<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 number 333-40067
HUNTSMAN PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0496065
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 532-5200
(Address of principal executive offices and telephone number)
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 [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On July 31, 1999, there were
1,000,001 outstanding shares of the registrant's Class A Common Stock, 6,999
outstanding shares of the registrant's Class B Common Stock and 49,511
outstanding shares of the registrant's Class C Common Stock.
================================================================================
<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
AS OF JUNE 30, 1999 AND DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 13,164 $ 19,217
Receivables, net of allowances of $1,642 and $2,570, respectively 106,123 89,381
Inventories 80,321 65,892
Income taxes receivable 1,174 7,365
Deferred income taxes 3,543 3,605
Prepaid expenses and other 1,742 3,063
------------ ------------
Total current assets 206,067 188,523
PLANT AND EQUIPMENT - Net 304,460 300,334
INTANGIBLE ASSETS - Net 217,073 221,290
OTHER ASSETS 23,031 24,125
------------ ------------
TOTAL ASSETS $ 750,631 $ 734,272
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 49,851 $ 43,186
Accrued liabilities 32,314 33,576
Current portion of long-term debt 13,719 11,406
Due to affiliates 1,421 7,000
------------ ------------
Total current liabilities 97,305 95,168
LONG-TERM DEBT- Net of current portion 511,747 513,530
OTHER LIABILITIES 13,374 11,394
DEFERRED INCOME TAXES 45,226 42,423
------------ ------------
Total liabilities 667,652 662,515
------------ ------------
REDEEMABLE COMMON STOCK - Class C nonvoting, no par value;
60,000 shares authorized; 49,511 and 11,700 shares outstanding, respectively,
net of related stockholder notes receivable of $2,718 in 1999 2,503 1,170
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock - Class A voting, no par value; 1,200,000 shares authorized,
1,000,001 shares outstanding 63,161 63,161
Common stock - Class B voting, no par value; 10,000 shares authorized,
6,999 shares outstanding 515 515
Retained earnings 23,160 13,731
Stockholder note receivable (434) (434)
Foreign currency translation adjustment (5,926) (6,386)
------------ ------------
Total stockholders' equity 80,476 70,587
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 750,631 $ 734,272
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
2
<PAGE> 3
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED INCOME STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
(IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ ------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
SALES - Net $ 186,793 $ 159,727 $ 361,236 $ 298,245
COST OF SALES 146,390 132,662 283,790 249,839
---------- ---------- ---------- ----------
Gross profit 40,403 27,065 77,446 48,406
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Administration and other 12,108 8,097 23,109 13,842
Sales and marketing 6,301 6,079 12,487 11,310
Research and development 1,397 928 2,861 1,898
---------- ---------- ---------- ----------
Total operating expenses 19,806 15,104 38,457 27,050
---------- ---------- ---------- ----------
OPERATING INCOME 20,597 11,961 38,989 21,356
INTEREST EXPENSE (10,835) (8,546) (21,057) (14,220)
OTHER INCOME (EXPENSE) - Net 1,793 (174) (191) 84
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 11,555 3,241 17,741 7,220
INCOME TAX PROVISION 4,397 1,625 8,312 3,493
---------- ---------- ---------- ----------
INCOME BEFORE
DISCONTINUED OPERATIONS 7,158 1,616 9,429 3,727
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) 256 582
GAIN ON SALE OF DISCONTINUED
OPERATIONS (net of income taxes) 5,300 5,300
---------- ---------- ---------- ----------
NET INCOME $ 7,158 $ 7,172 $ 9,429 $ 9,609
========== ========== ========== ==========
</TABLE>
See notes to consolidated condensed financial statements.
3
<PAGE> 4
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,429 $ 9,609
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 16,893 11,696
Deferred income taxes 2,865 3,026
Provision for losses on accounts receivable (928) (360)
Noncash compensation expense 270 -
(Gain) loss on sale of assets 98 (5,300)
Changes in assets and liabilities - net of effects of acquisitions:
Accounts receivable (15,890) 12,097
Inventories (14,429) 2,440
Prepaid expenses and other 1,321 958
Other assets 1,094 (2,126)
Trade accounts payable 6,665 (11,248)
Accrued liabilities (1,262) 8,889
Due to affiliates (5,579) (11,656)
Income taxes payable 6,191 (1,107)
Other liabilities 1,848 (1,906)
------------ ------------
Net cash provided by operating activities 8,586 15,012
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 40 28,269
Payments for purchase of Blessings Corporation, net of cash acquired - (282,973)
Payments for certain net assets of Ellehammer Industries - (7,877)
Capital expenditures for plant and equipment (17,116) (22,733)
------------ ------------
Net cash used in investing activities (17,076) (285,314)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Class C nonvoting common stock 1,139 1,160
Principal payments on borrowings (4,625) (18,371)
Proceeds from issuance of long-term debt 5,155 285,000
------------ ------------
Net cash provided by financing activities 1,669 267,789
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS 768 1,133
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (6,053) (1,380)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,217 12,411
------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,164 $ 11,031
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 20,754 $ 10,999
============ ============
Income taxes $ (2,899) $ 1,729
============ ============
</TABLE>
See notes to consolidated condensed financial statements.
4
<PAGE> 5
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying consolidated condensed financial statements have been
prepared, without audit, in accordance with generally accepted accounting
principles and pursuant to the rules and regulations of the Securities
and Exchange Commission. The information reflects all normal recurring
adjustments that, in the opinion of management, are necessary for a fair
presentation of the financial position, results of operations and cash
flows of Huntsman Packaging Corporation and its subsidiaries ("Huntsman
Packaging") for the periods presented. Results of operations for interim
periods are not necessarily indicative of results of operations to be
expected for a full fiscal year.
Certain information in footnote disclosures normally included in
financial statements presented in accordance with generally accepted
accounting principles has been condensed or omitted in accordance with
the rules and regulations of the Securities and Exchange Commission.
These statements should be read in conjunction with Huntsman Packaging's
Annual Report on Form 10-K for the year ended December 31, 1998.
2. INVENTORIES
Inventories are recorded at the lower of cost (on a first-in, first-out
basis) or market value. Inventories on June 30, 1999 and December 31,
1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Finished goods $ 43,774 $ 37,830
Raw materials 31,582 21,318
Work-in-process 4,965 6,744
------------ ------------
Total $ 80,321 $ 65,892
============ ============
</TABLE>
3. ACQUISITIONS
ELLEHAMMER INDUSTRIES LTD. AND ELLEHAMMER PACKAGING INC. - On March 12,
1998, we acquired certain assets and assumed certain liabilities of
Ellehammer Industries Ltd. and Ellehammer Packaging Inc. (collectively
the "Ellehammer Acquisition") for cash of approximately $7.9 million. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, results of operations are included in the accompanying
consolidated condensed financial statements from the date of acquisition.
We did not record any goodwill in this acquisition.
BLESSINGS CORPORATION - On May 19, 1998, in accordance with an Agreement
and Plan of Merger dated, April 1, 1998, we acquired Blessings
Corporation ("Blessings") by merging our wholly-owned subsidiary, VA
Acquisition Corp., with and into Blessings (the "Blessings Acquisition").
Blessings then became our wholly-owned subsidiary and Blessings changed
its name to Huntsman Edison Films Corporation. The aggregate purchase
price for Blessings was approximately $270 million (including the
assumption of approximately $57 million of Blessings' existing
indebtedness). In connection with the Blessings Acquisition, we incurred
transaction costs of
5
<PAGE> 6
approximately $17 million. The financing for the Blessings Acquisition
was provided under our $510 million Amended and Restated Credit
Agreement. The acquisition was accounted for using the purchase method of
accounting. Accordingly, the results of operations are included in the
accompanying consolidated financial statements from the date of
acquisition. We recorded goodwill and intangible assets of approximately
$168.8 million in this acquisition, which are being amortized on a
straight-line basis over 10 to 30 years.
The following pro forma information for the three and six months ended
June 30, 1998 presents our results of operations as if the Blessings
Acquisition had occurred at the beginning of 1998. The results of
operations give effect to certain adjustments, including amortization of
intangible assets, depreciation expense, interest expense on debt
borrowings to fund the acquisition and income taxes. The pro forma
results have been prepared for comparative purposes only and do not
purport to be indicative of what would have occurred had the acquisition
been made at the beginning of the applicable period or of the results
which may occur in the future.
Pro forma results of operations (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1998 June 30, 1998
------------------ ----------------
<S> <C> <C>
Sales - net $ 182,112 $ 365,530
Operating income 10,824 24,857
Loss before discontinued operations (1,354) (203)
</TABLE>
4. RECENT ACCOUNTING PRONOUNCEMENT
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 requiring that
derivative instruments be recorded in the balance sheet as either an
asset or liability measured at its fair market value, and that changes in
the derivative's fair value be recognized currently in earnings, unless
specific hedge accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 2000. We expect that the adoption
of this statement will not have a material effect on our consolidated
condensed financial statements.
5. COMPREHENSIVE INCOME
The following table reports comprehensive income for the three and six
months ended June 30, 1999 and 1998 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income $ 7,158 $ 7,172 $ 9,429 $ 9,609
Foreign currency translation adjustments 52 (437) 460 (746)
---------- ---------- ---------- ----------
Comprehensive income $ 7,210 $ 6,735 $ 9,889 $ 8,863
========== ========== ========== ==========
</TABLE>
6
<PAGE> 7
6. OTHER INCOME (EXPENSE)
We hold investments in marketable securities that are designated as
trading securities. For the three and six months ended June 30, 1999,
unrealized gains (losses) of approximately $1.8 million and $(0.2)
million, respectively, on these investments are included in other income
(expense), net.
7. OPERATING SEGMENTS
Operating segments are components of our company for which separate
financial information is available that is evaluated regularly by our
chief operating decision maker in deciding how to allocate resources and
in assessing performance. This information is reported on the same basis
that it is used internally for evaluating segment performance.
We have three reportable operating segments: design products, industrial
films and specialty films. The design products segment produces printed
rollstock, bags and sheets used to package products in the food and other
industries. The industrial films segment produces stretch films, used for
industrial unitizing and containerization, and PVC films, used to wrap
meat, cheese and produce. The specialty films segment produces converter
films that are sold to other flexible packaging manufacturers for
additional fabrication, barrier films that contain and protect food and
other products, and other films used in the personal care, medical,
agriculture and horticulture industries.
Sales and transfers between our segments are eliminated in consolidation.
We evaluate performance of the operating segments based on profit or loss
before income taxes, not including nonrecurring gains or losses. Our
reportable segments are managed separately with separate management
teams, because each segment has differing products, customer
requirements, technology and marketing strategies.
7
<PAGE> 8
Segment profit or loss and segment assets as of and for the three months
ended June 30, 1999 and 1998 are presented in the following table (in
thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
PRODUCTS FILMS FILMS OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Net sales to customers $ 40,549 $ 37,534 $ 108,710 $ 186,793
Intersegment sales 1,569 533 1,191 $ (3,293)
----------- ----------- ----------- ----------- -----------
Total net sales 42,118 38,067 109,901 (3,293) 186,793
Depreciation and amortization
1,842 1,154 4,691 763 8,450
Interest expense 779 87 3,327 6,642 10,835
Segment profit 2,311 4,738 14,969 (10,463) 11,555
Segment total assets 155,115 90,655 446,669 58,192 750,631
Capital expenditures 1,699 1,677 4,759 861 8,996
1998
Net sales to customers $ 33,220 $ 38,757 $ 87,750 $ 159,727
Intersegment sales 555 827 20 $ (1,402)
----------- ----------- ----------- ----------- -----------
Total net sales 33,775 39,584 87,770 (1,402) 159,727
Depreciation and amortization
999 1,288 3,467 1,000 6,754
Interest expense 1 105 17 8,423 8,546
Segment profit (35) 4,210 10,780 (11,714) 3,241
Segment total assets 136,935 83,088 453,469 41,798 715,290
Capital expenditures 4,502 2,150 6,561 43 13,256
</TABLE>
Segment profit or loss for the six months ended June 30, 1999 and 1998
are presented in the following table (in thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
PRODUCTS FILMS FILMS OTHER TOTAL
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1999
Net sales to customers $ 78,483 $ 71,281 $ 211,472 $ 361,236
Intersegment sales 2,475 840 2,558 $ (5,873)
----------- ----------- ----------- ----------- -----------
Total net sales 80,958 72,121 214,030 (5,873) 361,236
Depreciation and amortization
3,851 2,269 9,265 1,508 16,893
Interest expense 1,578 174 6,779 12,526 21,057
Segment profit 4,382 8,707 28,174 (23,522) 17,741
Capital expenditures 3,985 3,394 7,891 1,846 17,116
1998
Net sales to customers $ 56,265 $ 77,966 $ 164,014 $ 298,245
Intersegment sales 792 2,601 193 $ (3,586)
----------- ----------- ----------- ----------- -----------
Total net sales 57,057 80,567 164,207 (3,586) 298,245
Depreciation and amortization
1,530 2,724 5,416 2,026 11,696
Interest expense 2 172 24 14,022 14,220
Segment profit 2,492 7,521 18,604 (21,397) 7,220
Capital expenditures 7,394 3,355 11,120 864 22,733
</TABLE>
8
<PAGE> 9
A reconciliation of the totals reported for the operating segments to our totals
reported in the consolidated condensed financial statements is as follows (in
thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
3 months 6 months 3 months 6 months
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
PROFIT OR LOSS
Total profit for reportable segments $ 22,018 $ 41,263 $ 14,955 $ 28,617
Unallocated amounts:
Corporate expenses (3,821) (10,996) (3,291) (7,375)
Interest expense (6,642) (12,526) (8,423) (14,022)
--------- --------- --------- ---------
Income before taxes and
discontinued operations $ 11,555 $ 17,741 $ 3,241 $ 7,220
========= ========= ========= =========
1999 1998
--------- ---------
ASSETS
Total assets for reportable segments $ 692,439 $ 673,492
Intangible assets not allocated to segments 16,822 15,123
Other unallocated assets 41,370 26,675
--------- ---------
Total consolidated assets $ 750,631 $ 715,290
========= =========
</TABLE>
8. STOCK SALE AND CANCELLATION OF STOCK OPTIONS
During the first six months of 1999, we sold 12,188 shares of Class C
common stock to certain officers of Huntsman Packaging for $100 per
share, the estimated fair value of the shares on the date of purchase. In
addition, we redeemed 600 shares of Class C common stock for $100 per
share from one officer.
On February 22, 1999, we entered into Option Cancellation and Restricted
Stock Purchase Agreements with certain officers of Huntsman Packaging
holding options to purchase 26,223 shares of Class C common stock. Under
the agreements, options to purchase an aggregate of 26,223 shares of
Class C common stock were cancelled and 26,223 shares of Class C common
stock ("Restricted Class C Common") were sold to certain option holders
for $100 per share, the estimated fair market value of the shares on the
date of purchase. The purchase price for the shares was paid by delivery
of promissory notes to Huntsman Packaging. After the cancellation, 10,489
options to purchase Class C Common Stock remain outstanding. The 26,223
shares of Restricted Class C Common purchased are subject to repurchase
rights of Huntsman Packaging that will lapse under conditions
substantially the same as the vesting conditions of the canceled options.
The repurchase rights for 13,117 shares of Restricted Class C Common
lapse on a straight-line basis over a five-year period commencing January
1, 1998. The repurchase rights for the remaining 13,116 shares of
Restricted Class C Common lapse over the same five years, subject to
achievement of certain Huntsman Packaging performance criteria, or if the
performance criteria are not met, on December 31, 2007. The shares of
Restricted Class C Common are subject to essentially the same
restrictions and redemption options as the other outstanding Class C
common shares.
Additionally, options to purchase 2,622 shares of Class C common stock
were cancelled during the first six months of 1999.
9
<PAGE> 10
9. REDEEMABLE COMMON STOCK
Redeemable common stock is presented net of related stockholder notes
receivable of $2.7 million. Included in the stockholder notes receivable
is accrued interest on the notes of $0.1 million. Redeemable common stock
also includes accrued noncash compensation of $0.3 million relating to
performance-based stock options.
10. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS
The following condensed consolidating financial statements present, in
separate columns, financial information for (i) Huntsman Packaging (on a
parent only basis), with its investment in its subsidiaries recorded
under the equity method, (ii) guarantor subsidiaries (as specified in the
Indenture, dated September 30, 1997 (the "Indenture") relating to
Huntsman Packaging's $125 million senior subordinated notes (the
"Notes")) on a combined basis, with any investments in non-guarantor
subsidiaries specified in the Indenture recorded under the equity method,
(iii) direct and indirect non-guarantor subsidiaries on a combined basis,
(iv) the eliminations necessary to arrive at the information for Huntsman
Packaging and its subsidiaries on a consolidated basis, and (v) Huntsman
Packaging on a consolidated basis, in each case as of June 30, 1999 and
December 31, 1998 and for the three and six months ended June 30, 1999
and 1998. The Notes are fully and unconditionally guaranteed on a joint
and several basis by each guarantor subsidiary and each guarantor
subsidiary is wholly-owned, directly or indirectly, by Huntsman
Packaging. There are no contractual restrictions limiting transfers of
cash from guarantor and non-guarantor subsidiaries to Huntsman Packaging.
The consolidating condensed financial statements are presented herein,
rather than separate financial statements for each of the guarantor
subsidiaries, because management believes that separate financial
statements relating to the guarantor subsidiaries are not material to
investors.
On January 1, 1999, two of our guarantor subsidiary companies, Huntsman
Deerfield Films Corporation and Huntsman United Films Corporation, were
merged with and into Huntsman Packaging. Accordingly, these former
guarantor subsidiary companies are now included as part of the "Huntsman
Packaging Corporation Parent Only" column for all periods presented.
10
<PAGE> 11
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Consolidated
Packaging Combined Combined Huntsman
Corporation Guarantor Non-Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,075 $ 47 $ 11,042 $ 13,164
Receivables 70,415 17,531 18,177 106,123
Inventories 64,770 6,150 9,401 80,321
Income taxes receivable (112) 820 466 1,174
Deferred income taxes 4,058 803 (1,318) 3,543
Prepaid expenses and other 1,296 189 257 1,742
----------- ----------- ----------- -----------
Total current assets 142,502 25,540 38,025 206,067
PLANT AND EQUIPMENT - Net 180,455 72,251 51,754 304,460
INTANGIBLE ASSETS - Net 53,886 144,414 18,773 217,073
INVESTMENT IN SUBSIDIARIES 51,211 $ (51,211) -
OTHER ASSETS 16,605 142 6,284 23,031
----------- ----------- ----------- ----------- -----------
TOTAL $ 444,659 $ 242,347 $ 114,836 $ (51,211) $ 750,631
=========== =========== =========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 34,499 $ 5,969 $ 9,383 $ 49,851
Accrued liabilities 26,644 1,467 4,203 32,314
Long-term debt - current portion 10,625 3,094 13,719
Due to affiliates (30,132) 23,474 8,079 1,421
----------- ----------- ----------- -----------
Total current liabilities 41,636 30,910 24,759 97,305
LONG-TERM DEBT - Net of current portion 282,223 185,400 44,124 511,747
OTHER LIABILITIES 8,971 2,976 1,427 13,374
DEFERRED INCOME TAXES 28,850 13,657 2,719 45,226
----------- ----------- ----------- -----------
Total liabilities 361,680 232,943 73,029 667,652
----------- ----------- ----------- -----------
REDEEMABLE COMMON STOCK 2,503 2,503
----------- -----------
STOCKHOLDERS' EQUITY:
Common stock 63,676 6,357 29,241 $ (35,598) 63,676
Retained earnings 23,160 3,058 16,960 (20,018) 23,160
Stockholder note receivable (434) - - - (434)
Foreign currency translation adjustments (5,926) (11) (4,394) 4,405 (5,926)
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 80,476 9,404 41,807 (51,211) 80,476
----------- ----------- ----------- ----------- -----------
TOTAL $ 444,659 $ 242,347 $ 114,836 $ (51,211) $ 750,631
=========== =========== =========== =========== ===========
</TABLE>
11
<PAGE> 12
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED BALANCE SHEET
DECEMBER 31, 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,381 $ 525 $ 11,311 $ 19,217
Receivables 59,667 13,650 16,064 89,381
Inventories 50,243 5,994 9,655 65,892
Income taxes receivable 4,230 1,868 1,267 7,365
Deferred income taxes 4,059 803 (1,257) 3,605
Prepaid expenses and other 2,090 680 293 3,063
------------ ------------ ------------ ------------
Total current assets 127,670 23,520 37,333 188,523
PLANT AND EQUIPMENT - Net 173,850 73,589 52,895 300,334
INTANGIBLE ASSETS - Net 55,142 147,140 19,008 221,290
INVESTMENT IN SUBSIDIARIES 42,959 $ (42,959)
OTHER ASSETS 17,582 143 6,400 24,125
------------ ------------ ------------ ------------ ------------
TOTAL ASSETS $ 417,203 $ 244,392 $ 115,636 $ (42,959) $ 734,272
============ ============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 26,698 $ 6,760 $ 9,728 $ 43,186
Accrued liabilities 25,064 2,401 6,111 33,576
Current portion of long-term debt 8,875 2,531 11,406
Due to (from) affiliates (21,224) 18,111 10,113 7,000
------------ ------------ ------------ ------------
Total current liabilities 39,413 27,272 28,483 95,168
LONG-TERM DEBT - Net of current portion 273,519 194,200 45,811 513,530
OTHER LIABILITIES 6,740 3,171 1,483 11,394
DEFERRED INCOME TAXES 25,774 13,658 2,991 42,423
------------ ------------ ------------ ------------
Total liabilities 345,446 238,301 78,768 662,515
------------ ------------ ------------ ------------
REDEEMABLE COMMON STOCK 1,170 1,170
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock 63,676 6,357 29,241 $ (35,598) 63,676
Retained earnings 13,731 (255) 12,641 (12,386) 13,731
Shareholder note receivable (434) (434)
Foreign currency translation adjustments (6,386) (11) (5,014) 5,025 (6,386)
------------ ------------ ------------ ------------ ------------
Total stockholders' equity 70,587 6,091 36,868 (42,959) 70,587
------------ ------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 417,203 $ 244,392 $ 115,636 $ (42,959) $ 734,272
============ ============ ============ ============ ============
</TABLE>
12
<PAGE> 13
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 127,427 $ 34,360 $ 28,299 $ (3,293) $ 186,793
COST OF SALES 104,168 24,035 21,480 (3,293) 146,390
------------ ------------ ------------ ------------ ------------
Gross profit 23,259 10,325 6,819 40,403
OPERATING EXPENSES 14,637 2,831 2,338 19,806
------------ ------------ ------------ ------------
OPERATING INCOME 8,622 7,494 4,481 20,597
INTEREST EXPENSE (6,649) (3,320) (866) (10,835)
EQUITY IN EARNINGS OF SUBSIDIARIES 6,229 (6,229)
OTHER INCOME (EXPENSE) - Net (226) 6 2,013 1,793
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 7,976 4,180 5,628 (6,229) 11,555
INCOME TAX PROVISION 818 2,252 1,327 4,397
------------ ------------ ------------ ------------ ------------
NET INCOME $ 7,158 $ 1,928 $ 4,301 $ (6,229) $ 7,158
============ ============ ============ ============ ============
</TABLE>
13
<PAGE> 14
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE THREE MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 124,061 $ 18,238 $ 18,830 $ (1,402) $ 159,727
COST OF SALES 103,491 15,214 15,359 (1,402) 132,662
------------ ------------ ------------ ------------ ------------
Gross profit 20,570 3,024 3,471 27,065
OPERATING EXPENSES 12,204 1,005 1,895 15,104
------------ ------------ ------------ ------------
OPERATING INCOME 8,366 2,019 1,576 11,961
INTEREST EXPENSE (6,058) (2,015) (473) (8,546)
EQUITY IN EARNINGS OF SUBSIDIARIES 136 (136)
OTHER INCOME (EXPENSE) - Net 127 8 (309) (174)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 2,571 12 794 (136) 3,241
INCOME TAX PROVISION 699 251 675 1,625
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS 1,872 (239) 119 (136) 1,616
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) 256 256
GAIN ON SALE OF DISCONTINUED
OPERATIONS (net of income taxes) 5,300 5,300
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 7,172 $ (239) $ 375 $ (136) $ 7,172
============ ============ ============ ============ ============
</TABLE>
14
<PAGE> 15
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 246,149 $ 65,982 $ 54,978 $ (5,873) $ 361,236
COST OF SALES 201,446 46,425 41,792 (5,873) 283,790
------------ ------------ ------------ ------------ ------------
Gross profit 44,703 19,557 13,186 77,446
OPERATING EXPENSES 28,340 5,369 4,748 38,457
------------ ------------ ------------ ------------
OPERATING INCOME 16,363 14,188 8,438 38,989
INTEREST EXPENSE (12,539) (6,765) (1,753) (21,057)
EQUITY IN EARNINGS OF SUBSIDIARIES 7,632 (7,632)
OTHER INCOME (EXPENSE) - Net (430) 5 234 (191)
------------ ------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 11,026 7,428 6,919 (7,632) 17,741
INCOME TAX PROVISION 1,597 4,115 2,600 8,312
------------ ------------ ------------ ------------ ------------
NET INCOME $ 9,429 $ 3,313 $ 4,319 $ (7,632) $ 9,429
============ ============ ============ ============ ============
</TABLE>
15
<PAGE> 16
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED INCOME STATEMENT
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
SALES - Net $ 249,811 $ 18,589 $ 33,431 $ (3,586) $ 298,245
COST OF SALES 210,310 15,548 27,567 (3,586) 249,839
------------ ------------ ------------ ------------ ------------
Gross profit 39,501 3,041 5,864 48,406
OPERATING EXPENSES 23,087 1,042 2,921 27,050
------------ ------------ ------------ ------------ ------------
OPERATING INCOME 16,414 1,999 2,943 21,356
INTEREST EXPENSE (11,664) (2,015) (541) (14,220)
EQUITY IN EARNINGS OF SUBSIDIARIES 1,142 (1,142)
OTHER INCOME (EXPENSE) - Net 174 8 (98) 84
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE INCOME TAXES
AND DISCONTINUED OPERATIONS 6,066 (8) 2,304 (1,142) 7,220
INCOME TAX PROVISION 1,757 243 1,493 3,493
------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE
DISCONTINUED OPERATIONS 4,309 (251) 811 (1,142) 3,727
INCOME FROM DISCONTINUED
OPERATIONS (net of income taxes) 582 582
GAIN ON SALE OF DISCONTINUED
OPERATIONS (net of income taxes) 5,300 5,300
------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 9,609 $ (251) $ 1,393 $ (1,142) $ 9,609
============ ============ ============ ============ ============
</TABLE>
16
<PAGE> 17
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES $ (4,412) $ 11,080 $ 1,918 $ 8,586
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 32 8 40
Capital expenditures for plant and equipment (12,546) (2,758) (1,812) (17,116)
------------ ------------ ------------ ------------
Net cash used in investing activities (12,514) (2,758) (1,804) (17,076)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,139 1,139
Proceeds from issuance (payments) of long-term debt
10,454 (8,800) (1,124) 530
------------ ------------ ------------ ------------
Net cash provided by (used in) financing
activities 11,593 (8,800) (1,124) 1,669
------------ ------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
27 741 768
------------ ------------ ------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (5,306) (478) (269) (6,053)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
7,381 525 11,311 19,217
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 2,075 $ 47 $ 11,042 $ 13,164
============ ============ ============ ============
</TABLE>
17
<PAGE> 18
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES $ 16,244 $ (589) $ (643) $ 15,012
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 28,269 28,269
Payments for purchase of Blessings
Corporation, net of cash acquired (284,644) 99 1,572 (282,973)
Payments for certain net assets of Ellehammer Industries
(7,877) (7,877)
Capital expenditures for plant and equipment (18,626) (1,530) (2,577) (22,733)
------------ ------------ ------------ ------------
Net cash used in investing activities (282,878) (1,431) (1,005) (285,314)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,160 1,160
Principal payments on borrowings (19,852) 1,481 (18,371)
Proceeds from issuance of long-term debt 285,000 285,000
------------ ------------ ------------
Net cash provided by financing activities 266,308 1,481 267,789
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
(250) (16) 1,399 1,133
------------ ------------ ------------ ------------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (576) (555) (249) (1,380)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
1,206 19 11,186 12,411
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 630 $ (536) $ 10,937 $ 11,031
============ ============ ============ ============
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998
10-K"). This section contains certain forward-looking statements that involve
risks and uncertainties, including statements regarding our plans, objectives,
goals, strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as a
result of factors set forth under "Cautionary Statement for Forward-Looking
Information" below and elsewhere in this report.
GENERAL
Huntsman Packaging Corporation derives its revenues, earnings and cash
flows from the sale of film and flexible packaging products throughout the
world. Huntsman Packaging manufactures these products at its facilities located
in North America, Europe and Australia. Our sales have grown primarily as a
result of strategic acquisitions made over the past several years, increased
levels of production at acquired facilities and the overall growth in the market
for film and flexible packaging products. Our most recent acquisitions include
the 1997 acquisition of Huntsman Polymers Corporation's CT Film division (the
"CT Film Acquisition") and our 1998 acquisitions of Ellehammer Industries, Ltd.
and Ellehammer Packaging Inc. (collectively, the "Ellehammer Acquisition") and
Blessings Corporation (the "Blessings Acquisition").
In order to further benefit from these recent acquisitions, we ceased
operations at certain less efficient manufacturing facilities and relocated
equipment to more efficient facilities. In addition, we sold certain assets and
restructured and consolidated our operations and administrative functions. As a
result of these activities, we increased manufacturing efficiencies and product
quality, reduced costs, and increased operating profitability. As described in
the 1998 10-K, we also undertook certain significant divestitures and closures
of manufacturing facilities during 1998.
RESULTS OF OPERATIONS
The following table sets forth net sales and expenses, and such amounts
as a percentage of net sales, for the three and six months ended June 30, 1999
and 1998 (dollars in millions).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
---------------- --------------- ---------------- ----------------
% of % of % of % of
$ Sales $ Sales $ Sales $ Sales
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales-net $186.8 100.0% $159.7 100.0% $361.2 100.0% $298.2 100.0%
Cost of sales 146.4 78.4 132.6 83.0 283.8 78.6 249.8 83.8
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 40.4 21.6 27.1 17.0 77.4 21.4 48.4 16.2
Total operating expenses 19.8 10.6 15.1 9.5 38.4 10.6 27.0 9.0
------ ------ ------ ------ ------ ------ ------ ------
Operating income $ 20.6 11.0% $ 12.0 7.5% $ 39.0 10.8% $ 21.4 7.2%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
19
<PAGE> 20
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales
Net sales increased by $27.1 million, or 17.0%, from $159.7 million, for
the second quarter of 1998, to $186.8 million, for the three months ended June
30, 1999. The increase was primarily due to the Blessings Acquisition in late
May 1998. Operations acquired as part of the Blessings Acquisition are included
in our specialty films and design products operating segments. The Blessings
Acquisition accounted for aggregate increased net sales of approximately $25.5
million in the second quarter of 1999. Excluding the sales increases resulting
from the Blessings Acquisition, sales volumes increased approximately 7.3% in
the second quarter of 1999 compared to the same period in 1998. Our average
selling prices were approximately 5.8% lower in the second quarter of 1999, as
compared to the second quarter of 1998, excluding the effects of the Blessings
Acquisition. This decline in our average selling prices was due largely to lower
resin prices, as compared to the same period in 1998. In the markets we serve,
the average selling price of our products generally increases or decreases as
the price of resins, our primary raw material, increases or decreases. While the
resins market experienced a general price increase in the first half of 1999,
the average price of resins in the first half of 1999 remained below the average
price of resins during the same period in 1998.
Gross Profit
Gross profit increased by $13.3 million, or 49.1%, from $27.1 million,
for the second quarter of 1998, to $40.4 million, for the three months ended
June 30, 1999. The increase was due primarily to increased sales volume
resulting from the Blessings Acquisition in late May 1998. In addition, our
industrial and specialty films operating segments have increased their gross
profit through consolidating manufacturing facilities, through purchasing and
operational savings, and by improved manufacturing performance.
Total Operating Expenses
Total operating expenses increased by $4.7 million, or 31.1%, from $15.1
million, for the second quarter of 1998, to $19.8 million, for the three months
ended June 30, 1999. The increase was due primarily to additional goodwill
amortization resulting from the significant increase in intangible assets
associated with the Blessings Acquisition.
Operating Income
Operating income increased by $8.6 million, or 71.7%, from $12.0 million,
for the second quarter of 1998, to $20.6 million, for the three months ended
June 30, 1999, due to the factors discussed above.
Interest Expense
Interest expense increased by $2.3 million, or 27.1%, from $8.5 million,
for the second quarter of 1998, to $10.8 million, for the three months ended
June 30, 1999. The increase was primarily due to additional interest expense on
increased long-term debt to fund the recent acquisitions.
Other Income (Expense)
Other income (expense) changed from expense of $0.2 million for the
second quarter of 1998 to income of $1.8 million for the second quarter of 1999,
an increase in income of $2.0 million. The increase was due to unrealized gains
of $1.8 million on investments in trading securities in the second quarter of
1999.
20
<PAGE> 21
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales
Net sales increased by $63.0 million, or 21.1%, from $298.2 million, for
the first half of 1998, to $361.2 million, for the six months ended June 30,
1999. The increase was primarily due to the Blessings Acquisition in May 1998.
Operations acquired as part of the Blessings Acquisition are included in our
specialty films and design products operating segments. The Blessings
Acquisition accounted for aggregate increased net sales of approximately $69.1
million in 1999. Excluding the sales increases resulting from the Blessings
Acquisition, sales volumes increased approximately 5.9% in the first half of
1999 compared to the same period in 1998. Our average selling prices were
approximately 7.1% lower in the first half of 1999, as compared to the first
half of 1998, also excluding the effects of the Blessings Acquisition. The
decline in our average selling prices was due largely to lower resin prices. As
mentioned above, in the markets we serve, the average selling price of our
products generally increases or decreases as the price of resins, our primary
raw material, increases or decreases. While the resins market experienced a
general price increase in the first half of 1999, the average price of resins in
the first half of 1999 remained significantly below the average price of resins
during the first half of 1998.
Gross Profit
Gross profit increased by $29.0 million, or 59.9%, from $48.4 million,
for the first half of 1998, to $77.4 million, for the six months ended June 30,
1999. The increase was due primarily to increased sales volume resulting from
the Blessings Acquisition in May 1998. In addition, our industrial and specialty
films operating segments have increased their gross profit through consolidating
manufacturing facilities, through purchasing and operational savings, by
improved manufacturing performance, and by increased sales volumes.
Total Operating Expenses
Total operating expenses increased by $11.4 million, or 42.2%, from $27.0
million, for the first half of 1998, to $38.4 million, for the six months ended
June 30, 1999. The increase was due primarily to additional goodwill
amortization and operating expenses resulting from the Blessings Acquisition.
The increased goodwill amortization represented approximately 40% of the
increase in operating expenses.
Operating Income
Operating income increased by $17.6 million, or 82.2%, from $21.4
million, for the first half of 1998, to $39.0 million for the six months ended
June 30, 1999, due to the factors discussed above.
Interest Expense
Interest expense increased by $6.9 million, or 48.6%, from $14.2 million
for the first half of 1998, to $21.1 million for the six months ended June 30,
1999. The increase was due to additional interest expense resulting from
increased long-term debt to fund the recent acquisitions.
LIQUIDITY AND CAPITAL RESOURCES
In September 1997, we issued $125 million of 9.125% unsecured senior
subordinated notes due October 1, 2007 (the "Notes") and entered into a $225
million credit facility with The Chase Manhattan Bank ("Chase") and certain
financial institutions party thereto (the "Credit Agreement").
On May 14, 1998, the Credit Agreement was amended and restated as a $510
million facility (the "Amended Credit Agreement"). The Amended Credit Agreement
provides for the continuation of a
21
<PAGE> 22
previous term loan (the "Original Term Loan") in the principal amount of $75
million, maturing on September 30, 2005; a Tranche A Term Loan (the "Tranche A
Term Loan") in the principal amount of $140 million, maturing on September 30,
2005; a Tranche B Term Loan (the "Tranche B Term Loan") in the principal amount
of $100 million, maturing on June 30, 2006; and a term loan (the "Mexico Term
Loan") to ASPEN Industrial, S.A., our wholly-owned Mexican subsidiary, in the
principal amount of $45 million, maturing on September 30, 2005. The Amended
Credit Agreement also provides for a $150 million revolving loan facility (the
"Revolver") maturing on September 30, 2004. The Original Term Loan, the Tranche
A Term Loan and the Mexico Term Loan amortize at an increasing rate on a
quarterly basis. The Tranche A Term Loan and the Mexico Term Loan began
amortizing on December 31, 1998 and the Original Term Loan begins amortizing on
December 31, 2001. The Tranche B Term Loan amortizes at the rate of $1 million
per year, beginning September 30, 1998, with an aggregate of $93 million due in
the last four quarterly installments. The term loans described above are
required to be prepaid with the proceeds of certain asset sales, with 50% of the
proceeds of the sale of certain of our equity securities, and with the proceeds
of certain debt offerings.
Loans under the Amended Credit Agreement bear interest, at the election
of the Company, at either (i) zero to 0.75%, depending on certain of our
financial ratios, plus the higher of (a) Chase's prime rate, (b) the federal
funds rate plus 1/2% or (c) Chase's base CD rate plus 1%, or (ii) the London
Interbank Offered Rate plus 1.00% to 2.00%, also depending on certain of our
financial ratios.
Our obligations under the Amended Credit Agreement are guaranteed by
substantially all of our domestic subsidiaries and secured by substantially all
of our domestic assets. The Amended Credit Agreement is also secured by a pledge
of 65% of the capital stock of each of our foreign subsidiaries. See Note 10 to
the Consolidated Condensed Financial Statements included in this report.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $8.6 million for the six
months ended June 30, 1999, a decrease of $6.4 million from the same period in
1998. The decrease resulted primarily from 1999 increases in trade accounts
receivable and inventories offset by increases in trade accounts and income
taxes payable and non-cash income statement items. The increase in trade
accounts receivable is primarily due to increased sales volumes. The increase in
inventories and trade accounts payable is primarily due to the stockpiling of
resin inventory to reduce the impact of announced future resin price increases.
Net Cash Used in Investing Activities
Net cash used in investing activities was $17.1 million for the six
months ended June 30, 1999, a decrease of $268.2 million from the same period in
1998. Net cash used in investing activities was higher in 1998 due to the
acquisitions of Ellehammer and Blessings. Capital expenditures totaled $17.1
million for the six months ended June 30, 1999 and $22.7 million for the same
period in 1998. Capital expenditures during the first half of 1999 were
primarily for major expansion projects in our printed products and barrier films
product lines, upgrading and installation of equipment relocated from
recently-closed manufacturing facilities and several new and carryover
maintenance projects throughout our company. We expect capital expenditures to
remain approximately at current levels in future periods.
Net Cash Provided by Financing Activities
Net cash provided by financing activities was $1.7 million for the six
months ended June 30, 1999, compared to $267.8 million for the same period in
1998. The activity in 1998 was higher due to the proceeds from the Amended
Credit Agreement. The 1999 net cash provided by financing activities resulted
from borrowings on our revolving credit facilities and was used to fund our 1999
capital expenditures.
22
<PAGE> 23
Liquidity
As of June 30, 1999, Huntsman Packaging had $108.8 million of working
capital and approximately $109.1 million available under the Amended Credit
Agreement, approximately $3.9 million of which was issued as letters of credit.
As of June 30, 1999, the debt under the Amended Credit Agreement bore interest
at a weighted average rate of 7.7%.
As of June 30, 1999, we had $13.2 million in cash and cash equivalents,
including $11.0 million held by our foreign subsidiaries. The effective tax rate
of repatriating this money and future foreign earnings to the United States
varies from approximately 40% to 65% depending on various U.S. and foreign tax
factors, including each foreign subsidiary's country of incorporation. High
effective repatriation tax rates may limit our ability to access cash and cash
equivalents generated by our foreign operations for use in our United States
operations, including to pay principal, premium, if any, and interest on the
Notes and the Amended Credit Agreement. For the six months ended June 30, 1999,
our foreign operations generated net income from continuing operations of $4.5
million.
We expect that cash flows from operating activities and available
borrowings under our credit arrangements will provide sufficient working capital
to operate our business, to make expected capital expenditures and to meet
foreseeable liquidity requirements. If we were to engage in a significant
acquisition transaction, however, it may be necessary for us to restructure our
existing credit facilities.
YEAR 2000 COMPLIANCE
We have performed an analysis of both our computer systems and our
production and distribution activities and have implemented procedures to
address year 2000 issues. We are currently modifying our computer systems and
application programs for year 2000 compliance, and we anticipate that we will
complete this task by September 1, 1999. As of June 30, 1999, we had spent
approximately $4.0 million on computer systems and application programs upgrades
necessary to become year 2000 compliant. We believe the total cost to complete
the implementation procedures to address year 2000 issues will be less than $5.0
million. In addition to addressing year 2000 issues, these computer systems and
program upgrades will significantly enhance our information systems. We will
fund these upgrades through operating cash flows. Any costs for new systems will
be expensed or capitalized and amortized over the system's useful life, as
appropriate. We have a year 2000 third-party compliance policy in place to
identify and resolve potential third-party year 2000 problems. Although we are
working cooperatively with third parties upon whom we rely for raw materials,
utilities, transportation and other products and services, we cannot give any
assurance that the systems of other parties will be year 2000 compliant on a
timely basis. In the most reasonably likely worst-case scenario involving the
failure of our systems and applications or those operated by others, our
business, financial condition and results of operations would be materially
adversely affected. However, an estimate of the dollar amount of such an adverse
effect cannot be practically determined at this time.
CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION
Certain information set forth in this report contains "forward-looking
statements" within the meaning of federal securities laws. Forward-looking
statements include statements concerning our plans, objectives, goals,
strategies, future events, future revenues or performance, capital expenditures,
financing needs, plans or intentions relating to acquisitions and other
information that is not historical information. When used in this report, the
words "estimates," "expects," "anticipates," "forecasts," "plans," "intends,"
"believes" and variations of such words or similar expressions are intended to
identify forward-looking statements. We may also make additional forward-looking
statements from time to time. All such subsequent forward-looking statements,
whether written or oral, by or on behalf of Huntsman Packaging, are also
expressly qualified by these cautionary statements.
23
<PAGE> 24
All forward-looking statements, including without limitation,
management's examination of historical operating trends, are based upon our
current expectations and various assumptions. Our expectations, beliefs and
projections are expressed in good faith and we believe there is a reasonable
basis for them. But, there can be no assurance that management's expectations,
beliefs and projections will result or be achieved. All forward-looking
statements apply only as of the date made. We undertake no obligation to
publicly update or revise forward-looking statements which may be made to
reflect events or circumstances after the date made or to reflect the occurrence
of unanticipated events.
There are a number of risks and uncertainties that could cause our actual
results to differ materially from the forward-looking statements contained in or
contemplated by this report. These risks include, but are not limited to,
Huntsman Packaging's high degree of leverage and its ability to service
indebtedness, restrictions under the Huntsman Packaging's credit facilities,
fluctuations in the price of resins (our primary raw materials) and the
availability of resin supplies, competition, customer relationships, risks
associated with acquisitions and risks associated with international operations.
These risks and certain other uncertainties are discussed in more detail in the
1998 10-K. There may also be other factors, including those discussed elsewhere
in this report, that may cause our actual results to differ materially from the
forward-looking statements. Any forward-looking statements should be considered
in light of these factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various interest rate and resins price risks that arise
in the normal course of business. We finance our operations with borrowings
comprised primarily of variable rate indebtedness. Our raw material costs are
comprised primarily of resins. Significant increases in interest rates or the
price of resins could adversely affect our operating margins, results of
operations and ability to service our indebtedness.
We enter into interest rate collar and swap agreements to manage interest
rate market risks and commodity collar agreements to manage resin market risks.
As of June 30, 1999, we had one interest rate collar agreement and two commodity
collar agreements in place. The estimated fair market value of the interest rate
collar was approximately $82,000 and the estimated aggregate fair market value
of the two commodity collars was $250,000. We have performed a sensitivity
analysis assuming a hypothetical 10% adverse movement in interest rates and
commodity prices applied to the agreements described above. The analysis
indicated that such market movements would not have a material effect on our
consolidated financial position, results of operations or cash flows. Factors
that could impact the effectiveness of our hedging programs include the
volatility of interest rates and commodity markets and the availability of
hedging instruments in the future.
24
<PAGE> 25
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
10.1 First Amendment to the 1998 Huntsman Packaging Corporation Stock
Option Plan
27 Financial Data Schedule
(b) No report on Form 8-K was filed during the quarter for which this
report is filed.
25
<PAGE> 26
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.
HUNTSMAN PACKAGING CORPORATION
/s/ SCOTT K. SORENSEN
-----------------------------------------
SCOTT K. SORENSEN
Executive Vice President and
Chief Financial Officer, Treasurer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Date: August 10, 1999
26
<PAGE> 27
INDEX TO EXHIBITS
Exhibits
10.1 First Amendment to the 1998 Huntsman Packaging Corporation Stock
Option Plan
27 Financial Data Schedule.
27
<PAGE> 1
EXHIBIT 10.1
FIRST AMENDMENT TO THE
1998
HUNTSMAN PACKAGING CORPORATION
STOCK OPTION PLAN
This First Amendment to the 1998 Huntsman Packaging Corporation Stock
Option Plan (this "Amendment") is made as of April 5, 1999. Capitalized terms
used in this Amendment without definition shall have the meanings specified in
the 1998 Huntsman Packaging Corporation Stock Option Plan (as amended, the
"Plan").
In accordance with the provisions of Section 15 of the Plan, the Plan is
hereby amended as follows:
1. Section 9(d) of the Plan is hereby amended in its entirety to read as
follows:
"(d) The "Market Value of Equity" of the Company on any given date shall
equal (Adjusted EBITDA x 6.5) minus (Adjusted Net Debt), where:
"EBITDA" equals earnings from operations before interest expense,
taxes, depreciation and amortization on the applicable date,
determined in accordance with generally accepted accounting
principles, consistently applied ("GAAP");
"Adjusted EBITDA" equals the Company's EBITDA, as adjusted below, on
the applicable date;
"Net Debt" equals the Company's total interest bearing indebtedness on
the applicable date minus balance sheet "Cash and Cash Equivalents" as
of such date, determined in accordance with GAAP; and
"Adjusted Net Debt" equals Net Debt, as adjusted below, on the
applicable date.
Adjusted EBITDA and Adjusted Net Debt shall be determined by making
the following adjustments to the Company's EBITDA and to Net Debt;
(A) if the Company completes a material acquisition (an
"Acquisition") during any of the first three quarters of a calendar
year, the EBITDA of the acquired entity or business for the portion of
the calendar year prior to the Acquisition shall be included in
Adjusted EBITDA;
(B) if the Company completes a material divestiture (a
"Divestiture") during any of the first three quarters of a calendar
year, the EBITDA of the divested assets or business for the portion of
the calendar year prior to the Divestiture shall be excluded from
Adjusted EBITDA;
(C) if the Company engages in an Acquisition during the fourth
quarter of a calendar year, and amount equal to the total of (x) all
debt incurred with
<PAGE> 2
respect to the Acquisition and (y) all transaction costs associated
with the Acquisition shall be excluded from Adjusted Net Debt;
(D) if the Company engages in a Divestiture during the fourth
quarter of a calendar year, (x) the total amount of the proceeds
received by the Company with respect to the Divestiture shall be
included in Adjusted Net Debt, and (y) the total amount of the
budgeted EBITDA for the divested assets or business for all periods of
the calendar year subsequent to the Divestiture shall be included in
Adjusted EBITDA;
(E) the total amount of any charitable contributions made by the
Company during a calendar year shall be added back to Adjusted EBITDA;
(F) the total amount of any fees paid by the Company to Huntsman
Financial Corporation or its successors or assigns shall be added back
to Adjusted EBITDA; and
(G) the total amount of all borrowings of shareholders of the
Company from the Company shall be subtracted from Net Debt."
2. The Plan. All references to the "Plan" in the Plan shall mean and refer to
the Plan as amended by this Amendment.
3. No Other Amendments. Except as expressly provided in this Amendment, the
Plan is not otherwise modified and remains in full force and effect.
2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 13,164
<SECURITIES> 0
<RECEIVABLES> 107,765
<ALLOWANCES> 1,642
<INVENTORY> 80,321
<CURRENT-ASSETS> 206,067
<PP&E> 368,322
<DEPRECIATION> 63,862
<TOTAL-ASSETS> 750,631
<CURRENT-LIABILITIES> 97,305
<BONDS> 125,000
0
0
<COMMON> 63,676
<OTHER-SE> 16,800
<TOTAL-LIABILITY-AND-EQUITY> 750,631
<SALES> 361,236
<TOTAL-REVENUES> 361,236
<CGS> 283,790
<TOTAL-COSTS> 322,247
<OTHER-EXPENSES> 191
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,057
<INCOME-PRETAX> 17,741
<INCOME-TAX> 8,312
<INCOME-CONTINUING> 9,429
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,429
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
