10-Q 1 final.txt THIRD QUARTER REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- FORM 10-Q (Mark One) ___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) / X / OF THE SECURITIES EXCHANGE ACT OF 1934 ---- For the quarterly period ended September 30, 2001 OR ___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) / / OF THE SECURITIES EXCHANGE ACT OF 1934 ---- For the transition period from to --------------------- ---------------------- Commission file number 1-10258 ------- Tredegar Corporation -------------------------------------------------------------------------------- (Exact Name of Registrant as Specified in its Charter) Virginia 54-1497771 --------------------------------- ----------------------------- (State or Other Jurisdiction of (I.R.S. Employer 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 -------------- Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yes X No ----- ----- The number of shares of Common Stock, no par value, outstanding as of October 29, 2001: 38,124,727. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. Tredegar Corporation Consolidated Balance Sheets (In Thousands) (Unaudited)
Sept. 30, Dec. 31, 2001 2000 --------- --------- Assets Current assets: Cash and cash equivalents $ 74,081 $ 44,530 Receivable from securities brokers 480 292 Accounts and notes receivable 102,705 96,652 Income taxes recoverable 8,348 3,857 Inventories 43,832 46,825 Deferred income taxes 13,630 13,788 Prepaid expenses and other 3,132 2,818 --------- --------- Total current assets 246,208 208,762 --------- --------- Property, plant and equipment, at cost 538,404 518,174 Less accumulated depreciation 268,182 244,667 --------- --------- Net property, plant and equipment 270,222 273,507 --------- --------- Venture capital investments 169,506 232,259 Other assets and deferred charges 56,260 49,661 Goodwill and other intangibles 137,999 139,579 --------- --------- Total assets $880,195 $ 903,768 ========= ========= Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 50,127 $ 51,818 Accrued expenses 44,037 36,593 --------- --------- Total current liabilities 94,164 88,411 Long-term debt 264,767 268,102 Deferred income taxes 26,880 40,650 Other noncurrent liabilities 9,407 8,877 --------- --------- Total liabilities 395,218 406,040 --------- --------- Shareholders' equity: Common stock, no par value 106,764 106,587 Common stock held in trust for savings restoration plan (1,212) (1,212) Unrealized gain on available-for-sale securities 8,624 29,331 Foreign currency translation adjustment (5,697) (5,732) Loss on derivative financial instruments (1,983) - Retained earnings 378,481 368,754 --------- --------- Total shareholders' equity 484,977 497,728 --------- --------- Total liabilities and shareholders' equity $880,195 $ 903,768 ========= =========
See accompanying notes to financial statements. 2 Tredegar Corporation Consolidated Statements of Operations (In Thousands) (Unaudited)
Third Quarter Nine Months Ended September 30 Ended September 30 -------------------------- ---------------------- 2001 2000 2001 2000 --------- --------- --------- -------- Revenues: Gross sales $202,380 $ 219,678 $599,311 $684,198 Freight 3,968 4,051 11,653 12,840 --------- --------- --------- -------- Net sales 198,412 215,627 587,658 671,358 Other income (expense), net (4,151) 79,641 (7,839) 113,567 --------- --------- --------- -------- Total 194,261 295,268 579,819 784,925 --------- --------- --------- -------- Costs and expenses: Cost of goods sold 160,473 177,170 478,310 542,172 Selling, general and administrative 12,539 15,236 35,870 41,161 Research and development 9,014 6,910 24,271 18,887 Amortization of goodwill and other intangibles 1,226 1,276 3,682 3,828 Interest 2,954 4,455 10,227 13,057 Unusual items 9,848 16,870 10,477 21,829 --------- --------- --------- -------- Total 196,054 221,917 562,837 640,934 --------- --------- --------- -------- Income (loss) from continuing operations before income taxes (1,793) 73,351 16,982 143,991 Income taxes (679) 26,313 4,082 52,122 --------- --------- --------- -------- Income (loss) from continuing operations (1,114) 47,038 12,900 91,869 Income from discontinued operations - - 1,396 - --------- --------- --------- -------- Net income (loss) $ (1,114) $ 47,038 $ 14,296 $ 91,869 ========= ========= ========= ======== Earnings (loss) per share: Basic: Continuing operations $ (.03) $ 1.24 $ .34 $ 2.43 Discontinued operations - - .04 - --------- --------- --------- -------- Net income (loss) $ (.03) $ 1.24 $ .38 $ 2.43 ========= ========= ========= ======== Diluted: Continuing operations $ (.03) $ 1.21 $ .33 $ 2.36 Discontinued operations - - .04 - --------- --------- --------- -------- Net income (loss) $ (.03) $ 1.21 $ .37 $ 2.36 ========= ========= ========= ======== Shares used to compute earnings (loss) per share: Basic 38,059 37,944 38,055 37,859 Diluted 38,059 38,847 38,824 38,952 Dividends per share $ .04 $ .04 $ .12 $ .12
See accompanying notes to financial statements. 3 Tredegar Corporation Consolidated Statements of Cash Flows (In Thousands) (Unaudited)
Nine Months Ended September 30 ------------------------ 2001 2000 --------- --------- Cash flows from operating activities: Net income $ 14,296 $ 91,869 Adjustments for noncash items: Income from discontinued operations (1,396) - Depreciation 24,149 23,734 Amortization of intangibles 3,682 3,828 Write-off of goodwill - 9,950 Deferred income taxes 521 1,661 Accrued pension income and postretirement benefits (7,740) (5,703) Loss (gain) on venture capital investments 8,976 (112,839) Loss on equipment writedowns and divestitures 5,721 11,689 Allowance for doubtful accounts 298 4,010 Changes in assets and liabilities, net of effects from acquisitions and divestitures: Accounts and notes receivable (6,613) 5,663 Inventories 2,883 3,630 Income taxes recoverable (4,491) - Prepaid expenses and other (309) 329 Accounts payable (392) (1,020) Accrued expenses and income taxes payable 4,555 7,020 Other, net 1,465 (378) --------- --------- Net cash provided by operating activities 45,605 43,443 --------- --------- Cash flows from investing activities: Capital expenditures (30,010) (60,418) Venture capital investments (16,560) (74,783) Proceeds from the sale of venture capital investments 37,794 112,131 Proceeds from property disposals and divestitures 2,224 9,205 Other, net (1,775) (2,328) --------- --------- Net cash used in investing activities (8,327) (16,193) --------- --------- Cash flows from financing activities: Dividends paid (4,569) (4,554) Net decrease in borrowings (3,335) (5,000) Proceeds from exercise of stock options (including related income tax benefits realized) 177 3,710 --------- --------- Net cash used in financing activities (7,727) (5,844) --------- --------- Increase in cash and cash equivalents 29,551 21,406 Cash and cash equivalents at beginning of period 44,530 25,752 --------- --------- Cash and cash equivalents at end of period $ 74,081 $ 47,158 ========= =========
See accompanying notes to financial statements. 4 TREDEGAR CORPORATION NOTES TO THE CONSOLIDATED INTERIM FINANCIAL STATEMENTS (Unaudited) 1. In the opinion of management, the accompanying consolidated financial statements of Tredegar Corporation and Subsidiaries ("Tredegar") contain all adjustments necessary to present fairly, in all material respects, Tredegar's consolidated financial position as of September 30, 2001, and the consolidated results of operations and cash flows for the nine months ended September 30, 2001 and 2000. All such adjustments are deemed to be of a normal recurring nature. These financial statements should be read in conjunction with the consolidated financial statements and related notes included in Tredegar's Annual Report on Form 10-K for the year ended December 31, 2000. The results of operations for the nine months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. Effective January 1, 2001, we adopted the new accounting standard for derivative instruments and hedging activities issued by the Financial Accounting Standards Board. This standard affects our accounting for futures contracts to hedge aluminum price risk and our interest rate swap agreements to hedge interest rate risk. 2. See pages 11 through 13 for information on unusual items recognized during the quarter and the nine months ended September 30, 2001 and 2000. 3. A summary of our venture capital activities for the quarter and nine months ended September 30, 2001 and 2000, is provided below:
(In Thousands) Third Quarter Nine Months Ended September 30 Ended September 30 --------------------- ------------------------ 2001 2000 2001 2000 ---------- --------- --------- --------- Carrying value, beginning of period $ 198,476 $262,277 $ 232,259 $140,698 Activity for period (pre-tax): New investments 7,452 27,772 16,560 74,783 Proceeds from the sale of investments, including receivables from security brokers (9,740) (84,909) (37,982) (128,344) Realized gains 5,926 80,301 24,788 117,306 Realized losses, write-offs and write-downs (10,041) (1,003) (33,764) (4,467) Increase (decrease) in net unrealized gain on available-for-sale securities (22,567) 73,666 (32,355) 158,128 ---------- --------- --------- --------- Carrying value, end of period $ 169,506 $358,104 $ 169,506 $358,104 ========== ========= ========= =========
Our remaining unfunded commitments to private venture capital funds totaled approximately $40.3 million at September 30, 2001, and $50.9 million at December 31, 2000. A schedule of investments is provided on the following two pages. 5 ------------------------------------------------------------------------------------------------------------------------------------ Tredegar Corporation Schedule of Investments at September 30, 2001 and December 31, 2000 (In Thousands, Except Per-Share Amounts)
Yrs. Web Site Investment Symbol Held(a) Description (www.) ------------------------------------------------------------------------------------------------------------------------------------ Securities of Public Companies Held: Adolor Corporation ADLR 2.8 Develops pain-management therapeutic drugs adolor.com Illumina, Inc. ILMN 2.9 Fiber optic sensor technology for drug screening illumina.com SignalSoft Corporation SGSF 3.6 Wireless caller location detection software signalsoftcorp.com Vascular Solutions VASC 3.8 Vascular access site closure system vascularsolutions.com Photon Dynamics, Inc. (f) PHTN 3.3 Test and repair systems for flat panel display industry photondynamics.com Cisco Systems, Inc. (f) CSCO 2.2 Worldwide leader in networking for the Internet cisco.com Nortel Networks Corporation (f) NT 3.5 Networking solutions and services nortelnetworks.com CardioGenesis Corporation CGCP 7.3 Coronary revascularization eclipsesurg.com Openwave Systems, Inc. (f) OPWV 1.9 Infrastructure applications for the Internet openwave.com Lifeminders.com, Inc. LFMN 2.0 Online direct marketing of personalized content lifeminders.com Superconductor Tech., Inc. SCON 1.8 Manufactures filters for wireless networks suptech.com Rosetta Inpharmatics, Inc. RSTA 4.1 Gene function/drug screening on a chip rii.com Eprise Corporation EPRS 3.3 Web site maintenance & development tool eprise.com ------------------------------------------------------------------------------------------------------------------------------------ Total securities of public companies held ------------------------------------------------------------------------------------------------------------------------------------ Securities of Private Companies Held: CryoGen 6.0 Micro-cryogenic catheters for medical applications cryogen-inc.com Sensitech Inc. 4.6 Perishable product mgmt. solutions sensitech.com Bell Geospace 4.3 Presentation of 3D data to the oil & gas industry bellgeo.com Songbird Medical, Inc. 4.2 Disposable hearing aids RedCreek Communications 4.1 Internet and intranet security redcreek.com Appliant, Inc. 4.0 Software tools for managing executable software appliant.com Ellipsys Technologies, Inc. 3.9 Telephone system error detection ellipsystech.com HemoSense 3.9 Point of care blood coagulation time test device hemosense.com Moai Technologies, Inc. 3.8 System for holding auctions on the Internet moai.com Babycare, Ltd. 3.6 Direct retailing of baby care products in China NovaLux, Inc. 3.4 Blue-green light lasers novalux.com Xcyte Therapies, Inc. 3.2 Develops drugs to treat cancer & other disorders xcytetherapies.com Advanced Diagnostics, Inc. 2.9 3-D medical imaging equipment Praxon, Inc. 2.8 Integrated business communications equipment praxon.com AdiCom Wireless, Inc. 2.7 Wireless local loop technology adicomwireless.com EndoVasix, Inc. 2.7 Device for treatment of ischemic strokes endovasix.com eWireless, inc. 2.7 Technology linking cell phone users & advertising ewireless.com Cooking.com, Inc. 2.5 Sales of cooking-related items over the Internet cooking.com MediaFlex.com 2.5 Internet-based printing & publishing mediaflex.com eBabyCare Ltd. 2.3 Sales of babycare products over the Internet in China Kodiak Technologies, Inc. 2.3 Cooling products for organ & pharma transport kodiaktech.com Artemis Medical, Inc. 2.2 Medical devices for breast cancer surgery CEPTYR, Inc. 2.2 Develops small molecule drugs ceptyr.com GreaterGood.com 2.2 Internet marketing targeted at donors to charities greatergood.com Etera Corporation 2.1 Sales of branded perennial plants over the Internet etera.com ThinkFree.com 2.0 Java-based software complementary to Microsoft Office thinkfree.com BroadRiver Communications 1.9 Local DSL provider purepacket.com Quarry Technologies, Inc. 1.9 Technology for delivery of differentiated service levels quarrytech.com Norborn Medical, Inc. 1.8 Device for treatment of cardiovascular disease FastTrack Systems, Inc. 1.7 Clinical trial data management information systems Riveon, Inc. 1.6 Web-based data mining software for business managers MedManage Systems Inc. 1.5 Management of prescription drug sampling programs Linx Communications, Inc. 1.3 Unified communications and messaging systems Infinicon, Inc. 1.3 Manufacturer of infiniband input/output products Cbyon, Inc. 1.2 Provider of software image data to assist surgeons Extreme Devices 1.0 Manufacturer of integrated, solid-state electron source ------------------------------------------------------------------------------------------------------------------------------------ Subtotal securities of private companies held ------------------------------------------------------------------------------------------------------------------------------------ See notes on page 7.
------------------------------------------------------------------------------------------------------------------------------------ Tredegar Corporation Schedule of Investments at September 30, 2001 and December 31, 2000 (In Thousands, Except Per-Share Amounts)
Public Common Stock or Equivalents at 9/30/01 9/30/01 (e) 12/31/00 (e) --------------------------- ----------------------------------------------------------------- Estimated Restricted Estimated Estimated Shares Closing Stock Dis- Fair Carrying Cost Fair Carrying Cost Investment Held Price count (c) Value (b) Value (b) Basis Value (b) Value (b) Basis ------------------------------------------------------------------------------------------------------------------------------------ Securities of Public Companies Held: Adolor Corporation 583 $ 16.93 0% $ 9,876 $ 9,876 $ 2,386 $ 12,291 $ 12,291 $ 3,000 Illumina, Inc. 1,380 6.50 0% 8,970 8,970 3,282 21,395 21,395 3,925 SignalSoft Corporation 412 3.93 0% 1,612 1,612 1,330 7,261 7,261 3,006 Vascular Solutions 861 1.77 0% 1,523 1,523 2,429 5,060 5,060 2,450 Photon Dynamics, Inc. (f) 21 23.15 20% 387 387 940 14,993 3,825 4,700 Cisco Systems, Inc. (f) 14 12.18 0% 165 165 200 405 405 200 Nortel Networks Corporation (f) 25 5.61 20% 113 105 117 617 617 117 CardioGenesis Corporation 113 .84 0% 95 95 616 381 381 2,464 Openwave Systems, Inc. (f) 1 12.75 0% 18 18 7 2,689 2,689 348 Lifeminders.com, Inc. 4 1.55 0% 7 7 17 - - - Superconductor Tech., Inc. - - 0% - - - 603 603 552 Rosetta Inpharmatics, Inc. - - 0% - - - 13,599 13,599 4,745 Eprise Corporation - - 0% - - - 2,633 2,633 2,382 ------------------------------------------------------------------------------------------------------------------------------------ Total securities of public companies held 22,766 22,758 11,324 81,927 70,759 27,889 ------------------------------------------------------------------------------------------------------------------------------------ Securities of Private Companies Held: CryoGen 4,432 3,179 3,179 4,265 3,054 3,054 Sensitech Inc. 3,197 2,333 2,333 3,154 2,333 2,333 Bell Geospace - - 3,500 - - 3,500 Songbird Medical, Inc. 3,190 3,190 4,210 8,013 4,210 4,210 RedCreek Communications - - 2,256 706 549 2,256 Appliant, Inc. 6,439 3,899 3,899 6,352 3,899 3,899 Ellipsys Technologies, Inc. - - 2,275 - - 2,275 HemoSense 2,771 2,485 2,485 2,733 2,485 2,485 Moai Technologies, Inc. - - 2,021 6,263 2,021 2,021 Babycare, Ltd. - - 1,009 - - 1,009 NovaLux, Inc. 50,721 10,149 10,149 50,801 10,149 10,149 Xcyte Therapies, Inc. 5,589 3,795 3,795 5,598 3,795 3,795 Advanced Diagnostics, Inc. 2,032 2,121 2,121 1,321 1,371 1,371 Praxon, Inc. - - 2,309 - - 2,309 AdiCom Wireless, Inc. - - 4,062 2,648 2,648 4,062 EndoVasix, Inc. 4,263 4,000 4,000 4,270 4,000 4,000 eWireless, inc. 47,652 2,250 2,250 47,728 2,250 2,250 Cooking.com, Inc. 1,500 1,500 4,500 1,500 1,500 4,500 MediaFlex.com - - 3,500 4,085 3,500 3,500 eBabyCare Ltd. - - 314 - - 314 Kodiak Technologies, Inc. 2,094 2,094 2,094 1,694 1,694 1,694 Artemis Medical, Inc. 3,267 2,467 2,467 3,201 2,467 2,467 CEPTYR, Inc. 1,750 1,750 1,750 1,750 1,750 1,750 GreaterGood.com - - 3,797 - - 3,781 Etera Corporation - - 5,500 5,269 5,000 5,000 ThinkFree.com 3,773 1,491 1,491 3,696 1,491 1,491 BroadRiver Communications - - 4,779 9,136 4,779 4,779 Quarry Technologies, Inc. 2,567 2,567 4,046 3,425 3,425 3,425 Norborn Medical, Inc. - - 188 - - 188 FastTrack Systems, Inc. 7,182 5,479 5,479 7,962 5,134 5,134 Riveon, Inc. - - 1,990 1,700 1,700 1,700 MedManage Systems Inc. 5,200 5,200 5,200 4,000 4,000 4,000 Linx Communications, Inc. 125 125 3,000 3,000 3,000 3,000 Infinicon, Inc. 3,485 3,485 3,485 3,485 3,485 3,485 Cbyon, Inc. 3,839 3,839 3,839 3,500 3,500 3,500 Extreme Devices 5,000 5,000 5,000 5,000 5,000 5,000 ------------------------------------------------------------------------------------------------------------------------------------ Subtotal securities of private companies held 170,068 72,398 118,272 206,255 94,189 113,686 ------------------------------------------------------------------------------------------------------------------------------------ See notes on page 7.
6 ------------------------------------------------------------------------------------------------------------------------------------ Tredegar Corporation Schedule of Investments at September 30, 2001 and December 31, 2000 (In Thousands, Except Per-Share Amounts)
Yrs. Web Site Investment Held (a) Description (www.) ------------------------------------------------------------------------------------------------------------------------------------ Total securities of public companies held (from page 6) ------------------------------------------------------------------------------------------------------------------------------------ Subtotal securities of private companies held (from page 6) Locus Discovery .9 Computational chemogenomics technology eTunnels .8 VPNs across all ISPs and companies Elixir .8 Evaluation technology for anti-aging compounds ------------------------------------------------------------------------------------------------------------------------------------ Total securities of private companies held ------------------------------------------------------------------------------------------------------------------------------------ Limited partnership interests in private venture capital funds (period held of .8 - 9.0 years) (d) ------------------------------------------------------------------------------------------------------------------------------------ Total investments Estimated taxes on assumed disposal at fair value ------------------------------------------------------------------------------------------------------------------------------------ Estimated net asset value ("NAV") ------------------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------------------ Tredegar Corporation Schedule of Investments at September 30, 2001 and December 31, 2000 9/30/01(e) 12/31/00(e) (In Thousands, Except Per-Share Amounts) -------------------------------------------------------------- Estimated Estimated Fair Carrying Cost Fair Carrying Cost Investment Value (b) Value (b) Basis Value (b) Value (b) Basis ------------------------------------------------------------------------------------------------------------------------------------ Total securities of public companies held (from page 6) 22,766 22,758 11,324 81,927 70,759 27,889 ------------------------------------------------------------------------------------------------------------------------------------ Subtotal securities of private companies held (from page 6) 170,068 72,398 118,272 206,255 94,189 113,686 Locus Discovery 6,333 4,000 4,000 3,000 3,000 3,000 eTunnels 3,000 3,000 3,000 3,000 3,000 3,000 Elixir 2,827 2,827 2,827 250 250 250 ------------------------------------------------------------------------------------------------------------------------------------ Total securities of private companies held 182,228 82,225 128,099 212,505 100,439 119,936 ------------------------------------------------------------------------------------------------------------------------------------ Limited partnership interests in private venture capital funds (period held of .8 - 9.0 years) 77,413 64,523 72,370 109,099 61,061 65,271 ------------------------------------------------------------------------------------------------------------------------------------ Total investments 282,407 $169,506 $211,793 403,531 $232,259 $213,096 -------------------- -------------------- Estimated taxes on assumed disposal at fair value 25,421 68,557 -------------------------------------------------------------------------------- ------------ Estimated net asset value ("NAV") $ 256,986 $ 334,974 -------------------------------------------------------------------------------- ------------
(a) The period held for an investment in a company or a venture capital fund is computed using the initial investment date and the current valuation date. If a company has merged with another company, then the initial investment date is the date of the investment in the predecessor company. (b) Amounts are shown net of carried interest estimated using realized and unrealized net gains to date. Amounts may change due to changes in estimated carried interest, and such changes are not expected to be material. Carried interest is the portion of value payable to portfolio managers based on realized net gains and is a customary incentive in the venture capital industry. (c) Restricted securities are securities for which an agreement exists not to sell shares for a specified period of time, usually 180 days. Also included within the category of restricted securities are unregistered securities, the sale of which must comply with an exemption to the Securities Act of 1933 (usually SEC Rule 144). These unregistered securities are either the same class of stock that is registered and publicly traded or are convertible into a class of stock that is registered and publicly traded. (d) At September 30, 2001, Tredegar had ownership interests in 28 venture capital funds, including an indirect interest in the following public companies, among others (disposition of shares held by venture funds, including distributions to limited partners, is at the sole discretion of the general partner of the fund):
Indirect Investment Symbol Description -------------------------------------------------------------------------------------------------------------- Adolor Corporation ADLR Develops pain-management therapeutic drugs (adolor.com) Illumina, Inc. ILMN Fiber optic sensor technology for drug screening (illumina.com) Array Biopharma ARRY Drug discovery research using innovative chemistry (arraybiopharma.com) Seattle Genetics SGEN Biopharmaceuticals for treatment of cancers (seattlegenetics.com) Universal Access, Inc. UAXS Wholesale provider of high bandwidth services (universalaccessinc.com) ASAT Holdings ASTT Provider of semiconductor assemply and testing services (asat.com) Lucent Technologies, Inc. LU Developer and manufacturer of communications systems (lucent.com) Metromedia Fiber Network MFNX Provider of high-band width fiber optic communications (mmfn.com) --------------------------------------------------------------------------------------------------------------
Indirect Indirect ------------------- Interest in Restricted Estimated Common Closing Stock Dis- Fair Cost Indirect Investment Shares Price count Value Basis ---------------------------------------------------------------------------------------------- Adolor Corporation 85 16.93 20% 1,148 411 Illumina, Inc. 203 6.50 20% 1,056 333 Array Biopharma 129 9.02 20% 933 279 Seattle Genetics 120 5.00 20% 481 219 Universal Access, Inc. 736 0.74 20% 436 521 ASAT Holdings 188 2.75 20% 414 449 Lucent Technologies, Inc. 71 5.73 0% 405 59 Metromedia Fiber Network 447 0.34 20% 122 546 ----------------------------------------------------------------------------------------------
(e) Our portfolio is subject to risks typically associated with investments in technology start-up companies, which include business failure, illiquidity and stock market volatility. (f) Public company stock received from the acquisition of a private company in the portfolio. 7 Certain events subsequent to September 30, 2001, indicate that there has been a $50 million reduction in the estimated fair value of private companies in our venture capital investment portfolio (a $30 million reduction in NAV). A write-off of related cost basis (carrying value) is expected in the fourth quarter of approximately $2 million ($1.3 million after income taxes). 4. Comprehensive income (loss), defined as net income (loss) and other comprehensive income (loss), was a loss of $17.5 million for the third quarter of 2001 and income of $89 million for the third quarter of 2000. Comprehensive income (loss) was a loss of $8.4 million for the first nine months of 2001 and income of $187.2 million for the first nine months of 2000. Other comprehensive income (loss) for both periods 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. For 2001, other comprehensive income (loss) includes the cumulative-effect adjustment for the adoption of the new accounting standard for derivative financial instruments (see Note 1) and changes in the gains and losses on derivative financial instruments recorded net of deferred income taxes directly in shareholders' equity. 5. The components of inventories are as follows: (In Thousands) Sept. 30, Dec. 31, 2001 2000 ---------- --------- Finished goods $ 7,225 $ 7,997 Work-in-process 4,386 4,314 Raw materials 20,771 23,889 Stores, supplies and other 11,450 10,625 ---------- --------- Total $ 43,832 $ 46,825 ========== ========= 6. Basic earnings per share is computed by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potentially dilutive common equivalent shares outstanding, determined as follows:
(In Thousands) Third Quarter Nine Months Ended September 30 Ended September 30 --------------------- ------------------------ 2001 2000 2001 2000 ---------- --------- --------- --------- Weighted average shares outstanding used to compute basic earnings per share 38,059 37,944 38,055 37,859 Incremental shares issuable upon the assumed exercise of stock options - 903 769 1,093 ---------- --------- --------- --------- Shares used to compute diluted earnings per share 38,059 38,847 38,824 38,952 ========== ========= ========= =========
Incremental shares issuable upon the assumed exercise of outstanding stock options are computed using the average market price during the related period. No incremental shares were assumed exercised in the third quarter of 2001 due to their anti-dilutive effect on the loss per share recognized for the period. 8 7. On April 27, 2001, we entered into a two-year interest rate swap agreement, with a notional amount of $50 million, under which we pay to a counterparty a fixed interest rate of 4.85% and the counterparty pays us a variable interest rate based on one-month LIBOR reset each month. This swap has been designated as and is accounted for as a cash flow hedge. It effectively fixes the rate on $50 million of our $250 million term loan at 4.85% plus the applicable credit spread (currently 62.5 basis points). On June 22, 2001, we entered into another two-year interest rate swap agreement, with a notional amount of $25 million, under which we pay to a counterparty a fixed interest rate of 4.64% and the counterparty pays us a variable interest rate based on one-month LIBOR reset each month. This swap has been designated as and is accounted for as a cash flow hedge. It effectively fixes the rate on $25 million of our $250 million term loan at 4.64% plus the applicable credit spread (currently 62.5 basis points). 8. The overall effective tax rate for the quarter ended September 30, 2001 is 37.9% versus 35.9% for the same quarter of prior year. The change is due to the amount of non-deductible expenses relative to the pretax loss. The overall effective tax rate from continuing operations for the nine months ended September 30, 2001 is 24% compared with 36.2% in the same period of the prior year. The decline in the overall rate is due primarily to the $1.9 million tax benefit related to the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations through 1997. Results for the nine months also include an after-tax gain from discontinued operations of $1.4 million related to the reversal of an income tax contingency accrual upon favorable conclusion of IRS examinations through 1997. The accrual was originally recorded in conjunction with the sale of The Elk Horn Coal Corporation in 1994. 9. In June 2001, the Financial Accounting Standards Board issued two new standards that primarily affect the accounting for acquisitions initiated after June 30, 2001 and the accounting for goodwill. There are transition provisions that may result in the reclassification of carrying values among existing goodwill and other intangible assets. Once adopted, these standards prohibit amortization of goodwill, but require transitional and annual impairment reviews that may result in the recognition of losses, among other requirements. We anticipate that adoption of these standards will result in an annual reduction of amortization expense of approximately $4.6 million ($3 million after income taxes). Additionally, we will reclassify from intangible assets to goodwill approximately $396,000 related to the Therics workforce, which no longer qualifies as a separately identifiable intangible asset. We have not yet completed the transitional impairment review. We will adopt these standards in the first quarter of 2002. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Results of Operations Third Quarter 2001 Compared with Third Quarter 2000 The loss for the third quarter of 2001 was $1.1 million (three cents per share), compared with net income of $47 million in 2000 ($1.21 per share). Results in the third quarter of 2001 include $3.6 million (nine cents per share) of realized net after-tax losses from venture capital investments compared with net after-tax gains of $49.8 million ($1.28 per share) in the third quarter of 2000. The third quarter of 2001 also includes an after-tax charge of $6.3 million (17 cents per share) related to two plant closings, while results in 2000 include a net after-tax charge of $10.8 million (28 cents per share) related primarily to a write-off of excess capacity and associated goodwill in our plastic films business. Pre-tax realized gains and losses from venture capital investment activities are included in "Other income (expense), net" in the consolidated statements of income on page 3 and "Venture capital investments" in the operating profit table on page 14. Operating expenses (primarily management fee expenses) for our venture capital investment activities are classified in "Selling, general and administrative expenses" ("SG&A") in the consolidated statements of income and "Venture capital investments" in the operating profit table. After-tax depreciation in the net asset value ("NAV") of the venture capital investment portfolio during the third quarter was $32.2 million. At September 30, 2001, the NAV of the portfolio was $257 million. For more information on our venture capital investment activities, see pages 15-17 and Note 3 on pages 5-8 (including discussion of events subsequent to September 30, 2001, affecting the venture capital investment portfolio). Net sales in the third quarter of 2001 decreased by 8% compared with 2000 due primarily to lower volume in Aluminum Extrusions (volume down 14%). For more information on net sales, see the business segment review beginning on page 14. The gross profit margin during the third quarter of 2001 increased to 19.1% from 17.8% in 2000. The improved profit margin was driven mainly by higher sales of new higher-margin products in Film Products. The gross profit margin in 2000 was negatively impacted by higher production costs associated with the commercialization of new products in Film Products. SG&A expenses in the third quarter of 2001 were $12.5 million, down from $15.2 million in 2000. The decline in SG&A expenses is primarily due to a $3.5 million charge in the third quarter of 2000 for a provision for doubtful accounts related to two film customers. As a percentage of net sales, SG&A expenses were 6.3% in the third quarter of 2001 compared with 7.1% in 2000. R&D expenses increased to $9 million in the third quarter of 2001 versus $6.9 million in 2000 primarily due to higher spending in Tredegar Biotech (Molecumetics and Therics) in support of increased research and development efforts. 10 Unusual items in the third quarter of 2001 totaled $9.8 million ($6.3 million after income taxes) and included: - a charge of $6.8 million ($4.4 million after income taxes) for the shutdown of the aluminum extrusions plant in El Campo, Texas, including an impairment loss for building and equipment ($4.5 million), severance costs ($710,000), excess working capital ($890,000) and other items ($700,000); and - a charge of $3 million ($1.9 million after income taxes) for the shutdown of the films manufacturing facility in Tacoma, Washington, including an impairment loss for equipment ($1.2 million), dismantling of equipment and restoration of the leased space ($700,000), excess working capital ($650,000) and other items ($450,000). Unusual items in the third quarter of 2000 totaled $16.9 million ($10.8 million after income taxes) and included: - a charge of $17.9 million ($11.4 million after income taxes) for the write-off of excess production capacity at our plastic films plants in Lake Zurich, Illinois, and Terre Haute, Indiana, including an impairment loss for equipment of $7.9 million and an impairment loss for the related goodwill of $10 million; and - a reversal of $1 million ($640,000 after income taxes) related to the first quarter charge for the shutdown of the Manchester, Iowa, films manufacturing facility due to revised estimates. Interest income, which is included in "Other income (expense), net" in the consolidated statements of income, was $717,000 in the third quarter of 2001 and $494,000 in 2000. The average tax-equivalent yield earned on cash equivalents was approximately 3.6% in the third quarter of 2001 and 6.5% in the third quarter of last year. The average cash and cash equivalents balance was approximately $78 million for the third quarter of 2001 versus approximately $30 million in 2000. 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 $3 million in the third quarter of 2001 from $4.5 million in 2000 due to a lower overall average interest rate and lower average debt outstanding. The average rate on variable-rate debt (approximately $255 million in 2001 versus $260 million in 2000), including the portion fixed by interest rate swaps (see Note 7 on pages 8-9), was 4.4% in the third quarter of 2001 versus 7.35% in 2000. The average rate on fixed-rate debt ($10 million in the third quarter of 2001 and $15 million in the third quarter of 2000) was 7.2% in both periods. The effective tax rate from manufacturing operations, excluding unusual items, decreased to 35.5% in the third quarter of 2001 from 36.5% in 2000 due to lower taxes accrued on income from foreign operations. The overall effective tax rate for the quarter was 37.9% versus 35.9% in the same quarter of the prior year. The change is due to the amount of non-deductible expenses relative to the pretax loss. Nine Months 2001 Compared with Nine Months 2000 Net income for the first nine months of 2001 was $14.3 million, down from $91.9 million in 2000 (37 cents per share versus $2.36 per share). Results for 2001 include $8.8 million (23 cents per share) of realized after-tax losses from venture capital investments compared with a gain of $69.8 million ($1.79 11 per share) in 2000. Results in 2001 also include an after-tax gain of $2.5 million (seven cents per share) related to the reversal of income tax contingency accruals and related interest received on tax overpayments upon favorable conclusion of certain IRS examinations and a gain of $1.4 million (four cents per share) related to the reversal of income tax contingency accruals associated with discontinued operations. The after-tax depreciation in the NAV of the venture capital investment portfolio through the first nine months of this year was $66.9 million. See Note 3 on pages 5-8 for more information on our venture capital investment activities, including discussion of events subsequent to September 30, 2001, affecting the venture capital investment portfolio. Net sales for the nine months ended September 30, 2001, decreased by 12.5% compared with the same period of last year. The lower net sales are due to lower volume in both Aluminum Extrusions (volume down 21%) and Film Products (volume down 6%). The impact on net sales of the decrease in volume in Film Products was offset by higher sales of new higher-margin products. For more information on net sales, see the business segment review beginning on page 14. The gross profit margin for the first nine months of 2001 decreased to 18.6% from 19.2% in 2000 primarily due to lower profit in Aluminum Extrusions resulting from lower volume. SG&A expenses were $35.9 million in 2001, down from $41.2 million in 2000. The decrease is primarily attributable to lower employee-related costs and the $3.5 million provision for doubtful accounts related to two film customers recorded in 2000. As a percentage of net sales, SG&A expenses were flat at 6.1% in both periods. R&D expenses increased to $24.3 million in 2001 from $18.9 million in 2000 due to higher spending in Tredegar Biotech in support of increased research and development efforts. Unusual items for the nine months ended September 30, 2001, totaled $10.5 million ($4.8 million after income taxes) and included: - a charge of $1.6 million ($1 million after income taxes) for further rationalization in the plastic films business; - a gain of $1 million ($621,000 after income taxes) for interest received on tax overpayments upon favorable conclusion of IRS examinations through 1997 (included in "Corporate expenses, net" in the net sales and operating profit by segment table); - an income tax benefit of $1.9 million related to the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations through 1997 (included in "Income taxes" in the Consolidated Statements of Income) - a charge of $6.8 million ($4.4 million after income taxes) for the shutdown of the aluminum extrusions plant in El Campo, Texas, including an impairment loss for building and equipment ($4.5 million), severance costs ($710,000), excess working capital ($890,000) and other items ($700,000); and - a charge of $3 million ($1.9 million after income taxes) for the shutdown of the films manufacturing facility in Tacoma, Washington, including an impairment loss for equipment ($1.2 million), dismantling of equipment and restoration of the leased space ($700,000), excess working capital($650,000) and other items ($450,000). 12 Results for the nine months also include an after-tax gain from discontinued operations of $1.4 million related to the reversal of an income tax contingency accrual upon favorable conclusion of IRS examinations through 1997. The accrual was originally recorded in conjunction with the sale of The Elk Horn Coal Corporation in 1994. Unusual items for the nine months ended September 30, 2000, totaled $21.8 million ($14 million after income taxes) and included: - a charge of $5.3 million ($3.4 million after income taxes) for the shutdown of a plastic films manufacturing facility in Manchester, Iowa, including an impairment loss for building and equipment ($4.1 million), severance costs ($700,000), and excess inventory and other items ($450,000); - a charge of $191,000 ($122,000 after income taxes) for costs associated with the evaluation of financing and structural options for Tredegar Investments; - a gain of $525,000 ($336,000 after income taxes) for the sale of Fiberlux, Inc.; - a charge of $17.9 million ($11.4 million after income taxes) for the write-off of excess production capacity at our plastic films plants in Lake Zurich, Illinois, and Terre Haute, Indiana, including an impairment loss for equipment of $7.9 million and an impairment loss for the related goodwill of $10 million; and - a reversal of $1 million ($640,000 after income taxes) related to the first quarter charge for the shutdown of the Manchester, Iowa, production facility due to revised estimates. Interest income for 2001 was $2.1 million versus $1.4 million in 2000. The average cash and cash equivalents balance was approximately $65 million for the nine months ended September 30, 2001 versus approximately $22 million for the same period in 2000. The average tax-equivalent yield earned on cash equivalents was approximately 4.4% for 2001 and 6.2% for 2000. Interest expense decreased to $10.2 million in 2001 from $13.1 million in 2000 due to a lower overall average interest rate and lower average debt outstanding. The average rate on variable-rate debt ($254.4 million in 2001 versus $254.3 million in 2000) was 5.4% in 2001 versus 7.1% in 2000. The average rate on fixed-rate debt ($13 million in 2001 and $18 million in 2000) was 7.2% in both periods. The effective income tax rate from manufacturing operations, excluding unusual items, decreased to 35.5% in 2001 from 36.5% in 2000 due to lower taxes accrued on income from foreign operations. The overall effective tax rate from continuing operations for the nine months ended September 30, 2001, is 24% compared with 36.2% in 2000. The decline in the overall rate is due primarily to the $1.9 million tax benefit related to the reversal of income tax contingency accruals upon favorable conclusion of IRS examinations through 1997. 13 Business Segment Review The following tables present Tredegar's net sales and operating profit by segment for the third quarter and nine months ended September 30, 2001 and 2000. Net Sales by Segment (In Thousands) (Unaudited)
Third Quarter Nine Months Ended September 30 Ended September 30 ------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ----------- ------------- ------------ Film Products $ 99,016 $ 95,058 $ 286,589 $ 288,448 Aluminum Extrusions 98,722 118,622 297,228 375,467 Fiberlux - - - 1,856 Tredegar Biotech: Molecumetics 581 1,826 3,485 5,278 Therics 93 121 356 309 ------------- ----------- ------------- ------------ Total net sales $ 198,412 $ 215,627 $ 587,658 $ 671,358 ============= =========== ============= ============
Operating Profit by Segment (In Thousands) (Unaudited)
Third Quarter Nine Months Ended September 30 Ended September 30 ------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ----------- ------------- ------------ Film Products: Ongoing operations $ 16,107 $ 7,675 $ 44,073 $ 36,206 Unusual items (3,000) (16,870) (4,600) (22,163) ------------- ----------- ------------- ------------ Total Film Products 13,107 (9,195) 39,473 14,043 ------------- ----------- ------------- ------------ Aluminum Extrusions: Ongoing operations 7,191 12,941 23,743 45,786 Unusual items (6,848) - (6,848) - ------------- ----------- ------------- ------------ Total Aluminum Extrusions 343 12,941 16,895 45,786 ------------- ----------- ------------- ------------ Fiberlux: Ongoing operations - - - (264) Unusual items - - - 525 ------------- ----------- ------------- ------------ Total Fiberlux - - - 261 ------------- ----------- ------------- ------------ Tredegar Biotech: Molecumetics (3,121) (1,014) (6,277) (3,521) Therics (3,602) (1,930) (9,170) (5,783) ------------- ----------- ------------- ------------ Total Tredegar Biotech (6,723) (2,944) (15,447) (9,304) ------------- ----------- ------------- ------------ Tredegar Investments: Venture capital investments (5,622) 77,843 (13,693) 109,046 Unusual items - - - (191) ------------- ----------- ------------- ------------ Total Tredegar Investments (5,622) 77,843 (13,693) 108,855 ------------- ----------- ------------- ------------ Total operating profit 1,105 78,645 27,228 159,641 Interest income 717 494 2,131 1,391 Interest expense 2,954 4,455 10,227 13,057 Corporate expenses, net 661 1,333 2,150 3,984 ------------- ----------- ------------- ------------ Income (loss) from continuing operations before income taxes (1,793) 73,351 16,982 143,991 Income taxes (679) 26,313 4,082 52,122 ------------- ----------- ------------- ------------ Income (loss) from continuing operations (1,114) 47,038 12,900 91,869 Income from discontinued operations - - 1,396 - ------------- ----------- ------------- ------------ Net income (loss) $ (1,114) $ 47,038 $ 14,296 $ 91,869 ============= =========== ============= ============
14 Third-quarter net sales in Film Products increased 4% to $99 million while operating profit, excluding unusual items, was $16.1 million compared with $7.7 million in 2000. On a year-to-date basis, net sales in Film Products were relatively flat at $286.6 million while operating profit, excluding unusual items increased 21.7%. Volume in Film Products for the nine months ended September 30, 2001 declined 6% compared with the same period of last year. The decline in volume is primarily due to lower demand for our diaper backsheet film. The profit impact of the volume decline in diaper backsheet was offset by higher sales of new, higher-margin specialty film components for diapers and feminine hygiene products. Additionally, last year's third-quarter operating profit included a $3.5 million charge for doubtful accounts. In Aluminum Extrusions, third-quarter net sales were down 16.8% to $98.7 million while operating profit, excluding unusual items, was $7.2 million, down 44.4% versus the third quarter of 2000. On a year-to-date basis, net sales declined 20.8% to $297.2 million while operating profit was $23.7 million, down 48.1% compared with the same period of the prior year. The aluminum extrusions industry and Tredegar continue to be affected by poor economic conditions in our end-use markets. Volume for the first nine months of the year declined 21% compared with the same period of the prior year. For Tredegar Biotech, revenue was down for the quarter and nine months ended September 30, 2001 compared with the same periods of the prior year. The third-quarter operating loss in 2001 was $6.7 million versus $2.9 million in 2000. On a year-to-date basis, the operating loss was $15.4 million in 2001 versus $9.3 million in 2000. The higher losses in 2001 were due primarily to increased spending at both Molecumetics and Therics in support of research and development efforts. The depreciation or appreciation in NAV related to venture capital investment activities for the third quarter and nine months ended September 30, 2001 and 2000 is summarized below:
(In Millions) Third Quarter Nine Months Ended September 30 Ended September 30 ------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ----------- ------------- ------------ Net realized gains, losses, write-downs and related operating expenses for venture capital investments reflected in Tredegar's consolidated statements of income (net of tax) $ (3.6) $ 49.8 $ (8.8) $ 69.8 Change in unrealized appreciation of venture capital investments (net of tax) (28.6) 51.7 (58.1) 180.3 ------------- ----------- ------------- ------------ After-tax appreciation (depreciation) in NAV related to investment performance $ (32.2) $ 101.5 $ (66.9) $ 250.1 ============= =========== ============= ============
See Note 3 on pages 5-8 for more information on our venture capital investment activities, including a discussion of events subsequent to September 30, 2001, affecting the NAV of our venture capital investment portfolio. 15 The following companies held directly in the portfolio, or indirectly through our interests in other venture capital funds, accounted for most of the changes in NAV during the quarter and nine months ended September 30, 2001:
(In Millions) Appreciation (Depreciation) in Estimated NAV ----------------------------- 3rd Quarter Nine Months Ended Ended Investment Reason for Change 9/30/01 9/30/01 ------------------------------------------------------------------------------------------------------------------------- Public companies: Photon Dynamics, Inc. Acquisition of IRSI, a direct holding $ 0.3 $ (7.7) Illumina, Inc. Change in stock price (5.2) (6.3) Vascular Solutions Change in stock price (3.7) (2.3) Cosine Communications Change in stock price - (2.2) Universal Access Change in stock price (1.7) (2.2) SignalSoft Corporation Change in stock price (2.2) (1.3) Eprise Corporation Change in stock price - (1.0) Adolor Corporation Change in stock price (2.0) 0.4 Private companies: Venture capital funds Various (lower valuations) (8.7) (16.1) BroadRiver Communications Lower valuation - (5.8) Moai Technologies, Inc. Lower valuation (3.0) (4.0) Etera Corporation Lower valuation - (3.7) Songbird Medical, Inc. Lower valuation (3.2) (3.1) MediaFlex.com Lower valuation - (2.6) Linx Communications, Inc. Lower valuation (1.8) (1.8) AdiCom Wireless, Inc. Lower valuation - (1.7) Riveon Lower valuation - (1.3) Quarry Technologies, Inc. Lower valuation - (0.9) Locus Discovery Higher valuation 1.5 1.5 Other public and private companies Various (1.6) (1.8) ----------- ------------ Depreciation in NAV before operating expenses (31.3) (63.9) After-tax operating expenses (0.9) (3.0) ----------- ------------ Depreciation in NAV related to investment performance $(32.2) $(66.9) =========== ============
The cost basis, carrying value and NAV of the venture capital portfolio is reconciled below:
(In Millions) Sept. 30, Dec. 31, 2001 2000 ------------------------------- Cost basis of investments $ 211.8 $ 213.1 Write-downs taken on securities held (charged to earnings) (55.7) (26.6) Unrealized appreciation on public securities held by Tredegar (reflected directly in equity net of deferred income taxes) 13.4 45.8 ------------- ------------ Carrying value of investments reflected in the balance sheet 169.5 232.3 Unrealized appreciation in private securities held by Tredegar and in its indirect interest in all securities held by venture capital funds 112.9 171.3 ------------- ------------ Estimated fair value of venture capital investments 282.4 403.6 Estimated income taxes on assumed disposal at fair value (25.4) (68.6) ------------- ------------ NAV of venture capital investments $ 257.0 $ 335.0 ============= ============
16 Changes in NAV for the quarter and nine months ended September 30, 2001 and 2000 are summarized below:
(In Millions) Third Quarter Nine Months Ended September 30 Ended September 30 ------------------------- ------------------------------- 2001 2000 2001 2000 ------------- ----------- ------------- ------------ NAV at beginning of period $ 289.0 $ 347.2 $ 335.0 $ 180.2 ------------- ----------- ------------- ------------ After-tax appreciation (depreciation) in NAV related to investment performance (net of operating expenses) (32.2) 101.5 (66.9) 250.1 After-tax operating expenses funded by Tredegar .9 1.1 3.0 2.6 New investments 7.5 27.8 16.6 74.8 Reduction in NAV due to the sale of investments (8.2) (57.0) (30.7) (87.1) ------------- ----------- ------------- ------------ (Decrease) increase in NAV (32.0) 73.4 (78.0) 240.4 ------------- ----------- ------------- ------------ NAV at end of the period $ 257.0 $ 420.6 $ 257.0 $ 420.6 ============= =========== ============= ============
Our internal rate of return ("IRR") since inception in 1992 through September 30, 2001, is estimated at 50% (33% after income taxes), but is not necessarily indicative of future performance. IRR is the discount rate that equates the net present value of investment cash inflows with investment cash outflows. The IRR is calculated as an annualized compounded rate of return using actual investment cash flows, modified to incorporate our share of the current valuation of unliquidated holdings and operating expenses (and taxes in case of the after-tax IRR). Liquidity and Capital Resources Tredegar's total assets decreased to $880.2 million at September 30, 2001, from $903.8 million at December 31, 2000. The decrease is primarily attributable to the decline in the carrying value of venture capital investments (decrease of $62.8 million to $169.5). This decrease was partially offset by increases in the following: - Cash and cash equivalents increased ($29.6 million) due to the reasons described on the next page; and - Higher prepaid pension asset (up $8.1 million) due to pension income recognized during the period. The carrying value of the venture capital investments decreased compared with December 31, 2000, for the reasons noted in the table presented in Note 3 on page 5. 17 The reasons for the increase in cash and cash equivalents to $74.1 million at September 30, 2001, from $44.5 million at December 31, 2000, and the decrease in cash and cash equivalents from $25.8 million at December 31, 1999, to $21.4 million at September 30, 2000, are summarized below:
(In Thousands) Nine Months Ended September 30 -------------------------------- 2001 2000 ----------- ------------- Cash and cash equivalents, beginning of period $ 44,530 $ 25,752 ----------- ------------- Cash provided by (used in) operating activities net of capital expenditures and dividends 11,026 (21,529) Proceeds from the exercise of stock options 177 3,710 Net decrease in borrowings (3,335) (5,000) New venture capital investments, net of proceeds from disposals 21,234 37,348 Proceeds from divestitures and property disposals 2,224 9,205 Other, net (1,775) (2,328) ----------- ------------- Net increase in cash and cash equivalents 29,551 21,406 ----------- ------------- Cash and cash equivalents, end of period $ 74,081 $ 47,158 =========== =============
In 2001, cash provided by continuing operating activities, net of capital expenditures and dividends was $11 million compared with cash used in operating activities, net of capital expenditures and dividends of $21.5 million in 2000. In the table above and in the statements of cash flows, income taxes related to venture capital activities, divestitures and property disposals are classified in operating activities, while related gains and losses are effectively classified with proceeds. In addition, income tax benefits on write-downs of venture capital investments typically lag financial reporting recognition. Consequently, despite pretax losses for venture capital investments of $9 million for the first nine months of 2001, operating activities include income taxes paid of $7 million for the period. Pretax gains for venture capital investments were $112.8 million for the first nine months of 2000 and cash used in operating activities includes related income taxes paid of $38 million. The remaining change is primarily due to: - Changes in working capital; - Increased spending at Tredegar Biotech; - Lower income from manufacturing operations; and - A decrease in the level of capital expenditures. Capital expenditures have decreased from $60.4 million in 2000 to $30 million in 2001. Capital expenditures in 2001 reflect the normal replacement of machinery and equipment and the following key capital projects: - Press modernization at the aluminum extrusion plant in Kentland, Indiana; - A new plastic films manufacturing facility in Shanghai, China, which began production in the second quarter of 2001 and makes film used primarily for hygiene products; and - Continued expansion of plastic films manufacturing capacity at the facility in Hungary, which produces disposable films for hygiene products marketed in Europe. 18 Capital expenditures in 2000 included the following key capital projects: - A new feminine hygiene products topsheet film production line at the plant in Terre Haute, Indiana; - Machinery and equipment purchased for the manufacture of breathable and elastomeric films; - Expansion of capacity in Brazil for plastic films for hygiene products; - Continued expansion of plastic films manufacturing capacity at the Hungary facility; - A new plastic films manufacturing facility in Shanghai, China; and - The second phase of a modernization program at the aluminum extrusion plant in Newnan, Georgia. New Accounting Standards In June 2001, the Financial Accounting Standards Board issued two new standards that primarily affect the accounting for acquisitions initiated after June 30, 2001, and the accounting for goodwill. There are transition provisions that may result in the reclassification of carrying values among existing goodwill and other intangible assets. Once adopted, these standards prohibit amortization of goodwill, but require transitional and annual impairment reviews that may result in the recognition of losses, among other requirements. We anticipate that adoption of these standards will result in an annual reduction of amortization expense of approximately $4.6 million ($3 million after income taxes). Additionally, we will reclassify from intangible assets to goodwill approximately $396,000 related to the Therics workforce, which no longer qualifies as a separately identifiable intangible asset. We have not yet completed the transitional impairment review. We will adopt these standards in the first quarter of 2002. Item 3. Quantitative and Qualitative Disclosures About Market Risks. Tredegar has exposure to the volatility of interest rates, polyethylene and polypropylene resin prices, aluminum ingot and scrap prices, foreign currencies, emerging markets and technology stocks. Changes in resin prices, and the timing of those changes, could have a significant impact on profit margins in Film Products; however, those changes are generally followed by a corresponding change in selling prices. Profit margins in Aluminum Extrusions are sensitive to fluctuations in aluminum ingot and scrap prices, but fluctuations 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. 19 We sell to customers in foreign markets through our foreign operations and through exports from U.S. plants. The percentage of consolidated net sales from manufacturing operations related to foreign markets for the nine months ended September 30, 2001 and 2000 are presented below: Percentage of Net Sales from Manufacturing Operations Related to Foreign Markets* -------------------------------------------------------------------------------- Nine Months Ended September 30 ----------------------------------------------------------------- 2001 2000 ---------------------- ------------------------------- Exports Foreign Exports Foreign From U.S. Operations From U.S. Operations --------- ---------- --------- ----------- Canada 3 % 15 % 3 % 18 % Europe 1 7 1 4 Latin America 3 3 3 2 Asia 3 1 4 1 --------- ---------- --------- ----------- Total 10 % 26 % 11 % 25 % --------- ---------- --------- ----------- * Based on consolidated net sales from manufacturing operations (excluding Tredegar Biotech and Tredegar Investments). We attempt to match the pricing and cost of our products in the same currency and generally view the volatility of foreign currencies and emerging markets, and the corresponding impact on earnings and cash flow, as part of the overall risk of operating in a global environment. Exports from the U.S. are generally denominated in U.S. Dollars. Our foreign operations in emerging markets have agreements with certain customers that index the pricing of our products to the U.S. Dollar or the Euro. Our foreign currency exposure on income from foreign operations in Europe primarily relates to the Euro. We believe that our exposure to the Canadian Dollar has been substantially neutralized by the U.S. Dollar-based spread (the difference between selling prices and aluminum costs) generated from Canadian casting operations and exports from Canada to the U.S. The acquisition of Exxon Films on May 17, 1999, increased the proportion of assets located in the U.S. It also increased the amount of operating profit earned in the U.S., partially offset by higher U.S. Dollar interest expense on higher debt related to the acquisition. We have investments in private venture capital fund limited partnerships and early-stage technology companies, including the stock of privately-held companies and the restricted and unrestricted stock of companies that have recently registered shares in initial public offerings. The portfolio is subject to risks typically associated with investments in technology start-up companies, which include business failure, illiquidity and stock market volatility. Furthermore, publicly traded stocks of emerging, technology-based companies have higher volatility and risk than the U.S. stock market as a whole. See pages 15-17 and Note 3 on pages 5-8 for more information. 20 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibit No. 3 Amended By-laws (b) Reports on Form 8-K. No reports on Form 8-K have been filed for the quarter ended September 30, 2001. 21 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Tredegar Corporation (Registrant) Date: November 12, 2001 /s/ D. Andrew Edwards ---------------------- -------------------------------------------- D. Andrew Edwards Vice President, Finance and Treasurer (Principal Financial Officer) Date: November 12, 2001 /s/ Michelle O. Mosier ---------------------- -------------------------------------------- Michelle O. Mosier Corporate Controller (Principal Accounting Officer) 22