Atlantis Plastics: 10-Q for Quarter to 6/30/98 - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JUNE 30, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________to__________________ Commission File number 1-9487 ATLANTIS PLASTICS, INC. (Exact name of registrant as specified in its charter) FLORIDA 06-1088270 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1870 THE EXCHANGE, SUITE 200, ATLANTA, GEORGIA 30339 (Address of principal executive offices) (Zip Code) (Registrant's telephone number, including Area Code) (800) 497-7659 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X . No_____. Indicate the number of shares outstanding of each of the issuer's classes of Common Stock, as of the latest practicable date. CLASS SHARES OUTSTANDING AT JUNE 30, 1998 ------------- ---------------------------- A, $.10 par value 4,525,054 B, $.10 par value 2,918,043 ATLANTIS PLASTICS, INC. TABLE OF CONTENTS PAGE NO. -------- PART I. FINANCIAL INFORMATION Consolidated Statements of Income (Unaudited) for the Six Months Ended June 30, 1998 and 1997......................... 1 Consolidated Balance Sheets (Unaudited) as of June 30, 1998 and December 31, 1997............................. 2 Consolidated Statements of Cash Flows (Unaudited) for the Six Months Ended June 30, 1998 and 1997......................... 3 Notes to Consolidated Financial Statements (Unaudited).......... 4 Management's Discussion and Analysis of Financial Condition and Results of Operations................ 6 PART II. OTHER INFORMATION Item 1 - Legal Proceedings...................................... 9 Item 4 - Submission of Matters to a Vote of Security-Holders.... 9 Item 6 - Exhibits and Reports on Form 8-K....................... 9 SIGNATURES............................................................... 10 ATLANTIS PLASTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED - IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------- -------------------- 1998 1997 1998 1997 ---------------------- -------------------- Net sales................................................................. $ 64,080 $ 65,530 $ 128,507 $129,853 Cost of sales............................................................. 52,927 56,428 106,065 111,564 --------- --------- --------- -------- GROSS PROFIT..................................................... 11,153 9,102 22,442 18,289 Selling, general and administrative expenses.............................. 6,377 6,456 12,350 12,886 Impairment of long-lived assets and restructuring charges................. - - - 960 --------- --------- --------- -------- OPERATING INCOME................................................. 4,776 2,646 10,092 4,443 Net interest expense (2,696) (2,879) (5,444) (5,716) --------- --------- --------- -------- INCOME (LOSS) BEFORE INCOME TAXES................................ 2,080 (233) 4,648 (1,273) Income tax (provision) benefit............................................ (504) (79) (1,385) 248 --------- --------- --------- -------- NET INCOME (LOSS) $ 1,576 $ (312) $ 3,263 $ (1,025) ========= ========= ========= ======== NET INCOME (LOSS) PER COMMON SHARE: Basic $ 0.21 $ (0.04) $ 0.44 $ (0.14) ========= ========= ========= ======== Diluted $ 0.20 $ (0.04) $ 0.42 $ (0.14) ========= ========= ========= ======== Weighted-average number of shares used in computing income (loss) per share (in thousands): Basic 7,479 7,062 7,413 7,132 ========= ========= ========= ======== Diluted 7,833 7,062 7,736 7,132 ========= ========= ========= ======== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 1 ATLANTIS PLASTICS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED - IN THOUSANDS) JUNE 30, DECEMBER 31, 1998 1997 ------------ -------------- ASSETS Cash and equivalents............................................................ $ 12,961 $ 8,346 Accounts receivable, net........................................................ 25,046 25,444 Inventories..................................................................... 16,620 18,517 Other current assets............................................................ 7,347 7,448 ---------- ---------- Current assets.............................................................. 61,974 59,755 Property and equipment, net..................................................... 59,499 60,065 Goodwill, net of accumulated amortization....................................... 48,175 48,961 Other assets.................................................................... 1,878 2,108 ---------- ---------- $ 171,526 $ 170,889 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses........................................... $ 24,075 $ 24,146 Current portion of long-term debt............................................... 3,245 3,254 ---------- ---------- Current liabilities......................................................... 27,320 27,400 Long-term debt, less current portion............................................ 99,889 101,862 Deferred income taxes........................................................... 8,507 8,287 Other liabilities............................................................... 628 791 ---------- ---------- Total liabilities........................................................... 136,344 138,340 ---------- ---------- Commitments and contingencies - - Shareholders' equity: Class A Common Stock, $.10 par value, 20,000,000 shares authorized, 4,525,054 and 4,205,028 shares issued and outstanding in 1998 and 1997...... 453 436 Class B Common Stock, $.10 par value, 7,000,000 shares authorized, 2,918,043 and 2,861,979 shares issued and outstanding in 1998 and 1997...... 292 274 Additional paid-in capital.................................................... 8,910 7,117 Notes receivable from sale of Common Stock (923) - Retained earnings............................................................. 26,450 24,722 ---------- ---------- Total shareholders' equity.................................................. 35,182 32,549 ---------- ---------- $ 171,526 $ 170,889 ========== ========== SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 2 ATLANTIS PLASTICS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED - IN THOUSANDS) SIX MONTHS ENDED JUNE 30, ------------------------------- 1998 1997 ------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)............................................................ 3,263 ($1,025) ------------ ------------ Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation............................................................. 3,963 3,669 Amortization of goodwill................................................. 786 786 Loan fee and other amortization.......................................... 230 311 Changes in assets and liabilities: Decrease in accounts receivable..................................... 398 638 Decrease (increase) in inventories................................... 1,897 (1,950) Decrease (increase) in other current assets.......................... 101 (1,000) (Decrease) in accounts payable and accrued expenses.................. (71) (4,539) Increase in deferred income taxes................................... 220 275 Decrease in other liabilities........................................ (163) (148) Other, net........................................................... 4 25 ------------ ------------ Total adjustments.................................................... 7,365 (1,933) ------------ ------------ Net cash provided by (used in) operating activities................ 10,628 (2,958) ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures....................................................... (3,515) (3,702) Proceeds from asset dispositions........................................... 118 - ------------ ------------ Net cash used in investing activities.............................. (3,397) (3,702) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Borrowings under revolving credit agreements............................... - - Repayments under revolving credit agreements............................... - - Payments on long-term debt................................................. (1,982) (1,314) Purchase of Common Stock and options....................................... (1,818) (2,994) Proceeds from exercise of stock options.................................... 1,184 104 ------------ ------------ Net cash used in financing activities.............................. (2,616) (4,204) ------------ ------------ Net increase (decrease) in cash and equivalents.............................. 4,615 (10,864) Cash and equivalents at beginning of period.................................. 8,346 15,905 ------------ ------------ Cash and equivalents at end of period........................................ $ 12,961 $ 5,041 ============ ============ SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED). 3 ATLANTIS PLASTICS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. The accompanying unaudited consolidated financial statements of Atlantis Plastics, Inc. and Subsidiaries ("Atlantis" or the "Company"), do not include all disclosures provided in the annual consolidated financial statements. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the footnotes thereto contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 as filed with the Securities and Exchange Commission. The December 31, 1997 balance sheet, included herein, was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. Atlantis Plastic Films accounts for approximately three-quarters of the Company's net sales and produces: (i) stretch films (multilayer plastic films that are used principally to wrap pallets of materials for shipping or storage), (ii) custom film products (high-grade laminating films, embossed films, and specialty film products targeted primarily to industrial and packaging markets), and (iii) institutional products such as aprons, gloves, and tablecloths which are converted from polyethylene films. Atlantis Molded Plastics accounts for approximately one-quarter of the Company's net sales and employs two principal technologies, serving a wide variety of specific market segments, described as follows: (i) injection molded thermoplastic parts that are sold primarily to original equipment manufacturers and used in major household goods and appliances, power tools, and agricultural and automotive products, and (ii) a variety of custom and proprietary extruded plastic parts for both trim and functional applications (profile extrusion) that are incorporated into a broad range of consumer and commercial products such as recreational vehicles, residential windows and doors, office furniture, building supplies, and retail store fixtures. All material intercompany balances and transactions have been eliminated. Certain amounts included in prior period financial statements have been reclassified to conform with the current period presentation. 2. In the opinion of the Company, the accompanying unaudited consolidated financial statements contain all adjustments, which are of a normal recurring nature and necessary for a fair presentation of the financial statements. The results of operations for the six months ended June 30, 1998 are not necessarily indicative of the results to be expected for the full year. 3. In the first quarter of 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. This implementation required no additional disclosure by the Company. 4. During the first quarter of 1997, the Company recorded impairment of long-lived assets and other restructuring charges of $960,000, or $586,000 after taxes, related to: (i) the closing of the Company's Nashville, Tennessee injection molding facility, including approximately $250,000 in non-cash charges for 4 the write-down of fixed assets and leasehold improvements associated with that facility, and (ii) restructuring expenses associated with management changes in the Company's stretch film unit. Anticipated costs (primarily severance and moving costs) associated with the closing of the Nashville facility were reduced by $145,000 in the second half of 1997. 5. In November 1996, the Board of Directors authorized the repurchase of up to 1,000,000 shares of Atlantis Class A Common Stock, or 14% of the 7.1 million Class A and Class B Common Stock then outstanding. Through June 1997, the Company had repurchased 320,344 shares (including 210,244 shares issued in connection with the conversion of Preferred Stock, described below), and options for 55,125 shares, for total consideration of approximately $3.3 million. The Company was restricted from repurchases during the second half of 1997 since it fell below the fixed charge ratio specified in the 11% Senior Note Indenture. Since December 31, 1997, the Company has exceeded this fixed charge ratio and, accordingly, has had the ability to repurchase shares of its Common Stock under its share repurchase program effective February 11, 1998. Through June 1998, the Company has repurchased an additional 222,200 shares for a total consideration of approximately $1.8 million. In January 1997, the Company issued a mandatory conversion notice to the holder of the 20,000 outstanding shares of the Company's Series A Preferred Stock ("Preferred Stock"). The Preferred Stock was convertible into 210,244 shares of Class A Common Stock. After issuing the mandatory conversion notice, the Company reached an agreement with the Preferred Stock holder to repurchase all of the common shares resulting from the conversion notice for $2 million (the original price paid for the Preferred Stock by the holder and included in the $3.3 million consideration cited earlier in this Note), and completed the repurchase in late March 1997. Prior to this conversion, each share of Preferred Stock had a liquidation preference of $100, and the holder of the Preferred Stock was entitled to an annual cumulative dividend, payable in equal semiannual installments of $72,500 on April 15 and October 15 of each year. 6. In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued. SFAS 131 establishes standards for the way that public businesses report information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the impact of SFAS 131 on its future disclosures. SFAS 131 must be implemented for fiscal years ending after December 15, 1998. In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued. This Statement does not apply to the Company. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL Atlantis is a leading U.S. manufacturer of polyethylene stretch and custom films used in a variety of industrial and consumer applications and molded plastic products for the appliance, automotive, building supply, and recreational vehicle industries. Selected income statement data for the quarterly periods ended March 31, 1997 through June 30, 1998 are as follows: ($ in millions) 1998 1997 ---------------------- ---------------------------------------------- Q2 Q1 Q4 Q3 Q2 Q1 NET SALES --------- Plastic Films $44.4 $44.9 $45.6 $47.6 $48.1 $45.7 Molded Plastics 19.7 19.5 16.8 16.3 17.4 18.6 ---------------------- ---------------------------------------------- TOTAL $64.1 $64.4 $62.3 $63.9 $65.5 $64.3 ====================== ============================================== PERCENTAGE OF NET SALES GROSS PROFIT ------------ Plastic Films 20% 19% 18% 17% 13% 13% Molded Plastics 12% 15% 17% 13% 17% 18% ------------------ -------------------------------------------- TOTAL 17% 18% 17% 16% 14% 14% ================== ============================================ OPERATING INCOME ---------------- Plastic Films 9% 9% 7% 8% 3% 3%(a) Molded Plastics 4% 6% 5%(a) 2%(a) 6% 8%(a) ----------------- --------------------------------------------- TOTAL 8% 8% 7%(a) 6%(a) 4% 4%(a) ================= ============================================= NET INTEREST EXPENSE $2.7 $2.7 $2.8 $2.9 $2.9 $2.8 ================== ============================================= (a) Amounts exclude the effects of the 1997 impairment of long-lived assets and restructuring charges totaling $815,000 and more fully described in Note 4 of Notes to the Consolidated Financial Statements. RESULTS OF OPERATIONS The Company's 1998 second quarter and year-to-date sales of $64.1 million and $128.5 million were 2% and 1% below last year's sales for the same periods. Atlantis Molded Plastics' second quarter and year-to-date 1998 sales increased 13% and 9%, respectively, compared to last year's sales for the same periods, due to $6.2 million of new business awarded by Whirlpool Corporation in 1997, as well as strong appliance demand in the U.S. economy. 6 Atlantis Plastic Films' second quarter and year-to-date 1998 net sales of $44.4 million and $89.3 million, respectively, were $3.8 million and $4.6 million below last year's sales for the same periods primarily due to lower average selling prices resulting from continuing declines in polyethylene resin prices. Atlantis Plastic Films' second quarter and year-to-date 1998 gross margins equaled 20% and 19%, respectively, compared to 13% for both periods in 1997. This improvement was due primarily to increased productivity, cost reduction measures, and a more favorable pricing environment in the stretch film market. Atlantis Molded Plastics' second quarter and year-to-date 1998 gross margins equaled 12% and 13%, respectively, compared to 17% for the same periods last year. These decreases were due primarily to substantial reductions in sales volumes in one of the Company's injection molding plants. In June 1998, employment levels in this plant were reduced, and efforts are underway to secure additional business in this facility. The Company's second quarter 1998 selling, general and administrative ("SG&A") expenses were $6.4 million, which was slightly below last year's SG&A expenses for the same period. The 1998 year-to-date SG&A expenses were $12.4 million compared to $12.9 million in 1997. Second quarter and year-to-date 1998 net interest expense equaled $2.7 million and $5.4 million, respectively, lower than the $2.9 million and $5.7 million for the same periods in 1997. This decrease is due to reduced debt levels during the first half of 1998 and to higher interest income resulting from increased cash balances. Effective tax rates differed from applicable statutory rates in both 1998 and 1997, primarily due to nondeductible goodwill amortization, as well as a reduction in the Company's reserve for deferred taxes in 1998. For the first half and second quarter of 1998, the Company made favorable adjustments for amounts that were no longer considered necessary for contingencies for income taxes, resulting in a reduction in income tax expense of $544,000 and $379,000 ($0.07/share and $0.05/share) respectively. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital at June 30, 1998 totaled approximately $34.7 million (including cash and equivalents of $13.0 million), compared to $32.4 million (including cash and equivalents of $8.3 million) at December 31, 1997. On June 30, 1998, there were no borrowings on the Company's revolving credit facility. Unused availability, net of outstanding letters of credit of approximately $1.2 million, equaled $13.8 million. The Company's primary needs for liquidity, on both a short- and long-term basis, relate to working capital (principally accounts receivable and inventories), debt service, and capital expenditures. The Company presently does not have any material commitments for future capital expenditures, and expects to meet its short- and long-term liquidity needs with cash on hand, funds generated from operations, and funds available under its revolving credit facility. CASH FLOWS FROM OPERATING ACTIVITIES In the first six months of 1998, net cash provided by operating activities was approximately $10.6 million, compared to cash used in operations of $3.0 million for the same period last year. Inventories decreased in the first six months of 1998 by $1.9 million due to lower raw materials costs and lower levels of inventories, compared to an increase of $2.0 million in the January to June 1997 period. 7 Accounts payable and accrued expenses decreased $71,000 in the first half of 1998 compared to a decline of $4.5 million in 1997. The large decrease in 1997 was primarily due to incentive compensation and income tax payments made during the first quarter of 1997 related to 1996 results. CASH FLOWS FROM INVESTING ACTIVITIES Net cash used in investing activities during the first six months of 1998 consisted primarily of capital expenditures totaling $3.5 million, compared to capital expenditures of $3.7 million for the same period last year. CASH FLOWS FROM FINANCING ACTIVITIES Net cash used by financing activities for the first half of 1998 was $2.6 million, compared to $4.2 million during this period last year. Approximately $1.8 million was used to repurchase Common Stock in the first half of 1998, compared to $3.0 million in 1997. Payments on long-term debt totaled $2.0 million this year, compared to $1.3 million in the same period last year. Proceeds from the exercise of stock options amounted to $1.2 million in the first half of 1998, compared to $0.1 million in the same period last year. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from these statements. These risks include, but are not limited to, raw material costs and the ability to pass price increases to customers in a timely fashion, industry overcapacity, product acceptance, and technological changes which could alter the demand for product or adversely impact the competitive cost of production. All forward-looking statements should be considered in light of these risks and uncertainties. ACCOUNTING PRONOUNCEMENTS In June 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" was issued. SFAS 131 establishes standards for the way that public businesses report information about operating segments in annual financial statements, and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. The Company has not yet determined the impact of SFAS 131 on its future disclosures. SFAS 131 must be implemented for fiscal years ending after December 15, 1998. In February 1998, SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" was issued. This Statement does not apply to the Company. 8 Part II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is not a party to any legal proceeding other than routine litigation incidental to its business, none of which is material. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS. (a) The Registrant held its Annual Meeting of Shareholders on June 4, 1998. (b) Not Required. (c) The matters voted on at the Annual Meeting of Shareholders, and the tabulation of votes on such matters are as follows: 1. ELECTION OF DIRECTORS NAME FOR WITHHELD ---- --- -------- CLASS A Charles D. Murphy, III 4,429,524 1,458 Chester B. Vanetta 4,430,077 905 CLASS B Cesar L. Alvarez 2,717,008 - 0 - Anthony F. Bova 2,717,008 - 0 - Phillip T. George, M.D. 2,717,008 - 0 - Larry D. Horner 2,717,008 - 0 - Earl W. Powell 2,717,008 - 0 - Paul Rudovsky 2,717,008 - 0 - 2. ADOPTION OF THE COMPANY'S 1998 STOCK OPTION PLAN BROKER FOR AGAINST ABSTENTIONS NON-VOTES --- ------- ----------- --------- 31,490,582 109,290 1,189 1 (d) Not Applicable ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. 3. Exhibits 27.1 Financial Data Schedule - ---------- (b) Reports on Form 8-K: During the second quarter of 1998, the Registrant filed a current report on Form 8-K, dated April 6, 1998. 9 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ATLANTIS PLASTICS, INC. Date: July 29, 1998 /s/ ANTHONY F. BOVA --------------------------- ANTHONY F. BOVA President and Chief Executive Officer Date: July 29, 1998 /s/ PAUL RUDOVSKY ----------------- PAUL RUDOVSKY Executive Vice President, Finance and Administration 10 EXHIBIT INDEX EXHIBIT DESCRIPTION - ------- ----------- 27.1 Financial Data Schedule End