<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
Commission file number 333-40067
HUNTSMAN PACKAGING CORPORATION
(Exact name of registrant as specified in its charter)
Utah 87-0496065
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 Huntsman Way
Salt Lake City, Utah 84108
(801) 584-5700
(Address of principal executive offices and telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. On August 11, 2000, there were
574,006 outstanding shares of the registrant's Common Stock.
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<PAGE> 2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2000 AND DECEMBER 31, 1999 (DOLLARS IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
--------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 11,217 $ 9,097
Receivables, net of allowances of $1,489 and $2,115, respectively 116,869 122,634
Inventories 88,194 78,199
Prepaid expenses and other 2,074 2,644
Income taxes receivable 8,033 2,691
Deferred income taxes 7,866 5,408
--------- ---------
Total current assets 234,253 220,673
PLANT AND EQUIPMENT, net 323,654 314,452
INTANGIBLE ASSETS, net 210,513 214,956
OTHER ASSETS 30,212 18,942
--------- ---------
TOTAL ASSETS $ 798,632 $ 769,023
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 70,654 $ 60,056
Accrued liabilities 32,702 34,936
Current portion of long-term debt 3,928 17,120
Due to affiliates 4,715
--------- ---------
Total current liabilities 107,284 116,827
LONG-TERM DEBT, net of current portion 695,067 493,262
OTHER LIABILITIES 18,498 13,983
DEFERRED INCOME TAXES 49,856 51,363
--------- ---------
Total liabilities 870,705 675,435
--------- ---------
REDEEMABLE COMMON STOCK - Class C nonvoting, no par value; 60,000 shares
authorized; 49,511 shares outstanding, net of related stockholders'
notes receivable of $2,795 in 1999 2,926
--------- ---------
REDEEMABLE PREFERRED STOCK - 200,000 shares authorized, 100,000 shares
outstanding and designated as Series A, no par value, with a redemption and
liquidation value of $1,000 per share 79,950
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock - Class A voting, no par value; 1,200,000 shares authorized,
1,000,001 shares outstanding in 1999 63,161
Common stock - Class B voting, no par value; 10,000 shares authorized,
6,999 shares outstanding in 1999 515
Common stock - no par value; 10,000,000 shares authorized, 572,356 shares
outstanding 108,141
Warrants 26,469
Retained earnings (deficit) (260,797) 32,042
Stockholder's notes receivable (19,019) (299)
Cumulative foreign currency translation adjustment (6,817) (4,757)
--------- ---------
Total stockholders' equity (deficit) (152,023) 90,662
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 798,632 $ 769,023
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 1999
(IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NET SALES $ 203,948 $ 186,793 $ 416,485 $ 361,236
COST OF SALES 167,702 146,555 337,226 284,171
--------- --------- --------- ---------
Gross profit 36,246 40,238 79,259 77,065
--------- --------- --------- ---------
OPERATING EXPENSES:
Administration and other 22,326 12,108 37,590 23,109
Sales and marketing 6,653 6,301 13,292 12,487
Research and development 1,125 1,397 2,207 2,861
Compensation and transaction costs related to
recapitalization 1,426 6,626
--------- --------- --------- ---------
Total operating expenses 31,530 19,806 59,715 38,457
--------- --------- --------- ---------
OPERATING INCOME 4,716 20,432 19,544 38,608
INTEREST EXPENSE (14,290) (10,835) (25,848) (21,057)
OTHER INCOME (EXPENSE) - Net (588) 1,793 (158) (191)
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY LOSS (10,162) 11,390 (6,462) 17,360
INCOME TAX PROVISION (BENEFIT) (1,318) 4,232 981 7,931
--------- --------- --------- ---------
INCOME (LOSS) BEFORE
EXTRAORDINARY LOSS (8,844) 7,158 (7,443) 9,429
EXTRAORDINARY LOSS
(net of income taxes) (11,250) (11,250)
--------- --------- --------- ---------
NET INCOME (LOSS) $ (20,094) $ 7,158 $ (18,693) $ 9,429
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 1999 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, June 30,
2000 1999
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (18,693) $ 9,429
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 19,048 16,893
Deferred income taxes (1,879) 2,865
Provision for losses on accounts receivable (626) (928)
Noncash compensation expense 1,223 270
Loss on sale of assets 474 98
Extraordinary loss 11,250
Changes in assets and liabilities:
Accounts receivable 6,484 (15,890)
Inventories (9,995) (14,429)
Prepaid expenses and other 570 1,321
Other assets 1,277 1,094
Trade accounts payable 10,598 6,665
Accrued liabilities (2,234) (1,262)
Due to affiliates (4,715) (5,579)
Income taxes payable 147 6,191
Other liabilities 3,348 1,848
--------- --------
Net cash provided by operating activities 16,277 8,586
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 40
Capital expenditures for plant and equipment (25,185) (17,116)
--------- --------
Net cash used in investing activities (25,185) (17,076)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capitalized loan fees (21,317)
Payment of fees from tender offer (10,055)
Redemption of common stock (314,034)
Net proceeds from issuance of stock and net change in related stockholders'
notes receivable 161,161 1,139
Principal payments on borrowings (503,002) (4,625)
Proceeds from issuance of long-term debt 699,508 5,155
--------- --------
Net cash provided by financing activities 12,261 1,669
--------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS (1,233) 768
--------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,120 (6,053)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 9,097 19,217
--------- --------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,217 $ 13,164
========= ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the period for:
Interest $ 23,870 $ 20,754
========= ========
Income taxes $ (434) $ (2,899)
========= ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements have been
prepared, without audit, in accordance with U.S. generally accepted
accounting principles and pursuant to the rules and regulations of the
Securities and Exchange Commission. The information reflects all normal
recurring adjustments that, in the opinion of management, are necessary
for a fair presentation of the financial position, results of operations
and cash flows of Huntsman Packaging Corporation and its subsidiaries
("Huntsman Packaging") for the periods presented. Results of operations
for interim periods are not necessarily indicative of results of
operations to be expected for a full fiscal year.
Certain information in footnote disclosures normally included in
financial statements presented in accordance with U.S. generally
accepted accounting principles has been condensed or omitted in
accordance with the rules and regulations of the Securities and Exchange
Commission. These statements should be read in conjunction with Huntsman
Packaging's Annual Report on Form 10-K for the year ended December 31,
1999.
2. RECAPITALIZATION
On March 31, 2000, we, together with our then existing stockholders,
entered into an agreement (the "Recapitalization Agreement") with Chase
Domestic Investments, L.L.C., a newly formed Delaware limited liability
company ("Investor L.L.C."), and an affiliate of Chase Capital Partners
("CCP"), whereby Investor L.L.C. agreed to acquire majority ownership in
our Company in a recapitalization transaction.
Pursuant to the Recapitalization Agreement, we redeemed all of the
shares of our common stock held by Jon M. Huntsman, our founder, then
majority stockholder and then Chairman of the Board (the "Equity
Redemption") for approximately $314.0 million. Investor L.L.C. purchased
approximately one-half of the shares of our common stock held
collectively by The Christena Karen H. Durham Trust (the "Trust") and by
members of our senior management (the "Management Investors") for
approximately $101.8 million. Investor L.L.C. and certain other
institutional investors also purchased (the "Investor Common Equity
Contribution") shares of common stock directly from us for approximately
$63.5 million. The Trust and the Management Investors retained
approximately one-half of the shares of our common stock collectively
owned by them prior to the recapitalization. In addition, we issued to
Investor L.L.C. and certain other institutional investors a new series
of senior cumulative exchangeable redeemable preferred stock (the "New
Preferred Stock") and detachable warrants for our common stock (the "New
Preferred Stock Warrants") for net consideration of approximately $98.5
million, of which approximately $80.0 has been allocated to the New
Preferred Stock and 18.5 million has been allocated to the New
Preferred Stock Warrants, based on the relative fair market values of
the instruments. The foregoing transactions are collectively referred
to as the "Recapitalization." The Recapitalization was consummated on
May 31, 2000. The total consideration paid in the Recapitalization was
approximately $1.1 billion, including transaction costs and subject to
post-closing purchase price adjustments.
At June 30, 2000, Investor L.L.C. owned approximately 55.5% of our
outstanding common stock, certain other institutional investors owned
approximately 4.3% of our outstanding common stock, and the Trust and
the Management Investors owned approximately 40.2% of our outstanding
common stock.
We incurred $1.4 million and $6.6 million of fees and expenses in
connection with the Recapitalization in the three and six month periods
ended June 30, 2000, respectively, and these fees and expenses are
included in "compensation and transaction costs related to
recapitalization" in the accompanying condensed consolidated statement
of income. The accounting for the Recapitalization did not result in
changes to the historical cost presentation of our assets and
liabilities.
In connection with the Recapitalization, we purchased all of our
outstanding $125.0 million principal amount of 9-1/8% Senior
Subordinated Notes due 2007 (the "9-1/8% Notes") pursuant to a tender
offer (the "Tender Offer") and discharged our obligations under the
related indenture.
5
<PAGE> 6
Upon closing of the Recapitalization, we issued 220,000 Units (the
"Units") consisting of $220.0 million principal amount of 13% Senior
Subordinated Notes due 2010 (the "Notes") and Warrants (the "Note
Warrants") to purchase 18,532 shares of common stock. The Senior
Subordinated Notes were issued at a discount of approximately $5.9
million and we allocated approximately $8.0 million to Note Warrants and
approximately $206.1 million to Notes based on the relative fair market
values of each instrument. The discount and the amount allocated to the
Note Warrants are being amortized over the life of the Notes. The
Units were issued in a transaction exempt from the registration
requirements under the Securities Act of 1933. The Notes are
unsecured. The Notes are subordinated to all of our existing an
future senior debt, rank equally with any future senior subordinated
debt and rank senior to any future subordinated debt. The Notes are
guaranteed by some of our subsidiaries. The Note Warrants become
exercisable on the occurrence of certain events (which will be no later
than November 27, 2000) and mature on June 1, 2010.
Upon closing of the offering of the Units and the Recapitalization, we
refinanced all amounts outstanding under our prior credit facility (the
"Prior Credit Facility") and replaced the Prior Credit Facility with
amended and restated senior secured credit facilities (the "New Credit
Facilities") with The Chase Manhattan Bank, Bankers Trust Company, The
Bank of Nova Scotia and a syndicate of banking institutions. The New
Credit Facilities consist of a $200.0 million senior secured tranche A
facility, $40.0 million of which was made available to our principal
Mexican subsidiary (the "Tranche A Facility"), a $280.0 million senior
secured tranche B facility (the "Tranche B Facility") and a $100.0
million revolving credit facility (the "Revolving Credit Facility").
Included in extraordinary loss is a $5.2 million charge (net of tax) for
the write off of capitalized loan fees associated with the 9-1/8% Notes
and the Prior Credit Facility and a $6.0 million charge (net of tax)
for the Tender Offer payment to the holders of the 9-1/8% Notes.
Long-term debt outstanding as of June 30, 2000 consists of the
following (amounts in thousands):
<TABLE>
<CAPTION>
<S> <C>
New Credit Facilities:
Tranche A Facility $200,000
Tranche B Facility 280,000
Revolving Credit Facility 7,000
Notes (net of original issue discount and
Note Warrants being amortized of
$5,920 and $7,919, respectively) 206,161
Line of credit 3,537
Obligations under capital leases 439
Insurance obligations 1,858
--------
Total 698,995
Less current portion (3,928)
--------
Long-term portion $695,067
========
</TABLE>
3. INVENTORIES
Inventories are recorded at the lower of cost (on a first-in, first-out
basis) or market value. Inventories as of June 30, 2000 and December 31,
1999 consisted of the following (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
------- ------------
<S> <C> <C>
Finished goods $50,437 $41,408
Raw materials 30,165 28,910
Work-in-process 7,592 7,881
------- -------
Total $88,194 $78,199
======= =======
</TABLE>
4. COMPREHENSIVE INCOME
The following table reports comprehensive income (loss) for the three
and six months ended June 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2000 1999 2000 1999
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Net income (loss) $(20,094) $7,158 $(18,693) $9,429
Foreign currency translation adjustments (1,687) 52 (2,060) 460
-------- ------ -------- ------
Comprehensive income (loss) $(21,781) $7,210 $(20,753) $9,889
-------- ====== -------- ======
</TABLE>
6
<PAGE> 7
5. OTHER INCOME (EXPENSE)
During 1999, we held investments in marketable securities that were
designated as trading securities. For the three and six months ended
June 30, 1999, unrealized gains (losses) of approximately $1.8 million
and $(0.2) million, respectively, on these investments are included in
other income (expense), net. We liquidated our position in the trading
securities in the fourth quarter of 1999.
6. OPERATING SEGMENTS
Operating segments are components of our company for which separate
financial information is available that is evaluated regularly by our
chief operating decision maker in deciding how to allocate resources and
in assessing performance. This information is reported on the same basis
that is used internally for evaluating segment performance.
We have three reportable operating segments: specialty films, design
products and industrial films. The specialty films segment produces
converter films that are sold to other flexible packaging manufacturers
for additional fabrication, barrier films used to package and protect
food and other products, and other films used in the personal care,
medical and agriculture industries. 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.
Sales and transfers between our segments are eliminated in
consolidation. We evaluate performance of the operating segments based
on profit or loss before income taxes, not including nonrecurring gains
or losses. Our reportable segments are managed separately with separate
management teams, because each segment has different products, customer
requirements, technology and marketing strategies.
Segment profit or loss and segment assets as of and for the three months
ended June 30, 2000 and 1999 are presented in the following table (in
thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
2000 PRODUCTS FILMS FILMS OTHER TOTAL
---------------------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales to customers $ 50,696 $41,521 $111,731 $ 203,948
Intersegment sales 1,309 1,583 2,019 $ (4,911)
-------- ------- -------- --------- ---------
Total net sales 52,005 43,104 113,750 (4,911) 203,948
Depreciation and
amortization 2,223 1,228 5,186 896 9,533
Interest expense 891 87 4,056 9,256 14,290
Segment profit 2,540 4,840 7,424 (23,540) (8,736)
Compensation and
transaction costs
related to
recapitalization 14,381 14,381
Segment total assets 178,783 90,055 452,966 76,828 798,632
Capital expenditures 2,843 2,153 7,325 2,771 15,092
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
1999
----------------------
<S> <C> <C> <C> <C> <C>
Net sales to customers $ 40,549 $37,534 $108,710 $ 186,793
Intersegment sales 1,569 533 1,191 $ (3,293)
-------- ------- -------- --------- ---------
Total net sales 42,118 38,067 109,901 (3,293) 186,793
Depreciation and
amortization 1,842 1,154 4,691 763 8,450
Interest expense 779 87 3,327 6,642 10,835
Segment profit 2,146 4,738 14,969 (10,463) 11,390
Segment total assets 155,115 90,655 446,669 58,192 750,631
Capital expenditures 1,699 1,677 4,759 861 8,996
</TABLE>
Segment profit or loss for the six months ended June 30, 2000 and 1999 are
presented in the following table (in thousands):
<TABLE>
<CAPTION>
DESIGN INDUSTRIAL SPECIALTY CORPORATE/
2000 PRODUCTS FILMS FILMS OTHER TOTAL
---------------------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Net sales to customers $102,319 $80,800 $233,366 $416,485
Intersegment sales 2,777 2,722 4,173 $ (9,672) --
-------- ------- -------- --------- --------
Total net sales 105,096 83,522 237,539 (9,672) 416,485
Depreciation and
amortization 4,437 2,509 10,327 1,775 19,048
Interest expense 1,779 174 7,877 16,018 25,848
Segment profit 6,515 9,126 21,892 (37,369) 164
Compensation and
transaction costs
related to
recapitalization 19,581 19,581
Capital expenditures 4,204 5,532 11,495 3,954 25,185
1999
----------------------
Net sales to customers $ 78,483 $71,281 $211,472 $ 361,236
Intersegment sales 2,475 840 2,558 $ (5,873)
-------- ------- -------- --------- --------
Total net sales 80,958 72,121 214,030 (5,873) 361,236
Depreciation and
amortization 3,851 2,269 9,265 1,508 16,893
Interest expense 1,578 174 6,779 12,526 21,057
Segment profit 4,001 8,707 28,174 (23,522) 17,360
Capital expenditures 3,985 3,394 7,891 1,846 17,116
</TABLE>
8
<PAGE> 9
A reconciliation of the totals reported for the operating segments to our totals
reported in the consolidated condensed financial statements is as follows (in
thousands):
<TABLE>
<CAPTION>
2000 1999
----------------------- -----------------------
3 months 6 months 3 months 6 months
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PROFIT OR LOSS
Total profit for reportable segments $ 14,804 $ 37,533 $ 21,853 $ 40,882
Unallocated amounts:
Corporate expenses (14,284) (21,351) (3,821) (10,996)
Interest expense (9,256) (16,018) (6,642) (12,526)
Compensation and transaction costs
related to recapitalization (1,426) (6,626)
-------- -------- -------- --------
Income (loss) before taxes and
extraordinary loss $(10,162) $ (6,462) $ 11,390 $ 17,360
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of June 30,
----------------------
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Total assets for reportable segments $721,804 $692,439
Intangible assets not allocated to segments 15,511 16,822
Other unallocated assets 61,317 41,370
-------- --------
Total consolidated assets $798,632 $750,631
======== ========
</TABLE>
7. STOCK OPTIONS AND RESTRICTED STOCK
During 1998, our board of directors adopted the 1998 Huntsman Packaging
Corporation Stock Option Plan. The 1998 plan authorized grants of
nonqualified stock options covering up to 41,956 shares of our nonvoting
Class C common stock. During 1998, we granted options covering a total
of 41,956 shares under the 1998 plan. Options covering 5,244 shares were
subsequently canceled. In addition, 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 of Class C common stock to
certain members of our senior management. Options covering a total of
8,902 shares issued under the 1998 Plan were "rolled-over" in the
Recapitalization.
Pursuant to the Recapitalization, we adopted a 2000 stock-based
incentive compensation plan. The 2000 plan became effective as of the
consummation of the Recapitalization and authorizes grants to our
management employees as designated by the compensation committee of our
board of directors of nonqualified stock options or restricted stock
covering 51,010 shares of our common stock. As of June 30, 2000, we had
granted restricted stock covering 32,750 shares of common stock and
options to acquire 10,030 shares of common stock. The options or
restricted common stock will vest as follows: (1) one-sixth are
"time-vested" options or shares, which will vest on January 1, 2001, so
long as the recipient is still our employee on such date, and (2) the
remainder are "performance vested" options or shares, which will vest in
equal increments over a five-year period commencing on December 31, 2000
as follows: (a) vesting in full, if 100% or more of the applicable
target market value of equity is achieved as of the end of the
applicable calendar year and (b) partial vesting if more than 90% of the
applicable target market value of equity is achieved as of the end of
the applicable calendar year. Moreover, all performance vested options
or shares not previously vested in accordance with the preceding
sentence will vest automatically in full on December 31, 2009 so long as
the recipient is still our employee on such date.
9
<PAGE> 10
8. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The following condensed consolidating financial statements present, in
separate columns, financial information for (i) Huntsman Packaging (on a
parent only basis), with its investment in its subsidiaries recorded
under the equity method, (ii) guarantor subsidiaries (as specified in
the Indenture, dated May 31, 2000 (the "Indenture") relating to Huntsman
Packaging's $220 million senior subordinated notes due 2010 (the
"Notes")) on a combined basis, with any investments in non-guarantor
subsidiaries specified in the Indenture recorded under the equity
method, (iii) direct and indirect non-guarantor subsidiaries on a
combined basis, (iv) the eliminations necessary to arrive at the
information for Huntsman Packaging and its subsidiaries on a
consolidated basis, and (v) Huntsman Packaging on a consolidated basis,
in each case as of June 30, 2000 and December 31, 1999 and for the three
and six months ended June 30, 2000 and 1999. The Notes are fully and
unconditionally guaranteed on a joint and several basis by each
guarantor subsidiary and each guarantor subsidiary is wholly owned,
directly or indirectly, by Huntsman Packaging. There are no contractual
restrictions limiting transfers of cash from guarantor and non-guarantor
subsidiaries to Huntsman Packaging. The consolidating condensed
financial statements are presented herein, rather than separate
financial statements for each of the guarantor subsidiaries, because
management believes that separate financial statements relating to the
guarantor subsidiaries are not material to investors.
10
<PAGE> 11
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 212 $ (20) $ 11,025 $ 11,217
Receivables, net 72,408 27,004 17,457 116,869
Inventories 62,710 16,686 8,798 88,194
Income taxes receivable 8,063 136 (166) 8,033
Deferred income taxes 9,115 426 (1,675) 7,866
Prepaid expenses and other 1,582 113 379 2,074
--------- --------- --------- ---------
Total current assets 154,090 44,345 35,818 234,253
PLANT AND EQUIPMENT, net 196,547 82,990 44,117 323,654
INTANGIBLE ASSETS , net 51,466 141,027 18,020 210,513
INVESTMENT IN SUBSIDIARIES 65,454 $ (65,454)
OTHER ASSETS 27,846 144 2,222 30,212
--------- --------- --------- --------- ---------
TOTAL ASSETS $ 495,403 $ 268,506 $ 100,177 $ (65,454) $ 798,632
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Trade accounts payable $ 47,102 $ 12,487 $ 11,065 $ 70,654
Accrued liabilities 24,348 2,810 5,544 32,702
Current portion of long-term debt 3,928 3,928
Due to affiliates (19,920) 22,448 (2,528)
--------- --------- --------- ---------
Total current liabilities 55,458 37,745 14,081 107,284
LONG-TERM DEBT, net of current portion 467,163 184,000 43,904 695,067
OTHER LIABILITIES 15,497 1,531 1,470 18,498
DEFERRED INCOME TAXES 29,358 18,465 2,033 49,856
--------- --------- --------- ---------
Total liabilities 567,476 241,741 61,488 870,705
--------- --------- --------- ---------
REDEEMABLE PREFERRED STOCK 79,950 79,950
--------- ---------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock 108,141 20,377 29,241 $ (49,618) 108,141
Warrants 26,469 26,469
Retained earnings (deficit) (260,797) 6,399 14,708 (21,107) (260,797)
Stockholder note receivable (19,019) (19,019)
Foreign currency translation adjustments (6,817) (11) (5,260) 5,271 (6,817)
--------- --------- --------- --------- ---------
Total stockholders' equity (deficit) (152,023) 26,765 38,689 (65,454) (152,023)
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT) $ 495,403 $ 268,506 $ 100,177 $ (65,454) $ 798,632
========= ========= ========= ========= =========
</TABLE>
11
<PAGE> 12
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1999 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
HUNTSMAN CONSOLIDATED
PACKAGING COMBINED HUNTSMAN
CORPORATION COMBINED NON- PACKAGING
PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION
----------- ---------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,212 $ 536 $ 7,349 $ 9,097
Receivables, net 75,053 27,238 20,343 122,634
Inventories 56,646 13,560 7,993 78,199
Income taxes receivable 3,486 212 (1,007) 2,691
Deferred income taxes 6,715 426 (1,733) 5,408
Prepaid expenses and other 2,127 101 416 2,644
--------- --------- --------- ---------
Total current assets 145,239 42,073 33,361 220,673
PLANT AND EQUIPMENT, net 184,444 83,742 46,266 314,452
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 $ 269,795 $ 100,276 $ (61,533) $ 769,023
========= ========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable $ 39,293 $ 10,780 $ 9,983 $ 60,056
Accrued liabilities 25,238 3,468 6,230 34,936
Current portion of long-term debt 13,464 3,656 17,120
Due to (from) affiliates (19,737) 27,781 (3,329) 4,715
--------- --------- --------- ---------
Total current liabilities 58,258 42,029 16,540 116,827
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 366,897 246,227 62,311 675,435
--------- --------- --------- ---------
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 3,184 11,949 (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 23,568 37,965 (61,533) 90,662
--------- --------- --------- --------- ---------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 460,485 $ 269,795 $ 100,276 $ (61,533) $ 769,023
========= ========= ========= ========= =========
</TABLE>
12
<PAGE> 13
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 133,385 $ 48,528 $ 26,946 $ (4,911) $ 203,948
COST OF SALES 112,960 38,949 20,704 (4,911) 167,702
--------- -------- -------- -------- ---------
Gross profit 20,425 9,579 6,242 36,246
OPERATING EXPENSES 25,044 3,650 2,836 31,530
--------- -------- -------- ---------
OPERATING INCOME (LOSS) (4,619) 5,929 3,406 4,716
INTEREST EXPENSE (9,262) (4,050) (978) (14,290)
EQUITY IN EARNINGS OF SUBSIDIARIES 1,823 (1,823)
OTHER INCOME (EXPENSE), net (405) (392) 209 (588)
--------- -------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (12,463) 1,487 2,637 (1,823) (10,162)
INCOME TAX PROVISION (BENEFIT) (3,619) 1,175 1,126 (1,318)
--------- -------- -------- -------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
(8,844) 312 1,511 (1,823) (8,844)
EXTRAORDINARY LOSS (NET OF TAX) (11,250) (11,250)
--------- -------- -------- -------- ---------
NET INCOME (LOSS) $ (20,094) $ 312 $ 1,511 $ (1,823) $ (20,094)
========= ======== ======== ======== =========
</TABLE>
13
<PAGE> 14
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 127,427 $ 38,222 $ 24,437 $ (3,293) $186,793
COST OF SALES 104,168 27,294 18,386 (3,293) 146,555
--------- -------- -------- -------- --------
Gross profit 23,259 10,928 6,051 40,238
OPERATING EXPENSES 14,637 2,831 2,338 19,806
--------- -------- -------- --------
OPERATING INCOME 8,622 8,097 3,713 20,432
INTEREST EXPENSE (6,649) (3,320) (866) (10,835)
EQUITY IN EARNINGS OF SUBSIDIARIES 6,229 (6,229)
OTHER INCOME (EXPENSE), net (226) 6 2,013 1,793
--------- -------- -------- -------- --------
INCOME BEFORE INCOME TAXES 7,976 4,783 4,860 (6,229) 11,390
INCOME TAX PROVISION 818 2,252 1,162 4,232
--------- -------- -------- -------- --------
NET INCOME $ 7,158 $ 2,531 $ 3,698 $ (6,229) $ 7,158
========= ======== ======== ======== ========
</TABLE>
14
<PAGE> 15
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 270,911 $ 101,946 $ 53,300 $ (9,672) $ 416,485
COST OF SALES 226,911 79,103 40,884 (9,672) 337,226
--------- --------- -------- -------- ---------
Gross profit 44,000 22,843 12,416 79,259
OPERATING EXPENSES 46,714 7,279 5,722 59,715
--------- --------- -------- -------- ---------
OPERATING INCOME (LOSS) (2,714) 15,564 6,694 19,544
INTEREST EXPENSE (16,029) (7,863) (1,956) (25,848)
EQUITY IN EARNINGS OF SUBSIDIARIES 6,224 (6,224)
OTHER INCOME (EXPENSE) - Net (343) (411) 596 (158)
--------- --------- -------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS (12,862) 7,290 5,334 (6,224) (6,462)
INCOME TAX PROVISION (BENEFIT) (5,419) 4,075 2,325 981
--------- --------- -------- -------- ---------
NET INCOME (LOSS) BEFORE EXTRAORDINARY LOSS
(7,443) 3,215 3,009 (6,224) (7,443)
EXTRAORDINARY LOSS (Net of tax) (11,250) (11,250)
--------- --------- -------- -------- ---------
NET INCOME (LOSS) $ (18,693) $ 3,215 $ 3,009 $ (6,224) $ (18,693)
========= ========= ======== ======== =========
</TABLE>
15
<PAGE> 16
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
NET SALES $246,149 $72,853 $48,107 $(5,873) $361,236
COST OF SALES 201,446 52,558 36,040 (5,873) 284,171
-------- ------- ------- ------- --------
Gross profit 44,703 20,295 12,067 77,065
OPERATING EXPENSES 28,340 5,369 4,748 38,457
-------- ------- ------- --------
OPERATING INCOME 16,363 14,926 7,319 38,608
INTEREST EXPENSE (12,539) (6,761) (1,757) (21,057)
EQUITY IN EARNINGS OF SUBSIDIARIES 7,632 (7,632)
OTHER INCOME (EXPENSE), net (430) (12) 251 (191)
-------- ------- ------- ------- --------
INCOME BEFORE INCOME TAXES 11,026 8,153 5,813 (7,632) 17,360
INCOME TAX PROVISION 1,597 4,115 2,219 7,931
-------- ------- ------- ------- --------
NET INCOME $ 9,429 $ 4,038 $ 3,594 $(7,632) $9,429
======== ======= ======= ======= ========
</TABLE>
16
<PAGE> 17
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
OPERATING ACTIVITIES $ 5,178 $ 3,026 $ 8,073 $ 16,277
-------- ------ ------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for plant and equipment (19,876) (3,564) (1,745) (25,185)
-------- ------ ------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment of capitalized loan fees (21,317) (21,317)
Payment of fees from tender offer (10,055) (10,055)
Redemption of common stock (314,034) (314,034)
Proceeds from issuance of common stock and net
change in related stockholders' notes
receivable 161,161 161,161
Proceeds from issuance (payments) of long-term
debt 198,413 (1,907) 196,506
-------- ------ ------- ---------
Net cash provided by (used in) financing
activities 14,168 (1,907) 12,261
-------- ------ ------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS (470) (18) (745) (1,233)
-------- ------ ------- ---------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,000) (556) 3,676 2,120
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD 1,212 536 7,349 9,097
-------- ------ ------- ---------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 212 $ (20) $11,025 $ 11,217
======== ====== ======= =========
</TABLE>
17
<PAGE> 18
HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Huntsman Combined Consolidated
Packaging Combined Non- Huntsman
Corporation Guarantor Guarantor Packaging
Parent Only Subsidiaries Subsidiaries Eliminations Corporation
----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS PROVIDED BY
(USED IN) OPERATING ACTIVITIES $ (4,412) $ 11,399 $ 1,599 $ 8,586
-------- -------- -------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 32 8 40
Capital expenditures for plant and equipment (12,546) (3,085) (1,485) (17,116)
-------- -------- ------- -------
Net cash used in investing activities (12,514) (3,077) (1,485) (17,076)
-------- -------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 1,139 1,139
Proceeds from issuance (payments) of long-term
debt 10,454 (8,800) (1,124) 530
-------- -------- ------- -------
Net cash provided by (used in) financing
activities 11,593 (8,800) (1,124) 1,669
-------- -------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS 27 741 768
-------- -------- ------- -------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (5,306) (478) (269) (6,053)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE
PERIOD 7,381 525 11,311 19,217
-------- -------- ------- -------
CASH AND CASH EQUIVALENTS AT
END OF THE PERIOD $ 2,075 $ 47 $11,042 $13,164
======== ======== ======= =======
</TABLE>
18
<PAGE> 19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources and results of operations.
This analysis should be read in conjunction with Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-K for the year ended December 31, 1999 (the "1999
10-K") and our Registration Statement on Form S-4 (file no. 333-42008) filed
with the Securities and Exchange Commission on July 21, 2000. 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
On May 31, 2000, we consummated a recapitalization (the
"Recapitalization") pursuant to an agreement dated March 31, 2000 among us, our
then existing shareholders and Chase Domestic Investments, L.L.C., an affiliate
of Chase Capital Partners. The Recapitalization was valued at approximately
$1.1 billion, including transaction costs, and is subject to post-closing
purchase price adjustments. See Note 2 to the consolidated financial
statements included elsewhere in this report for a discussion of the
transactions that occurred in connection with the Recapitalization and the
related financing thereof.
We generate our revenues, earnings and cash flows from the sale of film
and flexible packaging products throughout the world. We manufacture these
products at 24 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 markets for our film and flexible packaging products.
19
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth net sales and expenses, and such amounts
as a percentage of net sales, for the three and six months ended June 30, 2000
and 1999 (dollars in millions).
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------ ------------------
%of %of %of %of
$ Sales $ Sales $ Sales $ Sales
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales-net $203.9 100.0% $186.8 100.0% $416.5 100.0% $361.2 100.0%
Cost of sales 167.7 82.2 146.6 78.5 337.2 81.0 284.2 78.7
------ ------ ------ ------ ------ ------ ------ ------
Gross profit 36.2 17.8 40.2 21.5 79.3 19.0 77.0 21.3
Total operating expenses 31.5 15.5 19.8 10.6 59.8 14.3 38.4 10.6
------ ------ ------ ------ ------ ------ ------ ------
Operating income $ 4.7 2.3% $ 20.4 10.9% $ 19.5 4.7% $ 38.6 10.7%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net Sales
Net sales increased by $17.1 million, or 9.2%, from $186.8 million, for
the second quarter of 1999, to $203.9 million, for the second quarter of 2000.
The increase was primarily due to a 12% increase in our average selling price,
offset by a 2.5% decrease in sales volume. The sales price increase was spread
across all of our business segments. In the markets we serve, the average
selling price of our products generally increases or decreases as the price of
resins, our primary raw material, increases or decreases. Average resin prices
were significantly higher during the second quarter of 2000 compared to the
second quarter of 1999, resulting in a significant increase in our average
selling prices. The decrease in sales volumes was due to inventory corrections
and product line rationalization by our customers in all of our business
segments.
Gross Profit
Gross profit decreased by $4.0 million, or 10.0%, from $40.2 million,
for the second quarter of 1999, to $36.2 million, for the second quarter of
2000. This decrease, on a dollar basis, was due primarily to reduced gross
profit margins, which more than offset the increase in net sales for the period.
The decrease in gross profit margins was due primarily to a dramatic increase in
resin prices and our inability to increase our selling prices as rapidly as
resin costs rose during the period. As a percentage of sales, raw material costs
were 370 basis points higher in this period as compared to the prior year. In
addition, in some of our markets, we experienced reduced gross profit margins
due to a shift by some of our customers toward lower profit margin products.
Total Operating Expenses
Total operating expenses increased by $11.7 million, or 59.1%, from
$19.8 million, for the second quarter of 1999, to $31.5 million, for the second
quarter of 2000. Most of the increase resulted from two significant, unusual
items that ocurred in the second quarter of 2000, and which accounted for
$9.7 million of the $11.7 million increase. Excluding these two significant
items, operating expenses as a percentage of net sales were 10.7% for the second
quarter of 2000, approximately the same as the second quarter of 1999.
Costs related to the Recapitalization constitute the first significant
item affecting total operating expenses. We incurred $1.4 million of costs
related to the Recapitalization, of which $0.6 million related to incentive
compensation under a "stay bonus" plan. Under this plan, certain members of
management who continue their employment with us for six months after the
Recapitalization will receive a bonus equal to three months' salary.
20
<PAGE> 21
The second significant item affecting total operating expenses was a
company-wide supply chain improvement initiative. We incurred fees and expenses
during the second quarter of 2000 totaling $8.3 million in connection with this
initiative. We began this major initiative in the fourth quarter of 1999 with
the assistance of A.T. Kearney, a management consulting firm. The project is
focused on improving the efficiency of our operations. In March 2000, we began
implementing specific improvement projects and expect that finance identified
projects will be fully implemented by the end of 2001.
Operating Income
Operating income decreased by $15.7 million, or 77.0%, from $20.4
million, for the second quarter of 1999, to $4.7 million, for the second quarter
of 2000, as a result of the factors discussed above. Excluding the two
significant items described above, operating income decreased by $6.0 million,
or 29.4%, from $20.4 million for the second quarter of 1999, to $14.4 million
for the second quarter of 2000.
Interest Expense
Interest expense increased by $3.5 million, or 32.4%, from $10.8
million, for the second quarter of 1999, to $14.3 million, for the second
quarter of 2000. The increase was primarily due to additional interest expense
as a result of increased levels of long-term debt incurred to finance the
Recapitalization and higher interest rates in 2000 as compared to 1999.
Other Income (Expense)
Other income (expense) decreased from $1.8 million for the second
quarter of 1999 to $(0.6) million for the second quarter of 2000, a decrease in
income of $2.4 million. The decrease was due primarily to unrealized gains of
$1.8 million from investments in trading securities in the second quarter of
1999, which were not repeated in the second quarter of 2000, and losses on the
sale of fixed assets of $0.4 million in the second quarter of 2000. We
liquidated our position in the trading securities in the fourth quarter of 1999.
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Sales
Net sales increased by $55.3 million, or 15.3%, from $361.2 million, for
the first half of 1999, to $416.5 million, for the first half of 2000. The
increase was primarily due to a 1.7% increase in sales volume and a 12.3%
increase in our average selling price. The sales volume increases were most
significant in our design products segment. However, inventory corrections and
product rationalization by our customers resulted in slower sales volume growth
for us during the period. The sales price increases were spread generally
across all of our business segments. As mentioned above, in the markets we
serve, the average selling price of our products generally increases or
decreases as the price of resins, our primary raw material, increases or
decreases. Average resin prices were significantly higher during the first half
of 2000 compared to the first half of 1999, resulting in a significant increase
in our average selling prices.
Gross Profit
Gross profit increased by $2.3 million, or 3.0%, from $77.0 million, for
the first half of 1999, to $79.3 million, for the first half of 2000. The
increase was due primarily to a strong increase in net sales, but was offset
significantly by reduced gross profit margins. The decrease in the gross profit
margin was due primarily to a dramatic increase in resin prices and our
inability to increase our selling price as rapidly as resin costs rose, and at
the same margins. As a percentage of sales, raw material costs were 370 basis
points higher in this period, as compared to the prior year. In addition, in
some of our markets, we experienced reduced profit margins due to a shift by
some of our customers toward lower profit margin products.
21
<PAGE> 22
Total Operating Expenses
Total operating expenses increased by $21.4 million, or 55.7%, from
$38.4 million, for the first half of 1999, to $59.8 million, for the first half
of 2000. Most of the increase resulted from three significant items, which
accounted for $17.2 million of the $21.4 million increase. Excluding these three
significant items, operating expenses as a percentage of net sales were 10.2%
for the first half of 2000, compared with 10.6% for the first half of 1999.
Costs relating to the Recapitalization constituted the first significant
item affecting total operating expenses. We incurred $6.6 million of costs
related to the Recapitalization. These costs consisted of long-term incentive
compensation expense of $5.0 million, $0.6 million of incentive compensation
under a "stay bonus" plan and transaction fees and expenses of $1.0 million.
Under the provisions of our long-term incentive plans, certain incentive
payments were due upon a "change of control" in our ownership. Because the
Recapitalization was probable to occur and constituted a" change of control"
under our long-term incentive plans, we accrued a liability for the long-term
compensation due during the first quarter of 2000. These amounts were paid in
second quarter.
The second significant item affecting total operating expenses was
noncash stock-based compensation expense. We incurred noncash stock-based
compensation expense of $1.2 million related to outstanding options to purchase
our Class C common stock. As a result of the Recapitalization, the stock options
fully vested and became exercisable upon the consummation of the
Recapitalization. The $1.2 million noncash stock-based compensation expense
recognizes the accelerated vesting of all performance-based stock options based
on the estimated per share purchase price implied in the Recapitalization. We
incurred $0.3 million of noncash stock-based compensation expense in the first
half of 1999.
The third significant item affecting total operating expenses was our
company-wide supply chain initiative discussed above. We incurred fees and
expenses during the first half of 2000 totaling $9.7 million in connection with
this initiative.
Operating Income
Operating income decreased by $19.1 million, or 49.5%, from $38.6
million, for the first half of 1999, to $19.5 million, for the first half of
2000, due to the factors discussed above. Excluding the three significant items
described above, operating income decreased by $1.9 million, or 4.9%, from
$38.6 million for the first half of 1999, to $36.7 million for the first half
of 2000.
Interest Expense
Interest expense increased by $4.7 million, or 22.3%, from $21.1 million
for the first half of 1999, to $25.8 million for the first half of 2000. The
increase was due to additional interest expense as a result of increased levels
of long-term debt incurred to finance the Recapitalization and higher interest
rates in 2000 as compared to 1999.
22
<PAGE> 23
LIQUIDITY AND CAPITAL RESOURCES
Upon closing of the Recapitalization, we issued 220,000 Units (the
"Units") consisting of $220.0 million principal amount of 13% Senior
Subordinated Notes due 2010 (the "Notes") and Warrants (the "Note Warrants") to
purchase 18,532 shares of common stock. The Notes were issued at a discount of
approximately $5.9 million. The Units were issued in a transaction exempt from
the registration requirements under the Securities Act of 1933. The Notes are
unsecured. The Notes are subordinated to all of our existing and future senior
debt, rank equally with any future senior subordinated debt and rank senior to
any future subordinated debt. The Notes are guaranteed by some of our
subsidiaries. The Note Warrants become exercisable on the occurrence of certain
events (which will be no later than November 27, 2000) and mature on June 1,
2010.
Upon closing of the offering of the Units and the Recapitalization, we
purchased all of our outstanding $125.0 million principal amount of 9-1/8%
Senior Subordinated Notes due 2007, refinanced all amounts outstanding under our
prior credit facility (the "Prior Credit Facility") and replaced the Prior
Credit Facility with amended and restated senior secured credit facilities (the
"New Credit Facilities") with The Chase Manhattan Bank, Bankers Trust Company,
The Bank of Nova Scotia and a syndicate of banking institutions. The New Credit
Facilities consist of a $200.0 million senior secured tranche A facility, $40.0
million of which was made available to our principal Mexican subsidiary (the
"Tranche A Facility"), a $280.0 million senior secured tranche B facility (the
"Tranche B Facility") and a $100.0 million revolving credit facility (the
"Revolving Credit Facility").
Loans under the Revolving Credit Facility and the Tranche A Facility
bear interest, at our option, at either Adjusted LIBOR plus 2.50% or ABR (as
defined below) plus 1.50%, in each case subject to certain adjustments. Loans
under the Tranche B Facility bear interest, at our option, at either Adjusted
LIBOR plus 3.00% or ABR plus 2.00%. We may elect interest periods of one, two,
three or six months for Adjusted LIBOR borrowings. Interest is calculated on the
basis of actual days elapsed in a year of 360 days (or 365 or 366 days, as the
case may be, in the case of ABR loans based on the Prime Rate) and interest is
payable at the end of each interest period and, in any event, at least every
three months. ABR is the Alternate Base Rate, which is the higher of Bankers
Trust Company's Prime Rate or the Federal Funds Effective Rate plus _ of 1%.
Adjusted LIBOR will at all times include statutory reserves.
Our obligations under the New Credit Facilities are guaranteed by
substantially all of our domestic subsidiaries and secured by substantially all
of our domestic assets. The New Credit Facilities are also secured by a pledge
of 65% of the capital stock of each of our foreign subsidiaries.
The New Credit Facilities and the indenture relating to the Notes impose
certain restrictions on us, including restrictions on our ability to incur
indebtedness, pay dividends, make investments, grant liens, sell our assets and
engage in certain other activities. In addition, the New Credit Facilities
require us to maintain certain financial ratios. Indebtedness under the New
Credit Facilities is secured by substantially all of our assets, including our
real and personal property, inventory, accounts receivable, intellectual
property, and other intangibles.
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $16.3 million for the
first half of 2000, an increase of $7.7 million from the same period in 1999.
The increase resulted primarily from decreases in trade accounts receivable,
lower inventories in 2000 compared to 1999, and non-cash income statement items.
The increase was offset by a decrease in net income during the first half of
2000 and an increase in income tax receivable.
Net Cash Used in Investing Activities
Net cash used in investing activities was $25.2 million for the first
half of 2000, an increase of $8.1 million from the same period in 1999. In both
periods, the expenditures were almost entirely for capital expenditures.
Capital expenditures during the first half of 2000 were primarily for major
expansion projects in our industrial films and specialty films product
lines,for upgrading and installing equipment relocated from closed
manufacturing facilities to other facilities, for upgrading our information
systems, and for several new and carryover maintenance projects throughout our
company. We expect capital expenditures to remain at approximately current
levels in future periods.
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Net Cash Provided by Financing Activities
Net cash provided by financing activities was $12.3 million for the
first half of 2000, compared to $1.7 million for the same period in 1999. The
activity in 2000 was higher as a result of the financial change caused by the
Recapitalization.
Liquidity
As of June 30, 2000, we had approximately $127.0 million of working
capital and approximately $93.0 million available under the New Credit
Facilities, approximately $1.3 million of which was represented by outstanding
letters of credit. As of June 30, 2000, the debt under the New Credit Facilities
bore interest at a weighted average rate of 9.69%.
As of June 30, 2000, we had $11.2 million in cash and cash equivalents,
including $11.0 million held in 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 New Credit Facilities. For the six months ended June 30, 2000, our
foreign operations generated net income from continuing operations of $3.8
million.
Interest expense on the New Credit Facilities and the Notes will
significantly increase our liquidity requirements. We expect that cash flows
from operating activities and available borrowings under the New Credit
Facilities will provide sufficient working capital to operate our business, to
make expected capital expenditures and to meet foreseeable liquidity
requirements, including debt service on the Notes and the New Credit Facilities.
If we were to engage in a significant acquisition transaction, however, it may
be necessary for us to restructure our existing credit arrangements.
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 us or on our behalf, 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. These risks include, but are not
limited to, our high degree of leverage and our ability to service indebtedness,
restrictions under our New Credit Facilities and the indenture related to the
Notes, fluctuations in the price of resins (our primary raw materials) and the
availability of resin supplies, competition, customer relationships, changes in
demand for our products, risks associated with acquisitions and risks associated
with international operations. These risks and certain other uncertainties are
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discussed in more detail in the 1999 10-K and in our Registration Statement on
Form S-4 (file no. 333-42008) filed with the Securities and Exchange Commission
on July 21, 2000. There may also be other factors, including those discussed
elsewhere in this report, that may cause our actual results to differ materially
from the forward-looking statements. Any forward-looking statements should be
considered in light of these factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to various interest rate and resins price risks that
arise in the normal course of business. We finance our operations with
borrowings comprised primarily of variable rate indebtedness. Our raw material
costs are comprised primarily of resins. Significant increases in interest rates
or the price of resins could adversely affect our operating margins, results of
operations and ability to service our indebtedness.
We enter into interest rate collar and swap agreements to manage
interest rate market risks and commodity collar agreements to manage resin
market risks. As of June 30, 2000, we had one interest rate collar agreement. We
did not have any swap agreements or commodity collar agreements in place at June
30, 2000. The estimated fair market value of the interest rate collar was
approximately $0.2 million. The interest rate collar was sold in July 2000 for
approximately $0.2 million. 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.
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PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
As part of the Recapitalization, the Company issued and sold the
following equity securities on May 31, 2000: (i) 317,306 shares of its common
stock to Chase Domestic Investments, L.L.C., an affiliate of Chase Capital
Partners, for approximately $153.3 million, (ii) 24,839 shares of its common
stock to certain other institutional investors for approximately $12.0 million,
(iii) 52,000 shares of its senior cumulative exchangeable redeemable preferred
stock and warrants to purchase 22,486 shares of its common stock to Chase
Domestic Investments, L.L.C. for $52.0 million and (iv) 48,000 shares of its
senior cumulative exchangeable redeemable preferred stock and warrants to
purchase 20,756 shares of its common stock to certain other institutional
investors for $48.0 million. The issuances and sales by the Company of the
common stock, the preferred stock and the warrants were made in reliance on
the exemption from registration provided by Section 4(2) under the Securities
Act of 1933 (the "Securities Act").
On May 31, 2000, the Company also issued 220,000 units (the "Units")
consisting of $220.0 million principal amount of 13% senior subordinated notes
due 2010 and warrants to purchase 18,532 shares of common stock to qualified
institutional buyers as defined in Rule 144A under the Securities Act. The
aggregate offering price for the Units was $220.0 million, less a discount of
$5.9 million. We paid the initial purchasers Chase Securities Inc. and
Deutsche Banc Alex Brown, fees of approximately $6.6 million in connection
with the offering. The issuance and sale by the Company of the Units to the
initial purchasers was made in reliance on the exemption from registration
provided by Section 4(2) under the Securities Act.
On May 31, 2000, the Company also issued 32,750 shares of restricted
common stock, which are subject to time and performance vesting requirements,
to certain members of its senior management under the terms of its 2000
stock-based incentive compensation plan. The Company received promissory notes
in the aggregate amount of approximately $15.8 million as consideration from
the purchasers. The issuance and sale by the Company of the restricted common
stock to the members of its senior management was made in reliance on the
exemptions from registration provided by Section 4(2) under the Securities Act
and Rule 701 under the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
By unanimous written consents, effective May 31, 2000, the Company's
shareholders approved the Third Amended and Restated Articles of Incorporation
of the Company, adopted Amended and Restated Bylaws of the Company, and adopted
the Company's 2000 Stock Incentive Plan. Also by unanimous written consent,
effective May 31, 2000, the Company's shareholders elected a new Board of
Directors, consisting of Donald J. Hofmann, Jr., Timothy J. Walsh, John M.B.
O'Connor, Richard D. Waters,Richard P. Durham, Jack E. Knott and Scott K.
Sorensen.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed with this report.
27 Financial Data Schedule
(b) The Company filed a report on Form 8-K with the Securities and
Exchange Commission on April 14, 2000 relating to the
announcement by the Company that it had entered into the
Recapitalization Agreement.
The Company filed a report on Form 8-K with the Securities and
Exchange Commission on June 14, 2000 relating to the
consummation of the Recapitalization and the resulting change of
control.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HUNTSMAN PACKAGING CORPORATION
/s/ Scott K. Sorensen
-------------------------------------------
SCOTT K. SORENSEN
Executive Vice President and
Chief Financial Officer, Treasurer
(Authorized Signatory and
Principal Financial and Accounting Officer)
Date: August 14, 2000
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INDEX TO EXHIBITS
<TABLE>
Exhibits
--------
<S> <C>
27 Financial Data Schedule.
</TABLE>
28
