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.
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(Exact name of registrant as specified in its charter)
Virginia 54-1497771
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
1100 Boulders Parkway, Richmond, Virginia 23225
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 804-330-1000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- --------------------------------- -------------------------------------------
Common Stock New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
Aggregate market value of voting stock held by non-affiliates of the registrant
as of 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.
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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.
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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
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Total 100
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Raw materials for Aluminum Extrusions, consisting of aluminum ingot,
aluminum scrap and various alloys, are purchased from domestic and foreign
producers in open-market purchases and under short-term contracts. We do not
expect critical shortages of aluminum or other required raw materials and
supplies.
Aluminum Extrusions competes primarily on the basis of product
quality, 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.
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1998 1997
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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
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Dividend Information
On May 20, 1998, we declared a three-for-one stock split payable on
July 1, 1998, to shareholders of record on June 15, 1998. Accordingly, all
historical references to per-share amounts, shares repurchased and the shares
used to compute earnings per share have been restated to reflect the split.
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
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Tredegar Industries, Inc., and Subsidiaries
Years Ended December 31 1998 1997 1996 1995 1994 1993 1992 1991
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(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
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703,811 598,019 527,799 588,785 501,912 448,821 445,455 439,931
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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
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608,601 507,853 458,804 550,463 496,578 441,896 429,513 435,944
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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
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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
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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 - -
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Net income $68,869 $58,446 $45,035 $24,053 $38,635 $ 9,542 $15,312 5,623
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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
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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
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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%
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Refer to notes to financial tables on pages 16-17.
11
SEGMENT TABLES
Tredegar Industries, Inc., and Subsidiaries
Net Sales
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Segment 1998 1997 1996 1995 1994 1993 1992 1991
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(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 - -
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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
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Total $ 699,796 $581,004 $523,551 $589,454 $502,208 $449,208 $445,229 $439,186
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Refer to notes to financial tables on pages 16-17.
12
Operating Profit
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Segment 1998 1997 1996 1995 1994 1993 1992 1991
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(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) - -
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53,786 50,463 43,838 37,769 34,726 20,505 26,700 32,189
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Fiberlux:
Ongoing operations 1,433 845 1,220 452 950 557 (127) 756
Unusual items - - - - - - - 2,797(k)
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1,433 845 1,220 452 950 557 (127) 3,553
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Aluminum Extrusions:
Ongoing operations 47,091 32,057 23,371 16,777 11,311 7,964 4,180 (4,247)
Unusual items (664)(d) - - - - - - -
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46,427 32,057 23,371 16,777 11,311 7,964 4,180 (4,247)
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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.
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.
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.
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.
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.
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
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
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
5
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
