10-Q 1 e10-q.txt QUARTERLY REPORT FOR PERIOD ENDED JUNE 30, 2000 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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. ================================================================================ 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) --------------------------------------------------------------------------------
June 30, December 31, 2000 1999 --------- ------------ 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 ========= =========
See notes to condensed consolidated financial statements. 2 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) --------------------------------------------------------------------------------
Three Months Ended Six Months Ended June 30, June 30, ------------------------- ------------------------- 2000 1999 2000 1999 --------- --------- --------- --------- 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 ========= ========= ========= =========
See notes to condensed consolidated financial statements. 3 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) --------------------------------------------------------------------------------
June 30, June 30, 2000 1999 --------- -------- 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) ========= ========
See notes to condensed consolidated financial statements. 4 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 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):
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 ========
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):
June 30, December 31, 2000 1999 ------- ------------ Finished goods $50,437 $41,408 Raw materials 30,165 28,910 Work-in-process 7,592 7,881 ------- ------- Total $88,194 $78,199 ======= =======
4. COMPREHENSIVE INCOME The following table reports comprehensive income (loss) for the three and six months ended June 30, 2000 and 1999 (in thousands).
Three Months Ended Six Months Ended June 30, June 30, --------------------- --------------------- 2000 1999 2000 1999 -------- ------ -------- ------ 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 -------- ====== -------- ======
6 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):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ 2000 PRODUCTS FILMS FILMS OTHER TOTAL ---------------------- --------- ---------- --------- ---------- --------- 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
7 8
1999 ---------------------- Net sales to customers $ 40,549 $37,534 $108,710 $ 186,793 Intersegment sales 1,569 533 1,191 $ (3,293) -------- ------- -------- --------- --------- Total net sales 42,118 38,067 109,901 (3,293) 186,793 Depreciation and amortization 1,842 1,154 4,691 763 8,450 Interest expense 779 87 3,327 6,642 10,835 Segment profit 2,146 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
Segment profit or loss for the six months ended June 30, 2000 and 1999 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ 2000 PRODUCTS FILMS FILMS OTHER TOTAL ---------------------- --------- ---------- --------- ---------- --------- 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
8 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):
2000 1999 ----------------------- ----------------------- 3 months 6 months 3 months 6 months -------- -------- -------- -------- 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 ======== ======== ======== ========
As of June 30, ---------------------- 2000 1999 -------- -------- 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 ======== ========
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 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 11 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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 ========= ========= ========= ========= =========
11 12 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ 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 ========= ========= ========= ========= =========
12 13 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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) ========= ======== ======== ======== =========
13 14 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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 ========= ======== ======== ======== ========
14 15 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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) ========= ========= ======== ======== =========
15 16 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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 ======== ======= ======= ======= ========
16 17 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2000 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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 ======== ====== ======= =========
17 18 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (IN THOUSANDS) (UNAUDITED) --------------------------------------------------------------------------------
Huntsman Combined Consolidated Packaging Combined Non- Huntsman Corporation Guarantor Guarantor Packaging Parent Only Subsidiaries Subsidiaries Eliminations Corporation ----------- ------------ ------------ ------------ ------------ 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 ======== ======== ======= =======
18 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 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).
Three Months Ended June 30, Six Months Ended June 30, ------------------------------------------ ------------------------------------------ 2000 1999 2000 1999 ------------------ ------------------ ------------------ ------------------ %of %of %of %of $ Sales $ Sales $ Sales $ Sales ------ ------ ------ ------ ------ ------ ------ ------ 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% ====== ====== ====== ====== ====== ====== ====== ======
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 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 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 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. 23 24 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 24 25 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. 25 26 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. 26 27 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 27 28 INDEX TO EXHIBITS Exhibits -------- 27 Financial Data Schedule.
28