Upon the award of shares of Common Stock pursuant to a Stock Award the Company may issue shares of Common Stock from its authorized but unissued Common Stock. Upon the exercise of any Option the Company may deliver to the Participant (or the Participant's broker if the Participant so directs), shares of Common Stock from its authorized but unissued Common Stock. 3 5.02. Aggregate Limit. The maximum aggregate number of shares of Common Stock that may be issued under this Plan pursuant to the exercise of Options and the grant of Stock Awards is 15,000 shares. The maximum aggregate number of shares that may be issued under this Plan shall be subject to adjustment as provided in Article VIII. 5.03. Reallocation of Shares. If an Option is terminated, in whole or in part, for any reason other than its exercise, the number of shares of Common Stock allocated to the Option or portion thereof may be reallocated to other Options and Stock Awards to be granted under this Plan. If a Stock Award is forfeited, in whole or in part, the number of shares of Common Stock allocated to the Stock Award or portion thereof may be reallocated to other Options and Stock Awards to be granted under this Plan. ARTICLE VI OPTIONS 6.01. Award. In accordance with the provisions of Article IV, the Committee, subject to the approval of the Board, will designate each individual to whom an Option is to be granted. 6.02. Option Price. The price per share for Common Stock purchased on the exercise of an Option shall be determined by the Committee on the date of grant, subject to the approval of the Board, but shall not be less than the Fair Market Value on the date the Option is granted. 6.03. Maximum Option Period The maximum period in which an Option may be exercised shall be determined by the Committee on the date of grant, subject to the approval of the Board, except that no Option shall be exercisable after the expiration of ten years from the date such Option was granted. 6.04. Nontransferability. Except as provided in Section 6.05, each Option granted under this Plan shall be nontransferable except by will or by the laws of descent and 4 distribution. Except as provided in Section 6.05, during the lifetime of the Participant to whom the Option is granted, the Option may be exercised only by the Participant. No right or interest of a Participant in any Option shall be liable for, or subject to, any lien, obligation, or liability of such Participant. 6.05. Transferable Options. Section 6.04 to the contrary notwithstanding, if the Agreement provides, an Option may be transferred by a Participant to the Participant's children, grandchildren, spouse, one or more trusts for the benefit of such family members or a partnership in which such family members are the only partners, on such terms and conditions as may be permitted under Securities Exchange Commission Rule 16b-3 as in effect from time to time. The holder of an Option transferred pursuant to this section shall be bound by the same terms and conditions that governed the Option during the period that it was held by the Participant; provided, however, that such transferee may not transfer the Option except by will or the laws of descent and distribution. 6.06. Director Status. In the event that the terms of any Option provide that it may be exercised only during a Participant's service on the Board or within a specified period of time thereafter, the Committee may decide to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous service. 6.07. Exercise. Subject to the provisions of this Plan and the applicable Agreement, an Option may be exercised in whole at any time or in part from time to time at such times and in compliance with such requirements as the Committee, with the approval of the Board, shall determine. An Option granted under this Plan may be exercised with respect to any number of whole shares less than the full number for which the Option could be exercised. A partial exercise of an Option shall not affect the right to exercise the Option from time to time in accordance with this Plan and the applicable Agreement with respect to the remaining shares subject to the Option. 6.08. Payment. Unless otherwise provided by the Agreement, payment of the Option price shall be made in cash or a cash equivalent. If the Agreement provides, payment of all or part of the Option price may be made by surrendering shares of Common Stock to the Company. If Common Stock is used to pay all or part of the Option price, the sum of the cash and cash equivalent and the Fair Market Value (determined as of the day preceding the date of exercise) of the shares 5 surrendered must not be less than the Option price of the shares for which the Option is being exercised. 6.09. Shareholder Rights. No Participant shall have any rights as a shareholder with respect to shares subject to his Option until the date of exercise of such Option. ARTICLE VII STOCK AWARDS 7.01. Award. In accordance with the provisions of Article IV, the Committee, subject to the approval of the Board, will designate each individual to whom a Stock Award is to be made and the number of shares of Common Stock subject to the Stock Award. 7.02. Vesting. The Committee on the date of the award, subject to the approval of the Board, may prescribe that a Participant's rights in a Stock Award shall be forfeitable or otherwise restricted for a period of time or subject to such conditions as may be set forth in the Agreement. 7.03. Director Status. In the event that the terms of any Stock Award provide that shares may become transferable and nonforfeitable thereunder only after completion of a specified period of service on the Board, the Committee may decide in each case to what extent leaves of absence for governmental or military service, illness, temporary disability, or other reasons shall not be deemed interruptions of continuous service. 7.04. Shareholder Rights Prior to their forfeiture (in accordance with the applicable Agreement and while the shares of Common Stock granted pursuant to the Stock Award may be forfeited or are nontransferable), a Participant will have all rights of a shareholder with respect to a Stock Award, including the right to receive dividends and vote the shares; provided, however, that during such period (i) a Participant may not sell, transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of Common Stock granted pursuant to a Stock Award, and (ii) the Company shall retain custody of the certificates evidencing shares of Common Stock granted pursuant to a Stock Award, and (iii) the Participant will deliver to the Company a stock power, endorsed in blank, with respect to each Stock 6 Award. The limitations set forth in the preceding sentence shall not apply after the shares of Common Stock granted under the Stock Award are transferable and are no longer forfeitable. ARTICLE VIII ADJUSTMENT UPON CHANGE IN COMMON STOCK The maximum number of shares as to which Options and Stock Awards may be granted under this Plan and the terms of outstanding Options and Stock Awards shall be adjusted as the Board shall determine to be equitably required in the event that (a) the Company (i) effects one or more stock dividends, stock split-ups, subdivisions or consolidations of shares or (ii) engages in a transaction to which Section 424 of the Code applies or (b) there occurs any other event which, in the judgment of the Board necessitates such action. Any determination made under this Article VIII by the Board shall be final and conclusive. The issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, for cash or property, or for labor or services, either upon direct sale or upon the exercise of rights or warrants to subscribe therefor, or upon conversion of shares or obligations of the Company convertible into such shares or other securities, shall not affect, and no adjustment by reason thereof shall be made with respect to, the maximum number of shares as to which Options and Stock Awards may be granted or the terms of outstanding Options and Stock Awards. ARTICLE IX COMPLIANCE WITH LAW AND APPROVAL OF REGULATORY BODIES No Option shall be exercisable, no Common Stock shall be issued, no certificates for shares of Common Stock shall be delivered, and no payment shall be made under this Plan except in compliance with all applicable federal and state laws and regulations (including, without limitation, withholding tax requirements), any listing agreement to which the Company is a party, and the rules of all domestic stock exchanges on which the Company's shares may be listed. The Company shall have the right to rely on an opinion of its counsel as to such compliance. Any share certificate issued to evidence Common Stock when an Option is exercised or a Stock Award is granted may bear such legends and statements as the Committee may deem advisable to assure compliance with federal and state laws and regulations. No Option shall be exercisable, no Common Stock 7 shall be issued, no certificate for shares shall be delivered, and no payment shall be made under this Plan until the Company has obtained such consent or approval as the Committee may deem advisable from regulatory bodies having jurisdiction over such matters. ARTICLE X GENERAL PROVISIONS 10.01. Effect on Service. Neither the adoption of this Plan, its operation, nor any documents describing or referring to this Plan (or any part thereof), shall confer upon any individual any right to continue in the service of the Company or in any way affect any right and power of the Company to terminate the service of any individual at any time with or without assigning a reason therefor. 10.02. Unfunded Plan. The Plan, insofar as it provides for grants, shall be unfunded, and the Company shall not be required to segregate any assets that may at any time be represented by grants under this Plan. Any liability of the Company to any person with respect to any grant under this Plan shall be based solely upon any contractual obligations that may be created pursuant to this Plan. No such obligation of the Company shall be deemed to be secured by any pledge of, or other encumbrance on, any property of the Company. 10.03. Rules of Construction. Headings are given to the articles and sections of this Plan solely as a convenience to facilitate reference. The reference to any statute, regulation, or other provision of law shall be construed to refer to any amendment to or successor of such provision of law. 8 ARTICLE XI AMENDMENT The Board may amend or terminate this Plan from time to time; provided, however, that no amendment may become effective until shareholder approval is obtained if (i) the amendment increases the aggregate number of shares of Common Stock that may be issued under the Plan (other than an adjustment pursuant to Article VIII) or (ii) the amendment changes the class of individuals eligible to become Participants. No amendment shall, without a Participant's consent, adversely affect any rights of such Participant under any Option or Stock Award outstanding at the time such amendment is made. ARTICLE XII DURATION OF PLAN No Option or Stock Award may be granted under this Plan after February 24, 2008. Options and Stock Awards granted before that date shall remain valid in accordance with their terms. ARTICLE XIII EFFECTIVE DATE OF PLAN Options may be granted under this Plan upon its adoption by the Board, provided that no Option shall be effective or exercisable unless this Plan is approved by a majority of the votes cast by the Company's shareholders, voting either in person or by proxy, at a duly held shareholders' meeting at which a quorum is present. Stock Awards may be granted under this Plan upon its approval by the company's shareholders in accordance with the preceding sentence. 9 EX-21 7 SUBSIDIARIES Exhibit 21 TREDEGAR INDUSTRIES, INC. Virginia Jurisdiction Name of Subsidiary of Incorporation BLC G.P., Inc. Virginia Bon L Campo Limited Partnership Texas Bon L Canada Inc. Canada The William L. Bonnell Company, Inc. Georgia Capitol Products Corporation Pennsylvania Fiberlux, Inc. Virginia Guangzhou Tredegar Films Company Limited China Idlewood Properties, Inc. Virginia Molecumetics Institute, Ltd. Virginia Molecumetics, Ltd. Virginia TGI Fund I, LC Virginia TGI Fund II, LC Virginia Tredegar Brazil Industria Brazil De Plasticos Ltda. Tredegar Development Corporation Virginia Tredegar Exploration, Inc. Virginia Tredegar Film Products Argentina S.A. Argentina Tredegar Film Products, B.V. Netherlands Tredegar Film Products (Japan) Ltd. Virginia Tredegar Film Products Kft Hungary Tredegar Film Products Polska Sp. z o.o. Poland Tredegar Films Development, Inc. Virginia Tredegar Foreign Sales Corporation U.S. Virgin Islands Tredegar Holdings Corporation Virginia Tredegar Reserves, Inc. Virginia Tredegar Investments, Inc. Virginia Virginia Techport, Inc. Virginia WLB L.P., Inc. Virginia EX-23 8 CONSENT OF INDEPENDENT ACCOUNTANTS CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Tredegar Industries, Inc. on Form S-3 (File No. 33-57268) and on Forms S-8 (File No. 33-31047, File No. 33-50276, File No. 33-64647, File No. 33-12985 and File No. 33-63487) of our report dated January 12, 1999, on our audits of the consolidated financial statements of Tredegar Industries, Inc. and subsidiaries as of December 31, 1998 and 1997 and for each of the three years in the period ended December 31, 1998, which report is included in the Annual Report on Form 10-K. /s/ PricewaterhouseCoopers LLP January 29, 1999 Richmond, Virginia EX-27 9 FDS
5 THE SCHEDULE CONTAINS UNAUDITED SUMMARY FINANCIAL INFORMATION FOR TREDEGAR INDUSTRIES, INC. AND SUBSIDIARIES EXTRACTED FROM THE BALANCE SHEET FOR THE PERIOD ENDED DECEMBER 31, 1998 AND THE STATEMENT OF INCOME FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 DEC-31-1998 25,409 0 98,040 3,699 34,276 166,324 356,411 200,380 457,178 88,865 25,000 0 0 95,893 214,402 457,178 699,796 703,811 553,389 553,389 53,234 660 1,318 95,210 31,054 64,156 4,713 0 0 68,869 1.90 1.78
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