-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KqwVqyEGH/QEcP6rOtR9ESh0hqNJEoGoGhkxahNPd/ip1igs6ljVnjeChk/UV0uj LkNczLQ/g2ooazS9u5AJtw== 0000950149-99-000583.txt : 19990402 0000950149-99-000583.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950149-99-000583 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HUNTSMAN PACKAGING CORP CENTRAL INDEX KEY: 0001049442 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, FOIL & COATED PAPER BAGS [2673] IRS NUMBER: 042162223 STATE OF INCORPORATION: UT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 333-40067 FILM NUMBER: 99580024 BUSINESS ADDRESS: STREET 1: 500 HUNTSMAN WAY CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015325200 10-K405 1 HUNTSMAN 10-K FOR FISCAL YEAR ENDED 12/31/98 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ___________ Commission File Number 333-40067 HUNTSMAN PACKAGING CORPORATION (Exact Name of the Registrant as Specified in its Charter) 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) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] At March 26, 1999, there were 1,000,001 outstanding shares of Class A Common Stock, 6,999 outstanding shares of Class B Common Stock, and 49,511 outstanding shares of Class C Common Stock. As of such date, none of the outstanding shares of Common Stock were held by persons other than affiliates or employees of the Registrant, and there was no public market for the Common Stock. ================================================================================ 2 This report contains certain forward-looking statements that involve risks and uncertainties, including statements about our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements. Some of the factors that could negatively affect our performance are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations--Cautionary Statement for Forward-Looking Information" and elsewhere in this report. PART I ITEM 1. BUSINESS GENERAL Huntsman Packaging Corporation ("Huntsman Packaging" or the "Company") was founded in 1992, as a wholly-owned subsidiary of Huntsman Corporation, a privately-owned petrochemical company headquartered in Salt Lake City, Utah. Originally formed to acquire the Wingfoot Films division of Goodyear Tire & Rubber Company, since 1992, we have successfully acquired and integrated 11 additional film businesses. We are now one of the largest manufacturers of film and flexible packaging products in North America. In September 1997, the Company was "spun off" from Huntsman Corporation. We continue to be privately owned, however, and all of the owners of the common stock are affiliates or employees of the Company. Significant events in 1998 included our acquisition of Blessings Corporation, a leading manufacturer of personal care and agricultural films, and the closure of some of our less efficient manufacturing facilities. These activities are discussed in more detail in Notes 3, 4 and 12 to the Consolidated Financial Statements included in this report. INDUSTRY OVERVIEW Flexible packaging and film products are thin, pliable films, bags, pouches and labels for food, consumer and industrial uses. Our products are generally made from blends or co-extrusions of polyethylene, polyvinyl chloride ("PVC") or other resins and are used for food packaging, medical and pharmaceutical applications, household goods and retail merchandising. In consumer applications, our flexible packaging replaces rigid containers (paperboard, glass, metals and rigid plastic) with lower-cost and lighter-weight packaging. In industrial applications, stretch and shrink films are used to unitize cans, boxes and loads for transport and are replacing traditional forms of packaging, such as steel strapping, corrugated paper boxes and taping. Our films are also used extensively in personal care products, such as disposable diapers and feminine care products. DESCRIPTION OF BUSINESS We offer one of the industry's most diverse product lines. We have plants in the United States, Canada, Mexico, Germany and Australia. For the year ended December 31, 1998, we had net sales of $651.9 million. We focus on technology and product development, strategic acquisitions, and manufacturing improvements to take advantage of current and projected market trends. We have brought new technology and new products to the marketplace, such as Winwrap and the patented G-Bond manufacturing process. We have also sought to continuously improve our operating efficiency, and we have a successful track record of improving capacity utilization, reducing overhead costs and increasing the profits of our acquired businesses. 1 3 We divide our products into three operating segments for financial and business reporting purposes: design products, industrial films and specialty films. Each of our operating segments is described below. Additional information about our foreign and domestic operations and operations in different business segments appears in Note 13 to the Consolidated Financial Statements included in this report. Design Products Design products accounted for 20.9%, 20.8% and 25.8% of our net sales in 1998, 1997 and 1996, respectively. Our design products include printed polyethylene roll stock, bags and sheets used to package food and consumer goods. Printed roll stock is sold to fresh and frozen food processors, who use their own packaging equipment to fabricate pouches and bags for their products. Printed bags are sold to bakeries, fresh and frozen food processors, textile manufacturers and other dry goods processors. Bread and bakery bags represent a significant portion of our design products business. Our design products group produces approximately one billion bread and bakery bags each year. Approximately 28% of our design products business consists of sales outside the United States. Industrial Films Industrial films accounted for 22.2%, 39.2% and 57.3% of our net sales in 1998, 1997 and 1996, respectively. Our industrial film products include polyethylene stretch films and PVC films. Our stretch films are used primarily to bundle products and wrap pallets. Currently, approximately one-half of all loads shipped in North America are unitized with stretch film. PVC films are used by supermarkets, institutions and homes to wrap meat, cheese and produce. Approximately 33% of our industrial films business consists of sales outside the United States. Specialty Films Specialty films accounted for 56.9%, 40.0% and 16.9% of our net sales in 1998, 1997 and 1996, respectively. Our specialty films include converter films and barrier films. Converter Films. Converter films are single-layer and multi-layer polyethylene films that are sold to converters and laminators for final processing into consumer products such as bags, pouches and printed products. Converter films may also be laminated to another film or to paper or foil to give each layer a specific performance characteristic, such as moisture, oxygen or odor barriers or light protection. Because converter films are sold for their sealability or barrier characteristics, they must meet stringent performance specifications including gauge control, layer thickness, sealability and web width accuracy. We are a leader in introducing new converter film product offerings to respond to industry trends and to meet customer needs. Barrier Films. Barrier films are polyethylene films that are sold to food processors and other end users. These films are puncture resistant and provide specific types of barrier protection against such things as moisture, oxygen and light. Our barrier films include cookie, cracker and cereal films, personal care and medical films, and agricultural and horticultural films. Cookie, Cracker and Cereal Films. We make coextruded barrier films that are manufactured into box liners for packaging cookies, crackers, cereals and other dry goods. As a leading supplier of these films, we continue to develop advanced coextrusion technology to gain market share and introduce new products. Personal Care and Medical Films. We are also an industry leader in personal care films used in disposable diapers, feminine hygiene products and adult incontinence products. A significant portion of our specialty films business consists of the sale of personal care films to Kimberly-Clark Corporation and its affiliates. Kimberly-Clark accounts for approximately 25% of our specialty films sales and 14% of our consolidated net sales. Our medical films include medical supply packaging and surgical drapes and gowns. 2 4 Agricultural and Horticultural Films. Our agricultural and horticultural films include mulch films, used to protect crops and enhance growth, and greenhouse films that cover greenhouses and protect young plants. SEASONALITY Our business is generally not subject to large seasonal fluctuations. Historically, however, we have experienced slight increases in sales volumes during the second and third quarters of each year. RESEARCH AND DEVELOPMENT Research and development are critical elements of our business. We spent $3.7 million, $2.5 million and $2.1 million on research and development in 1998, 1997 and 1996, respectively. Research and development spending represented approximately 0.6% of our net sales for 1998. Our research and development facilities are located in Akron, Ohio and Newport News, Virginia. INTELLECTUAL PROPERTY RIGHTS We believe patents, trademarks and licenses are significant to our business. We have trademarks associated with a number of our products. We own 21 unexpired U.S. patents and routinely apply for patents on significant product developments. Our patents have remaining terms ranging from 2 months to 16 years. We also have exclusive and nonexclusive licenses under patents owned by third parties. We also rely on unpatented proprietary know-how, continuing technological innovation and other trade secrets to develop and maintain our competitive position. We routinely enter into confidentiality agreements designed to protect our trade secrets and proprietary know-how. Although we constantly seek to protect our patents, trademarks and other intellectual property, there can be no assurance that our precautions will provide meaningful protection against competitors. RAW MATERIALS Our primary raw materials are low-density and linear low-density polyethylene resins and polyvinyl chloride resin. The costs of our raw materials are a function of, among other things, manufacturing capacity, demand, and the price of crude oil and natural gas feedstocks. Although we contract with large suppliers for raw materials, these materials are generally available from numerous sources. Resin shortages or significant increases in the price of resin, however, could have a significant adverse effect on our business. EMPLOYEES As of December 31, 1998, we had approximately 3,000 employees. Management believes its relationships with employees are good. There have been no strikes or work stoppages in our operating history. 3 5 ENVIRONMENTAL MATTERS Our operations are subject to environmental laws in the United States and abroad, including those described below ("Environmental Laws"). Our operating budgets include costs and expenses associated with complying with these laws, including the acquisition, maintenance and repair of pollution control equipment. Additional costs and expenses may also be incurred to meet new requirements under Environmental Laws, as well as in connection with the investigation and remediation of threatened or actual pollution. Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), and similar state statutes, an owner or operator of real property may be liable for the costs of removing or remediating hazardous substances on or under the property, regardless of whether the owner or operator owned or operated the real property at the time of the release of the hazardous substances and regardless of whether the release or disposal was in compliance with law at the time it occurred. To date, we are not aware of any claims under CERCLA or similar state statutes against us. Under the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), and similar state statutes, companies that hold permits to treat or store hazardous waste can be required to remediate contamination from solid waste management units at a facility, regardless of when the contamination occurred. Our plants generate either small, incidental volumes of hazardous waste or larger volumes which we store for less than 90 days. As a result, we are not required to hold RCRA permits at our individual facilities. Such waste, when generated, is disposed of at fully-permitted, off-site facilities or is recycled in fully-permitted recovery facilities. Our operations are also subject to regulation under the Clean Air Act and the Clean Water Act, as well as similar state statutes. Our Rochester, New York and Seattle, Washington plants have the potential to emit air pollutants in quantities that require them to obtain a Title V permit under the Clean Air Act Amendments of 1990 and the implementing state regulations. Both facilities have timely filed Title V applications under their respective state programs. Some capital costs for additional air pollution controls or monitors may be required at both sites. However, such expenditures would not be materially adverse to our business. Several facilities may also be required to obtain stormwater permits under the Clean Water Act and implementing regulations. The cost of this kind of permitting is not material. We are also subject to environmental laws and regulations in those foreign countries in which we operate. Our operating expenses for environmental matters totaled less than $0.2 million in each of 1998, 1997 and 1996 and are expected to remain at approximately this level in 1999. We believe this will be sufficient to cover, among other things, our routine measures to prevent, contain and clean up spills of materials that occur in the ordinary course of our business. Our estimated capital expenditures for environmental matters were approximately $0.6 million in 1998, $0.5 million in 1997 and $0.3 million in 1996, and are expected to be approximately $0.7 million in 1999 and approximately $1 million in 2000. Capital expenditures and, to a lesser extent, costs and operating expenses relating to environmental matters will be subject to evolving regulatory requirements and will depend on the timing and promulgation of specific standards which impose requirements on our operations. INTERNATIONAL OPERATIONS We operate facilities and sell products in several countries outside the United States, particularly in Mexico. As a result, we are subject to risks associated with selling and operating in foreign countries. These risks include devaluations and fluctuations in currency exchange rates, limitations on conversion of foreign currencies into U.S. dollars and remittance of dividends and other payments by foreign subsidiaries. The imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in certain foreign countries, and imposition or increase of investment and other restrictions by foreign governments could also have a negative effect on our business. 4 6 COMPETITION The markets in which we operate are highly competitive. We believe we compete on the basis of service, product quality, product innovation and price. In addition to competition from many smaller competitors, we face strong competition from a number of large flexible packaging companies. Some of our competitors are substantially larger, are more diversified and have greater financial resources than we do, and, therefore, may have certain competitive advantages. ITEM 2. PROPERTIES Our principal executive offices are located at 500 Huntsman Way, Salt Lake City, Utah 84108, and are leased from Huntsman Headquarters Corporation, an indirect, wholly-owned subsidiary of Huntsman Corporation. We own most of the improved real property and other assets used in our operations. We lease a few of the sites at which we have manufacturing operations and we also lease warehouse and office space at various locations. We consider the condition of our plants, warehouses and other properties and the other assets owned or leased by us to be generally good. Our principal manufacturing plants are listed below. Unless otherwise indicated, each property is owned. DESIGN PRODUCTS Langley, British Columbia* Mexico City, Mexico (two facilities) Rochester, New York Seattle, Washington INDUSTRIAL FILMS Calhoun, Georgia Danville, Kentucky Lewisburg, Tennessee Merced, California Phillipsburg, Germany Melbourne, Australia* Toronto, Canada SPECIALTY FILMS Birmingham, Alabama Bloomington, Indiana* Chippewa Falls, Wisconsin Dalton, Georgia Danville, Kentucky Deerfield, Massachusetts Harrington, Delaware McAlester, Oklahoma Newport News, Virginia Odon, Indiana* Washington, Georgia - ---------- * Leased properties 5 7 We have an annual manufacturing capacity of approximately 850 million pounds of polyethylene and PVC films. We believe that the capacities of our plants are adequate to meet our immediate needs. Our plants have historically operated at 75% to 100% of capacity. ITEM 3. LEGAL PROCEEDINGS Huntsman Packaging is involved in litigation from time to time in the ordinary course of our business. In management's opinion, none of such litigation is material to our financial condition or operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF STOCKHOLDERS We did not submit any matters to a vote of security holders during the fourth quarter of 1998. 6 8 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS At March 26, 1999, the Company had 1,000,001 shares of Class A Common Stock outstanding, 6,999 shares of Class B Common Stock outstanding and 49,511 shares of Class C Common Stock outstanding (the Class A Common Stock, the Class B Common Stock and the Class C Common Stock are herein collectively referred to as the "Common Stock"). At March 26, 1999, there were three holders of record of the Class A Common Stock, two holders of record of the Class B Common Stock and four holders of record of the Class C Common Stock. There is no established trading market for any class of the Company's Common Stock. The Company has not declared or paid any cash dividends on its capital stock during the last two years and does not anticipate paying any cash dividends in the foreseeable future. The indenture governing the Company's outstanding debt securities and the Company's bank credit facility contain certain restrictions on the payment of cash dividends with respect to the Company's Common Stock. During 1998, the Company sold 12,200 shares of Class C Common Stock to certain members of senior management. The shares of Class C Common Stock were sold for $100 per share, the estimated fair market value of the shares on the date of purchase. The Company believes that the issuance of the Class C Common Stock to members of its senior management, which did not involve a public offering or sale of securities, was exempt from the registration requirements of the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act. No underwriters, brokers or finders were involved in these transactions. In September 1998, 500 shares of Class C Common Stock were redeemed from one member of senior management who is no longer employed by the Company. In March 1999, 600 shares of Class C Common Stock were redeemed from another member of senior management. In 1999, the Company also sold 12,188 shares of Class C Common Stock to certain members of senior management for $100 per share, the estimated fair market value of the shares on the date of purchase. Also on February 22, 1999, the Company canceled outstanding options to purchase 26,223 shares of Class C Common Stock and sold an additional 26,223 shares of Class C Common Stock to certain members of senior management for $100 per share, the estimated fair market value of the shares on the date of purchase. The Company believes that the foregoing issuances of Class C Common Stock to members of its senior management were exempt from the registration requirements of the Securities Act pursuant to Rule 701 thereunder. Alternatively, the Company believes that the foregoing issuances of Class C Common Stock, which did not involve a public offering or sale of securities, were exempt from the registration requirements of the Securities Act pursuant to the exemption from registration afforded by Section 4(2) of the Securities Act. No underwriters, brokers or finders were involved in these transactions. 7 9 ITEM 6. SELECTED FINANCIAL DATA The following selected financial data have been summarized from our consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations," under Item 7 below. SELECTED FINANCIAL DATA
Year ended December 31, -------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------- ------- ------- ------- ------- (dollars in millions) STATEMENT OF OPERATIONS DATA: Sales - net $ 651.9 $ 447.7 $ 295.7 $ 280.0 $ 255.7 Cost of sales 532.4 389.6 253.5 235.1 210.4 ------- ------- ------- ------- ------- Gross profit 119.5 58.1 42.2 44.9 45.3 Total operating expenses 70.1 45.0 38.1 31.8 33.5 ------- ------- ------- ------- ------- Operating income 49.4 13.1 4.1 13.1 11.8 Interest expense (37.5) (17.0) (11.6) (8.8) (7.5) Other income (expense) - net (0.8) 0.7 (2.7) (2.5) -- ------- ------- ------- ------- ------- Income (loss) before income taxes, discontinued operations and extraordinary item 11.1 (3.2) (10.2) 1.8 4.3 Income tax expense (benefit) 8.6 (0.5) (5.2) 0.9 1.9 ------- ------- ------- ------- ------- Income (loss) before discontinued operations and extraordinary item 2.5 (2.7) (5.0) 0.9 2.4 Income from discontinued operations(1) 0.6 3.1 1.8 1.4 2.0 Gain on sale of discontinued operations(1) 5.2 -- -- -- -- Extraordinary item(2) -- -- (1.3) -- -- ------- ------- ------- ------- ------- Net income (loss) $ 8.3 $ 0.4 $ (4.5) $ 2.3 $ 4.4 ======= ======= ======= ======= ======= OTHER FINANCIAL DATA: Depreciation and amortization $ 27.1 $ 16.4 $ 14.0 $ 10.6 $ 8.5 EBITDA(3) 75.7(4) 30.2(5) 15.4(6) 21.2 20.3 Cash flows from operating activities 45.5 28.6 20.1 9.7 (1.9) Cash flows from investing activities (314.8) (87.2) (88.9) (17.6) (8.1) Cash flows from financing activities 275.6 63.2 68.6 6.7 9.9 Capital expenditures 52.1 17.9 12.8 16.5 8.3 BALANCE SHEET DATA (AT YEAR END): Working capital $ 93.4 $ 94.1 $ 74.6 $ 53.0 $ 46.8 Total assets 734.3 400.4 329.2 204.6 196.1 Long-term debt - net of current portion 513.5 250.2 186.7 103.0 88.7 Total liabilities 662.5 337.4 262.1 142.5 136.1 Stockholders' equity 70.6 63.0 67.0 62.1 60.0
- --------------------------- (1) In 1998, we sold our entire interest in our foam products operations, which were operated exclusively in Europe. The financial position and results of operations of this separate business segment are reflected as discontinued operations for all periods presented. See Note 3 to the Consolidated Financial Statements included in this report. (2) In 1996, we refinanced most of our long-term debt and recorded an extraordinary item for the write-off of previously deferred loan costs. See Note 6 to the Consolidated Financial Statements included in this report. (3) EBITDA is defined as net income before interest expense, taxes, depreciation, amortization, discontinued operations, and extraordinary items. We believe EBITDA information enhances an investor's understanding of a company's ability to satisfy principal and interest obligations with respect to its indebtedness and to utilize cash for other purposes. However, there may be contractual, legal, economic or other reasons which may prevent us from satisfying principal and interest obligations with respect to our indebtedness and may require us to allocate funds for other purposes. EBITDA does not represent and should not be considered as an alternative to net income or cash flows from operating activities as determined by GAAP and may not be comparable to other similarly titled measures of other companies. 8 10 (4) Includes aggregate nonrecurring charges of $4.9 million resulting from the closing of a facility in the year ended December 31, 1998. Had this facility been closed on January 1, 1998, we estimate overhead savings of $2.1 million would have been realized in the year ended December 31, 1998. (5) Includes aggregate nonrecurring charges of $9.3 million resulting from the closing of a facility in the year ended December 31, 1997. Had this facility been closed January 1, 1997, we estimate overhead savings of $3.0 million would have been realized in the year ended December 31, 1997. (6) Includes aggregate nonrecurring charges of $12.1 million resulting from the closing of certain facilities in the year ended December 31, 1996. Had these facilities been closed on January 1, 1996, we estimate overhead savings of $2.9 million would have been realized in the year ended December 31, 1996. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and notes which appear elsewhere in this report. This section contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL Huntsman Packaging derives its revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. Huntsman Packaging manufactures these products at its facilities located in North America, Europe and Australia. Huntsman Packaging's sales have grown primarily as a result of strategic acquisitions made over the past several years, increased levels of production at acquired facilities and the overall growth in the market for film and flexible packaging products. Our most recent acquisitions include the 1996 acquisitions of Deerfield Plastics Co. Inc. (the "Deerfield Acquisition") and United Films Corporation (the "United Films Acquisition"), the 1997 acquisition of Huntsman Polymers Corporation's CT Film division (the "CT Film Acquisition"), and our 1998 acquisitions of Ellehammer Industries, Ltd. and Ellehammer Packaging Inc. (collectively, the "Ellehammer Acquisition") and Blessings Corporation (the "Blessings Acquisition"). In order to further benefit from these recent acquisitions, we ceased operations at certain less efficient manufacturing facilities and relocated equipment to more efficient facilities. In addition, we sold certain assets and restructured and consolidated our operations and administrative functions. As a result of these activities, we increased manufacturing efficiencies and product quality, reduced costs, and increased operating profitability. As part of this process, in 1998, we undertook the following significant divestitures and closures of manufacturing facilities. (See Notes 3 and 4 to the Consolidated Financial Statements included in this report.) During the second quarter of 1998, we announced our plan to cease operations at our Clearfield, Utah facility, acquired as part of the CT Film Acquisition. As of December 31, 1998, operations at the facility had ceased and nearly all of the facility's assets had been relocated. On June 1, 1998, Huntsman Container Corporation International, our wholly-owned subsidiary, sold its entire interest in the capital stock of Huntsman Container Company Limited ("HCCL") and Huntsman Container Company France SA ("HCCFSA") to Polarcup Limited and Huhtamaki Holdings France Sarl, subsidiaries of Huhtamaki Oyj. Together, HCCL and HCCFSA comprised our foam products business segment, which was operated exclusively in Europe. Net proceeds from the sale were approximately $28.3 million. In December 1997, we announced our plan to cease operations at our Carrollton, Ohio facility and relocate certain assets from the Carrollton facility to other facilities. We recognized plant closing costs of approximately $9.3 million in our consolidated income statement for the year ended December 31, 1997 relating to this closure. On 9 11 August 11, 1998, we sold the land, building and certain surplus manufacturing equipment associated with the Carrollton facility to North American Plastics Chemicals Incorporated. Net proceeds from the sale were approximately $1.6 million. On August 14, 1998, we sold our entire interest in the capital stock of Huntsman Packaging UK Limited ("HPUK") to Skymark Packaging International Limited. HPUK owned our Scunthorpe, UK facility, which manufactured and sold polyethylene film exclusively in Europe. Net proceeds from this sale were approximately $5.6 million. In connection with the Blessings Acquisition, we announced our plan to cease manufacturing operations at our Newport News, Virginia production facility. On November 20, 1998, we sold the land, building and certain surplus manufacturing equipment associated with our Newport News, Virginia production facility. Net proceeds from the sale were approximately $1.3 million. RESULTS OF OPERATIONS The following table indicates net sales and expenses, and such amounts as a percentage of net sales, for the years ended December 31, 1998, 1997 and 1996.
Year Ended December 31, -------------------------------------------------------------- 1998 1997 1996 ------------------ ------------------ ------------------ (dollars in millions) Sales - net $651.9 100% $447.7 100% $295.7 100% Cost of sales 532.4 82 389.6 87 253.5 86 ------ ------ ------ ------ ------ ------ Gross profit 119.5 18 58.1 13 42.2 14 Total operating expenses 70.1 11 45.0 10 38.1 13 ------ ------ ------ ------ ------ ------ Operating income $ 49.4 7% $ 13.1 3% $ 4.1 1% ====== ====== ====== ====== ====== ======
1998 VERSUS 1997 Net Sales Net sales increased by $204.2 million, or 45.6%, in 1998 to $651.9 million from $447.7 million in 1997. The increase was primarily due to the Blessings Acquisition in May 1998 and a full year's results from the September 1997 CT Film Acquisition. The CT Film Acquisition and the Blessings Acquisition collectively accounted for increased net sales of approximately $256 million in 1998. Excluding the sales increases resulting from these acquisitions, we realized increased sales volumes of approximately 1.7% in 1998 compared to 1997. These sales volume related increases were offset by a 4.6% reduction in the average selling prices for our products, excluding the effects of the acquisitions. The average selling price reductions were primarily due to declines in the price of resins, our primary raw material. In the markets we serve, the average selling price of our products generally increases or decreases as resin prices increase or decrease. 10 12 Gross Profit Gross profit increased by $61.4 million, or 105.7%, in 1998 to $119.5 million from $58.1 million in 1997. The increase was due to increased sales volume from the recent acquisitions and internal growth, integration and rationalization of acquired and existing facilities, realization of purchasing and operational synergies associated with the recent acquisitions, and improved manufacturing performance within our operations. Due to our rationalization and integration of operations and facilities, a precise measure of the additional gross profit added in 1998 from the recent acquisitions is not practicable. However, the gross profit for the facilities associated with the CT Film Acquisition and the Blessings Acquisition was approximately $49.2 million, including the effects of the above activities. Total Operating Expenses Total operating expenses (including research and development expenses) increased by $25.1 million, or 55.8%, in 1998 to $70.1 million from $45.0 million in 1997. The increase was due primarily to additional operating expenses resulting from the CT Film Acquisition and the Blessings Acquisition. In addition, we incurred nonrecurring operating expenses totaling approximately $8.0 million in 1998. The nonrecurring expenses included the following components (in millions): Plant closing costs $ 4.9 Indirect plant closing costs 1.6 Blessings Acquisition transition costs 1.5 ----- $ 8.0
The plant closing costs charge relates to the closure of our Clearfield, Utah facility. During 1998, we ceased operations at the Clearfield facility and most of the production equipment was relocated to other of our facilities. The nonrecurring $4.9 million charge includes a $0.6 million charge for the write-off of assets not relocated, a $0.4 million provision for the write-off of impaired goodwill, a $0.5 million charge for reduction of work force costs associated with the elimination of approximately 52 full-time equivalent employees, and an accrual of $3.4 million for estimated future net lease and other costs incurred to close the facility. See Note 4 to the Consolidated Financial Statements included in this report. The indirect plant closing costs include one-time costs to tear down and relocate equipment from closed plants to other of our facilities. The Blessings Acquisition transition costs consist primarily of labor costs relating to former Blessings Corporation employees retained on a temporary basis to assist through the early stages of our ownership of the operation. Ongoing operating expenses (excluding the nonrecurring charges discussed above) as a percentage of net sales were approximately 9.5% in 1998 compared to 10.5% in 1997, computed subsequent to the September 1997 CT Film Acquisition. We believe the 1998 ongoing operating expense percentage to be indicative of future operating expenses. Operating Income Operating income increased by $36.3 million, or 277.1%, in 1998 to $49.4 million from $13.1 million in 1997 as a result of the factors discussed above. 1997 VERSUS 1996 Net Sales Net sales increased by $152.0 million, or 51.4%, in 1997 to $447.7 million from $295.7 million in 1996. The increase was primarily due to the CT Film Acquisition in September 1997 and a full year's results from the 1996 Deerfield and United Films Acquisitions. These acquisitions increased sales by approximately $158.0 million 11 13 in 1997. Excluding the effect of these acquisitions, sales decreased approximately $6.0 million in 1997, primarily due to lower sales volumes of approximately 5% in the North America PVC product line and unfavorable Australian and European currency translation rates. As discussed above, our average sales prices generally follow increases and decreases in resin prices. Average resin prices were relatively stable in 1997, as compared to 1998 and 1996. As a result, 1997 average sales prices were relatively stable as well. Gross Profit Gross profit increased by $15.9 million, or 37.7%, in 1997 to $58.1 million from $42.2 million in 1996. The CT Film, Deerfield and United Films Acquisitions discussed above increased gross profit by approximately $22.0 million in 1997. These increases were offset by a decrease in gross profit of approximately $6.0 million in the industrial films segment, due primarily to decreased margins. In stretch film markets of our industrial films segment, gross profit decreased by approximately $3.0 million in 1997, due to general price reductions as a result of excess supply of stretch film. The remaining gross profit decrease was due primarily to reduced North American PVC product line sales volume and unfavorable Australian and European currency translation rates. Total Operating Expenses Total operating expenses for 1997 (including research and development expenses) increased by $6.9 million, or 18.1%, to $45.0 million from $38.1 million in 1996. Additional operating expenses of approximately $8.6 million associated with the Deerfield, United Films and CT Film Acquisitions were incurred in 1997. This increase was partially offset by $1.6 million in reduced plant closing costs, compared to 1996. In 1997, we recognized a nonrecurring plant closing charge of $9.3 million. The CT Film Acquisition in 1997 provided us with relatively new, efficient manufacturing equipment with significant available capacity. Thereafter, we decided to cease operations at the Carrollton, Ohio facility and to relocate most of the equipment to other facilities. The nonrecurring $9.3 million charge includes $4.2 million for the write-off of assets not relocated, $3.3 million for the write-off of goodwill associated with the original acquisition of the Carrollton facility and $1.8 million for work force reduction costs associated with the elimination of approximately 83 full-time equivalent employees and other costs. See Note 4 to the Consolidated Financial Statements included in this report. Operating Income Operating income increased by $9.0 million, or 219.5%, to $13.1 million from $4.1 million due to the factors discussed above. OPERATING SEGMENT REVIEW General We have adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Operating segments are components of our company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. For more information on our operating segments, see Note 13 to the Consolidated Financial Statements included in this report. Our acquisitions during 1998, 1997 and 1996 led to fundamental changes in our organizational structure, operations and mix of business. These acquisitions allowed us to significantly expand our business, exit non-core businesses, close less efficient plants and organize our company into our current operating segments. These changes were not completed until the end of 1998. Because our business segments, profitability and total assets have 12 14 changed so dramatically during the past two years, we believe a discussion of the segment changes from 1996 to 1997 is not necessary to gain an understanding of our current business. Accordingly, the following operating segment review focuses on changes from 1997 to 1998. Design Products Net Sales The design products segment net sales increased by $42.7 million, or 45.7%, in 1998 to $136.1 million from $93.4 million in 1997. This increase was primarily due to our recent acquisitions and to sales volume increases resulting from production capacity expansions. The Blessings Acquisition added approximately $30.2 million to net sales in 1998. These additional sales relate to our Mexican operation acquired from Blessings Corporation. Excluding the effect of this acquisition, net sales dollars increased by 13.3% and sales volume increased by 16.1%. The sales dollar and volume increases were due to additional production capacity added over the last two years in our Rochester, New York and Seattle, Washington facilities. These increases were off-set by a 2.1% reduction in 1998 average selling prices, excluding the effects of the Blessings Acquisition. As previously discussed, the decreased average selling prices resulted from a reduction in resin prices during 1998. Segment Profit The design products segment profit increased by $1.1 million, or 9.7%, in 1998 to $12.4 million from $11.3 million in 1997. The increase was primarily due to our recent acquisitions and increased sales volume resulting from production capacity expansions. In 1997, operating expenses associated with this segment were not allocated to the operating segment. Accordingly, the acquisition and sales volume related segment profit increases were partially off-set by increased operating expenses in 1998 as compared to 1997. The increase in operating expenses was due to the Blessings Acquisition and the establishment of a separate segment management team. Segment Total Assets The design products segment total assets increased by $98.8 million, or 180.9%, in 1998 to $153.4 million from $54.6 million in 1997 due primarily to our recent acquisitions and capital expenditures to expand capacity. The 1998 acquisitions added total assets of approximately $84.6 million and 1998 capital expenditures added approximately $18.4 million. These additions were off-set by 1998 depreciation and reductions in working capital. Capital expenditures were for significant capacity expansion at our Rochester, New York and Seattle, Washington facilities and normal maintenance expenditures. The capacity expansion expenditures included state-of-the-art, 8-color printing presses that allow us to pursue higher margin printing applications. Industrial Films Net Sales The net sales of our industrial films segment decreased by $30.7 million, or 17.5%, in 1998 to $144.7 million from $175.4 million in 1997. The decrease in sales was primarily due to a combination of the closure of our Carrollton, Ohio facility and reductions in our average selling prices. During 1998, we completed the closure of the Carrollton facility. We relocated the more efficient Carrollton manufacturing equipment to facilities in other of our operating segments and the equipment that was not relocated was sold (see Note 4 to the Consolidated Financial Statements included in this report). These asset transfers and dispositions caused net sales to decrease by approximately $17 million in 1998. Excluding the effects of the Carrolton closure, we experienced a decline in our average selling prices of approximately 9.0% as a result of general industry selling price declines resulting from declines in resin prices. The volume of our PVC film business was virtually unchanged in 1998, while our stretch film volume increased approximately 1.8% in 1998, excluding the effects of the Carrollton closure. 13 15 Segment Profit The industrial films segment profit increased by $1.5 million, or 15.8%, in 1998 to $11.0 million from $9.5 million in 1997. The increase in segment profit was primarily due to a combination of dramatically increased stretch film gross profits over 1997 and the closure of the Carrollton plant. The stretch film business realized a return to profitability in 1998 after sustaining significant losses in 1997. During 1997, our stretch film business suffered through historically low gross profits due to excess supply in stretch film markets and lower than expected production efficiencies in our facilities. Although excess supply continued to be a factor in 1998, we realized significantly increased production efficiencies and lower production costs. The closure of the Carrollton plant added approximately $1.0 million to our segment profit, as compared to 1997. The increase in profitability was partially off-set by increased operating expenses in 1998, due to the establishment of a separate segment management team. In 1997, operating expenses associated with this segment were not allocated to the operating segment. Excluding the effects of the increase in segment operating expenses, the PVC business profitability was slightly increased over 1997. Segment profit excludes nonrecurring plant closing costs. The Carrollton plant closing, discussed above, resulted in a 1997 plant closing cost charge of $9.3 million. This charge relates entirely to the industrial film operating segment. See Note 4 to the Consolidated Financial Statements included in this report. Segment Total Assets The industrial films segment total assets decreased by $13.8 million, or 14.3%, in 1998 to $82.7 million from $96.5 million in 1997. The decrease was due primarily to the closure of the Carrollton plant, 1998 depreciation and reductions in working capital. These reductions were off-set by 1998 capital expenditures of approximately $5.7 million. The capital expenditures were for ongoing maintenance and improvements, as well as a major upgrade to one of our stretch film production lines. Specialty Films Net sales The net sales of our specialty films segment increased by $192.3 million, or 107.5%, in 1998 to $371.2 million from $178.9 million in 1997. The increase was due primarily to the 1998 Blessings Acquisition and the inclusion of a full year's results from the 1997 CT Film Acquisition. The addition of these operations resulted in 1998 increased sales of approximately $182.9 million. Excluding the acquisition related increases, our specialty film 1998 volume increased by approximately 12.6%. The volume increase was due primarily to the completion of significant capacity expansions in our barrier film operations and the relocation of equipment from our closed facilities to specialty films' facilities. These increases were slightly off-set by a 5.0% reduction in our average selling prices, excluding the effects of the recent acquisitions. As previously discussed, the reduction in selling prices resulted from declines in 1998 resin prices. Segment Profit The specialty films segment profit increased by $26.7 million, or 136.2%, in 1998 to $46.3 million from $19.6 million in 1997. The increase was due primarily to the recent acquisitions and the increase in sales volume resulting from production capacity expansions. In 1997, operating expenses associated with this segment were not allocated to the operating segment. Accordingly, the segment profit increase due to acquisitions and volume increases was partially off-set by increased operating expenses in 1998. The increase in operating expenses was due to the CT Film and Blessings Acquisitions and the establishment of a separate segment management team. Segment profit excludes nonrecurring plant closing costs. The Clearfield, Utah plant closing, discussed above, resulted in a 1998 plant closing cost charge of $4.9 million. This charge relates entirely to the specialty films operating segment. See Note 4 to the Consolidated Financial Statements included in this report. 14 16 Segment Total Assets The specialty films segment total assets increased by $247.0 million, or 131.3%, in 1998 to $435.1 million from $188.1 million in 1997. The increase was primarily due to the recent acquisitions and capital expenditures. The 1998 acquisitions increased segment total assets by approximately $244.4 million and 1998 capital expenditures were $26.2 million. 1998 capital expenditures included the purchase of a new barrier film production line at our Bloomington, Indiana facility and ongoing maintenance and enhancements. These increases were off-set by reductions in assets resulting from the closure of the Clearfield, Utah facility, the sale of the Scunthorpe, UK, facility, by 1998 depreciation and by reductions in working capital. LIQUIDITY AND CAPITAL RESOURCES Huntsman Packaging was separated from Huntsman Corporation on September 30, 1997 (the "Split-Off"). Prior to the Split-Off, we financed our operations with borrowings from Huntsman Corporation or its affiliates. In connection with the Split-Off, we issued $125 million of 9.125% unsecured senior subordinated notes due October 1, 2007 (the "Notes") and entered into a $225 million credit facility with The Chase Manhattan Bank ("Chase") and certain financial institutions party thereto (the "Credit Agreement"). Proceeds from the issuance of the Notes and the Credit Agreement were used to repay indebtedness to Huntsman Corporation and to fund the CT Film Acquisition. Since the Split-Off, we have financed our operations through cash provided by operations and by borrowings under the Credit Agreement, as amended. See Note 6 to the Consolidated Financial Statements included in this report. Huntsman Packaging's Amended Credit Facilities On May 14, 1998, the Credit Agreement was amended and restated as a $510 million facility (the "Amended Credit Agreement"). The Amended Credit Agreement provides for the continuation of a previous term loan (the "Original Term Loan") in the principal amount of $75 million, maturing on September 30, 2005; a Tranche A Term Loan (the "Tranche A Term Loan") in the principal amount of $140 million, maturing on September 30, 2005; a Tranche B Term Loan (the "Tranche B Term Loan") in the principal amount of $100 million, maturing on June 30, 2006; and a term loan (the "Mexico Term Loan") to ASPEN Industrial, S.A., our wholly-owned Mexican subsidiary, in the principal amount of $45 million, maturing on September 30, 2005. The Amended Credit Agreement also provides for a $150 million revolving loan facility (the "Revolver") maturing on September 30, 2004. The Original Term Loan, the Tranche A Term Loan and the Mexico Term Loan amortize at an increasing rate on a quarterly basis. The Tranche A Term Loan and the Mexico Term Loan began amortizing on December 31, 1998 and the Original Term Loan begins amortizing on December 31, 2001. The Tranche B Term Loan amortizes at the rate of $1 million per year, beginning September 30, 1998, with an aggregate of $93 million due in the last four quarterly installments. The term loans described above are required to be prepaid with the proceeds of certain asset sales, with 50% of the proceeds of the sale of certain Huntsman Packaging equity securities, and with the proceeds of certain debt offerings. Loans under the Amended Credit Agreement bear interest, at the election of the Company, at either (i) zero to 0.75%, depending on certain of our financial ratios, plus the higher of (a) Chase's prime rate, (b) the federal funds rate plus 1/2% or (c) Chase's base CD rate plus 1%, or (ii) the London Interbank Offered Rate plus 1.00% to 2.00%, also depending on certain of our financial ratios. Our obligations under the Amended Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and secured by substantially all of our domestic assets. The Amended Credit Agreement is also secured by a pledge of 65% of the capital stock of each of our foreign subsidiaries. See Note 16 to the Consolidated Financial Statements included in this report. Net Cash Provided by Operating Activities Net cash provided by operating activities was $45.5 million in 1998, an increase of $16.9 million, or 59.1%, from $28.6 million in 1997. The increase resulted primarily from increased net income in 1998 of $8.0 million and a reduction in inventories and prepaid expenses. Net cash provided by operating activities increased 15 17 $8.5 million, or 42.3%, in 1997 to $28.6 million from $20.1 million in 1996. The 1997 increase resulted primarily from increased net income in 1997 of $4.9 million and a reduction in inventories. Net Cash Used in Investing Activities Net cash used in investing activities was $314.8 million, $87.2 million and $88.9 million for 1998, 1997 and 1996, respectively. The majority of cash was used in the Blessings, Deerfield, United Films and CT Film Acquisitions. During 1998, we made net cash payments of approximately $285.7 million for the purchase of Blessings Corporation and $10.9 million for other acquisitions. During 1997, we made net cash payments of approximately $69.4 million for the purchase of CT Film. During 1996, we made net cash payments of approximately $12.3 million and $63.9 million for the purchase of United Films and Deerfield Plastics, respectively. See Note 12 to the Consolidated Financial Statements included in this report. Capital Expenditures Total capital expenditures were $52.1 million, $17.9 million and $12.8 million for 1998, 1997 and 1996, respectively. The 1998 capital expenditures included expenditures to upgrade and relocate equipment, to add capacity in our design products facilities, to add new information systems and upgrades to existing information systems, and to add several new production lines in our specialty films facilities. The 1997 capital expenditures included film production capacity expansions in our newly acquired Deerfield and United Film facilities, as well as printing capacity expansion in our design products facilities. The Company estimates that total maintenance capital expenditures of $12 million per year will be required in the near future. Net Cash Provided by Financing Activities Net cash provided by financing activities was $275.6 million, $63.2 million and $68.6 million for 1998, 1997 and 1996, respectively. Net cash provided by financing activities consists primarily of net borrowings under our current and prior credit arrangements. See Note 6 to the Consolidated Financial Statements included in this report. Net cash provided by financing activities was used primarily to fund the Blessings, CT Film, Deerfield and United Films Acquisitions, as well as our capital expenditures. Liquidity As of December 31, 1998, we had $93.4 million of working capital. As of December 31, 1998, we had approximately $110 million available under the Revolver of our Amended Credit Agreement, $4.2 million of which was issued as letters of credit. The debt under our Amended Credit Agreement bears interest at LIBOR plus 2%, and may adjust downward based upon our leverage ratio (as defined in the Amended Credit Agreement) to a minimum of LIBOR plus 1%. As of December 31, 1998, we had $11.3 million in cash and cash equivalents held by our foreign subsidiaries. The effective tax rate of repatriating this money and future foreign earnings to the United States varies from approximately 40% to 65% depending on various U.S. and foreign tax factors, including each foreign subsidiary's country of incorporation. High effective repatriation tax rates may limit our ability to access cash and cash equivalents generated by our foreign operations for use in our United States operations, including to pay principal, premium, if any, and interest on the Notes and the Amended Credit Agreement. In 1998, 1997 and 1996, our foreign operations generated income from continuing operations of $0.5 million, $1.7 million and $5.0 million, respectively. We expect that cash flows from operating activities and available borrowings under our credit arrangements will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements. If we were to engage in a significant acquisition transaction, however, it may be necessary for us to restructure our existing credit arrangements. 16 18 OTHER MATTERS Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards that require derivative instruments to be recorded on the balance sheet as either an asset or liability, measured at fair market value, and that changes in the derivative's fair value be recognized currently in earnings, unless specific hedging accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. We expect that the adoption of this statement will not have a material effect on our consolidated financial statements. Environmental Matters Our manufacturing operations are subject to certain federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, the protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials ("Environmental Laws"). In the ordinary course of business, we are subject to periodic environmental inspections and monitoring by governmental enforcement authorities. We could incur substantial costs, including fines and civil or criminal sanctions as a result of actual or alleged violations of Environmental Laws. In addition, our production facilities require environmental permits that are subject to revocation, modification and renewal ("Environmental Permits"). Violations of Environmental Permits can also result in substantial fines and civil or criminal sanctions. We are in substantial compliance with applicable Environmental Laws and Environmental Permits. The ultimate costs under Environmental Laws and the timing of such costs, however, are difficult to predict and potentially significant expenditures could be required in order to comply with Environmental Laws that may be adopted or imposed in the future. The Year 2000 Issue We have performed an analysis of both our computer systems and our production and distribution activities and have implemented procedures to address year 2000 issues. We are currently modifying our computer systems and application programs for year 2000 compliance, and we anticipate that we will complete this task by September 1, 1999. As of December 31, 1998, we had spent approximately $2.5 million on computer systems and application programs upgrades necessary to become year 2000 compliant. We believe the total cost to complete the implementation procedures to address year 2000 issues will be less than $5.0 million. In addition to addressing year 2000 issues, these computer systems and application programs upgrades will significantly enhance our information systems. We will fund these upgrades through operating cash flows. Any costs for new systems will be expensed or capitalized and amortized over the system's useful life, as appropriate. We have a year 2000 third-party compliance policy in place to identify and resolve potential third-party year 2000 problems. Although we are working cooperatively with third parties upon whom we rely for raw materials, utilities, transportation and other products and services, we cannot give any assurances that the systems of other parties will be year 2000 compliant on a timely basis. In the most reasonably likely worst-case scenario involving the failure of our systems and applications or those operated by others, our business, financial condition and results of operations would be materially adversely affected. However, an estimate of the dollar amount of such an adverse effect cannot be practically determined at this time. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward- 17 19 looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by or on behalf of Huntsman Packaging, are also expressly qualified by these cautionary statements. All forward-looking statements, including without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. The following factors are among the factors that could cause actual results to differ materially from the forward-looking statements. There may be other factors, including those discussed elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. Substantial Leverage We are highly leveraged, particularly in comparison to some of our competitors that are publicly owned. Our relatively high degree of leverage may limit our ability to obtain additional financing. In addition, a substantial portion of our cash flow from operations must be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available for other purposes. Certain of our borrowings are at variable rates of interest, exposing us to the risk of increased interest rates. Our leveraged position may also limit our flexibility in adjusting to changing market conditions and our ability to withstand competitive pressures. Ability to Service Indebtedness Our ability to make scheduled payments or to refinance our debt obligations depends on our financial and operating performance. Our financial and operating performance is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. These include fluctuations in interest rates, unscheduled plant shutdowns, increased operating costs, raw material and product prices, regulatory developments and our ability to repatriate cash generated outside of the United States without incurring substantial tax liabilities. Any default under our debt facilities could have a significant adverse effect on our business and operations. Restrictions under Credit Facilities We are subject to certain restrictive covenants under the indenture relating to our outstanding debt securities and our bank credit facility, including financial and operating covenants. Failure to comply with any of these covenants would permit our bank lenders to cease making further loans and our bank lenders and holders of our debt securities to accelerate the maturity of our debt and institute foreclosure proceedings against us. Such actions would adversely affect our ability to service our indebtedness. Exposure to Fluctuations in Resin Prices and Dependence on Resin Supplies We use large quantities of resins in manufacturing our products. Significant increases in the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. In addition, should any of our resin suppliers fail to deliver resin or should any significant resin supply contract be canceled, we would be forced to purchase resin in the open market. No assurances can be given that we would be able to make such purchases at prices that would allow us to remain competitive. 18 20 Competition The markets in which we operate are highly competitive on the basis of service, product quality, product innovation and price. In addition to competition from many smaller competitors, we face strong competition from a number of large flexible packaging companies. Some of these companies are substantially larger, more diversified and have greater financial resources than we have. Customer Relationships We are dependent upon a limited number of large customers with substantial purchasing power for a majority of our sales. In particular, we are currently the sole outside supplier to Kimberly Clark of its breathable personal care films and other film components. Kimberly Clark accounted for approximately 14% of our revenue in 1998. The loss of Kimberly Clark or one or more other customers, or a material reduction in the sales to Kimberly Clark or these other customers, would have a material adverse effect on our operations and on our ability to service our indebtedness. Risks Associated with Acquisitions We have completed a number of recent acquisitions. In order to further benefit from these acquisitions, we have ceased operations at less efficient manufacturing facilities and relocated equipment to more efficient facilities. In addition, we have sold assets and restructured and consolidated our operations and administrative functions in an effort to increase manufacturing efficiencies and product quality, reduce costs and increase operating profitability. There can be no assurance, however, that our efforts to integrate the acquired businesses will result in increased sales or profits. Difficulties encountered in the ongoing transition and integration process could have a material adverse effect on our financial condition, results of operations or cash flows. Risks Associated with International Operations We operate facilities and sell products in several countries outside the United States, particularly in Mexico. As a result, we are subject to risks associated with selling and operating in foreign countries. These risks include devaluations and fluctuations in currency exchange rates, imposition of limitations on conversion of foreign currencies into U.S. dollars or remittance of dividends and other payments by foreign subsidiaries. The imposition or increase of withholding and other taxes on remittances and other payments by foreign subsidiaries, hyperinflation in certain foreign countries, and imposition or increase of investment and other restrictions by foreign governments could also have a negative effect on our business. Other Factors In addition to the factors described above, we face a number of uncertainties, including: (i) changes in demand for our products; (ii) potential legislation and regulatory changes; (iii) our ability and those with which we conduct business to timely resolve Year 2000 issues; (iv) new technologies; (v) changes in distribution channels or competitive conditions in the markets or countries where we operate; (vi) increases in the cost of compliance with laws and regulations, including environmental laws and regulations; and (viii) environmental liabilities in excess of the amounts reserved. ITEM 7A. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various interest rate and resins price risks that arise in the normal course of business. We finance our operations with borrowings comprised primarily of variable rate indebtedness. Our raw material costs are comprised primarily of resins. Significant increases in interest rates or the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. 19 21 We enter into interest rate collar and swap agreements to manage interest rate market risks and commodity collar agreements to manage resin market risks. As of December 31, 1998, we had one interest rate collar agreement and one commodity collar agreement in place. The estimated fair market value of the interest rate collar was negative $214,000 and the estimated fair market value of the commodity collar was $80,000. We have performed a sensitivity analysis assuming a hypothetical 10% adverse movement in interest rates and commodity prices applied to the agreements described above. The analysis indicated that such market movements would not have a material effect on our consolidated financial position, results of operations or cash flows. Factors that could impact the effectiveness of our hedging programs include the volatility of interest rates and commodity markets and the availability of hedging instruments in the future. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 14(a) below. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES On April 16, 1998, the Company notified Deloitte & Touche LLP ("Deloitte & Touche") that effective as of that date, the Company had determined to change its independent accountants. The Company then engaged the accounting firm of Arthur Andersen LLP to serve as its independent accountants. Neither Deloitte & Touche's reports on the Company's financial statements for the years ended December 31, 1996 or December 31, 1997 contained an adverse opinion or a disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. The decision to change accountants was approved by the Company's Board of Directors. The Company does not have an audit or similar committee. During the years ended December 31, 1996 and December 31, 1997 and the subsequent interim period preceding the Company's replacement of Deloitte & Touche, there were no disagreements with Deloitte & Touche on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Deloitte & Touche, would have caused Deloitte & Touche to make reference to the subject matter of the disagreement in connection with its report. 20 22 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The names, ages, positions and offices held, and a brief account of the educational and business experience of each current director and each executive officer is set forth below. BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
NAME AGE POSITION - ---- --- -------- Jon M. Huntsman* 61 Director and Chairman of the Board of Directors Karen H. Huntsman* 61 Vice Chairman Richard P. Durham* 34 Director, President and Chief Executive Officer Christena H. Durham* 34 Director, Vice President Jack E. Knott 44 Executive Vice President and Chief Operating Officer Scott K. Sorensen* 37 Executive Vice President and Chief Financial Officer, Treasurer Ronald G. Moffitt 46 Senior Vice President and General Counsel, Secretary
* Jon M. Huntsman is Christena H. Durham's father and Richard P. Durham's father-in-law. Karen H. Huntsman is Jon M. Huntsman's wife, Christena H. Durham's mother and Richard P. Durham's mother-in-law. Richard P. Durham and Christena H. Durham are married. Scott K. Sorensen is Richard P. Durham's brother-in-law. JON M. HUNTSMAN is a Director and the Chairman of the Board of Directors of Huntsman Packaging and has served as Chairman of the Board, Chief Executive Officer and a Director of Huntsman Corporation, its predecessors, and other Huntsman companies for over 25 years. He is also the Chairman and founder of the Huntsman Cancer Foundation. In addition, Mr. Huntsman serves on numerous charitable, civic and industry boards. In 1994, Mr. Huntsman received the prestigious Kavaler Award as the chemical industry's outstanding Chief Executive Officer. Mr. Huntsman formerly served as Special Assistant to the President of the United States and as Vice Chairman of the U.S. Chamber of Commerce. Mr. Huntsman served as the Company's Chief Executive Officer until March 1997. KAREN H. HUNTSMAN was appointed Vice Chairman of Huntsman Packaging Corporation on November 24, 1997, and serves as an officer and director of other Huntsman companies. The Vice Chairman, an advisory position to the Board of Directors, does not vote on matters brought to the Board. Mrs. Huntsman has served as a Vice President and Director of Huntsman Corporation since 1995 and as a Vice President and director of Huntsman Chemical Corporation since 1982 and 1986, respectively. By appointment of the Governor of the State of Utah, Mrs. Huntsman serves as a member of the Utah State Board of Regents. Mrs. Huntsman also serves on the board of directors of various corporate and non-profit entities, including First Security Corporation and Intermountain Health Care Inc. RICHARD P. DURHAM became President and Chief Executive Officer of Huntsman Packaging in March 1997. Mr. Durham is a Director of Huntsman Packaging and also is a Director of Huntsman Corporation. Mr. Durham has been with the Huntsman organization in various positions since 1985. Most recently, Mr. Durham served as Co-President and Chief Financial Officer of Huntsman Corporation, where, in addition to being responsible for accounting, treasury, finance, tax, legal, human resources, public affairs, purchasing, research and development, and information systems, he also was responsible for Huntsman Packaging. Mr. Durham attended Columbia College and graduated from the Wharton School of Business at the University of Pennsylvania. 21 23 CHRISTENA H. DURHAM was appointed a Director of Huntsman Packaging Corporation on October 1, 1997, and became a Vice President on November 24, 1997. Prior to joining the Company, Mrs. Durham held no other officer positions or directorships with any other for-profit organizations. Mrs. Durham also serves on the Board of Directors of various non-profit organizations, including the YWCA of Salt Lake City and as a trustee of the Huntsman Excellence in Education Foundation. JACK E. KNOTT became Executive Vice President and Chief Operating Officer of Huntsman Packaging on September 1, 1997. Prior to joining the Company, Mr. Knott was a member of the Board of Directors of Rexene Corporation (from April 1996 until August 1997) and held the position of Executive Vice President of Rexene Corporation and President of Rexene Products (from March 1995 to August 1997). Mr. Knott was Executive Vice President-Sales and Market Development of Rexene Corporation (from March 1992 to March 1995), Executive Vice President of Rexene Corporation (from January 1991 to March 1992) and President of CT Film, a division of Rexene Corporation (from February 1989 to January 1991). Prior to joining Rexene Corporation, Mr. Knott worked for American National Can. Mr. Knott received a B.S. degree in Chemical Engineering and an M.B.A. degree from the University of Wisconsin and holds nine patents. SCOTT K. SORENSEN joined Huntsman Packaging as Executive Vice President and Chief Financial Officer on February 1, 1998. Prior to joining the Company, Mr. Sorensen was an executive with Westinghouse Electric Corporation, serving as Chief Financial Officer for both the Communication and Information Systems Division and the Power Generation Division. Prior to joining Westinghouse in 1996, Mr. Sorensen spent two years as Director of Business Development and Planning at Phelps Dodge Industries, a subsidiary of Phelps Dodge Corporation, and over four years as a management consultant with McKinsey & Company. Mr. Sorensen received a B.S. degree in Accounting from the University of Utah and an M.B.A. degree from Harvard Business School. RONALD G. MOFFITT joined Huntsman Packaging in 1997, after serving as Vice President and General Counsel of Huntsman Chemical Corporation. Prior to joining Huntsman in 1994, Mr. Moffitt was a partner and a member of the board of directors of the Salt Lake City law firm of Van Cott, Bagley, Cornwall & McCarthy, with which he had been associated since 1981. Mr. Moffitt holds a B.A. degree in Accounting, a Master of Professional Accountancy degree, and a J.D. degree from the University of Utah. 22 24 ITEM 11. EXECUTIVE COMPENSATION The following Summary Compensation Table sets forth information about compensation earned in the fiscal years ended December 31, 1998 and 1997 by the Chief Executive Officer and the three other executive officers (as of the end of the last fiscal year) (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION ---------------------------------- --------------------------------- AWARDS PAYOUTS ----------------------- ------- NUMBER OF SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTION/ LTIP ALL OTHER SALARY BONUS COMPENSATION AWARD(S) SARS PAYOUTS COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)(1) ($) (#) ($) ($) - --------------------------- ---- -------- -------- ------------ ---------- ---------- ------- ------------ Richard P. Durham 1998 $400,000 $ 73,721 -- -- 15,734 -- $ 34,101(3) Chief Executive Officer(2) 1997 $415,618 $420,000 -- -- -- -- $117,033 Jack E. Knott 1998 $263,333 $ 31,331 -- -- 10,489 -- $ 8,840(5) Executive Vice President 1997 $ 85,000 $ 70,000 -- -- -- -- $ 2,400 and Chief Operating Officer(4) Scott K. Sorensen 1998 $206,068 $ 28,574 -- -- 7,867 -- $ 84,067(7) Executive Vice President and 1997 -- -- -- -- -- -- -- Chief Financial Officer, Treasurer(6) Ronald G. Moffitt 1998 $170,527 $ 18,761 -- -- 2,622 -- $ 5,745(8) Senior Vice President 1997 $116,939 $ 50,000 -- -- -- -- $ 17,973 and General Counsel, Secretary(2)
- -------------- (1) Perquisites and other personnel benefits, securities or property, in the aggregate, are less than either $50,000 or 10% of the total annual salary and bonus reported for the named executive officer. (2) Prior to September 30, 1997, the compensation of Richard P. Durham and Ronald G. Moffitt, other than Mr. Durham's directors fees for 1997 (which are described in "Compensation of Directors," and listed in the "All Other Compensation" column), was paid entirely by Huntsman Corporation. Huntsman Packaging reimbursed Huntsman Corporation for such compensation for the period beginning October 1, 1997 and ending December 31, 1997. Salary figures for Mr. Durham and Mr. Moffitt represent a prorated portion of Huntsman Corporation compensation attributable to the percentage of executive services that were dedicated to Huntsman Packaging. (3) Consists of a $25,000 director's fee from Huntsman Packaging, which is also described in "Compensation of Directors" and employer's 401(k) contributions of $9,101. (4) Mr. Knott joined the Company on September 1, 1997. His 1997 compensation is reported only for the period he was employed by Huntsman Packaging. (5) Consists of employer's 401(k) contributions of $8,840. (6) Mr. Sorensen joined the Company on February 1, 1998. His 1998 compensation is reported only for the period he was employed by Huntsman Packaging. (7) Consists of employer's 401(k) contributions of $6,832 and moving expenses of $77,235. (8) Consists of employer's 401(k) contributions of $5,745. 23 25 STOCK OPTIONS AND RESTRICTED STOCK During 1998, the Board of Directors of the Company adopted the 1998 Huntsman Packaging Corporation Stock Option Plan (the "1998 Plan"). The 1998 Plan authorizes grants of nonqualified stock options covering up to 41,956 shares of the Company's nonvoting Class C Common Stock. During 1998, options covering a total of 41,956 shares were granted under the 1998 Plan. Options covering 5,244 shares were subsequently canceled. In addition, as described below, outstanding options covering 26,223 shares under the 1998 Plan were canceled on February 22, 1999 in connection with the sale of 26,223 shares to certain members of senior management. Options covering a total of 10,489 shares remain outstanding under the 1998 Plan. The following table provides information related to options to purchase shares of the Company's nonvoting Class C Common Stock granted to the Named Executive Officers during the last fiscal year pursuant to the 1998 Plan. The Company has never granted any freestanding stock appreciation rights. OPTION/SAR GRANTS IN LAST FISCAL YEAR
Potential Realizable Value at Assumed Annual Rates of Individual Grants Stock Price Appreciation for Option Terms(3)(4) - --------------------------------------------------------------------------------------- --------------------------- Number of % of Total Securities Options/SARs Underlying Granted to Exercise or Options/SARs Employees in Base Price(1) Expiration Name Granted (#) Fiscal Year ($/Sh) Date(2) 5%($) 10%($) - ---- ------------ ------------ ------------- ---------- ---------- ---------- Richard P. Durham 15,734 37.50% $100.00 12/31/07 $989,503 $2,507,594 Jack E. Knott 10,489 25.00% $100.00 12/31/07 $659,648 $1,671,676 Scott K. Sorensen 7,867 18.75% $100.00 12/31/07 $494,751 $1,253,797 Ronald G. Moffitt 2,622 6.25% $100.00 12/31/07 $164,896 $ 417,879
- ---------- (1) Fair market value on date of grant. (2) Subject to earlier termination under certain circumstances. (3) Potential realizable value is calculated based on an assumption that the price of the Company's Common Stock appreciates at the annual rates shown (5% and 10%), compounded annually, from the date of grant of the option until the end of the option term. The value is net of the exercise price but is not adjusted for the taxes that would be due upon exercise. The 5% and 10% assumed rates of appreciation are mandated by the rules of the Securities and Exchange Commission and do not represent the Company's estimate or projection of future stock values. Actual gains, if any, upon future exercise of any of these options will depend upon the actual value of the Company's Common Stock. (4) All of the options granted to the Named Executive Officers during 1998 are subject to vesting requirements. One-half of the options granted to each Named Executive Officer are time vested options, which vest in equal increments over a five-year period beginning December 31, 1998. The remaining one-half of the options granted to each named Executive Officer are performance vested options, which vest in equal increments over a five-year period beginning December 31, 1998, provided that the Company has achieved a specified market value of equity applicable to such increment. For purposes of the performance vested options, the Company's market value of equity is determined pursuant to a formula based upon the Company's adjusted earnings. The terms of the options provide for partial vesting of the performance vested options if at least 80% of the applicable market value of equity is achieved. The terms of the options also provide for accelerated vesting in the event of a change of control. In addition to the options described above, the Company granted short-term options to facilitate the purchase of nonvoting Class C Common Stock by certain Named Executive Officers during 1998. All of these options expired during 1998. The sale of Class C Common Stock pursuant to these options is further described in Item 5. "Market for the Registrant's Common Stock and Related Stockholder Matters." 24 26 The following table provides information as to the value of options held by each of the Named Executive Officers at the end of 1998 measured in terms of the fair market value of the Company's nonvoting Class C Common Stock on December 31, 1998 ($100 per share, as determined by the Company). None of the named Executive Officers exercised any options under the 1998 Plan during the last fiscal year. AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
SHARES NUMBER OF SECURITIES VALUE OF UNEXERCISED ACQUIRED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARS AT ON VALUE OPTIONS/SARS AT FY-END (#) FY-END ($) NAME EXERCISE (#) REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ------------ -------- ------------------------- ---------------------------- Richard P. Durham - - 1,573/14,161 0/0 Jack E. Knott - - 1,049/9,440 0/0 Scott K. Sorensen - - 787/7,080 0/0 Ronald G. Moffitt - - 262/2,360 0/0
On February 22, 1999, 26,223 outstanding options under the 1998 Plan were canceled in connection with the sale of 26,223 shares of Class C Common Stock to certain members of senior management. See Item 5. "Market For the Registrant's Common Stock and Related Stockholder Matters." The 26,223 shares were purchased by certain Named Executive Officers for $100 per share, the estimated fair market value of the shares on the date of purchase, pursuant to the terms of an Option Cancellation and Restricted Stock Purchase Agreement between the Company and certain Named Executive Officers. Mr. Durham purchased 15,734 shares, Mr. Sorensen purchased 7,867 shares and Mr. Moffitt purchased 2,622 shares. All of such shares are subject to vesting requirements similar to the canceled options. Accordingly, one-half of the shares purchased by each Named Executive Officer are time vested shares, which vest in equal increments over a five-year period commencing January 1, 1998, and the remaining one-half of the shares purchased by each Named Executive Officer are performance vested options, which vest in equal increments over a five-year period commencing January 1, 1998, provided that the Company has achieved a specified market value of equity applicable to such increment. For purposes of the performance vested shares, the Company's market value of equity is determined pursuant to a formula based upon the Company's adjusted earnings. The terms of the restricted stock purchase agreements provide for partial vesting of the performance vested shares if more than 80% of the applicable market value of equity is achieved. The restricted stock purchase agreements also provide for accelerated vesting in the event of a change of control. PENSION PLANS The following table shows the estimated annual benefits payable under Huntsman Packaging's tax-qualified defined benefit pension plan (the "Pension Plan") in specified final average earnings and years of service classifications. 25 27 HUNTSMAN PACKAGING PENSION PLAN TABLE
YEARS OF BENEFIT SERVICE AT RETIREMENT -------------------------------------------------------------------------------- FINAL AVERAGE COMPENSATION 10 15 20 25 30 35 40 - -------------------------- ------- ------- ------- ------- ------- ------- -------- $100,000 $16,000 $24,000 $32,000 $40,000 $48,000 $56,000 $ 64,000 125,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 150,000 24,000 36,000 48,000 60,000 72,000 84,000 96,000 175,000 25,067 37,600 50,133 62,667 75,200 87,733 100,267 200,000 25,067 37,600 50,133 62,667 75,200 87,733 100,267
The current Pension Plan benefit is based on the following formula: 1.6% of final average compensation multiplied by years of credited service, minus 1.5% of estimated Social Security benefits multiplied by years of credited service (with a maximum of 50% of Social Security benefits). Final Average Compensation is based on the highest average of three consecutive years of compensation. Covered compensation for purposes of the Pension Plan includes compensation earned with affiliates of the Company. The named executive officers were participants in the Pension Plan in 1998. The Final Average Compensation for purposes of the Pension Plan in 1998 for each of the named executive officers is $160,000, which is the maximum that can be considered for the 1998 plan year under federal regulations. Federal regulations also provide that the maximum annual benefit paid from a qualified defined benefit plan cannot exceed $130,000 as of January 1, 1998. Benefits are calculated on a straight life annuity basis. The benefit amounts under the Pension Plan are offset for Social Security as described above. The number of completed years of credit service as of December 31, 1998 under the Pension Plan for the named executive officers participating in the plan were as follows:
YEARS OF NAME CREDITED SERVICE ---- ---------------- Richard P. Durham (1) 13 Jack E. Knott (1) 13 Scott K. Sorensen 1 Ronald G. Moffitt (1) 4
- -------------- (1) The years of credited service under the Pension Plan includes 12 years of service credited with affiliates of the Company for Mr. Durham, 12 years of service credited with affiliates of the Company for Mr. Knott, and 3 years of service credited with affiliates of the Company for Mr. Moffitt. The benefit calculation upon retirement under the Pension Plan is made using all credited service but the benefit is then multiplied by a fraction representing that part of total credited service represented by service for the Company. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with Jack E. Knott, effective September 1, 1997. The employment agreement provides that Mr. Knott shall be employed as the Executive Vice President and Chief Operating Officer of the Company for an initial term of two years. Thereafter, Mr. Knott will be employed under the employment agreement for 12-month renewal terms unless either party provides notice of non-renewal. The employment agreement establishes Mr. Knott's base salary and sets forth his right to receive a performance bonus and certain other benefits. The employment agreement also contains certain restrictions on Mr. Knott, including restrictions with respect to confidential information, non-competition and non-solicitation of employees. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The Board of Directors of the Company has designated the Executive Committee, which is comprised of Jon M. Huntsman and Richard P. Durham, to perform the duties of a compensation committee for the Company. Richard P. Durham is the President and Chief Executive Officer of the Company and Jon M. Huntsman is the Chairman of the Board of Directors of the Company. Richard P. Durham serves as a director of Huntsman Corporation, but is not one of the people who performs the duties of a compensation committee of the Board of Directors of Huntsman Corporation. 26 28 On August 7, 1998, Huntsman Packaging made an offer to the Board of Directors of Applied Extrusion Technologies, Inc. ("AET"), a publicly traded company, to purchase all of the outstanding shares of common stock of AET at $10.50 per share in a merger transaction. AET's Board rejected the offer. On September 10, 1998, the Company made another offer to the Board of Directors of AET to purchase all of the outstanding shares of common stock of AET at $12.50 per share in a merger transaction. On September 14, 1998, HPC Investment, Inc., a wholly-owned subsidiary of Huntsman Packaging, purchased shares of the common stock of AET from Richard P. Durham, President and Chief Executive Officer of Huntsman Packaging, for an aggregate purchase price of $3.3 million, in an arms-length transaction approved by the Board of Directors of HPC Investment, Inc. AET's Board of Directors subsequently rejected Huntsman Packaging's second offer. COMPENSATION OF DIRECTORS Each director receives an annual fee of $25,000. 27 29 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Set forth below is certain information as of March 26, 1999 with respect to the beneficial ownership of shares of Common Stock by (i) each director of the Company, (ii) each of the Named Executive Officers and (iii) all directors and executive officers as a group.
NAME AND ADDRESS NUMBER OF SHARES PERCENT OF TITLE OF CLASS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED(2) CLASS(3) - -------------- ---------------------- --------------------- ---------- Class A Common Jon M. Huntsman 650,000 Class A 65.0% Total 61.5% Class A Common Richard P. Durham 5,000 Class A * Class B Common Richard P. Durham 2,000 Class B 28.6% Class C Common Richard P. Durham 21,289(4) Class C 42.1% Total 2.7% Class A Common Christena H. Durham 345,001(5) Class A 34.5% Class B Common Christena H. Durham 4,999(5) Class B 71.4% Total 33.1% Class C Common Jack E. Knott 8,549(6) Class C 16.9% Total * Class C Common Scott K. Sorensen 15,000(7) Class C 29.7% Total 1.4% Class C Common Ronald G. Moffitt 5,722(8) Class C 11.3% Total * Class A, Class B & All directors and executive officers Class C Common As a group (six persons) 1,057,560 100%
- -------- * Less than 1%. (1) Unless otherwise indicated in these footnotes, the mailing address of each beneficial owner listed is 500 Huntsman Way, Salt Lake City, Utah 84108. (2) Except as otherwise indicated in these footnotes, each of the beneficial owners listed has, to the knowledge of the Company, sole voting and investment power with respect to the indicated shares of Common Stock. (3) The Company has three classes of Common Stock outstanding: Class A, Class B and Class C. The percentages in the table marked "total" have been calculated based upon the total outstanding shares of Common Stock as if all of the outstanding shares were part of a single class. The Class A Common Stock, the Class B Common Stock and the Class C Common Stock have identical rights, except with respect to voting. The Class A shareholders are entitled to elect one of the Company's three directors and the Class B shareholders are entitled to elect the remaining two of the Company's three directors. The Class C shareholders do not have voting rights, except as required by the Utah Revised Business Corporation Act. (4) Includes 15,734 shares of Class C Common Stock subject to time and performance vesting requirements. (5) 345,001 shares of Class A Common Stock and 4,999 shares of Class B Common Stock are held by The Christena Karen H. Durham Trust for the benefit of Christena H. Durham. Richard P. Durham and Ronald G. Moffitt, as trustees of The Christena Karen H. Durham Trust, share voting power with respect to such shares. (6) Includes 1,049 shares of Class C Common Stock subject to options that are exercisable or become exercisable within 60 days of March 26, 1999. (7) Includes 7,867 shares of Class C Common Stock subject to time and performance vesting requirements. (8) Includes 2,622 shares of Class C Common Stock subject to time and performance vesting requirements. 28 30 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The principal executive offices of Huntsman Packaging are leased from Huntsman Headquarters Corporation, an indirect wholly-owned subsidiary of Huntsman Corporation. Huntsman Packaging is obligated to pay rent calculated as a pro-rata portion (based on its percentage occupancy) of the mortgage principal and interest payments on the headquarters facility. Huntsman Packaging is a party to agreements with certain affiliates of Huntsman Corporation, including but not limited to, Huntsman Polymers Corporation, for the purchase of various resins. All such agreements provide for the purchase of materials or services at prevailing market prices. Huntsman Packaging obtains some of its insurance coverage under policies of Huntsman Corporation. Huntsman Packaging is party to an agreement with Huntsman Corporation that provides for reimbursement of insurance premiums paid by Huntsman Corporation on behalf of Huntsman Packaging. The reimbursement payments are based on premium allocations which are determined in cooperation with Huntsman Corporation's independent insurance broker. Huntsman Packaging is a party to a services agreement dated as of January 1, 1999 with Huntsman Corporation covering the provision of certain administrative services. These services are provided to Huntsman Packaging at prices that would be payable to an unaffiliated third party. During 1998, the Company paid a management fee in the amount of $133,333 to Huntsman Financial Corporation, a subsidiary of Huntsman Corporation, for consulting services provided to the Company by Jon M. Huntsman. In connection with the Split-Off, Huntsman Packaging issued 7,000 shares of its common stock to Richard P. Durham, President and Chief Executive Officer and a director of Huntsman Packaging, in exchange for a $700,000 note receivable. Such note bears interest at 7% per annum and is payable over approximately 51 months. As of December 31, 1998, the outstanding balance on this note receivable was $434,000. On August 7, 1998, Huntsman Packaging made an offer to the Board of Directors of Applied Extrusion Technologies, Inc. ("AET"), a publicly traded company, to purchase all of the outstanding shares of common stock of AET at $10.50 per share in a merger transaction. AET's Board rejected the offer. On September 10, 1998, the Company made another offer to the Board of Directors of AET to purchase all of the outstanding shares of common stock of AET at $12.50 per share in a merger transaction. On September 14, 1998, HPC Investment, Inc., a wholly-owned subsidiary of Huntsman Packaging, purchased shares of the common stock of AET from Richard P. Durham, President and Chief Executive Officer of Huntsman Packaging, for an aggregate purchase price of $3.3 million, in an arms-length transaction approved by the Board of Directors of HPC Investment, Inc. AET's Board of Directors subsequently rejected Huntsman Packaging's second offer. On February 22, 1999, the Company sold 26,223 shares of Class C Common Stock to certain members of senior management. 15,734 shares were issued to Richard P. Durham, President and Chief Executive Officer and a director of Huntsman Packaging, in exchange for a $1,573,400 note receivable; 7,867 shares were issued to Scott K. Sorensen, Executive Vice President, Chief Financial Officer and Treasurer of Huntsman Packaging, in exchange for a $786,700 note receivable; and 2,622 shares were issued to Ronald G. Moffitt, Senior Vice President, General Counsel and Secretary of Huntsman Packaging, in exchange for a $262,200 note receivable. All of such notes bear interest at 7% per annum and are payable in three annual installments beginning in February 2002. During 1998, the Company made a $500,000 charitable contribution to the Huntsman Cancer Institute, a public charity. Jon M. Huntsman, Chairman of the Board of Directors of the Company, and Richard P. Durham, President and Chief Executive Officer of the Company, serve on the Board of Trustees of the Huntsman Cancer Institute. See Note 15 to the Consolidated Financial Statements included in this report. 29 31 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) Financial Statements HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES Report of Management F-2 Report of Independent Public Accountants (Arthur Andersen LLP) F-3 Independent Auditors' Report (Deloitte & Touche LLP) F-4 Consolidated Balance Sheets at December 31, 1998 and 1997 F-5 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 F-7 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 F-8 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 F-9 Notes to Consolidated Financial Statements F-12 BLESSINGS CORPORATION Independent Auditors' Report (Deloitte & Touche LLP) F-43 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-44 Consolidated Statements of Earnings for the years ended December 31, 1997 and 1996 and the 52 weeks ended December 30, 1995 F-45 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997 and 1996 and the 52 weeks ended December 30, 1995 F-46 Consolidated Statements of Cash Flows for the years ended December 31, 1997 and 1996 and the 52 weeks ended December 30, 1995 F-47 Notes to Consolidated Financial Statements F-48 (a)(2) Financial Statement Schedule Schedule II - Valuation and Qualifying Accounts F-42
30 32 (a)(3) The following exhibits are filed herewith or incorporated by reference: Exhibit Number Exhibit 3.1 Second Amended and Restated Articles of Incorporation of Huntsman Packaging (incorporated by reference to Exhibit 3.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Amended and Restated Bylaws of Huntsman Packaging (incorporated by reference to Exhibit 3.2 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 4.1 Indenture, dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and The Bank of New York (incorporated by reference to Exhibit 4.1 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 4.2 Supplemental Indenture No. 1 to Indenture dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and the Bank of New York (incorporated by reference to Exhibit 4.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4.3 Supplemental Indenture No. 2 to Indenture dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and the Bank of New York (incorporated by reference to Exhibit 4.2 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4.4 Form of Exchange Notes (incorporated by reference to Exhibit A-2 to Exhibit 4.1)). 4.5 Registration Rights Agreement, dated as of September 19, 1997, by and among Huntsman Packaging, BT Alex. Brown Incorporated and Chase Securities Inc. (incorporated by reference to Exhibit 4.3 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.1 Exchange Agreement, dated as of September 26, 1997 by and among Huntsman Corporation and Jon M. Huntsman, Richard P. Durham and Elizabeth Whitsett, as Trustees of the Christena Karen H. Durham Trust (incorporated by reference to Exhibit 10.1 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.2 First Amended Asset Purchase Agreement, dated as of September 26, 1997, between Huntsman Packaging and Huntsman Polymers Corporation (incorporated by reference to Exhibit 10.2 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.3 Amended and Restated Credit Agreement, dated as of May 14, 1998, among Huntsman Packaging, the various lenders party thereto (the "Lenders") and The Chase Manhattan Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.4 Guarantee Agreement, dated September 30, 1997, among the subsidiaries of Huntsman Packaging and The Chase Manhattan Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.4 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.5 Security Agreement, dated as of September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.5 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 31 33 10.6 Pledge Agreement, dated September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.6 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.7 Indemnity, Subrogation and Contribution Agreement, dated September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.7 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.8 Form of Option Cancellation and Restricted Stock Purchase Agreement *(1) 10.9 Employment Agreement between Huntsman Packaging and Jack E. Knott *(1) 10.10 1998 Huntsman Packaging Corporation Stock Option Plan.*(1) 21 Subsidiaries of Huntsman Packaging.* 27 Financial Data Schedule.* * Filed with this report. (1) Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. (b) Reports on Form 8-K Not Applicable. 32 34 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on March 26, 1999. HUNTSMAN PACKAGING CORPORATION By /s/ Richard P. Durham ---------------------------------------------------- Richard P. Durham, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 26, 1999 by the following persons on behalf of the Registrant and in the capacities indicated. By /s/ Jon M. Huntsman ---------------------------------------------------- Jon M. Huntsman, Director and Chairman of the Board of Directors By /s/ Richard P. Durham ---------------------------------------------------- Richard P. Durham, Director, President and Chief Executive Officer (Principal Executive Officer) By /s/ Christena H. Durham ---------------------------------------------------- Christena H. Durham, Director By /s/ Scott K. Sorensen ---------------------------------------------------- Scott K. Sorensen, Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) 33 35 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULE II
PAGE ---- HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES: As of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996: Report of Management................................................................ F-2 Report of Independent Public Accountants (Arthur Andersen LLP)...................... F-3 Independent Auditors' Report (Deloitte & Touche LLP)................................ F-4 Consolidated Balance Sheets......................................................... F-5 Consolidated Statements of Income................................................... F-7 Consolidated Statements of Stockholders' Equity..................................... F-8 Consolidated Statements of Cash Flows............................................... F-9 Notes to Consolidated Financial Statements.......................................... F-12 Schedule II - Valuation and Qualifying Accounts..................................... F-42 BLESSINGS CORPORATION AND SUBSIDIARIES: As of December 31, 1997 and 1996 and for the years ended December 31, 1997 and 1996 and the 52 weeks ended December 30, 1995: Independent Auditors' Report (Deloitte & Touche LLP)................................ F-43 Consolidated Balance Sheets......................................................... F-44 Consolidated Statements of Operations............................................... F-45 Consolidated Statements of Stockholders' Equity..................................... F-46 Consolidated Statements of Cash Flows............................................... F-47 Notes to Consolidated Financial Statements.......................................... F-48
F-1 36 REPORT OF MANAGEMENT Huntsman Packaging's management has prepared the accompanying financial statements and related notes in conformity with generally accepted accounting principles. In so doing, management makes informed judgments and estimates of the expected effects of events and transactions. Financial data appearing elsewhere in this report are consistent with these financial statements. Huntsman Packaging maintains a system of internal controls to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by policies and procedures, careful selection and training of qualified personnel, and, beginning in 1999, a formal internal audit program. The accompanying financial statements have been audited by Arthur Andersen LLP and Deloitte & Touche LLP, independent public accountants, for the specified periods as indicated in their reports. Their audits were made in accordance with generally accepted auditing standards. They considered Huntsman Packaging's internal control structure only to the extent necessary to determine the scope of their audit procedures for the purpose of rendering an opinion on the financial statements. Members of the Board of Directors meet with management, the internal auditors and the independent public accountants to review accounting, auditing and financial reporting matters. Subject to stockholder approval, the independent public accountants are appointed by the Board of Directors. Richard P. Durham Scott K. Sorensen President and Chief Executive Officer Executive Vice President and Chief Financial Officer F-2 37 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Huntsman Packaging Corporation: We have audited the accompanying consolidated balance sheet of Huntsman Packaging Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of income, stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Huntsman Packaging Corporation and subsidiaries as of December 31, 1998, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. Schedule II is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. Schedule II for the year ended December 31, 1998 has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Salt Lake City, Utah February 12, 1999, except with respect to the matters discussed in the second and last paragraphs of Note 10 as to which the date is March 26, 1999 F-3 38 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Huntsman Packaging Corporation and Subsidiaries: We have audited the accompanying consolidated balance sheet of Huntsman Packaging Corporation and subsidiaries as of December 31, 1997, and the consolidated statements of operations, stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Huntsman Packaging Corporation and subsidiaries at December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Our audits were conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. Supplemental Schedule II - Valuation and Qualifying Accounts is presented for the purpose of additional analysis and is not a required part of the basic financial statements. This supplemental schedule is the responsibility of the Company's management. Such schedule has been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, is fairly stated in all material respects. DELOITTE & TOUCHE LLP Salt Lake City, Utah February 11, 1998 F-4 39 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
ASSETS 1998 1997 CURRENT ASSETS: Cash and cash equivalents $ 19,217 $ 12,411 Receivables: Trade accounts, net of allowances of $2,570 and $3,257, respectively 79,825 72,986 Other 9,556 4,845 Inventories 65,892 63,704 Prepaid expenses and other 3,063 2,136 Income taxes receivable 7,365 Deferred income taxes 3,605 1,271 Net current assets of discontinued operations 6,420 ---------- ---------- Total current assets 188,523 163,773 ---------- ---------- PLANT AND EQUIPMENT: Land and improvements 7,442 7,068 Buildings and improvements 54,933 39,650 Machinery and equipment 263,737 146,197 Furniture, fixtures and vehicles 4,200 1,212 Leasehold improvements 521 422 Construction in progress 21,321 6,482 ---------- ---------- 352,154 201,031 Less accumulated depreciation and amortization (51,820) (37,298) ---------- ---------- Plant and equipment - net 300,334 163,733 ---------- ---------- INTANGIBLE ASSETS - Net 221,290 50,053 ---------- ---------- OTHER ASSETS 24,125 12,573 ---------- ---------- NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 10,260 ---------- ---------- TOTAL ASSETS $ 734,272 $ 400,392 ========== ==========
(Continued) F-5 40 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS) - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997 CURRENT LIABILITIES: Trade accounts payable $ 43,186 $ 27,896 Accrued liabilities: Customer rebates 8,450 5,378 Other 25,126 18,875 Current portion of long-term debt 11,406 343 Income taxes payable 1,912 Due to affiliates 7,000 15,279 ---------- ---------- Total current liabilities 95,168 69,683 LONG-TERM DEBT - Net of current portion 513,530 250,171 OTHER LIABILITIES 11,394 8,869 DEFERRED INCOME TAXES 42,423 8,695 ---------- ---------- Total liabilities 662,515 337,418 ---------- ---------- COMMITMENTS AND CONTINGENCIES (Notes 6, 7, 9, 10 and 11) REDEEMABLE COMMON STOCK- Class C nonvoting, no par value; 60,000 shares authorized, 11,700 shares outstanding 1,170 ---------- ---------- STOCKHOLDERS' EQUITY: Common stock - Class A voting, no par value; 1,200,000 shares authorized, 1,000,001 shares outstanding 63,161 63,161 Common stock - Class B voting, no par value; 10,000 shares authorized, 6,999 shares outstanding 515 515 Retained earnings 13,731 5,393 Stockholder note receivable (434) (700) Cumulative foreign currency translation adjustments (6,386) (5,395) ---------- ---------- Total stockholders' equity 70,587 62,974 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 734,272 $ 400,392 ========== ==========
See notes to consolidated financial statements. F-6 41 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------
1998 1997 1996 SALES - Net $ 651,957 $ 447,743 $ 295,679 COST OF SALES 532,410 389,628 253,506 --------- --------- --------- Gross profit 119,547 58,115 42,173 --------- --------- --------- OPERATING EXPENSES: Administration and other 37,383 15,113 10,237 Sales and marketing 24,148 18,143 14,864 Research and development 3,677 2,507 2,061 Plant closing costs 4,875 9,276 10,873 --------- --------- --------- Total operating expenses 70,083 45,039 38,035 --------- --------- --------- OPERATING INCOME 49,464 13,076 4,138 INTEREST EXPENSE (37,519) (17,000) (11,623) OTHER INCOME (EXPENSE) - Net (879) 750 (2,700) --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 11,066 (3,174) (10,185) --------- --------- --------- INCOME TAX EXPENSE (BENEFIT): Current 1,567 3,679 1,276 Deferred 6,966 (4,188) (6,490) --------- --------- --------- Total income tax expense (benefit) 8,533 (509) (5,214) --------- --------- --------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM 2,533 (2,665) (4,971) INCOME FROM DISCONTINUED OPERATIONS (net of income tax expense of $387, $1,348 and $1,058, respectively) 582 3,040 1,783 GAIN ON SALE OF DISCONTINUED OPERATIONS (net of income tax expense of $6,729) 5,223 EXTRAORDINARY ITEM - Loss on early extinguishment of debt (net of income tax benefit of $780) (1,338) --------- --------- --------- NET INCOME (LOSS) $ 8,338 $ 375 $ (4,526) ========= ========= =========
See notes to consolidated financial statements. F-7 42 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------
CLASS A CLASS B COMMON STOCK COMMON STOCK COMMON STOCK ----------------- ------------------- ------------------ TOTAL SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT ----- ------ ------ ------ ------ ------ ------ BALANCE, JANUARY 1, 1996 $ 71,053 1 $ 1 Comprehensive loss: Net loss (4,526) Other comprehensive income - Foreign currency translation adjustments 518 -------- Comprehensive loss (4,008) Other (33) ------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1996 67,012 1 1 -------- Comprehensive loss: Net income 375 Other comprehensive loss - Foreign currency translation adjustments (4,378) -------- Comprehensive loss (4,003) Recapitalization (Note 1) (1) (1) 995 $62,661 5 $315 Shares issued for note receivable 5 500 2 200 Other (35) ------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1997 62,974 1,000 63,161 7 515 -------- Comprehensive income: Net income 8,338 Other comprehensive loss - Foreign currency translation adjustments (991) -------- Comprehensive income 7,347 Payments received on shareholder note receivable 266 ------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $ 70,587 1,000 $63,161 7 $515 ===============================================================================
CUMULATIVE FOREIGN ADDITIONAL CURRENCY PAID-IN RETAINED STOCKHOLDER TRANSLATION CAPITAL EARNINGS RECEIVABLE ADJUSTMENTS ------- -------- ---------- ----------- BALANCE, JANUARY 1, 1996 $62,975 $9,612 $(1,535) Comprehensive loss: Net loss (4,526) Other comprehensive income - Foreign currency translation 518 adjustments Comprehensive loss Other (33) ---------------------------------------------------------- BALANCE, DECEMBER 31, 1996 62,975 5,053 (1,017) Comprehensive loss: Net income 375 Other comprehensive loss - Foreign currency translation (4,378) adjustments Comprehensive loss Recapitalization (Note 1) (62,975) Shares issued for note receivable $(700) Other (35) ---------------------------------------------------------- BALANCE, DECEMBER 31, 1997 5,393 (700) (5,395) Comprehensive income: Net income 8,338 Other comprehensive loss - Foreign currency translation (991) adjustments Comprehensive income Payments received on shareholder note receivable 266 ---------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $13,731 $(434) $(6,386) ==========================================================
See notes to consolidated financial statements. F-8 43 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------
1998 1997 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 8,338 $ 375 $ (4,526) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Extraordinary item - loss on early extinguishment of debt 1,338 Depreciation and amortization 27,088 16,442 14,000 Deferred income taxes 6,966 (4,188) (6,490) Provision for losses on accounts receivable (1,714) 241 264 Gain on sale of discontinued operations (5,223) Provision for write-down of goodwill 411 3,286 3,283 Provision for write-down of plant and equipment 629 4,262 5,300 Loss on disposal of assets 305 Changes in operating assets and liabilities - net of effects of acquisitions: Trade accounts receivable 15,041 (6,431) (7,484) Other receivables (7,526) (1,666) 4,957 Inventories 14,298 7,961 (12,833) Prepaid expenses and other 46 1,758 (2,665) Other assets 1,685 (7,621) 3,174 Trade accounts payable 1,528 340 3,825 Accrued liabilities 1,998 (96) 9,722 Due to affiliates (8,279) 8,839 5,153 Income taxes payable/receivable (9,004) 3,427 200 Other liabilities (1,097) 1,719 2,901 --------- -------- -------- Net cash provided by operating activities 45,490 28,648 20,119 --------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 33,850 Payment for purchase of Blessings Corporation, net of cash acquired (285,712) Capital expenditures for plant and equipment (52,101) (17,861) (12,774) Payments for certain net assets of Ellehammer Industries (7,877) Payments for certain assets of AlliedSignal (3,000) Payment for purchase of CT Film, net of cash acquired (69,366) Payment for purchase of United Films Corporation (12,276) Payment for purchase of Deerfield Plastics, net of cash acquired (63,889) --------- -------- -------- Net cash used in investing activities (314,840) (87,227) (88,939) ========= ======== ========
(Continued) F-9 44 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - --------------------------------------------------------------------------------
1998 1997 1996 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Class C nonvoting common stock $ 1,170 Principal payments on borrowings (10,544) $(249,509) $(131,731) Proceeds from issuance of long-term debt 285,000 312,700 200,348 --------- --------- --------- Net cash provided by financing activities 275,626 63,191 68,617 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 530 (2,848) 3,660 --------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 6,806 1,764 3,457 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 12,411 10,647 7,190 --------- --------- --------- CASH AND CASH EQUIVALENTS, END OF YEAR $ 19,217 $ 12,411 $ 10,647 ========= ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ 33,253 $ 27,596 $ 501 ========= ========= ========= Income taxes $ 5,647 $ 1,614 $ 800 ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES: On August 1, 1996, we purchased all of the outstanding capital stock of United Films Corporation for approximately $12,276. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired (including goodwill of $12,076) $ 21,950 Cash paid (12,276) -------- Liabilities assumed $ 9,674 ========
(Continued) F-10 45 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS) - -------------------------------------------------------------------------------- On October 21, 1996, we purchased all of the outstanding capital stock of Deerfield Plastics, Inc. for approximately $68,207. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired (including goodwill of $18,400) $ 90,265 Cash paid (68,207) -------- Liabilities assumed (including deferred acquisition payments) $ 22,058 ========
On September 30, 1997, we purchased all of the assets of CT Film (a division of Huntsman Polymers Corporation, formerly Rexene Corporation) and Rexene Corporation Limited (a wholly-owned subsidiary of Huntsman Polymers Corporation) for cash of approximately $70,000. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired (including goodwill of $7,763) $ 87,923 Cash paid (70,000) -------- Liabilities assumed $ 17,923 ========
On March 12, 1998, we acquired certain assets and assumed certain liabilities of Ellehammer Industries, Ltd. and Ellehammer Packaging, Inc. for cash of approximately $7,900. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired $ 8,604 Cash paid (7,877) ------- Liabilities assumed $ 727 =======
On May 19, 1998, we purchased all of the outstanding capital stock of Blessings Corporation for cash of approximately $213,000. As part of the acquisition, liabilities assumed were as follows: Fair value of assets acquired (including goodwill of $168,704) $ 328,403 Cash paid (including the repayment of Blessings Corporation's debt) (287,499) --------- Liabilities assumed $ 40,904 =========
See notes to consolidated financial statements. F-11 46 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Huntsman Packaging Corporation and its subsidiaries (collectively "Huntsman Packaging") produce plastic films and printed plastic films and bags. Our manufacturing facilities are located in North America, Germany and Australia. RECAPITALIZATION - Prior to September 30, 1997, Huntsman Packaging was a wholly-owned subsidiary of Huntsman Corporation ("HC"). On September 30, 1997, Huntsman Packaging was recapitalized by authorizing two new classes of common stock, Class A Common and Class B Common. The 1,000 shares of previously issued and outstanding common stock were canceled. On September 30, 1997, Huntsman Packaging was separated from HC in a tax free transaction under Section 355 of the Internal Revenue Code (the "Split-Off") when Jon M. Huntsman and The Christena Karen H. Durham Trust exchanged shares of HC common stock for shares of Huntsman Packaging's newly authorized common stock. Additionally, Richard P. Durham purchased shares of Huntsman Packaging's newly authorized common stock in exchange for a note receivable. PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include the accounts of Huntsman Packaging and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS - The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. REVENUE RECOGNITION - Sales revenue is recognized upon shipment of product in fulfillment of a customer order. CARRYING VALUE OF LONG-LIVED ASSETS - We evaluate the carrying value of long-lived assets, including intangible assets, based upon current and expected undiscounted cash flows, and recognize an impairment when the estimated cash flows are less than the carrying value of the asset. Measurement of the amount of impairment, if any, is based upon the difference between the asset's carrying value and fair value. INVENTORIES - Inventories consist principally of finished film products and the raw materials necessary to produce them. Inventories are carried at the lower of cost (on a first-in, first-out basis) or market value. F-12 47 PLANT AND EQUIPMENT - Plant and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated economic useful lives of the assets as follows: Land improvements 20 years Buildings and improvements 20 years Machinery and equipment 7-15 years Furniture, fixtures and vehicles 3-7 years Leasehold improvements 10-20 years
INTANGIBLE ASSETS - Intangible assets are stated at cost. Amortization is computed using the straight-line method over the estimated economic useful lives of the assets as follows: Cost in excess of fair value of net assets acquired 30-40 years Other intangible assets 2-15 years
OTHER ASSETS - Other assets consist primarily of deferred debt issuance costs, deposits, spare parts, and the cash surrender values of life insurance policies. CASH AND CASH EQUIVALENTS - For the purpose of the consolidated statements of cash flows, we consider cash in checking accounts and in short-term highly liquid investments with an original maturity of three months or less to be cash and cash equivalents. Cash and cash equivalents generated outside of the United States are generally subject to taxation if repatriated. INCOME TAXES - We use the asset and liability method of accounting for income taxes. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial and tax reporting purposes. Subsequent to the Split-Off, we file our own consolidated income tax returns. Prior to the Split-Off, our operations were included in the consolidated U.S. income tax returns of HC. The intercompany tax allocation policy provided for each subsidiary to calculate its own provision on a "separate return basis." DERIVATIVE FINANCIAL INSTRUMENTS - We enter into interest rate collar and swap agreements to manage interest rate risk on long-term debt. These agreements are classified as hedges for matched transactions. The differential to be paid or received as interest rates change is accrued and recognized as an adjustment to interest expense. The related amount payable to or receivable from the counterparties is included in other liabilities or assets. Gains and losses on terminations of interest-rate swap agreements are deferred and amortized as an adjustment to interest expense over the lesser of the remaining term of the original contract or the life of the debt. We also enter into commodity collar agreements to manage the market risk of our raw material prices. These agreements are classified as hedges. The differential to be paid or received as commodity prices change is accrued and recognized as an adjustment to inventory. The related amount payable to or receivable from the counterparties is included in other liabilities or assets. FOREIGN CURRENCY TRANSLATION - The accounts of our foreign subsidiaries are translated into U.S. Dollars using the exchange rate at each balance sheet date for assets and liabilities and a weighted average exchange rate for each period for revenues, expenses, gains and losses. Transactions are translated using the exchange rate at each transaction date. Where the local currency is the functional currency, translation adjustments are recorded as a separate component of stockholders' equity. Where the U.S. Dollar is the functional currency, translation adjustments are recorded in other income within current operations. RECENT ACCOUNTING PRONOUNCEMENT - In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 F-13 48 establishes accounting and reporting standards that require derivative instruments to be recorded on the balance sheet as either an asset or liability, measured at fair market value, and that changes in the derivative's fair value be recognized currently in earnings, unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. We expect that the adoption of this statement will not have a material effect on our consolidated financial statements. 2. INVENTORIES Inventory Balances - Inventories consist of the following at December 31, 1998 and 1997 (in thousands): 1998 1997 Finished goods $37,830 $37,254 Raw materials 21,318 21,675 Work-in-process 6,744 4,775 ------- ------- Total $65,892 $63,704 ======= =======
COMMODITY COLLAR TERMS - In 1998, we entered into a commodity collar agreement to manage the market risk of one of our major raw materials. The collar agreement entitles us to receive from the counterparty (a major risk management company) the amounts, if any, by which the published market price, as defined in the agreement, of low density polyethylene ("LDPE") exceeds $0.35 per pound. The collar agreement requires us to pay the counterparty the amounts, if any, by which the published market price of LDPE is below $0.295 per pound. As of December 31, 1998, the defined published market price for LDPE was $0.30 per pound. There was no premium paid for the collar agreement. We are exposed to credit losses in the event of nonperformance by the counterparty to the agreement. We anticipate, however, that the counterparty will be able to fully satisfy its obligations under the contract. Market risk arises from changes in commodity prices. As of December 31, 1998, the terms of the outstanding LDPE commodity collar agreement are as follows: Notional amount (in pounds) 18 million Maturity date April 30, 2000 Cap amount (per pound) $0.350 Floor amount (per pound) $0.295
3 SALE OF ASSETS On June 1, 1998, Huntsman Container Corporation International ("HCCI"), a wholly-owned subsidiary of Huntsman Packaging, sold its entire interest in the capital stock of Huntsman Container Company Limited ("HCCL") and Huntsman Container Company France SA ("HCCFSA") to Polarcup Limited and Huhtamake Holdings France Sarl, subsidiaries of Huhtamaki Oyj. Together, HCCL and HCCFSA comprised our foam products operations, which were operated exclusively in Europe. Net proceeds from the sale were approximately $28.3 million and resulted in a gain of approximately $5.2 million, net of applicable income taxes. The financial position and results of operations of this separate business segment are reflected as discontinued operations in the accompanying consolidated financial statements for all years presented. Revenues from the foam products operations for the years ended December 31, 1998, 1997 and 1996 amounted to $15.6 million, $43.4 million and $43.5 million, respectively. F-14 49 As part of our acquisition of the CT Film Division of Huntsman Polymers (see Note 12), we acquired Huntsman Packaging UK Limited ("HPUK"). HPUK owned CT Film's Scunthorpe, UK facility, which manufactured and sold polyethylene film exclusively in Europe. At the time of the CT Film acquisition, we announced our intention to close or sell the Scunthorpe, UK facility. During 1998, we adjusted our preliminary estimate of the fair value of the Scunthorpe, UK facility assets acquired, resulting in an increase of $2.9 million to the associated goodwill recorded. On August 14, 1998, we sold our interest in the capital stock of HPUK to Skymark Packaging International Limited. Net proceeds from the sale were approximately $5.6 million, including a note receivable from the buyer. The note receivable balance was approximately $1.3 million at December 31, 1998. 4. PLANT CLOSING COSTS As part of our recent acquisitions (see Note 12), we developed a plan to close some of our less efficient production facilities and use available capacity at more efficient facilities. During 1998, we announced our plan to cease operations at our Clearfield, Utah facility. Included in 1998 operating expenses is a $4.9 million charge, comprised of a $0.4 million provision for the write-off of impaired goodwill, a $0.6 million provision for the write-down of impaired plant equipment associated with the facility, a $0.5 million charge for reduction of work force costs associated with the elimination of approximately 52 full-time equivalent employees, and an accrual of $3.4 million for estimated future net lease and other costs incurred to close the facility. During 1997, we announced the cessation of operations at our Carrollton, Ohio facility and our intention to relocate certain assets from that facility to other of our facilities. Included in 1997 operating expenses is a $9.3 million charge, comprised of a $3.3 million provision for the write-off of impaired goodwill, a $4.2 million provision for the write-down of impaired plant equipment associated with the facility, a $1.6 million charge for reduction in work force costs associated with the elimination of approximately 83 full-time equivalent employees, and an accrual of $0.2 million of other costs related to the closure of the facility. During 1996, we decided to cease operations at our Dallas, Texas and Bowling Green, Kentucky facilities. Included in 1996 operating expenses is a $10.9 million charge, comprised of a $3.3 million charge for the write-off of impaired goodwill, a $5.3 million provision for the write-down of impaired plant equipment associated with the two operations, a $1.1 million charge for reduction in work force costs associated with the elimination of approximately 81 full-time equivalent employees, and an accrual of $1.2 million of other costs related to the closure of the facilities. As of December 31, 1998, all previously announced plant closings were complete and no additional plant closing costs are anticipated for these closed facilities. As of December 31, 1998, the plant closing accrual balance included in accrued liabilities is $2.6 million and relates entirely to the Clearfield, Utah facility closure. F-15 50 5. INTANGIBLE ASSETS The cost of intangible assets and accumulated amortization at December 31, 1998 and 1997 is as follows (in thousands):
1998 1997 Cost in excess of fair value of net assets aqcuired $213,406 $50,458 Trademarks, patents and technology 15,776 4,676 Noncompete agreements 7,283 7,283 Other 7,455 4,445 -------- ------- 243,920 66,872 Less accumulated amortization (22,630) (16,819) -------- ------- Total $221,209 $50,053 ======== =======
Amortization expense for intangible assets was approximately $6.1 million, $3.1 million and $1.6 million for the years ended December 31, 1998, 1997 and 1996, respectively. 6. LONG-TERM DEBT Long-term debt as of December 31, 1998 and 1997 consists of the following (in thousands):
1998 1997 Credit Agreement: Revolver, variable interest at a weighted average rate of 7.95% as of December 31, 1998 $ 43,000 $ 47,000 Term loans, variable interest at a weighted average rate of 7.38% as of December 31, 1998 356,687 75,000 Senior subordinated notes, interest at 9.125% 125,000 125,000 Line of credit agreement, interest at 8.5%, due September 2000 2,852 Obligations under capital leases (see Note 7) 249 531 Other 131 --------- --------- Total 524,936 250,514 Less current portion (11,406) (343) --------- --------- Long-term portion $ 513,530 $ 250,171 ========= =========
On September 30, 1997, we entered into a $225 million credit facility (the "Credit Agreement") with various banks. On May 14, 1998, the Credit Agreement was amended and restated as a $510 million facility (the "Amended Credit Agreement"). The Amended Credit Agreement provides for the continuation of a previous term loan (the "Original Term Loan") in the principal amount of $75 million, maturing on September 30, 2005; a Tranche A Term Loan (the "Tranche A Term Loan") in the principal amount of $140 million, maturing on September 30, 2005; a Tranche B Term Loan (the "Tranche B Term Loan") in the principal amount of $100 million, maturing on June 30, 2006; and a term loan (the "Mexico F-16 51 Term Loan") to ASPEN Industrial, S.A., our wholly-owned Mexican subsidiary, in the principal amount of $45 million, maturing on September 30, 2005. The Amended Credit Agreement also provides for a $150 million revolving loan facility (the "Revolver") maturing on September 30, 2004. The Original Term Loan, the Tranche A Term Loan and the Mexico Term Loan amortize at an increasing rate on a quarterly basis. The Tranche A Term Loan and the Mexico Term Loan began amortizing on December 31, 1998 and the Original Term Loan begins amortizing December 31, 2001. The Tranche B Term Loan amortizes at the rate of $1 million per year, beginning September 30, 1998, with an aggregate of $93 million due in the last four quarterly installments. The term loans described above are required to be prepaid with the proceeds of certain asset sales, with 50% of the proceeds of the sale of certain Huntsman Packaging equity securities, and with the proceeds of certain debt offerings. Loans under the Amended Credit Agreement bear interest at our election, at either (1) zero to 0.75%, depending on certain of our financial ratios, plus the higher of (a) the agent bank's prime rate, (b) the federal funds rate plus 0.50% or (c) the agent bank's base CD rate plus 1%; or (2) the London Interbank Offered Rate plus 1% to 2%, also depending on certain of our financial ratios. We pay a quarterly commitment fee on the unused amount of the Revolver at an annual rate commencing at 0.50%. The interest rate margins and the commitment fee are subject to reduction if we achieve certain ratios. As of December 31, 1998, we had outstanding letters of credit of approximately $4.2 million. Obligations under the Amended Credit Agreement are guaranteed by the assets of all of our domestic subsidiaries. The Amended Credit Agreement does not permit cash dividends and contains covenants customary for transactions of this type, including restrictions on indebtedness, liens, asset sales, capital expenditures, acquisitions, investments, transactions with affiliates, and other restricted payments. The Amended Credit Agreement also contains financial covenants, including a ratio of maximum total debt to EBITDA, a minimum interest coverage ratio, and minimum net worth. Also on September 30, 1997, we issued $125 million of 9.125% unsecured senior subordinated notes which mature on October 1, 2007 (the "Notes"). Interest on the Notes is payable semi-annually on each April 1 and October 1, commencing April 1, 1998. The Notes are guaranteed by our domestic subsidiaries (see Note 16). The Notes are redeemable, at our option, in whole at any time or in part from time to time, on or after October 1, 2002, at redemption prices decreasing from 104.563% to 100% of the outstanding principal balance after October 2005. Additionally, up to 35% of the Notes may be redeemed prior to October 1, 2000, with the proceeds of one or more equity offerings at a price equal to 109.125% of the principal amount. The Notes are subject to certain covenants customary to this type of transaction, including restrictions on the incurrence of additional indebtedness, certain restricted payments, asset sales, dividend and other payment restrictions affecting subsidiaries, liens, mergers, and transactions with affiliates. As of December 31, 1998, we were in compliance with the covenants of the Amended Credit Agreement and the Notes. The proceeds of the Credit Agreement and the Notes were used to repay indebtedness to HC at the time of the Split-Off and to purchase CT Film. The proceeds of the Amended Credit Agreement were used to purchase the stock of Blessings Corporation (see Notes 1 and 12). On January 29, 1996, we wrote-off approximately $2.1 million of previously deferred loan costs, which were recorded, net of the applicable income tax benefit of approximately $0.8 million, as an extraordinary item in the accompanying 1996 consolidated income statement. F-17 52 The scheduled maturities of long-term debt by year as of December 31, 1998 are as follows (in thousands):
Year ending December 31: 1999 $ 11,406 2000 16,066 2001 24,865 2002 50,899 2003 50,901 Thereafter 370,799 -------- Total $524,936 ========
In 1997, we purchased an interest rate collar agreement to reduce the impact of changes in interest rates on our floating-rate long-term debt. The collar agreement entitles us to receive amounts from the counterparty (a major bank) if the three-month LIBOR interest rate, as defined in the agreement, exceeds 6.25%. The collar agreement requires us to pay amounts to the counterparty if the three-month LIBOR interest rate is less than 5.25%. As of December 31, 1998, the defined three-month LIBOR interest rate was 5.06%. The net premium paid for the collar agreement purchased is included in other assets in the consolidated balance sheets and is amortized to interest expense over the term of the agreement. Amounts receivable or payable under the agreement are recognized as yield adjustments over the life of the related debt. We are exposed to credit losses in the event of nonperformance by the counterparty to the financial instrument. We anticipate, however, that the counterparty will be able to fully satisfy its obligations under the contract. Market risk arises from changes in interest rates. As of December 31, 1998, we had one outstanding interest rate collar agreement. The terms of the agreement are as follows: Notional amount $20 million Maturity date November 5, 2001 Cap rate 6.25% Floor rate 5.25%
In 1997, we also entered into a series of interest rate swap agreements to hedge the interest rate exposure in anticipation of issuing the Notes. The agreements were accounted for as hedges and were subsequently terminated. Termination costs of approximately $1.2 million are being amortized to interest expense over the life of the Notes. F-18 53 7. LEASES CAPITAL LEASES - We have acquired certain land, building, machinery and equipment under capital lease arrangements that expire at various dates through 2007. At December 31, 1998 and 1997, the gross amounts of plant and equipment and related accumulated amortization recorded under capital leases were as follows (in thousands):
1998 1997 Building $ 309 $ 671 Machinery and equipment 1,512 ----- ------- Total assets under capital leases 309 2,183 Less accumulated amortization (39) (1,652) ----- ------- $ 270 $ 531 ===== =======
OPERATING LEASES - We also have several noncancelable operating leases, primarily for vehicles, equipment, warehouse, and office space that expire through 2006, as well as month-to-month leases. The total expense recorded under all operating lease agreements in the accompanying consolidated income statements is approximately $5.8 million, $2.9 million and $2.3 million for the years ended December 31, 1998, 1997 and 1996, respectively. Future minimum lease payments under operating leases and the present value of future minimum capital lease payments as of December 31, 1998 are as follows (in thousands):
CAPITAL OPERATING LEASES LEASES Years ending December 31: 1999 $ 45 $ 5,269 2000 45 3,295 2001 45 2,775 2002 45 2,415 2003 45 2,223 Thereafter 174 12,388 ---- ------- Total minimum lease payments 399 $28,365 ======= Amounts representing interest at a rate of 11.75% (150) ----- Present value of net minimum capital lease payments (see Note 6) $249 ====
F-19 54 8. INCOME TAXES The following is a summary of domestic and foreign provisions for current and deferred income taxes and a reconciliation of the U.S. statutory income tax rate to the effective income tax rate. The provision (benefit) for income taxes for the years ended December 31, 1998, 1997 and 1996 is as follows (in thousands):
1998 1997 1996 Current: Federal $(1,877) State 128 $ 1,156 Foreign 3,316 2,523 $ 1,276 ------- ------- ------- Total current 1,567 3,679 1,276 ------- ------- ------- Deferred: Federal 6,960 (4,110) (5,876) State 793 (470) (671) Foreign (787) 392 57 ------- ------- ------- Total deferred 6,966 (4,188) (6,490) ------- ------- ------- Total income tax expense (benefit) (excluding income taxes applicable to discontinued operations and extraordinary item) $ 8,533 $ (509) $(5,214) ======= ======= =======
The effective income tax rate reconciliations for the years ended December 31, 1998, 1997 and 1996 are as follows (in thousands):
1998 1997 1996 Income (loss) before income taxes, discontinued operations and extraordinary item $11,066 $(3,174) $(10,185) ======= ======= ======== Expected income tax provision (benefit) at U.S. statutory rate of 35% $ 3,873 $(1,111) $ (3,565) Increase (decrease) resulting from: Nondeductible cost in excess of fair value of net assets acquired 1,331 1,150 1,186 State taxes 353 49 (663) Adjustment of tax attributes 1,361 Foreign rate difference and other - net 1,615 (597) (2,172) ------- ------- -------- Total income tax expense (benefit) (excluding income taxes applicable to discontinued operations and extraordinary item) $ 8,533 $ (509) $ (5,214) ======= ======= ======== Effective income tax rate 77.1% 16.0% 51.2% ======= ======= ========
F-20 55 Components of net deferred income tax assets and liabilities as of December 31, 1998 and 1997 are as follows (in thousands): AMT and foreign tax credit carryforwards $ 3,512 $ 3,617 Net operating loss carryforward 4,685 Accrued pension costs not deducted for tax 2,522 Accrued employee benefits 1,562 394 Plant closing costs not deducted for tax 1,024 4,439 Allowance for doubtful trade accounts receivable 635 577 Inventory 633 234 Amortization of intangibles 501 Other 1,084 1,528 -------- -------- Total deferred income tax assets 10,972 15,975 -------- -------- Deferred income tax liabilities: Tax depreciation in excess of book depreciation (42,650) (21,704) Amortization of intangibles (6,188) Other (952) (1,695) -------- -------- Total deferred income tax liabilities (49,790) (23,399) -------- -------- Net deferred income tax liability $(38,818) $ (7,424) ======== ======== As reported on the consolidated balance sheets: Net current deferred income tax asset $ 3,605 $ 1,271 Net noncurrent deferred income tax liability (42,423) (8,695) -------- -------- $(38,818) $ (7,424) ======== ========
9. EMPLOYEE BENEFIT PLANS DEFINED CONTRIBUTION PLAN - We sponsor a salary deferral plan covering substantially all of our non-union domestic employees. Plan participants may elect to make voluntary contributions to this plan up to 15% of their compensation. We contribute 1% of the participants' compensation and also match employee contributions up to 2% of the participants' compensation. We expensed approximately $5.0 million, $3.1 million and $0.9 million as our contribution to this plan for the years ended December 31, 1998, 1997 and 1996, respectively. DEFINED BENEFIT PLANS - We sponsor five noncontributory defined benefit pension plans (the "United States Plans") covering domestic employees with 1,000 or more hours of service. We fund the actuarially computed retirement cost. Contributions are intended to not only provide for benefits attributed to service to date but also for those expected to be earned in the future. We also sponsor a defined benefit plan in Germany (the "Germany Plan"). The consolidated accrued net pension expense for the years ended December 31, 1998, 1997 and 1996 includes the following components (in thousands): F-21 56 UNITED STATES PLANS 1998 1997 1996 Service cost - benefits earned during the period $ 3,726 $ 2,299 $ 1,768 Interest cost on projected benefit obligation 3,469 1,806 612 Expected return on assets (3,777) (1,886) (637) Other (3) 17 (25) ------- ------- ------- Total accrued pension expense $ 3,415 $ 2,236 $ 1,718 ======= ======= ======= GERMANY PLAN Service cost - benefits earned during the period $ 64 $ 58 $ 77 Interest cost on projected benefit obligation 66 56 22 ------- ------- ------- Total accrued pension expense $ 130 $ 114 $ 99 ======= ======= =======
The following table sets forth the funded status of the United States Plans and the Germany Plan as of December 31, 1998 and 1997 and the amounts recognized in the consolidated balance sheets at those dates (in thousands):
UNITED STATES PLANS 1998 1997 Change in benefit obligation: Obligation at January 1 $ 27,025 $ 8,237 Service cost 3,726 2,299 Interest cost 3,469 1,806 Curtailments (2,137) Settlements 50 Plan amendments 2,340 Actuarial gain 1,333 2,706 Acquisition 18,264 12,497 Benefits paid (1,722) (520) -------- -------- Obligation at December 31 $ 52,348 $ 27,025 ======== ======== Change in plan assets: Fair value of assets at January 1 $ 24,235 $ 8,555 Actual return on plan assets 3,941 3,688 Acquisition 16,143 12,296 Employer contributions 1,404 216 Benefit payments (1,722) (520) -------- -------- Fair value of plan assets at December 31 $ 44,001 $ 24,235 ======== ======== Underfunded status at December 31 $ 8,347 $ 2,790 Unrecognized net actuarial loss 641 1,853 Unrecognized prior service cost (1,586) (299) Additional liability 14 -------- -------- Accrued long-term pension liability included in other liabilities $ 7,402 $ 4,358 ======== ========
F-22 57 For the above calculations, increases in future compensation ranging from 4.0% through 5.0% were used for the non-union plans. There was no increase in future compensation used for the three union plans. For the calculations, discount rates ranging from 6.75% through 7.00% and expected rates of return on plan assets ranging from 9.0% through 10.0% were used for all plans.
GERMANY PLAN 1998 1997 Change in benefit obligation: Obligation at January 1 $ 956 $ 1,249 Service cost 64 58 Interest cost 66 56 Benefits paid (5) (5) Change due to exchange rate 62 (402) ------- ------- Obligation at December 31 $ 1,143 $ 956 ======= ======= Fair value of plan assets at December 31 None None ======= ======= Underfunded status at December 31 $ 1,143 $ 956 Unrecognized net actuarial loss 81 84 ------- ------- Accrued long-term pension liability included in other liabilities $ 1,224 $ 1,040 ======= =======
Increases in future compensation ranging from 2.5% through 3.5% and discount rates ranging from 6.5% through 7.0% were used in determining the actuarially computed present value of the projected benefit obligation of the Germany Plan. The cash surrender value of life insurance policies for Germany Plan participants included in other assets is approximately $0.7 million and $0.5 million as of December 31, 1998 and 1997, respectively. FOREIGN PLANS OTHER THAN GERMANY - Employees in other foreign countries are covered by various post employment arrangements consistent with local practices and regulations. Such obligations are not significant and are included in the consolidated financial statements in other liabilities. OTHER PLANS - As part of the acquisition of Blessings Corporation (see Note 12), we assumed two supplemental retirement plans covering certain former employees of Blessings Corporation. The liability for these plans included in other liabilities at December 31, 1998 was approximately $2.1 million. 10. STOCK PURCHASE AGREEMENTS AND STOCK OPTION PLAN STOCK PURCHASE AGREEMENTS - During 1998, our shareholders approved stock purchase agreements for the purchase of 12,200 shares of Class C nonvoting common stock by certain officers and a director. The fair market value purchase price was determined by the Board of Directors to be $100 per share. A shareholders agreement governing the shares contains various restrictions, including a right of first refusal and provisions for Huntsman Packaging to purchase any owned shares from an employee within 180 days after termination of employment. The purchasers have the right, following three years from the purchase date, to put any or all shares to Huntsman Packaging for repurchase. The redemption value is based on the following: (1) when there is a public market for the shares, the average of the high and low reported sale prices per share for the 20 trading days prior to the date the put option or our purchase option is exercised; or (2) when there is no public market for the shares, a share price based on a market value of equity, as defined, determined on the last day of the month in which the redemption occurs. During 1998, we redeemed 500 shares of Class C common stock for $100 per share from one officer who terminated his employment with us. F-23 58 Subsequent to December 31, 1998, we sold an additional 12,188 shares of Class C common stock to certain officers for $100 per share, the estimated fair market value of the shares on the date of purchase. We redeemed an additional 600 shares of Class C common stock for $100 per share from another officer. The additional 12,188 shares of Class C common stock are subject to the same terms and restrictions as the original 12,200 shares of Class C common stock. 1998 STOCK OPTION PLAN - During 1998, our shareholders approved the adoption of the Huntsman Packaging Corporation 1998 Stock Option Plan, which provides for the granting of options to purchase up to 41,956 shares of Class C nonvoting common stock to certain officers and directors. The exercise price of the options is $100 per share, which was determined by the Board of Directors to be the fair market value of the related stock on the date of grant. Of these options, 20,978 vest in five equal annual installments beginning December 31, 1998. The remaining 20,978 vest over the same period, subject to the achievement of certain financial performance criteria. All of the options issued under this plan expire on December 31, 2007. A summary of stock options outstanding at December 31, 1998 and changes during the year then ended is presented below:
WEIGHTED AVERAGE NUMBER OF EXERCISE PRICE SHARES PER SHARE Outstanding at beginning of year Granted 41,956 $100 Forfeited or cancelled (2,622) 100 ------- ---- Outstanding at end of year 39,334 $100 ======= ==== Exercisable at end of year 3,933 $100 ======= ====
At December 31, 1998, 19,667 of the outstanding options are performance-based options and none are exercisable. Of the remaining 19,667 options, 3,933 are exercisable. All outstanding options have a weighted average remaining contractual life of approximately 9 years. ACCOUNTING FOR STOCK-BASED COMPENSATION PLANS - We apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for stock-based compensation plans as they relate to employees and directors. No compensation expense has been recognized during 1998 for the stock option grants or shares purchased because the awards were at the estimated fair market value of Huntsman Packaging's Class C nonvoting common stock at the date of grant. Had compensation cost been determined in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," our income from continuing operations for the year ended December 31, 1998 would have decreased to the pro forma amount presented below:
Income from continuing operations as reported $2,533 Pro forma income from continuing operations 2,147
F-24 59 The Black-Scholes option-pricing model was used to calculate the weighted average fair market value of options using the following assumptions for grants: dividend yield of 0%, average risk free interest rate of 6.75% and expected life of 10 years. The weighted average fair market value of options granted under our 1998 Stock Option Plan during 1998 was estimated to be approximately $49. The estimated fair market value of the options granted is subject to the assumptions made and if the assumptions were to change, the estimated fair market value amounts could be significantly different. SUBSEQUENT CANCELLATION OF STOCK OPTIONS - On February 22, 1999, we entered into Option Cancellation and Restricted Stock Purchase Agreements with the holders of 26,223 options to purchase Class C common stock. Under the agreements, options to purchase 26,223 shares of Class C common stock were cancelled and 26,223 shares of Class C common stock were sold to the former option holders for $100 per share, the estimated fair market value of the shares on the date of purchase. The purchase price for the shares was payable by delivery of promissory notes to Huntsman Packaging. The 26,223 shares purchased are subject to repurchase rights of Huntsman Packaging that will lapse under conditions substantially the same as the vesting conditions of the options. The repurchase rights for 13,117 shares lapse on a straight-line basis over a five-year period commencing January 1, 1998. The repurchase rights for the remaining 13,116 lapse over the same five years, subject to achievement of certain Huntsman Packaging performance criteria, or if the performance criteria are not met, on December 31, 2007. The shares of Class C common stock are subject to essentially the same restrictions and put options as the other Class C common shares described above. Additionally, options to purchase 2,622 shares of Class C common stock have been cancelled subsequent to December 31, 1998. 11. COMMITMENTS AND CONTINGENCIES INDEMNITY AGREEMENT - Our operations are subject to extensive environmental laws and regulations concerning emissions to the air, discharges to surface and subsurface waters, and the generation, handling, storage, transportation, treatment, and disposal of waste materials, as adopted by various governmental authorities in the jurisdictions in which we operate. We make every reasonable effort to remain in full compliance with existing governmental laws and regulations concerning the environment. As part of a sale of a plant site in 1992, we agreed to indemnify environmental losses of up to $5 million which may have been created at the plant site between January 1, 1988 and May 18, 1992. This indemnity expires on May 8, 2002 and reduces ten percent each year beginning May 12, 1997. We believe that the ultimate liability, if any, resulting from this indemnification will not be material to our consolidated financial statements. ROYALTY AGREEMENTS - We have entered into royalty agreements (the "Agreements") for the right to use certain patents in the production of our Winwrap stretch film. We paid a fee of $450,000 to the patent holder for the first 2,250,000 pounds of film produced in North America. The Agreements require us to pay the patent holder a fee of $.10 for each pound of Winwrap produced in excess of 2,250,000 pounds but less than 37,500,000 pounds and $.05 per pound for each pound of Winwrap produced in excess of 37,500,000 pounds in North America. The Agreements require us to pay certain fees to obtain the rights to sell Winwrap outside of North America. The Agreements also require us to pay $.075 per pound of Winwrap sold outside of North America. We have the option to maintain these rights in subsequent years for certain agreed-upon fees. The Agreements terminate upon the expiration of the related patents in 2009. LITIGATION - We are subject to litigation and claims arising in the ordinary course of business. We believe, after consulting with legal counsel, that any liabilities arising from such litigation and claims will not have a material adverse effect on our consolidated financial statements. F-25 60 12. ACQUISITIONS UNITED FILMS CORPORATION - On July 31, 1996, we acquired all of the issued and outstanding common stock of United Films Corporation for cash of approximately $12.3 million. The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations are included in the accompanying consolidated financial statements from the date of acquisition. We recorded goodwill of approximately $12.1 million in this acquisition, which is being amortized on a straight-line basis over 40 years. DEERFIELD PLASTICS COMPANY, INC. - On October 21, 1996, we acquired all of the issued and outstanding common stock of Deerfield Plastics Company, Inc. for cash of approximately $68.2 million, a $1.4 million payment based on Deerfield's working capital at the acquisition date, and deferred payments totaling approximately $5.2 million. The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations are included in the accompanying consolidated financial statements from the date of acquisition. We recorded goodwill of approximately $18.4 million in this acquisition, which is being amortized on a straight-line basis over 40 years. CT FILM - On September 30, 1997, we acquired all of the assets of CT Film (a division of Huntsman Polymers Corporation, formerly Rexene Corporation) and Rexene Corporation Limited (a wholly-owned subsidiary of Huntsman Polymers Corporation) for approximately $70 million cash. The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations have been included in the accompanying consolidated financial statements from the date of acquisition. In connection with the acquisition, we planned to exit certain of the activities acquired with the purchase of CT Film, including the film operations at Scunthorpe, UK. During 1998, we sold the Scunthorpe, UK facility acquired from CT Film and adjusted the fair value assigned to the Scunthorpe, UK facility accordingly (see Note 3). We recorded goodwill of approximately $7.8 million in this acquisition, which is being amortized on a straight-line basis over 40 years. ELLEHAMMER INDUSTRIES LTD. AND ELLEHAMMER PACKAGING, INC. - On March 12, 1998, we acquired certain assets and assumed certain liabilities of Ellehammer Industries Ltd. and Ellehammer Packaging Inc. (collectively, "Ellehammer") for cash of approximately $7.9 million. The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations are included in the accompanying consolidated financial statements from the date of acquisition. We did not record any goodwill in this acquisition. BLESSINGS CORPORATION - On May 19, 1998, in accordance with an Agreement and Plan of Merger dated April 1, 1998, we acquired Blessings Corporation ("Blessings") by merging our wholly-owned subsidiary, VA Acquisition Corp., with and into Blessings. Blessings then became our wholly-owned subsidiary and Blessings changed its name to Huntsman Edison Films Corporation. The aggregate purchase price for Blessings was approximately $270 million (including the assumption of approximately $57 million of Blessings' existing indebtedness). In connection with the Blessing Acquisition, we incurred transaction costs of approximately $17 million. The financing for the Blessings Acquisition was provided under a $510 million Amended and Restated Credit Agreement (see Note 6). The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations are included in the accompanying consolidated financial statements from the date of acquisition. We recorded goodwill and intangible assets of approximately $168.7 million in this acquisition, which are being amortized on a straight-line basis over 10 to 30 years. F-26 61 Our pro forma results of operations for the years ended December 31, 1998, 1997 and 1996 (assuming the acquisitions of United Films Corporation, Deerfield Plastics Company, Inc., CT Film, Ellehammer and Blessings had occurred as of January 1, 1996) are as follows (in thousands):
1998 1997 1996 Revenues $719,242 $745,998 $682,235 Loss from continuing operations (1,267) (14,379) (9,763)
HUNTSMAN CONTAINER CORPORATION INTERNATIONAL (HCCI) - On August 31, 1996, Huntsman Corporation contributed all of the outstanding capital stock of HCCI to Huntsman Packaging in the form of a capital contribution. The transaction was accounted for at historical cost in a manner similar to a pooling of interests. On June 1, 1998 the operations of HCCI, consisting of our European foam business, were sold (see Note 3). The results of operations of HCCI have been reflected as discontinued operations in the accompanying consolidated financial statements from January 1, 1996 through the date of the sale. 13. OPERATING SEGMENTS We have adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." 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 basis that it is used internally for evaluating segment performance. We have three reportable operating segments: design products, industrial films and specialty films. The design products segment produces printed rollstock, bags and sheets used to package products in the food and other industries. The industrial films segment produces stretch films, used for industrial unitizing and containerization, and PVC films, used to wrap meat, cheese and produce. The specialty films segment produces converter films that are sold to other flexible packaging manufacturers for additional fabrication, barrier films that contain and protect food and other products, and other films used in the personal care, medical, agriculture and horticulture industries. The accounting policies of the operating segments are the same as those described in the summary of significant accounting policies. Sales and transfers between our segments are eliminated in consolidation. We evaluate performance of the operating segments based on profit or loss before income taxes, not including plant closing costs and other nonrecurring gains or losses. Our reportable segments are managed separately with separate management teams, because each segment has differing products, customer requirements, technology and marketing strategies. Segment profit or loss and segment assets as of and for the years ended December 31, 1998, 1997 and 1996 are presented in the following table (in thousands). F-27 62
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL 1998 Net sales to customers $ 136,059 $144,736 $ 371,162 $651,957 Intersegment sales 1,671 3,975 1,782 $ (7,428) Total net sales 137,730 148,711 372,944 (7,428) 651,957 Depreciation and amortization 5,096 4,712 13,211 4,069 27,088 Interest expense 2,108 60 19 35,332 37,519 Segment profit 12,385 11,027 46,306 (53,777) 15,941 Plant closing costs (297) 5,172 4,875 Segment total assets 153,385 82,737 435,075 63,075 734,272 Capital expenditures 18,424 5,734 26,174 1,769 52,101 1997 Net sales to customers $ 93,386 $175,438 $ 178,919 $447,743 Intersegment sales 1,212 8,338 312 $ (9,862) Total net sales 94,598 183,776 179,231 (9,862) 447,743 Depreciation and amortization 2,044 5,295 3,534 5,569 16,442 Interest expense 8 425 116 16,451 17,000 Segment profit 11,332 9,538 19,603 (34,371) 6,102 Plant closing costs 9,276 9,276 Segment total assets 54,610 96,484 188,114 30,307 369,515 Capital expenditures 5,445 2,912 5,548 3,956 17,861 1996 Net sales to customers $ 76,300 $169,310 $ 50,069 $295,679 Intersegment sales 8,461 2,156 $ (10,617) Total net sales 76,300 177,771 52,225 (10,617) 295,679 Depreciation and amortization 1,417 4,563 1,997 6,023 14,000 Interest expense 4 640 34 10,945 11,623 Segment profit 3,198 16,149 2,968 (21,627) 688 Plant closing costs 9,572 1,301 10,873 Segment assets 50,273 114,702 102,878 32,322 300,175 Capital expenditures 2,703 2,410 2,089 5,572 12,774
F-28 63 A reconciliation of the totals reported for the operating segments to our totals reported in the consolidated financial statements is as follows (in thousands):
1998 1997 1996 PROFIT OR LOSS Total profit for reportable segments $ 69,718 $ 40,473 $ 22,315 Plant closing costs (4,875) (9,276) (10,873) Unallocated amounts: Corporate expenses (18,445) (17,920) (10,682) Interest expense (35,332) (16,451) (10,945) --------- --------- --------- Income (loss) before taxes, discontinued operations and extraordinary items $ 11,066 $ (3,174) $ (10,185) ========= ========= ========= ASSETS Total assets for reportable segments $ 671,197 $ 339,208 $ 267,853 Intangible assets not allocated to segments 17,080 15,565 20,138 Net effect of discontinued operations 30,878 28,982 Other unallocated assets 45,995 14,741 12,184 --------- --------- --------- Total consolidated assets $ 734,272 $ 400,392 $ 329,157 ========= ========= =========
F-29 64 The following table presents financial information by country based on the location of production of the product.
1998 1997 1996 NET SALES United States $563,658 $390,793 $236,730 Mexico 30,201 Canada 25,770 21,355 20,264 Other 32,328 35,595 38,685 -------- -------- -------- Total $651,957 $447,743 $295,679 ======== ======== ======== LONG-LIVED ASSETS United States $475,891 $214,964 $117,462 Mexico 59,085 Canada 5,547 6,033 6,709 Other 5,226 5,362 6,567 -------- -------- -------- Total $545,749 $226,359 $130,738 ======== ======== ========
Our sales to Kimberly Clark Corporation and its affiliates represented approximately 14 percent of consolidated net sales in 1998 and less than 10% of consolidated net sales in 1997 and 1996. Substantially all of the sales to Kimberly Clark are from the specialty films and design products operating segments. 14. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The estimated fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. In the case of cash and cash equivalents, the carrying amount is considered a reasonable estimate of fair value. The carrying amount of floating rate debt approximates fair value because of the floating interest rates associated with such debt. The fair value of fixed rate debt is estimated by discounting estimated future cash flows through the projected maturity using market discount rates that reflect the approximate credit risk, operating cost, and interest rate risk potentially inherent in fixed rate debt. The estimated fair value of off-balance sheet instruments is obtained from market quotes representing the estimated amount we would receive or pay to terminate the contract, taking into account current interest rates. Fair value estimates are made at a specific point in time. Because no market exists for a significant portion of our financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, interest rate levels, and other factors. These estimates are subjective in nature and involve uncertainties and matters of judgment and therefore cannot be determined or relied on with any degree of certainty. Changes in assumptions could significantly affect the estimates. F-30 65 Below is a summary of our financial instruments' carrying amounts and estimated fair values as of December 31, 1998 and 1997 (in thousands):
1998 1997 ------------------------- ------------------------- CARRYING ESTIMATED CARRYING ESTIMATED AMOUNT FAIR VALUE AMOUNT FAIR VALUE Financial assets - cash and cash equivalents $ 19,217 $ 19,217 $ 12,411 $ 12,411 ======== ========= ======== ========= Financial liabilities: Floating rate debt $399,936 $ 399,936 $125,514 $ 125,514 Fixed rate debt 125,000 125,000 125,000 127,500 -------- --------- -------- --------- Total financial liabilities $524,936 $ 524,936 $250,514 $ 253,014 ======== ========= ======== ========= Off-balance sheet instruments: Interest rate collar $ 106 $ (214) $ 144 $ (134) Commodity collar None 80
15. RELATED-PARTY TRANSACTIONS The accompanying consolidated financial statements include the following balances and transactions with affiliated companies not disclosed elsewhere (in thousands). All transactions with affiliated companies have been recorded at estimated fair market values for the related products and services. TRANSACTIONS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996: With Huntsman Corporation and subsidiaries: Inventory purchases $27,523 $15,692 $9,449 Rent expense under operating lease 392 423 353 Administrative expenses 5,599 4,220 2,126 With Huntsman Cancer Institute: Charitable contribution $ 500
ROYALTY TRANSACTION WITH HUNTSMAN GROUP INTELLECTUAL PROPERTIES HOLDING CO. ("HUNTSMAN INTELLECTUAL") During 1996, Huntsman Packaging and other affiliates entered into a royalty agreement (the "Royalty Agreement") with Huntsman Intellectual whereby we paid Huntsman Intellectual a royalty for the use of certain trademarks, etc. Huntsman Intellectual was owned by Huntsman Packaging and certain subsidiaries of Huntsman Corporation ("HC"). During 1997 and 1996, we paid royalties of approximately $1.9 million and $1.7 million, respectively, to Huntsman Intellectual. Huntsman Intellectual recorded a patronage dividend to us of $1.2 million and $1.1 million during 1997 and 1996, respectively. The royalty expense is included in administration and other expense. The dividend is included in other income. Immediately prior to the Split-Off, the patronage dividend receivable from Huntsman Intellectual at the date of the Split-Off was settled in full. Huntsman Packaging's ownership F-31 66 of Huntsman Intellectual and its participation in the Royalty Agreement were terminated. We no longer use the trademarks or other intellectual property covered under the Royalty Agreement. CT FILM EMPLOYEES - Subsequent to the purchase of CT Film from Huntsman Polymers Corporation (a subsidiary of HC) ("Huntsman Polymers") (see Note 12), employees associated with the CT Film operations remained employed by Huntsman Polymers through December 31, 1997. The total payroll and benefits costs incurred by Huntsman Polymers from September 30, 1997 to December 31, 1997 for these employees of approximately $6.2 million was allocated to us and is included in cost of sales and operating expenses in the 1997 consolidated income statement. The entire amount was paid to Huntsman Polymers in 1998. INSURANCE COVERAGE - We obtain most of our insurance coverage under policies of HC. Reimbursement payments to HC are based on premium allocations, which are determined in cooperation with an independent insurance broker. ADMINISTRATIVE EXPENSES - Included in administrative and other expense in the consolidated income statements are HC administrative expenses allocated to us. Prior to the Split-off, these costs represent the estimated portion of costs incurred by HC to provide services to us. Subsequent to the Split-off, these costs are for certain administrative services provided to us by HC under a cancelable services agreement. OFFICE SPACE - We are obligated to pay rent calculated as a pro rata portion (based on our percentage occupancy) of the mortgage principal and interest payments related to the HC headquarters facility. Payments under this obligation are included in administrative expenses. INVESTMENT - On August 7, 1998, Huntsman Packaging made an offer to the Board of Directors of Applied Extrusion Technologies, Inc. ("AET"), a publicly-traded company, to purchase all of the outstanding shares of common stock of AET at $10.50 per share in a merger transaction. AET's Board rejected the offer. On September 10, 1998, Huntsman Packaging made another offer to the Board of Directors of AET to purchase all of the outstanding shares of common stock of AET at $12.50 per share in a merger transaction. On September 14, 1998, HPC Investment, Inc., a wholly-owned subsidiary of Huntsman Packaging, purchased shares of the common stock of AET from Richard P. Durham, President and Chief Executive Officer of Huntsman Packaging, for an aggregate purchase price of $3.3 million, in an arms-length transaction approved by the Board of Directors of HPC Investment, Inc. AET's Board of Directors subsequently rejected Huntsman Packaging's second offer. F-32 67 16. CONDENSED CONSOLIDATING FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Huntsman Packaging Corporation (on a parent only basis), with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture dated September 30, 1997 (the "Indenture") relating to Huntsman Packaging Corporation's $125 million senior subordinated notes (the "Notes")) on a combined basis, with any investments in non-guarantor subsidiaries specified in the Indenture recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for Huntsman Packaging Corporation and its subsidiaries on a consolidated basis, and (v) Huntsman Packaging Corporation on a consolidated basis, in each case as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly-owned, directly or indirectly, by Huntsman Packaging Corporation. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Huntsman Packaging Corporation. The condensed consolidating financial statements are presented herein, rather than separate financial statements for each of the guarantor subsidiaries, because management believes that separate financial statements relating to the guarantor subsidiaries are not material to investors. F-33 68 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1998 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 4,509 $ 3,397 $ 11,311 $ 19,217 Receivables 45,676 27,641 16,064 89,381 Inventories 39,496 16,741 9,655 65,892 Prepaid expenses and other 1,675 1,095 293 3,063 Income taxes receivable 4,230 1,868 1,267 7,365 Deferred income taxes 4,059 803 (1,257) 3,605 -------- -------- -------- ---------- -------- Total current assets 99,645 51,545 37,333 188,523 PLANT AND EQUIPMENT - Net 114,023 133,416 52,895 300,334 INTANGIBLE ASSETS - Net 26,652 175,630 19,008 221,290 INVESTMENT IN SUBSIDIARIES 135,439 $ (135,439) OTHER ASSETS 17,522 203 6,400 24,125 -------- -------- -------- ---------- -------- TOTAL ASSETS $393,281 $360,794 $115,636 $ (135,439) $734,272 ======== ======== ======== ========== ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 22,724 $ 10,734 $ 9,728 $ 43,186 Accrued liabilities 23,327 4,138 6,111 33,576 Current portion of long-term debt 8,875 2,531 11,406 Due to (from) affiliates (29,920) 26,807 10,113 7,000 -------- -------- -------- ---------- -------- Total current liabilities 25,006 41,679 28,483 95,168 LONG-TERM DEBT - Net of current portion 273,270 194,449 45,811 513,530 OTHER LIABILITIES 6,740 3,171 1,483 11,394 DEFERRED INCOME TAXES 16,508 22,924 2,991 42,423 -------- -------- -------- ---------- -------- Total liabilities 321,524 262,223 78,768 662,515 -------- -------- -------- ---------- -------- COMMITMENTS AND CONTINGENCIES REDEEMABLE COMMON STOCK 1,170 1,170 -------- -------- -------- ---------- -------- STOCKHOLDERS' EQUITY: Common stock 63,676 89,301 29,241 $ (118,542) 63,676 Retained earnings 13,731 9,281 12,641 (21,922) 13,731 Shareholder note receivable (434) (434) Cumulative foreign currency translation adjustments (6,386) (11) (5,014) 5,025 (6,386) -------- -------- -------- ---------- -------- Total stockholders' equity 70,587 98,571 36,868 (135,439) 70,587 -------- -------- -------- ---------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $393,281 $360,794 $115,636 $ (135,439) $734,272 ======== ======== ======== ========== ========
F-34 69 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ SALES - Net $336,297 $232,319 $90,769 $(7,428) $651,957 COST OF SALES 276,581 191,513 71,744 (7,428) 532,410 -------- -------- ------- ------- -------- GROSS PROFIT 59,716 40,806 19,025 119,547 TOTAL OPERATING EXPENSES 34,131 24,220 11,732 70,083 -------- -------- ------- ------- -------- OPERATING INCOME 25,585 16,586 7,293 49,464 INTEREST EXPENSE (25,167) (10,232) (2,120) (37,519) EQUITY IN EARNINGS OF SUBSIDIARIES 3,597 (3,597) OTHER INCOME (EXPENSE) - Net 1,415 (148) (2,146) (879) -------- -------- ------- ------- -------- INCOME BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 5,430 6,206 3,027 (3,597) 11,066 INCOME TAX EXPENSE 2,315 3,689 2,529 8,533 -------- -------- ------- ------- -------- INCOME BEFORE DISCONTINUED OPERATIONS 3,115 2,517 498 (3,597) 2,533 INCOME FROM DISCONTINUED OPERATIONS - Net of income taxes 582 582 GAIN ON SALE OF DISCONTINUED OPERATIONS - Net of income taxes 5,223 5,223 -------- -------- ------- ------- -------- NET INCOME $8,338 $2,517 $1,080 $(3,597) $8,338 ======== ======== ======= ======= ========
F-35 70 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: $ (1,291) $ 39,327 $ 7,454 $ 45,490 --------- -------- ------- ------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 33,850 33,850 Payments for acquisitions (298,274) 97 1,588 (296,589) Capital expenditures for plant and equipment (29,498) (14,039) (8,564) (52,101) --------- -------- ------- ------- --------- Net cash used in investing activities (293,922) (13,942) (6,976) (314,840) --------- -------- ------- ------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,170 1,170 Principal payments on borrowings 12,819 (22,800) (563) (10,544) Proceeds from issuance of long-term debt 285,000 285,000 --------- -------- ------- ------- --------- Net cash provided by (used in) financing activities 298,989 (22,800) (563) 275,626 --------- -------- ------- ------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 331 (11) 210 530 --------- -------- ------- ------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 4,107 2,574 125 6,806 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 402 823 11,186 12,411 --------- -------- ------- ------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $4,509 $3,397 $11,311 $19,217 ========= ======== ======= ======= =========
F-36 71 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 1997 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 402 $ 823 $11,186 $ 12,411 Receivables 51,533 16,881 9,417 77,831 Inventories 45,548 11,918 6,238 63,704 Prepaid expenses and other 1,997 (8) 147 2,136 Current deferred income taxes 1,266 5 1,271 Net current assets of discontinued operations 6,420 6,420 -------- -------- ------- --------- -------- Total current assets 100,746 29,619 33,408 163,773 PLANT AND EQUIPMENT - Net 93,700 52,778 17,255 163,733 INTANGIBLE ASSETS - Net 19,322 29,234 1,497 50,053 INVESTMENT IN SUBSIDIARIES 132,917 $(132,917) OTHER ASSETS 11,392 106 1,075 12,573 NET LONG-TERM ASSETS OF DISCONTINUED OPERATIONS 10,260 10,260 -------- -------- ------- --------- -------- TOTAL ASSETS $358,077 $111,737 $63,495 $(132,917) $400,392 ======== ======== ======= ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 18,516 $ 5,809 $ 3,571 $ 27,896 Accrued liabilities 16,026 2,133 6,094 24,253 Current portion of long-term debt 19 324 343 Due to affiliates 5,123 (1,656) 11,812 15,279 Income taxes payable 3,237 (1,325) 1,912 -------- -------- ------- --------- -------- Total current liabilities 42,921 6,610 20,152 69,683 LONG-TERM DEBT - Net of current portion 245,947 319 3,905 250,171 OTHER LIABILITIES 7,351 288 1,230 8,869 DEFERRED INCOME TAXES (1,116) 9,275 536 8,695 -------- -------- ------- --------- -------- Total liabilities 295,103 16,492 25,823 337,418 -------- -------- ------- --------- -------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Common stock 63,676 88,481 29,931 $(118,412) 63,676 Retained earnings 5,393 6,764 11,837 (18,601) 5,393 Stockholder note receivable (700) (700) Cumulative foreign currency translation adjustments (5,395) (4,096) 4,096 (5,395) -------- -------- ------- --------- -------- Total stockholders' equity 62,974 95,245 37,672 (132,917) 62,974 -------- -------- ------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $358,077 $111,737 $63,495 $(132,917) $400,392 ======== ======== ======= ========= ========
F-37 72 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ SALES - Net $256,016 $142,915 $58,674 $(9,862) $447,743 COST OF SALES 220,229 131,120 48,141 (9,862) 389,628 -------- -------- ------- ------- -------- GROSS PROFIT 35,787 11,795 10,533 58,115 TOTAL OPERATING EXPENSES 29,636 10,985 4,418 45,039 -------- -------- ------- ------- -------- OPERATING INCOME 6,151 810 6,115 13,076 INTEREST EXPENSE (16,461) (134) (405) (17,000) EQUITY IN EARNINGS OF SUBSIDIARIES 5,513 (5,513) OTHER INCOME (EXPENSE) - Net 1,748 99 (1,097) 750 -------- -------- ------- ------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (3,049) 775 4,613 (5,513) (3,174) INCOME TAX EXPENSE (BENEFIT) (3,424) 2,915 (509) -------- -------- ------- ------- -------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS - Net of income taxes 375 775 1,698 (5,513) (2,665) INCOME FROM DISCONTINUED OPERATIONS 3,040 3,040 -------- -------- ------- ------- -------- NET INCOME $375 $775 $4,738 $(5,513) $375 ======== ======== ======= ======= ========
F-38 73 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1997 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: $14,004 $7,965 $6,679 $ 28,648 -------- ------- ------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for acquisitions (69,366) (69,366) Capital expenditures for plant and equipment (8,435) (6,222) (3,204) (17,861) -------- ------- ------- -------- -------- Net cash used in investing activities (77,801) (6,222) (3,204) (87,227) -------- ------- ------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowings (249,015) (494) (249,509) Proceeds from issuance of long-term debt 312,700 312,700 Payment of cash dividend 1,900 (1,900) -------- ------- ------- -------- -------- Net cash provided by (used in) financing activities 65,585 (494) (1,900) 63,191 -------- ------- ------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (518) (2,330) (2,848) -------- ------- ------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,270 1,249 (755) 1,764 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (868) (426) 11,941 10,647 -------- ------- ------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR $402 $823 $11,186 $12,411 ======== ======= ======= ======== ========
F-39 74 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ SALES - Net $217,991 $26,974 $61,331 $(10,617) $295,679 COST OF SALES 189,414 25,011 49,698 (10,617) 253,506 -------- ------- ------- -------- -------- GROSS PROFIT 28,577 1,963 11,633 42,173 TOTAL OPERATING EXPENSES 31,567 834 5,634 38,035 -------- ------- ------- -------- -------- OPERATING INCOME (LOSS) (2,990) 1,129 5,999 4,138 INTEREST EXPENSE (10,951) (38) (634) (11,623) EQUITY IN EARNINGS OF SUBSIDIARIES 6,809 (6,809) OTHER INCOME (EXPENSE) - Net (1,502) (2,192) 994 (2,700) -------- ------- ------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES, DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM (8,634) (1,101) 6,359 (6,809) (10,185) INCOME TAX EXPENSE (BENEFIT) (6,118) (429) 1,333 (5,214) -------- ------- ------- -------- -------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM (2,516) (672) 5,026 (6,809) (4,971) INCOME FROM DISCONTINUED OPERATIONS - Net of income taxes 1,783 1,783 EXTRAORDINARY ITEM - Net of income taxes (1,338) (1,338) -------- ------- ------- -------- -------- NET INCOME (LOSS) $ (3,854) $(672) $6,809 $(6,809) $ (4,526) ======== ======= ======= ======== ========
F-40 75 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 (IN THOUSANDS)
HUNTSMAN CONSOLIDATED PACKAGING COMBINED HUNTSMAN CORPORATION COMBINED NON- PACKAGING PARENT ONLY GUARANTORS GUARANTORS ELIMINATIONS CORPORATION ----------- ---------- ---------- ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES $ (872) $ 5,584 $ 15,407 $ 20,119 -------- ------- -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Payments for acquisitions (76,165) (76,165) Capital expenditures for plant and equipment (6,977) (336) (5,461) (12,774) -------- ------- -------- --------- --------- Net cash used in investing activities (83,142) (336) (5,461) (88,939) -------- ------- -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on borrowings (113,879) (5,674) (12,178) (131,731) Proceeds from issuance of long-term debt 200,348 200,348 -------- ------- -------- --------- --------- Net cash provided by (used in) financing activities 86,469 (5,674) (12,178) 68,617 -------- ------- -------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 565 3,095 3,660 -------- ------- -------- --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,020 (426) 863 3,457 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR (3,888) 11,078 7,190 -------- ------- -------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ (868) $ (426) $ 11,941 $ 10,647 ======== ======= ======== ========= =========
F-41 76 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS)
- --------------------------------------------------------------------------------------------------------------------- DESCRIPTION ADDITIONS - ----------- BALANCE AT CHARGED TO CASH BEGINNING COSTS AND PAYMENTS BALANCE AT OF YEAR EXPENSES MADE OTHER END OF YEAR ACCUMULATED AMORTIZATION OF INTANGIBLE ASSETS: 1998 $16,819 $6,125 $(314)(2) $22,630 1997 13,771 3,058 (10)(2) 16,819 1996 12,175 1,613 (17)(2) 13,771 ALLOWANCE FOR DOUBTFUL ACCOUNTS: 1998 $ 3,257 $(687)(1) $ 2,570 1997 2,641 $ 241 375 (1) 3,257 1996 2,070 960 (389)(1) 2,641 PLANT CLOSING ACCRUAL: 1998 $ 1,800 $3,900 $(3,100) $ 2,600 1997 2,300 1,800 (2,300) 1,800 1996 None 2,300 2,300 - -------------------------------------------------------------------------------------------------------------------
(1) Represents the net of accounts written off against the allowance and recoveries of previous write-offs. (2) Relates to write-down of goodwill. F-42 77 INDEPENDENT AUDITORS' REPORT Board of Directors and Shareholders Blessings Corporation Newport News, Virginia: We have audited the accompanying consolidated balance sheets of Blessings Corporation and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Blessings Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP Richmond, Virginia February 20, 1998 F-43 78 BLESSINGS CORPORATION CONSOLIDATED BALANCE SHEETS DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
December 31, 1997 1996 ------------- ------------- ASSETS Current Assets: Cash and cash equivalents $ 5,106,200 $ 5,801,800 Accounts receivable less allowance for doubtful accounts Of $1,603,200 and $1,541,000 for 1997 and 1996 respectively 21,632,600 22,832,200 Inventories 14,309,200 12,905,700 Prepaid deferred taxes 1,510,300 1,417,900 Prepaid expenses 1,039,900 1,723,700 ------------- ------------- Total Current Assets 43,598,200 44,681,300 ------------- ------------- Property, Plant and Equipment - Net 89,378,200 80,573,600 Goodwill net of accumulated amortization of $3,710,700 and $2,659,500 for 1997 and 1996 respectively 22,794,600 23,845,800 Deferred Taxes 7,267,300 7,565,400 Other Assets 2,284,700 1,410,600 ------------- ------------- Total Assets $ 165,323,000 $ 158,076,700 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses $ 21,862,400 $ 25,025,800 Taxes on income 1,765,400 528,700 Current installments on long-term debt 3,125,000 3,744,300 Deferred taxes 1,397,000 1,024,200 ------------- ------------- Total Current Liabilities 28,149,800 30,323,000 ------------- ------------- Long-Term Debt 30,937,500 34,253,100 Deferred Taxes 9,572,500 8,373,800 Deferred Supplemental Pension Liability 2,267,100 1,950,700 Minority Interest 14,633,900 11,427,700 Commitments And Contingencies -- -- Shareholders' equity 4% Cumulative preferred stock, $10 par value -- -- authorized 259 shares, none outstanding Common stock, $.71 par value; authorized 25,000,000 shares, 7,252,500 7,252,500 issued 10,214,846 for 1997 and 1996 respectively Additional paid-in capital 5,968,100 6,012,900 Translation loss (6,255,900) (6,255,900) Retained earnings 73,823,200 65,631,200 ------------- ------------- 80,787,900 72,640,700 ------------- ------------- Common Stock in Treasury, at cost - 98,046 and 80,342 shares For 1997 and 1996 respectively (1,025,700) (892,300) ------------- ------------- Total Shareholders' Equity 79,762,200 71,748,400 ------------- ------------- Total Liabilities and Shareholders' Equity $ 165,323,000 $ 158,076,700 ============= =============
See notes to consolidated financial statements. F-44 79 BLESSINGS CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS FOR THE YEARS ENDED DECEMBER 31, 1996, AND 1997 - --------------------------------------------------------------------------------
Year Ended Year Ended 52 Weeks Ended December 31, 1997 December 31, 1996 December 30, 1995 ----------------- ----------------- ----------------- Net Sales $174,756,100 $ 158,135,100 $ 156,309,400 Costs and Expenses Cost of sales 124,878,300 115,207,000 111,032,500 Selling, general and administrative 28,659,700 27,948,200 25,242,000 Foreign exchange loss 383,600 293,300 3,600,600 Interest and other - net 2,575,900 2,466,500 2,464,200 ------------ ------------- ------------- Total cost and expenses 156,497,500 145,915,000 142,339,300 ------------ ------------- ------------- Earnings before provision for taxes on income and minority interest 18,258,600 12,220,100 13,970,100 ------------ ------------- ------------- Taxes on income Currently payable 5,083,100 3,902,400 6,235,600 Deferred 1,777,200 (632,900) (86,400) ------------ ------------- ------------- Total taxes on income 6,860,300 3,269,500 6,149,200 ------------ ------------- ------------- Minority interest in net income of subsidiary 3,206,300 3,938,700 1,935,700 ------------ ------------- ------------- Net Earnings $ 8,192,000 $ 5,011,900 $ 5,885,200 ============ ============= ============= Basic earnings per share on common stock $ .81 $ .49 $ .58 ============ ============= ============= Diluted earnings per share on common stock $ .81 $ .49 $ .58 ============ ============= =============
See notes to consolidated financial statements. F-45 80 BLESSINGS CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, 1996 AND 1997 - --------------------------------------------------------------------------------
CUMULATIVE FOREIGN COMMON STOCK ADDITIONAL CURRENCY TREASURY STOCK ------------------------ PAID-IN TRANSLATION RETAINED ----------------------- SHARES AMOUNT CAPITAL ADJUSTMENT EARNINGS SHARES AMOUNT ---------- ---------- ----------- ----------- ------------ ------- ----------- Balance December 31, 1994 10,211,846 $7,250,400 $ 6,196,100 $(2,687,500) $ 61,847,100 13,480 $ (235,900) Dividends declared on common stock $.30 per share -- -- -- -- (3,054,000) -- -- Purchase of company's common stock -- -- -- -- -- 88,650 (1,110,100) Reissuance of company's common stock under compensation plans -- -- (49,900) -- -- (11,172) 195,500 Issuance of company's common stock upon exercise of options 3,000 2,100 28,700 -- -- -- -- Translation adjustment -- -- -- (5,638,800) -- -- -- Income tax associated with translation adjustment -- -- -- 2,255,500 -- -- -- Net earnings -- -- -- -- 5,885,200 -- -- ---------- ---------- ----------- ----------- ------------ ------- ----------- Balance December 30, 1995 10,214,846 $7,252,500 $ 6,174,900 $(6,070,800) $ 64,678,300 90,958 $(1,150,500) Dividends declared on common stock $.40 per share -- -- -- -- (4,059,000) -- -- Purchase of company's common stock -- -- -- -- -- 45,350 (445,600) Reissuance of company's common stock under compensation plans -- -- (162,000) -- -- (55,966) 703,800 Translation adjustment -- -- -- (308,500) -- -- -- Income tax associated with translation adjustment -- -- -- 123,400 -- -- -- Net earnings -- -- -- -- 5,011,900 -- -- ---------- ---------- ----------- ----------- ------------ ------- ----------- Balance December 31, 1996 10,214,846 $7,252,500 $ 6,012,900 $(6,255,900) $ 65,631,200 80,342 $ (892,300) Purchase of company's common stock -- -- -- -- -- 34,656 (353,000) Reissuance of company's common stock under compensation plans -- -- (44,800) -- -- (16,952) 219,600 Net earnings -- -- -- -- 8,192,000 -- -- ---------- ---------- ----------- ----------- ------------ ------- ----------- Balance, December 31, 1997 10,214,846 $7,252,500 $ 5,968,100 $(6,255,900) $ 73,823,200 98,046 $(1,025,700) ========== ========== =========== =========== ============ ======= ===========
See notes to consolidated financial statements. F-46 81 BLESSINGS CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
YEAR ENDED YEAR ENDED 52 WEEKS ENDED DECEMBER 31, 1997 DECEMBER 31, 1996 DECEMBER 30, 1995 ----------------- ----------------- ----------------- Cash flows from operating activities: Net earnings $ 8,192,000 $ 5,011,900 $ 5,885,200 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 10,298,300 8,539,100 7,977,100 Amortization - goodwill 1,060,200 1,060,200 1,060,200 Amortization - other 47,900 466,300 348,200 Minority interest in net income of consolidated subsidiary 3,206,300 3,938,700 1,935,700 Provision for losses on accounts receivable 394,000 613,700 216,500 (Gain) loss on sale of assets 92,400 (41,800) 800 Change in assets and liabilities: (Increase) decrease in accounts receivable 597,500 (2,543,600) (2,739,300) (Increase) decrease in inventories (1,466,000) (3,528,700) 5,050,100 (Increase) decrease in prepaid expenses 461,400 (782,600) 466,100 Increase (decrease) in accounts payable and accrued expenses (3,114,700) 8,876,100 (2,254,900) Increase (decrease) in taxes on income 881,500 (769,000) (195,100) Increase (decrease) in deferred taxes on income 1,777,200 (632,900) (86,400) (Increase) decrease in other assets (546,100) (33,400) (555,100) Increase (decrease) in other liabilities 264,800 183,000 237,400 ------------ ------------ ------------ Net cash provided by operating activities 22,146,700 20,357,000 17,346,500 ------------ ------------ ------------ Cash flows from investing activities: (Increase) decrease in notes receivable 25,000 25,000 -- Proceeds from disposition of fixed assets 200,600 167,000 13,000 Capital expenditures (18,867,100) (20,398,200) (10,364,500) ------------ ------------ ------------ Net cash required by investing activities (18,641,500) (20,206,200) (10,351,500) ------------ ------------ ------------ Cash flows from financing activities: Reduction of long-term debt (3,934,900) (13,245,500) (10,258,800) Proceeds from issuance of long-term debt -- 20,000,000 6,357,400 Issuance of common stock under stock option plan -- -- 30,800 Issuance and acquisition of treasury stock (178,200) 96,200 (964,600) Dividends paid -- (4,059,000) (4,074,600) Distribution to minority interest -- (400,000) -- ------------ ------------ ------------ Net cash provided (required) by financing activities (4,113,100) 2,391,700 (8,909,800) ------------ ------------ ------------ Effect of exchange rate changes on cash (87,700) (57,600) (1,744,100) ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents (695,600) 2,484,900 (3,658,900) Cash and cash equivalents at beginning of period 5,801,800 3,316,900 6,975,800 ------------ ------------ ------------ Cash and cash equivalents at end of period $ 5,106,200 $ 5,801,800 $ 3,316,900 ============ ============ ============
See notes to consolidated financial statements F-47 82 BLESSINGS CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED DECEMBER 31, 1997; DECEMBER 31, 1996 AND DECEMBER 30, 1995 - -------------------------------------------------------------------------------- 1. ACCOUNTING POLICIES A. PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries, all of which are wholly-owned with the exception of NEPSA (see notes 2 and 14). All material intercompany profits, transactions and balances have been eliminated in consolidation. The Company is approximately 54% owned by the Williamson-Dickie Manufacturing Company. The Company has no material transactions with the Williamson-Dickie Manufacturing Company. B. CASH AND CASH EQUIVALENTS - The Company considers all highly-liquid debt instruments with a maturity of three months or less when purchased to be cash equivalents. C. INVENTORIES - Inventories are stated at the lower of cost or market. The cost of inventories is determined by the first-in, first-out method (FIFO) and an average cost method. D. PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, carried at cost, is depreciated over the estimated useful life of the assets. Depreciation expense is computed on a straight-line basis for book purposes. Accelerated methods are used for income tax purposes. Major improvements are capitalized and ordinary repairs and maintenance are expensed in the year incurred. E. ACCOUNTING PERIOD - Effective with the beginning of 1996, the Company changed its accounting periods from four weeks to one month each with the fiscal year coinciding with the calendar year. Accordingly, under the new calendar year, the Company's quarters are each comprised of three calendar months of thirteen weeks each ending March 31, June 30, September 30, and December 31. Formerly, the Company's first quarter was comprised of sixteen weeks, and the remaining three quarters were each comprised of twelve weeks. Therefore, the year ending December 30, 1995 was comprised of fifty-two weeks, while the following two years ending December 31, 1997 and 1996 were comprised of twelve months each. Due to the relative similarity of the year ending December 30, 1995 with the two following years, 1995 results were not recast. F. INTANGIBLES RESULTING FROM BUSINESS ACQUISITIONS - Intangible assets resulting from business acquisitions principally consist of the excess of the acquisition cost over the fair value of the net assets of the businesses acquired (goodwill). Goodwill is amortized over twenty-five years. Other intangible assets are amortized on a straight-line basis over their estimated useful lives. The carrying value of goodwill and other intangibles is evaluated if circumstances indicate a possible impairment in value. If undiscounted cash flows over the remaining amortization period indicate that goodwill and other intangibles may not be recoverable, the carrying value of goodwill and other intangibles will be reduced by the estimated shortfall of cash flows on a discounted basis. G. TAXES ON INCOME - The company provides deferred taxes to reflect future consequences of differences between the tax basis of assets and liabilities and their reported amounts for financial reporting purposes, in accordance with Statement of Financial Accounting Standards (SFAS) No. 109. The significant components of deferred tax assets and liabilities are principally related to depreciation, F-48 83 allowance for doubtful accounts, retirement plans, inventory and accrued expenses not currently deductible. H. TRANSLATION OF FOREIGN CURRENCIES - In 1997 the functional currency of the Company's Mexican subsidiary changed from the peso to the dollar. As a result of this change, translation gains and losses previously recorded in shareholders' equity are recorded in income. Prior to 1997, the Company translated foreign currency financial statements by translating balance sheet accounts at the current exchange rate and income statement accounts at the average exchange rate for the year. Translation gains and losses were recorded in shareholders' equity, and transaction gains and losses were reflected in income. I. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts reflected on those statements. Actual results could differ from those estimates. J. FINANCIAL INSTRUMENTS - The carrying amounts of assets and liabilities as reported on the balance sheet at December 31, 1997, which qualify as financial instruments, approximate fair value. The fair value of interest rate swap agreements held by the Company at year end which were not recorded on the financial statements, was $395,000 and $470,400 which represents the cash requirement to settle these agreements at December 31, 1997 and 1996, respectively. K. INTEREST AND DIVIDENDS - NET -
December 31, December 31, December 30, 1997 1996 1995 -------------------------------------------------------- Interest expense (net of capitalized interest) $3,138,900 $3,405,900 $3,122,900 Interest income (563,000) (923,200) (658,700) Dividend income -- (16,200) -- --------------------------------------------------------------------------------------------- Interest and dividends - net expense $2,575,900 $2,466,500 $2,464,200 ---------------------------------------------------------------------------------------------
Cash payments for interest were $3,215,600, $2,775,100 and $2,978,600 for the 1997, 1996, and 1995 fiscal years respectively. L. OTHER - The Company has adopted Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. The adoption of this statement did not have a material impact on the earnings per share calculations for the 1997, 1996 and 1995 fiscal years. During 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The effect of adopting the new standard is not expected to be significant as the Company does not currently have material items of other comprehensive income disclosed outside the statement of operations. Also during 1997, the FASB issued SFAS No. 131, Disclosure about Segments of an Enterprise and Related Information. The statement requires enterprises to report financial and descriptive information about its operating segments, products and services, countries and major customers, as well as reconciliations of segment financial information to corresponding amounts in the general-purpose financial statements. SFAS Nos. 130 and 131 will be adopted for the Company's 1998 fiscal year. F-49 84 2. NEPSA ACQUISITION The Company acquired 60% of the outstanding common stock of Nacional de Envases Plasticos, S.A. de C.V., and its associated companies, collectively known as NEPSA, on July 5, 1994. The acquisition of NEPSA was accounted for using the purchase method of accounting. The allocation of the purchase price of approximately $46,000,000 resulted in an excess of $26,505,300 in goodwill which will be amortized on a straight-line basis over its estimated life of twenty-five years. Amortization of goodwill was $1,060,200 for 1997, 1996 and 1995. The Company had non-cash investing and financing activities associated with the NEPSA transaction by issuing 400,000 shares of additional Blessings Corporation common stock valued at $5,400,000. On February 9, 1998 the Company purchased the remaining 40% of NEPSA (See note 14). 3. INVENTORIES
December 31 1997 1996 ------------------------------------------------------------------------ Raw materials $10,189,300 $10,050,500 Finished goods 4,119,900 2,855,200 ------------------------------------------------------------------------ Total $14,309,200 $12,905,700 ------------------------------------------------------------------------
4. PROPERTY, PLANT AND EQUIPMENT December 31 1997 1996 ------------------------------------------------------------------------------- Land $ 629,200 $ 629,200 ------------------------------------------------------------------------------- Buildings 15,614,400 15,258,800 Machinery and equipment 107,640,200 88,515,200 Motor vehicles 647,100 621,900 Furniture and fixtures 4,553,800 4,403,100 Leasehold improvements 1,317,500 936,900 Construction in progress 1,688,100 6,804,700 ------------------------------------------------------------------------------- Gross depreciable assets $131,461,100 $116,540,600 ------------------------------------------------------------------------------- Less accumulated depreciation and amortization 42,712,100 36,596,200 ------------------------------------------------------------------------------- Net depreciable assets 88,749,000 79,944,400 ------------------------------------------------------------------------------- Net assets $ 89,378,200 $ 80,573,600 -------------------------------------------------------------------------------
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31 1997 1996 ------------------------------------------------------------------------------- Accounts payable $14,764,700 $16,887,200 Salaries, wages and commission 2,790,400 2,263,100 Taxes, other than taxes on income 357,400 841,800 Interest 616,300 716,600 Insurance 619,500 1,019,200 Relocation and restructuring 443,900 791,200 Miscellaneous current liabilities 2,270,200 2,506,700 ------------------------------------------------------------------------------- Total $21,862,400 $25,025,800 -------------------------------------------------------------------------------
F-50 85 6. LONG-TERM DEBT
December 31 1997 1996 ------------------------------------------------------------------------------ 6.55% note due 2002 $10,000,000 $10,000,000 7.22% note due 2008 10,000,000 10,000,000 NEPSA Credit Agreement due 2002 14,062,500 17,187,500 Mexico bank loans due 1998 collateralized by equipment -- 809,900 ------------------------------------------------------------------------------ $34,062,500 $37,997,400 Less installments due within one year 3,125,000 3,744,300 ------------------------------------------------------------------------------ Total long-term debt $30,937,500 $34,253,100 ------------------------------------------------------------------------------
During 1996, the Company entered into a $20,000,000 Note Purchase Agreement with a major insurance company. Under the terms of the Note Purchase Agreement, the Company issued $10,000,000 of 7.22% senior unsecured notes due January 30, 2008 and $10,000,000 of 6.55% senior unsecured notes due January 30, 2002. Interest is payable semi-annually on January 30 and July 30 of each year. The Company is not obligated to make principal payments until January 30, 2000. The proceeds were used to repay two secured mortgages and advances under the revolving credit and to finance major capital projects. The Company has available a $25,000,000 two year, unsecured revolving credit agreement with major lending institutions. Borrowings under the revolving credit agreement bear interest at rates based on the London Interbank Offered Rates (LIBOR) or the prime interest lending rate. The Company had no borrowings outstanding under this agreement at December 31, 1997. On February 20, 1998, the Company entered into an $18,500,000 unsecured Term Loan Agreement with a major lending institution. The term loan bears interest at rates based upon either the LIBOR Rates or the Prime Rate and will be payable quarterly. Principal payments will commence on September 15, 1998 and will be payable quarterly thereafter with the final payment on June 15, 2006. The proceeds from the term loan were used to purchase the remaining 40% ownership of NEPSA (see note 14). The Company has short-term lines of credit of $12,000,000 available through its principal lenders. On December 31, 1997, the Company had standby letters of credit of $997,000 outstanding under the lines of credit. In December of 1994 and during the first half of 1995, the Company entered into five interest rate swap agreements to limit its exposure to changes in interest rates on the NEPSA Credit Agreement. The agreements obligate the Company to make fixed payments to a counter party which, in turn, is obligated to make variable payments to the Company. The amount to be paid or received under the terms of the swaps is measured by applying contractually agreed upon variable and fixed rates to the notional amounts of principal. The counterparty to the agreements is a major financial institution which is expected to fully perform under the terms of the agreement. The notional amounts, which decrease over the term of the agreements, are used to measure the contractual amounts to be received or paid and do not represent the amount of exposure to credit loss. The agreements terminate in 2002 and effectively convert approximately $13,900,000 of three month LIBOR-based floating rate debt to 8.21% fixed rate debt. Interest paid on these swaps was recorded as an adjustment to interest expense. F-51 86 The long-term debt agreements contain various restrictive covenants limiting the Company's ability to incur additional indebtedness or to undertake mergers and acquisitions. The agreements also include quarterly tests relating to the maintenance of net worth, cash flow and interest coverage ratios. The maturities on long-term debt are as follows:
Fiscal Years Amount ------------------------------------------------------------------------- 1998 $ 3,125,000 1999 3,125,000 2000 6,458,300 2001 6,458,300 2002 4,895,900 2003 and after 10,000,000 ------------------------------------------------------------------------- Total $34,062,500 -------------------------------------------------------------------------
7. COMMITMENTS At December 31, 1997, aggregate rental commitments on long-term real estate operating leases were as follows: Fiscal Years Amount ------------------------------------------------------------------------- 1998 $1,291,300 1999 645,600 2000 -- 2001 -- 2002 -- 2003 and after -- ------------------------------------------------------------------------- Total $1,936,900 -------------------------------------------------------------------------
Rent expense for the fiscal years ended December 31, 1997; December 31, 1996; and December 30, 1995, amounted to $1,362,100, $1,449,800 and $2,024,500 respectively. The Company has commitments to purchase raw materials over the next two years of approximately $3,800,000 per year. 8. PENSION TRUST PLAN The Company sponsors a defined benefit pension plan that covers substantially all employees. The cost of the plan is borne by the Company. The plan calls for benefits to be paid to eligible employees at retirement, based primarily upon years of service with the Company and compensation rates near retirement. Contributions are intended to provide not only for benefits attributable to service to date but also for those expected to be earned in the future. Plan assets consist primarily of bonds, mortgages and common stock. Pension expense was $806,200, $587,800 and $459,500 in the 1997, 1996 and 1995 fiscal years respectively. Net pension cost for the Company's qualified and nonqualified defined benefit plans for 1997, 1996 and 1995 included the following components: F-52 87
1997 1996 1995 ---------------------------------------------------------------------------- Service cost of current period $ 716,200 $ 645,200 $ 597,200 Interest cost on projected benefit obligation 1,235,700 1,090,300 998,100 Actual return on plan assets (1,951,600) (1,459,700) (1,887,300) Net amortization and deferral 805,900 312,000 751,500 ---------------------------------------------------------------------------- Net periodic pension cost $ 806,200 $ 587,800 $ 459,500 ----------------------------------------------------------------------------
The following table sets for the plan's funded status and amounts recognized in the Company's statement of cash flows at year-end. Actuarial present value of benefit obligations;
1997 1996 ------------------------------------------------------------------------------------- Vested benefits $ 15,173,600 $ 13,075,000 Non vested benefits 225,200 351,100 ------------------------------------------------------------------------------------- Accumulated benefit obligation $ 15,398,800 $ 13,426,100 Fair value of assets held in the plan $ 16,143,000 $ 14,316,000 Projected benefit obligation for services rendered to date (18,028,400) (15,865,200) -------------------------------------------------------------------------------------- Projected benefit obligation in excess of plan assets $ (1,885,400) $ (1,549,200) Unrecognized net loss 1,194,500 924,100 Unrecognized prior service cost (85,000) (92,800) Unrecognized net asset at January 1, 1988, being amortized over 17 years (213,200) (248,700) Unrecognized net obligation at December 31, 1994, being amortized over 15 years 740,900 808,300 ------------------------------------------------------------------------------------- Accrued pension cost included in other liabilities $ (248,200) $ (158,300) --------------------------------------------------------------------------------------
The weighted-average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.5% and 5.0%, respectively, for 1997 and 1996. The expected long-term rate of return on assets was 10% of 1997 and 1996. During 1994 the Company adopted a Supplemental Restoration plan designed to restore pension benefits which have been limited as a result of changes in the Internal Revenue Service code of 1993 (OBRA '93). In December, 1990, and November, 1992, FASB issued SFAS No. 106, Employers' Accounting for Post Retirement Benefits Other Than Pensions and SFAS No. 112, Employers' Accounting for Post Employment Benefits respectively. These pronouncements do not have an effect on the Company's F-53 88 financial statements as the cost to the Company of providing the benefits covered in these pronouncements is not significant. 9. PENSION SAVINGS PLAN (401K) The Company initiated a pension savings plan in 1988 designed to comply with Section 401(k) of the Internal Revenue Service code. Under the terms of the plan, the Company matches 50% of the employees' contribution up to a maximum of 3% of salary. The Company's matching contribution to the plan was $436,000, $378,200 and $337,900 for the 1997, 1996 and 1995 fiscal years respectively. 10. STOCK OPTION PLAN Under the Company's stock option plans, officers, directors and key employees may be granted options to purchase the Company's common stock at no less than 100% of the market price on the date the option is granted. The plans provide options to become exercisable either immediately upon grant or one year from date of grant and can be issued with or without stock appreciation rights with terms of 5 to 10 years. The Company has authorized 443,000 shares for issuance under the plans. At December 31, 1997, there were 130,750 shares available under the plans. As permitted by SFAS No. 123, Accounting for Stock Based Compensation, the Company has elected to follow APB Opinion No. 25 Accounting for Stock issued to Employees, for the measurement and recognition of employee stock-based compensation. Accordingly, no compensation cost has been recognized for the company's plans. The pro forma effect of applying SFAS 123 fair value method of measuring compensation costs to the Company's stock-based awards was not significant to reported net income and earnings per share. A summary of stock option transactions in fiscal 1997, 1996 and 1995 follows:
December 31, 1997 December 31, 1996 December 30, 1995 - --------------------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price - --------------------------------------------------------------------------------------------------------------------------- Outstanding beginning of the year 159,200 $12.64 134,200 $12.98 98,200 $12.85 Granted 67,500 10.48 79,000 9.99 46,000 13.20 Exercised (6,000) 10.42 (50,000) 9.25 (3,000) 8.81 Canceled (3,250) 11.93 (4,000) 14.11 (7,000) 14.38 - --------------------------------------------------------------------------------------------------------------------------- Outstanding, end of the year 217,450 $12.06 159,200 $12.64 134,200 $12.98 - --------------------------------------------------------------------------------------------------------------------------- Options exercisable at year end 217,450 $12.06 134,700 $12.97 92,700 $12.89
The following table summarizes information about stock options outstanding at December 31, 1997:
------------------------------------------------------------------------------------------------------------ Options Outstanding ------------------------------------------------------------------------------------------------------------ Number Weighted-Average Range of Outstanding Remaining Weighted-Average Exercise Prices at 12/31/97 Contractual Life Exercise Price ------------------------------------------------------------------------------------------------------------ $ 8.81 - 10.88 103,450 5.3 Years $10.29 $12.00 - 14.38 114,000 6.5 Years $12.69 ------------------------------------------------------------------------------------------------------------
F-54 89 Using the Black-Scholes model, the weighted average fair value of options granted and significant weighted-average assumptions used were as follows:
- ------------------------------------------------------------------------------- 1997 1996 - ------------------------------------------------------------------------------- Fair market value of options granted $4.20 $3.51 Risk-free interest rate 6.5% 6.5% Expected life (years) 5.0 9.0 Expected dividends 0.0% 3.0% Volatility 32.0% 31.8% - -------------------------------------------------------------------------------
11. TAXES ON INCOME The components of income before taxes are as follows:
- --------------------------------------------------------------------------------------- December 31 December 31 December 30 1997 1996 1995 - --------------------------------------------------------------------------------------- U.S. $ 8,573,600 $ 4,850,000 $ 8,398,800 Foreign 9,685,000 7,370,100 5,571,300 - --------------------------------------------------------------------------------------- $18,258,600 $12,220,100 $13,970,100 - ---------------------------------------------------------------------------------------
Income tax expense from continuing operations consisted of the following components in the fiscal year ended on:
- -------------------------------------------------------------------------------------- December 31 December 31 December 30 1997 1996 1995 - -------------------------------------------------------------------------------------- Taxes estimated to be payable currently U.S. $1,759,600 $ 1,174,400 $2,553,700 Foreign 3,135,500 2,689,900 3,383,500 State 188,000 38,100 298,400 - -------------------------------------------------------------------------------------- Total $5,083,100 $ 3,902,400 $6,235,600 - -------------------------------------------------------------------------------------- Taxes deferred - net U.S. 886,300 $587,800 $6,500 Foreign 670,700 $(1,366,700) (153,700) State 220,200 146,000 60,800 - -------------------------------------------------------------------------------------- Total 1,777,200 (632,900) (86,400) - -------------------------------------------------------------------------------------- $6,860,300 $ 3,269,500 $6,149,200 - --------------------------------------------------------------------------------------
F-55 90 Temporary differences which give rise to deferred tax assets and liabilities at December 31, 1997, December 31, 1996, and December 30, 1995, are as follows:
- --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Deferred Deferred Deferred Deferred Deferred Deferred tax tax tax tax tax tax assets liabilities assets liabilities assets liabilities - --------------------------------------------------------------------------------------------------------------------------- Current Allowance for doubtful accounts $ 562,400 -- $ 554,900 -- $ 427,100 -- Compensated absences 444,900 -- 361,600 -- 312,500 -- Restricted stock 138,400 -- 111,700 -- 138,600 -- Other 364,600 1,397,000 389,700 1,024,200 -- -- - --------------------------------------------------------------------------------------------------------------------------- Total current 1,510,300 1,397,000 1,417,900 1,024,200 878,200 -- - --------------------------------------------------------------------------------------------------------------------------- Non-current Tax deductible expenses not charge against book income (primarily depreciation) -- 9,245,900 -- 8,038,900 -- $6,210,800 Income tax benefit of fixed asset indexation 1,902,200 -- 2,316,700 -- -- -- Loss on foreign currency translation 4,170,600 -- 4,170,600 -- 4,047,200 -- Other 1,194,500 326,600 1,078,100 334,900 382,000 923,900 - --------------------------------------------------------------------------------------------------------------------------- Total non-current 7,267,300 9,572,500 7,565,400 8,373,800 4,429,200 7,134,700 - --------------------------------------------------------------------------------------------------------------------------- Total deferred taxes $8,777,600 $10,969,500 $8,983,300 $9,398,000 $5,307,400 $7,134,700 - ---------------------------------------------------------------------------------------------------------------------------
A reconciliation of the differences between income taxes computed at the U.S. income tax rate and the consolidated tax provision is as follows:
- -------------------------------------------------------------------------------------------------------------------------- December 31, 1997 December 31, 1996 December 30, 1995 - -------------------------------------------------------------------------------------------------------------------------- Amount % Amount % Amount % - -------------------------------------------------------------------------------------------------------------------------- Tax at statutory U.S. tax rate $6,390,500 35.0 $4,277,000 35.0 $4,889,500 35.0 Differential due to operations outside U.S. 45,500 .3 (1,540,000) (12.6) 892,600 6.4 State and local taxes net of federal tax 265,300 1.5 184,100 1.5 237,100 1.6 benefit Nondeductible goodwill amortization 371,100 2.0 371,100 3.0 371,100 2.7 Other - Net (212,100) (1.2) (22,700) (.1) (241,100) (1.7) - -------------------------------------------------------------------------------------------------------------------------- Total Provision for income taxes $6,860,300 37.6 $3,269,500 26.8 $6,149,200 44.0 - --------------------------------------------------------------------------------------------------------------------------
Cash payments for taxes were $2,994,800, $3,128,200 and $6,442,000 for the 1997, 1996 and 1995 fiscal years respectively 12. NET EARNINGS PER SHARE Net earnings per share for all periods presented have been computed based upon the weighted average number of shares outstanding during the year. The following schedule represents a reconciliation of the numerator and the denominator used to calculate basic and diluted earnings per share for 1997, 1996 and 1995:
- --------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Income Shares Pre-Share Income Shares Per-Share Income Shares Per-Share (Num.) (Denom.) Amount (Num.) (Denom.) Amount (Num.) (Denom.) Amount - --------------------------------------------------------------------------------------------------------------------------- Basic EPS $8,192,000 10,117,965 $.810 $5,011,900 10,149,692 $.494 $5,885,200 10,159,088 $.579 Effect of Dilutive -- 30,497 -- 20,406 -- 44,211 Options - --------------------------------------------------------------------------------------------------------------------------- Diluted EPS $8,192,000 10,148,462 $.807 $5,011,900 10,170,098 $.493 $5,885,200 10,203,299 $.577 - ---------------------------------------------------------------------------------------------------------------------------
F-56 91 13. QUARTERLY FINANCIAL DATA, MARKET AND DIVIDEND INFORMATION (UNAUDITED)
First Second Third Fourth Quarter Quarter Quarter Quarter Total First Year Ended December 31, 1997 3 Months 3 Months 3 Months 3 Months Year - --------------------------------------------------------------------------------------------------------------------------- Net sales $45,076,700 $43,185,000 $43,707,700 $42,786,700 $174,756,100 - --------------------------------------------------------------------------------------------------------------------------- Cost of sales $31,510,300 $30,617,400 $31,946,100 $30,804,500 $124,878,300 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 2,296,900 $ 1,619,800 $ 1,962,000 $ 2,313,300 $ 8,192,000 - --------------------------------------------------------------------------------------------------------------------------- Average number of shares outstanding 10,125,386 10,114,869 10,114,803 10,116,800 10,117,965 - --------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ .23 $ .16 $ .19 $ .23 $.81 - --------------------------------------------------------------------------------------------------------------------------- Dividends paid per share -- -- -- -- -- - --------------------------------------------------------------------------------------------------------------------------- Market price of common stock HIGH $ 11.25 $ 10.75 $15.38 $15.88 $15.88 LOW $ 9.25 $ 9.31 $10.13 $13.75 $9.25 - --------------------------------------------------------------------------------------------------------------------------- Fiscal Year Ended December 31, 1996 - --------------------------------------------------------------------------------------------------------------------------- Net sales $39,533,300 $36,253,400 $40,008,000 $42,340,400 $158,135,100 - --------------------------------------------------------------------------------------------------------------------------- Cost of sales $26,337,600 $26,355,000 $30,162,600 $32,351,800 $115,207,000 - --------------------------------------------------------------------------------------------------------------------------- Net earnings $ 2,236,700 $ 1,015,600 $ 1,177,300 $ 582,300 $ 5,011,900 - --------------------------------------------------------------------------------------------------------------------------- Average number of shares outstanding 10,139,754 10,164,637 10,159,871 10,134,504 10,149,692 - --------------------------------------------------------------------------------------------------------------------------- Net earnings per share $ .22 $ .10 $ .12 $ .05 $ .49 - --------------------------------------------------------------------------------------------------------------------------- Dividends paid per share $ .10 $ .10 $ .10 $ .10 $ .40 - --------------------------------------------------------------------------------------------------------------------------- Market price of common stock HIGH $ 12.00 $ 14.25 $ 11.00 $ 11.88 $ 14.25 LOW $ 8.50 $ 9.25 $ 8.63 $ 8.75 $ 8.50 - ---------------------------------------------------------------------------------------------------------------------------
14. SUBSEQUENT EVENT On February 9, 1998, the Company purchased the remaining 40% of its 60% owned subsidiary in Mexico, NEPSA for $18,500,000. Pro forma results assuming consolidation of 100% of NEPSA's earnings would have been net earnings of $10,455,300 or $1.03 per share for 1997, $7,885,600 or $.78 per share for 1996 and $6,671,900 or $.66 per share for 1995. 15. MAJOR CUSTOMER A customer of the Company accounted for 44.9%, 44.6% and 46.6% of total sales in the 1997, 1996, and 1995 fiscal years respectively. 16. SEGMENT AND GEOGRAPHIC INFORMATION The Company operates in one principal industry segment: the design, manufacture and sale of specialty plastics for use in a variety of disposable healthcare products, as well as in numerous industrial, agricultural and packaging end uses. The Company operates in two primary geographic areas: the United States and Mexico. F-57 92 Geographic financial information is as follows:
- ---------------------------------------------------------------------------- 1997 1996 1995 - ---------------------------------------------------------------------------- Net Sales to unaffiliated customers: United States $120,160,100 $109,616,200 $107,877,500 Mexico 54,596,000 48,518,900 48,431,900 - ---------------------------------------------------------------------------- Total sales $174,756,100 $158,135,100 $156,309,400 - ---------------------------------------------------------------------------- Net Earnings: United States $ 5,519,500 $ 2,903,700 $ 5,479,500 Mexico 2,672,500 2,108,200 405,700 - ---------------------------------------------------------------------------- Total earnings $ 8,192,000 $ 5,011,900 $ 5,885,200 - ---------------------------------------------------------------------------- Identifiable assets: United States (Including Goodwill) $132,652,600 $127,292,800 $116,976,300 Mexico 32,670,400 30,783,900 19,117,900 - ---------------------------------------------------------------------------- Total assets $165,323,000 $158,076,700 $136,094,200 - ----------------------------------------------------------------------------
F-58 93 INDEX TO EXHIBITS
EXHIBIT NUMBER EXHIBIT 3.1 Second Amended and Restated Articles of Incorporation of Huntsman Packaging (incorporated by reference to Exhibit 3.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 3.2 Amended and Restated Bylaws of Huntsman Packaging (incorporated by reference to Exhibit 3.2 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 4.1 Indenture, dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and The Bank of New York (incorporated by reference to Exhibit 4.1 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 4.2 Supplemental Indenture No. 1 to Indenture dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and the Bank of New York (incorporated by reference to Exhibit 4.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4.3 Supplemental Indenture No. 2 to Indenture dated as of September 30, 1997, between Huntsman Packaging, the Guarantors and the Bank of New York (incorporated by reference to Exhibit 4.2 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 4.4 Form of Exchange Notes (incorporated by reference to Exhibit A-2 to Exhibit 4.1)). 4.5 Registration Rights Agreement, dated as of September 19, 1997, by and among Huntsman Packaging, BT Alex. Brown Incorporated and Chase Securities Inc. (incorporated by reference to Exhibit 4.3 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.1 Exchange Agreement, dated as of September 26, 1997 by and among Huntsman Corporation and Jon M. Huntsman, Richard P. Durham and Elizabeth Whitsett, as Trustees of the Christena Karen H. Durham Trust (incorporated by reference to Exhibit 10.1 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.2 First Amended Asset Purchase Agreement, dated as of September 26, 1997, between Huntsman Packaging and Huntsman Polymers Corporation (incorporated by reference to Exhibit 10.2 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.3 Amended and Restated Credit Agreement, dated as of May 14, 1998, among Huntsman Packaging, the various lenders party thereto (the "Lenders") and The Chase Manhattan Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.1 to Huntsman Packaging's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998). 10.4 Guarantee Agreement, dated September 30, 1997, among the subsidiaries of Huntsman Packaging and The Chase Manhattan Bank, as Administrative Agent for the Lenders (incorporated by reference to Exhibit 10.4 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.5 Security Agreement, dated as of September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.5 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)).
94 10.6 Pledge Agreement, dated September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.6 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.7 Indemnity, Subrogation and Contribution Agreement, dated September 30, 1997, among Huntsman Packaging, each subsidiary of Huntsman Packaging party thereto and The Chase Manhattan Bank, as Collateral Agent for the Secured Parties (incorporated by reference to Exhibit 10.7 to Huntsman Packaging's registration statement on Form S-4 (File No. 333-40067)). 10.8 Form of Option Cancellation and Restricted Stock Purchase Agreement *(1) 10.9 Employment Agreement between Huntsman Packaging and Jack E. Knott *(1) 10.10 1998 Huntsman Packaging Corporation Stock Option Plan.*(1) 21 Subsidiaries of Huntsman Packaging.* 27 Financial Data Schedule.*
* Filed with this report. (1) Management contract or compensatory plan or arrangement required to be filed as an exhibit hereto. EX-10.8 2 FORM OF OPTION CANCELLATION & RESTRICTED AGREE. 1 EXHIBIT 10.8 OPTION CANCELLATION AND RESTRICTED STOCK PURCHASE AGREEMENT THIS OPTION CANCELLATION AND RESTRICTED STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of February 22, 1999 by and between Huntsman Packaging Corporation, a Utah corporation (the "Company"), and _________________ (the "Purchaser"). Recitals A. Purchaser currently holds a nonstatutory stock option (the "Option") to purchase ______ shares of the Company's non-voting no par value Class C Common Stock ("Class C Stock") for $100 per share. The Option was granted under the Huntsman Packaging Corporation Stock Option Plan (the "Plan") and is evidenced by an Employee Option Agreement dated as of January 1, 1998 (the "Option Agreement"). Under the terms of the Option Agreement, the Option is only partially exercisable as of the date of this Agreement. B. The Company and the Purchaser now desire to replace the Option with a restricted stock purchase pursuant to which the Purchaser will purchase a number of shares of Class C Stock equal to the number of shares covered by the Option subject to repurchase rights of the Company that will lapse under conditions similar to the vesting conditions of the Option. Agreement NOW, THEREFORE, in consideration of the agreements, covenants and promises contained in this Agreement, intending to be legally bound, the Company and the Purchaser agree as follows: 1. CANCELLATION, PURCHASE AND SALE. Subject to the terms and conditions set forth in this Agreement: (a) The Company and the Purchaser agree that the Option is hereby cancelled and shall have no further force or effect. (b) The Company hereby sells to the Purchaser, and the Purchaser hereby purchases and accepts from the Company, _________ shares of Class C Stock (the "Shares") at a purchase price of $100 per Share, for an aggregate purchase price of $________ (the "Purchase Price"). The Purchase Price is payable by delivery of a promissory note in the form attached as Exhibit A hereto (the "Promissory Note"). The Company acknowledges receipt from the Purchaser of the executed Promissory Note. To secure the Company's rights under the Repurchase Option described in Section 2, the Company will retain the certificate or certificates representing the Shares. 2. REPURCHASE OPTION. _______ [ONE-HALF, ROUNDED UP] of the Shares shall be "Time Vested Shares" and _______ [ONE-HALF, ROUNDED DOWN] of the Shares shall be "Performance Vested Shares." 2 (a) OPTION ON TERMINATION OF EMPLOYMENT. If Purchaser ceases to be an employee of the Company for any reason, with or without cause, including death, disability, or retirement (a "Termination"), the Company shall have an irrevocable, exclusive option (the "Repurchase Option") for a period of 180 days from the date of Termination to repurchase at the original price per Share set forth in Section 1 all or any portion of the Shares held by Purchaser on the date of the Termination that have not been released from the Repurchase Option as provided in this Section 2. (b) EXERCISE OF REPURCHASE OPTION. The Repurchase Option shall be exercised by the Company by delivering to the Purchaser a written notice of exercise and either (i) a check in the amount of the purchase price, (ii) if there is an outstanding balance on the Promissory Note, a notice stating that unpaid interest and then principal equal to the amount of the purchase price shall be applied to reduce the outstanding balance on the Promissory Note, or (iii) a combination of (i) and (ii). Upon delivery of such notice and payment of the purchase price in any of the ways described above, the Company shall become the legal and beneficial owner of the Shares being repurchased and all rights and interest therein or related thereto, and the Company shall have the right to transfer to its own name the number of Shares being repurchased without further action by the Purchaser. (c) Release from Repurchase Option. (i) TIME VESTED SHARES. In accordance with the original vesting schedule set forth in the Option Agreement, the Time Vested Shares subject to the Repurchase Option shall be released from the Repurchase Option as follows: (A) twenty percent (20%) of the Time Vested Shares shall be released on December 31, 1998; (B) twenty percent (20%) of the Time Vested Shares shall be released on December 31, 1999; (C) twenty percent (20%) of the Time Vested Shares shall be released on December 31, 2000; (D) twenty percent (20%) of the Time Vested Shares shall be released on December 31, 2001; (E) twenty percent (20%) of the Time Vested Shares shall be released on December 31, 2002; (ii) PERFORMANCE VESTED SHARES. In accordance with the original vesting schedule set forth in the Option Agreement, the Performance Vested Shares shall be released from the Repurchase Option in installments as follows: (A) if the Company has a "Market Value of Equity" or MVE (as defined below) of at least $135,000,000 (such amount, and each such amount specified in subsections (B) through (E) below, the "Target MVE"), as soon as practicable after December 31, 1998 (such date, and each such date specified in subsections (B) through (E) below, as to Performance Vested Shares, a "Target Date"), twenty percent (20%) of the Performance Vested Shares shall be released on December 31, 1998 (because the Company's MVE on December 31, 1998 was less than 80% of the Target MVE, no Performance Vested Shares have been released from the Repurchase Option under this subsection (A) as of the date of this Agreement); 2 3 (B) if the Company has an MVE of at least $182,250,000 on December 31, 1999, twenty percent (20%) of the Performance Vested Shares shall be released as soon as practicable after December 31, 1999; (C) if the Company has an MVE of at least $246,037,500 on December 31, 2000, twenty percent (20%) of the Performance Vested Shares shall be released as soon as practicable after December 31, 2000; (D) if the Company has an MVE of at least $332,150,625 on December 31, 2001, twenty percent (20%) of the Performance Vested Shares shall be released as soon as practicable after December 31, 2001; and (E) if the Company has an MVE of at least $448,403,344 on December 31, 2002, twenty percent (20%) of the Performance Vested Shares shall be released as soon as practicable after December 31, 2002. (d) MARKET VALUE OF EQUITY. (i) The market value of equity ("MVE") of the Company on any given date shall equal (Adjusted EBITDA x 6.5) minus (Adjusted Net Debt), where: "EBITDA" equals earnings from operations before interest expense, taxes, depreciation and amortization on the applicable date, determined in accordance with generally accepted accounting principles, consistently applied ("GAAP"); "ADJUSTED EBITDA" equals the Company's EBITDA, as adjusted below, on the applicable date; "NET DEBT" equals the Company's total interest bearing indebtedness on the applicable date minus balance sheet "Cash and Cash Equivalents" as of such date, determined in accordance with GAAP; and "Adjusted Net Debt" equals Net Debt, as adjusted below, on the applicable date. Adjusted EBITDA and Adjusted Net Debt shall be determined by making the following adjustments to the Company's EBITDA and to Net Debt: (A) if the Company completes a material acquisition (an "Acquisition") during any of the first three quarters of a calendar year, the EBITDA of the acquired entity or business for the portion of the calendar year prior to the Acquisition shall be included in Adjusted EBITDA; (B) if the Company completes a material divestiture (a "Divestiture") during any of the first three quarters of a calendar year, the EBITDA of the divested assets or business for the portion of the calendar year prior to the Divestiture shall be excluded from Adjusted EBITDA; 3 4 (C) if the Company engages in an Acquisition during the fourth quarter of a calendar year, an amount equal to the total of (x) all debt incurred with respect to the Acquisition and (y) all transaction costs associated with the Acquisition shall be excluded from Adjusted Net Debt; (D) if the Company engages in a Divestiture during the fourth quarter of a calendar year, (x) the total amount of the proceeds received by the Company with respect to the Divestiture shall be included in Adjusted Net Debt, and (y) the total amount of the budgeted EBITDA for the divested assets or business for all periods of the calendar year subsequent to the Divestiture shall be included in Adjusted EBITDA; (E) the total amount of any charitable contributions made by the Company during a calendar year shall be added back to Adjusted EBITDA; (F) the total amount of any fees paid by the Company to Huntsman Financial Corporation or its successors or assigns shall be added back to Adjusted EBITDA; and (G) the total amount of all borrowings of shareholders of the Company from the Company shall be subtracted from Adjusted Net Debt. (ii) For purposes of this Agreement only, the Company's MVE shall be determined within 90 days after the end of each calendar year or at such other date as may be necessary to calculate MVE for purposes of this Agreement. (e) PERCENTAGE RELEASE FROM REPURCHASE OPTION. If the Company's MVE as of a Target Date is less than the applicable Target MVE, but is at least 80% of the applicable Target MVE as of such Target Date, a percentage of the Performance Vested Shares available for release from the Repurchase Option as of the Target Date shall be released from the Repurchase Option according to the following proportionate release schedule:
Actual MVE as a Percentage of Target MVE Percentage of Shares Released ------------------------ ----------------------------- 80% 0% 85% 25% 90% 50% 95% 75% 100% 100%
The percentage of Shares released shall be prorated for whole percentage increases between the MVE percentages shown (e.g., if the Company's MVE is at least 81%, but less than 82%, of Target MVE, 5% of the Performance Vested Shares available for vesting as of the Target Date would be released from the Repurchase Option). 4 5 (f) "CLAWBACK RIGHTS" Rights. Notwithstanding any other provision of this Section 2, if the Company's MVE is less than the applicable Target MVE on any Target Date, but the Company's MVE is equal to or exceeds the applicable Target MVE on any subsequent Target Date prior to January 1, 2003, all Performance Vested Shares which have not been previously released from the Repurchase Option in any prior year shall thereupon be released from the Repurchase Option. (g) TERMINATION OF REPURCHASE OPTION. Any Performance Vested Shares that are not released from the Repurchase Option according to the foregoing provisions of this Section 2 shall be released from the Repurchase Option on December 31, 2007. (h) ACCELERATION EVENT. An "Acceleration Event" shall occur in the event of a merger involving the Company as a result of which the holders of outstanding Common Stock of the Company immediately prior to the merger do not hold at least 50% of the Common Stock of the surviving corporation or any parent corporation of the surviving corporation immediately after the merger, the sale of all or substantially all of the assets or Common Stock of the Company, or the dissolution or liquidation of the Company. If an Acceleration Event occurs on or before December 31, 2002, all Time Vested Shares shall be released from the Repurchase Option immediately prior to the Acceleration Event. If an Acceleration Event occurs before December 31, 2002, some or all of the Performance Vested Shares that have not been released from the Repurchase Option (because the Target Dates and/or Target MVE have not yet been reached) shall be released from the Repurchase Option immediately prior to the Acceleration Event in an amount equal to the mean percentage of Performance Vested Shares that have been released from the Repurchase Option up to the date of the Acceleration Event multiplied by the total number of Performance Vested Shares then subject to the Repurchase Option, taking into account the effect of Section 2(f). Further, for purposes of calculating the Company's MVE in connection with an Acceleration Event, MVE shall be calculated as of the end of the calendar month immediately prior to the Acceleration Event and Target MVE shall be prorated to the end of the calendar month immediately prior to the Acceleration Event. (For example, if the Purchaser had earned release of 0% and 80% of the Performance Vested Shares as of December 31, 1998 and 1999, respectively, and an Acceleration Event occurred in July 2000, and if the Company's actual MVE as of June 30, 2000 was $193,000,000, then (i) the Target MVE would be prorated to June 30, 2000, pursuant to this Section 2(h) ($182,250,000 + [.50 x ($246,037,500 - $182,250,000)] = $214,143,750); (ii) the June 30, 2000 actual MVE as a percentage of the prorated Target MVE as of December 31, 2000 would be 90%; (iii) therefore, 50% of the Performance Vested Shares scheduled for release as of December 31, 2000 would be released from the Repurchase Option, pursuant to Section 2(e), immediately prior to the Acceleration Event; and (iv) immediately prior to the Acceleration Event, 43.33% of the Performance Vested Shares scheduled for release from the Repurchase Option based on the Company's MVE as of December 31, 2001 and 2002 would be released from the Repurchase Option, all for the immediate benefit of the Purchaser. As a further example, if the Purchaser had earned release of 0% and 0% of the Performance Vested Shares as of December 31, 1998 and 1999, respectively, and an Acceleration Event occurs in July 2000, and if the Company's actual MVE as of June 30, 2000 was $218,500,000, then (i) the Target MVE as of June 30, 2000 would be prorated to June 30, 2000, pursuant to this Section 2(h) ($214,143,750); (ii) the June 30, 2000 actual MVE as a percentage of the prorated Target MVE as of December 31, 2000 would be 102%; (iii) 100% of the Performance Vested Shares scheduled for release as of December 31, 2000 would be released from the Repurchase Option pursuant to Section 2(e), immediately prior to the Acceleration Event; and (iv) taking into account the effect of Section 2(f), and immediately prior to the Acceleration Event, 100% of the Performance Vested Shares scheduled for release from the Repurchase Option based on the Company's MVE as of December 31, 1998, 1999, 2001 and 2002 would be released from the Repurchase Option, all for the immediate benefit of the Purchaser. If an Acceleration Event occurs after December 31, 2002, no additional Performance Vested Shares shall be released from the Repurchase Option pursuant to this Section 2(h). The Company may exercise the Repurchase Option effective as of the time of an Acceleration Event with respect to any Performance Vested Shares that are not released from the Repurchase Option, regardless of whether or not a termination of employment occurs. 5 6 (i) FRACTIONAL SHARES. Notwithstanding the foregoing, no fractional shares shall be released from the Repurchase Option until a number of such fractional shares accumulate to equal one share. (j) LIMITATION ON TRANSFER. (i) Except as provided in subsection (ii) below, the Purchaser shall not sell, assign, encumber, dispose of or transfer (including transfer by operation of law) any interest in any Shares that have not been released from the Repurchase Option. (ii) Notwithstanding the provisions of subsection (i) above, all or any portion of the Shares may be sold or otherwise transferred to: (A) the spouse or lineal descendants (whether or not adopted) of the Purchaser, (B) the trustee of a trust for the primary benefit of the Purchaser, his spouse or lineal descendants, or (C) any corporation, partnership, limited liability company or other business entity controlled by the Purchaser, his spouse or such lineal descendants. In such event, the spouse, lineal descendant, trustee, or business entity will continue to be subject to all of the terms, conditions and restrictions applicable to the Shares as set forth herein, provided that the exercisability of the Repurchase Option shall continue to depend upon the employment of Purchaser and not any transferee. Any such sale or transfer will be permitted only if the transferee agrees in writing, prior to such sale or transfer to be bound by all of the terms and conditions of this Agreement. 3. STOCKHOLDERS' AGREEMENT. The Company and the Purchaser acknowledge and agree that the Shares are subject to and restricted by the Stockholders' Agreement dated as of January 1, 1998 by and among the Company and the stockholders of the Company, as amended as of February 22, 1999. The parties agree that the Put Option provided to the Purchaser under Section 2(a) of the Stockholders' Agreement (a) may not be exercised with respect to any of the Shares purchased under this Agreement until January 1, 2003, and (b) may not be exercised thereafter with respect to any Shares that have not been released from the Repurchase Option. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Purchaser, as of the date hereof, as follows: (a) The Company is a duly organized and validly existing corporation under the laws of the State of Utah and has the corporate power and the corporate authority to execute and deliver this Agreement and to perform its obligations as specified in this Agreement. (b) The Shares have been duly authorized by the Company and, upon receipt of the Purchase Price, will be validly issued, fully paid and nonassessable. (c) This Agreement has been duly authorized by the Board of Directors of the Company and has been executed and delivered by the Company. 6 7 (d) The execution and delivery by the Company of, and the performance by the Company of its obligations under, this Agreement do not contravene any provision of applicable law or the Articles of Incorporation or Bylaws of the Company or any agreement or other instrument binding upon the Company that is material to the Company, or any judgment, order or decree of any court or governmental authority having jurisdiction over the Company, and no material consent, approval, authorization or order of, or qualification with, any governmental authority is required for the performance by the Company of its obligations under this Agreement, except such approvals as have been obtained and are in full force and effect. (e) Assuming that the representations and warranties of the Purchaser contained in this Agreement are true and correct, the offer, sale and delivery of the Shares in the manner contemplated by this Agreement is exempt from registration under Section 61-1-14(2)(n) of the Utah Uniform Securities Act, as amended (the "Utah Act"). (f) Assuming that the representations and warranties of the Purchaser contained in this Agreement are true and correct, the offer, sale and delivery of the Shares in the manner contemplated by this Agreement is exempt from registration under the Securities Act of 1933, as amended (the "Securities Act") either pursuant to Section 4(2) of the Securities Act or Rule 701 thereunder. (g) The Company has provided to the Purchaser, to the extent material to an understanding of an investment in the Shares, all information concerning the Company and the Class C Stock, and any other matters requested by the Purchaser and relevant to the decision of the Purchaser to enter into the transactions contemplated by this Agreement, including, but not limited to: (i) the Company's reports on forms 10-K and 10-Q for the periods ending December 31, 1997, March 31, 1998, June 30, 1998, and September 30, 1998, respectively; and (ii) the unaudited balance sheet of the Company as at December 31, 1998 and unaudited statements of income and cash flows for the period ending December 31, 1998. 5. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser represents and warrants to the Company, as of the date hereof, as follows: (a) The Purchaser is an executive officer of the Company and has received all of the information concerning the Company, the Class C Stock and any other matters relevant to his decision to purchase the Shares that he has requested. (b) The Purchaser, as a result of his position as an executive officer of the Company, is an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act. 7 8 (c) The Purchaser is experienced in evaluating and making speculative investments, and has the capacity to protect his interest in connection with the acquisition of the Shares. In addition, the Purchaser has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of this investment. (d) The Purchaser is purchasing the Shares for his own account, for investment purposes only and not with a view to any public sale or distribution thereof. (e) The Purchaser understands that (i) the Shares have not been and will not be registered by the Company under the Securities Act, the Utah Act or the securities laws of any other jurisdiction and will be considered "restricted securities" under the Securities Act, (ii) the Shares will bear the legends set forth in Section 6 below, (iii) the Company has no obligation to register the Shares under the Securities Act or any state securities law, and (iv) the Purchaser will not sell, transfer, hypothecate or otherwise dispose of any Shares other than in accordance with (x) the provisions, or exemptions therefrom, of the Securities Act and the rules and regulations promulgated thereunder and the securities laws of all other applicable jurisdictions, and (y) the Stockholders' Agreement and this Agreement. (f) The Purchaser understands that the Company will rely upon the accuracy and truth of the representations and warranties of the Purchaser set forth in this Section 5, and the Purchaser hereby consents to such reliance. 6. Stock Legends. Certificates for the Shares shall bear legends substantially as follows: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR UNDER STATE SECURITIES LAWS. THESE SECURITIES MAY NOT BE RESOLD OR TRANSFERRED UNLESS REGISTERED OR EXEMPT FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND APPLICABLE STATE SECURITIES LAWS. THE CORPORATION IS AUTHORIZED TO ISSUE DIFFERENT CLASSES OF SHARES. IN ACCORDANCE WITH SECTION 16-10a-625 OF THE UTAH REVISED BUSINESS CORPORATION ACT, UPON WRITTEN REQUEST BY THE SHAREHOLDER, THE CORPORATION WILL FURNISH, WITHOUT CHARGE, A SUMMARY OF THE DESIGNATIONS, PREFERENCES, LIMITATIONS AND RELATIVE RIGHTS APPLICABLE TO EACH CLASS OF SHARES. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF, AND RESTRICTIONS ON TRANSFER SET FORTH IN, A STOCKHOLDERS' AGREEMENT, DATED AS OF JANUARY 1, 8 9 1998, AS AMENDED, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED, ENCUMBERED, OTHERWISE GRANTED AS SECURITY, OR OTHERWISE DISPOSED OF, ONLY IN ACCORDANCE THEREWITH. THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE TERMS AND CONDITIONS OF, AND RESTRICTIONS ON TRANSFER SET FORTH IN, AN OPTION CANCELLATION AND RESTRICTED STOCK PURCHASE AGREEMENT, DATED AS OF FEBRUARY 22 1999, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY, AND MAY BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED, HYPOTHECATED, ENCUMBERED, OTHERWISE GRANTED AS SECURITY, OR OTHERWISE DISPOSED OF, ONLY IN ACCORDANCE THEREWITH. 7. FURTHER AGREEMENTS. The Company and the Purchaser hereby agree to execute, deliver and record or cause to be executed, delivered and recorded such further instruments, and take such other actions, as may be reasonably required to effectuate the transactions contemplated by this Agreement. 8. SURVIVAL. The respective representations, warranties, covenants and agreements made by the Company and the Purchaser in this Agreement shall survive the payment of the Purchase Price and the delivery of the Shares (notwithstanding any investigation made by or on behalf of any party to this Agreement). 9. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit of and be binding upon the Company, the Purchaser and their respective successors and assigns. Nothing expressed in this Agreement is intended or shall be construed to give any person other than the persons referred to in the preceding sentence any legal or equitable right, remedy or claim under or in respect of this Agreement. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned or delegated by any party hereto without the prior written consent of the other party. 10. SEVERABILITY. Any covenant, provision, agreement or term of this Agreement that is prohibited or is held to be void or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement. 11. MODIFICATIONS, AMENDMENTS AND WAIVERS. At any time subsequent to the date hereof, (i) the parties hereto may, by written agreement, modify, amend or supplement any term or provision of this Agreement and (ii) any term or provision of this Agreement may be waived by the party which is entitled to the benefits thereof. No course of dealing among the parties or delay in exercising rights and remedies shall operate as a waiver of such rights and remedies. 9 10 12. GENERAL MATTERS. This Agreement constitutes the entire agreement and understanding of the parties to this Agreement with respect to the matters and transactions contemplated by this Agreement and supersedes all prior agreements and understandings whatsoever relating to such matters and transactions. The headings in this Agreement are for the purpose of reference only and shall not limit or otherwise affect the meaning hereof. This Agreement may be executed in counterparts, each of which shall constitute an original, but all of which shall together constitute one instrument. 13. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the laws of the State of Utah. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the date first written above. Company: Huntsman Packaging Corporation, a Utah corporation ----------------------------------------- Richard P. Durham President and Chief Executive Officer Purchaser: ----------------------------------------- 10 EX-10.9 3 EMPLOYMENT AGREEMENT BETWEEN HUNTSMAN & J. KNOTT 1 EXHIBIT 10.9 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is entered into this 1st day of September,1997 ("Effective Date") by and between Huntsman Packaging Corporation, a Utah corporation ("Employer"), and Jack E. Knott ("Employee"), an individual residing at 5436 Edgehollow Place, Dallas, Texas 75287. WHEREAS, Employer desires to employ Employee in accordance with the terms and conditions hereinafter set forth and Employee desires to be so employed; NOW, THEREFORE, in consideration of the mutual covenants herein contained, Employer and Employee agree as follows: 1. EMPLOYMENT. Employer hereby employs Employee as Executive Vice President and Chief Operating Officer ("COO") of Employer. In this position, Employee shall report to the President and Chief Executive Officer of Employer or such other individual as designated by Employer. 2. DUTIES. During the Term of Employment (as hereinafter defined), Employee's duties shall include, but not be limited to those generally associated with "Chief Operating Officer," and such other duties consistent therewith as may be assigned to Employee from time to time by Employer. Employee shall diligently and competently devote his time, abilities and attention to these activities, shall perform his duties in a professional, ethical and businesslike manner, and shall comply with all policies and procedures of Employer. 3. PLACE OF WORK/RELOCATION. During the period beginning September 1, 1997 and ending May 31, 1999, Employee need not relocate his residence to Salt Lake City, Utah. However, Employee acknowledges and agrees that he shall be employed at and his office shall be located in Salt Lake City. To that end, to the extent it is prudent and practical, Employee shall perform his duties from his Salt Lake City office. From June 1, 1999 forward, Employer shall have the right to require Employee to relocate his residence to Salt Lake City, Utah. If Employee is required to relocate his residence and declines to do so, the Term of Employment shall terminate on the date Employee so declines. 4. TERM OF EMPLOYMENT. Unless earlier terminated as provided herein, the "Term of Employment," as that phrase is used in this Agreement, shall be from September 1, 1997 through and including August 31, 2000 (the "Initial Term"). The Term of Employment shall be renewed automatically for successive periods of twelve (12) months ("Renewal Terms") after the expiration of the Initial Term (and any subsequent Renewal Terms) unless either party provides written notice of non-renewal at least six (6) months prior to the end of the Initial Term or three (3) months prior to the end of any Renewal Term. 5. COMPENSATION AND BENEFITS. During the Term of Employment, Employer shall provide to Employee, and Employee shall accept from Employer as full compensation for Employee's services hereunder, compensation and benefits as follows: 2 a. Base Salary. Employee shall be paid at an annual base salary rate of $255,000 ("Base Salary"). The Base Salary may be increased (but not decreased during the Initial Term), as determined by Employer in its sole discretion and consistent with Employer's corporate practices. The Base Salary shall be provided in accordance with payroll practices in effect for all salaried employees of Employer. b. Performance Bonus. Employee shall be eligible for a Performance Bonus, which shall be calculated in accordance with the following: A. Employee's target Performance Bonus shall be 50% of his Base Salary for the calendar year. Employee's maximum Performance Bonus will be 100% of his Base Salary for the calendar year and Employee's minimum Performance Bonus will be 25% of his Base Salary for the calendar year. Employee's Performance Bonus shall be paid not later than ninety (90) days after the end of each calendar year. B. Prior to the commencement of each calendar year, the Board of Directors of the Employer and Employee shall establish performance goals based on two measurement areas: Financial Objectives and Strategic Objectives. 75% of Employee's Performance Bonus shall be based on the Financial Objectives and 25% of Employee's Performance Bonus shall be based on the Strategic Objectives. Employee's Performance Bonus will be determined by the extent to which the Employer attains the objective performance goals established by the Board and Employee prior to the beginning of the year. C. Notwithstanding the foregoing, Employee's Performance Bonus for 1997 shall be 50% of his Base Salary for the four-month period beginning September 1, 1997. c. Benefit Plans. Employee shall be eligible to participate in the health, fife, disability, retirement and all other fringe benefit plans from time to time in effect for similarly situated senior executive employees of Employer, in accordance with the terms of those plans then in effect, and without any gap in coverage between the time Employee terminates employment with Rexene Corporation and commences employment with Employer. d. SERP. Employer shall take all corporate actions available to it in order to cause Employee's benefit accrued under the Rexene Corporation Supplemental Executive Retirement Plan (the "SERP")to be fully paid to Employee in a single lump sum, as soon as practicable after the Effective Date. Employee shall be responsible for the payment of all taxes on such payment. Employer and Employee understand and agree that the SERP cannot be amended in any manner for a period of two (2) years following the acquisition of Rexene Corporation by Huntsman Corporation without the written consent of a majority of the participants in the SERP. e. Stock Options. On or before January 1, 1998, Employer shall grant Employee an option to purchase shares of non-voting common stock of Employer equal to one percent of all outstanding classes of Employer common stock as of January 1, 1998, under terms and conditions 2 3 specified in the Huntsman Packaging Corporation Stock Option Plan and the Option Agreement between Employer and Employee. f. Business Expenses. Employer shall reimburse Employee for reasonable and necessary business expenses, in accordance with Employer's policies and upon presentation of appropriate documentation. g. Relocation Expenses. If Employee relocates his residence to Salt Lake City from Dallas, Employer shall reimburse Employee for reasonable and necessary expenses incurred in connection with his relocation, in accordance with the terms of Employer's relocation policy then in effect. h. Past-Service Credit. Employer shall take into account Employee's years of service with Rexene Corporation for purposes of Employees benefit plans in the manner provided for the employees of the CT Film Division in Section 5.5 of the Agreement and Plan of Merger between Huntsman Corporation and Rexene Corporation, to the extent permitted by law. 6. TERMINATION. The Term of Employment shall terminate upon: a. Employee's death; b. Employee's disability (as such term is defined within Employer's Benefit Plans) as of the date Employee is eligible to receive benefits under Employer's long-term disability plan; c. Termination by Employer for "Cause." For purposes of this Agreement, "Cause" means: (i) repeated failures by Employee to substantially perform his duties; (ii) commission by Employee of a felony; or (iii) fraud, misappropriation or embezzlement involving property of Employer or other intentional wrongful acts that materially impair the goodwill or business of Employer or that cause material damage to its property, goodwill or business. Any termination pursuant to this subparagraph shall be by written notice to Employee; d. Written agreement of Employer and Employee; e. Termination by Employer without Cause; f. Upon written notice by either Employee or Employer in accordance with Paragraph 4. g. Termination by Employee for "Good Reason." For purposes of this Agreement "Good Reason" means: (-i) without the Employee's consent, the assignment to him of any material duties or responsibilities substantially inconsistent with his position, duties and responsibilities with Employer as set forth herein, which assignment, change or inconsistency is not cured by Employer within thirty (30) days following its receipt of notice from the Employee specifying in reasonable detail such assignment, change or inconsistency; or (H) the Employees 3 4 breach of any material terms of this Agreement, which breach is not cured by the Employer within thirty (30) days following its receipt of notice from Employee specifying in reasonable detail the breach. h. Termination by Employer in the event Employee declines to relocate his residence as set forth in Paragraph 3 hereof. 7. COMPENSATION UPON TERMINATION OR DISABILITY. a. If Employee's employment is terminated during the Initial Term, Employee shall receive the greater of (i) the remainder of his Base Salary under Paragraph 5(a) through the Initial Term and (ii) the amount payable under Paragraph 7(b)(1), (2) or (3), as applicable. b. If Employee is terminated during any Renewal Term, Employee shall be compensated upon termination as follows: 1. If Employee's employment is terminated pursuant to Paragraphs 6(a), 6(b), 6(c), or by Employee under 6(f), Employee shall not be entitled to receive any compensation or benefits after the date of such termination. 2. If Employee's employment is terminated by the parties pursuant to Paragraph 6(d) hereof, Employee shall be entitled to receive such compensation as may be specified in a written agreement, if any, between Employer and Employee regarding Employee's termination. 3. If Employee's employment is terminated pursuant to Paragraphs 6(e), by Employer under 6(f), or 6(g), Employee shall continue to receive his Base Salary under Paragraph 5(a) for a period of twelve (12) months following the date on which notice of termination is effective. Additionally, Employee shall continue to participate in the Employer's benefits plans (as described in Paragraph 5(c)), to the extent permitted by applicable law. c. Notwithstanding Paragraphs 7(a) and 7(b), if Employee's employment is terminated pursuant to Paragraph 6(h), Employee shall not be entitled to receive any compensation or benefits after the date of such termination. 8. RESTRICTIVE COVENANTS. a. Confidential Information. Employee acknowledges that he has had and will have access to confidential information (including, but not limited to, current and prospective confidential know-how, inventions, trade secrets, customer lists, marketing plans, business plans, information regarding acquisitions, mergers, divestitures and/or joint ventures) concerning the business, customers, products, plans, finances, suppliers, and assets of Employer and its parents, subsidiaries, affiliates and other related entities (collectively, the "Related Entities") that is not generally known outside Employer and/or the Related Entities ("Confidential Information"). Employee agrees that he shall not, at any time, directly or indirectly use, divulge, furnish or make accessible to any person any Confidential Information, but instead shall keep all Confidential 4 5 Information strictly and absolutely confidential. Employee agrees to deliver promptly to Employer, at the termination of his employment or at any other time at Employees request, without retaining any copies, all documents and other materials in his possession relating, directly or indirectly, to any Confidential Information. b. Non-Competition. Employee agrees that so long as he is employed by Employer and for a period of one (1) year thereafter (the "Period"), he shall not, without the prior written consent of Employer, participate or engage in, directly or indirectly (as an owner, partner, employee, officer, director, independent contractor, consultant, advisor or in any other capacity calling for the rendition of services, advice, or acts of management, operation or control), any business that, during the Period, is competitive with the Business Conducted by Employer or any of the Related Entities (as defined below) within any geographic area in which Employer or any of the Related Entities does business. c. Non-Solicitation of Employees. Employee agrees that, during the Period, he shall not, without the prior written consent of Employer, directly or indirectly solicit any current employee of Employer or any of the Related Entities or any individual who becomes an employee during the Period to leave such employment and join or become affiliated with any business that is, during the Period, competitive with the Business Conducted by Employer or any of the Related Entities within any geographical area in which Employer or any of the Related Entities does business. d. No Diversion of Business Opportunities and Prospects. During the Period, Employee shall not, without the written consent of Employer, directly or indirectly seek to divert or dissuade from continuing to do business with or entering into business with Employer or any of the Related Entities, any supplier, customer, or other person or entity that had a business relationship with or with which Employer was actively planning or pursuing a business relationship at or before the date of termination of his employment. e. Irreparable Harm. Employee acknowledges that: (i) Employee's compliance with this Agreement is necessary to preserve and protect the proprietary rights, Confidential Information and the goodwill of Employer and the Related Entities as going concerns; (ii) any failure by Employee to comply with the provisions of this Agreement will result in irreparable and continuing injury for which there will be no adequate remedy at law; and (iii) in the event that Employee should fail to comply with the terms and conditions of this Agreement, Employer shall be entitled, in addition to such other relief as may be proper, to all types of equitable relief (including, but not limited to, the issuance of an injunction and/or temporary restraining order) as may be necessary to cause Employee to comply with this Agreement, to restore to Employer its property, and to make Employer whole. f. Survival. The provisions set forth in this Section 8 shall, as noted, survive termination of this Agreement. 5 6 9. DEFINITIONS. a. For purposes of this Agreement, the term "Business Conducted by Employer or any of the Related Entities" shall mean the manufacture and sale of flexible packaging and plastic film products. 10. MISCELLANEOUS PROVISIONS. a. No modification, amendment or waiver of this Agreement nor consent to any departure by Employee from any of the terms or conditions thereof, shall be effective unless in writing and signed on behalf of Employer by a duly authorized officer. Any such waiver or consent shall be effective only in the specific instance and for the purpose for which given. This Agreement sets forth the entire agreement and understanding between Employer and Employee and supersedes all prior agreements and understandings, written or oral, relating to the subject matter hereof. b. This Agreement shall be binding upon and enforceable by Employee and shall inure to the benefit of Employee's executors, administrators, heirs, successors, devisees and legal representatives and Employer and any successor or assignee of Employer, but neither this Agreement nor any rights or payments arising hereunder may be assigned, pledged, transferred (except upon death) or hypothecated by Employee. c. All notices required to be given under the terms of the Agreement, or that either of the parties desires to give hereunder, shall be in writing and delivered personally or be sent by registered mail or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Employer: Huntsman Packaging Corporation 500 Huntsman Way Salt Lake City, UT 84108 Attention: Richard P. Durham, President and Chief Executive Officer With a Copy to: Huntsman Packaging Corporation 500 Huntsman Way Salt Lake City, UT 84108 Attention: Office of General Counsel If to Employee: Jack E. Knott 5436 Edgehollow Place Dallas, Texas 75287 Any party may change the address to which notice is to be sent to it or to him/her by notice in writing to the other party as provided above. d. This Agreement shall be subject to and governed by the laws of the State of Utah. 6 7 e. If any provisions(s) of this Agreement shall be found invalid or unenforceable, in whole or in part then such provision(s) shall be deemed to be modified or restricted to the extent and in the manner necessary to render the same valid and enforceable, or shall be deemed excised from this Agreement, as the case may require, and this Agreement shall be construed and enforced to the maximum extent permitted by law, as if such provision(s) had been originally incorporated herein as so modified or restricted, or as if such provisions) had not been originally incorporated herein, as the case may be. f. This Agreement may be executed in multiple counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, the undersigned have executed this Employment Agreement as of the date first above written. HUNTSMAN PACKAGING CORPORATION, JACK E. KNOTT (Employee) a Utah Corporation (Employer) By: /s/ By: /s/ --------------------------------- -------------------------------------- Rick Durham Jack E. Knott Its: President & CEO Date: Date: -------------------------------- ------------------------------------ 7 EX-10.10 4 HUNSTSMAN PACKAGING CORP. STOCK OPTION PLAN 1 EXHIBIT 10.10 1998 HUNTSMAN PACKAGING CORPORATION STOCK OPTION PLAN Huntsman Packaging Corporation, a Utah corporation (the "Company"), has adopted the Huntsman Packaging Corporation Stock Option Plan ("Plan"). 1. Purpose. The purpose of the Plan is to enable the Company and its subsidiaries to attract, retain, and reward key managerial employees ("Key Employees") by offering them an opportunity to have a greater proprietary interest in, and to more closely identify with, the Company and its subsidiaries, and with their financial success. An option granted under the Plan to purchase shares of the Company's nonvoting Class C Common Stock ("Option Stock") shall be a nonqualified stock option ("Option"). Proceeds received by the Company from the sale of Option Stock pursuant to Options shall be used for general corporate purposes. 2. Administration. The Plan shall be administered by the Executive Committee of the Board of Directors ("Board") of the Company or any other committee of the Board designated by the Board for such purpose (the "Committee"). The Committee shall be composed of not fewer than two members of the Board who shall be appointed from time to time by the Board. Subject to the express provisions of the Plan, and the provisions of the Company's Stockholders' Agreement dated as of January 1, 1998, as from time to time amended (the "Stockholders' Agreement"), the Committee may interpret the Plan, prescribe, amend and rescind rules and regulations relating to it, determine Option grants and the terms and provisions of Participants' Option Agreements (which need not be identical), and make such other determinations as it deems necessary or advisable for the administration of the Plan. The Committee may delegate decisions with respect to Options to such elected officer or officers of the Company as the Committee determines. The decisions of the Committee and its delegate(s) under the Plan shall be conclusive and binding. No member of the Board, the Committee or any of its delegate(s) shall be liable for any action taken or determination made in good faith. 3. Eligibility. The Committee shall determine, within the limits of the express provisions of the Plan, those Key Employees to whom, and the time or times at which, Options shall be granted. Each Key Employee who has been selected by the Committee to receive Options shall become a "Participant" in the Plan. The Committee also shall determine the number of shares of Option Stock to be subject to each such Option, the duration of each Option, the exercise price under each Option, the time or times within which (during the term of the Option) all or portions of each Option may be exercised, whether cash, Option Stock or Options may be accepted in full or partial payment upon exercise of an Option, and any other terms and conditions of such Options. In making such determinations, the Committee may take into account the nature of the services rendered by the Key Employee, his present and potential contributions to the success of the Company and its subsidiaries, and such other factors as the Committee, in its discretion, shall deem relevant. 4. Option Stock. No more than 41,956 shares of Option Stock may be subject to Options under the Plan, which is equal to two and one-half percent (2 1/2%) of all the outstanding shares of all classes of common stock of the Company ("Common Stock") on the effective date of the Plan (counting, for this purposes, all such shares of Option Stock as outstanding). The total number of shares of Option Stock authorized under this Section 4 will be adjusted in accordance with the provisions of Section 11 hereof. Such shares may be either authorized but 2 unissued shares or reacquired shares. In the event that any Option granted under the Plan expires unexercised, or is terminated, surrendered or canceled without being exercised, in whole or in part, for any reason, then the number of shares of Option Stock theretofore subject to such Option, or the unexercised, terminated, surrendered, forfeited, canceled or reacquired portion thereof, shall be added to the remaining number of shares of Option Stock that may be made subject to Options under the Plan. Such Options shall include Option awards to former holders of such Options, upon such terms and conditions as the Committee shall determine, which terms may be more or less favorable than those applicable to such former holders of Options. 5. Options. The following provisions shall apply to each Option granted under the Plan: (a) Option Agreement. Each Option shall be evidenced by a written agreement (the "Option Agreement") specifying the Option exercise price, the terms for payment of the exercise price, the duration of the Option, and the number of shares of Option Stock to which the Option pertains. An Option Agreement also may contain an installment exercise schedule, a noncompetition agreement, a confidentiality provision, provisions for forfeiture in the event of termination of the Participant's employment with the Company or any of its subsidiaries, and such other restrictions, conditions and terms, as the Committee shall determine. Option Agreements need not be identical. (b) Exercise Price. The per share exercise price of each Option shall be specified in the applicable Option Agreement. (c) Maximum Term. Subject to earlier termination as provided in Section 6, each such Option shall expire on January 1, 2008. (d) Nonstatutory Options. No Option granted under the Plan shall be an Incentive Stock Option as defined in Section 422 of the Internal Revenue Code of 1986, as amended ("Code"). (e) Acceleration of Vesting. The Committee, in its discretion, shall have the power to accelerate the dates for exercise of any or all Options, or any part thereof. 6. Vesting of Option Rights. The right to exercise the Option shall vest according to the terms of the applicable Option Agreement. The term "Vested Option Rights" shall mean a Participant's rights to exercise the Option that have vested pursuant to this Section 6, and "Owned Shares" shall mean shares of Option Stock owned by the Participant as a result of his exercise of the Option. Unless otherwise approved by the Committee, a Participant's Vested Option Rights shall terminate and expire 90 days from the date the Participant's employment terminates for any reason, including death. The Option, including, without limitation, Vested Option Rights, shall terminate if the Participant's employment is terminated for "Cause." "Cause" means: (i) repeated failures by the Participant to substantially perform his duties; (ii) Participant's conviction of, or plea nolo contendere to, a felony; or (iii) fraud, misappropriation or embezzlement involving property of 2 3 the Company or other intentional wrongful acts that materially impair the goodwill or business of the Company or that cause material damage to its property, business or goodwill. The Option, including, without limitation, Vested Option Rights, may also terminate for reasons set forth in the applicable Option Agreement. 7. Method of Exercise of Options. Any Vested Option Rights under the Plan may be exercised by a Participant, by a legatee or legatees of such Vested Option Rights under the Participant's last will, by his executors, personal representatives or distributees, or by his assignee or assignees as provided in Section 12 below, by delivering to the Secretary of the Company written notice of the number of shares of Option Stock with respect to which the Option is being exercised, accompanied by full payment to the Company of the exercise price of the shares being purchased under the Option, and by satisfying all other conditions provided for in the Plan. Except as otherwise provided in any Option Agreement, the exercise price of Option Stock upon exercise of any Option shall be paid in full in cash. The Company shall issue, in the name of the Participant (or, if applicable, the legatee(s), executor(s), personal representative(s), or distributee(s) of a deceased participant, or the assignee(s) of the Participant as provided in Section 12), stock certificates representing the total number of shares of Option Stock issuable pursuant to the exercise of any Option as soon as reasonably practicable after such exercise, which then shall become Owned Shares. 8. Terms and Conditions of Options. (a) Each Participant, and each other person described in Section 12, shall agree to such restrictions and conditions and other terms in connection with the exercise of an Option, including restrictions and conditions on the disposition of the Option Stock acquired upon the exercise thereof, as the Committee may deem appropriate and as are set forth in the Plan, the applicable Option Agreement, or in the Stockholders' Agreement. The certificates delivered to a Participant, or any other person described in Section 12, evidencing the shares of Option Stock acquired upon exercise of an Option shall bear a legend referring to the restrictions and conditions and other terms contained in the Plan, the applicable Option Agreement, or in the Stockholders' Agreement, and the Company may place a stop transfer order with its transfer agent against the transfer of such shares. (b) The obligation of the Company to sell and deliver Option Stock under the Plan shall be subject to the terms of the Stockholders' Agreement and all applicable laws, regulations, rules and approvals, including, but not by way of limitation, the effectiveness of a registration statement under the Securities Act of 1933, as amended (the "Securities Act"), if deemed necessary or appropriate by the Committee, with respect to the Option Stock or Options reserved for issuance or that may be offered under the Plan. Neither a Participant, nor any other person described in Section 12, shall have any rights as a stockholder with respect to any shares of Option Stock covered by an Option granted to, or exercised by, him until the date of delivery of a stock certificate to him for such shares. No adjustment, other than pursuant to subsection 11 hereof, shall be made for dividends or other rights for which the record date is prior to the date such stock certificate is delivered. (c) The following shall be conditions to the Company's obligation to issue or transfer shares to Participant after the exercise of the Option: (i) Participant has paid in 3 4 full for the shares with respect to which the Option was exercised and (ii) Participant has executed the Stockholders' Agreement. 9. Company's Repurchase of Owned Shares. (a) At any time following five years from the grant of the Options, or at such earlier time as may be specified in the applicable Option Agreement, the Participant shall have the right (the "Put Option"), exercisable by written notice to Company, to put any or all Owned Shares to the Company for repurchase. Each time that the Participant exercises the Put Option, the Redemption Value of the Participant's Owned Shares with respect to which the Put Option is exercised shall be converted to a Distribution Account on or before the Settlement Date (as hereafter defined), and shall be distributed according to the provisions of Section 10. (b) Upon the termination of Participant's employment for any reason, the Company shall have the option (the "Company Option"), exercisable by written notice to Participant within 180 days after such termination of employment, to purchase any or all Owned Shares and any or all Vested Option Rights not otherwise terminated pursuant to Section 6. Each time that the Company exercises the Company Option, the Redemption Value of the Participant's Owned Shares and Vested Option Rights (less the applicable exercise price for Vested Option Rights) with respect to which the Company Option is exercised shall be converted to a Distribution Account on or before the Settlement Date, and shall be distributed according to the provisions of Section 10. (c) "Redemption Value" shall mean, as it relates to Option Stock: (i) when there is a "Public Market for the Common Stock" (as hereinafter defined), the average of the high and low reported sales prices per share of the Company's Common Stock for each of the twenty trading days immediately prior to the date the Participant exercises his Put Option or the Company exercises its Company Option; or (ii) when there is not a Public Market for the Common Stock, a per share price of such Common stock based on the "Market Value of Equity" of the Company (as defined below) determined on the last day of the month in which the Participant exercises his Put Option or the Company exercises its Company Option. A "Public Market for the Shares" shall exist when at least 15% of the shares of Common Stock then outstanding have been sold pursuant to one or more effective registration statements under the Securities Act and shares of Common Stock are included for quotation on the National Association of Securities Dealers, Inc. Automated Quotation System or are listed on a national securities exchange. (d) The "Market Value of Equity" of the Company shall mean: [(EBITDA x 6.5) minus (Net Debt)], where: "EBITDA" equals the Company's earnings from operations before interest expense, taxes, and depreciation and amortization, determined in accordance with generally accepted accounting principles, consistently applied ("GAAP"); and 4 5 "Net Debt" equals the Company's total interest bearing indebtedness minus balance sheet "Cash" and Cash Equivalents, determined in accordance with GAAP. (e) The "Settlement Date" shall be a date within 30 days after the last day of the month in which the Participant exercises his Put Option or the Company exercises its Company Option. On the Settlement Date, Employee shall deliver to the Company any Owned Shares being purchased by the Company pursuant to such exercise free and clear of any liens or encumbrances (other than pursuant to the Stockholders' Agreement), and duly endorsed or with duly executed stock powers. 10. Distribution Account. The amount in a Participant's Distribution Account shall be distributed to the Participant in cash, (i) in five equal annual installment payments if the Settlement Date occurs before there is a Public Market for the Common Stock and (ii) on the Settlement Date if the Settlement Date occurs after there is a Public Market for the Common Stock; provided, however, to the extent the Company's credit facilities then in place prohibit or restrict distribution at the time(s) set forth above, distribution of a Participant's Distribution Account shall be made over such longer period or at such time as may be required under the terms of the Company's credit facilities then in effect. All amounts in the Distribution Account shall bear interest, as described in paragraph (c) below. Notwithstanding the foregoing, the Company may, in its sole discretion, at any time during the installment period, distribute the remaining amount of a Participant's Distribution Account in one or more lump sum cash payments, plus interest to the date of payment. The Company also may issue a promissory note evidencing its obligation to pay amounts in the Distribution Account. (a) Distribution of a Participant's Distribution Account shall commence no later than 60 days after the Settlement Date (the "Distribution Date"). In the event the Company is for any reason unable to purchase all shares available to be purchased on any date, the Company shall distribute to each Participant a ratable portion of the Participant's distribution in proportion to the number of shares beneficially owned by such Participant in relation to the number of shares beneficially owned by all Participants entitled to receive a distribution on such date. (b) If a Participant dies before complete distribution of his Distribution Account, the remaining value of the Participant's Distribution Account shall be distributed to the beneficiary designated by the Participant over the same period as distributions were being made to the Participant; except that, the Company may, in its sole discretion, determine to pay the remaining balance of the deceased Participant's Distribution Account (with interest to the date of payment) to the designated beneficiary in one or more lump sum payments at any time. If a Participant has not designated a beneficiary under the Plan, or if no designated beneficiary is living on the date of distribution hereunder, amounts distributable pursuant to this section shall be distributed to the Participant's estate. (c) Where distribution of a Participant's Distribution Account is made in installment payments, interest shall be credited to the amount in the Participant's Distribution Account at a floating rate per annum equal to one percent (1%) above the "Prime Rate" published in the Wall Street Journal from time to time during the 5 6 distribution period. Such interest shall accrue beginning on the Settlement Date and shall be credited to the Distribution Account quarterly. 11. Adjustments. Appropriate adjustment in the maximum number of shares of Option Stock subject to Options under the Plan and the Exercise Price with respect to Options shall be made to give effect to any increase or decrease in the number of shares of issued Common Stock resulting from a subdivision or consolidation of shares whether through reorganization, recapitalization, stock split, reverse stock split, spin-off, split-off, spin-out, or other distribution of assets to stockholders, stock distributions or combination of shares, assumption and conversion of outstanding Options due to an acquisition by the Company of the stock or assets of any other corporation, payment of stock dividends, other increase or decrease in the number of such shares outstanding effected without receipt of consideration by the Company, or any other occurrence for which the Committee determines an adjustment is appropriate, but not including an initial public offering or other capital infusion from any source. Except as described above, the existence of Options shall not affect in any way the right or power of the Company or its stockholders to make or authorize: (i) any reorganization, recapitalization, or other adjustments in the Company's capital structure, its ownership, or its business, (ii) any merger or consolidation of the Company, (iii) any issue or issuance of bonds, debentures, preferred, or prior preference stock ahead of or affecting any Common Stock of the Company, including the Class C Common stock, or the rights thereof, (iv) the dissolution or liquidation of the Company, (v) any sale or transfer of all or any part of the assets or business of the Company, or (vi) any other corporate act or proceeding whether of a similar or dissimilar character. On the basis of information known to the Company, the Committee shall make all determinations relating to the applicability and interpretation of this Section 11, and all such determinations shall be conclusive and binding. 12. Nontransferability. (a) Except as provided in subsection (b) next below, Options granted under the Plan, and any rights and privileges pertaining thereto, may not be transferred, assigned, pledged or hypothecated in any manner, by operation of law or otherwise, other than by will or by the laws of descent and distribution, and shall not be subject to execution, attachment or similar process. The granting of an Option shall impose no obligation upon the applicable Participant or any other person to exercise such Option. (b) Notwithstanding the provisions of subsection (a) above, an Option Agreement may permit the Participant who received the Option, at any time prior to his death, to assign all or any portion of an Option granted to him (together with his rights and obligations under Section 9) to: (i) his spouse or lineal descendants (whether or not adopted), (ii) the trustee of a trust for the primary benefit of the Participant, his spouse or lineal descendants, or (iii) any corporation, partnership, limited liability company or other business entity controlled by the Participant, his spouse or such lineal descendants. In such event, the spouse, lineal descendant, trustee, or business entity will be entitled to all of the rights of the Participant with respect to the assigned portion of such Option, and such portion of the Option will continue to be subject to all of the terms, conditions and restrictions applicable to the Option, as set forth herein and in the related Option Agreement immediately prior to the effective date of the assignment. Any such assignment will be permitted only if: (i) the Participant does not receive any 6 7 consideration therefor and (ii) the assignment is expressly permitted by the applicable Option Agreement as approved by the Committee. Any such assignment shall be evidenced by an appropriate written document executed by the Participant and the assignee, and a copy thereof shall be delivered to the Committee on or prior to the effective date of the assignment. 13. Indemnification of the Committee. In addition to such other rights of indemnification as they may have as members of the Board, or as members of the Committee, or as its delegates, the members of the Committee and its delegates shall be indemnified by the Company against (a) the reasonable expenses (as such expenses are incurred), including attorneys' fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding (or in connection with any appeal therein), to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan or any Option granted hereunder; and (b) against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee member or delegate is liable for gross negligence or willful misconduct in the performance of his duties. The Company may elect, at its own expense, to handle and defend such action, suit or proceeding. 14. No Contract of Employment. Neither the adoption of the Plan nor the grant of any Option shall be deemed to obligate the Company or any subsidiary to continue the employment of any Participant for any particular period, nor shall the granting of an Option constitute a request or consent to postpone the retirement date of any Participant. 15. Termination and Amendment of Plan. (a) The Board may at any time terminate, suspend or modify the Plan, without the authorization of stockholders to the extent allowed by law. (b) No termination, suspension or modification of the Plan shall adversely affect any right acquired by any Participant, or any other person designated in Section 12, under an Option granted before the effective date of such termination, suspension or modification, unless such Participant or other person shall consent; but it shall be conclusively presumed that any adjustment for changes in capitalization as provided for herein do not adversely affect any such right. 16. Effective Date of Plan. The Plan shall be effective as of January 1, 1998. 17. Withholding Taxes. Whenever the Company proposes or is required to issue or transfer shares of Option Stock to a Participant, or any other person designated in Section 12, under the Plan, the Company shall have the right to require the Participant or other person to remit to the Company an amount sufficient to satisfy all federal, state and local withholding tax requirements prior to the delivery of any certificate or certificates for such shares. If such certificates have been delivered prior to the time a withholding obligation arises, the Company shall have the right to require the Participant or other person to remit to the Company an amount sufficient to satisfy all federal, state or local withholding tax requirements at the time such 7 8 obligation arises and to withhold from any other amounts payable to the Participant or other person, as compensation or otherwise, as necessary. Whenever payments under the Plan are to be made to a Participant or any other person, in cash, such payments shall be net of any amounts sufficient to satisfy all federal, state and local withholding tax requirements. In connection with an Option in the form of shares of Option Stock, a Participant or any other person may elect to satisfy his tax withholding obligation incurred with respect to the Taxable Date of the Option by (a) directing the Company to withhold a portion of the shares of Option Stock otherwise distributable to the Participant or other person, or (b) by transferring to the Company a certain number of shares, such shares being valued at the Fair Market Value thereof on the Taxable Date. Notwithstanding any provision of the Plan to the contrary, a Participant's or other person's election pursuant to the preceding sentence (a) must be made on or prior to the Taxable Date with respect to such Option and (b) must be irrevocable. In lieu of a separate election on each Taxable Date of an Option, a Participant or any other person may make a blanket election with the Committee that shall govern all future Taxable Dates until revoked by the Participant or any other person. Taxable Date means the date a Participant or any other person recognizes income with respect to an Option under the Code or any applicable state income tax law. 18. Governing Law. The Plan, and all Option Agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Utah. 19. Successors. In the event of a sale of substantially all of the assets of the Company, or a merger, consolidation or share exchange involving the Company, all obligations of the Company under the Plan with respect to Options granted hereunder shall be binding on the successor to the transaction. Employment of a Participant with such successor shall be considered employment of the Participant with the Company for purposes of the Plan. 20. Notices. Notices given pursuant to the Plan shall be in writing and shall be deemed received when personally delivered, or three days after mailed by United States registered or certified mail, return receipt requested, addressee only, postage prepaid. Notice to the Company shall be directed to: Huntsman Packaging Corporation 500 Huntsman Way Salt Lake City, Utah 84108 Attention: Mr. Richard P. Durham, President and C.E.O. Notices to or with respect to a Participant shall be directed to the Participant, or the executors, personal representatives or distributees of a deceased Participant, or the assignees of a Participant, at the Participant's home address on the records of the Company. 21. Fractional Shares. If at any time the exercise of the Option would, except for this provision, require the issue or transfer of fractional shares, the number of shares of Option Stock shall be rounded down to the next whole number. 8 EX-21 5 SUBSIDIARIES OF HUNTSMAN PACKAGING. 1 EXHIBIT 21 HUNTSMAN PACKAGING CORPORATION SUBSIDIARIES STATES OF INCORPORATION AND QUALIFICATION
COMPANY NAME & STATE/ STATE/COUNTRY COUNTRY OF INCORPORATION QUALIFICATIONS - ------------------------ -------------- Huntsman Bulk Packaging Corporation (Utah) .................................Utah Huntsman Film Products of Canada Ltd. (Ontario) .........................Ontario Huntsman Film Products of Mexico, Inc. (Utah) ..............................Utah Huntsman Container Corporation International (Utah) ........................Utah Huntsman Packaging Georgia, Inc. (Georgia) ..............................Georgia Huntsman Preparatory, Inc. (Utah) ..........................................Utah Huntsman Film Products GmbH (Germany) ...................................Germany Huntsman Film Products Pty. Ltd. (Australia) ..........................Australia HPC Investment, Inc. (Utah) ................................................Utah Huntsman Packaging of Canada, LLC (Utah) .......................British Columbia Utah Huntsman Edison Films Corporation (Delaware) ...........................Delaware Georgia Oklahoma Virginia Aspen Industrial, S.A. DE C.V. (Mexico) ..................................Mexico Edison Exports, Inc. FSC Limited (Jamaica) ..............................Jamaica Edison Plastics International, Inc. (Delaware) .........................Delaware Nacional de Envases Plasticos, S.A. DE C.V. (Mexico) .....................Mexico Mexicana de Tintas, S.A. (Mexico) ........................................Mexico Plastihul, S.A. de C.V. (Mexico) .........................................Mexico
EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HUNTSMAN PACKAGING CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1998 DEC-31-1998 19,217 0 79,825 2,570 65,892 188,523 352,154 51,820 734,272 95,168 513,530 0 0 63,676 6,911 734,272 651,957 651,957 532,410 70,083 (879) 0 37,519 11,066 8,533 2,533 5,805 0 0 8,338 0 0
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