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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 September 30, 2002

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)

(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.

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ATLANTIS PLASTICS, INC.

FORM 10-Q

For the Quarter Ended September 30, 2002

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Part 1. Financial Information

Item 1. Financial Statements

ATLANTIS PLASTICS, INC.
 
CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)

See accompanying notes.

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ATLANTIS PLASTICS, INC.
 
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data) (unaudited)

See accompanying notes.

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ATLANTIS PLASTICS, INC.
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)

See accompanying notes.

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ATLANTIS PLASTICS, INC.
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

     The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.

     The information included in this Form 10-Q should be read in conjunction with Management’s Discussion and Analysis and financial statements and footnotes thereto included in the Atlantis Plastics, Inc. Form 10-K for the year ended December 31, 2001.

Inventories

     The components of inventory consist of the following:

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Segment Information

     The Company has two operating segments: Atlantis Plastics Films and Atlantis Molded Plastics. Information related to such segments is as follows:

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Earnings Per Share Data

     The following table sets forth the computation of basic and diluted earnings per share for the periods indicated.

     Excluded from the above calculation of diluted earnings per share are antidilutive options, which could potentially dilute earnings per share in the future. Antidilutive options for the nine months ended September 30, 2002 and September 30, 2001 not included above are 1,135,454 and 924,954 shares, respectively.

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Item 2. Management’s Discussion And Analysis of Financial Condition And Results of Operations

Overview

     Atlantis Plastics, Inc. (“Atlantis” or the “Company”) is a leading U.S. plastics manufacturer consisting of two operating segments: (i) Atlantis Plastics Films, which produces polyethylene stretch and custom films used in a variety of industrial and consumer applications, and (ii) Atlantis Molded Plastics, which produces molded plastic products for a variety of applications, including products and components for the appliance, automotive, building supply, and recreational vehicle industries.

     Atlantis Plastics Films accounts for approximately 65% of the Company’s net sales and produces (i) stretch films, which are multilayer plastic films that are used principally to wrap pallets of materials for shipping or storage; (ii) custom film products, such as 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 that are converted from polyethylene films.

     Atlantis Molded Plastics, which accounts for approximately 35% of the Company’s net sales, employs two principal technologies: (i) injection molded thermoplastic parts that are sold primarily to original equipment manufacturers and used in major household goods and appliances, power tools, agricultural and automotive products, and (ii) a variety of custom and proprietary extruded plastic parts (profile extrusion) for both trim and functional 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.

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     Selected income statement data for the quarterly periods ended March 31, 2001 through September 30, 2002 are as follows:

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Results of Operations

Net Sales

     The Company’s net sales for the quarter and nine months ended September 30, 2002 were $63.2 million and $188.6 million, respectively, compared to $63.4 million and $190.6 million, respectively, for the comparable periods ending September 30, 2001.

     Atlantis Plastics Films’ net sales (as measured in dollars) for the quarter and nine months ended September 30, 2002 increased 1% and decreased 5%, respectively, compared to the quarter and nine months ended September 30, 2001. Sales volume (as measured in pounds) for the quarter and nine months ended September 30, 2002 increased 1% and 5%, respectively, compared to the quarter and nine months ended September 30, 2001. The 5% decline in year-to-date sales dollars combined with the 5% increase in year-to-date pound volume is a result of lower year-to-date average selling prices caused by a combination of the year-over-year decrease in average resin costs, industry overcapacity, and competitive pricing pressures.

     Net sales for the molded products group (as measured in dollars) decreased 4% and increased 8%, respectively, compared to the quarter and nine months ended September 30, 2001. The increase in year-to-date net sales is primarily the result of volume increases to major customers as well as continued growth within the building products segment.

Gross Profit and Operating Profit

     Atlantis’ gross margin for the quarter and nine months ended September 30, 2002 were 15% and 17%, respectively, compared to 16% for both the quarter and nine-month periods ended September 30, 2001. Operating margins were 4% and 6%, respectively, for the quarter and nine-month periods ended September 30, 2002, compared to 5% for both the comparable periods ended September 30, 2001.

     In the plastic films segment, gross margin and operating margin were 14% and 3%, respectively, for the quarter ended September 30, 2002, compared with 15% and 4%, respectively, for the quarter ended September 30, 2001. For the nine-month period ended September 30, 2002 gross margin and operating margin were 16% and 4%, respectively, compared to 15% and 5%, respectively, for the nine-month period ended September 30, 2001.

     In the molded products segment, gross margin and operating margin for the quarter ended September 30, 2002 were 18% and 8% respectively, compared to 17% and 7% respectively, for the quarter ended September 30, 2001. For the nine-month period ended September 30, 2002 gross margin and operating margin were 19% and 8%, respectively, compared to 16% and 6%, respectively, for the nine-month period ended September 30, 2001. The increase in both gross and operating margins is attributable to the increase in net sales.

Selling, General, and Administrative Expense

     The Company’s selling, general, and administrative (“SG&A”) expenses increased to $6.8 million and $21.6 million, respectively, for the quarter and nine-month periods ended September 30, 2002 from $6.7 million and $19.4 million, excluding goodwill amortization of approximately $0.4 million and $1.3 million, respectively, for the quarter and nine-month periods ended September 30, 2001. The increase is primarily the result of increased health and general insurance costs and increases in incentive compensation costs.

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Net Interest Expense and Income Taxes

     Net interest expense for the quarter and nine months ended September 30, 2002 decreased to $2.0 million and $5.7 million, respectively, compared to $2.3 million and $7.3 million, respectively, for the quarter and nine months ended September 30, 2001. Lower interest rates during the three and nine-month periods ended September 30, 2002 resulted in a lower average interest rate on the variable rate portion of debt, compared to the average variable interest rate for the three and nine-month periods ended September 30, 2001. In addition, the Company repurchased approximately $25.5 million of the 11% fixed rate Senior Notes during the fiscal year 2001. The repurchase was funded by new debt and borrowings under the revolving credit agreement at lower variable interest rates than that of the Senior Notes. Total debt decreased to $88.3 million at September 30, 2002 from $88.9 million at December 31, 2001.

     The Company’s effective income tax rate in 2001 differed from the applicable statutory rate primarily due to nondeductible goodwill amortization.

Income

     As a result of the factors described above, operating income decreased to $2.7 million (4% of net sales) during the quarter ended September 30, 2002, compared to $2.8 million (4% of net sales), including goodwill amortization of $0.4 million, for the quarter ended September 30, 2001. For the nine months ended September 30, 2002, operating income increased to $10.4 million (6% of net sales), compared to $8.8 million (5% of net sales), including goodwill amortization of $1.3 million, for the nine months ended September 30, 2001.

     Net income and basic and diluted earnings per share for the quarter and nine months ended September 30, 2002 and 2001 were as follows:

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Liquidity and Capital Resources

     At September 30, 2002, the Company had approximately $88.3 million of outstanding indebtedness, approximately $1.0 million in cash and cash equivalents, and an additional $5.1 million of unused availability under its revolving credit facility, net of outstanding letters of credit of approximately $1.5 million. The revolving credit facility expires January 31, 2003, and there can be no assurance that the commitment will be renewed or extended, or that another source of financing will be available to the Company on satisfactory terms. As of September 30, 2002, borrowings on this facility totaled $24.0 million. The Company’s principal 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.

     At September 30, 2002, the Company’s current portion of long-term debt had increased by $50.7 million to $75.9 million from $25.2 million at December 31, 2001. This increase was primarily the result of the reclassification of the $49.3 million 11% Senior Notes due February 15, 2003 from long-term debt to current portion of long-term debt. Atlantis is actively exploring alternatives to refinance its long-term debt, including the 11% Senior Notes; however, there can be no assurance that the Company will be able to secure such refinancing.

     On October 8, 2002, the Company, through a wholly owned subsidiary, acquired the business and certain assets as well as assumed certain specified liabilities of Rio Grande Plastic Products, Inc. Under the terms of the acquisition, the purchase price was approximately $3.4 million. Of the total purchase price, approximately $2.0 million was funded through a master equipment lease agreement with General Electric Capital Corporation with the balance funded by borrowings under the Company’s existing senior credit facility.

     The Company’s high debt level presents substantial risks and could have negative consequences. For example, it could (1) require the Company to dedicate a substantial portion of its cash flow from operations to repayment of debt, limiting the availability of cash for other purposes; (2) increase the Company’s vulnerability to adverse general economic conditions by making it more difficult to borrow additional funds to maintain its operations if the Company suffers shortfalls in net sales; (3) hinder the Company’s flexibility in planning for, or reacting to, changes in its business and industry by preventing the Company from borrowing money to upgrade its equipment or facilities; and (4) limit or impair the Company’s ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, or general corporate purposes.

     In the event that the Company’s cash flow from operations is not sufficient to fund the Company’s expenditures or to service its indebtedness, the Company would be required to raise additional funds through the sale of assets or subsidiaries. There can be no assurance that any of these sources of funds would be available in amounts sufficient for the Company to meet its obligations. Moreover, even if the Company were able to meet its obligations, its highly leveraged capital structure could significantly limit its ability to finance its expansion program and other capital expenditures, to compete effectively, or to operate successfully under adverse economic conditions.

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Cash Flows from Operating Activities

     For the nine months ended September 30, 2002, net cash provided by operating activities was approximately $5.6 million, compared to $7.9 million for the nine months ended September 30, 2001. The difference between the Company’s net income of $2.9 million and its $5.6 million operating cash flow for the nine months ended September 30, 2002 was primarily attributable to approximately $9.0 million of depreciation and amortization expense, a $1.9 million decrease in other current assets resulting primarily from the receipt of resin rebates, and $0.1 million due to a loss on disposal of assets, partially offset by an approximately $5.5 million increase in inventories, a $1.2 million increase in accounts receivable, a $0.9 million decrease in accounts payable and accrued liabilities, and a decrease in deferred income taxes of approximately $0.7 million.

Cash Flows from Investing Activities

     Net cash used in investing activities decreased to $5.1 million for the nine months ended September 30, 2002, compared to $5.3 million for the nine months ended September 30, 2001. This decrease was primarily the result of the sale of a building and other certain equipment in Tulsa, Oklahoma in connection with the prior consolidation of two facilities, partially offset by increased capital expenditures for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001.

Cash Flows from Financing Activities

     Net cash used in financing activities for the nine months ended September 30, 2002 was $0.4 million, compared with $4.9 million for the nine months ended September 30, 2001. The Company’s financing cash flow for the nine months ended September 30, 2002 reflects approximately $3.1 million in payments on long-term debt, partially offset by net borrowings of $2.5 million under the revolving credit agreement and the receipt of approximately $0.1 million in interest due from shareholder notes.

Recent Accounting Pronouncements

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards No. 141, Business Combinations and No. 142, Accounting for Goodwill and Other Intangibles (“SFAS 141 and SFAS 142”). SFAS 141 eliminated the use of pooling for business combinations after June 30, 2001. Under SFAS 142 goodwill and indefinite-lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets such as our customer lists that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Companies were required to immediately adopt the amortization provisions of SFAS 142 as it relates to goodwill and intangible assets acquired after June 30, 2001. On January 1, 2002, the Company adopted SFAS 142. The impact of the adoption as it relates to existing goodwill is expected to be a reduction of amortization expense of $1.8 million during the years ended December 31, 2002 and 2003. During the quarter and nine months ended September 30, 2002 the reduction to amortization expense was approximately $0.4 million and $1.3 million, respectively.

     In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). The Statement supersedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and supersedes the provisions of APB Opinion 30, Reporting the Results of Operations-Discontinued Events and Extraordinary Items, with regard to reporting the effects of a disposal of a segment of a business. The Statement provides a single accounting model for long-lived assets to be disposed of and significantly changes the criteria required to classify an asset as held-for-sale.

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Under the Statement, more dispositions will qualify for discontinued operations treatment in the statement of income, which requires expected future operating losses from discontinued operations to be displayed in discontinued operations in the period in which the losses are incurred. The Statement is effective for fiscal years beginning after December 15, 2001. At this time, the Company does not expect that the adoption of SFAS 144 will have a material impact on its financial statements.

     In April 2002, the FASB issued statement No. 145, Rescission of FASB Statements No. 4, 44 and 62, Amendment of FASB No. 13 and Technical Corrections (“FAS 145”). For most companies, FAS 145 will require gains and losses on extinguishment of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FAS 4. Extraordinary treatment will be required for certain extinguishments as provided in APB Opinion No. 30. The statement also amended FAS 13 for certain sales-leaseback and sublease accounting. The Company is required to adopt the provisions of FAS 145 effective January 1, 2003. The Company is currently evaluating the impact of adoption of this statement.

     In July 2002, the FASB issued Statement No. 146, Accounting for Costs Associated with Exit or Disposal Activities (“SFAS 146”). SFAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies the Emerging Issues Task Force Issue No. 94-3, Liability Recognition for Certain Employees Termination Benefits and Other Costs to Exit an Activity including Certain Costs Incurred in a Restructuring (“Issue 94-3”). The principal difference between Statement 146 and Issue 94-3 relates to Statement 146’s requirements for recognition of a liability for a cost associated with an exit or disposal activity. Statement 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. Under Issue 94-3, a liability for an exit cost was recognized at the date of an entity’s commitment to an exit plan. A fundamental conclusion reached by the FASB in this Statement is that an entity’s commitment to a plan, by itself, does not create an obligation that meets the definition of a liability. Therefore, this statement eliminates the definition and requirements for recognition of exit costs in Issue 94-3. This Statement also establishes that fair value is the objective for initial measurement of the liability. SFAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company believes that the adoption of SFAS 146 will not have a material impact on its financial position or results of operations.

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Note Regarding Forward Looking Statements

     This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of that term in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Additional written or oral forward-looking statements may be made by the Company from time to time, in press releases, annual or quarterly reports to shareholders, filings with the Securities Exchange Commission, presentations or otherwise. Statements contained herein that are not historical facts are forward-looking statements made pursuant to the safe harbor provisions referenced above.

     Forward-looking statements may include, but are not limited to, projections of net sales, income or losses, or capital expenditures; plans for future operations; financing needs or plans; compliance with financial covenants in loan agreements; plans for liquidation or sale of assets or businesses; plans relating to products or services of the Company; assessments of materiality; predictions of future events; the ability to obtain additional financing; the Company’s ability to meet obligations as they become due; the impact of pending and possible litigation; as well as assumptions relating to the foregoing. In addition, when used in this discussion, the words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “plans” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are inherently subject to risks and uncertainties, including, but not limited to, the repayment of significant debt obligations, the impact of leverage, dependence on major customers, fluctuating demand for the Company’s products, risks in product and technology development, fluctuating resin prices, competition, litigation, labor disputes, capital requirements, and other risk factors detailed in the Company’s Securities and Exchange Commission filings, some of which cannot be predicted or quantified based on current expectations.

     Consequently, future events and actual results could differ materially from those set forth in, contemplated by, or underlying the forward-looking statements. Readers are cautioned not to place undue reliance on any forward-looking statements contained herein, which speak only as of the date hereof. The Company undertakes no obligation to publicly release the result of any revisions to these forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

     The Company is exposed to market risk from changes in interest rates, primarily as a result of its floating interest rate debt.

     The following table summarizes information on debt instruments. The table presents expected maturity of debt instruments and projected annual average interest rates. For variable rate debt instruments, average interest rates are based on one-month London Inter-Bank Offered Rate (LIBOR), prime, and commercial paper rates as of November 1, 2002. For purposes of this table, the fair market value of the Senior Notes is par. The carrying value of the Company’s other long-term debt approximates its fair market value.

Interest Rate Sensitivity
Principal (Notional) Amount by Expected Maturity
Average Interest Rate
($ 000)