<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File Number 333-40067
HUNTSMAN PACKAGING CORPORATION
(Exact Name of the Registrant as Specified in its Charter)
<TABLE>
<S> <C>
Utah 87-0496065
- ------------------------------- ---------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
(Address of principal executive offices and telephone number)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
At March 24, 2000, there were 1,000,001 outstanding shares of Class A Common
Stock, 6,999 outstanding shares of Class B Common Stock, and 49,511 outstanding
shares of Class C Common Stock. As of such date, none of the outstanding shares
of Common Stock were held by persons other than affiliates or employees of the
Registrant, and there was no public market for the Common Stock.
================================================================================
<PAGE> 2
This report contains certain forward-looking statements that involve
risks and uncertainties, including statements about our plans, objectives,
goals, strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements.
Some of the factors that could negatively affect our performance are discussed
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Cautionary Statement for Forward-Looking Information" and elsewhere
in this report.
PART I
ITEM 1. BUSINESS
GENERAL
Huntsman Packaging Corporation ("Huntsman Packaging" or the "Company"),
with 1999 revenues of approximately $781 million, is one of North America's
largest producers of polymer-based ("plastic"), value-added films for flexible
packaging, personal care, medical, agricultural and industrial applications. We
operate 24 manufacturing and research and development facilities worldwide and
we currently have approximately one billion pounds of production capacity. We
offer a wide variety of film products and we have leading market positions in
each of our product lines.
Focusing on a strategy of building strong relationships with
market-leading customers by offering a broad line of innovative products,
providing technological and cost leadership, and assembling modern and efficient
manufacturing assets, we have successfully expanded our business and increased
its profitability.
We have a synergistic portfolio of value-added film products that
targets profitable, growing film markets. These products include personal care
and medical films, converter films, barrier and custom films, agricultural and
horticultural films, printed films and bags, industrial films, and closure
technology for a wide variety of flexible packaging products.
We deliver our products through modern and efficient manufacturing
facilities that are supported by industry-leading technology and intellectual
property. We have more than 180 film extrusion lines. These manufacturing assets
are supported by a progressive research and development facility, with a
production-scale pilot plant. We are among the leaders in the industry in
bringing innovative technological advances to the marketplace, through internal
product development and by purchasing or licensing technology from other film
companies throughout the world.
In September 1997, the Company was "spun off" from Huntsman Corporation.
We continue to be privately owned, however, and all of the owners of the common
stock are affiliates or employees of the Company. The separation from Huntsman
Corporation has allowed Huntsman Packaging to independently pursue its
value-added films business, implement its strategy of growing its market
position through superior products, technology and synergistic acquisitions, and
improve its financial and operating performance.
On December 1, 1999, we announced that we had begun the process of
evaluating a variety of financial alternatives to monetize the approximately 61%
interest of Jon M. Huntsman, the majority shareholder and Chairman of the
Company. The alternatives being considered include a potential initial public
offering, a recapitalization of the Company, a management buy-out of Mr.
Huntsman's interest, and an outright sale of the business.
INDUSTRY OVERVIEW
Our films are generally made from blends or co-extrusions of polyethylene
("PE"), polyvinyl chloride ("PVC") or other resins. Plastic films are sold into
the flexible packaging market for both food and non-food
1
<PAGE> 3
applications. Plastic films are also used in secondary packaging, such as pallet
wrap, and in masking film and other industrial films. Plastic films are also
component parts of many non-packaging products, such as moisture barriers for
disposable diapers, feminine care products and surgical drapes and gowns.
Plastic films are also used in a variety of agricultural uses, such as
greenhouse films and mulch films.
DESCRIPTION OF BUSINESS
Founded in 1992 to acquire the assets of Goodyear Tire & Rubber
Company's Film products Division, the Company has successfully combined
strategic acquisitions, internal growth, product innovation and operational
improvements to grow the business and increase its profitability. We have
successfully acquired and integrated 13 strategic film and flexible packaging
operations since 1992, including the 1996 acquisition of Deerfield Plastics, the
1997 acquisition of CT Film, and the 1998 acquisition of Blessings Corporation -
leading producers of personal care, converter and medical films. Most recently,
we acquired KCL Corporation, a leader in closure technology for flexible
packaging.
We divide our business into three operating segments for financial and
business reporting purposes: design products, industrial films and specialty
films. Our Design Products Division produces printed films and flexible
packaging products used in the food, textile and personal care industries. Our
Industrial Films division produces stretch films, used to unitize and bundle
loads and protect them during shipment and storage, and polyvinyl chloride
("PVC") films, for wrapping meat, cheese and produce. Our Specialty Films
include personal care films, used for disposal diapers, feminine care products
and adult incontinence products, and medical films, used to package sterile
medical devices. Our Specialty Films also include converter films, sold
primarily to manufacturers of flexible packaging products, and barrier and
custom films that provide oxygen, light or moisture barriers to a variety of
film products. Finally, our Specialty Films include agricultural, mulch and
greenhouse films. Each of our operating segments is described below. Additional
information about our foreign and domestic operations and operations in
different business segments appears in Note 13 to the Consolidated Financial
Statements included in this report.
Design Products
Design products accounted for 22.5%, 20.9% and 20.8% of our net sales in
1999, 1998 and 1997, respectively. Our Design Products are primarily printed
films. For financial reporting purposes, this reporting segment also includes
Huntsman's Mexican subsidiary, NEPSA. NEPSA is a leading producer of printed
products for Mexico and other Latin American countries. NEPSA also produces
personal care and barrier films for these markets. In 1999, approximately 32% of
our design products sales were outside the United States, primarily in Mexico
and Latin America.
Our Design Products include printed roll stock, bags and sheets used to
package food and consumer goods. Printed roll stock is sold to fresh and frozen
food processors, who use their own packaging equipment to fabricate pouches and
bags for their products. Printed bags are sold to bakeries, fresh and frozen
food processors, textile manufacturers and other dry goods processors. Bread and
bakery bags represent a significant portion of our Design Products business. Our
Design Products group produces approximately three billion bread and bakery bags
each year.
Industrial Films
Industrial films accounted for 19.6%, 22.2% and 39.2% of our net sales
in 1999, 1998 and 1997, respectively. Our industrial film products include
polyethylene stretch films and PVC films. Stretch films are used to bundle,
unitize and protect palletized loads during shipping and storage. Currently,
approximately one-half of all loads shipped in North America are unitized with
stretch film. Stretch film has replaced more traditional packaging, such as
corrugated boxes and metal strapping because of stretch film's lower cost,
higher strength, ease of use and environmental advantages.
2
<PAGE> 4
PVC films are used by supermarkets, delicatessens and restaurants to
wrap meat, cheese and produce. We participate primarily in the in-store wrap
segment. We also produce PVC films for laundry and dry cleaning bags. Finally,
we produce PVC films for companies that repackage the films in smaller cutterbox
rolls for sale in retail markets in North America, Latin America and Asia. PVC
film remains the packaging-of-choice for wrapping meat, cheese and produce in
in-store applications because of its low cost, excellent clarity, elasticity and
cling. In 1999, approximately 32% of our industrial films sales were outside the
United States, primarily in Canada, Europe and Australia.
Specialty Films
Specialty films accounted for 57.9%, 56.9% and 40.0% of our net sales in
1999, 1998 and 1997, respectively. Our specialty films include converter films,
personal care films, medical films, barrier films, and agricultural and
horticultural films.
Converter Films. Converter films are mono-layer and multi-layer,
co-extruded films that are sold to converters of flexible packaging who may
laminate them to foil, paper or another film, print them, or fabricate them into
the final flexible packaging product. Our converter films become a key component
of the final flexible packaging product--for example, a fresh-cut salad package,
a toothpaste tube, or a stand-up pouch. Generally, our converter film adds value
by providing the final packaging product with specific performance
characteristics, such as moisture, oxygen or odor barriers, ultraviolet
protection or desired sealant properties. Because converter films are sold for
their sealant, barrier or other properties, they must meet stringent performance
specifications from the converter, including gauge control, clarity, sealability
and web width accuracy. We are a leader in introducing new converter film
products to meet flexible packaging industry trends and specific customer needs.
Personal Care Films. We are also an industry leader in personal care
films used in disposable diapers, feminine hygiene products and adult
incontinence products. Personal care films must meet diverse and highly
technical specifications. Most of these films must "breathe," allowing water
vapors to escape. In some applications, the softness or "quietness" of the film
is important, as in adult incontinence products. A significant portion of our
specialty films business consists of the sale of personal care films to
Kimberly-Clark Corporation and its affiliates. Kimberly-Clark accounts for
approximately 22% of our specialty films sales and 13% of our 1999 consolidated
net sales.
Medical Films. We are a leader in medical films used to package sterile
medical supplies, such as syringes, scalpels, scissors and intravenous fluid
bags. These films also become components in disposable surgical drapes and
gowns. These films are manufactured in "clean-room" environments and must meet
stringent barrier requirements. A sterile barrier is necessary to provide and
assure the integrity of the devices and to prevent contamination and tampering.
These films must also be able to withstand varied sterilization processes.
Barrier Films. We manufacture a variety of barrier and custom films,
primarily for small, but profitable, niche segments in flexible packaging and
industrial markets. For example, we are a leading manufacturer of barrier films
for cookie, cracker and cereal box liners and for pet food liners in multi-wall
bags. We are also the leading producer of photoresist coating films for the
electronics industry and sheet molding compound films for the protection and
transportation of the sheet molding compound used in the manufacture of boats
and automotive products.
Agricultural and Horticultural Films. We are a leading supplier of
thin-gauge, polyethylene cast embossed and blown films to fruit and vegetable
growers and to greenhouse and nursery operators. Our agricultural films are used
extensively in North America and Latin America. Commercial growers of crops like
peppers, tomatoes, cucumbers and strawberries are the primary consumers of our
mulch films. These crops are typically planted on raised beds, that are tightly
covered with mulch film. The mulch film eliminates or retards weed growth,
significantly reduces the amount of water required by plants, controls bed
temperatures for ideal growing conditions and allows easy application of
fertilizer.
3
<PAGE> 5
Horticultural growers use greenhouse structures with plastic film as
covers to grow tropical plants, flowers, tomatoes and strawberries. The typical
greenhouse film must provide coverage for one to four years. Successful film
performance requires ultra violet light stability, strength to withstand varying
weather conditions and other specific product attributes based on climate and
application.
SEASONALITY
Our business is generally not subject to large seasonal fluctuations.
Historically, however, we have experienced modest increases in sales volumes
during the second and third quarters of each year as compared to the first and
fourth quarters.
TECHNOLOGY AND RESEARCH AND DEVELOPMENT
We believe our technology base and R&D support are among the best in the
film industry. Our Newport News research and development center employs 50
engineers and technical specialists who provide the latest resin and extrusion
technology to our manufacturing facilities and trial new resins and process
technologies. The technical center has a 17 million pound capacity pilot plant,
with four extrusion lines. The facility also has a film orientation line. These
capabilities allow the technical center to run commercial "scale-ups" for new
products. Our technological support enables our customers to get better products
to the market more quickly than they could with other suppliers.
We are also able to use our broad product offerings and technology to
transfer technological innovations from one market to another. For example, our
expertise in coextrusion technology, gained from the production of converter and
barrier films, and our expertise in applications involving metallocene and other
specialty resins, have placed us on the leading edge of downgauging many of our
personal care and medical films.
Excluding net sales revenue of commercial film production at our R&D
facilities, we spent $5.5 million, $3.7 million and $2.5 million on research and
development in 1999, 1998 and 1997, respectively. Research and development
spending represented approximately 0.7% of our net sales for 1999. Our technical
center is located in Newport News, Virginia. We also operate satellite technical
facilities in Akron, Ohio, and Chippewa Falls, Wisconsin.
INTELLECTUAL PROPERTY RIGHTS
Patents, trademarks and licenses are significant to our business. We
have patent protection on many of our products and processes, and we regularly
apply for new patents on significant product and process developments. We have
also registered trademarks on many of our products. We also rely on unpatented
proprietary know-how, continuing technological innovation and other trade
secrets to develop and maintain our competitive position. We routinely enter
into confidentiality agreements to protect our trade secrets and proprietary
know-how.
Although we constantly seek to protect our patents, trademarks and other
intellectual property, there can be no assurance that our precautions will
provide meaningful protection against competitors.
RAW MATERIALS
Polyethylene, PVC, polypropylene, other specialty resins, and additives
constitute the major raw materials for our products. Resin costs constitute
approximately 65% of total manufacturing costs. The price of resins is a
function of, among other things, manufacturing capacity, demand, and the price
of crude oil and natural gas feedstocks. While temporary shortages of raw
materials may occur from time to time, these items are generally considered to
be readily available from numerous suppliers. Resin shortages or significant
increases in the price of resin, however, could have a significant adverse
effect on our business.
4
<PAGE> 6
EMPLOYEES
We have approximately 3,800 employees worldwide. We have approximately
1,372 employees worldwide who are subject to collective bargaining agreements
that expire from October 2000 to November 2002. The Company's management
believes that its relationships with employees are good. On March 7, 2000,
however, approximately 130 employees at our Chippewa Falls, Wisconsin
manufacturing plant went on strike. The strike was subsequently resolved and the
striking employees returned to work on March 20, 2000.
ENVIRONMENTAL MATTERS
Our operations are subject to environmental laws in the United States
and abroad, including those described below ("Environmental Laws"). Our
operating budgets include costs and expenses associated with complying with
these laws, including the acquisition, maintenance and repair of pollution
control equipment. Additional costs and expenses may also be incurred to meet
new requirements under Environmental Laws, as well as in connection with the
investigation and remediation of threatened or actual pollution.
Under the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended ("CERCLA"), and similar state statutes, an
owner or operator of real property may be liable for the costs of removing or
remediating hazardous substances on or under the property, regardless of whether
the owner or operator owned or operated the real property at the time of the
release of the hazardous substances and regardless of whether the release or
disposal was in compliance with law at the time it occurred. We are not aware of
any current claims under CERCLA or similar state statutes against us.
Under the Resource Conservation and Recovery Act of 1976, as amended
("RCRA"), and similar state statutes, companies that hold permits to treat or
store hazardous waste can be required to remediate contamination from solid
waste management units at a facility, regardless of when the contamination
occurred. Our plants generate either small, incidental volumes of hazardous
waste or larger volumes which we store for less than 90 days. As a result, we
are not required to hold RCRA permits at our individual facilities. Such waste,
when generated, is disposed of at fully-permitted, off-site facilities or is
recycled in fully-permitted recovery facilities.
Our operations are also subject to regulation under the Clean Air Act
and the Clean Water Act, as well as similar state statutes. Our Rochester, New
York and Seattle, Washington plants have the potential to emit air pollutants in
quantities that require them to obtain a Title V permit under the Clean Air Act
Amendments of 1990 and the implementing state regulations. Both facilities have
timely filed Title V applications under their respective state programs. Some
capital costs for additional air pollution controls or monitors may be required
at both sites. However, such expenditures would not be materially adverse to our
business. Several facilities may also be required to obtain stormwater permits
under the Clean Water Act and implementing regulations. The cost of this kind of
permitting is not material to our business.
We are also subject to environmental laws and regulations in those
foreign countries in which we operate.
Our operating expenses for environmental matters totaled less than $0.2
million in each of 1999, 1998 and 1997 and are expected to remain at
approximately this level in 2000. We believe expenditures at this level will be
sufficient to cover, among other things, our routine measures to prevent,
contain and clean up spills of materials that occur in the ordinary course of
our business. Our estimated capital expenditures for environmental matters were
approximately $0.5 million in 1999, $0.6 million in 1998 and $0.5 million in
1997, and are expected to be approximately $0.5 million in both 2000 and 2001.
Capital expenditures and, to a lesser extent, costs and operating expenses
relating to environmental matters will be subject to evolving regulatory
requirements and will depend on the timing and promulgation of specific
standards which impose requirements on our operations.
INTERNATIONAL OPERATIONS
We operate facilities and sell products in several countries outside the
United States. Operations outside the United States include plants and sales
offices in Mexico, Canada, Germany and Australia. As a result, we are subject
5
<PAGE> 7
to risks associated with selling and operating in foreign countries. These risks
include devaluations and fluctuations in currency exchange rates, limitations on
conversion of foreign currencies into U.S. dollars and remittance of dividends
and other payments by foreign subsidiaries. The imposition or increase of
withholding and other taxes on remittances and other payments by foreign
subsidiaries, hyperinflation in certain foreign countries, and imposition or
increase of investment and other restrictions by foreign governments could also
have a negative effect on our business.
COMPETITION
The markets in which we operate are highly competitive. We believe we
compete on the basis of product innovation, service, product quality, and price.
In addition to competition from many smaller competitors, we face strong
competition from a number of large flexible packaging companies. Some of our
competitors are substantially larger, are more diversified and have greater
financial resources than we do, and, therefore, may have certain competitive
advantages.
6
<PAGE> 8
ITEM 2. PROPERTIES
Our principal executive offices are located at 500 Huntsman Way, Salt
Lake City, Utah 84108, and are leased from Huntsman Headquarters Corporation, an
indirect, wholly-owned subsidiary of Huntsman Corporation. We own most of the
improved real property and other assets used in our operations. We lease a few
of the sites at which we have manufacturing operations and we also lease
warehouse and office space at various locations. We consider the condition of
our plants, warehouses and other properties and the other assets owned or leased
by us to be generally good.
Our principal manufacturing plants are listed below. Unless otherwise
indicated, each property is owned.
DESIGN PRODUCTS
Dallas, Texas
Kent, Washington
Langley, British Columbia*
Macedon, New York
Mexico City, Mexico (two facilities)
Shelbyville, Indiana
INDUSTRIAL FILMS
Calhoun, Georgia
Danville, Kentucky
Lewisburg, Tennessee
Melbourne, Australia*
Merced, California
Phillipsburg, Germany
Toronto, Canada
SPECIALTY FILMS
Birmingham, Alabama
Bloomington, Indiana*
Chippewa Falls, Wisconsin
Dalton, Georgia
Danville, Kentucky
Harrington, Delaware
McAlester, Oklahoma
Newport News, Virginia
Odon, Indiana*
South Deerfield, Massachusetts
Washington, Georgia
- ----------
* Leased properties
We have an annual manufacturing capacity of approximately 850 million
pounds of polyethylene and PVC films. We believe that the capacities of our
plants are adequate to meet our immediate needs. Our plants have historically
operated at 75% to 100% of capacity.
ITEM 3. LEGAL PROCEEDINGS
Huntsman Packaging is involved in litigation from time to time in the
ordinary course of our business. In management's opinion, none of such
litigation is material to our financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS
We did not submit any matters to a vote of security holders during the
fourth quarter of 1999.
7
<PAGE> 9
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
At March 24, 2000, the Company had 1,000,001 shares of Class A Common
Stock outstanding, 6,999 shares of Class B Common Stock outstanding and 49,511
shares of Class C Common Stock outstanding (the Class A Common Stock, the Class
B Common Stock and the Class C Common Stock are herein collectively referred to
as the "Common Stock"). At March 24, 2000, there were three holders of record of
the Class A Common Stock, two holders of record of the Class B Common Stock and
four holders of record of the Class C Common Stock. There is no established
trading market for any class of the Company's Common Stock.
The Company has not declared or paid any cash dividends on its capital
stock during the last two years and does not anticipate paying any cash
dividends in the foreseeable future. The indenture governing the Company's
outstanding debt securities and the Company's bank credit facility contain
certain restrictions on the payment of cash dividends with respect to the
Company's Common Stock.
In 1999, the Company also sold 12,188 shares of Class C Common Stock to
certain members of senior management for $100 per share, the estimated fair
market value of the shares on the date of purchase. Also on February 22, 1999,
the Company canceled outstanding options to purchase 26,223 shares of Class C
Common Stock and sold an additional 26,223 shares of Class C Common Stock to
certain members of senior management for $100 per share, the estimated fair
market value of the shares on the date of purchase. The Company believes that
the foregoing issuances of Class C Common Stock to members of its senior
management were exempt from the registration requirements of the Securities Act
pursuant to Rule 701 thereunder. Alternatively, the Company believes that the
foregoing issuances of Class C Common Stock, which did not involve a public
offering or sale of securities, were exempt from the registration requirements
of the Securities Act pursuant to the exemption from registration afforded by
Section 4(2) of the Securities Act. No underwriters, brokers or finders were
involved in these transactions.
8
<PAGE> 10
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been summarized from our
consolidated financial statements and are qualified in their entirety by
reference to, and should be read in conjunction with, such consolidated
financial statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations," under Item 7 below.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------------------------
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
(dollars in millions)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Sales $ 781.4 $ 651.9 $ 447.7 $ 295.7 $ 280.0
Cost of sales 623.4 532.4 389.6 253.5 235.1
------ ------ ------ ------ ------
Gross profit 158.0 119.5 58.1 42.2 44.9
Total operating expenses 82.0 70.1 45.0 38.1 31.8
------ ------ ------ ------ ------
Operating income 76.0 49.4 13.1 4.1 13.1
Interest expense (44.0) (37.5) (17.0) (11.6) (8.8)
Other income (expense) - net 0.4 (0.8) 0.7 (2.7) (2.5)
------ ------ ------ ------ ------
Income (loss) before income taxes,
discontinued operations and
extraordinary item 32.4 11.1 (3.2) (10.2) 1.8
Income tax expense (benefit) 14.1 8.6 (0.5) (5.2) 0.9
------ ------ ------ ------ ------
Income (loss) before discontinued
operations and extraordinary item 18.3 2.5 (2.7) (5.0) 0.9
Income from discontinued operations (1) 0.6 3.1 1.8 1.4
Gain on sale of discontinued
operations (1) 5.2
Extraordinary item (2) (1.3)
------ ------ ------ ------ ------
Net income (loss) $ 18.3 $ 8.3 $ 0.4 $ (4.5) $ 2.3
======== ======== ======== ======== ========
OTHER FINANCIAL DATA:
Depreciation and amortization $ 35.0 $ 27.1 $ 16.4 $ 14.0 $ 10.6
EBITDA(3) 111.4(4) 75.7(5) 30.2(6) 15.4(7) 21.2
Cash flows from operating activities 51.5 45.5 28.6 20.1 9.7
Cash flows from investing activities (46.0) (314.8) (87.2) (88.9) (17.6)
Cash flows from financing activities (16.7) 275.6 63.2 68.6 6.7
Capital expenditures 35.7 52.1 17.9 12.8 16.5
BALANCE SHEET DATA (AT YEAR END):
Working capital $ 103.8 $ 93.4 $ 94.1 $ 74.6 $ 53.0
Total assets 769.0 734.3 400.4 329.2 204.6
Long-term debt - net of current portion 493.3 513.5 250.2 186.7 103.0
Total liabilities 675.4 662.5 337.4 262.1 142.5
Stockholders' equity 90.7 70.6 63.0 67.0 62.1
</TABLE>
- --------------------------------------------------------------------------------
(1) In 1998, we sold our entire interest in our foam products operations, which
were operated exclusively in Europe. The financial position and results of
operations of this separate business segment are reflected as discontinued
operations for all years presented. See Note 3 to the Consolidated Financial
Statements included in this report.
(2) In 1996, we refinanced most of our long-term debt and recorded an
extraordinary item for the write-off of unamortized deferred loan costs.
(3) EBITDA is defined as net income before interest expense, taxes,
depreciation, amortization, discontinued operations, and extraordinary
items. We believe EBITDA information enhances an investor's understanding of
a company's ability to satisfy principal and interest obligations with
respect to its indebtedness and to utilize cash for other purposes. However,
there may be contractual, legal, economic or other reasons which may prevent
us from satisfying principal and interest obligations with respect to our
indebtedness and may require us to allocate funds for other purposes. EBITDA
does not represent and should not be considered as an alternative to net
income or cash flows from operating activities as determined by GAAP and may
not be comparable to other similarly titled measures of other companies.
9
<PAGE> 11
(4) Includes aggregate nonrecurring charges of $2.5 million resulting from
the announced closing of a facility in the year ended December 31, 1999.
Had this facility been closed on January 1, 1999, we estimate overhead
savings of $2.6 million would have been realized in the year ended
December 31, 1999
(5) Includes aggregate nonrecurring charges of $4.9 million resulting from the
closing of a facility in the year ended December 31, 1998. Had this facility
been closed on January 1, 1998, we estimate overhead savings of $2.1 million
would have been realized in the year ended December 31, 1998.
(6) Includes aggregate nonrecurring charges of $9.3 million resulting from the
closing of a facility in the year ended December 31, 1997. Had this facility
been closed January 1, 1997, we estimate overhead savings of $3.0 million
would have been realized in the year ended December 31, 1997.
(7) Includes aggregate nonrecurring charges of $12.1 million resulting from the
closing of certain facilities in the year ended December 31, 1996. Had these
facilities been closed on January 1, 1996, we estimate overhead savings of
$2.9 million would have been realized in the year ended December 31, 1996.
ITEM 7. 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 the consolidated financial
statements and notes which appear elsewhere in this report. 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
We derive our revenues, earnings and cash flows from the sale of film
and flexible packaging products throughout the world. We manufacture these
products at 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"), Blessings Corporation (the
"Blessings Acquisition") and the 1999 acquisition of KCL Corporation (the "KCL
Acquisition").
In order to further benefit from these 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 part of this
process, in 1999 and 1998, we undertook the following significant divestitures
and closures of manufacturing facilities. (See Notes 3 and 4 to the Consolidated
Financial Statements included in this report.)
In connection with the 1999 purchase of KCL Corporation, we announced a
plan to eliminate certain employees, move certain purchased assets and install
them at desired locations and cease certain purchased operations.
During 1999, we announced a plan to cease operations at one of our
facilities located in Mexico City, Mexico. In addition, we announced our plan to
cease the production of one of our product lines at our Kent, Washington
facility.
10
<PAGE> 12
On August 14, 1998, we sold our entire interest in the capital stock of
Huntsman Packaging UK Limited ("HPUK") to Skymark Packaging International
Limited. HPUK owned our Scunthorpe, UK facility, which manufactured and sold
polyethylene film exclusively in Europe. Net proceeds from this sale were
approximately $5.6 million.
On June 1, 1998, Huntsman Container Corporation International, our
wholly-owned subsidiary, sold its entire interest in the capital stock of
Huntsman Container Company Limited ("HCCL") and Huntsman Container Company
France SA ("HCCFSA") to Polarcup Limited and Huhtamaki Holdings France Sarl,
subsidiaries of Huhtamaki Oyj. Together, HCCL and HCCFSA comprised our foam
products business segment, which was operated exclusively in Europe. Net
proceeds from the sale were approximately $28.3 million.
During 1998, we announced our plan to cease operations at our
Clearfield, Utah facility, acquired as part of the CT Film Acquisition. As of
December 31, 1999, operations at the facility had ceased and all of the
facility's assets had been relocated.
POTENTIAL MONETIZATION OF THE MAJORITY SHAREHOLDER'S INTEREST
On December 1, 1999, we announced that we had begun the process of
evaluating a variety of financial alternatives to monetize the 61% interest of
Jon M. Huntsman, the majority shareholder and Chairman of the Company. The
alternatives being considered include a potential initial public offering, a
recapitalization of the Company, a management buy-out of Mr. Huntsman's
interest, and an outright sale of the business.
RESULTS OF OPERATIONS
The following table sets forth net sales, expenses, and operating
income, and such amounts as a percentage of net sales, for the years ended
December 31, 1999, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997
---------------- ---------------- ----------------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 781.4 100% $ 651.9 100% $ 447.7 100%
Cost of sales 623.4 80 532.4 82 389.6 87
----- --- ----- --- ----- ---
Gross profit 158.0 20 119.5 18 58.1 13
Total operating expenses 82.0 10 70.1 11 45.0 10
----- --- ----- --- ----- ---
Operating income $ 76.0 10% $ 49.4 7% $ 13.1 3%
===== === ===== === ===== ===
</TABLE>
1999 VERSUS 1998
Net Sales
Net sales increased by $129.5 million, or 19.9%, in 1999 to $781.4
million from $651.9 million in 1998. The increase was primarily due to the
inclusion of a full year's results from the Blessings Acquisition, which
occurred in May 1998. The full year's sales from the manufacturing facilities
acquired as part of the Blessings Acquisition and post-acquisition sales volume
increases of approximately 15% over the 1998 pre-acquisition sales volume
accounted for increased net sales of approximately $90 million in 1999.
Excluding the sales increases resulting from this acquisition, we realized
increased sales volumes of approximately 4.5% in 1999 compared to 1998. In the
markets we serve, the average selling price of our products generally increases
or decreases as resin prices increase or decrease. Although the price of resin,
our primary raw material, increased significantly during most of 1999, the
average price of resins for the entire year was only slightly higher in 1999
compared to 1998. As a result, our average selling prices were slightly higher
in 1999 as compared to 1998.
11
<PAGE> 13
Gross Profit
Gross profit increased by $38.5 million, or 32.2%, in 1999 to $158.0
million from $119.5 million in 1998. The increase was due to increased sales
volume from the recent acquisitions and internal growth, integration and
rationalization of acquired and existing facilities and improved mix of products
sold. The recent acquisitions and capital expenditures have allowed us to
produce and sell proportionately more product in higher margin markets than in
the past. Due to our rationalization and integration of operations and
facilities, a precise measure of the additional gross profit added in 1999 from
the recent acquisitions is not practicable.
Operating Income
Operating income increased by $26.6 million, or 53.8%, in 1999 to $76
million from $49.4 million in 1998 as a result of the factors discussed above.
Total Operating Expenses
Total operating expenses (including research and development expenses)
increased by $11.9 million, or 17.0%, in 1999 to $82.0 million from $70.1
million in 1998. The increase was due primarily to additional operating expenses
resulting from the Blessings Acquisition, including increased intangible
amortization expense of $2.1 million. Operating expenses as percentage of net
sales decreased to 10% in 1999, as compared to 11% in 1998.
1998 VERSUS 1997
Net Sales
Net sales increased by $204.2 million, or 45.6%, in 1998 to $651.9
million from $447.7 million in 1997. The increase was primarily due to the
Blessings Acquisition, which occurred in May 1998 and a full year's results from
the September 1997 CT Film Acquisition. The CT Film Acquisition and the
Blessings Acquisition collectively accounted for increased net sales of
approximately $256 million in 1998. Excluding the sales increases resulting from
these acquisitions, we realized increased sales volumes of approximately 1.7% in
1998 compared to 1997. These sales volume related increases were offset by a
4.6% reduction in the average selling prices for our products, excluding the
effects of the acquisitions. The average selling price reductions were primarily
due to declines in the price of resins, our primary raw material.
Gross Profit
Gross profit increased by $61.4 million, or 105.7%, in 1998 to $119.5
million from $58.1 million in 1997. The increase was due to increased sales
volume from the recent acquisitions and internal growth, integration and
rationalization of acquired and existing facilities, realization of purchasing
and operational synergies associated with the recent acquisitions, and improved
manufacturing performance within our operations. Due to our rationalization and
integration of operations and facilities, a precise measure of the additional
gross profit added in 1998 from the recent acquisitions is not practicable.
However, the gross profit for the facilities associated with the CT Film
Acquisition and the Blessings Acquisition was approximately $49.2 million,
including the effects of the above activities.
12
<PAGE> 14
Total Operating Expenses
Total operating expenses (including research and development expenses)
increased by $25.1 million, or 55.8%, in 1998 to $70.1 million from $45.0
million in 1997. The increase was due primarily to additional operating expenses
resulting from the CT Film Acquisition and the Blessings Acquisition. In
addition, we incurred nonrecurring operating expenses totaling approximately
$8.0 million in 1998. The nonrecurring expenses included the following
components (in millions):
<TABLE>
<S> <C>
Plant closing costs $ 4.9
Indirect plant closing costs 1.6
Blessings Acquisition transition costs 1.5
------
$ 8.0
======
</TABLE>
The plant closing costs charge relates to the closure of our Clearfield,
Utah facility. During 1998, we ceased operations at the Clearfield facility and
most of the production equipment was relocated to other of our facilities.
The indirect plant closing costs include one-time costs to tear down and
relocate equipment from closed plants to other of our facilities. The Blessings
Acquisition transition costs consist primarily of labor costs relating to former
Blessings Corporation employees retained on a temporary basis to assist through
the early stages of our ownership of the operation.
Operating Income
Operating income increased by $36.3 million, or 277.1%, in 1998 to $49.4
million from $13.1 million in 1997 as a result of the factors discussed above.
OPERATING SEGMENT REVIEW
General
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. For more information on our operating segments, see Note 13 to the
Consolidated Financial Statements included in this report.
1999 VERSUS 1998
Design Products
Net Sales
The design products segment net sales increased by $39.3 million, or
28.9%, in 1999 to $175.4 million from $136.1 million in 1998. This increase was
primarily due to our recent acquisitions and to sales volume increases resulting
from production capacity expansions. The design products segment includes our
Mexican operation acquired as part of the May 1998 Blessings Acquisition and,
accordingly, 1999 sales include a full year of results from this operation.
Excluding the approximate effect of this acquisition, net sales dollars
increased by 13.3% and sales volume increased by 12.7%. The sales dollar and
volume increases were due to additional production capacity added over the last
two years in our design products production facilities.
13
<PAGE> 15
Segment Profit
The design products segment profit decreased by $3.1 million, or 25.0%,
in 1999 to $9.3 million from $12.4 million in 1998. The decrease was due to a
4.5% decline in the difference between our average selling price and our average
raw material cost. A significant portion of our design products sales prices are
tied to a resin price index with our sales price often adjusting quarterly. Due
to the rapid increases in resin prices during 1999, we were unable to increase
our selling prices as quickly as resin prices increased. Accordingly, our
segment profit declined. During late 1999 and early 2000, our margins returned
to normal levels as resin prices stabilized. The decrease is also due to higher
operating expenses resulting from a full year of costs associated with a
separate segment management team.
Segment profit excludes nonrecurring plant closing costs. The 1999 plant
closing costs of $2.5 million relates entirely to the design products operating
segment. See Note 4 to the Consolidated Financial Statements included in this
report.
Segment Total Assets
The design products segment total assets increased by $22.5 million, or
14.7%, in 1999 to $175.9 million from $153.4 million in 1998. The increase was
due to the KCL Acquisition, 1999 capital expenditures of approximately $6.9
million and an increase in working capital. These additions were off-set, in
part, by depreciation expense in 1999.
Capital expenditures were for capacity expansion at our Rochester, New
York facility and other ongoing capital improvements.
Industrial Films
Net Sales
The net sales of our industrial films segment increased by $8.6 million,
or 5.9%, in 1999 to $153.3 million from $144.7 million in 1998. The increase in
sales was due entirely to an increase in our sales volume as our average selling
prices were unchanged in 1999 as compared to 1998.
Segment Profit
The industrial films segment profit increased by $5.4 million, or 49.1%,
in 1999 to $16.4 million from $11.0 million in 1998. The increase was due to
increased sales volumes, lower operating expenses, and improved manufacturing
performance.
Segment Total Assets
The industrial films segment total assets increased by $2.1 million, or
2.5%, in 1999 to $84.8 million from $82.7 million in 1998. The increase was due
to capital expenditures of approximately $6.6 million reduced, in part, by
depreciation. The capital expenditures were for ongoing capital improvements, as
well as a major upgrade to one of our stretch film production lines.
Specialty Films
Net Sales
The net sales of our specialty films segment increased by $81.5 million,
or 22.0%, in 1999 to $452.7 million from $371.2 million in 1998. The increase
was due primarily to inclusion of a full year's results from the 1998 Blessings
Acquisition, including post-acquisition sales volume increases in the operations
acquired. The addition of these operations, including the post-acquisition sales
improvements, resulted in 1999 increased sales of
14
<PAGE> 16
approximately $65.2 million. Excluding the acquisition related increases, our
specialty film volume increased in 1999 by approximately 9.9%. The volume
increase was due primarily to a full year's results of capacity expansion in our
barrier film operations and the relocation of certain equipment from our closed
facilities to specialty films' facilities.
Segment Profit
The specialty films segment profit increased by $21.5 million, or 59.6%,
in 1999 to $57.6 million from $36.1 million in 1998. The increase was due
primarily to the recent acquisitions and the increase in sales volume resulting
from production capacity expansions. In 1999, operating expenses associated with
this segment increased due to a full year of operations from the facilities
acquired as part of the Blessings Acquisition and due to costs associated with a
separate segment management team.
Segment Total Assets
The specialty films segment total assets increased by $11.8 million, or
2.7%, in 1999 to $446.9 million from $435.1 million in 1998. The increase was
primarily due to capital expenditures of approximately $18.8 million and an
increase in working capital. These increases were off-set, in part, by 1999
depreciation and amortization. Capital expenditures related mainly to capacity
expansion and to quality improvement projects, as well as ongoing capital
improvements.
1998 VERSUS 1997
Design Products
Net Sales
The design products segment net sales increased by $42.7 million, or
45.7%, in 1998 to $136.1 million from $93.4 million in 1997. This increase was
primarily due to our recent acquisitions and to sales volume increases resulting
from production capacity expansions. The Blessings Acquisition added
approximately $30.2 million to net sales in 1998. These additional sales relate
to our Mexican operation acquired from Blessings Corporation. Excluding the
effect of this acquisition, net sales dollars increased by 13.3% and sales
volume increased by 16.1%. The sales dollar and volume increases were due to
additional production capacity added over the last two years in our Rochester,
New York and Seattle, Washington facilities. These increases were off-set, in
part, by a 2.1% reduction in 1998 average selling prices, excluding the effects
of the Blessings Acquisition. As previously discussed, the decreased average
selling prices resulted from a reduction in resin prices during 1998.
Segment Profit
The design products segment profit increased by $1.1 million, or 9.7%,
in 1998 to $12.4 million from $11.3 million in 1997. The increase was primarily
due to our recent acquisitions and increased sales volume resulting from
production capacity expansions. In 1997, operating expenses associated with this
segment were not allocated to the operating segment. Accordingly, the
acquisition and sales volume related segment profit increases were partially
off-set by increased operating expenses in 1998 as compared to 1997. The
increase in operating expenses was due to the Blessings Acquisition and the
establishment of a separate segment management team.
Segment Total Assets
The design products segment total assets increased by $98.8 million, or
180.9%, in 1998 to $153.4 million from $54.6 million in 1997 due primarily to
our recent acquisitions and capital expenditures to expand capacity. The 1998
acquisitions added total assets of approximately $84.6 million and 1998 capital
expenditures added approximately $18.4 million. These additions were partially
off-set by 1998 depreciation and reductions in working capital.
15
<PAGE> 17
Capital expenditures were for significant capacity expansion at our
Rochester, New York and Seattle, Washington facilities and ongoing capital
improvements. The capacity expansion expenditures included new, 8-color printing
presses that allow us to pursue higher margin printing applications.
Industrial Films
Net Sales
The net sales of our industrial films segment decreased by $30.7
million, or 17.5%, in 1998 to $144.7 million from $175.4 million in 1997. The
decrease in sales was primarily due to a combination of the closure of our
Carrollton, Ohio facility and reductions in our average selling prices. During
1998, we completed the closure of the Carrollton facility. We relocated the more
efficient Carrollton manufacturing equipment to facilities in other of our
operating segments and the equipment that was not relocated was sold (see Note 4
to the Consolidated Financial Statements included in this report). These asset
transfers and dispositions caused net sales to decrease by approximately $17
million in 1998. Excluding the effects of the Carrolton closure, we experienced
a decline in our average selling prices of approximately 9.0% as a result of
general industry selling price declines resulting from declines in resin prices.
The volume of our PVC film business was virtually unchanged in 1998, while our
stretch film volume increased approximately 1.8% in 1998, excluding the effects
of the Carrollton closure.
Segment Profit
The industrial films segment profit increased by $1.5 million, or 15.8%,
in 1998 to $11.0 million from $9.5 million in 1997. The increase in segment
profit was primarily due to a combination of dramatically increased stretch film
gross profits over 1997 and the closure of the Carrollton plant. The stretch
film business realized a return to profitability in 1998 after sustaining
significant losses in 1997. During 1997, our stretch film business suffered
through historically low gross profits due to excess supply in stretch film
markets and lower than expected production efficiencies in our facilities.
Although excess supply continued to be a factor in 1998, we realized
significantly increased production efficiencies and lower production costs. The
closure of the Carrollton plant added approximately $1.0 million to our segment
profit, as compared to 1997. The increase in profitability was partially off-set
by increased operating expenses in 1998, due to the establishment of a separate
segment management team. In 1997, operating expenses associated with this
segment were not allocated to the operating segment. Excluding the effects of
the increase in segment operating expenses, the PVC business profitability was
slightly increased over 1997.
Segment profit excludes nonrecurring plant closing costs. The Carrollton
plant closing, discussed above, resulted in a 1997 plant closing cost charge of
$9.3 million. This charge relates entirely to the industrial film operating
segment. See Note 4 to the Consolidated Financial Statements included in this
report.
Segment Total Assets
The industrial films segment total assets decreased by $13.8 million, or
14.3%, in 1998 to $82.7 million from $96.5 million in 1997. The decrease was due
primarily to the closure of the Carrollton plant, 1998 depreciation and
reductions in working capital. These reductions were partially off-set by 1998
capital expenditures of approximately $5.7 million. The capital expenditures
were for ongoing capital improvements, as well as a major upgrade to one of our
stretch film production lines.
Specialty Films
Net sales
The net sales of our specialty films segment increased by $192.3
million, or 107.5%, in 1998 to $371.2 million from $178.9 million in 1997. The
increase was due primarily to the 1998 Blessings Acquisition and the inclusion
of a full year's results from the 1997 CT Film Acquisition. The addition of
these operations resulted in
16
<PAGE> 18
1998 increased sales of approximately $182.9 million. Excluding the acquisition
related increases, our specialty film 1998 volume increased by approximately
12.6%. The volume increase was due primarily to the completion of significant
capacity expansions in our barrier film operations and the relocation of
equipment from our closed facilities to specialty films' facilities. These
increases were slightly off-set by a 5.0% reduction in our average selling
prices, excluding the effects of the recent acquisitions. As previously
discussed, the reduction in selling prices resulted from declines in 1998 resin
prices.
Segment Profit
The specialty films segment profit increased by $16.5 million, or 84.2%,
in 1998 to $36.1 million from $19.6 million in 1997. The increase was due
primarily to the recent acquisitions and the increase in sales volume resulting
from production capacity expansions. In 1997, operating expenses associated with
this segment were not allocated to the operating segment. Accordingly, the
segment profit increase due to acquisitions and volume increases was partially
off-set by increased operating expenses in 1998. The increase in operating
expenses was due to the CT Film and Blessings Acquisitions and the establishment
of a separate segment management team.
Segment profit excludes nonrecurring plant closing costs. The
Clearfield, Utah plant closing, discussed above, resulted in a 1998 plant
closing cost charge of $4.9 million. This charge relates entirely to the
specialty films operating segment. See Note 4 to the Consolidated Financial
Statements included in this report.
Segment Total Assets
The specialty films segment total assets increased by $247.0 million, or
131.3%, in 1998 to $435.1 million from $188.1 million in 1997. The increase was
primarily due to the recent acquisitions and capital expenditures. The 1998
acquisitions increased segment total assets by approximately $244.4 million and
1998 capital expenditures were $26.2 million. 1998 capital expenditures included
the purchase of a new barrier film production line at our Bloomington, Indiana
facility and ongoing capital improvements. These increases were partially
off-set by reductions in assets resulting from the closure of the Clearfield,
Utah facility, the sale of the Scunthorpe, UK, facility, by 1998 depreciation
and by reductions in working capital.
LIQUIDITY AND CAPITAL RESOURCES
On September 30, 1997, we issued $125 million of 9.125% unsecured senior
subordinated notes which mature on October 1, 2007 (the "Notes"). Interest on
the Notes is payable semi-annually on each April 1 and October 1, commencing
April 1, 1998. Additionally, on September 30, 1997, we entered into a $225
million credit facility (the "Credit Agreement") with a syndicate of banks.
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 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 Huntsman Packaging
equity securities, and with the proceeds of certain debt offerings.
17
<PAGE> 19
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 Notes 6 and
16 to the Consolidated Financial Statements included in this report.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $51.4 million in 1999, an
increase of $5.9 million, or 13.0%, from $45.5 million in 1998. The increase
resulted primarily from increased net income in 1999 of $10.0 million, an
increase in accounts payable, an increase in non-cash items and a decrease in
income taxes receivable. These increases in cash flows were offset by increases
in receivables and inventories. Net cash provided by operating activities
increased $16.9 million, or 59.1%, in 1998 to $45.5 million from $28.6 million
in 1997. The 1998 increase resulted primarily from increased net income in 1998
of $8.0 million and a reduction in inventories and prepaid expenses.
Net Cash Used in Investing Activities
Net cash used in investing activities was $46.0 million, $314.8 million
and $87.2 million for 1999, 1998 and 1997, respectively. The majority of cash
was used in the KCL, Blessings, and CT Film Acquisitions and capital
expenditures (see below). During 1999, we made net cash payments of
approximately $11.5 million for KCL Corporation. During 1998, we made net cash
payments of approximately $285.7 million for the purchase of Blessings
Corporation and $10.9 million for other acquisitions. During 1997, we made net
cash payments of approximately $69.4 million for the purchase of CT Film. See
Note 12 to the Consolidated Financial Statements included in this report.
Capital Expenditures
Total capital expenditures were $35.7 million, $52.1 million and $17.9
million for 1999, 1998 and 1997, respectively. The 1999 capital expenditures
included expenditures to add new capacity, to upgrade and relocate existing
equipment, and to upgrade existing information systems. The 1998 capital
expenditures included expenditures to upgrade and relocate existing equipment,
to add significant new capacity in our design products and specialty films
facilities, to add new information systems, and to upgrade existing information
systems. The 1997 capital expenditures included film production capacity
expansions in our facilities acquired in 1996, as well as printing capacity
expansion in our design products facilities. We currently estimate that a
minimum of $12 million to $15 million of ongoing capital expenditures are
required each year.
Net Cash Provided by Financing Activities
Net cash provided (used) by financing activities was $(16.7) million,
$275.6 million and $63.2 million for 1999, 1998 and 1997, respectively. Net cash
provided by financing activities consists primarily of net borrowings under our
current and prior credit arrangements in 1998 and 1997. In 1999, cash was used
to pay scheduled principal payments and to pay down the outstanding balance on
the Revolver. See Note 6 to the Consolidated Financial Statements included in
this report. Net cash provided by financing activities was used primarily to
fund our capital expenditures, as well as the 1998 Blessings Acquisition and the
1997 CT Film Acquisition.
18
<PAGE> 20
Liquidity
As of December 31, 1999, we had $103.8 million of working capital and
$112.7 million available under the Revolver of our Amended Credit Agreement,
$1.3 million of which was issued as letters of credit. The debt under our
Amended Credit Agreement bears interest at LIBOR plus 2%, and may adjust
downward based upon our leverage ratio (as defined in the Amended Credit
Agreement) to a minimum of LIBOR plus 1%.
As of December 31, 1999, we had $7.3 million in cash and cash
equivalents 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. In 1999, 1998 and 1997, our foreign operations
generated income from continuing operations of $8.3 million, $0.5 million and
$1.7 million, respectively.
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 arrangements.
OTHER MATTERS
Accounting Standards
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards that require derivative instruments to be recorded on the
balance sheet as either an asset or liability, measured at fair market value,
and that changes in the derivative's fair value be recognized currently in
earnings, unless specific hedging 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
financial statements.
Environmental Matters
Our manufacturing operations are subject to certain federal, state,
local and foreign laws, regulations, rules and ordinances relating to pollution,
the protection of the environment and the generation, storage, handling,
transportation, treatment, disposal and remediation of hazardous substances and
waste materials ("Environmental Laws"). In the ordinary course of business, we
are subject to periodic environmental inspections and monitoring by governmental
enforcement authorities. We could incur substantial costs, including fines and
civil or criminal sanctions as a result of actual or alleged violations of
Environmental Laws. In addition, our production facilities require environmental
permits that are subject to revocation, modification and renewal ("Environmental
Permits"). Violations of Environmental Permits can also result in substantial
fines and civil or criminal sanctions. We are in substantial compliance with
applicable Environmental Laws and Environmental Permits. The ultimate costs
under Environmental Laws and the timing of such costs, however, are difficult to
predict and potentially significant expenditures could be required in order to
comply with Environmental Laws that may be adopted or imposed in the future.
The Year 2000 Issue
In 1999, we performed analyses of both our computer systems and our
production and distribution activities and implemented procedures to address
year 2000 issues. We have not experienced any significant year 2000 related
computer problems. We do not anticipate any future year 2000 related computer
problems or additional costs to upgrade computer systems related to this issue.
19
<PAGE> 21
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.
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. The following factors are among the
factors that could cause actual results to differ materially from the
forward-looking statements. There may 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.
Substantial Leverage
We are highly leveraged, particularly in comparison to some of our
competitors that are publicly owned. Our relatively high degree of leverage may
limit our ability to obtain additional financing. In addition, a substantial
portion of our cash flow from operations must be dedicated to the payment of
principal and interest on our indebtedness, thereby reducing the funds available
for other purposes. Certain of our borrowings are at variable rates of interest,
exposing us to the risk of increased interest rates. Our leveraged position may
also limit our flexibility in adjusting to changing market conditions and our
ability to withstand competitive pressures.
Ability to Service Indebtedness
Our ability to make scheduled payments or to refinance our debt
obligations depends on our financial and operating performance. Our financial
and operating performance is subject to prevailing economic and competitive
conditions and to financial, business and other factors beyond our control.
These include fluctuations in interest rates, unscheduled plant shutdowns,
increased operating costs, raw material and product prices, regulatory
developments and our ability to repatriate cash generated outside of the United
States without incurring substantial tax liabilities. Any default under our debt
facilities could have a significant adverse effect on our business and
operations.
Restrictions under Credit Facilities
We are subject to certain restrictive covenants under the indenture
relating to our outstanding debt securities and our bank credit facility,
including financial and operating covenants. Failure to comply with any of these
covenants would permit our bank lenders to cease making further loans and our
bank lenders and holders of our debt securities to accelerate the maturity of
our debt and institute foreclosure proceedings against us. Such actions would
adversely affect our ability to service our indebtedness.
20
<PAGE> 22
Exposure to Fluctuations in Resin Prices and Dependence on Resin Supplies
We use large quantities of polyethylene, PVC and other resins in
manufacturing our products. Significant increases in the price of resins could
adversely affect our operating margins, results of operations and ability to
service our indebtedness. In addition, should any of our resin suppliers fail to
deliver resin or should any significant resin supply contract be canceled, we
would be forced to purchase resin in the open market. No assurances can be given
that we would be able to make such purchases at prices that would allow us to
remain competitive.
Competition
The markets in which we operate are highly competitive on the basis of
service, product quality, product innovation and price. In addition to
competition from many smaller competitors, we face strong competition from a
number of large flexible packaging companies. Some of these companies are
substantially larger, more diversified and have greater financial resources than
we have.
Customer Relationships
We are dependent upon a limited number of large customers with
substantial purchasing power for a majority of our sales. In particular, we are
currently the sole outside supplier to Kimberly Clark of its breathable personal
care films and other film components. Kimberly Clark accounted for approximately
13% of our revenue in 1999. The loss of Kimberly Clark or one or more other
customers, or a material reduction in the sales to Kimberly Clark or these other
customers, would have a material adverse effect on our operations and on our
ability to service our indebtedness.
Risks Associated with Acquisitions
We have completed a number of recent acquisitions. In order to further
benefit from these acquisitions, we have ceased operations at less efficient
manufacturing facilities and relocated equipment to more efficient facilities.
In addition, we have sold assets and restructured and consolidated our
operations and administrative functions in an effort to increase manufacturing
efficiencies and product quality, reduce costs and increase operating
profitability. There can be no assurance, however, that our efforts to integrate
the acquired businesses will result in increased sales or profits. Difficulties
encountered in the ongoing transition and integration process could have a
material adverse effect on our financial condition, results of operations or
cash flows.
Risks Associated with International Operations
We operate facilities and sell products in several countries outside the
United States, particularly in Mexico. As a result, we are subject to risks
associated with selling and operating in foreign countries. These risks include
devaluations and fluctuations in currency exchange rates, imposition of
limitations on conversion of foreign currencies into U.S. dollars or remittance
of dividends and other payments by foreign subsidiaries. The imposition or
increase of withholding and other taxes on remittances and other payments by
foreign subsidiaries, hyperinflation in certain foreign countries, and
imposition or increase of investment and other restrictions by foreign
governments could also have a negative effect on our business.
Other Factors
In addition to the factors described above, we face a number of
uncertainties, including: (i) changes in demand for our products; (ii) potential
legislation and regulatory changes; (iii) new technologies; (iv) changes in
distribution channels or competitive conditions in the markets or countries
where we operate; (v) increases in the cost of compliance with laws and
regulations, including environmental laws and regulations; and (vi)
environmental liabilities in excess of the amounts reserved.
21
<PAGE> 23
ITEM 7A. QUANTATIVE 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 December 31, 1999, we had one interest rate collar agreement
and one commodity collar agreement in place. The estimated fair market value of
the interest rate collar was $183,000 and the estimated fair market value of the
commodity collar was $325,000. 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 14(a) below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
On April 16, 1998, the Company notified Deloitte & Touche LLP ("Deloitte
& Touche") that effective as of that date, the Company had determined to change
its independent accountants. The Company then engaged the accounting firm of
Arthur Andersen LLP to serve as its independent accountants.
Neither Deloitte & Touche's reports on the Company's financial
statements for the years ended December 31, 1996 or December 31, 1997 contained
an adverse opinion or a disclaimer of opinion, nor were they qualified or
modified as to uncertainty, audit scope or accounting principles.
The decision to change accountants was approved by the Company's Board
of Directors. The Company does not have an audit or similar committee.
During the years ended December 31, 1996 and December 31, 1997 and the
subsequent interim period preceding the Company's replacement of Deloitte &
Touche, there were no disagreements with Deloitte & Touche on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
Deloitte & Touche, would have caused Deloitte & Touche to make reference to the
subject matter of the disagreement in connection with its report.
22
<PAGE> 24
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, positions and offices held, and a brief account of the
educational and business experience of each current director and each executive
officer is set forth below.
BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jon M. Huntsman* 62 Director and Chairman of the Board of
Directors
Karen H. Huntsman* 62 Vice Chairman
Richard P. Durham* 35 Director, President and Chief Executive
Officer
Christena H. Durham* 35 Director, Vice President
Jack E. Knott 45 Executive Vice President and Chief
Operating Officer
Scott K. Sorensen* 38 Executive Vice President and Chief
Financial Officer, Treasurer
Ronald G. Moffitt 47 Senior Vice President and General Counsel,
Secretary
</TABLE>
- --------------------------------------------------------------------------------
* Jon M. Huntsman is Christena H. Durham's father and Richard P. Durham's
father-in-law. Karen H. Huntsman is Jon M. Huntsman's wife, Christena H.
Durham's mother and Richard P. Durham's mother-in-law. Richard P. Durham
and Christena H. Durham are married. Scott K. Sorensen is Richard P.
Durham's brother-in-law.
JON M. HUNTSMAN is a Director and the Chairman of the Board of Directors of
Huntsman Packaging and has served as Chairman of the Board, Chief Executive
Officer and a Director of Huntsman Corporation, its predecessors, and other
Huntsman companies for over 25 years. He is also the Chairman and founder of the
Huntsman Cancer Foundation. In addition, Mr. Huntsman serves on numerous
charitable, civic and industry boards. In 1994, Mr. Huntsman received the
prestigious Kavaler Award as the chemical industry's outstanding Chief Executive
Officer. Mr. Huntsman formerly served as Special Assistant to the President of
the United States and as Vice Chairman of the U.S. Chamber of Commerce. Mr.
Huntsman served as the Company's Chief Executive Officer until March 1997.
KAREN H. HUNTSMAN was appointed Vice Chairman of Huntsman Packaging
Corporation on November 24, 1997, and serves as an officer and director of other
Huntsman companies. The Vice Chairman, an advisory position to the Board of
Directors, does not vote on matters brought to the Board. Mrs. Huntsman has
served as a Vice President and Director of Huntsman Corporation since 1995 and
as a Vice President and Director of Huntsman Chemical Corporation since 1982 and
1986, respectively. By appointment of the Governor of the State of Utah, Mrs.
Huntsman serves as a member of the Utah State Board of Regents. Mrs. Huntsman
also serves on the board of directors of various corporate and non-profit
entities, including First Security Corporation and Intermountain Health Care
Inc.
RICHARD P. DURHAM became President and Chief Executive Officer of Huntsman
Packaging in March 1997. Mr. Durham is a Director of Huntsman Packaging and also
is a Director of Huntsman Corporation. Mr. Durham has been with the Huntsman
organization in various positions since 1985. Most recently, Mr. Durham served
as Co-President and Chief Financial Officer of Huntsman Corporation, where, in
addition to being responsible for accounting, treasury, finance, tax, legal,
human resources, public affairs, purchasing, research and development, and
information systems, he also was responsible for Huntsman Packaging. Mr. Durham
attended Columbia College and graduated from the Wharton School of Business at
the University of Pennsylvania.
23
<PAGE> 25
CHRISTENA H. DURHAM was appointed a Director of Huntsman Packaging
Corporation on October 1, 1997, and became a Vice President on November 24,
1997. Prior to joining the Company, Mrs. Durham held no other officer positions
or directorships with any other for-profit organizations. Mrs. Durham also
serves on the Board of Directors of various non-profit organizations, including
the YWCA of Salt Lake City and as a trustee of the Huntsman Excellence in
Education Foundation.
JACK E. KNOTT became Executive Vice President and Chief Operating Officer of
Huntsman Packaging on September 1, 1997. Prior to joining the Company, Mr. Knott
was a member of the Board of Directors of Rexene Corporation and held the
position of Executive Vice President of Rexene Corporation and President of
Rexene Products. Mr. Knott served in various capacities at Rexene from 1985 to
1997, including Executive Vice President-Sales and Market Development of Rexene
Corporation, Executive Vice President of Rexene Corporation and President of CT
Film, a division of Rexene Corporation. Prior to joining Rexene Corporation, Mr.
Knott worked for American National Can. Mr. Knott received a B.S. degree in
Chemical Engineering and an M.B.A. degree from the University of Wisconsin. Mr.
Knott also holds nine patents.
SCOTT K. SORENSEN joined Huntsman Packaging as Executive Vice President and
Chief Financial Officer on February 1, 1998. Prior to joining the Company, Mr.
Sorensen was an executive with Westinghouse Electric Corporation, serving as
Chief Financial Officer for both the Communication and Information Systems
Division and the Power Generation Division. Prior to joining Westinghouse in
1996, Mr. Sorensen spent two years as Director of Business Development and
Planning at Phelps Dodge Industries, a subsidiary of Phelps Dodge Corporation,
and over four years as a management consultant with McKinsey & Company. Mr.
Sorensen received a B.S. degree in Accounting from the University of Utah and an
M.B.A. degree from Harvard Business School.
RONALD G. MOFFITT joined Huntsman Packaging in 1997, after serving as Vice
President and General Counsel of Huntsman Chemical Corporation. Prior to joining
Huntsman Chemical Corporation in 1994, Mr. Moffitt was a partner and a member of
the board of directors of the Salt Lake City law firm of Van Cott, Bagley,
Cornwall & McCarthy, with which he had been associated since 1981. Mr. Moffitt
holds a B.A. degree in Accounting, a Master of Professional Accountancy degree,
and a J.D. degree from the University of Utah.
24
<PAGE> 26
ITEM 11. EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth information about
compensation earned in the fiscal years ended December 31, 1999, 1998 and 1997
by the Chief Executive Officer and the three other executive officers (as of the
end of the last fiscal year) (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
------------------------------------- --------------------------------
Awards Payouts
---------------------- -------
Number of
Securities
Other Restricted Underlying
Annual Stock Option/ LTIP All Other
Salary Bonus Compensation Award(s) SARs Payouts Compensation
Name and Principal Position Year ($) ($) ($) (1) ($) (#) ($) ($)
- --------------------------- ---- -------- ------ ------- ------- ------- --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Richard P. Durham 1999 $450,000 $327,325 --- --- --- --- $ 29,800(3)
President and Chief Executive Officer(2) 1998 400,000 73,721 --- --- 15,734 --- 29,800
1997 415,618 420,000 --- --- --- --- 117,033
Jack E. Knott 1999 $285,421 $140,622 --- --- --- --- $ 4,800(5)
Executive Vice President 1998 263,333 31,331 --- --- 10,489 --- 4,800
and Chief Operating Officer(4) 1997 85,000 70,000 --- --- --- --- 2,400
Scott K. Sorensen 1999 $232,504 $112,534 --- --- --- --- $ 4,800(7)
Executive Vice President and 1998 206,068 28,574 --- --- 7,867 --- 82,035
Chief Financial Officer, 1997 -- -- --- --- --- --- --
Treasurer (6)
Ronald G. Moffitt 1999 $183,336 $ 63,053 --- --- --- --- $ 4,800(8)
Senior Vice President 1998 170,527 18,761 --- --- 2,622 --- 4,800
and General Counsel, 1997 116,939 50,000 --- --- --- --- 17,973
Secretary(2)
</TABLE>
- --------------------------------------------------------------------------------
(1) Perquisites and other personnel benefits, securities or property, in the
aggregate, are less than either $50,000 or 10% of the total annual salary
and bonus reported for the named executive officer.
(2) Prior to September 30, 1997, the compensation of Richard P. Durham and
Ronald G. Moffitt, other than Mr. Durham's directors fees for 1997 (which
are described in "Compensation of Directors," and listed in the "All Other
Compensation" column), was paid entirely by Huntsman Corporation. Huntsman
Packaging reimbursed Huntsman Corporation for such compensation for the
period beginning October 1, 1997 and ending December 31, 1997. Salary
figures for Mr. Durham and Mr. Moffitt represent a prorated portion of
Huntsman Corporation compensation attributable to the percentage of
executive services that were dedicated to Huntsman Packaging.
(3) Consists of a $25,000 director's fee from Huntsman Packaging, which is also
described in "Compensation of Directors" and employer's 401(k) contributions
of $4,800.
(4) Mr. Knott joined the Company on September 1, 1997. His 1997 compensation
is reported only for the period he was employed by Huntsman Packaging.
(5) Consists of employer's 401(k) contributions of $4,800.
(6) Mr. Sorensen joined the Company on February 1, 1998. His 1998
compensation is reported only for the period he was employed by Huntsman
Packaging.
(7) Consists of employer's 401(k) contributions of $4,800.
(8) Consists of employer's 401(k) contributions of $4,800.
25
<PAGE> 27
STOCK OPTIONS AND RESTRICTED STOCK
During 1998, the Board of Directors of the Company adopted the 1998
Huntsman Packaging Corporation Stock Option Plan (the "1998 Plan"). The 1998
Plan authorized grants of nonqualified stock options covering up to 41,956
shares of the Company's nonvoting Class C Common Stock. During 1998, options
covering a total of 41,956 shares were granted under the 1998 Plan. Options
covering 5,244 shares were subsequently canceled. In addition, as described
below, outstanding options covering 26,223 shares under the 1998 Plan were
canceled on February 22, 1999 in connection with the sale of 26,223 shares to
certain members of senior management. Options covering a total of 10,489 shares
remain outstanding under the 1998 Plan.
The following table provides information as to the value of options held
by each of the Named Executive Officers at the end of 1999 measured in terms of
the fair market value of the Company's nonvoting Class C Common Stock on
December 31, 1999 ($247 per share, as determined by the Company). None of the
named Executive Officers exercised any options under the 1998 Plan during the
last fiscal year.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
Shares Number of Securities Value of Unexercised
Acquired Underlying Unexercised In-the-Money Options/SARs
on Value Options/SARs at FY-End(#) at FY-End ($)
Name Exercise(#) Realized Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Jack E. Knott - - 4,196/6,293 $616,812/$925,071
</TABLE>
Outstanding options under the 1998 Plan are subject to time and
performance vesting requirements. One-half of the outstanding options are time
vested options, which become exercisable in equal increments over a five-year
period commencing January 1, 1998, and the remaining one-half of the outstanding
options are performance vested options, which vest in equal increments over a
five-year period commencing January 1, 1998, provided that the Company has
achieved a specific market value of equity applicable to such increment. For
purposes of the performance vested options, the Company's adjusted market value
of equity is determined pursuant to a formula based upon the Company's adjusted
earnings. The terms of the option agreements provide for partial vesting of the
performance vested shares if more than 80% of the applicable market value of
equity is achieved. The option agreements also provide for accelerated vesting
in the event of a change of control.
On February 22, 1999, 26,223 outstanding options under the 1998 Plan
were canceled in connection with the sale of 26,223 shares of Class C Common
Stock to certain members of senior management. See Item 5. "Market For the
Registrant's Common Stock and Related Stockholder Matters." The 26,223 shares
were purchased by certain Named Executive Officers for $100 per share, the
estimated fair market value of the shares on the date of purchase, pursuant to
the terms of an Option Cancellation and Restricted Stock Purchase Agreement
between the Company and certain Named Executive Officers. Mr. Durham purchased
15,734 shares, Mr. Sorensen purchased 7,867 shares and Mr. Moffitt purchased
2,622 shares. All of such shares are subject to vesting requirements similar to
the canceled options. Accordingly, one-half of the shares purchased by each
Named Executive Officer are time vested shares, which vest in equal increments
over a five-year period commencing January 1, 1998, and the remaining one-half
of the shares purchased by each Named Executive Officer are performance vested
shares, which vest in equal increments over a five-year period commencing
January 1, 1998, provided that the Company has achieved a specified market value
of equity applicable to such increment. For purposes of the performance vested
shares, the Company's market value of equity is determined pursuant to a formula
based upon the Company's adjusted earnings. The terms of the restricted stock
purchase agreements provide for partial vesting of the performance vested shares
if more than 80% of the applicable market value of equity is achieved. The
restricted stock purchase agreements also provide for accelerated vesting in the
event of a change of control.
26
<PAGE> 28
PENSION PLANS
The following table shows the estimated annual benefits payable under
Huntsman Packaging's tax-qualified defined benefit pension plan (the "Pension
Plan") in specified final average earnings and years of service classifications.
HUNTSMAN PACKAGING PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF BENEFIT SERVICE AT RETIREMENT
----------------------------------------------------------
FINAL AVERAGE COMPENSATION 10 15 20 25 30 35 40
- -------------------------- -- -- -- -- -- -- --
<S> <C> <C> <C> <C> <C> <C> <C>
$100,000 $ 16,000 $ 24,000 $ 32,000 $ 40,000 $ 48,000 $ 56,000 $ 64,000
125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000
150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000
175,000 25,600 38,400 51,200 64,000 76,800 89,600 102,400
200,000 25,600 38,400 51,200 64,000 76,800 89,600 102,400
</TABLE>
The current Pension Plan benefit is based on the following formula: 1.6%
of final average compensation multiplied by years of credited service, minus
1.5% of estimated Social Security benefits multiplied by years of credited
service (with a maximum of 50% of Social Security benefits). Final Average
Compensation is based on the highest average of three consecutive years of
compensation. Covered compensation for purposes of the Pension Plan includes
compensation earned with affiliates of the Company. The named executive officers
were participants in the Pension Plan in 1999. The Final Average Compensation
for purposes of the Pension Plan in 1999 for each of the named executive
officers is $160,000, which is the maximum that can be considered for the 1999
plan year under federal regulations. Federal regulations also provide that the
maximum annual benefit paid from a qualified defined benefit plan cannot exceed
$130,000 as of January 1, 1999. Benefits are calculated on a straight life
annuity basis. The benefit amounts under the Pension Plan are offset for Social
Security as described above.
The number of completed years of credit service as of December 31, 1999
under the Pension Plan for the named executive officers participating in the
plan were as follows:
<TABLE>
<CAPTION>
NAME YEARS OF CREDITED SERVICE
---- -------------------------
<S> <C>
Richard P. Durham (1) 14
Jack E. Knott (1) 14
Scott K. Sorensen 2
Ronald G. Moffitt (1) 5
</TABLE>
(1) The years of credited service under the Pension Plan includes 12 years of
service credited with affiliates of the Company for Mr. Durham, 12 years of
service credited with affiliates of the Company for Mr. Knott, and 3 years
of service credited with affiliates of the Company for Mr. Moffitt. The
benefit calculation upon retirement under the Pension Plan is made using all
credited service but the benefit is then multiplied by a fraction
representing that part of total credited service represented by service for
the Company.
EMPLOYMENT AGREEMENTS
The Company does not currently have any employment agreements with its
executive officers.
27
<PAGE> 29
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Board of Directors of the Company has designated the Executive
Committee, which is comprised of Jon M. Huntsman and Richard P. Durham, to
perform the duties of a compensation committee for the Company. Richard P.
Durham is the President and Chief Executive Officer of the Company and Jon M.
Huntsman is the Chairman of the Board of Directors of the Company.
Richard P. Durham serves as a director of Huntsman Corporation, but is
not one of the people who performs the duties of a compensation committee of the
Board of Directors of Huntsman Corporation.
COMPENSATION OF DIRECTORS
Each Director receives an annual fee of $25,000.
28
<PAGE> 30
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Set forth below is certain information as of March 24, 2000 with respect
to the beneficial ownership of shares of Common Stock by (i) each director of
the Company, (ii) each of the Named Executive Officers and (iii) all directors
and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF
TITLE OF CLASS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) CLASS(3)
- -------------- ---------------------- --------------------- --------
<S> <C> <C> <C>
Class A Common Jon M. Huntsman 650,000 Class A 65.0%
Total 61.3%
Class A Common Richard P. Durham 5,000 Class A *
Class B Common Richard P. Durham 2,000 Class B 28.6%
Class C Common Richard P. Durham 21,289(4) Class C 39.6%
Total 2.7%
Class A Common Christena H. Durham 345,001(5) Class A 34.5%
Class B Common Christena H. Durham 4,999(5) Class B 71.4%
Total 33.0%
Class C Common Jack E. Knott 11,696(6) Class C 21.8%
Total 1.1%
Class C Common Scott K. Sorensen 15,000(7) Class C 27.9%
Total 1.4%
Class C Common Ronald G. Moffitt 5,722(8) Class C 10.7%
Total *
Class A, Class B & All directors and
Class C Common executive officers 1,060,707 100%
As a group (six persons)
</TABLE>
- --------
* Less than 1%.
(1) Unless otherwise indicated in these footnotes, the mailing address of
each beneficial owner listed is 500 Huntsman Way, Salt Lake City, Utah
84108.
(2) Except as otherwise indicated in these footnotes, each of the beneficial
owners listed has, to the knowledge of the Company, sole voting and
investment power with respect to the indicated shares of Common Stock.
(3) The Company has three classes of Common Stock outstanding: Class A,
Class B and Class C. The percentages in the table marked "total" have
been calculated based upon the total outstanding shares of Common Stock
as if all of the outstanding shares were part of a single class. The
Class A Common Stock, the Class B Common Stock and the Class C Common
Stock have identical rights, except with respect to voting. The Class A
shareholders are entitled to elect one of the Company's three directors
and the Class B shareholders are entitled to elect the remaining two of
the Company's three directors. The Class C shareholders do not have
voting rights, except as required by the Utah Revised Business
Corporation Act.
(4) Includes 9,440 shares of Class C Common Stock subject to time and
performance vesting requirements.
(5) 345,001 shares of Class A Common Stock and 4,999 shares of Class B
Common Stock are held by The Christena Karen H. Durham Trust for the
benefit of Christena H. Durham. Richard P. Durham and Ronald G. Moffitt,
as trustees of The Christena Karen H. Durham Trust, share voting power
with respect to such shares.
(6) Includes 4,196 shares of Class C Common Stock subject to options that
are exercisable or become exercisable within 60 days of March 24, 2000.
(7) Includes 4,720 shares of Class C Common Stock subject to time and
performance vesting requirements.
(8) Includes 1,573 shares of Class C Common Stock subject to time and
performance vesting requirements.
29
<PAGE> 31
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The principal executive offices of Huntsman Packaging are leased from
Huntsman Headquarters Corporation, an indirect wholly-owned subsidiary of
Huntsman Corporation. Huntsman Packaging is obligated to pay rent calculated as
a pro-rata portion (based on its percentage occupancy) of the mortgage principal
and interest payments on the headquarters facility.
Huntsman Packaging is a party to agreements with certain affiliates of
Huntsman Corporation, including but not limited to, Huntsman Polymers
Corporation, for the purchase of various resins. All such agreements provide for
the purchase of materials or services at prevailing market prices.
Huntsman Packaging obtains some of its insurance coverage under policies
of Huntsman Corporation. Huntsman Packaging is party to an agreement with
Huntsman Corporation that provides for reimbursement of insurance premiums paid
by Huntsman Corporation on behalf of Huntsman Packaging. The reimbursement
payments are based on premium allocations which are determined in cooperation
with Huntsman Corporation's independent insurance broker.
Huntsman Packaging is a party to a services agreement dated as of
January 1, 1999 with Huntsman Corporation covering the provision of certain
administrative services. These services are provided to Huntsman Packaging at
prices that would be payable to an unaffiliated third party.
During 1999 and 1998, the Company paid a management fee in the amount of
$150,000 and $133,333, respectively, to Huntsman Financial Corporation, an
affiliate of Huntsman Corporation, for consulting services provided to the
Company by Jon M. Huntsman.
In connection with the Split-Off, Huntsman Packaging issued 7,000 shares
of its common stock to Richard P. Durham, President and Chief Executive Officer
and a director of Huntsman Packaging, in exchange for a $700,000 note
receivable. Such note bears interest at 7% per annum and is payable over
approximately 51 months. As of December 31, 1999, the outstanding balance on
this note receivable was $299,000.
On February 22, 1999, the Company sold 26,223 shares of Class C Common
Stock to certain members of senior management. 15,734 shares were issued to
Richard P. Durham, President and Chief Executive Officer and a director of
Huntsman Packaging, in exchange for a $1,573,400 note receivable; 7,867 shares
were issued to Scott K. Sorensen, Executive Vice President, Chief Financial
Officer and Treasurer of Huntsman Packaging, in exchange for a $786,700 note
receivable; and 2,622 shares were issued to Ronald G. Moffitt, Senior Vice
President, General Counsel and Secretary of Huntsman Packaging, in exchange for
a $262,200 note receivable. All of such notes bear interest at 7% per annum and
are payable in three annual installments beginning in February 2002.
During 1999 and 1998, the Company made charitable contributions of
$1,000,000 and $500,000, respectively, to the Huntsman Cancer Institute, a
public charity. Jon M. Huntsman, Chairman of the Board of Directors of the
Company, and Richard P. Durham, President and Chief Executive Officer of the
Company, serve on the Board of Trustees of the Huntsman Cancer Institute.
See Note 15 to the Consolidated Financial Statements included in this
report.
30
<PAGE> 32
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
<TABLE>
<S> <C> <C>
(a)(1) Financial Statements
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
Report of Management F-2
Report of Independent Public Accountants
(Arthur Andersen LLP) F-3
Independent Auditors' Report (Deloitte & F-4
Touche LLP)
Consolidated Balance Sheets at December 31, F-5
1999 and 1998
Consolidated Statements of Income for the F-7
years ended December 31, 1999, 1998 and 1997
Consolidated Statements of Stockholders' F-8
Equity for the years ended December 31,
1999, 1998 and 1997
Consolidated Statements of Cash Flows for F-9
the years ended December 31, 1999, 1998 and
1997
Notes to Consolidated Financial Statements F-12
BLESSINGS CORPORATION
Independent Auditors' Report (Deloitte & F-42
Touche LLP)
Consolidated Balance Sheets as of December
31, 1997 and 1996 F-43
Consolidated Statements of Earnings for the
years ended December 31, 1997 and 1996 and F-44
the 52 weeks ended December 30, 1995
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1997 F-45
and 1996 and the 52 weeks ended December 30,
1995
Consolidated Statements of Cash Flows for
the years ended December 31, 1997 and 1996 F-46
and the 52 weeks ended December 30, 1995
Notes to Consolidated Financial Statements F-47
(a)(2) Financial Statement Schedule
Schedule II - Valuation and Qualifying F-41
Accounts
</TABLE>
31
<PAGE> 33
(a)(3) The following exhibits are filed herewith or incorporated by reference:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------ -------
<S> <C>
3.1 Second Amended and Restated Articles of Incorporation of Huntsman Packaging
(incorporated by reference to Exhibit 3.1 to Huntsman Packaging's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1998).
3.2 Amended and Restated Bylaws of Huntsman Packaging (incorporated by reference
to Exhibit 3.2 to Huntsman Packaging's registration statement on Form S-4
(File No. 333-40067)).
4.1 Indenture, dated as of September 30, 1997, between Huntsman Packaging, the
Guarantors and The Bank of New York (incorporated by reference to Exhibit 4.1
to Huntsman Packaging's registration statement on Form S-4 (File No.
333-40067)).
4.2 Supplemental Indenture No. 1 to Indenture dated as of September
30, 1997, between Huntsman Packaging, the Guarantors and the Bank
of New York (incorporated by reference to Exhibit 4.1 to Huntsman
Packaging's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
4.3 Supplemental Indenture No. 2 to Indenture dated as of September
30, 1997, between Huntsman Packaging, the Guarantors and the Bank
of New York (incorporated by reference to Exhibit 4.2 to Huntsman
Packaging's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1998).
4.4 Form of Exchange Notes (incorporated by reference to Exhibit A-2 to Exhibit
4.1)).
4.5 Registration Rights Agreement, dated as of September 19, 1997, by and among
Huntsman Packaging, BT Alex. Brown Incorporated and Chase Securities Inc.
(incorporated by reference to Exhibit 4.3 to Huntsman Packaging's registration
statement on Form S-4 (File No. 333-40067)).
10.1 Exchange Agreement, dated as of September 26, 1997 by and among Huntsman
Corporation and Jon M. Huntsman, Richard P. Durham and Elizabeth Whitsett, as
Trustees of the Christena Karen H. Durham Trust (incorporated by reference to
Exhibit 10.1 to Huntsman Packaging's registration statement on Form S-4 (File
No. 333-40067)).
10.2 First Amended Asset Purchase Agreement, dated as of September 26,
1997, between Huntsman Packaging and Huntsman Polymers
Corporation (incorporated by reference to Exhibit 10.2 to
Huntsman Packaging's registration statement on Form S-4 (File No.
333-40067)).
10.3 Amended and Restated Credit Agreement, dated as of May 14, 1998,
among Huntsman Packaging, the various lenders party thereto (the
"Lenders") and The Chase Manhattan Bank, as Administrative Agent
for the Lenders (incorporated by reference to Exhibit 10.1 to
Huntsman Packaging's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998).
10.4 Guarantee Agreement, dated September 30, 1997, among the
subsidiaries of Huntsman Packaging and The Chase Manhattan Bank,
as Administrative Agent for the Lenders (incorporated by
reference to Exhibit 10.4 to Huntsman Packaging's registration
statement on Form S-4 (File No. 333-40067)).
10.5 Security Agreement, dated as of September 30, 1997, among
Huntsman Packaging, each subsidiary of Huntsman Packaging party
thereto and The Chase Manhattan Bank, as Collateral Agent for the
Secured Parties (incorporated by reference to Exhibit 10.5 to
Huntsman Packaging's registration statement on Form S-4 (File No.
333-40067)).
</TABLE>
32
<PAGE> 34
<TABLE>
<S> <C>
10.6 Pledge Agreement, dated September 30, 1997, among Huntsman
Packaging, each subsidiary of Huntsman Packaging party thereto
and The Chase Manhattan Bank, as Collateral Agent for the Secured
Parties (incorporated by reference to Exhibit 10.6 to Huntsman
Packaging's registration statement on Form S-4 (File No.
333-40067)).
10.7 Indemnity, Subrogation and Contribution Agreement, dated
September 30, 1997, among Huntsman Packaging, each subsidiary of
Huntsman Packaging party thereto and The Chase Manhattan Bank, as
Collateral Agent for the Secured Parties (incorporated by
reference to Exhibit 10.7 to Huntsman Packaging's registration
statement on Form S-4 (File No. 333-40067)).
10.8 Form of Option Cancellation and Restricted Stock Purchase Agreement
(incorporated by reference to Exhibit 10.8 to Huntsman Packaging's Annual
Report on Form 10-K for the year ended December 31, 1998). (1)
10.9 1998 Huntsman Packaging Corporation Stock Option Plan (incorporated by
reference to Exhibit 10.10 to Huntsman Packaging's Annual Report on Form 10-K
for the year ended December 31, 1998). (1)
10.10 First Amendment to the 1998 Huntsman Packaging Corporation Stock Option Plan
(incorporated by reference to Exhibit 10.1 to Huntsman Packaging's Quarterly
Report on Form 10-Q for the quarter ended June 30,1999). (1)
21 Subsidiaries of Huntsman Packaging (incorporated by reference to Exhibit 21 to
Huntsman Packaging's Annual Report on Form 10-K for the year ended December
31, 1998).
27 Financial Data Schedule.*
</TABLE>
* Filed with this report.
(1) Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K with the Securities and Exchange
Commission on December 10, 1999 relating to the announcement by the
Company with respect to its evaluation of a variety of financial
alternatives to monetize the investment of its majority shareholder.
33
<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on March 28, 2000.
HUNTSMAN PACKAGING CORPORATION
By /s/ RICHARD P. DURHAM
----------------------------------
Richard P. Durham, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 28, 2000 by the following persons on
behalf of the Registrant and in the capacities indicated.
By /s/ JON M. HUNTSMAN
----------------------------------
Jon M. Huntsman, Director and
Chairman of the Board of Directors
By /s/ RICHARD P. DURHAM
----------------------------------
Richard P. Durham, Director,
President and Chief Executive
Officer
(Principal Executive Officer)
By /s/ CHRISTENA H. DURHAM
----------------------------------
Christena H. Durham, Director
By /s/ SCOTT K. SORENSEN
----------------------------------
Scott K. Sorensen, Executive Vice
President, Chief Financial Officer
and Treasurer
(Principal Financial and
Accounting Officer)
34
<PAGE> 36
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL SCHEDULE
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
As of December 31, 1999 and 1998 and for each of the three years in the period ended December 31, 1999:
Report of Management..................................................................................... F-2
Report of Independent Public Accountants (Arthur Andersen LLP)........................................... F-3
Independent Auditors' Report (Deloitte & Touche LLP)..................................................... F-4
Consolidated Balance Sheets.............................................................................. F-5
Consolidated Statements of Income........................................................................ F-7
Consolidated Statements of Stockholders' Equity.......................................................... F-8
Consolidated Statements of Cash Flows.................................................................... F-9
Notes to Consolidated Financial Statements............................................................... F-12
Schedule II - Valuation and Qualifying Accounts.......................................................... F-41
BLESSINGS CORPORATION AND SUBSIDIARIES
As of December 31, 1997 and 1996 and for the years ended December 31, 1997 and
1996 and the 52 weeks ended December 30, 1995:
Independent Auditors' Report (Deloitte & Touche LLP)..................................................... F-42
Consolidated Balance Sheets.............................................................................. F-43
Consolidated Statements of Earnings...................................................................... F-44
Consolidated Statements of Shareholders' Equity.......................................................... F-45
Consolidated Statements of Cash Flows.................................................................... F-46
Notes to Consolidated Financial Statements............................................................... F-47
</TABLE>
F-1
<PAGE> 37
REPORT OF MANAGEMENT
Huntsman Packaging Corporation's management has prepared the accompanying
consolidated financial statements and related notes in conformity with
accounting principles generally accepted in the United States. In so doing,
management makes informed judgments and estimates of the expected effects of
events and transactions. Financial data appearing elsewhere in this report are
consistent with these financial statements.
Huntsman Packaging Corporation maintains a system of internal controls to
provide reasonable, but not absolute, assurance of the reliability of the
financial records and the protection of assets. The internal control system is
supported by policies and procedures, careful selection and training of
qualified personnel, and, beginning in 1999, a formal internal audit program.
The accompanying consolidated financial statements have been audited by Arthur
Andersen LLP and Deloitte & Touche LLP, independent public accountants, for the
specified periods as indicated in their reports. Their audits were made in
accordance with auditing standards generally accepted in the United States. They
considered Huntsman Packaging Corporation's internal control structure only to
the extent necessary to determine the scope of their audit procedures for the
purpose of rendering an opinion on the financial statements.
Members of the Board of Directors meet with management, the internal auditors
and the independent public accountants to review accounting, auditing and
financial reporting matters. Subject to stockholder approval, the independent
public accountants are appointed by the Board of Directors.
Richard P. Durham Scott K. Sorensen
President Executive Vice President
and Chief Executive Officer and Chief Financial Officer
F-2
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Huntsman Packaging Corporation:
We have audited the accompanying consolidated balance sheets of Huntsman
Packaging Corporation and subsidiaries as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Huntsman Packaging
Corporation and subsidiaries as of December 31, 1999 and 1998, and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. Schedule II is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. Schedule II for the years ended December 31,
1999 and 1998 has been subjected to the auditing procedures applied in the
audits of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Salt Lake City, Utah
January 28, 2000
F-3
<PAGE> 39
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Huntsman Packaging Corporation:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of Huntsman Packaging Corporation and
subsidiaries for the year ended December 31, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of Huntsman Packaging Corporation and
subsidiaries' operations and their cash flows for the year ended December 31,
1997 in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. Schedule II is presented for purposes of complying
with the Securities and Exchange Commission's rules and is not part of the basic
financial statements. Schedule II for the year ended December 31, 1997 has been
subjected to the auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
DELOITTE & TOUCHE LLP
Salt Lake City, Utah
February 11, 1998
F-4
<PAGE> 40
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 9,097 $ 19,217
Receivables:
Trade accounts, net of allowances of
$2,115 and $2,570, respectively 109,768 79,825
Other 12,866 9,556
Inventories 78,199 65,892
Prepaid expenses and other 2,644 3,063
Income taxes receivable 2,691 7,365
Deferred income taxes 5,408 3,605
--------- ---------
Total current assets 220,673 188,523
--------- ---------
PLANT AND EQUIPMENT:
Land and improvements 7,442 7,442
Buildings and improvements 59,645 54,933
Machinery and equipment 310,232 263,737
Furniture, fixtures and vehicles 4,501 4,200
Leasehold improvements 813 521
Construction in progress 9,412 21,321
--------- ---------
392,045 352,154
Less accumulated depreciation and amortization (77,593) (51,820)
--------- ---------
Plant and equipment, net 314,452 300,334
--------- ---------
INTANGIBLE ASSETS, net 214,956 221,290
--------- ---------
OTHER ASSETS 18,942 24,125
--------- ---------
Total assets $ 769,023 $ 734,272
========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 41
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
AS OF DECEMBER 31, 1999 AND 1998 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1999 1998
--------- ---------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 17,120 $ 11,406
Trade accounts payable 60,056 43,186
Accrued liabilities:
Customer rebates 8,910 8,450
Other 26,026 25,126
Due to affiliates 4,715 7,000
--------- ---------
Total current liabilities 116,827 95,168
LONG-TERM DEBT, net of current portion 493,262 513,530
OTHER LIABILITIES 13,983 11,394
DEFERRED INCOME TAXES 51,363 42,423
--------- ---------
Total liabilities 675,435 662,515
--------- ---------
COMMITMENTS AND CONTINGENCIES
(Notes 6, 7 and 11)
REDEEMABLE COMMON STOCK- Class C nonvoting, no par value;
60,000 shares authorized, 49,511 and 11,700 shares outstanding in 1999 and 1998,
respectively, net of related stockholder notes receivable of $2,795 in 1999 2,926 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 32,042 13,731
Stockholder note receivable (299) (434)
Cumulative foreign currency translation adjustments (4,757) (6,386)
--------- ---------
Total stockholders' equity 90,662 70,587
--------- ---------
Total liabilities and stockholders' equity $ 769,023 $ 734,272
========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 42
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
NET SALES $ 781,416 $ 651,957 $ 447,743
COST OF SALES 623,438 532,410 389,628
--------- --------- ---------
Gross profit 157,978 119,547 58,115
--------- --------- ---------
OPERATING EXPENSES:
Administration and other 48,905 37,383 15,113
Sales and marketing 25,071 24,148 18,143
Research and development 5,514 3,677 2,507
Plant closing costs 2,497 4,875 9,276
--------- --------- ---------
Total operating expenses 81,987 70,083 45,039
--------- --------- ---------
OPERATING INCOME 75,991 49,464 13,076
INTEREST EXPENSE (44,028) (37,519) (17,000)
OTHER INCOME (EXPENSE), net 435 (879) 750
--------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS 32,398 11,066 (3,174)
--------- --------- ---------
INCOME TAX EXPENSE (BENEFIT):
Current 6,829 1,567 3,679
Deferred 7,258 6,966 (4,188)
--------- --------- ---------
Total income tax expense (benefit) 14,087 8,533 (509)
--------- --------- ---------
INCOME (LOSS) BEFORE DISCONTINUED
OPERATIONS 18,311 2,533 (2,665)
--------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS
(net of income tax expense of $387 and
$1,348, respectively) 582 3,040
GAIN ON SALE OF DISCONTINUED OPERATIONS
(net of income tax expense of $6,729) 5,223
--------- --------- ---------
NET INCOME $ 18,311 $ 8,338 $ 375
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 43
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK COMMON STOCK
--------------------- -------------------- --------------------
TOTAL SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 67,012 1 $ 1
--------
Comprehensive loss:
Net income 375
Other comprehensive loss -
Foreign currency translation
adjustments (4,378)
--------
Comprehensive loss (4,003)
--------
Recapitalization (Note 1) (1) (1) 995 $ 62,661 5 $ 315
Shares issued for note receivable 5 500 2 200
Other (35)
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 62,974 1,000 63,161 7 515
--------
Comprehensive income:
Net income 8,338
Other comprehensive loss -
Foreign currency translation
adjustments (991)
--------
Comprehensive income 7,347
--------
Payments received on stockholder
note receivable 266
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 70,587 1,000 63,161 7 515
--------
Comprehensive income:
Net income 18,311
Other comprehensive income -
Foreign currency translation
adjustments 1,629
--------
Comprehensive income 19,940
--------
Payments received on stockholder
note receivable 135
------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 90,662 1,000 $ 63,161 7 $ 515
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
ADDITIONAL CURRENCY
PAID-IN RETAINED STOCKHOLDER TRANSLATION
CAPITAL EARNINGS RECEIVABLE ADJUSTMENTS
---------- -------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 62,975 $ 5,053 $ (1,017)
Comprehensive loss:
Net income 375
Other comprehensive loss -
Foreign currency translation
adjustments (4,378)
Comprehensive loss
Recapitalization (Note 1) (62,975)
Shares issued for note receivable $ (700)
Other (35)
-------------------------------------------------
BALANCE, DECEMBER 31, 1997 5,393 (700) (5,395)
Comprehensive income:
Net income 8,338
Other comprehensive loss -
Foreign currency translation
adjustments (991)
Comprehensive income
Payments received on stockholder
note receivable 266
-------------------------------------------------
BALANCE, DECEMBER 31, 1998 13,731 (434) (6,386)
Comprehensive income:
Net income 18,311
Other comprehensive income -
Foreign currency translation
adjustments 1,629
Comprehensive income
Payments received on stockholder
note receivable 135
-------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 32,042 $ (299) $ (4,757)
=================================================
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 44
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 18,311 $ 8,338 $ 375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 35,019 27,088 16,442
Deferred income taxes 7,137 6,966 (4,188)
Increase (decrease) in provision for losses on accounts receivable (455) (1,714) 241
Noncash compensation expense related to stock options 770
Gain on sale of discontinued operations (5,223)
Write-down of goodwill 411 3,286
Write-down of plant and equipment 1,370 629 4,262
Loss on disposal of assets 86 305
Changes in operating assets and liabilities - net of
effects of acquisitions:
Trade accounts receivable (26,278) 15,041 (6,431)
Other receivables (3,070) (7,526) (1,666)
Inventories (7,829) 14,298 7,961
Prepaid expenses and other 1,411 46 1,758
Other assets 7,145 1,685 (7,621)
Trade accounts payable 16,870 1,528 340
Accrued liabilities (4,012) 1,998 (96)
Due to affiliates (2,285) (8,279) 8,839
Income taxes payable/receivable 4,674 (9,004) 3,427
Other liabilities 2,589 (1,097) 1,719
--------- --------- ---------
Net cash provided by operating activities 51,453 45,490 28,648
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (35,723) (52,101) (17,861)
Payment for purchase of certain net assets of KCL Corporation,
net of cash acquired (11,498)
Proceeds from sale of assets 1,191 33,850
Payment for purchase of Blessings Corporation,
net of cash acquired (285,712)
Payment for purchase of certain net assets of Ellehammer (7,877)
Payment for purchase of certain assets of Allied Signal (3,000)
Payment for purchase of CT Film, net of cash acquired (69,366)
--------- --------- ---------
Net cash used in investing activities (46,030) (314,840) (87,227)
--------- --------- ---------
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE> 45
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt $ (12,125)
Principal payments on borrowings (5,725) $ (10,544) $(249,509)
Proceeds from issuance of Class C nonvoting common stock 986 1,170
Payments received from stockholder on note receivable 135 266
Proceeds from issuance of long-term debt 285,000 312,700
--------- --------- ---------
Net cash provided by (used in) financing activities (16,729) 275,892 63,191
--------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND
CASH EQUIVALENTS 1,186 264 (2,848)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (10,120) 6,806 1,764
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR 19,217 12,411 10,647
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF THE YEAR $ 9,097 $ 19,217 $ 12,411
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest $ 43,179 $ 33,253 $ 27,596
========= ========= =========
Income taxes $ (361) $ 5,647 $ 1,614
========= ========= =========
</TABLE>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
A capital lease obligation of $353 was incurred during 1999 when we entered into
a lease for new equipment.
On October 18, 1999, we acquired certain assets and assumed certain liabilities
of KCL Corporation for cash of $11,498. As part of the acquisition, liabilities
assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill of $2,651) $ 15,500
Cash paid (11,498)
--------
Liabilities assumed $ 4,002
========
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE> 46
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 (DOLLARS IN THOUSANDS)
- --------------------------------------------------------------------------------
On May 19, 1998, we purchased all of the outstanding capital stock of Blessings
Corporation for cash of $213,000. As part of the acquisition, liabilities
assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill of $168,704) $ 328,403
Cash paid (including the repayment of Blessings Corporation's
debt) (287,499)
---------
Liabilities assumed $ 40,904
=========
</TABLE>
On March 12, 1998, we acquired certain assets and assumed certain liabilities of
Ellehammer Industries, Ltd. and Ellehammer Packaging, Inc. for cash of $7,877.
As part of the acquisition, liabilities assumed were as follows:
<TABLE>
<S> <C>
Fair value of assets acquired $ 8,604
Cash paid (7,877)
-------
Liabilities assumed $ 727
=======
</TABLE>
On September 30, 1997, we purchased all of the assets of CT Film (a division of
Huntsman Polymers Corporation, formerly Rexene Corporation) and Rexene
Corporation Limited (a wholly owned subsidiary of Huntsman Polymers Corporation)
for cash of $70,000. As part of the acquisition, liabilities assumed were as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired (including goodwill of $7,763) $ 87,923
Cash paid (70,000)
--------
Liabilities assumed $ 17,923
========
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE> 47
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Huntsman Packaging Corporation and its subsidiaries (collectively
"Huntsman Packaging") produce polymer-based (plastic), value-added films
for flexible packaging, personal care, medical, agricultural and
industrial applications. Our manufacturing facilities are located in
North America, Germany and Australia.
RECAPITALIZATION - Prior to September 30, 1997, Huntsman Packaging was a
wholly owned subsidiary of Huntsman Corporation ("HC"). On September 30,
1997, Huntsman Packaging was recapitalized by authorizing two new classes
of common stock, Class A Common and Class B Common. The 1,000 shares of
previously issued and outstanding common stock were canceled.
On September 30, 1997, Huntsman Packaging was separated from HC in a tax
free transaction under Section 355 of the Internal Revenue Code (the
"Split-Off"), when Jon M. Huntsman and The Christena Karen H. Durham
Trust exchanged shares of HC common stock for shares of Huntsman
Packaging's newly authorized common stock. Additionally, Richard P.
Durham purchased shares of Huntsman Packaging's newly authorized common
stock in exchange for a note receivable.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements
include the accounts of Huntsman Packaging and its wholly owned
subsidiaries. All significant intercompany balances and transactions have
been eliminated in consolidation.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS - The preparation of
financial statements in conformity with accounting principles generally
accepted in the United States requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REVENUE RECOGNITION - Sales revenue is recognized upon shipment of
product in fulfillment of a customer order.
INVENTORIES - Inventories consist principally of finished film products
and the raw materials necessary to produce them. Inventories are carried
at the lower of cost (on a first-in, first-out basis) or market value.
PLANT AND EQUIPMENT - Plant and equipment are stated at cost.
Depreciation is computed using the straight-line method over the
estimated economic useful lives of the assets as follows:
Land improvements 20 years
Buildings and improvements 20 years
Machinery and equipment 7-15 years
Furniture, fixtures and vehicles 3-7 years
Leasehold improvements 10-20 years
F-12
<PAGE> 48
INTANGIBLE ASSETS - Intangible assets are stated at cost. Amortization is
computed using the straight-line method over the estimated economic
useful lives of the assets as follows:
Cost in excess of fair value of net assets acquired 10-40 years
Other intangible assets 2-15 years
CARRYING VALUE OF LONG-LIVED ASSETS - We evaluate the carrying value of
long-lived assets, including intangible assets, based upon current and
expected undiscounted cash flows, and recognize an impairment when the
estimated cash flows are less than the carrying value of the asset.
Measurement of the amount of impairment, if any, is based upon the
difference between the asset's carrying value and fair value.
OTHER ASSETS - Other assets consist primarily of deferred debt issuance
costs, deposits, spare parts, and the cash surrender values of key-person
life insurance policies.
CASH AND CASH EQUIVALENTS - For the purpose of the consolidated
statements of cash flows, we consider cash in checking accounts and in
short-term, highly liquid investments with an original maturity of three
months or less to be cash and cash equivalents. Cash and cash equivalents
generated outside of the United States are generally subject to taxation
if repatriated.
INCOME TAXES - We use the asset and liability method of accounting for
income taxes. Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial and tax reporting purposes. Since the
Split-Off, we have filed our own consolidated income tax returns. Prior
to the Split-Off, our operations were included in the consolidated United
States income tax returns of HC. HC's intercompany tax allocation policy
provided for each subsidiary to calculate its own provision on a
"separate return basis."
DERIVATIVE FINANCIAL INSTRUMENTS - In the normal course of business, we
occasionally enter into interest rate collar and swap agreements to
manage interest rate risk on long-term debt. These agreements are
classified as hedges for matched transactions. The differential to be
paid or received as interest rates change is accrued and recognized as an
adjustment to interest expense. The related amount payable to or
receivable from the counterparties is included in other liabilities or
assets. Gains and losses on terminations of interest-rate swap agreements
are deferred and amortized as an adjustment to interest expense over the
lesser of the remaining term of the original contract or the life of the
debt. We also occasionally enter into commodity collar agreements to
manage the market risk of our raw material prices. These agreements are
classified as hedges. The differential to be paid or received as
commodity prices change is accrued and recognized as an adjustment to
inventory. The related amount payable to or receivable from the
counterparties is included in other liabilities or assets.
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 that require derivative instruments to be
recorded on the balance sheet as either an asset or liability, measured
at 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 financial statements.
FOREIGN CURRENCY TRANSLATION - The accounts of our foreign subsidiaries
are translated into U.S. dollars using the exchange rate at each balance
sheet date for assets and liabilities and a weighted average exchange
rate for each period for revenues, expenses, gains and losses.
Transactions are translated using
F-13
<PAGE> 49
the exchange rate at each transaction date. Where the local currency is
the functional currency, translation adjustments are recorded as a
separate component of stockholders' equity. Where the U.S. dollar is the
functional currency, translation adjustments are recorded in other income
within current operations.
2. INVENTORIES
INVENTORY BALANCES - Inventories consist of the following at December 31,
1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Finished goods $41,408 $37,830
Raw materials 28,910 21,318
Work-in-process 7,881 6,744
------- -------
Total $78,199 $65,892
======= =======
</TABLE>
COMMODITY COLLAR TERMS - In 1999, we entered into a commodity collar
agreement to manage the market risk of one of our major raw materials.
The collar agreement entitles us to receive from the counterparty (a
major risk management company) the amounts, if any, by which the
published market price, as defined in the agreement, of polyvinyl
chloride ("PVC") exceeds $0.30 per pound. The collar agreement requires
us to pay the counterparty the amounts, if any, by which the published
market price of PVC is below $0.23 per pound. The collar ended on
December 31, 1999. There was no premium paid for the collar agreement. We
realized a reduction in raw material inventory costs of $0.5 million
during 1999 from this collar.
In 1998, we entered into a separate commodity collar agreement to manage
the market risk of one of our other major raw materials. The collar
agreement entitles us to receive from the counterparty (a major risk
management company) the amounts, if any, by which the published market
price, as defined in the agreement, of low density polyethylene ("LDPE")
exceeds $0.35 per pound. The collar agreement requires us to pay the
counterparty the amounts, if any, by which the published market price of
LDPE is below $0.295 per pound. As of December 31, 1999, the defined
published market price for LDPE was $0.46 per pound. There was no premium
paid for the collar agreement. We realized a reduction in raw material
inventory costs of $0.8 million during 1999 from this collar. The
notional amount of this contract is 18 million pounds and the maturity
date is April 30, 2000.
We are exposed to credit losses in the event of nonperformance by the
counterparty to the agreement. We anticipate, however, that the
counterparty will be able to fully satisfy its obligations under the
contract. Market risk arises from changes in commodity prices.
3. SALE OF ASSETS
On June 1, 1998, Huntsman Container Corporation International ("HCCI"), a
wholly owned subsidiary of Huntsman Packaging, sold its entire interest
in the capital stock of Huntsman Container Company Limited ("HCCL") and
Huntsman Container Company France SA ("HCCFSA") to Polarcup Limited and
Huhtamake Holdings France Sarl, subsidiaries of Huhtamaki Oyj. Together,
HCCL and HCCFSA comprised our foam products operations, which were
operated exclusively in Europe. Net proceeds from the sale were
approximately $28.3 million and a gain of approximately $5.2 million, net
of applicable income taxes, was recorded. The financial position and
results of operations of this separate business segment are reflected as
discontinued operations in the accompanying consolidated financial
statements
F-14
<PAGE> 50
for all years presented. Revenues from the foam products operations for
the years ended December 31, 1998 and 1997 amounted to $15.6 million and
$43.4 million, respectively.
As part of our acquisition of the CT Film Division of Huntsman Polymers
(see Note 12), we acquired Huntsman Packaging UK Limited ("HPUK"). HPUK
owned CT Film's Scunthorpe, UK facility, which manufactured and sold
polyethylene film exclusively in Europe. At the time of the CT Film
acquisition, we announced our intention to close or sell the Scunthorpe,
UK facility. During 1998, we adjusted our preliminary estimate of the
fair value of the Scunthorpe, UK facility assets acquired, resulting in
an increase of $2.9 million to the associated goodwill recorded. On
August 14, 1998, we sold our interest in the capital stock of HPUK to
Skymark Packaging International Limited. Net proceeds from the sale were
approximately $5.6 million, including a note receivable from the buyer.
The note receivable balance was collected at December 31, 1999.
4. PLANT CLOSING COSTS
During 1999, we announced our plan to cease operations at one of our
facilities located in Mexico City, Mexico. Included in 1999 operating
expenses is a $2.3 million charge, comprised of a $1.3 million write-off
of impaired plant equipment, and a $1.0 million charge for reduction of
work force costs associated with the elimination of 110 full-time
equivalent employees. In addition, we announced our plan to cease the
production of one of our product lines at our Kent, Washington facility.
Included in 1999 operating expenses is a $0.2 million charge for the
write-off of impaired plant equipment and for reduction of work force
costs associated with the elimination of 36 full-time equivalent
employees.
In connection with the purchase of KCL Corporation, we announced a plan
to eliminate 32 full-time equivalent employees, move certain purchased
assets and install them at desired locations, cease certain purchased
operations, and write-off related impaired plant equipment and inventory.
The purchase price allocation includes $0.7 million for reduction of
workforce costs, $0.4 million for asset removal and relocation and $0.1
million for the write-off of inventory.
During 1998, we announced our plan to cease operations at our Clearfield,
Utah facility. Included in 1998 operating expenses is a $4.9 million
charge, comprised of a $0.4 million write-off of impaired goodwill, a
$0.6 million write-off of impaired plant equipment associated with the
facility, a $0.5 million charge for reduction of work force costs
associated with the elimination of 52 full-time equivalent employees, and
an accrual of $3.4 million for estimated future net lease and other costs
incurred to close the facility.
During 1997, we announced our plan to cease operations at our Carrollton,
Ohio facility and our intention to relocate certain assets from that
facility to other of our facilities. Included in 1997 operating expenses
is a $9.3 million charge, comprised of a $3.3 million write-off of
impaired goodwill, a $4.2 million write-off of impaired plant equipment
associated with the facility, a $1.6 million charge for reduction in work
force costs associated with the elimination of 83 full-time equivalent
employees, and an accrual of $0.2 million for other costs related to the
closure of the facility.
As of December 31, 1999, all plant closings announced prior to 1999 were
complete and no additional plant closing expenses are anticipated for
these closed facilities. As of December 31, 1999, the plant closing
accrual is $4.8 million and is included in accrued liabilities.
F-15
<PAGE> 51
5. INTANGIBLE ASSETS
The cost of intangible assets and related accumulated amortization at
December 31, 1999 and 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Goodwill $ 216,058 $ 213,406
Trademarks, patents and technology 15,776 15,776
Noncompete agreements 7,283 7,283
Other 7,455 7,455
--------- ---------
246,572 243,920
Less accumulated amortization (31,616) (22,630)
--------- ---------
Total $ 214,956 $ 221,290
========= =========
</TABLE>
Amortization expense for intangible assets was approximately $9.0
million, $6.1 million and $3.1 million for the years ended December 31,
1999, 1998 and 1997, respectively.
6. LONG-TERM DEBT
Long-term debt as of December 31, 1999 and 1998 consists of the following
(in thousands):
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Credit Agreement:
Revolver, variable interest at a weighted average rate of 8.644%
as of December 31, 1999 $ 33,000 $ 43,000
Term loans, variable interest at a weighted average rate of 8.272%
as of December 31, 1999 345,281 356,687
Senior subordinated notes, interest at 9.125% 125,000 125,000
Line of credit agreement, interest at 9.25%, due September 2000 4,274
Obligations under capital leases (see Note 7) 497 249
Insurance financing, interest at 6.62% 2,330
--------- ---------
Total 510,382 524,936
Less current portion (17,120) (11,406)
--------- ---------
Long-term portion $ 493,262 $ 513,530
========= =========
</TABLE>
On September 30, 1997, we entered into a $225 million credit facility
(the "Credit Agreement") with various banks. 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 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
F-16
<PAGE> 52
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 December 31, 2001. As of September 30, 1998, the
Tranche B Term Loan began amortizing at the rate of $1 million per year,
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 Huntsman Packaging equity securities, and with the
proceeds of certain debt offerings, should such events occur.
Loans under the Amended Credit Agreement bear interest at our election,
at either (1) zero to 0.75%, depending on certain of our financial
ratios, plus the higher of (a) the agent bank's prime rate, (b) the
federal funds rate plus 0.50% or (c) the agent bank's base CD rate plus
1%; or (2) the London Interbank Offered Rate plus 1% to 2%, also
depending on certain of our financial ratios.
We pay a quarterly commitment fee on the unused amount of the Revolver at
an annual rate commencing at 0.50%. The interest rate margins and the
commitment fee are subject to reduction if we achieve certain ratios. As
of December 31, 1999, we had outstanding letters of credit of
approximately $1.3 million.
Obligations under the Amended Credit Agreement are guaranteed by the
assets of all of our domestic subsidiaries (see Note 16). The Amended
Credit Agreement does not permit cash dividends and contains covenants
customary for transactions of this type, including restrictions on
indebtedness, liens, asset sales, capital expenditures, acquisitions,
investments, transactions with affiliates, and other restricted payments.
The Amended Credit Agreement also contains financial covenants, including
a ratio of maximum total debt to EBITDA, a minimum interest coverage
ratio, and minimum net worth. As of December 31, 1999, we were in
compliance with the covenants of the Amended Credit Agreement and the
Notes.
On September 30, 1997, we issued $125 million of 9.125% unsecured senior
subordinated notes which mature on October 1, 2007 (the "Notes").
Interest on the Notes is payable semi-annually on each April 1 and
October 1, commencing April 1, 1998. The Notes are guaranteed by our
domestic subsidiaries (see Note 16). The Notes are redeemable, at our
option, in whole at any time or in part from time to time, on or after
October 1, 2002, at redemption prices decreasing from 104.563% to 100% of
the outstanding principal balance after October 2005. Additionally, up to
35% of the Notes may be redeemed prior to October 1, 2000 at a price
equal to 109.125% of the principal amount with the proceeds of one or
more equity offerings. The Notes are subject to certain covenants
customary to this type of transaction, including restrictions on the
incurrence of additional indebtedness, certain restricted payments, asset
sales, dividend and other payment restrictions affecting subsidiaries,
liens, mergers, and transactions with affiliates.
During 1999, we entered into a financing agreement to finance insurance
premiums. Payments are payable monthly and run through April 2002.
F-17
<PAGE> 53
The scheduled maturities of long-term debt by year as of December 31,
1999 are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000 $ 17,120
2001 26,009
2002 51,280
2003 50,901
2004 56,248
Thereafter 308,824
--------
Total $510,382
========
</TABLE>
In 1997, we purchased an interest rate collar agreement to reduce the
impact of changes in interest rates on our floating-rate long-term debt.
The collar agreement entitles us to receive amounts from the counterparty
(a major bank) if the three-month LIBOR interest rate, as defined in the
agreement, exceeds 6.25%. The collar agreement requires us to pay amounts
to the counterparty if the three-month LIBOR interest rate is less than
5.25%. As of December 31, 1999, the defined three-month LIBOR interest
rate was 6.18%.
The net premium paid for the collar agreement purchased is included in
other assets in the consolidated balance sheets and is amortized to
interest expense over the term of the agreement. Amounts receivable or
payable under the agreement are recognized as yield adjustments over the
life of the related debt.
We are exposed to credit losses in the event of nonperformance by the
counterparty to the financial instrument. We anticipate, however, that
the counterparty will be able to fully satisfy its obligations under the
contract. Market risk arises from changes in interest rates.
As of December 31, 1999, we had one outstanding interest rate collar
agreement. The terms of the agreement are as follows:
Notional amount $20 million
Maturity date November 5, 2001
Cap rate 6.25%
Floor rate 5.25%
In 1997, we also entered into a series of interest rate swap agreements
to hedge the interest rate exposure in anticipation of issuing the Notes.
The agreements were accounted for as hedges and were subsequently
terminated. Termination costs of approximately $1.2 million are being
amortized to interest expense over the life of the Notes.
7. LEASES
CAPITAL LEASES - We have acquired certain land, building, machinery and
equipment under capital lease arrangements that expire at various dates
through 2007. At December 31, 1999 and 1998, the gross amounts of plant
and equipment and related accumulated amortization recorded under capital
leases were as follows (in thousands):
F-18
<PAGE> 54
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
Land and building $ 309 $ 309
Machinery and equipment 353
------ ------
Total assets held under capital leases 662 309
Less accumulated amortization (104) (39)
------ ------
$ 558 $ 270
====== ======
</TABLE>
OPERATING LEASES - We have noncancelable operating leases, primarily for
vehicles, equipment, warehouse, and office space that expire through
2006, as well as month-to-month leases. The total expense recorded under
all operating lease agreements in the accompanying consolidated
statements of income is approximately $6.6 million, $5.8 million and $2.9
million for the years ended December 31, 1999, 1998 and 1997,
respectively.
Future minimum lease payments under operating leases and the present
value of future minimum capital lease payments as of December 31, 1999
are as follows (in thousands):
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- --------
<S> <C> <C>
Year Ending December 31,
2000 $ 5,589 $ 177
2001 4,365 177
2002 3,448 81
2003 2,872 45
2004 2,073 45
Thereafter 11,145 129
------- -------
Total minimum lease payments $29,492 654
=======
Amounts representing interest (157)
-------
Present value of net minimum capital lease payments (see Note 6) $ 497
=======
</TABLE>
8. INCOME TAXES
The following is a summary of domestic and foreign provisions for current
and deferred income taxes and a reconciliation of the U.S. statutory
income tax rate to the effective income tax rate.
F-19
<PAGE> 55
The provisions (benefits) for income taxes for the years ended December
31, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 1,581 $(1,877)
State 770 128 $ 1,156
Foreign 4,478 3,316 2,523
------- ------- -------
Total current 6,829 1,567 3,679
------- ------- -------
Deferred:
Federal 6,975 6,960 (4,110)
State 71 793 (470)
Foreign 212 (787) 392
------- ------- -------
Total deferred 7,258 6,966 (4,188)
------- ------- -------
Total income tax expense (benefit) (excluding income taxes
applicable to discontinued operations and extraordinary
item) $14,087 $ 8,533 $ (509)
======= ======= =======
</TABLE>
The effective income tax rate reconciliations for the years ended
December 31, 1999, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Income (loss) before income taxes, discontinued operations
and extraordinary item $ 32,398 $ 11,066 $ (3,174)
======== ======== ========
Expected income tax provision (benefit) at U.S. statutory
rate of 35% $ 11,339 $ 3,873 $ (1,111)
Increase (decrease) resulting from:
Goodwill 1,625 1,331 1,150
State taxes 547 353 49
Adjustment of tax attributes (912) 1,361
Foreign rate difference and other, net 1,488 1,615 (597)
-------- -------- --------
Total income tax expense (benefit) (excluding income taxes
applicable to discontinued operations and extraordinary
item $ 14,087 $ 8,533 $ (509)
======== ======== ========
Effective income tax rate 43.5% 77.1% 16.0%
======== ======== ========
</TABLE>
F-20
<PAGE> 56
Components of net deferred income tax assets and liabilities as of
December 31, 1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Deferred income tax assets:
AMT and foreign tax credit carryforwards $ 2,867 $ 3,512
Accrued pension costs not deducted for tax 5,833 2,522
Accrued employee benefits 1,372 1,562
Plant closing costs not deducted for tax 758 1,024
Allowance for doubtful trade accounts receivable 340 635
Inventory related costs not deducted for tax 476 633
Other 1,330 1,084
-------- --------
Total deferred income tax assets 12,976 10,972
-------- --------
Deferred income tax liabilities:
Tax depreciation in excess of book depreciation (52,611) (42,650)
Amortization of intangibles (5,365) (6,188)
Other (955) (952)
-------- --------
Total deferred income tax liabilities (58,931) (49,790)
-------- --------
Net deferred income tax liability $(45,955) $(38,818)
======== ========
As reported on consolidated balance sheets:
Net current deferred income tax asset $ 5,408 $ 3,605
Net noncurrent deferred income tax liability (51,363) (42,423)
-------- --------
Net deferred income tax liability $(45,955) $(38,818)
======== ========
</TABLE>
The foreign tax credit carryforwards of approximately $1,405 expire in
2004.
9. EMPLOYEE BENEFIT PLANS
DEFINED CONTRIBUTION PLAN - We sponsor a salary deferral plan covering
substantially all of our non-union domestic employees. Plan participants
may elect to make voluntary contributions to this plan up to 15% of their
compensation. We contribute 1% of the participants' compensation and also
match employee contributions up to 2% of the participants' compensation.
We expensed approximately $7.2 million, $5.0 million and $3.1 million as
our contribution to this plan for the years ended December 31, 1999, 1998
and 1997, respectively.
DEFINED BENEFIT PLANS - We sponsor five noncontributory defined benefit
pension plans (the "United States Plans") covering domestic employees
with 1,000 or more hours of service. We fund the actuarially computed
retirement cost. Contributions are intended to not only provide for
benefits attributed to service to date but also for those expected to be
earned in the future. We also sponsor a defined benefit plan in Germany
(the "Germany Plan"). The consolidated accrued net pension expense for
the years ended December 31, 1999, 1998 and 1997 includes the following
components (in thousands):
F-21
<PAGE> 57
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
UNITED STATES PLANS
Service cost - benefits earned during the period $ 4,056 $ 3,726 $ 2,299
Interest cost on projected benefit obligation 3,659 3,469 1,806
Expected return on assets (3,913) (3,777) (1,886)
Other 100 (3) 17
------- ------- -------
Total accrued pension expense $ 3,902 $ 3,415 $ 2,236
======= ======= =======
GERMANY PLAN
Service cost - benefits earned during the period $ 63 $ 64 $ 58
Interest cost on projected benefit obligation 62 66 56
------- ------- -------
Total accrued pension expense $ 125 $ 130 $ 114
======= ======= =======
</TABLE>
The following table sets forth the funded status of the United States
Plans and the Germany Plan as of December 31, 1999, 1998 and 1997 and the
amounts recognized in the consolidated balance sheets at those dates (in
thousands):
F-22
<PAGE> 58
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
UNITED STATES PLANS
Change in benefit obligation:
Obligation at January 1 $ 52,348 $ 27,025 $ 8,237
Service cost 4,056 3,726 2,299
Interest cost 3,659 3,469 1,806
Curtailments (2,137)
Settlements 50
Plan amendments 2,340
Actuarial (gain) loss (7,781) 1,333 2,706
Acquisition 18,264 12,497
Benefits paid (1,877) (1,722) (520)
-------- -------- --------
Obligation at December 31 $ 50,405 $ 52,348 $ 27,025
======== ======== ========
Change in plan assets:
Fair value of assets at January 1 $ 44,001 $ 24,235 $ 8,555
Actual return on plan assets 6,603 3,941 3,688
Acquisition 16,143 12,296
Employer contributions 563 1,404 216
Benefit payments (1,877) (1,722) (520)
-------- -------- --------
Fair value of plan assets at December 31 $ 49,290 $ 44,001 $ 24,235
======== ======== ========
Underfunded status at December 31 $ 1,115 $ 8,347 $ 2,790
Unrecognized net actuarial loss 11,103 641 1,853
Unrecognized prior service cost (1,477) (1,586) (299)
Additional liability 14
-------- -------- --------
Accrued long-term pension liability included
in other liabilities $ 10,741 $ 7,402 $ 4,358
======== ======== ========
</TABLE>
For the above calculations, increases in future compensation ranging from
4.0% to 4.25% were used for the non-union plans. There was no increase in
future compensation used for the three union plans. For the calculations,
discount rates ranging from 6.75% to 7.75% and expected rates of return
on plan assets of 9.0% were used for all plans.
F-23
<PAGE> 59
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
GERMANY PLAN
Change in benefit obligation:
Obligation at January 1 $ 1,143 $ 956
Service cost 63 64
Interest cost 62 66
Benefits paid (5) (5)
Change due to exchange rate (173) 62
------- -------
Obligation at December 31 $ 1,090 $ 1,143
======= =======
Fair value of plan assets at December 31 None None
======= =======
Underfunded status at December 31 $ 1,090 $ 1,143
Unrecognized net actuarial loss 75 81
------- -------
Accrued long-term pension liability included in other liabilities $ 1,165 $ 1,224
======= =======
</TABLE>
Increases in future compensation ranging from 2.0% to 3.5% and discount
rates ranging from 6.0% to 7.0% were used in determining the actuarially
computed present value of the projected benefit obligation of the Germany
Plan. The cash surrender value of life insurance policies for Germany
Plan participants included in other assets is approximately $0.5 million
and $0.7 million as of December 31, 1999 and 1998, respectively.
FOREIGN PLANS OTHER THAN GERMANY - Employees in other foreign countries
are covered by various post employment arrangements consistent with local
practices and regulations. Such obligations are not significant and are
included in the consolidated financial statements in other liabilities.
OTHER PLANS - As part of the acquisition of Blessings Corporation (see
Note 12), we assumed two supplemental retirement plans covering certain
former employees of Blessings Corporation. The liability for these plans
included in other liabilities at December 31, 1999 was approximately $1.7
million.
10. REDEEMABLE COMMON STOCK AND STOCK OPTION PLAN
REDEEMABLE COMMON STOCK - In 1998, our stockholders approved stock
purchase agreements for the purchase of 12,200 shares of Class C
nonvoting common stock by certain officers. The fair market value
purchase price was determined by the Board of Directors to be $100 per
share. The shareholders agreement governing the shares contains various
restrictions, including a right of first refusal and provisions for
Huntsman Packaging to purchase any owned shares from an employee within
180 days after termination of employment. The stockholders have the
right, following three years from the purchase date, to put any or all of
such shares to Huntsman Packaging for repurchase. When there is a public
market for the shares, the redemption value is the average of the high
and low reported sale prices per share for the 20 trading days prior to
the date the put or call option is exercised. When there is no public
market for the shares, the redemption value is the market value of
equity, as defined, determined on the last day of the month preceding the
date on which the put or call option is made. During 1998, we redeemed
500 shares of Class C common stock from one officer who terminated his
employment with us for $100 per share.
During early 1999, we sold 38,411 shares of Class C common stock to
certain officers for $100 per share, the estimated fair market value of
the shares on the date of purchase. Of these 38,411 shares, 26,223
F-24
<PAGE> 60
shares are subject to repurchase rights of Huntsman Packaging (the
"Restricted Shares"). The repurchase rights for 13,117 of the Restricted
Shares lapse on a straight-line basis over a five-year period ending
January 1, 2003. The repurchase rights for 13,116 of the Restricted
Shares 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. All other terms of and restrictions on
the 38,411 shares of Class C common stock sold during 1999 are the same
as the original 12,200 shares of Class C common stock. In 1999, we
redeemed a total of 600 shares of Class C common stock from an officer
for $100 per share.
1998 STOCK OPTION PLAN - In 1998, our stockholders approved the adoption
of the 1998 Huntsman Packaging Corporation Stock Option Plan, which
provided for the granting of options to purchase up to 41,956 shares of
Class C nonvoting common stock to certain officers at the fair market
value of the related stock on the date of grant. All of the options
issued under this plan expire on December 31, 2007. In 1999, we canceled
options relating to 26,223 shares and issued 26,223 Restricted Shares, as
described above.
A summary of stock options outstanding at December 31, 1999 and 1998 and
changes during the year then ended is presented below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES WEIGHTED AVERAGE
------------------------- EXERCISE PRICE
1999 1998 PER SHARE
-------- -------- ----------------
<S> <C> <C> <C>
Outstanding at beginning of year 39,334 $ 100
Granted 41,956 100
Forfeited or cancelled (28,845) (2,622) 100
-------- -------- --------
Outstanding at end of year 10,489 39,334 $ 100
======== ======== ========
Exercisable at end of year 4,196 3,933 $ 100
======== ======== ========
</TABLE>
At December 31, 1999, 5,245 of the outstanding options are
performance-based options and 2,098 are exercisable as result of
achieving the performance criteria. The remaining 5,244 options vest in
five equal installments on December 31 of each year. At December 31,
1999, 2098 are exercisable. All outstanding options have a weighted
average remaining contractual life of approximately 8 years.
ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - We apply Accounting
Principles Board Opinion No. 25 and related interpretations in accounting
for stock-based compensation plans as they relate to employees and
directors. The performance-based options require variable plan accounting
and we estimate compensation expense at each reporting period based upon
the expected achievement of the performance criteria and the estimated
fair market value of the common stock. For the year ended December 31,
1999, we recorded compensation expense of $770,000. All other options
require fixed plan accounting and accordingly, no compensation expense
was recognized because the awards were made at the estimated fair market
value of Huntsman Packaging's Class C nonvoting common stock at the date
of grant. Had compensation cost been determined in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," our income from
continuing operations for the years ended December 31, 1999 and 1998
would have changed to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Income from continuing operations as reported $18,311 $ 2,533
Pro forma income from continuing operations 18,978 2,147
</TABLE>
F-25
<PAGE> 61
Using the Black-Scholes option-pricing model, the weighted average fair
market value of the options was $49 for each share using the following
assumptions for the 1998 grants: dividend yield of 0%, average risk free
interest rate of 6.75% and expected life of 10 years. The estimated fair
market value of the options granted is subject to the assumptions made
and if the assumptions were to change, the estimated fair market value
amounts could be significantly different.
11. COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL CONTINGENCIES - Our operations are subject to extensive
environmental laws and regulations concerning emissions to the air,
discharges to surface and subsurface waters, and the generation,
handling, storage, transportation, treatment, and disposal of waste
materials, as adopted by various governmental authorities in the
jurisdictions in which we operate. We make every reasonable effort to
remain in full compliance with existing governmental laws and regulations
concerning the environment. As part of a sale of a plant site in 1992, we
agreed to indemnify environmental losses of up to $5 million which may
have been created at the plant site between January 1, 1988 and May 18,
1992. This indemnity expires on May 8, 2002 and reduces ten percent each
year beginning May 12, 1997. We believe that the ultimate liability, if
any, resulting from this indemnification will not be material to our
financial position or results of operations.
ROYALTY AGREEMENTS - We have entered into royalty agreements (the
"Agreements") for the right to use certain patents in the production of
our Winwrap stretch film. We paid a fee of $450,000 to the patent holder
for the first 2,250,000 pounds of film produced in North America. The
Agreements require us to pay the patent holder a fee of $.10 for each
pound of Winwrap produced in excess of 2,250,000 pounds but less than
37,500,000 pounds and $.05 per pound for each pound of Winwrap produced
in excess of 37,500,000 pounds in North America. The Agreements require
us to pay certain fees to obtain the rights to sell Winwrap outside of
North America. The Agreements also require us to pay $.075 per pound of
Winwrap sold outside of North America. We have the option to maintain
these rights in subsequent years for certain agreed-upon fees. The
Agreements terminate upon the expiration of the related patents in 2009.
LITIGATION - We are subject to litigation and claims arising in the
ordinary course of business. We believe, after consulting with legal
counsel, that any liabilities arising from such litigation and claims
will not have a material adverse effect on our financial position and
results of operations.
12. ACQUISITIONS
CT FILM - On September 30, 1997, we acquired all of the assets of CT Film
(a division of Huntsman Polymers Corporation, formerly Rexene
Corporation) and Rexene Corporation Limited (a wholly owned subsidiary of
Huntsman Polymers Corporation) for approximately $70 million in cash. The
acquisition was accounted for using the purchase method of accounting.
Accordingly, results of operations have been included in the accompanying
consolidated financial statements from the date of acquisition. In
connection with the acquisition, we planned to exit certain of the
activities acquired with the purchase of CT Film, including the film
operations at Scunthorpe, UK. During 1998, we sold the Scunthorpe, UK
facility acquired from CT Film and adjusted the fair value assigned to
the Scunthorpe, UK facility accordingly (see Note 3). We recorded
goodwill of approximately $7.8 million in this acquisition, which is
being amortized on a straight-line basis over 40 years.
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,
"Ellehammer") 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
F-26
<PAGE> 62
accompanying consolidated 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. 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 approximately $17 million.
The financing for the Blessings Acquisition was provided under a $510
million Amended and Restated Credit Agreement (see Note 6). The
acquisition was accounted for using the purchase method of accounting.
Accordingly, results of operations are included in the accompanying
consolidated financial statements from the date of acquisition. We
recorded goodwill and intangible assets of approximately $168.7 million
in this acquisition, which are being amortized on a straight-line basis
over 10 to 30 years.
KCL CORPORATION - On October 18, 1999, we acquired certain assets and
assumed certain liabilities of KCL Corporation and subsidiaries for cash
of approximately $11.5 million. The acquisition was accounted for using
the purchase method of accounting. Accordingly, results of operations
have been included in the accompanying consolidated financial statements
from the date of acquisition. We recorded goodwill of approximately $2.7
million, which is being amortized on a straight-line basis over 10 years.
Our pro forma results of operations for the years ended December 31,
1999, 1998 and 1997 (assuming the significant acquisitions had occurred
as of January 1, 1997) are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 781,416 $ 719,242 $ 745,998
Income (loss) from continuing operations 18,311 (1,267) (14,379)
</TABLE>
13. OPERATING SEGMENTS
Operating segments are components of our business 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 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.
The accounting policies of the operating segments are the same as those
described in the summary of significant accounting policies. 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 plant closing costs and other
nonrecurring gains or losses. Our reportable segments are
F-27
<PAGE> 63
managed separately with separate management teams, because each segment
has differing products, customer requirements, technology and marketing
strategies.
Segment profit or loss and segment assets as of and for the years ended
December 31, 1999, 1998 and 1997 are presented in the following table (in
thousands). Certain reclassifications have been made to be consistent with
the 1999 presentation.
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
PRODUCTS FILMS FILMS OTHER TOTAL
--------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
1999
Net sales to customers $ 175,442 $ 153,265 $ 452,709 $ 781,416
Intersegment sales 7,189 3,276 6,149 $ (16,614)
Total net sales 182,631 156,541 458,858 (16,614) 781,416
Depreciation and amortization 8,095 4,579 19,026 3,319 35,019
Interest expense 3,397 351 13,832 26,448 44,028
Segment profit 9,304 16,473 57,564 (48,446) 34,895
Plant closing costs 2,497 2,497
Segment total assets 175,924 84,755 446,852 61,492 769,023
Capital expenditures 6,885 6,628 18,779 3,431 35,723
1998s
Net sales to customers $ 136,059 $ 144,736 $ 371,162 $ 651,957
Intersegment sales 1,671 3,975 1,782 $ (7,428)
Total net sales 137,730 148,711 372,944 (7,428) 651,957
Depreciation and amortization 5,096 4,712 13,211 4,069 27,088
Interest expense 2,108 60 10,219 25,132 37,519
Segment profit 12,385 11,027 36,106 (43,577) 15,941
Plant closing costs (297) 5,172 4,875
Segment total assets 153,385 82,737 435,075 63,075 734,272
Capital expenditures 18,424 5,734 26,174 1,769 52,101
1997s
Net sales to customers $ 93,386 $ 175,438 $ 178,919 $ 447,743
Intersegment sales 1,212 8,338 312 $ (9,862)
Total net sales 94,598 183,776 179,231 (9,862) 447,743
Depreciation and amortization 2,044 5,295 3,534 5,569 16,442
Interest expense 8 425 116 16,451 17,000
Segment profit 11,332 9,538 19,603 (34,371) 6,102
Plant closing costs 9,276 9,276
Segment total assets 54,610 96,484 188,114 30,307 369,515
Capital expenditures 5,445 2,912 5,548 3,956 17,861
</TABLE>
F-28
<PAGE> 64
A reconciliation of the totals reported for the operating segments to the
totals reported in the consolidated financial statements is as follows (in
thousands):
<TABLE>
<CAPTION>
PROFIT OR LOSS 1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Total profit for reportable segments $ 83,341 $ 59,518 $ 40,473
Plant closing costs (2,497) (4,875) (9,276)
Unallocated amounts:
Corporate expenses (21,998) (18,445) (17,920)
Interest expense (26,448) (25,132) (16,451)
--------- --------- ---------
Income (loss) before taxes and discontinued operations $ 32,398 $ 11,066 $ (3,174)
========= ========= =========
ASSETS
Total assets for reportable segments $ 707,531 $ 671,197 $ 339,208
Intangible assets not allocated to segments 16,166 17,080 15,565
Net effect of discontinued operations 30,878
Other unallocated assets 45,326 45,995 14,741
--------- --------- ---------
Total consolidated assets $ 769,023 $ 734,272 $ 400,392
========= ========= =========
</TABLE>
The following table presents financial information by country based on the
location of production of the product.
<TABLE>
<CAPTION>
NET SALES 1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
United States $659,582 $563,658 $390,793
Mexico 56,422 30,201
Canada 36,390 25,770 21,355
Other 29,022 32,328 35,595
-------- -------- --------
Total $781,416 $651,957 $447,743
======== ======== ========
LONG-LIVED ASSETS
United States $476,344 $475,891 214,964
Mexico 55,970 59,085
Canada 10,668 5,547 6,033
Other 5,368 5,226 5,362
-------- -------- --------
Total $548,350 $545,749 226,359
======== ======== ========
</TABLE>
Our sales to Kimberly-Clark Corporation and its affiliates represented
approximately 13% and 11% of consolidated net sales in 1999 and 1998 and
less than 10% of consolidated net sales in 1997. Substantially all of the
sales to Kimberly-Clark are from the specialty films and design products
operating segments. No other customers accounted for more than 10% of
consolidated net sales during 1999, 1998 and 1997.
F-29
<PAGE> 65
14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of a financial instrument is the amount at which
the instrument could be exchanged in a current transaction between
willing parties, other than in a forced or liquidation sale. In the case
of cash and cash equivalents, the carrying amount is considered a
reasonable estimate of fair value. The carrying amount of floating rate
debt approximates fair value because of the floating interest rates
associated with such debt. The fair value of fixed rate debt is estimated
by discounting estimated future cash flows through the projected maturity
using market discount rates that reflect the approximate credit risk,
operating cost, and interest rate risk potentially inherent in fixed rate
debt. The estimated fair value of off-balance sheet instruments is
obtained from market quotes representing the estimated amount we would
receive or pay to terminate the contract, taking into account current
interest rates.
Fair value estimates are made at a specific point in time. Because no
market exists for a significant portion of our financial instruments,
fair value estimates are based on judgments regarding future expected
loss experience, current economic conditions, risk characteristics of
various financial instruments, interest rate levels, and other factors.
These estimates are subjective in nature and involve uncertainties and
matters of judgment and therefore cannot be determined or relied on with
any degree of certainty. Changes in assumptions could significantly
affect the estimates.
Below is a summary of our financial instruments' carrying amounts and
estimated fair values as of December 31, 1999 and 1998 (in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------------ -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Financial assets - cash and cash
equivalents $ 9,097 $ 9,097 $ 19,217 $ 19,217
========= ========= ========= =========
Financial liabilities:
Floating rate debt $ 383,054 $ 383,054 $ 399,936 $ 399,936
Fixed rate debt 127,328 126,036 125,000 125,000
--------- --------- --------- ---------
Total financial liabilities $ 510,382 $ 509,090 $ 524,936 $ 524,936
========= ========= ========= =========
Off-balance sheet instruments:
Interest rate collar $ 69 $ 183 $ 106 $ (214)
Commodity collar None 325 None 80
</TABLE>
15. RELATED-PARTY TRANSACTIONS
The accompanying consolidated financial statements include the following
balances and transactions with affiliated companies not disclosed
elsewhere for the years ended December 31, 1999, 1998 and 1997 (in
thousands). All transactions with affiliated companies have been recorded
at estimated fair market values for the related products and services.
F-30
<PAGE> 66
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
With Huntsman Corporation and subsidiaries
Inventory purchases $21,124 $27,523 $15,692
Rent expense under operating lease 396 392 423
Administrative expenses 2,681 5,599 4,220
Sales of film products 258
With Huntsman Cancer Institute
Charitable contribution 1,000 500
With Huntsman Financial Corporation
Administrative expenses 150 133
</TABLE>
ROYALTY TRANSACTION WITH HUNTSMAN GROUP INTELLECTUAL PROPERTIES HOLDING
CO. ("HUNTSMAN INTELLECTUAL") - During 1996, Huntsman Packaging and other
affiliates entered into a royalty agreement (the "Royalty Agreement")
with Huntsman Intellectual whereby we paid Huntsman Intellectual a
royalty for the use of certain trademarks, etc. Huntsman Intellectual was
owned by Huntsman Packaging and certain subsidiaries of Huntsman
Corporation ("HC"). During 1997, we paid royalties of approximately $1.9
million to Huntsman Intellectual. Huntsman Intellectual recorded a
patronage dividend to us of $1.2 million in 1997. The royalty expense is
included in administration and other expense. The dividend is included in
other income. Immediately prior to the Split-Off, the patronage dividend
receivable from Huntsman Intellectual at the date of the Split-Off was
settled in full. Huntsman Packaging's ownership of Huntsman Intellectual
and its participation in the Royalty Agreement were terminated. We no
longer use the trademarks or other intellectual property covered under
the Royalty Agreement.
CT FILM EMPLOYEES - Subsequent to the purchase of CT Film from Huntsman
Polymers Corporation (a subsidiary of HC) ("Huntsman Polymers") (see Note
12), employees associated with the CT Film operations remained employed
by Huntsman Polymers through December 31, 1997. The total payroll and
benefits costs incurred by Huntsman Polymers from September 30, 1997 to
December 31, 1997 for these employees of approximately $6.2 million was
allocated to us and is included in cost of sales and operating expenses
in the 1997 consolidated statement of income. The entire amount was paid
to Huntsman Polymers in 1998.
INSURANCE COVERAGE - We obtain most of our insurance coverage under
policies of HC. Reimbursement payments to HC are based on premium
allocations, which are determined in cooperation with an independent
insurance broker.
ADMINISTRATIVE EXPENSES - Included in administrative and other expense in
the consolidated statements of income are HC administrative expenses
allocated to us. Prior to the Split-off, these costs represent the
estimated portion of costs incurred by HC to provide services to us.
Subsequent to the Split-off, these costs are for certain administrative
services provided to us by HC under a cancelable services agreement.
OFFICE SPACE - We are obligated to pay rent calculated as a pro rata
portion (based on our percentage occupancy) of the mortgage principal and
interest payments related to the HC headquarters facility. Payments under
this obligation are included in administrative expenses.
INVESTMENT - On August 7, 1998, Huntsman Packaging made an offer to the
Board of Directors of Applied Extrusion Technologies, Inc. ("AET"), a
publicly traded company, to purchase all of the outstanding shares of
common stock of AET at $10.50 per share in a merger transaction. AET's
Board rejected the offer. On September 10, 1998, Huntsman Packaging made
another offer to the Board of Directors of AET to purchase all of the
outstanding shares of common stock of AET at $12.50 per share
F-31
<PAGE> 67
in a merger transaction. On September 14, 1998, HPC Investment, Inc., a
wholly owned subsidiary of Huntsman Packaging, purchased shares of the
common stock of AET from Richard P. Durham, President and Chief Executive
Officer of Huntsman Packaging, for an aggregate purchase price of $3.3
million, in an arms-length transaction approved by the Board of Directors
of HPC Investment, Inc. AET's Board of Directors subsequently rejected
Huntsman Packaging's second offer. At December 31, 1999, we had
liquidated our entire investment in AET stock.
16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements present, in
separate columns, financial information for (i) Huntsman Packaging
Corporation (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 Corporation'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 Corporation and its
subsidiaries on a consolidated basis, and (v) Huntsman Packaging
Corporation on a consolidated basis, in each case as of December 31, 1999
and 1998 and for the years ended December 31, 1999, 1998 and 1997. 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 Corporation.
There are no contractual restrictions limiting transfers of cash from
guarantor and non-guarantor subsidiaries to Huntsman Packaging
Corporation. The condensed consolidating 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.
F-32
<PAGE> 68
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<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 $ 1,212 $ 536 $ 7,349 $ 9,097
Receivables 75,053 24,211 23,370 122,634
Inventories 56,646 10,067 11,486 78,199
Prepaid expenses and other 2,127 90 427 2,644
Income taxes receivable 3,486 212 (1,007) 2,691
Deferred income taxes 6,715 426 (1,733) 5,408
--------- --------- --------- --------- ---------
Total current assets 145,239 35,542 39,892 220,673
PLANT AND EQUIPMENT, net 184,444 78,649 51,359 314,452
INTANGIBLE ASSETS, net 52,676 143,836 18,444 214,956
INVESTMENT IN SUBSIDIARIES 61,533 $ (61,533)
OTHER ASSETS 16,593 144 2,205 18,942
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 460,485 $ 258,171 $ 111,900 $ (61,533) $ 769,023
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 39,293 $ 9,629 $ 11,134 $ 60,056
Accrued liabilities 25,238 2,833 6,865 34,936
Current portion of long-term debt 13,464 3,656 17,120
Due to (from) affiliates (19,737) 17,431 7,021 4,715
--------- --------- --------- --------- ---------
Total current liabilities 58,258 29,893 28,676 116,827
LONG-TERM DEBT, net of current portion 267,107 184,000 42,155 493,262
OTHER LIABILITIES 10,741 1,733 1,509 13,983
DEFERRED INCOME TAXES 30,791 18,465 2,107 51,363
--------- --------- --------- --------- ---------
Total liabilities 366,897 234,091 74,447 675,435
--------- --------- --------- --------- ---------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE COMMON STOCK 2,926 2,926
--------- --------- --------- --------- ---------
STOCKHOLDERS' EQUITY:
Common stock 63,676 20,377 29,241 $ (49,618) 63,676
Retained earnings 32,042 3,696 11,437 (15,133) 32,042
Shareholder note receivable (299) (299)
Cumulative foreign currency
translation adjustments (4,757) 7 (3,225) 3,218 (4,757)
--------- --------- --------- --------- ---------
Total stockholders' equity 90,662 24,080 37,453 (61,533) 90,662
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 460,485 $ 258,171 $ 111,900 $ (61,533) $ 769,023
========= ========= ========= ========= =========
</TABLE>
F-33
<PAGE> 69
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 524,191 $ 152,464 $ 121,375 $ (16,614) $ 781,416
COST OF SALES 436,315 110,074 93,663 (16,614) 623,438
--------- --------- --------- --------- ---------
GROSS PROFIT 87,876 42,390 27,712 157,978
TOTAL OPERATING EXPENSES 47,677 18,137 16,173 81,987
--------- --------- --------- --------- ---------
OPERATING INCOME 40,199 24,253 11,539 75,991
INTEREST EXPENSE (26,502) (13,805) (3,721) 44,028
EQUITY IN EARNINGS OF
SUBSIDIARIES 7,747 (7,747)
OTHER INCOME (EXPENSE), net (150) 129 456 435
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 21,294 10,577 8,274 (7,747) 32,398
INCOME TAX EXPENSE 2,983 6,626 4,478 14,087
--------- --------- --------- --------- ---------
NET INCOME $ 18,311 $ 3,951 $ 3,796 $ (7,747) $ 18,311
========= ========= ========= ========= =========
</TABLE>
F-34
<PAGE> 70
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ -----------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 33,629 $ 16,875 $ 949 $ 51,453
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 98 1,093 1,191
Payments for acquisitions (11,812) 314 (11,498)
Capital expenditures for plant and equipment (24,302) (6,996) (4,425) (35,723)
-------- -------- -------- -------- --------
Net cash used in investing activities (36,016) (6,682) (3,332) (46,030)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 986 986
Payments received form stockholder note
receivable 135 135
Principal payments on borrowings 4,475 (10,200) (5,725)
Payments on long-term debt (9,594) (2,531) (12,125)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing
activities (3,998) (10,200) (2,531) (16,729)
-------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 216 18 952 1,186
-------- -------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS (6,169) 11 (3,962) (10,120)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 7,381 525 11,311 19,217
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 1,212 $ 536 $ 7,349 $ 9,097
======== ======== ======== ======== ========
</TABLE>
F-35
<PAGE> 71
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1998
(IN THOUSANDS)
<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>
F-36
<PAGE> 72
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 486,484 $ 82,132 $ 90,769 $ (7,428) $ 651,957
COST OF SALES 403,574 64,520 71,744 (7,428) 532,410
--------- --------- --------- --------- ---------
GROSS PROFIT 82,910 17,612 19,025 119,547
TOTAL OPERATING EXPENSES 52,948 5,403 11,732 70,083
--------- --------- --------- --------- ---------
OPERATING INCOME 29,962 12,209 7,293 49,464
INTEREST EXPENSE (25,206) (10,193) (2,120) (37,519)
EQUITY IN EARNINGS OF
SUBSIDIARIES 904 (904)
OTHER INCOME (EXPENSE), net 1,339 (72) (2,146) (879)
--------- --------- --------- --------- ---------
INCOME BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS 6,999 1,944 3,027 (904) 11,066
INCOME TAX EXPENSE 3,884 2,120 2,529 8,533
--------- --------- --------- --------- ---------
INCOME BEFORE DISCONTINUED OPERATIONS 3,115 (176) 498 (904) 2,533
INCOME FROM DISCONTINUED OPERATIONS, net of
income taxes 582 582
GAIN ON SALE OF DISCONTINUED OPERATIONS, net
of income taxes 5,223 5,223
--------- --------- --------- --------- ---------
NET INCOME $ 8,338 $ (176) $ 1,080 $ (904) $ 8,338
========= ========= ========= ========= =========
</TABLE>
F-37
<PAGE> 73
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 11,433 $ 26,603 $ 7,454 $ 45,490
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 33,850 33,850
Payments for acquisitions (298,274) 97 1,588 (296,589)
Capital expenditures for plant and equipment (40,154) (3,383) (8,564) (52,101)
--------- --------- --------- --------- ---------
Net cash used in investing activities (304,578) (3,286) (6,976) (314,840)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,170 1,170
Payments received from stockholder note
receivable 266 266
Principal payments on borrowings 12,819 (22,800) (563) (10,544)
Proceeds from issuance of long-term debt 285,000 285,000
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 299,255 (22,800) (563) 275,892
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 65 (11) 210 264
--------- --------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 6,175 506 125 6,806
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR 1,206 19 11,186 12,411
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 7,381 $ 525 $ 11,311 $ 19,217
========= ========= ========= ========= =========
</TABLE>
F-38
<PAGE> 74
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 396,814 $ 2,117 $ 58,674 $ (9,862) $ 447,743
COST OF SALES 349,337 2,012 48,141 (9,862) 389,628
--------- --------- --------- --------- ---------
GROSS PROFIT 47,477 105 10,533 58,115
TOTAL OPERATING EXPENSES 40,493 128 4,418 45,039
--------- --------- --------- --------- ---------
OPERATING INCOME 6,984 (23) 6,115 13,076
INTEREST EXPENSE (16,595) (405) (17,000)
EQUITY IN EARNINGS OF SUBSIDIARIES 4,715 (4,715)
OTHER INCOME (EXPENSE), net 1,847 (1,097) 750
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED
OPERATIONS (3,049) (23) 4,613 (4,715) (3,174)
INCOME TAX EXPENSE (BENEFIT) (3,424) 2,915 (509)
--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS, net
of income taxes 375 (23) 1,698 (4,715) (2,665)
INCOME FROM DISCONTINUED OPERATIONS 3,040 3,040
--------- --------- --------- --------- ---------
NET INCOME $ 375 $ (23) $ 4,738 $ (4,715) $ 375
========= ========= ========= ========= =========
</TABLE>
F-39
<PAGE> 75
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $ 21,967 $ 2 $ 6,679 $ 28,648
--------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments for acquisitions (69,366) (69,366)
Capital expenditures for plant and equipment (14,657) (3,204) (17,861)
--------- --------- --------- --------- ---------
Net cash used in investing activities (84,023) (3,204) (87,227)
--------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (249,509) (249,509)
Proceeds from issuance of long-term debt 312,700 312,700
Payment of cash dividend 1,900 (1,900)
--------- --------- --------- --------- ---------
Net cash provided by (used in) financing
activities 65,091 (1,900) 63,191
--------- --------- --------- --------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (518) (2,330) (2,848)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,517 2 (755) 1,764
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE YEAR (1,311) 17 11,941 10,647
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE YEAR $ 1,206 $ 19 $ 11,186 $ 12,411
========= ========= ========= ========= =========
</TABLE>
F-40
<PAGE> 76
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO CASH
BEGINNING COSTS AND PAYMENTS BALANCE AT
DESCRIPTION OF YEAR EXPENSES MADE OTHER END OF YEAR
----------- ---------- ---------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
ACCUMULATED AMORTIZATION OF
INTANGIBLE ASSETS:
1999 $ 22,630 $ 9,046 $ $ (60)(2) $ 31,616
1998 16,819 6,125 (314)(2) 22,630
1997 13,771 3,058 (10)(2) 16,819
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
1999 $ 2,570 $ 518 $ $ (973)(1) $ 2,115
1998 3,257 (687)(1) 2,570
1997 2,641 241 375 (1) 3,257
PLANT CLOSING ACCRUAL:
1999 $ 2,600 $ 2,500 $ (1,500) $ 1,200 (3) $ 4,800
1998 1,800 3,900 (3,100) 2,600
1997 2,300 1,800 (2,300) 1,800
</TABLE>
(1) Represents the net of accounts written off against the allowance and
recoveries of previous write-offs.
(2) Relates to write-down of goodwill.
(3) Represents accruals charged to good will
F-41
<PAGE> 77
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Blessings Corporation
Newport News, Virginia:
We have audited the accompanying consolidated balance sheets of Blessings
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of earnings, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Blessings Corporation and
Subsidiaries as of December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Richmond, Virginia
February 20, 1998
F-42
<PAGE> 78
BLESSINGS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 5,106,200 $ 5,801,800
Accounts receivable less allowance for doubtful accounts
Of $1,603,200 and $1,541,000 for 1997 and 1996 respectively 21,632,600 22,832,200
Inventories 14,309,200 12,905,700
Prepaid deferred taxes 1,510,300 1,417,900
Prepaid expenses 1,039,900 1,723,700
------------- -------------
Total Current Assets 43,598,200 44,681,300
------------- -------------
Property, Plant and Equipment - Net 89,378,200 80,573,600
Goodwill net of accumulated amortization of $3,710,700 and
$2,659,500 for 1997 and 1996 respectively 22,794,600 23,845,800
Deferred Taxes 7,267,300 7,565,400
Other Assets 2,284,700 1,410,600
------------- -------------
Total Assets $ 165,323,000 $ 158,076,700
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses $ 21,862,400 $ 25,025,800
Taxes on income 1,765,400 528,700
Current installments on long-term debt 3,125,000 3,744,300
Deferred taxes 1,397,000 1,024,200
------------- -------------
Total Current Liabilities 28,149,800 30,323,000
------------- -------------
Long-Term Debt 30,937,500 34,253,100
Deferred Taxes 9,572,500 8,373,800
Deferred Supplemental Pension Liability 2,267,100 1,950,700
Minority Interest 14,633,900 11,427,700
Commitments And Contingencies -- --
Shareholders' equity
4% Cumulative preferred stock, $10 par value -- --
authorized 259 shares, none outstanding
Common stock, $.71 par value; authorized 25,000,000 shares,
issued 10,214,846 for 1997 and 1996 respectively 7,252,500 7,252,500
Additional paid-in capital 5,968,100 6,012,900
Translation loss (6,255,900) (6,255,900)
Retained earnings 73,823,200 65,631,200
------------- -------------
80,787,900 72,640,700
------------- -------------
Common Stock in Treasury, at cost - 98,046 and 80,342 shares
For 1997 and 1996 respectively (1,025,700) (892,300)
------------- -------------
Total Shareholders' Equity 79,762,200 71,748,400
------------- -------------
Total Liabilities and Shareholders' Equity $ 165,323,000 $ 158,076,700
============= =============
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE> 79
BLESSINGS CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended Year Ended 52 Weeks Ended
December 31, 1997 December 31, 1996 December 30, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Net Sales $ 174,756,100 $ 158,135,100 $ 156,309,400
Costs and Expenses
Cost of sales 124,878,300 115,207,000 111,032,500
Selling, general and administrative 28,659,700 27,948,200 25,242,000
Foreign exchange loss 383,600 293,300 3,600,600
Interest and other - net 2,575,900 2,466,500 2,464,200
------------- ------------- -------------
Total cost and expenses 156,497,500 145,915,000 142,339,300
------------- ------------- -------------
Earnings before provision for taxes on income
and minority interest 18,258,600 12,220,100 13,970,100
------------- ------------- -------------
Taxes on income
Currently payable 5,083,100 3,902,400 6,235,600
Deferred 1,777,200 (632,900) (86,400)
------------- ------------- -------------
Total taxes on income 6,860,300 3,269,500 6,149,200
------------- ------------- -------------
Minority interest in net income of subsidiary 3,206,300 3,938,700 1,935,700
------------- ------------- -------------
Net Earnings $ 8,192,000 $ 5,011,900 $ 5,885,200
============= ============= =============
Basic earnings per share on common stock $ .81 $ .49 $ .58
============= ============= =============
Diluted earnings per share on common
stock $ .81 $ .49 $ .58
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE> 80
BLESSINGS CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CUMULATIVE
FOREIGN
COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK
------------ ------------ PAID-IN TRANSLATION RETAINED --------------------------
SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 10,211,846 $ 7,250,400 $ 6,196,100 $ (2,687,500) $ 61,847,100 13,480 $ (235,900)
Dividends declared on
common stock $.30 per share -- -- -- -- (3,054,000) -- --
Purchase of company's
common stock -- -- -- -- -- 88,650 (1,110,100)
Reissuance of company's
common stock under
compensation plans -- -- (49,900) -- -- (11,172) 195,500
Issuance of company's
common stock upon
exercise of options 3,000 2,100 28,700 -- -- -- --
Translation adjustment -- -- -- (5,638,800) -- -- --
Income tax associated
with translation adjustment -- -- -- 2,255,500 -- -- --
Net earnings -- -- -- -- 5,885,200 -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance December 30, 1995 10,214,846 $ 7,252,500 $ 6,174,900 $ (6,070,800) $ 64,678,300 90,958 $ (1,150,500)
Dividends declared on
common stock $.40 per share -- -- -- -- (4,059,000) -- --
Purchase of company's
common stock -- -- -- -- -- 45,350 (445,600)
Reissuance of company's
common stock under
compensation plans -- -- (162,000) -- -- (55,966) 703,800
Translation adjustment -- -- -- (308,500) -- -- --
Income tax associated
with translation adjustment -- -- -- 123,400 -- -- --
Net earnings -- -- -- -- 5,011,900 -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance December 31, 1996 10,214,846 $ 7,252,500 $ 6,012,900 $ (6,255,900) $ 65,631,200 80,342 $ (892,300)
Purchase of company's
common stock -- -- -- -- -- 34,656 (353,000)
Reissuance of company's
common stock under
compensation plans -- -- (44,800) -- -- (16,952) 219,600
Net earnings -- -- -- -- 8,192,000 -- --
------------ ------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1997 10,214,846 $ 7,252,500 $ 5,968,100 $ (6,255,900) $ 73,823,200 98,046 $ (1,025,700)
============ ============ ============ ============ ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE> 81
BLESSINGS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 52 WEEKS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 30, 1995
----------------- ----------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 8,192,000 $ 5,011,900 $ 5,885,200
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 10,298,300 8,539,100 7,977,100
Amortization - goodwill 1,060,200 1,060,200 1,060,200
Amortization - other 47,900 466,300 348,200
Minority interest in net income
of consolidated subsidiary 3,206,300 3,938,700 1,935,700
Provision for losses on accounts receivable 394,000 613,700 216,500
(Gain) loss on sale of assets 92,400 (41,800) 800
Change in assets and liabilities:
(Increase) decrease in accounts receivable 597,500 (2,543,600) (2,739,300)
(Increase) decrease in inventories (1,466,000) (3,528,700) 5,050,100
(Increase) decrease in prepaid expenses 461,400 (782,600) 466,100
Increase (decrease) in accounts payable
and accrued expenses (3,114,700) 8,876,100 (2,254,900)
Increase (decrease) in taxes on income 881,500 (769,000) (195,100)
Increase (decrease) in deferred taxes on income 1,777,200 (632,900) (86,400)
(Increase) decrease in other assets (546,100) (33,400) (555,100)
Increase (decrease) in other liabilities 264,800 183,000 237,400
------------ ------------ ------------
Net cash provided by operating activities 22,146,700 20,357,000 17,346,500
------------ ------------ ------------
Cash flows from investing activities:
(Increase) decrease in notes receivable 25,000 25,000 --
Proceeds from disposition of fixed assets 200,600 167,000 13,000
Capital expenditures (18,867,100) (20,398,200) (10,364,500)
------------ ------------ ------------
Net cash required by investing activities (18,641,500) (20,206,200) (10,351,500)
------------ ------------ ------------
Cash flows from financing activities:
Reduction of long-term debt (3,934,900) (13,245,500) (10,258,800)
Proceeds from issuance of long-term debt -- 20,000,000 6,357,400
Issuance of common stock under stock option plan -- -- 30,800
Issuance and acquisition of treasury stock (178,200) 96,200 (964,600)
Dividends paid -- (4,059,000) (4,074,600)
Distribution to minority interest -- (400,000) --
------------ ------------ ------------
Net cash provided (required) by financing activities (4,113,100) 2,391,700 (8,909,800)
------------ ------------ ------------
Effect of exchange rate changes on cash (87,700) (57,600) (1,744,100)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents (695,600) 2,484,900 (3,658,900)
Cash and cash equivalents at beginning of period 5,801,800 3,316,900 6,975,800
------------ ------------ ------------
Cash and cash equivalents at end of period $ 5,106,200 $ 5,801,800 $ 3,316,900
============ ============ ============
</TABLE>
See notes to consolidated financial statements
F-46
<PAGE> 82
BLESSINGS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997; DECEMBER 31, 1996 AND DECEMBER 30,
1995
- --------------------------------------------------------------------------------
1. ACCOUNTING POLICIES
A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its subsidiaries, all
of which are wholly-owned with the exception of NEPSA (see notes 2 and
14). All material intercompany profits, transactions and balances have
been eliminated in consolidation. The Company is approximately 54% owned
by the Williamson-Dickie Manufacturing Company. The Company has no
material transactions with the Williamson-Dickie Manufacturing Company.
B. CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid
debt instruments with a maturity of three months or less when purchased to
be cash equivalents.
C. INVENTORIES - Inventories are stated at the lower of cost or market.
The cost of inventories is determined by the first-in, first-out method
(FIFO) and an average cost method.
D. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, carried
at cost, is depreciated over the estimated useful life of the assets.
Depreciation expense is computed on a straight-line basis for book
purposes. Accelerated methods are used for income tax purposes. Major
improvements are capitalized and ordinary repairs and maintenance are
expensed in the year incurred.
E. ACCOUNTING PERIOD - Effective with the beginning of 1996, the Company
changed its accounting periods from four weeks to one month each with the
fiscal year coinciding with the calendar year. Accordingly, under the new
calendar year, the Company's quarters are each comprised of three calendar
months of thirteen weeks each ending March 31, June 30, September 30, and
December 31. Formerly, the Company's first quarter was comprised of
sixteen weeks, and the remaining three quarters were each comprised of
twelve weeks. Therefore, the year ending December 30, 1995 was comprised
of fifty-two weeks, while the following two years ending December 31, 1997
and 1996 were comprised of twelve months each. Due to the relative
similarity of the year ending December 30, 1995 with the two following
years, 1995 results were not recast.
F. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS - Intangible assets
resulting from business acquisitions principally consist of the excess of
the acquisition cost over the fair value of the net assets of the
businesses acquired (goodwill). Goodwill is amortized over twenty-five
years. Other intangible assets are amortized on a straight-line basis over
their estimated useful lives. The carrying value of goodwill and other
intangibles is evaluated if circumstances indicate a possible impairment
in value. If undiscounted cash flows over the remaining amortization
period indicate that goodwill and other intangibles may not be
recoverable, the carrying value of goodwill and other intangibles will be
reduced by the estimated shortfall of cash flows on a discounted basis.
G. TAXES ON INCOME - The company provides deferred taxes to reflect future
consequences of differences between the tax basis of assets and
liabilities and their reported amounts for financial reporting purposes,
in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. The significant components of deferred tax assets and liabilities are
principally related to depreciation,
F-47
<PAGE> 83
allowance for doubtful accounts, retirement plans, inventory and accrued
expenses not currently deductible.
H. TRANSLATION OF FOREIGN CURRENCIES - In 1997 the functional currency of
the Company's Mexican subsidiary changed from the peso to the dollar. As a
result of this change, translation gains and losses previously recorded in
shareholders' equity are recorded in income. Prior to 1997, the Company
translated foreign currency financial statements by translating balance
sheet accounts at the current exchange rate and income statement accounts
at the average exchange rate for the year. Translation gains and losses
were recorded in shareholders' equity, and transaction gains and losses
were reflected in income.
I. USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts reflected on those statements. Actual results could differ from
those estimates.
J. FINANCIAL INSTRUMENTS - The carrying amounts of assets and liabilities
as reported on the balance sheet at December 31, 1997, which qualify as
financial instruments, approximate fair value. The fair value of interest
rate swap agreements held by the Company at year end which were not
recorded on the financial statements, was $395,000 and $470,400 which
represents the cash requirement to settle these agreements at December 31,
1997 and 1996, respectively.
K. INTEREST AND DIVIDENDS - NET -
<TABLE>
<CAPTION>
December 31, December 31, December 30,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest expense
(net of capitalized interest) $ 3,138,900 $ 3,405,900 $ 3,122,900
Interest income (563,000) (923,200) (658,700)
Dividend income -- (16,200) --
-------------------------------------------------------------------------------------
Interest and dividends -
net expense $ 2,575,900 $ 2,466,500 $ 2,464,200
-------------------------------------------------------------------------------------
</TABLE>
Cash payments for interest were $3,215,600, $2,775,100 and $2,978,600 for
the 1997, 1996, and 1995 fiscal years respectively.
L. OTHER - The Company has adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share. The adoption of this
statement did not have a material impact on the earnings per share
calculations for the 1997, 1996 and 1995 fiscal years. During 1997, the
FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement
establishes standards for reporting and display of comprehensive income
and its components in a full set of general-purpose financial statements.
The effect of adopting the new standard is not expected to be significant
as the Company does not currently have material items of other
comprehensive income disclosed outside the statement of operations. Also
during 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an
Enterprise and Related Information. The statement requires enterprises to
report financial and descriptive information about its operating segments,
products and services, countries and major customers, as well as
reconciliations of segment financial information to corresponding amounts
in the general-purpose financial statements. SFAS Nos. 130 and 131 will be
adopted for the Company's 1998 fiscal year.
F-48
<PAGE> 84
2. NEPSA ACQUISITION
The Company acquired 60% of the outstanding common stock of Nacional de
Envases Plasticso, S.A. de C.V., and its associated companies,
collectively known as NEPSA, on July 5, 1994. The acquisition of NEPSA was
accounted for using the purchase method of accounting. The allocation of
the purchase price of approximately $46,000,000 resulted in an excess of
$26,505,300 in goodwill which will be amortized on a straight-line basis
over its estimated life of twenty-five years. Amortization of goodwill was
$1,060,200 for 1997, 1996 and 1995.
The Company had non-cash investing and financing activities associated
with the NEPSA transaction by issuing 400,000 shares of additional
Blessings Corporation common stock valued at $5,400,000.
On February 9, 1998 the Company purchased the remaining 40% of NEPSA (See
note 14).
3. INVENTORIES
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Raw materials $10,189,300 $10,050,500
Finished goods 4,119,900 2,855,200
--------------------------------------------------------------------
Total $14,309,200 $12,905,700
--------------------------------------------------------------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Land $ 629,200 $ 629,200
--------------------------------------------------------------------
Buildings 15,614,400 15,258,800
Machinery and equipment 107,640,200 88,515,200
Motor vehicles 647,100 621,900
Furniture and fixtures 4,553,800 4,403,100
Leasehold improvements 1,317,500 936,900
Construction in progress 1,688,100 6,804,700
--------------------------------------------------------------------
Gross depreciable assets $131,461,100 $116,540,600
--------------------------------------------------------------------
Less accumulated depreciation
and amortization 42,712,100 36,596,200
--------------------------------------------------------------------
Net depreciable assets 88,749,000 79,944,400
--------------------------------------------------------------------
Net assets $ 89,378,200 $ 80,573,600
--------------------------------------------------------------------
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
<TABLE>
<CAPTION>
December 31
1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Accounts payable $14,764,700 $16,887,200
Salaries, wages and commission 2,790,400 2,263,100
Taxes, other than taxes on income 357,400 841,800
Interest 616,300 716,600
Insurance 619,500 1,019,200
Relocation and restructuring 443,900 791,200
Miscellaneous current liabilities 2,270,200 2,506,700
--------------------------------------------------------------------
Total $21,862,400 $25,025,800
--------------------------------------------------------------------
</TABLE>
F-49
<PAGE> 85
6. LONG-TERM DEBT
<TABLE>
<CAPTION>
December 31
1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
6.55% note due 2002 $10,000,000 $10,000,000
7.22% note due 2008 10,000,000 10,000,000
NEPSA Credit Agreement due 2002 14,062,500 17,187,500
Mexico bank loans due 1998
collateralized by equipment -- 809,900
-----------------------------------------------------------------------
$34,062,500 $37,997,400
Less installments due within one year 3,125,000 3,744,300
-----------------------------------------------------------------------
Total long-term debt $30,937,500 $34,253,100
-----------------------------------------------------------------------
</TABLE>
During 1996, the Company entered into a $20,000,000 Note Purchase
Agreement with a major insurance company. Under the terms of the Note
Purchase Agreement, the Company issued $10,000,000 of 7.22% senior
unsecured notes due January 30, 2008 and $10,000,000 of 6.55% senior
unsecured notes due January 30, 2002. Interest is payable semi-annually on
January 30 and July 30 of each year. The Company is not obligated to make
principal payments until January 30, 2000. The proceeds were used to repay
two secured mortgages and advances under the revolving credit and to
finance major capital projects.
The Company has available a $25,000,000 two year, unsecured revolving
credit agreement with major lending institutions. Borrowings under the
revolving credit agreement bear interest at rates based on the London
Interbank Offered Rates (LIBOR) or the prime interest lending rate. The
Company had no borrowings outstanding under this agreement at December 31,
1997.
On February 20, 1998, the Company entered into an $18,500,000 unsecured
Term Loan Agreement with a major lending institution. The term loan bears
interest at rates based upon either the LIBOR Rates or the Prime Rate and
will be payable quarterly. Principal payments will commence on September
15, 1998 and will be payable quarterly thereafter with the final payment
on June 15, 2006. The proceeds from the term loan were used to purchase
the remaining 40% ownership of NEPSA (see note 14).
The Company has short-term lines of credit of $12,000,000 available
through its principal lenders. On December 31, 1997, the Company had
standby letters of credit of $997,000 outstanding under the lines of
credit.
In December of 1994 and during the first half of 1995, the Company entered
into five interest rate swap agreements to limit its exposure to changes
in interest rates on the NEPSA Credit Agreement.
The agreements obligate the Company to make fixed payments to a counter
party which, in turn, is obligated to make variable payments to the
Company. The amount to be paid or received under the terms of the swaps is
measured by applying contractually agreed upon variable and fixed rates to
the notional amounts of principal. The counterparty to the agreements is a
major financial institution which is expected to fully perform under the
terms of the agreement. The notional amounts, which decrease over the term
of the agreements, are used to measure the contractual amounts to be
received or paid and do not represent the amount of exposure to credit
loss. The agreements terminate in 2002 and effectively convert
approximately $13,900,000 of three month LIBOR-based floating rate debt to
8.21% fixed rate debt. Interest paid on these swaps was recorded as an
adjustment to interest expense.
F-50
<PAGE> 86
The long-term debt agreements contain various restrictive covenants
limiting the Company's ability to incur additional indebtedness or to
undertake mergers and acquisitions. The agreements also include quarterly
tests relating to the maintenance of net worth, cash flow and interest
coverage ratios.
The maturities on long-term debt are as follows:
<TABLE>
<CAPTION>
Fiscal Years Amount
--------------------------------------------------------------------
<S> <C>
1998 $ 3,125,000
1999 3,125,000
2000 6,458,300
2001 6,458,300
2002 4,895,900
2003 and after 10,000,000
--------------------------------------------------------------------
Total $34,062,500
--------------------------------------------------------------------
</TABLE>
7. COMMITMENTS
At December 31, 1997, aggregate rental commitments on long-term real
estate operating leases were as follows:
<TABLE>
<CAPTION>
Fiscal Years Amount
--------------------------------------------------------------------
<S> <C>
1998 $1,291,300
1999 645,600
2000 --
2001 --
2002 --
2003 and after --
--------------------------------------------------------------------
Total $1,936,900
--------------------------------------------------------------------
</TABLE>
Rent expense for the fiscal years ended December 31, 1997; December 31,
1996; and December 30, 1995, amounted to $1,362,100, $1,449,800 and
$2,024,500 respectively. The Company has commitments to purchase raw
materials over the next two years of approximately $3,800,000 per year.
8. PENSION TRUST PLAN
The Company sponsors a defined benefit pension plan that covers
substantially all employees. The cost of the plan is borne by the Company.
The plan calls for benefits to be paid to eligible employees at
retirement, based primarily upon years of service with the Company and
compensation rates near retirement. Contributions are intended to provide
not only for benefits attributable to service to date but also for those
expected to be earned in the future. Plan assets consist primarily of
bonds, mortgages and common stock.
Pension expense was $806,200, $587,800 and $459,500 in the 1997, 1996 and
1995 fiscal years respectively. Net pension cost for the Company's
qualified and nonqualified defined benefit plans for 1997, 1996 and 1995
included the following components:
F-51
<PAGE> 87
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of
current period $ 716,200 $ 645,200 $ 597,200
Interest cost on
projected benefit
obligation 1,235,700 1,090,300 998,100
Actual return on
plan assets (1,951,600) (1,459,700) (1,887,300)
Net amortization
and deferral 805,900 312,000 751,500
------------------------------------------------------------------------
Net periodic
pension cost $ 806,200 $ 587,800 $ 459,500
------------------------------------------------------------------------
</TABLE>
The following table sets for the plan's funded status and amounts
recognized in the Company's statement of cash flows at year-end.
Actuarial present value of benefit obligations;
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------------
<S> <C> <C>
Vested benefits $ 15,173,600 $ 13,075,000
Non vested benefits 225,200 351,100
---------------------------------------------------------------------------
Accumulated benefit obligation $ 15,398,800 $ 13,426,100
Fair value of assets held in the plan $ 16,143,000 $ 14,316,000
Projected benefit obligation for
services rendered to date (18,028,400) (15,865,200)
---------------------------------------------------------------------------
Projected benefit obligation in excess
of plan assets $ (1,885,400) $ (1,549,200)
Unrecognized net loss 1,194,500 924,100
Unrecognized prior service cost (85,000) (92,800)
Unrecognized net asset at
January 1, 1988, being amortized
over 17 years (213,200) (248,700)
Unrecognized net obligation at
December 31, 1994, being amortized
over 15 years 740,900 808,300
---------------------------------------------------------------------------
Accrued pension cost
included in other liabilities $ (248,200) $ (158,300)
---------------------------------------------------------------------------
</TABLE>
The weighted-average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.5% and 5.0%, respectively, for 1997
and 1996. The expected long-term rate of return on assets was 10% of 1997
and 1996.
During 1994 the Company adopted a Supplemental Restoration plan designed
to restore pension benefits which have been limited as a result of changes
in the Internal Revenue Service code of 1993 (OBRA '93).
In December, 1990, and November, 1992, FASB issued SFAS No. 106,
Employers' Accounting for Post Retirement Benefits Other Than Pensions and
SFAS No. 112, Employers' Accounting for Post Employment Benefits
respectively. These pronouncements do not have an effect on the Company's
F-52
<PAGE> 88
financial statements as the cost to the Company of providing the benefits
covered in these pronouncements is not significant.
9. PENSION SAVINGS PLAN (401(k))
The Company initiated a pension savings plan in 1988 designed to comply
with Section 401(k) of the Internal Revenue Service code. Under the terms
of the plan, the Company matches 50% of the employees' contribution up to
a maximum of 3% of salary. The Company's matching contribution to the plan
was $436,000, $378,200 and $337,900 for the 1997, 1996 and 1995 fiscal
years respectively.
10. STOCK OPTION PLAN
Under the Company's stock option plans, officers, directors and key
employees may be granted options to purchase the Company's common stock at
no less than 100% of the market price on the date the option is granted.
The plans provide options to become exercisable either immediately upon
grant or one year from date of grant and can be issued with or without
stock appreciation rights with terms of 5 to 10 years. The Company has
authorized 443,000 shares for issuance under the plans. At December 31,
1997, there were 130,750 shares available under the plans. As permitted by
SFAS No. 123, Accounting for Stock Based Compensation, the Company has
elected to follow APB Opinion No. 25 Accounting for Stock issued to
Employees, for the measurement and recognition of employee stock-based
compensation. Accordingly, no compensation cost has been recognized for
the company's plans. The pro forma effect of applying SFAS 123 fair value
method of measuring compensation costs to the Company's stock-based awards
was not significant to reported net income and earnings per share. A
summary of stock option transactions in fiscal 1997, 1996 and 1995
follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 30, 1995
- ------------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding beginning of the year 159,200 $ 12.64 134,200 $ 12.98 98,200 $ 12.85
Granted 67,500 10.48 79,000 9.99 46,000 13.20
Exercised (6,000) 10.42 (50,000) 9.25 (3,000) 8.81
Canceled (3,250) 11.93 (4,000) 14.11 (7,000) 14.38
- ------------------------------------------------------------------------------------------------------------------------
Outstanding, end of the year 217,450 $ 12.06 159,200 $ 12.64 134,200 $ 12.98
- ------------------------------------------------------------------------------------------------------------------------
Options exercisable at year end 217,450 $ 12.06 134,700 $ 12.97 92,700 $ 12.89
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Options Outstanding
- ----------------------------------------------------------------------------------------------
Number Weighted-Average
Range of Outstanding Remaining Weighted-Average
Exercise Prices at 12/31/97 Contractual Life Exercise Price
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$ 8.81 -10.88 103,450 5.3 Years $ 10.29
$12.00 -14.38 114,000 6.5 Years $ 12.69
- ----------------------------------------------------------------------------------------------
</TABLE>
F-53
<PAGE> 89
Using the Black-Scholes model, the weighted average fair value of options
granted and significant weighted-average assumptions used were as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Fair market value of options granted $ 4.20 $ 3.51
Risk-free interest rate 6.5% 6.5%
Expected life (years) 5.0 9.0
Expected dividends 0.0% 3.0%
Volatility 32.0% 31.8%
- -------------------------------------------------------------------------------
</TABLE>
11. TAXES ON INCOME
The components of income before taxes are as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
December 31 December 31 December 30
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. $ 8,573,600 $ 4,850,000 $ 8,398,800
Foreign 9,685,000 7,370,100 5,571,300
- --------------------------------------------------------------------------------
$18,258,600 $12,220,100 $13,970,100
- --------------------------------------------------------------------------------
</TABLE>
Income tax expense from continuing operations consisted of the following
components in the fiscal year ended on:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
December 31 December 31 December 30
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Taxes estimated to be
payable currently
U.S $ 1,759,600 $ 1,174,400 $ 2,553,700
Foreign 3,135,500 2,689,900 3,383,500
State 188,000 38,100 298,400
- -------------------------------------------------------------------------------
Total $ 5,083,100 $ 3,902,400 $ 6,235,600
- -------------------------------------------------------------------------------
Taxes deferred - net
U.S 886,300 $ 587,800 $ 6,500
Foreign 670,700 $(1,366,700) (153,700)
State 220,200 146,000 60,800
- -------------------------------------------------------------------------------
Total 1,777,200 (632,900) (86,400)
- -------------------------------------------------------------------------------
$ 6,860,300 $ 3,269,500 $ 6,149,200
- -------------------------------------------------------------------------------
</TABLE>
F-54
<PAGE> 90
Temporary differences which give rise to deferred tax assets and
liabilities at December 31, 1997, December 31, 1996, and December 30,
1995, are as follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
Deferred Deferred tax Deferred Deferred tax Deferred Deferred tax
tax assets liabilities tax assets liabilities tax assets liabilities
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Current
Allowance for doubtful accounts $ 562,400 -- $ 554,900 -- $ 427,100 --
Compensated absences 444,900 -- 361,600 -- 312,500 --
Restricted stock 138,400 -- 111,700 -- 138,600 --
Other 364,600 1,397,000 389,700 1,024,200 -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Total current 1,510,300 1,397,000 1,417,900 1,024,200 878,200 --
- ------------------------------------------------------------------------------------------------------------------------------------
Non-current
Tax deductible expenses not
charge against book income
(primarily depreciation) -- 9,245,900 -- 8,038,900 -- $ 6,210,800
Income tax benefit of fixed asset
indexation 1,902,200 -- 2,316,700 -- -- --
Loss on foreign currency translation 4,170,600 -- 4,170,600 -- 4,047,200 --
Other 1,194,500 326,600 1,078,100 334,900 382,000 923,900
- ------------------------------------------------------------------------------------------------------------------------------------
Total non-current 7,267,300 9,572,500 7,565,400 8,373,800 4,429,200 7,134,700
- ------------------------------------------------------------------------------------------------------------------------------------
Total deferred taxes $ 8,777,600 $10,969,500 $ 8,983,300 $ 9,398,000 $ 5,307,400 $ 7,134,700
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
A reconciliation of the differences between income taxes computed at the
U.S. income tax rate and the consolidated tax provision is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 December 31, 1996 December 30, 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax at statutory U.S. tax rate $ 6,390,500 35.0 $ 4,277,000 35.0 $ 4,889,500 35.0
Differential due to operations outside U.S. 45,500 .3 (1,540,000) (12.6) 892,600 6.4
State and local taxes net of federal tax benefit 265,300 1.5 184,100 1.5 237,100 1.6
Nondeductible goodwill amortization 371,100 2.0 371,100 3.0 371,100 2.7
Other - Net (212,100) (1.2) (22,700) (.1) (241,100) (1.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Provision for income taxes $ 6,860,300 37.6 $ 3,269,500 26.8 $ 6,149,200 44.0
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Cash payments for taxes were $2,994,800, $3,128,200 and $6,442,000 for the
1997, 1996 and 1995 fiscal years respectively
12. NET EARNINGS PER SHARE
Net earnings per share for all periods presented have been computed based
upon the weighted average number of shares outstanding during the year.
The following schedule represents a reconciliation of the numerator and
the denominator used to calculate basic and diluted earnings per share for
1997, 1996 and 1995:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Income Shares Pre-Share Income Shares Per-Share Income Shares Per-Share
(Num.) (Denom.) Amount (Num.) (Denom.) Amount (Num.) (Denom.) Amount
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Basic EPS $8,192,000 10,117,965 $ .810 $5,011,900 10,149,692 $ .494 $5,885,200 10,159,088 $ .579
---------- ---------- -------- ---------- ---------- -------- ---------- ---------- --------
Effect of
Dilutive Options -- 30,497 -- 20,406 -- 44,211
- ---------------------------------------------------------------------------------------------------------------------------------
Diluted EPS $8,192,000 10,148,462 $ .807 $5,011,900 10,170,098 $ .493 $5,885,200 10,203,299 $ .577
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-55
<PAGE> 91
13. QUARTERLY FINANCIAL DATA, MARKET AND DIVIDEND INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
First Year Ended December 31, 1997 3 Months 3 Months 3 Months 3 Months Year
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 45,076,700 $ 43,185,000 $ 43,707,700 $ 42,786,700 $174,756,100
- -------------------------------------------------------------------------------------------------------------------------
Cost of sales $ 31,510,300 $ 30,617,400 $ 31,946,100 $ 30,804,500 $124,878,300
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,296,900 $ 1,619,800 $ 1,962,000 $ 2,313,300 $ 8,192,000
- -------------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 10,125,386 10,114,869 10,114,803 10,116,800 10,117,965
- -------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ .23 $ .16 $ .19 $ .23 $ .81
- -------------------------------------------------------------------------------------------------------------------------
Dividends paid per share -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Market price of common stock
HIGH $ 11.25 $ 10.75 $ 15.38 $ 15.88 $ 15.88
LOW $ 9.25 $ 9.31 $ 10.13 $ 13.75 $ 9.25
- -------------------------------------------------------------------------------------------------------------------------
Fiscal Year Ended December 31, 1996
- -------------------------------------------------------------------------------------------------------------------------
Net sales $ 39,533,300 $ 36,253,400 $ 40,008,000 $ 42,340,400 $158,135,100
- -------------------------------------------------------------------------------------------------------------------------
Cost of sales $ 26,337,600 $ 26,355,000 $ 30,162,600 $ 32,351,800 $115,207,000
- -------------------------------------------------------------------------------------------------------------------------
Net earnings $ 2,236,700 $ 1,015,600 $ 1,177,300 $ 582,300 $ 5,011,900
- -------------------------------------------------------------------------------------------------------------------------
Average number of shares outstanding 10,139,754 10,164,637 10,159,871 10,134,504 10,149,692
- -------------------------------------------------------------------------------------------------------------------------
Net earnings per share $ .22 $ .10 $ .12 $ .05 $ .49
- -------------------------------------------------------------------------------------------------------------------------
Dividends paid per share $ .10 $ .10 $ .10 $ .10 $ .40
- -------------------------------------------------------------------------------------------------------------------------
Market price of common stock
HIGH $ 12.00 $ 14.25 $ 11.00 $ 11.88 $ 14.25
LOW $ 8.50 $ 9.25 $ 8.63 $ 8.75 $ 8.50
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
14. SUBSEQUENT EVENT
On February 9, 1998, the Company purchased the remaining 40% of its 60%
owned subsidiary in Mexico, NEPSA for $18,500,000. Pro forma results
assuming consolidation of 100% of NEPSA's earnings would have been net
earnings of $10,455,300 or $1.03 per share for 1997, $7,885,600 or $.78
per share for 1996 and $6,671,900 or $.66 per share for 1995.
15. MAJOR CUSTOMER
A customer of the Company accounted for 44.9%, 44.6% and 46.6% of total
sales in the 1997, 1996, and 1995 fiscal years respectively.
16. SEGMENT AND GEOGRAPHIC INFORMATION
The Company operates in one principal industry segment: the design,
manufacture and sale of specialty plastics for use in a variety of
disposable healthcare products, as well as in numerous industrial,
agricultural and packaging end uses. The Company operates in two primary
geographic areas: the United States and Mexico.
F-56
<PAGE> 92
Geographic financial information is as follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales to
unaffiliated
customers:
United States $120,160,100 $109,616,200 $107,877,500
Mexico 54,596,000 48,518,900 48,431,900
- --------------------------------------------------------------------------------
Total sales $174,756,100 $158,135,100 $156,309,400
- --------------------------------------------------------------------------------
Net Earnings:
United States $ 5,519,500 $ 2,903,700 $ 5,479,500
Mexico 2,672,500 2,108,200 405,700
- --------------------------------------------------------------------------------
Total earnings $ 8,192,000 $ 5,011,900 $ 5,885,200
- --------------------------------------------------------------------------------
Identifiable assets:
United States
(Including Goodwill) $132,652,600 $127,292,800 $116,976,300
Mexico 32,670,400 30,783,900 19,117,900
- --------------------------------------------------------------------------------
Total assets $165,323,000 $158,076,700 $136,094,200
- --------------------------------------------------------------------------------
</TABLE>
F-57
<PAGE> 93
INDEX TO EXHIBITS
EXHIBIT
NUMBER
- ------
3.1 Second Amended and Restated Articles of Incorporation of Huntsman
Packaging (incorporated by reference to Exhibit 3.1 to Huntsman
Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998).
3.2 Amended and Restated Bylaws of Huntsman Packaging (incorporated by
reference to Exhibit 3.2 to Huntsman Packaging's registration statement
on Form S-4 (File No. 333-40067)).
4.1 Indenture, dated as of September 30, 1997, between Huntsman Packaging,
the Guarantors and The Bank of New York (incorporated by reference to
Exhibit 4.1 to Huntsman Packaging's registration statement on Form S-4
(File No. 333-40067)).
4.2 Supplemental Indenture No. 1 to Indenture dated as of September 30,
1997, between Huntsman Packaging, the Guarantors and the Bank of New
York (incorporated by reference to Exhibit 4.1 to Huntsman Packaging's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
4.3 Supplemental Indenture No. 2 to Indenture dated as of September 30,
1997, between Huntsman Packaging, the Guarantors and the Bank of New
York (incorporated by reference to Exhibit 4.2 to Huntsman Packaging's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
4.4 Form of Exchange Notes (incorporated by reference to Exhibit A-2 to
Exhibit 4.1).
4.5 Registration Rights Agreement, dated as of September 19, 1997, by and
among Huntsman Packaging, BT Alex. Brown Incorporated and Chase
Securities Inc. (incorporated by reference to Exhibit 4.3 to Huntsman
Packaging's registration statement on Form S-4 (File No. 333-40067)).
10.1 Exchange Agreement, dated as of September 26, 1997 by and among Huntsman
Corporation and Jon M. Huntsman, Richard P. Durham and Elizabeth
Whitsett, as Trustees of the Christena Karen H. Durham Trust
(incorporated by reference to Exhibit 10.1 to Huntsman Packaging's
registration statement on Form S-4 (File No. 333-40067)).
10.2 First Amended Asset Purchase Agreement, dated as of September 26, 1997,
between Huntsman Packaging and Huntsman Polymers Corporation
(incorporated by reference to Exhibit 10.2 to Huntsman Packaging's
registration statement on Form S-4 (File No. 333-40067)).
10.3 Amended and Restated Credit Agreement, dated as of May 14, 1998, among
Huntsman Packaging, the various lenders party thereto (the "Lenders")
and The Chase Manhattan Bank, as Administrative Agent for the Lenders
(incorporated by reference to Exhibit 10.1 to Huntsman Packaging's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1998).
10.4 Guarantee Agreement, dated September 30, 1997, among the subsidiaries of
Huntsman Packaging and The Chase Manhattan Bank, as Administrative Agent
for the Lenders (incorporated by reference to Exhibit 10.4 to Huntsman
Packaging's registration statement on Form S-4 (File No. 333-40067)).
10.5 Security Agreement, dated as of September 30, 1997, among Huntsman
Packaging, each subsidiary of Huntsman Packaging party thereto and The
Chase Manhattan Bank, as Collateral Agent for the Secured Parties
(incorporated by reference to Exhibit 10.5 to Huntsman Packaging's
registration statement on Form S-4 (File No. 333-40067)).
<PAGE> 94
10.6 Pledge Agreement, dated September 30, 1997, among Huntsman Packaging,
each subsidiary of Huntsman Packaging party thereto and The Chase
Manhattan Bank, as Collateral Agent for the Secured Parties
(incorporated by reference to Exhibit 10.6 to Huntsman Packaging's
registration statement on Form S-4 (File No. 333-40067)).
10.7 Indemnity, Subrogation and Contribution Agreement, dated September 30,
1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging
party thereto and The Chase Manhattan Bank, as Collateral Agent for the
Secured Parties (incorporated by reference to Exhibit 10.7 to Huntsman
Packaging's registration statement on Form S-4 (File No. 333-40067)).
10.8 Form of Option Cancellation and Restricted Stock Purchase Agreement
(incorporated by reference to Exhibit 10.8 to Huntsman Packaging's
Annual Report on Form 10-K for the year ended December 31, 1998). (1)
10.9 1998 Huntsman Packaging Corporation Stock Option Plan (incorporated by
reference to Exhibit 10.10 to Huntsman Packaging's Annual Report on Form
10-K for the year ended December 31, 1998). (1)
10.10 First Amendment to the 1998 Huntsman Packaging Corporation Stock Option
Plan (incorporated by reference to Exhibit 10.1 to Huntsman Packaging's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1999). (1)
21 Subsidiaries of Huntsman Packaging (incorporated by reference to Exhibit
21 to Huntsman Packaging's Annual Report on Form 10-K for the year ended
December 31, 1998).
27 Financial Data Schedule.*
* Filed with this report.
(1) Management contract or compensatory plan or arrangement required to be
filed as an exhibit hereto.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HUNTSMAN
PACKAGING CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER
31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 9,097
<SECURITIES> 0
<RECEIVABLES> 109,768
<ALLOWANCES> 2,115
<INVENTORY> 78,199
<CURRENT-ASSETS> 220,673
<PP&E> 392,045
<DEPRECIATION> 77,593
<TOTAL-ASSETS> 769,023
<CURRENT-LIABILITIES> 116,827
<BONDS> 493,262
0
0
<COMMON> 63,676
<OTHER-SE> 26,986
<TOTAL-LIABILITY-AND-EQUITY> 769,023
<SALES> 781,416
<TOTAL-REVENUES> 781,416
<CGS> 623,438
<TOTAL-COSTS> 81,987
<OTHER-EXPENSES> 435
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,028
<INCOME-PRETAX> 32,398
<INCOME-TAX> 14,087
<INCOME-CONTINUING> 18,311
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,311
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
