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 MAY 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ______ to ______
COMMISSION FILE NO. 33-95318
PORTOLA PACKAGING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 94-1582719
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
890 FAULSTICH COURT
SAN JOSE, CALIFORNIA 95112
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(408) 453-8840
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. YES X NO.
--- ---
12,017,870 shares of Registrant's $.001 par value Common Stock, consisting of
2,134,992 shares of nonvoting Class A Common Stock and 9,882,878 shares in the
aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at June 25, 1999
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information
- -------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
May 31, 1999 and August 31, 1998
Condensed Consolidated Statements of Operations for
the Three and Nine Months Ended May 31, 1999 and May 31, 1998
Condensed Consolidated Statements of Cash Flows for
the Three and Nine Months Ended May 31, 1999 and May 31, 1998
Notes to Condensed Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Part II - Other Information
- ----------------------------
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
<TABLE>
<CAPTION>
May 31, August 31,
1999 1998
------------ ----------
<S> <C> <C>
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $2,170 $3,570
Accounts receivable, net........................ 25,598 22,887
Inventories..................................... 14,094 11,260
Other current assets............................ 844 1,356
Deferred income taxes........................... 2,516 2,516
------------ ----------
Total current assets........................ 45,222 41,589
Property, plant and equipment, net.............. 92,590 85,874
Goodwill, net................................... 11,873 12,086
Patents, net.................................... 2,411 1,814
Covenants not to compete, net................... 155 607
Debt financing costs, net....................... 2,559 2,982
Other assets.................................... 2,613 3,908
------------ ----------
Total assets.................................... $157,423 $148,860
============ ==========
LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK
AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt............... $2,165 $2,772
Accounts payable................................ 9,535 8,138
Accrued liabilities............................. 10,723 10,793
Accrued interest................................ 2,209 5,224
------------ ----------
Total current liabilities..................... 24,632 26,927
Long-term debt, less current portion............ 139,469 127,936
Other long term obligations..................... 918 777
Deferred income taxes........................... 6,591 6,666
------------ ----------
Total liabilities........................... 171,610 162,306
Commitments and contingencies (Note 4)
Minority Interest............................... 929 --
Redeemable warrants to purchase Class A
Common Stock.................................. 9,872 7,959
------------ ----------
Common stock and other shareholders' equity (deficit):
Class A convertible Common Stock of $.001
par value:
Authorized: 5,203 shares; Issued and
outstanding 2,135 shares in both periods.... 2 2
Class B, Series 1, Common Stock of $.001
par value:
Authorized: 17,715 shares; Issued and
outstanding 8,671 shares in 1999 and 8,636
shares in 1998.............................. 8 8
Class B, Series 2, convertible Common Stock
of $.001 par value:
Authorized: 2,571 shares; Issued and
outstanding 1,171 shares in both periods.... 1 1
Additional paid-in capital...................... 7,847 7,797
Notes receivable from shareholders.............. (473) (463)
Cumulative foreign currency translation
adjustments................................... (2,088) (1,039)
Accumulated deficit............................. (30,285) (27,711)
------------ ----------
Total common stock and other
shareholders' deficit................... (24,988) (21,405)
------------ ----------
Total liabilities, redeemable
warrants, common stock and other
shareholders' deficit................... $157,423 $148,860
============ ==========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Three Months For the Nine Months
Ended May 31, Ended May 31,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales........................... $50,167 $46,561 $138,201 $127,804
Cost of sales................... 37,049 35,937 103,840 99,309
---------- ---------- ---------- ----------
Gross profit.................... 13,118 10,624 34,361 28,495
---------- ---------- ---------- ----------
Selling, general and
administrative................ 7,615 6,132 20,759 16,999
Research and development........ 561 900 1,960 2,547
Amortization of intangibles..... 666 838 1,833 2,503
---------- ---------- ---------- ----------
8,842 7,870 24,552 22,049
---------- ---------- ---------- ----------
Income from operations.......... 4,276 2,754 9,809 6,446
---------- ---------- ---------- ----------
Other (income) expense:
Interest income............... -- (142) (163) (392)
Interest expense.............. 3,711 3,566 10,824 10,270
Amortization of debt
financing costs............. 201 129 441 386
Minority interest............. (53) -- (247) --
Loss (gain) from sale of
securities and property plant
and equipment (Note 6)...... 67 (710) 114 (1,544)
Other (income) expense, net... (199) 35 (125) (25)
---------- ---------- ---------- ----------
3,727 2,878 10,844 8,695
---------- ---------- ---------- ----------
Income (loss) before income
taxes....................... 549 (124) (1,035) (2,249)
Income tax expense (benefit).... 197 (63) (374) (1,443)
---------- ---------- ---------- ----------
Net income (loss)............... $352 ($61) ($661) ($806)
========== ========== ========== ==========
Number of shares used in
computing basic per share
amounts....................... 11,953 11,776 11,948 11,777
========== ========== ========== ==========
Basic income (loss)
per share..................... $0.03 ($0.01) ($0.06) ($0.07)
Number of shares used in
computing diluted per share
amounts....................... 14,372 11,776 11,948 11,777
========== ========== ========== ==========
Diluted income (loss)
per share..................... $0.02 ($0.01) ($0.06) ($0.07)
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine Months
Ended May 31,
---------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... ($661) ($806)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization........................ 12,896 12,425
Deferred income taxes................................ (75) (1,114)
Loss (gain) on property and equipment dispositions... 114 (794)
Gain on sale of marketable securities................ -- (750)
Provision for doubtful accounts...................... 298 238
Provision for excess and obsolete inventories........ 514 51
Minority interest income............................. (247) --
Changes in working capital:
Accounts receivable.................................. (1,388) 395
Inventories.......................................... (2,472) (948)
Other current assets................................. 12 (21)
Accounts payable..................................... (580) (4,321)
Accrued liabilities.................................. 281 (259)
Accrued interest..................................... (3,015) (2,790)
---------- ----------
Net cash provided by operating activities............ 5,677 1,306
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment............. (13,021) (14,025)
Proceeds from sale of property, plant and equipment.... 875 926
Proceeds from sale of marketable securities............ -- 1,744
Payment for Allied Tool acquisition, net of
cash acquired........................................ (2,204) --
(Increase) decrease in other assets.................... (797) 747
---------- ----------
Net cash used in investing activities................ (15,147) (10,608)
---------- ----------
Cash flows from financing activities:
Borrowings under long-term debt arrangements, net...... 8,146 10,175
Increase in notes receivable from shareholders......... (10) (24)
Payments on covenant not to compete agreements......... -- (620)
Issuance of common stock............................... 71 59
Repurchase of common stock............................. (21) (132)
---------- ----------
Net cash provided by financing activities............ 8,186 9,458
---------- ----------
Effect of exchange rate changes on cash.................. (116) (183)
---------- ----------
Decrease in cash and cash equivalents................ (1,400) (27)
Cash and cash equivalents at beginning of period......... 3,570 3,242
---------- ----------
Cash and cash equivalents at end of period............... $2,170 $3,215
========== ==========
</TABLE>
The accompanying notes are an integral part of the
condensed consolidated financial statements.
<PAGE>
Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation:
The unaudited condensed consolidated financial statements included
herein have been prepared by Portola Packaging, Inc. and its
subsidiaries (the "Company") without audit and in the opinion of
management include all adjustments (consisting only of normal recurring
adjustments) considered necessary for a fair presentation. The
accompanying condensed consolidated financial statements should be read
in conjunction with the audited consolidated financial statements
contained in the Company's Form 10-K previously filed with the
Securities and Exchange Commission. The August 31, 1998 condensed
consolidated balance sheet data was derived from audited consolidated
financial statements, but does not include all disclosures required by
generally accepted accounting principles. Interim results are subject
to seasonal variations and the results of operations for the three and
nine-month periods ended May 31, 1999 are not necessarily indicative of
the results to be expected for the full fiscal year ending August 31,
1999.
Effective December 1, 1998, the Company increased its existing
equity interest in its Mexican joint venture (PPI Mexico) to 75% and has
consolidated PPI Mexico into the Company's unaudited condensed
consolidated financial statements (Note 4). All material intercompany
accounts and transactions have been eliminated.
On March 31, 1999, the Company acquired certain operating and
intangible assets of Allied Tool, Inc. (Allied) for a cash payment and
the assumption of certain debt and liabilities (Note 4). The
acquisition was accounted for as a purchase and accordingly, the
purchase price has been allocated to the underlying assets and
liabilities based on their respective estimated fair values at March 31,
1999. Any excess purchase price over the estimated fair values has been
recorded as goodwill.
Certain prior period balances have been reclassified to conform to
current period financial statement presentation. These
reclassifications had no effect on net income (loss) for the three and
nine-month periods ended May 31, 1998.
2. Computation of Earnings (Loss) Per Common Share:
Basic EPS is computed as net income (loss) divided by the weighted
average number of common shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur from common shares
issuable through stock options, warrants and other convertible
securities. Common equivalent shares are excluded from the computations
of net loss per share as their effect is anti-dilutive.
Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
3. Inventories:
Inventory balances as of May 31, 1999 and August 31, 1998 were
as follows (in thousands):
May 31, August 31,
1999 1998
----------- -----------
(unaudited)
Raw materials.................... $6,551 $5,429
Work in process.................. 1,601 1,606
Finished goods................... 5,942 4,225
----------- -----------
$14,094 $11,260
=========== ===========
4. Commitments and Contingencies:
As of August 31, 1998, the Company maintained $3.0 million in a
United States Bank to collateralize a bank loan by a Mexican bank to PPI
Mexico. The Company's joint venture partner (Partner) guaranteed the
repayment of 50% of the loan balance ($1.5 million) to the Company in
the event PPI Mexico was unable to repay the loan and collateralized
this guarantee by pledging 25% of its stock interest in PPI Mexico. The
loan matured on November 6, 1998 and was not repaid by PPI Mexico. In
December 1998, the $3 million collateral maintained by the Company was
used to settle PPI Mexico's debt to the bank. Based on the collateral
agreement, the Company has asserted its right to the Partner's 25% stock
interest in satisfaction of the $1.5 million loan guarantee and has
thereby increased its ownership in PPI Mexico to 75% (Note 1). The
Partner has not agreed to the collateral claim to his 25% stock
interest. The Company has subsequently entered into negotiations with
the Partner to settle any issues related to the collateral agreement and
to pursue the purchase of his remaining interests in PPI Mexico.
The Allied acquisition agreement provides for cash payments to the
former owners for non-compete agreements, sign-on bonuses and contingent
consideration based on the achievement of future sales growth targets.
The acquisition agreement also calls for payments to a third party for
Allied stock purchase warrants, a non-compete agreement and to satisfy
certain debt obligations of Allied.
The Company has an outstanding warrant to purchase shares of its
Class A Common Stock that became redeemable by the Company at the option
of the holder of the warrant (an affiliate of the Company) effective
June 30, 1999, upon 60 days prior written notice to the Company. The
obligation of the Company to redeem the warrant is suspended if the
redemption of the warrant would cause a default or an event of default
under the Company's credit facilities. The Company's credit facilities
do not currently permit redemption of the warrant. Were the warrant
holder currently able to exercise its put option, the cost to the
Company to redeem the warrant is presently estimated to be approximately
$9.3 million.
The Company is currently engaged in patent infringement litigation
with two separate parties who are seeking to have the court declare
certain patents owned by the Company invalid. These parties have also
included allegations of anti-trust violations in their complaints. The
Company believes its patents are valid, and is contesting these
allegations vigorously. However, there can be no assurance that the
Company will be successful in its defense of these matters. In
Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
4. Commitments and Contingencies (continued):
addition, the Company is also a party to a number of other lawsuits and
claims arising out of the normal course of business.
While there can be no assurances, management does not believe the
final disposition of these matters will have a material adverse effect
on the financial position, results of operations or cash flows of the
Company.
5. Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting. The Company will
implement SFAS No. 130 and 131, which require the reporting and display
of certain information related to comprehensive income and segment
reporting, as required for the fiscal year ending 1999.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits".
SFAS No. 132 revises employers' disclosures about pension and other
post-retirement benefit plans. It does not change the measurement or
recognition related to the Company's benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires the
recognition of all derivatives in the balance sheet at their fair market
values. The implementation date of this standard was recently delayed
and it is not effective for the Company until fiscal year 2001. The
impact of adopting this statement on the Company's current financial
statements would not be material.
6. Sale of Securities and Property, Plant and Equipment:
The Company recorded a gain of $750,000 on the sale of marketable
securities related to its investment in Suncoast, Inc. for the three
months ended May 31, 1998 and a gain of $1,023,000 on the sale of its
Portland, Oregon facilities for the nine months ended May 31, 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Disclosures Regarding Forward-Looking Statements
This report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended. Certain statements
included in this Form 10-Q, including, without limitation, statements
related to the impact of the final disposition of legal matters in the
"Commitments and Contingencies" footnote to the condensed consolidated
financial statements, anticipated cash flow sources and uses under
"Liquidity and Capital Resources", the mitigation of the Year 2000 issue
under "Impact of the Year 2000 Issue" and other statements contained in
the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" regarding the Company's financing alternatives,
financial position, business strategy, plans and objectives of management
of the Company for future operations, and industry conditions, are
forward-looking statements. Although the Company believes that the
expectations reflected in any such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to
have been correct. Any forward-looking statements herein are subject to
certain risks and uncertainties in the Company's business, including, but
not limited to, competition in its markets and reliance on key customers,
all of which may be beyond the control of the Company. Any one or more of
these factors could cause actual results to differ materially from those
expressed in any forward-looking statement. All subsequent written and
oral forward-looking statements attributable to the Company or any person
acting on its behalf are expressly qualified in their entirety by the
cautionary statements disclosed in this paragraph and elsewhere in this
report.
Results of Operations
Sales increased $3.6 million, or 7.7%, from $46.6 million for the
three months ended May 31, 1998 to $50.2 million for the three months
ended May 31, 1999. For the first nine months of fiscal year 1999 sales
were $138.2 million compared to $127.8 million for the first nine months
of fiscal year 1998, an 8.1% increase. This increase in sales for the
three and nine month periods ended May 31, 1999 as compared to the same
periods in fiscal year 1998 was primarily due to the addition of sales
from the consolidation of our Mexico operations, an increase in sales in
Canada, and an increase in sales in the United Kingdom. Contributing to
the sales increases for both the three and nine month periods to a much
lesser degree were sales from a newly operational joint venture in China
and sales from a new subsidiary, Portola Allied Tool, which commenced
operations on March 31, 1999. The increases in Canada and the United
Kingdom sales resulted mainly from increased unit shipments. The sales
increases were partially offset by a decrease in domestic closure sales
due mainly to decreased prices.
Gross profit increased $2.4 million to $13.1 million, or 22.4%, for
the third quarter of fiscal 1999 as compared to $10.7 million for the
third quarter of fiscal 1998 and increased $5.9 million, or 20.7%, to
$34.4 million for the nine months ended May 31, 1999, from $28.5 million
for the same period in fiscal year 1998. Gross profit as a percentage
of sales increased from 23.0% for the three months ended May 31, 1998 to
26.1% for the same period in fiscal year 1999, and from 22.3% for the
nine months ended May 31, 1998 to 24.9% for the same period in fiscal
year 1999. Most of the increases for the three and nine month periods
ended May 31, 1999 were attributable to margin improvements in domestic
closures, the United Kingdom and Canada, and the addition of margin from
Mexico. These increases were offset by a decrease in equipment margins.
The margin increase in domestic closures and Canada is primarily the
result of improved cost control efforts and the benefits of a
restructuring completed in the fall of 1998. The United Kingdom
operations margins reflect a benefit due to a shift from using expensive
subcontractors and imported closures during their start-up phase in
fiscal year 1998 to producing more closures in their own facility during
fiscal year 1999.
Selling, general and administrative expenses increased $1.5 million,
or 24.6%, to $7.6 million for the three months ended May 31, 1999 as
compared to $6.1 million for the same period in fiscal year 1998, and
increased as a percentage of sales from 13.1% for the three months ended
May 31, 1998 to 15.1% for the three months ended May 31, 1999. For the
nine months ended May 31, 1999, selling, general and administrative
expenses were $20.8 million, an increase of $3.8 million, or 22.4%, from
$17.0 million for the same period in fiscal year 1998. As a percentage
of sales, selling, general and administrative expenses were 15.1% for
the nine months ended May 31, 1999 as compared to 13.3% for the same
period in fiscal year 1998. These increases are primarily due to
additional expenses related to the China and Mexico operations and
increased expenses related to additional personnel in the United Kingdom
operations. Also contributing to the increases were increased costs for
insurance, bonuses and legal expenses.
Research and development expense decreased $.3 million, or 33.3%, to
$.6 million for the three months ended May 31, 1999 as compared to $.9
million for the three months ended May 31, 1998 and decreased as a
percentage of sales from 1.9% in the three months ended May 31, 1998 to
1.2% in the three months ended May 31, 1999. For the nine months ended
May 31, 1999, research and development expense was $2.0 million, a
decrease of $.5 million, or 20.0%, from $2.5 million for the same period
in fiscal 1998. As a percentage of sales, research and development
expense was 1.5% for the nine months ended May 31, 1999 as compared to
2.0% for the same period in fiscal 1998. The decreases in research and
development expense for the three and nine months ended May 31, 1999 as
compared to the same periods in fiscal year 1998 were due primarily to a
reduction in consulting expenses and prototype costs.
Amortization of intangibles (consisting of amortization of patents,
goodwill and covenants not to compete) decreased $.1 million, or 12.5%,
to $.7 million for the three months ended May 31, 1999 as compared to
$.8 million for the three months ended May 31, 1998 and decreased $.7
million, or 28.0%, to $1.8 million for the nine months ended May 31,
1999. The decrease was primarily a result of certain covenants of the
Canadian operations becoming fully amortized in June 1998.
The Company had no interest income for the three months ended May
31, 1999, a decrease of $.1 million from $.1 million for the same period
in fiscal year 1998. Interest income decreased $.2 million to $.2
million for the nine months ended May 31, 1999 as compared to $.4
million for the same period in fiscal 1998. The interest income
balances fluctuated based on the levels of invested cash.
Interest expense increased $.1 million to $3.7 million for the three
months ended May 31, 1999 as compared to $3.6 million for the three
months ended May 31, 1998 and increased $.5 million to $10.8 million for
the nine months ended May 31, 1999 as compared to $10.3 million for the
same period in fiscal 1998. These increases were primarily due to an
increase in the Company's outstanding line of credit balance for the
three and nine months ended May 31, 1999 as compared to the same period
in fiscal year 1998 and the addition of the Mexico operations interest
expense.
The Company recorded a gain of $750,000 on the sale of marketable
securities related to its investment in Suncoast, Inc. for the three
months ended May 31, 1998 and a gain of $1,023,000 on the sale of its
Portland, Oregon facilities for the nine months ended May 31, 1998.
The Company recorded a benefit from income taxes of $.4 million for
the nine months ended May 31, 1999 based on its pre-tax loss using an
effective tax rate of 36%. The Company recorded a benefit from income
taxes of $1.4 million for the nine month period ending May 31, 1998.
The actual effective tax rate for the entire fiscal year could vary
substantially depending on actual results achieved.
Liquidity and Capital Resources
The Company has relied primarily upon cash from operations,
borrowings from financial institutions and sales of common stock to
finance its operations, repay long-term indebtedness and fund capital
expenditures and acquisitions. At May 31, 1999, the Company had cash
and cash equivalents of $2.2 million, a decrease of $1.4 million from
August 31, 1998.
Cash provided by operations totaled $5.7 million for the nine months
ended May 31, 1999, a $4.4 million increase from the $1.3 million
provided by operations for the nine months ended May 31, 1998.
Accounts receivable used funds of $1.4 million for the first nine months
of fiscal year 1999 as compared to providing funds of $.4 million for
the same period in fiscal year 1998. Accounts payable used funds of $.6
million in the first nine months of fiscal 1999 compared to using funds
of $4.3 million in the first nine months of fiscal year 1998, and
accrued expenses provided funds of $.3 million in the first nine months
of fiscal 1999 as compared to using funds of $.3 million in the same
period of fiscal year 1998. Accrued interest used funds of $3.0 million
in the first nine months of fiscal 1999 compared to using funds of $2.8
million in the same period of fiscal year 1998.
Cash used in investing activities was $15.1 million for the nine
months ended May 31, 1999 as compared to using $10.6 million for the
same period in fiscal year 1998. In both periods the use of cash
consisted primarily of additions to property, plant and equipment and in
fiscal 1999 included the use of cash for the acquisition of the assets
of Allied Tool. Proceeds from the sale of property, plant and equipment
in the first nine months of fiscal year 1999 included $.9 million from
the sale of the Company's Bettendorf, Iowa facility. Cash used in
investing activities in the first nine months of fiscal year 1998
included $1.7 million of proceeds from the sale of marketable securities
and $.9 million of proceeds from the sale of the Portland, Oregon
facility.
Cash provided by financing activities was $8.2 million for the nine
month period ended May 31, 1999 as compared to $9.5 million for the
first nine months of fiscal year 1998. The fluctuation is due to
changes in borrowings under the line of credit for the nine month period
ended May 31, 1999 and payments made under covenants not to compete in
fiscal year 1998.
At May 31, 1999, the Company had $2.2 million in cash and cash
equivalents as well as borrowing capacity under the revolving credit
line (of which $6.9 million was available for draw as of May 31, 1999).
While there can be no assurances, management believes that these
resources, together with anticipated cash flow from operations and
financing available from other sources, will be adequate to fund the
Company's operations, debt service requirements and capital expenditures
into fiscal year 2000.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income", and SFAS No. 131 "Disclosure About Segments of an
Enterprise and Related Information". SFAS No. 130 establishes standards
for reporting and display of comprehensive income and its components in
a full set of general-purpose financial statements. SFAS No. 131
changes current practice under SFAS No. 14 by establishing a new
framework on which to base segment reporting. The Company will
implement SFAS No. 130 and 131, which require the reporting and display
of certain information related to comprehensive income and segment
reporting, as required for the fiscal year ending 1999.
In February 1998, the Financial Accounting Standards Board issued
SFAS No. 132, "Employer's Disclosure About Pension and Other Benefits".
SFAS No. 132 revises employers' disclosures about pension and other
post-retirement benefit plans. It does not change the measurement or
recognition related to the Company's benefit plans.
In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities and requires the
recognition of all derivatives in the balance sheet at their fair market
values. The implementation date of this standard was recently delayed
and it is not effective for the Company until fiscal year 2001. The
impact of adopting this statement on the Company's current financial
statements would not be material.
Impact of the Year 2000 Issue
The year 2000 issue is the result of computer programs being written
using two digits, rather than four, to define the applicable year.
Software programs, hardware and machinery that have date-sensitive
software or embedded chips may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a major system
failure or miscalculations causing disruptions of operations, including a
temporary inability to engage in normal business activities.
As a result of ongoing assessments, the Company has determined it
will be required to modify or replace portions of hardware, software and
machinery so that those systems properly utilize dates beyond December
31, 1999. The Company believes that with these modifications and
replacements, the year 2000 issue will be mitigated. However, if such
modifications are not completed in a timely manner the effects of the
year 2000 issue could have a material impact on the operations and
financial condition of the Company.
The Company's plan to resolve the year 2000 issue involves four
phases; inventory and assessment, remediation, implementation and
testing. To date, the Company has completed its inventory and assessment
of all material software systems, including: order entry, sales,
accounting, payroll, costing, shipping/receiving and purchasing; and
concluded that those systems are year 2000 ready. The Company's
inventory and assessment of hardware, communications systems and
machinery used in the production process has also been completed. The
remediation of these items is ongoing and is expected to be completed in
September 1999. The testing and implementation phase should also be
completed by September 1999. In addition to the hardware and software
directly owned and operated by the Company, a significant portion of the
Company's business is conducted through systems that interact directly
with independent sales representatives. The software systems through
which the sales representatives interact with the Company are year 2000
compliant. Remediation, implementation and testing of the sales
representatives' hardware has been performed as the equipment is
inventoried and has been substantially completed.
Systems that interface directly with outside parties other than sales
representatives are limited to certain payroll functions. The Company
has completed its inventory and assessment process of these systems and
has concluded that they are year 2000 ready, except for certain modules
that are to be replaced by October 1999. The Company has also queried its
other important suppliers, service providers and customers and expects
this assessment to be completed by July 1999. After this assessment is
completed, preliminary contingency plans should be finalized and
implemented in the fall of 1999. These contingency plans will include,
among other things, the Company's strategy to meet any unusual changes in
demand from customers towards the end of calendar year 1999 which could
lead to distortions in normal quarterly sales activity. Currently, the
Company is not aware of any other issues at these entities that may
materially impact its results of operations, liquidity, or capital
resources. However, the Company has no means of ensuring that these
entities will be year 2000 ready and their inability to complete the year
2000 resolution process could materially affect the Company, its
operations and financial condition.
The Company will use mainly internal resources to resolve its year
2000 issues and expects to fund the total estimated project costs of $.4
million through operating cash flows. External costs incurred to date by
the Company, all of which have been capitalized, approximate $.2 million.
Of the total remaining project costs, approximately $.15 million is
attributable to the purchase of new software and equipment, which will be
capitalized. Approximately $.05 million of the Company's total year 2000
cost relates to the repair of hardware and software, which will be
expensed as incurred.
The Company's plans to complete the year 2000 modifications are based
on management's best estimates and are predicated on the continued
availability of skilled resources and the delivery of compliant systems
and components from its third party hardware and software manufacturers.
Estimates on the status of completion and the expected completion dates
are based on planned timetables and costs incurred to date. However,
there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those plans. Specific
factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes and similar
uncertainties.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by
reference herein.
Exhibit
Number Exhibit Title
- ------- -------------
27.01 Financial Data Schedule.
(b) The Company did not file any reports on Form 8-K during the period
ended May 31, 1999.
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
PORTOLA PACKAGING, INC.
(Registrant)
Date: July 8, 1999 /s/ James A. Taylor
---------------------
James A. Taylor
Vice-President and
Chief Financial Officer
(Principal Financial Officer
and Duly Authorized Officer)
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- ------- -------------
27.01 Financial Data Schedule.
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE ACCOMPANYING FINANCIAL STATEMENTS AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> MAY-31-1999
<CASH> 2,170
<SECURITIES> 0
<RECEIVABLES> 25,598 <F1>
<ALLOWANCES> 0
<INVENTORY> 14,094
<CURRENT-ASSETS> 45,222
<PP&E> 92,590 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 157,423
<CURRENT-LIABILITIES> 24,632
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (24,999)
<TOTAL-LIABILITY-AND-EQUITY> 157,423
<SALES> 138,201
<TOTAL-REVENUES> 138,201
<CGS> 103,840
<TOTAL-COSTS> 103,840
<OTHER-EXPENSES> 24,552
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,824
<INCOME-PRETAX> (1,035)
<INCOME-TAX> (374)
<INCOME-CONTINUING> (661)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (661)
<EPS-BASIC> ($0.06)
<EPS-DILUTED> ($0.06)
<FN>
<F1> Shown net of allowance
<F2> Shown net of depreciation
</FN>
</TABLE>
