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 FEBRUARY 28, 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.
--- ---
11,947,886 shares of Registrant's $.001 par value Common Stock, consisting of
2,134,992 shares of nonvoting Class A Common Stock and 9,812,894 shares in the
aggregate of voting Class B Common Stock, Series 1 and 2 combined, were
outstanding at March 31, 1999
<PAGE>
PORTOLA PACKAGING, INC. AND SUBSIDIARIES
INDEX
Part I - Financial Information
- -------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
February 28, 1999 and August 31, 1998
Condensed Consolidated Statements of Operations for
the Three and Six Months Ended February 28, 1999 and 1998
Condensed Consolidated Statements of Cash Flows for
the Three and Six Months Ended February 28, 1999 and 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>
February 28, August 31,
1999 1998
------------ ----------
<S> <C> <C>
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $2,857 $3,570
Accounts receivable, net........................ 22,495 22,887
Inventories..................................... 12,702 11,260
Other current assets............................ 1,219 1,356
Deferred income taxes........................... 2,516 2,516
------------ ----------
Total current assets........................ 41,789 41,589
Property, plant and equipment, net.............. 90,402 85,874
Goodwill, net................................... 11,660 12,086
Patents, net.................................... 2,458 1,814
Covenants not to compete, net................... 243 607
Debt financing costs, net....................... 2,753 2,982
Other assets.................................... 2,244 3,908
------------ ----------
Total assets.................................... $151,549 $148,860
============ ==========
LIABILITIES, REDEEMABLE WARRANTS, COMMON STOCK
AND OTHER SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current portion of long-term debt............... $4,917 $2,772
Accounts payable................................ 10,843 8,138
Accrued liabilities............................. 10,025 10,793
Accrued interest................................ 5,082 5,224
------------ ----------
Total current liabilities..................... 30,867 26,927
Long-term debt, less current portion............ 127,793 127,936
Other long term obligations..................... 924 777
Deferred income taxes........................... 6,592 6,666
------------ ----------
Total liabilities........................... 166,176 162,306
Commitments and contingencies (Note 4)
Minority interest............................... 982 --
Redeemable warrants to purchase Class A
Common Stock.................................. 9,188 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 8,645 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...................... 7,797 7,797
Notes receivable from shareholders.............. (463) (463)
Cumulative foreign currency translation
adjustments................................... (2,189) (1,039)
Accumulated deficit............................. (29,953) (27,711)
------------ ----------
Total common stock and other
shareholders' deficit................... (24,797) (21,405)
------------ ----------
Total liabilities, redeemable
warrants, common stock and other
shareholders' deficit................... $151,549 $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 Six Months
Ended February 28, Ended February 28,
--------------------- ---------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Sales........................... $43,275 $39,267 $88,034 $81,243
Cost of sales................... 33,527 30,485 66,791 63,372
---------- ---------- ---------- ----------
Gross profit.................... 9,748 8,782 21,243 17,871
---------- ---------- ---------- ----------
Selling, general and
administrative................ 6,970 5,403 13,144 10,867
Research and development........ 611 779 1,399 1,647
Amortization of intangibles..... 582 831 1,167 1,665
---------- ---------- ---------- ----------
8,163 7,013 15,710 14,179
---------- ---------- ---------- ----------
Income from operations.......... 1,585 1,769 5,533 3,692
---------- ---------- ---------- ----------
Other (income) expense:
Interest income............... (89) (120) (169) (250)
Interest expense.............. 3,597 3,389 7,119 6,704
Amortization of debt
financing costs............. 120 130 240 257
Minority interest............. (194) -- (194) --
Other expense (income), net... 300 150 121 (894)
---------- ---------- ---------- ----------
3,734 3,549 7,117 5,817
---------- ---------- ---------- ----------
Loss before income taxes. ...... (2,149) (1,780) (1,584) (2,125)
Income tax benefit.............. (772) (1,173) (571) (1,380)
---------- ---------- ---------- ----------
Net loss........................ ($1,377) ($607) ($1,013) ($745)
========== ========== ========== ==========
Number of shares used in
computing basic per share
amounts....................... 11,949 11,772 11,946 11,777
========== ========== ========== ==========
Basic loss per share.......... ($0.12) ($0.05) ($0.09) ($0.06)
Number of shares used in
computing diluted per share
amounts....................... 11,949 11,772 11,946 11,777
========== ========== ========== ==========
Diluted loss per share........ ($0.12) ($0.05) ($0.09) ($0.06)
</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 Six Months
Ended February 28,
---------------------
1999 1998
---------- ----------
(unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................... ($1,013) ($745)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization........................ 8,306 7,625
Deferred income taxes................................ (74) (1,319)
Loss (gain) on property and equipment dispositions... 47 (834)
Provision for doubtful accounts...................... 183 162
Provision for excess and obsolete inventories........ 168 162
Minority interest income............................. (194) --
Changes in working capital:
Accounts receivable.................................. 1,691 4,006
Inventories.......................................... (1,027) (525)
Other current assets................................. (524) 236
Accounts payable..................................... 926 (4,050)
Accrued liabilities.................................. (378) 309
Accrued interest..................................... (142) 86
---------- ----------
Net cash provided by operating activities............ 7,969 5,113
---------- ----------
Cash flows from investing activities:
Additions to property, plant and equipment............. (8,244) (8,832)
Proceeds from sale of property, plant and equipment.... 863 1,154
(Increase) decrease in other assets.................... (563) 625
---------- ----------
Net cash used in investing activities................ (7,944) (7,053)
---------- ----------
Cash flows from financing activities:
Borrowings under long-term debt arrangements, net...... (693) 1,569
Increase in notes receivable from shareholders......... -- (10)
Payments on covenant not to compete agreements......... -- (417)
Issuance of common stock............................... -- 59
Repurchase of common stock............................. -- (132)
---------- ----------
Net cash (used in) provided by financing activities.. (693) 1,069
---------- ----------
Effect of exchange rate changes on cash.................. (45) 56
---------- ----------
Decrease in cash and cash equivalents................ (713) (815)
Cash and cash equivalents at beginning of period......... 3,570 3,242
---------- ----------
Cash and cash equivalents at end of period............... $2,857 $2,427
========== ==========
</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
six-month periods ended February 28, 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 February 28, 1999 unaudited
condensed consolidated financial statements (Note 4). All material
intercompany accounts and transactions have been eliminated.
Certain prior period balances have been reclassified to conform to
current period financial statement presentation. These
reclassifications had no effect on net loss for the three and six-month
periods ended February 28, 1998.
2. Computation of Earnings (Loss) Per Common Share:
Effective for the quarter ended February 28, 1998, the Company
adopted Financial Accounting Standards Board No. 128 "Earnings Per
Share" (EPS). 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 February 28,
1999 computations of net loss per share as their effect is antidilutive.
Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
3. Inventories:
Inventory balances as of February 28, 1999 and August 31, 1998 were
as follows (in thousands):
February 28, August 31,
1999 1998
----------- -----------
(unaudited)
Raw materials.................... $6,370 $5,429
Work in process.................. 1,022 1,606
Finished goods................... 5,310 4,225
----------- -----------
$12,702 $11,260
=========== ===========
4. Commitments and Contingencies:
As of November 30, 1998 and 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 Company is currently engaged in patent infringement litigation
with three separate parties who are seeking to have the court declare
certain patents owned by the Company invalid. Two of 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
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.
Portola Packaging, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
5. Recent Accounting Pronouncements (continued):
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. It is effective for
the Company in fiscal year 1999.
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. It is effective for the Company in fiscal year 2000.
The Company is currently studying the implications of these
statements and except as noted above, has not yet determined the impact
of adopting such statements on the Company's financial statements.
6. Subsequent Event:
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. The acquisition
agreement provides for additional 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 acquisition will be accounted
for as a purchase and accordingly, the purchase price will be 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 will be recorded as goodwill.
Allied is a Michigan based company engaged primarily in the
manufacture and sale of tooling used in the blowmolding industry. The
acquired company will be known as Portola Allied Tool, Inc. and will be
operated as a separate subsidiary of the Company.
Unaudited pro-forma information related to this acquisition has not
been included as the impact of the acquisition is not deemed to be
material.
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 $4.0 million, or 10.2%, from $39.3 million for the
three months ended February 28, 1998 to $43.3 million for the three
months ended February 28, 1999. For the first six months of fiscal year
1999 sales were $88.0 million compared to $81.3 million for the first
six months of fiscal year 1998, an 8.4% increase. This increase in
sales for the three and six month periods ended February 28, 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. The increases in Canada and the United Kingdom sales resulted
mainly from increased unit shipments. These increases were partially
offset by a decrease in domestic closure sales due mainly to decreased
prices.
Gross profit increased $1.0 million to $9.8 million, or 11.4%, for
the second quarter of fiscal 1999 as compared to $8.8 million for the
second quarter of fiscal 1998 and increased $3.3 million, or 18.4%, to
$21.2 million for the six months ended February 28, 1999, from $17.9
million for the same period in fiscal year 1998. Gross profit as a
percentage of sales increased from 22.4% for the three months ended
February 28, 1998 to 22.6% for the same period in fiscal year 1999, and
from 22.0% for the six months ended February 28, 1998 to 24.1% for the
same period in fiscal year 1999. Most of the increases for the three
and six month periods ended February 28, 1999 were attributable to
margin improvements in domestic closures, the United Kingdom and Canada.
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 recent
restructuring. The United Kingdom operations margins continue to
improve 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 in fiscal year 1999.
Selling, general and administrative expenses increased $1.6 million,
or 30.0%, to $7.0 million for the three months ended February 28, 1999
as compared to $5.4 million for the same period in fiscal year 1998, and
increased as a percentage of sales from 13.7% for the three months ended
February 28, 1998 to 16.2% for the three months ended February 28, 1999.
For the six months ended February 28, 1999, selling, general and
administrative expenses were $13.1 million, an increase of $2.2 million,
or 20.2%, from $10.9 million for the same period in fiscal year 1998. As
a percentage of sales selling, general and administrative expenses were
14.9% for the six months ended February 28, 1999 as compared to 13.4%
for the same period in fiscal year 1998. These increases are primarily
due to increased personnel in the United Kingdom operations, additional
expenses related to the China and Mexico operations, increased expenses
for bonus costs and increased legal expenses.
Research and development expense decreased $.2 million, or 25.0%, to
$.6 million for the three months ended February 28, 1999 as compared to
$.8 million for the three months ended February 28, 1998 and decreased
as a percentage of sales from 2.0% in the three months ended February
28, 1998 to 1.4% in the three months ended February 28, 1999. For the
six months ended February 28, 1999, research and development expense was
$1.4 million, a decrease of $.2 million, or 12.5%, from $1.6 million for
the same period in fiscal 1998. As a percentage of sales, research and
development expense was 1.6% for the six months ended February 28, 1999
as compared to 2.0% for the same period in fiscal 1998. The decreases
in research and development expense for the three and six months ended
February 28, 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 $.2 million, or 25.0%,
to $.6 million for the three months ended February 28, 1999 as compared
to $.8 million for the three months ended February 28, 1998 and
decreased $.5 million, or 29.4%, to $1.2 million for the six months
ended February 28, 1999. The decrease was primarily a result of certain
covenants of the Canadian operations becoming fully amortized in June
1998.
Interest income remained stable at $.1 million for the three months
ended February 28, 1999 as compared to the same period in fiscal year
1998 and decreased $.1 million to $.2 million for the six months ended
February 28, 1999 as compared to $.3 million for the same period in
fiscal 1998. The interest income balances fluctuated based on the
levels of invested cash.
Interest expense increased $.2 million to $3.6 million for the three
months ended February 28, 1999 as compared to $3.4 million for the three
months ended February 28, 1998 and increased $.4 million to $7.1 million
for the six months ended February 28, 1999 as compared to $6.7 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 six months ended February 28, 1999 as compared to the same
period in fiscal year 1998 and the addition of the Mexican operations
interest expense.
Other expense increased $.1 million to $.3 million for the three
months ended February 28, 1999 as compared to other expense of $.2
million for the same period in fiscal year 1998, and totaled $.1 million
for the six months ended February 28, 1999 as compared to other income
of $.9 million for the same period in fiscal 1998. The expense in
fiscal year 1999 is due primarily to exchange losses on intercompany
transactions. Other income for the first six months of fiscal 1998
reflects gains from the sale of the Portland, Oregon facility.
The Company recorded a benefit for income taxes of $.6 million for
the six months ended February 28, 1999 based on its pre-tax loss using
an effective tax rate of 36%. The actual effective tax rate for the
entire fiscal year could vary substantially depending on actual results
achieved. The Company recorded a benefit from income taxes of $1.4
million for the six-month period ending February 28, 1998.
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 February 28, 1999, the Company had
cash and cash equivalents of $2.9 million, a decrease of $.7 million
from August 31, 1998.
Cash provided by operations totaled $8.0 million for the six months
ended February 28, 1999, a $2.9 million increase from the $5.1 million
provided by operations for the six months ended February 28, 1998.
Accounts receivable provided funds of $1.7 million for the first six
months of fiscal year 1999 as compared to providing funds of $4.0
million for the same period in fiscal year 1998. Accounts payable
provided funds of $.9 million in the first six months of fiscal 1999
compared to using funds of $4.1 million in the first six months of
fiscal year 1998, and accrued expenses used funds of $.4 million in the
first six months of fiscal 1999 as compared to providing funds of $.3
million in the same period of fiscal year 1998. Accrued interest
expense used funds of $.1 million in the first six months of fiscal 1999
compared to providing funds of $.1 million in the same period of fiscal
year 1998.
Cash used in investing activities was $7.9 million for the six
months ended February 28, 1999 as compared to using $7.1 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.
Proceeds from the sale of property, plant and equipment in the first six
months of fiscal year 1999 included $.9 million from the sale of the
Company's Bettendorf, Iowa facility as compared to $1.2 million in
proceeds related to the sale of the Portland, Oregon facility in the
first six months of fiscal 1998.
Cash used by financing activities was $.7 million for the six month
period ended February 28, 1999 as compared to cash provided by financing
activities of $1.1 million for the first six months of fiscal year 1998.
The decrease was principally due to a decrease in borrowings under the
line of credit for the six-month period ended February 28, 1999 as
compared to the same period in fiscal year 1998.
At February 28, 1999, the Company had $2.9 million in cash and cash
equivalents as well as borrowing capacity under the revolving credit
line (of which $19.6 million was available for draw as of February 28,
1999). While there can be no assurances, management believes that these
resources, together with anticipated cash flow from operations, 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. It is effective for
the Company in fiscal year 1999.
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. It is effective for the Company in fiscal year 2000.
The Company is currently studying the implications of these
statements and except as noted above, has not yet determined the impact
of adopting such statements on the Company's financial statements.
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, certain communications systems and
machinery used in the production process has been substantially
completed. The remediation of these items is ongoing and is expected to
be completed in July 1999. The testing and implementation phase should
be completed as scheduled by August 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 and an inventory and assessment of the
hardware used by the various sales representatives is almost complete.
Remediation, implementation and testing of the sales representatives'
hardware has been performed as the equipment is inventoried and is
expected to be completed in April 1999.
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. The Company has
also queried its other important suppliers, service providers and
customers and expects this assessment to be completed by May 1999.
After this assessment is completed, preliminary contingency plans should
be finalized and implemented in June 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 costs through operating cash flows.
External costs incurred to date by the Company, all of which have been
capitalized, approximate $150,000. Of the total remaining project
costs, approximately $200,000 is attributable to the purchase of new
software and equipment, which will be capitalized. Approximately
$50,000 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 February 28, 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: April 7, 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> 6-MOS
<FISCAL-YEAR-END> AUG-31-1999
<PERIOD-START> SEP-01-1998
<PERIOD-END> FEB-28-1999
<CASH> 2,857
<SECURITIES> 0
<RECEIVABLES> 22,495 <F1>
<ALLOWANCES> 0
<INVENTORY> 12,702
<CURRENT-ASSETS> 41,789
<PP&E> 90,402 <F2>
<DEPRECIATION> 0
<TOTAL-ASSETS> 151,549
<CURRENT-LIABILITIES> 30,867
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (24,808)
<TOTAL-LIABILITY-AND-EQUITY> 151,549
<SALES> 88,034
<TOTAL-REVENUES> 88,034
<CGS> 66,791
<TOTAL-COSTS> 66,791
<OTHER-EXPENSES> 15,710
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,119
<INCOME-PRETAX> (1,584)
<INCOME-TAX> (571)
<INCOME-CONTINUING> (1,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,013)
<EPS-PRIMARY> ($0.09)
<EPS-DILUTED> ($0.09)
<FN>
<F1> Shown net of allowance
<F2> Shown net of depreciation
</FN>
</TABLE>
