-----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, BwRI/XScxAcdsVM7cUpOc5bX7Hf7hCg2zBBI7qsSKLMpbs8+q1jIbhYj31SKRH2H UctZI+yWd9iK6mL5ahBXeA== 0000950149-99-002015.txt : 19991117 0000950149-99-002015.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950149-99-002015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991115 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-Q SEC ACT: SEC FILE NUMBER: 333-40067 FILM NUMBER: 99753070 BUSINESS ADDRESS: STREET 1: 500 HUNTSMAN WAY CITY: SALT LAKE CITY STATE: UT ZIP: 84108 BUSINESS PHONE: 8015325200 10-Q 1 QUARTERLY REPORT FOR QUARTER ENDED SEPT. 30, 1999 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 -------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission file number 333-40067 HUNTSMAN PACKAGING CORPORATION (Exact name of registrant as specified in its charter) Utah 87-0496065 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 500 Huntsman Way Salt Lake City, Utah 84108 (801) 584-5700 (Address of principal executive offices and telephone number) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. On October 31, 1999, there were 1,000,001 outstanding shares of the registrant's Class A Common Stock, 6,999 outstanding shares of the registrant's Class B Common Stock and 49,511 outstanding shares of the registrant's Class C Common Stock. ================================================================================ 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS AS OF SEPTEMBER 30, 1999 AND DECEMBER 31, 1998 (DOLLARS IN THOUSANDS) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------- September 30, December 31, 1999 1998 ------------- ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 13,677 $ 19,217 Receivables, net of allowances of $1,610 and $2,570, respectively 116,225 89,381 Inventories 77,177 65,892 Income taxes receivable 3,579 7,365 Deferred income taxes 2,724 3,605 Prepaid expenses and other 3,401 3,063 --------- --------- Total current assets 216,783 188,523 PLANT AND EQUIPMENT - Net 306,780 300,334 INTANGIBLE ASSETS - Net 214,850 221,290 OTHER ASSETS 23,881 24,125 --------- --------- TOTAL ASSETS $ 762,294 $ 734,272 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 52,621 $ 43,186 Accrued liabilities 36,299 33,576 Current portion of long-term debt 15,936 11,406 Due to affiliates 4,730 7,000 --------- --------- Total current liabilities 109,586 95,168 LONG-TERM DEBT - Net of current portion 504,229 513,530 OTHER LIABILITIES 13,843 11,394 DEFERRED INCOME TAXES 46,203 42,423 --------- --------- Total liabilities 673,861 662,515 --------- --------- REDEEMABLE COMMON STOCK - Class C nonvoting, no par value; 60,000 shares authorized; 49,511 and 11,700 shares outstanding in 1999 and 1998, respectively, net of related stockholder notes receivable of $2,749 in 1999 2,472 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 27,281 13,731 Stockholder note receivable (434) (434) Foreign currency translation adjustment (4,562) (6,386) --------- --------- Total stockholders' equity 85,961 70,587 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 762,294 $ 734,272 ========= =========
See notes to consolidated condensed financial statements. 2 3 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED INCOME STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) (UNAUDITED)
- -------------------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------- ----------------------- 1999 1998 1999 1998 --------- --------- --------- --------- SALES - Net $ 200,529 $ 183,633 $ 561,765 $ 481,878 COST OF SALES 161,335 149,912 445,506 399,751 --------- --------- --------- --------- Gross profit 39,194 33,721 116,259 82,127 --------- --------- --------- --------- OPERATING EXPENSES: Administration and other 11,393 12,217 34,502 26,059 Sales and marketing 6,324 6,598 18,811 17,908 Research and development 1,367 865 4,228 2,763 Plant closing costs 2,497 3,996 2,497 3,996 --------- --------- --------- --------- Total operating expenses 21,581 23,676 60,038 50,726 --------- --------- --------- --------- OPERATING INCOME 17,613 10,045 56,221 31,401 INTEREST EXPENSE (11,216) (10,666) (32,273) (24,886) OTHER INCOME (EXPENSE) - Net 514 (1,525) 323 (1,441) --------- --------- --------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 6,911 (2,146) 24,271 5,074 INCOME TAX PROVISION 2,790 473 10,721 3,966 --------- --------- --------- --------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 4,121 (2,619) 13,550 1,108 INCOME FROM DISCONTINUED OPERATIONS (net of income taxes) 582 GAIN (LOSS) ON SALE OF DISCONTINUED OPERATIONS (net of income taxes) (91) 5,209 --------- --------- --------- --------- NET INCOME (LOSS) $ 4,121 $ (2,710) $ 13,550 $ 6,899 ========= ========= ========= =========
See notes to consolidated condensed financial statements. 3 4 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------- 1999 1998 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 13,550 $ 6,899 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 25,866 20,120 Deferred income taxes 4,661 4,050 Reduction in provision for losses on accounts receivable (960) (951) Noncash compensation expense 270 Gain on sale of discontinued operations (5,209) Provision for write-down of long-term assets 1,370 411 Loss on disposal of assets 102 461 Changes in assets and liabilities - net of effects of acquisitions: Receivables (25,884) 2,262 Inventories (11,285) 13,584 Prepaid expenses and other 643 (1,470) Other assets 2,206 (7,234) Trade accounts payable 9,435 (10,388) Accrued liabilities 1,353 5,872 Due to affiliates (2,270) (8,411) Income taxes receivable 3,786 (6,772) Other liabilities 2,449 (1,495) --------- --------- Net cash provided by operating activities 25,292 11,729 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 40 32,631 Payments for purchase of Blessings Corporation, net of cash acquired (284,028) Payments for certain net assets of Ellehammer Industries (7,877) Capital expenditures for plant and equipment (25,719) (35,419) --------- --------- Net cash used in investing activities (25,679) (294,693) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of Class C nonvoting common stock 1,032 1,160 Principal payments on borrowings (8,395) (1,171) Proceeds from issuance of long-term debt 328 285,000 --------- --------- Net cash provided by (used in) financing activities (7,035) 284,989 --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,882 1,623 --------- --------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (5,540) 3,648 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 19,217 12,411 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,677 $ 16,059 ========= ========= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest $ 24,263 $ 19,512 ========= ========= Income taxes $ (2,906) $ 6,755 ========= =========
See notes to consolidated condensed financial statements. 4 5 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - -------------------------------------------------------------------------------- 1. BASIS OF PRESENTATION The accompanying consolidated condensed financial statements have been prepared, without audit, in accordance with generally accepted accounting principles and pursuant to the rules and regulations of the Securities and Exchange Commission. The information reflects all normal recurring adjustments that, in the opinion of management, are necessary for a fair presentation of the financial position, results of operations and cash flows of Huntsman Packaging Corporation and its subsidiaries ("Huntsman Packaging") for the periods indicated. Results of operations for interim periods are not necessarily indicative of results of operations to be expected for a full fiscal year. Certain information in footnote disclosures normally included in financial statements presented in accordance with generally accepted accounting principles has been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission. These statements should be read in conjunction with Huntsman Packaging's Annual Report on Form 10-K for the year ended December 31, 1998. 2. INVENTORIES Inventories are valued at the lower of cost (on a first-in, first-out basis) or market value. Inventories as of September 30, 1999 and December 31, 1998 consisted of the following (in thousands):
September 30, December 31, 1999 1998 ------------- ------------ Finished goods $41,531 $37,830 Raw materials 29,537 21,318 Work-in-process 6,109 6,744 ------- ------- Total $77,177 $65,892 ======= =======
3. ACQUISITIONS ELLEHAMMER INDUSTRIES LTD. AND ELLEHAMMER PACKAGING INC. - On March 12, 1998, we acquired certain assets and assumed certain liabilities of Ellehammer Industries Ltd. and Ellehammer Packaging Inc. (collectively, the "Ellehammer Acquisition") for cash of approximately $7.9 million. The acquisition was accounted for using the purchase method of accounting. Accordingly, results of operations are included in the accompanying consolidated condensed financial statements from the date of acquisition. We did not record any goodwill in this acquisition. BLESSINGS CORPORATION - On May 19, 1998, in accordance with an Agreement and Plan of Merger dated, April 1, 1998, we acquired Blessings Corporation ("Blessings") by merging our wholly-owned subsidiary, VA Acquisition Corp., with and into Blessings (the "Blessings Acquisition"). Blessings then became our wholly-owned subsidiary and Blessings changed its name to Huntsman Edison Films Corporation. The aggregate purchase price for Blessings was approximately $270 million (including the assumption of approximately $57 million of Blessings' existing indebtedness). In connection with the Blessings Acquisition, we incurred transaction costs of 5 6 approximately $17 million. The financing for the Blessings Acquisition was provided under our $510 million Amended and Restated Credit Agreement. The acquisition was accounted for using the purchase method of accounting. Accordingly, the results of operations are included in the accompanying consolidated financial statements from the date of acquisition. We recorded goodwill and intangible assets of approximately $168.8 million in this acquisition, which are being amortized on a straight-line basis over 10 to 30 years. The following pro forma information for the nine months ended September 30, 1998 presents our results of operations as if the Blessings Acquisition had occurred at the beginning of 1998. The results of operations give effect to certain adjustments, including amortization of intangible assets, depreciation expense, interest expense on debt borrowings to fund the acquisition and income taxes. The pro forma results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisition been made at the beginning of the applicable period or of the results which may occur in the future. Pro forma results of operations (in thousands):
Nine Months Ended September 30, 1998 ------------------ Sales - net $ 549,163 Operating income 34,902 Loss before discontinued operations (2,822)
KCL CORPORATION - On October 18, 1999, subsequent to the end of the third quarter, we acquired certain assets and assumed certain liabilities of KCL Corporation and KCL Promotional Packaging Products, Ltd. for cash of approximately $11.5 million. The acquisition will be accounted for using the purchase method of accounting. 4. PLANT CLOSING COSTS During the nine months ended September 30, 1999, we announced our plan to cease operations at one of our facilities located in Mexico City, Mexico. Included in 1999 operating expenses is a $2.3 million charge, comprised of a $1.3 million write-off of impaired goodwill and fixed assets, and a $1.0 million charge for reduction of work force costs associated with the elimination of 110 full-time equivalent employees. In addition, we announced our plan to cease the production of one of our product lines at our Kent, Washington facility. Included in 1999 operating expenses is a $0.2 million charge for the write-off of impaired fixed assets and for reduction of work force costs associated with the elimination of 36 full-time equivalent employees. During 1998, we announced our plan to cease operations at our Clearfield, Utah facility. Included in 1998 operating expenses is a $4.0 million charge, comprised of a $0.4 million provision for the write-off of impaired goodwill, a $0.2 million charge for reduction of work force costs associated with the elimination of 52 full-time equivalent employees, and an accrual of $3.4 million for estimated future net lease and other costs incurred to close the facility. 5. RECENT ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that derivative instruments be recorded in the balance sheet as either an asset or liability measured at its fair market value, and that changes in the derivative's fair value 6 7 be recognized currently in earnings, unless specific hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years beginning after June 15, 2000. We expect that the adoption of this statement will not have a material effect on our consolidated financial statements. 6. COMPREHENSIVE INCOME The following table reports comprehensive income for the three and nine months ended September 30, 1999 and 1998 (in thousands).
Three Months Ended Nine Months Ended September 30, September 30, ----------------- ------------------ 1999 1998 1999 1998 ------ ------- ------- ------- Net income $4,121 $(2,710) $13,550 $ 6,899 Foreign currency translation adjustments 1,364 (146) 1,824 (891) ------ ------- ------- ------- Comprehensive income $5,485 $(2,856) $15,374 $ 6,008 ====== ======= ======= =======
7. OTHER INCOME (EXPENSE) We hold investments in marketable securities that are designated as trading securities. For the three and nine months ended September 30, 1999, unrealized losses of approximately $0.1 million and $0.3 million, respectively, on these investments are included in other income (expense) - net. 8. OPERATING SEGMENTS Operating segments are components of our company for which separate financial information is available that is evaluated regularly by our chief operating decision maker in deciding how to allocate resources and in assessing performance. This information is reported on the same basis that is used internally for evaluating segment performance. We have three reportable operating segments: design products, industrial films and specialty films. The design products segment produces printed rollstock, bags and sheets used to package products in the food and other industries. The industrial films segment produces stretch films, used for industrial unitizing and containerization, and PVC films, used to wrap meat, cheese and produce. The specialty films segment produces converter films that are sold to other flexible packaging manufacturers for additional fabrication, barrier films that contain and protect food and other products, and other films used in the personal care, medical, agriculture and horticulture industries. Sales and transfers between our segments are eliminated in consolidation. We evaluate performance of the operating segments based on profit or loss before income taxes, not including nonrecurring gains or losses. Our reportable segments are managed separately with separate management teams, because each segment has differing products, customer requirements, technology and marketing strategies. 7 8 Segment profit or loss and segment assets as of and for the three months ended September 30, 1999 and 1998 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL 1999 Net sales to customers $ 43,534 $ 38,765 $118,230 $200,529 Intersegment sales 2,881 1,425 1,360 $ (5,666) -------- -------- -------- --------- -------- Total net sales 46,415 40,190 119,590 (5,666) 200,529 Depreciation and amortization 2,078 1,148 4,764 983 8,973 Interest expense 895 88 3,486 6,747 11,216 Segment profit 1,739 2,893 14,919 (10,143) 9,408 Plant closing costs 2,497 2,497 Segment total assets 160,586 96,343 445,019 60,346 762,294 Capital expenditures 973 1,330 5,416 884 8,603 1998 Net sales to customers $ 40,261 $ 36,213 $107,159 $183,633 Intersegment sales 361 758 769 $ (1,888) -------- -------- -------- --------- -------- Total net sales 40,622 36,971 107,928 (1,888) 183,633 Depreciation and amortization 1,500 726 5,290 908 8,424 Interest expense 21 232 8 10,405 10,666 Segment profit 6,504 (196) 12,367 (16,825) 1,850 Plant closing costs (297) 4,293 3,996 Segment total assets 137,575 84,076 444,888 58,637 725,176 Capital expenditures 4,015 1,377 7,084 210 12,686
8 9 Segment profit or loss for the nine months ended September 30, 1999 and 1998 are presented in the following table (in thousands):
DESIGN INDUSTRIAL SPECIALTY CORPORATE/ PRODUCTS FILMS FILMS OTHER TOTAL -------- ---------- --------- ---------- -------- 1999 Net sales to customers $122,017 $110,046 $329,702 $561,765 Intersegment sales 5,356 2,265 3,918 $(11,539) -------- -------- -------- -------- -------- Total net sales 127,373 112,311 333,620 (11,539) 561,765 Depreciation and amortization 5,929 3,417 14,029 2,491 25,866 Interest expense 2,473 262 10,265 19,273 32,273 Segment profit 5,740 11,600 43,093 (33,665) 26,768 Plant closing costs 2,497 2,497 Capital expenditures 4,958 4,724 13,307 2,730 25,719 1998 Net sales to customers $ 96,526 $114,179 $271,173 $481,878 Intersegment sales 1,153 3,359 962 $ (5,474) -------- -------- -------- -------- -------- Total net sales 97,679 117,538 272,135 (5,474) 481,878 Depreciation and amortization 3,030 3,450 10,706 2,934 20,120 Interest expense 23 404 32 24,427 24,886 Segment profit 8,996 7,325 30,971 (38,222) 9,070 Plant closing costs (297) 4,293 3,996 Capital expenditures 11,409 4,732 18,204 1,074 35,419
A reconciliation of the totals reported for the operating segments to our totals reported in the consolidated condensed financial statements is as follows (in thousands):
1999 1998 ---- ---- 3 months 9 months 3 months 9 months ------- -------- -------- -------- PROFIT OR LOSS Total profit for reportable segments $19,551 $ 60,433 $ 18,675 $ 47,292 Plant closing costs (2,497) (2,497) (3,996) (3,996) Unallocated amounts: Corporate expenses (3,396) (14,392) (6,420) (13,795) Interest expense (6,747) (19,273) (10,405) (24,427) ------- -------- -------- -------- Income before taxes and discontinued operations $ 6,911 $ 24,271 $ (2,146) $ 5,074 ======= ======== ======== ======== 1999 1998 ---- ---- ASSETS Total assets for reportable segments $701,948 $666,539 Intangible assets not allocated to segments 16,494 14,898 Other unallocated assets 43,852 43,739 -------- -------- Total consolidated assets $762,294 $725,176 ======== ========
9 10 9. STOCK SALE AND CANCELLATION OF STOCK OPTIONS During the nine months ended September 30, 1999, we sold 12,188 shares of Class C common stock to certain officers of Huntsman Packaging for $100 per share, the estimated fair value of the shares on the date of purchase. In addition, we redeemed 600 shares of Class C common stock for $100 per share from one officer. On February 22, 1999, we entered into Option Cancellation and Restricted Stock Purchase Agreements with certain officers of Huntsman Packaging holding options to purchase 26,223 shares of Class C common stock. Under the agreements, options to purchase an aggregate of 26,223 shares of Class C common stock were cancelled and 26,223 shares of Class C common stock ("Restricted Class C Common") were sold to certain option holders for $100 per share, the estimated fair market value of the shares on the date of purchase. The purchase price for the shares was paid by delivery of promissory notes to Huntsman Packaging. After the cancellation, 10,489 options to purchase Class C Common Stock remain outstanding. The 26,223 shares of Restricted Class C Common purchased are subject to repurchase rights of Huntsman Packaging that will lapse under conditions substantially the same as the vesting conditions of the canceled options. The repurchase rights for 13,117 shares of Restricted Class C Common lapse on a straight-line basis over a five-year period commencing January 1, 1998. The repurchase rights for the remaining 13,116 shares of Restricted Class C Common lapse over the same five years, subject to achievement of certain Huntsman Packaging performance criteria, or if the performance criteria are not met, on December 31, 2007. The shares of Restricted Class C Common are subject to essentially the same restrictions and redemption options as the other outstanding Class C common shares. Additionally, options to purchase 2,622 shares of Class C common stock were cancelled during the nine months ended September 30, 1999. 10. REDEEMABLE COMMON STOCK Redeemable common stock includes Restricted Class C Common and is presented net of related stockholder notes receivable of $2.7 million. Included in the stockholder notes receivable is accrued interest on the notes of $0.1 million. Redeemable common stock also includes accrued noncash compensation of $0.3 million relating to performance-based stock options. 11. CONSOLIDATING CONDENSED FINANCIAL STATEMENTS The following condensed consolidating financial statements present, in separate columns, financial information for (i) Huntsman Packaging (on a parent only basis), with its investment in its subsidiaries recorded under the equity method, (ii) guarantor subsidiaries (as specified in the Indenture, dated September 30, 1997 (the "Indenture") relating to Huntsman Packaging's $125 million senior subordinated notes (the "Notes")) on a combined basis, with any investments in non-guarantor subsidiaries specified in the Indenture recorded under the equity method, (iii) direct and indirect non-guarantor subsidiaries on a combined basis, (iv) the eliminations necessary to arrive at the information for Huntsman Packaging and its subsidiaries on a consolidated basis, and (v) Huntsman Packaging on a consolidated basis, in each case as of September 30, 1999 and December 31, 1998 and for the three and nine months ended September 30, 1999 and 1998. The Notes are fully and unconditionally guaranteed on a joint and several basis by each guarantor subsidiary and each guarantor subsidiary is wholly-owned, directly or indirectly, by Huntsman Packaging. There are no contractual restrictions limiting transfers of cash from guarantor and non-guarantor subsidiaries to Huntsman Packaging. The consolidating condensed financial statements are presented herein, rather than separate financial statements for each of the guarantor 10 11 subsidiaries, because management believes that separate financial statements relating to the guarantor subsidiaries are not material to investors. On January 1, 1999, two of our guarantor subsidiary companies, Huntsman Deerfield Films Corporation and Huntsman United Films Corporation, were merged with and into Huntsman Packaging. Accordingly, these former guarantor subsidiary companies are now included as part of the "Huntsman Packaging Corporation Parent Only" column for all periods presented. 11 12 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 812 $ 52 $ 12,813 $ 13,677 Receivables - net 74,955 19,726 21,544 116,225 Inventories 59,420 6,677 11,080 77,177 Income taxes receivable 2,539 195 845 3,579 Deferred income taxes 3,726 329 (1,331) 2,724 Prepaid expenses and other 2,797 293 311 3,401 --------- --------- --------- --------- Total current assets 144,249 27,272 45,262 216,783 PLANT AND EQUIPMENT - Net 182,178 73,313 51,289 306,780 INTANGIBLE ASSETS - Net 53,281 142,966 18,603 214,850 INVESTMENT IN SUBSIDIARIES 55,324 $(55,324) OTHER ASSETS 17,513 144 6,224 23,881 --------- --------- --------- -------- --------- TOTAL ASSETS $ 452,545 $ 243,695 $ 121,378 $(55,324) $ 762,294 ========= ========= ========= ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 34,023 $ 8,260 $ 10,338 $ 52,621 Accrued liabilities 27,448 1,808 7,043 36,299 Current portion of long-term debt 12,561 3,375 15,936 Due to (from) affiliates (28,988) 23,551 10,167 4,730 --------- --------- --------- --------- Total current liabilities 45,044 33,619 30,923 109,586 LONG-TERM DEBT - Net of current portion 276,949 184,000 43,280 504,229 OTHER LIABILITIES 9,453 2,875 1,515 13,843 DEFERRED INCOME TAXES 32,666 11,725 1,812 46,203 --------- --------- --------- --------- Total liabilities 364,112 232,219 77,530 673,861 --------- --------- --------- --------- REDEEMABLE COMMON STOCK 2,472 2,472 --------- --------- STOCKHOLDERS' EQUITY: Common stock 63,676 6,357 29,241 $(35,598) 63,676 Retained earnings 27,281 5,130 17,612 (22,742) 27,281 Stockholder note receivable (434) (434) Foreign currency translation adjustment (4,562) (11) (3,005) 3,016 (4,562) --------- --------- --------- -------- --------- Total stockholders' equity 85,961 11,476 43,848 (55,324) 85,961 --------- --------- --------- -------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 452,545 $ 243,695 $ 121,378 $(55,324) $ 762,294 ========= ========= ========= ======== =========
12 13 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED BALANCE SHEET DECEMBER 31, 1998 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------------- HUNTSMAN CONSOLIDATED PACKAGING HUNTSMAN CORPORATION COMBINED COMBINED PACKAGING (PARENT ONLY) GUARANTORS NON-GUARANTORS ELIMINATIONS CORPORATION ------------- ---------- -------------- ------------ ------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 7,381 $ 525 $ 11,311 $ 19,217 Receivables 59,667 13,650 16,064 89,381 Inventories 50,243 5,994 9,655 65,892 Income taxes receivable 4,230 1,868 1,267 7,365 Deferred income taxes 4,059 803 (1,257) 3,605 Prepaid expenses and other 2,090 680 293 3,063 -------- -------- -------- -------- Total current assets 127,670 23,520 37,333 188,523 PLANT AND EQUIPMENT - Net 173,850 73,589 52,895 300,334 INTANGIBLE ASSETS - Net 55,142 147,140 19,008 221,290 INVESTMENT IN SUBSIDIARIES 42,959 $(42,959) OTHER ASSETS 17,582 143 6,400 24,125 -------- -------- -------- -------- -------- TOTAL ASSETS $417,203 $244,392 $115,636 $(42,959) $734,272 ======== ======== ======== ========= ======== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade accounts payable $ 26,698 $ 6,760 $ 9,728 $ 43,186 Accrued liabilities 25,064 2,401 6,111 33,576 Current portion of long-term debt 8,875 2,531 11,406 Due to (from) affiliates (21,224) 18,111 10,113 7,000 --------- -------- -------- -------- Total current liabilities 39,413 27,272 28,483 95,168 LONG-TERM DEBT - Net of current portion 273,519 194,200 45,811 513,530 OTHER LIABILITIES 6,740 3,171 1,483 11,394 DEFERRED INCOME TAXES 25,774 13,658 2,991 42,423 -------- -------- -------- -------- Total liabilities 345,446 238,301 78,768 662,515 -------- -------- -------- -------- REDEEMABLE COMMON STOCK 1,170 1,170 -------- -------- STOCKHOLDERS' EQUITY: Common stock 63,676 6,357 29,241 $(35,598) 63,676 Retained earnings 13,731 (255) 12,641 (12,386) 13,731 Shareholder note receivable (434) (434) Foreign currency translation adjustments (6,386) (11) (5,014) 5,025 (6,386) -------- -------- --------- -------- --------- Total stockholders' equity 70,587 6,091 36,868 (42,959) 70,587 -------- -------- -------- --------- -------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $417,203 $244,392 $115,636 $(42,959) $734,272 ======== ======== ======== ========= ========
13 14 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------ Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ SALES - Net $ 136,714 $ 38,169 $ 31,312 $(5,666) $ 200,529 COST OF SALES 115,376 27,007 24,618 (5,666) 161,335 --------- -------- -------- ------- --------- Gross profit 21,338 11,162 6,694 39,194 OPERATING EXPENSES 13,193 3,265 5,123 21,581 --------- -------- -------- --------- OPERATING INCOME 8,145 7,897 1,571 17,613 INTEREST EXPENSE (6,780) (3,480) (956) (11,216) EQUITY IN EARNINGS OF SUBSIDIARIES 2,724 (2,724) OTHER INCOME 122 392 514 --------- -------- -------- --------- INCOME BEFORE INCOME TAXES 4,211 4,417 1,007 (2,724) 6,911 INCOME TAX PROVISION 90 2,345 355 2,790 --------- -------- -------- ------- --------- NET INCOME $ 4,121 $ 2,072 $ 652 $(2,724) $ 4,121 ========= ======== ======== ======= =========
14 15 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED INCOME STATEMENT FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation --------- -------- -------- -------- --------- SALES - Net $ 123,779 $ 35,207 $ 26,535 $ (1,888) $ 183,633 COST OF SALES 102,327 28,972 20,501 (1,888) 149,912 --------- -------- -------- -------- --------- Gross profit 21,452 6,235 6,034 33,721 OPERATING EXPENSES 19,135 2,311 2,230 23,676 --------- -------- -------- --------- OPERATING INCOME 2,317 3,924 3,804 10,045 INTEREST EXPENSE (5,406) (4,422) (838) (10,666) EQUITY IN EARNINGS OF SUBSIDIARIES (211) 211 OTHER EXPENSE (100) (7) (1,418) (1,525) --------- -------- -------- -------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (3,400) (505) 1,548 211 (2,146) INCOME TAX PROVISION (BENEFIT) (781) 116 1,138 473 --------- -------- -------- -------- --------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS (2,619) (621) 410 211 (2,619) LOSS ON SALE OF DISCONTINUED OPERATIONS (net of income taxes) (91) (91) --------- -------- -------- -------- --------- NET INCOME (LOSS) $ (2,710) $ (621) $ 410 $ 211 $ (2,710) ========= ======== ======== ======== =========
15 16 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ SALES - Net $ 382,863 $ 104,151 $ 86,290 $(11,539) $ 561,765 COST OF SALES 316,822 73,432 66,791 (11,539) 445,506 --------- --------- -------- -------- --------- Gross profit 66,041 30,719 19,499 116,259 OPERATING EXPENSES 41,533 8,634 9,871 60,038 --------- --------- -------- --------- OPERATING INCOME 24,508 22,085 9,628 56,221 INTEREST EXPENSE (19,319) (10,245) (2,709) (32,273) EQUITY IN EARNINGS OF SUBSIDIARIES 10,356 (10,356) OTHER INCOME (EXPENSE) (308) 5 626 323 --------- --------- -------- -------- --------- INCOME BEFORE INCOME TAXES 15,237 11,845 7,545 (10,356) 24,271 INCOME TAX PROVISION 1,687 6,460 2,574 10,721 --------- --------- -------- -------- --------- NET INCOME $ 13,550 $ 5,385 $ 4,971 $(10,356) $ 13,550 ========= ========= ======== ======== =========
16 17 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED INCOME STATEMENT FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ SALES - Net $ 373,590 $ 51,035 $ 62,727 $(5,474) $ 481,878 COST OF SALES 312,637 42,188 50,400 (5,474) 399,751 --------- -------- -------- ------- --------- Gross profit 60,953 8,847 12,327 82,127 OPERATING EXPENSES 42,222 3,342 5,162 50,726 --------- -------- -------- --------- OPERATING INCOME 18,731 5,505 7,165 31,401 INTEREST EXPENSE (17,224) (6,437) (1,225) (24,886) EQUITY IN EARNINGS OF SUBSIDIARIES 931 (931) OTHER INCOME (EXPENSE) 228 7 (1,676) (1,441) --------- -------- -------- ------- --------- INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS 2,666 (925) 4,264 (931) 5,074 INCOME TAX PROVISION 976 359 2,631 3,966 --------- -------- -------- ------- --------- INCOME (LOSS) BEFORE DISCONTINUED OPERATIONS 1,690 (1,284) 1,633 (931) 1,108 INCOME FROM DISCONTINUED OPERATIONS (net of income taxes) 582 582 GAIN ON SALE OF DISCONTINUED OPERATIONS (net of income taxes) 5,209 5,209 --------- -------- -------- ------- --------- NET INCOME (LOSS) $ 6,899 $ (1,284) $ 2,215 $ (931) $ 6,899 ========= ======== ======== ======= =========
17 18 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 6,718 $ 14,741 $ 3,833 $ 25,292 -------- -------- -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 32 8 40 Capital expenditures for plant and equipment (17,955) (5,014) (2,750) (25,719) -------- -------- -------- -------- Net cash used in investing activities (17,923) (5,014) (2,742) (25,679) -------- -------- -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,032 1,032 Proceeds from issuance (payments) of long-term debt 3,820 (10,200) (1,687) (8,067) -------- -------- -------- -------- Net cash provided by (used in) financing activities 4,852 (10,200) (1,687) (7,035) -------- -------- -------- -------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (216) 2,098 1,882 -------- -------- -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,569) (473) 1,502 (5,540) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,381 525 11,311 19,217 -------- -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 812 $ 52 $ 12,813 $ 13,677 ======== ======== ======== ========
18 19 HUNTSMAN PACKAGING CORPORATION AND SUBSIDIARIES CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 (IN THOUSANDS) (UNAUDITED)
- ------------------------------------------------------------------------------------------------------------------------------- Huntsman Consolidated Packaging Combined Combined Huntsman Corporation Guarantor Non-Guarantor Packaging (Parent Only) Subsidiaries Subsidiaries Eliminations Corporation ------------- ------------ ------------- ------------ ------------ CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 3,968 $ 3,706 $ 4,055 $ 11,729 --------- -------- -------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of assets 32,631 32,631 Payments for purchase of Blessings Corporation, net of cash acquired (285,699) 99 1,572 (284,028) Payments for certain net assets of Ellehammer Industries (7,877) (7,877) Capital expenditures for plant and equipment (27,226) (2,521) (5,672) (35,419) --------- -------- -------- --------- Net cash used in investing activities (288,171) (2,422) (4,100) (294,693) --------- -------- -------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock 1,160 1,160 Principal payments on borrowings (1,171) (1,171) Proceeds from issuance of long-term debt 285,000 285,000 --------- -------- -------- --------- Net cash provided by financing activities 284,989 284,989 --------- -------- -------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 1,031 (14) 606 1,623 --------- -------- -------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS 1,817 1,270 561 3,648 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,206 19 11,186 12,411 --------- -------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,023 $ 1,289 $ 11,747 $ 16,059 ========= ======== ======== =========
19 20 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this section is to discuss and analyze our consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 1998 (the "1998 10-K"). This section contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under "Cautionary Statement for Forward-Looking Information" below and elsewhere in this report. GENERAL Huntsman Packaging Corporation derives its revenues, earnings and cash flows from the sale of film and flexible packaging products throughout the world. Huntsman Packaging manufactures these products at its facilities located in North America, Europe and Australia. Our sales have grown primarily as a result of strategic acquisitions made over the past several years, increased levels of production at acquired facilities and the overall growth in the market for film and flexible packaging products. Our most recent acquisitions include the 1998 acquisitions of Ellehammer Industries, Ltd. and Ellehammer Packaging Inc. (collectively, the "Ellehammer Acquisition") and Blessings Corporation (the "Blessings Acquisition"). In order to further benefit from these recent acquisitions, we ceased operations at certain less efficient manufacturing facilities and relocated equipment to more efficient facilities. In addition, we sold certain assets and restructured and consolidated our operations and administrative functions. As a result of these activities, we increased manufacturing efficiencies and product quality, reduced costs, and increased operating profitability. As described in the 1998 10-K, we also undertook certain significant divestitures during 1998. RESULTS OF OPERATIONS The following table sets forth net sales and expenses, and such amounts as a percentage of net sales, for the three and nine month periods ended September 30, 1999 and 1998 (dollars in millions).
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------ ------------------------------------ 1999 1998 1999 1998 ---------------- ---------------- ---------------- ---------------- % of % of % of % of $ Sales $ Sales $ Sales $ Sales ------ ----- ------ ----- ------ ----- ------ ----- Sales - net $200.5 100.0% $183.6 100.0% $561.8 100.0% $481.9 100.0% Cost of sales 161.3 80.4 149.9 81.6 445.5 79.3 399.8 83.0 ------ ----- ------ ----- ------ ----- ------ ----- Gross profit 39.2 19.6 33.7 18.4 116.3 20.7 82.1 17.0 Total operating expenses 21.6 10.8 23.7 12.9 60.1 10.7 50.7 10.5 ------ ----- ------ ----- ------ ----- ------ ----- Operating income $ 17.6 8.8% $ 10.0 5.5% $ 56.2 10.0% $ 31.4 6.5% ====== ===== ====== ===== ====== ===== ====== =====
20 21 THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 1998 Net Sales Net sales increased by $16.9 million, or 9.2%, from $183.6 million, for the third quarter of 1998, to $200.5 million, for the three months ended September 30, 1999. The increase was due primarily to increased sales volumes and increased average selling prices. As compared to the third quarter of 1998, we realized a 5.2% increase in sales volumes in the third quarter of 1999. All three of our operating segments experienced increased sales volumes, led by our design products operating segment with a 10.4% increase in sales volumes and our specialty films operating segment with a 9.1% increase in sales volumes. Our average selling prices experienced an overall increase of 3.1% in the third quarter of 1999 as compared to the third quarter of 1998. As with sales volumes, we realized selling price increases across all of our operating segments. Our third quarter 1999 increase in average selling prices was 9.6%, 5.8% and 4.2% in our design products, industrial films and specialty films operating segments, respectively. This increase in average selling prices was due primarily to increased resin prices, as compared to 1998. In the markets we serve, the average selling price of our products generally increases or decreases as the price of resins, our primary raw material, increases or decreases. Gross Profit Gross profit increased by $5.5 million, or 16.3%, from $33.7 million, for the third quarter of 1998, to $39.2 million, for the three months ended September 30, 1999. The increase related almost entirely to our specialty films operating segment and resulted from specialty films' increased sales volume, improved product mix and improved manufacturing performance. The design products and industrial films operating segments' gross profit remained essentially unchanged in the third quarter of 1999, as compared to 1998. Although these two operating segments increased sales volumes and improved manufacturing performance during the third quarter of 1999, those improvements were offset by raw material prices that increased at a faster rate than our selling prices. Total Operating Expenses Total operating expenses decreased by $2.1 million, or 8.9%, from $23.7 million, for the third quarter of 1998, to $21.6 million, for the three months ended September 30, 1999. The decrease was due primarily to lower plant closing costs in the third quarter of 1999 as compared to 1998. Excluding plant closing costs, operating expenses decreased by $0.6 million or 3.0% for the same period. Operating Income Operating income increased by $7.6 million, or 76.0%, from $10.0 million, for the third quarter of 1998, to $17.6 million, for the three months ended September 30, 1999, as a result of the factors discussed above. Interest Expense Interest expense increased by $0.5 million, or 4.7%, from $10.7 million, for the three months ended September 30, 1998, to $11.2 million, for the three months ended September 30, 1999. Interest expense increased due to increased average interest rates on our bank debt. The increased interest rates were offset partially by lower overall long-term debt in 1999 as compared to 1998. 21 22 NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1998 Net Sales Net sales increased by $79.9 million, or 16.6%, from $481.9 million, for the first nine months of 1998, to $561.8 million, for the nine months ended September 30, 1999. The increase was primarily due to the Blessings Acquisition in May 1998. Operations acquired as part of the Blessings Acquisition are included in our specialty films and design products operating segments. The facilities acquired as part of the Blessings Acquisition accounted for aggregate increased net sales of approximately $75.9 million in 1999. Excluding the sales increases resulting from the Blessings Acquisition, sales volumes increased slightly in the first nine months of 1999 compared to the same period in 1998, and our mix of products sold improved. However, these improvements were offset partially by slightly lower average selling prices in the first three quarters of 1999 as compared to 1998. Gross Profit Gross profit increased by $34.2 million, or 41.7%, from $82.1 million, for the first nine months of 1998, to $116.3 million, for the nine months ended September 30, 1999. The increase was due primarily to increased sales volume resulting from the Blessings Acquisition in May 1998. Excluding the effects of the Blessings Acquisition, gross profit increased due to the realized benefits from our recent consolidation of manufacturing facilities, by improved manufacturing performance, and by increased sales volumes. Total Operating Expenses Total operating expenses increased by $9.4 million, or 18.5%, from $50.7 million, for the first nine months of 1998, to $60.1 million, for the nine months ended September 30, 1999. The increase was due primarily to additional goodwill amortization and operating expenses resulting from the Blessings Acquisition. The increased goodwill amortization represented approximately 43% of the total increase in operating expenses. Operating Income Operating income increased by $24.8 million, or 79.0%, from $31.4 million, for the first nine months of 1998, to $56.2 million, for the nine months ended September 30, 1999, as a result of the factors discussed above. Interest Expense Interest expense increased by $7.4 million, or 29.7%, from $24.9 million, for the nine months ended September 30, 1998, to $32.3 million for the nine months ended September 30, 1999. Interest expense increased because we incurred significant additional long-term debt to fund the May 1998 Blessings Acquisition. LIQUIDITY AND CAPITAL RESOURCES In September 1997, we issued $125 million of 9.125% unsecured senior subordinated notes due October 1, 2007 (the "Notes") and entered into a $225 million credit facility with The Chase Manhattan Bank ("Chase") and certain financial institutions party thereto (the "Credit Agreement"). On May 14, 1998, the Credit Agreement was amended and restated as a $510 million facility (the "Amended Credit Agreement"). The Amended Credit Agreement provides for the continuation of a 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 22 23 $140 million, maturing on September 30, 2005; a Tranche B Term Loan (the "Tranche B Term Loan") in the principal amount of $100 million, maturing on June 30, 2006; and a term loan (the "Mexico Term Loan") to ASPEN Industrial, S.A., our wholly-owned Mexican subsidiary, in the principal amount of $45 million, maturing on September 30, 2005. The Amended Credit Agreement also provides for a $150 million revolving loan facility (the "Revolver") maturing on September 30, 2004. The Original Term Loan, the Tranche A Term Loan and the Mexico Term Loan amortize at an increasing rate on a quarterly basis. The Tranche A Term Loan and the Mexico Term Loan began amortizing on December 31, 1998 and the Original Term Loan begins amortizing on December 31, 2001. The Tranche B Term Loan amortizes at the rate of $1 million per year, beginning September 30, 1998, with an aggregate of $93 million due in the last four quarterly installments. The term loans described above are required to be prepaid with the proceeds of certain asset sales, with 50% of the proceeds of the sale of certain of our equity securities, and with the proceeds of certain debt offerings. Loans under the Amended Credit Agreement bear interest, at the election of the Company, at either (i) zero to 0.75%, depending on certain of our financial ratios, plus the higher of (a) Chase's prime rate, (b) the federal funds rate plus 1/2% or (c) Chase's base CD rate plus 1%, or (ii) the London Interbank Offered Rate plus 1.00% to 2.00%, also depending on certain of our financial ratios. Our obligations under the Amended Credit Agreement are guaranteed by substantially all of our domestic subsidiaries and secured by substantially all of our domestic assets. The Amended Credit Agreement is also secured by a pledge of 65% of the capital stock of each of our foreign subsidiaries. See Note 11 to the Consolidated Condensed Financial Statements included in this report. Net Cash Provided by Operating Activities Net cash provided by operating activities was $25.3 million for the nine months ended September 30, 1999, an increase of $13.6 million from the same period in 1998. The increase resulted primarily from increased net income, increases in accounts payable, decreases in income taxes receivable, and increased non-cash items. These positive cash flow changes were partially offset by increases in inventories and receivables. The increase in inventories and trade accounts payable is due primarily to significant increases in resin prices and the stockpiling of resin inventory to reduce the impact of announced future resin price increases. The increase in trade accounts receivable is primarily due to increased sales volumes. Net Cash Used in Investing Activities Net cash used in investing activities was $25.7 million for the nine months ended September 30, 1999, compared to $294.7 million for the same period in 1998. Net cash used in investing activities was higher in 1998 due to the acquisitions of Ellehammer and Blessings. Capital expenditures totaled $25.7 million for the nine months ended September 30, 1999 and $35.4 million for the same period in 1998. Capital expenditures during 1999 were primarily for major expansion projects in our printed products and barrier films product lines, upgrading and installation of equipment relocated from recently-closed manufacturing facilities and several new and carryover maintenance projects throughout our company. We expect capital expenditures to remain approximately at current levels in future periods. Net Cash Provided by Financing Activities Net cash provided (used) by financing activities was $(7.0) million for the nine months ended September 30, 1999, compared to $285.0 million for the same period in 1998. The activity in 1998 was higher due to the proceeds from the Amended Credit Agreement. The 1999 net cash used by financing activities resulted primarily from payments on our revolving credit facilities. 23 24 Liquidity As of September 30, 1999, Huntsman Packaging had $107.2 million of net working capital and approximately $110 million of available borrowings under the Amended Credit Agreement, approximately $2.3 million of which was issued as letters of credit. As of September 30, 1999, the debt under the Amended Credit Agreement bore interest at a weighted average rate of 7.8%. As of September 30, 1999, we had $13.7 million in cash and cash equivalents, including $12.8 million held by our foreign subsidiaries. The effective tax rate of repatriating this money and future foreign earnings to the United States varies from approximately 40% to 65%, depending on various U.S. and foreign tax factors, including each foreign subsidiary's country of incorporation. High effective repatriation tax rates may limit our ability to access cash and cash equivalents generated by our foreign operations for use in our United States operations, including to pay principal, premium, if any, and interest on the Notes and the Amended Credit Agreement. For the nine months ended September 30, 1999, our foreign operations generated net income from continuing operations of approximately $5.3 million. We expect that cash flows from operating activities and available borrowings under the Amended Credit Agreement will provide sufficient working capital to operate our business, to make expected capital expenditures and to meet foreseeable liquidity requirements. If we were to engage in a significant acquisition transaction, however, it may be necessary for us to restructure our existing credit facilities. YEAR 2000 COMPLIANCE We have performed an analysis of both our computer systems and our production and distribution activities and have implemented procedures to address year 2000 issues. As of November 1, 1999, we have completed modifying our computer systems and application programs for year 2000 compliance. As of September 30, 1999, we had spent approximately $4.5 million on computer systems and application programs upgrades necessary to become year 2000 compliant. In addition to addressing year 2000 issues, these computer systems and program upgrades will significantly enhance our information systems. We will fund these upgrades through operating cash flows. Any costs for new systems will be expensed or capitalized and amortized over the system's useful life, as appropriate. We have a year 2000 third-party compliance policy in place to identify and resolve potential third-party year 2000 problems. Although we are working cooperatively with third parties upon whom we rely for raw materials, utilities, transportation and other products and services, we cannot give any assurance that the systems of other parties will be year 2000 compliant on a timely basis. In the most reasonably likely worst-case scenario involving the failure of our systems and applications or those operated by others, our business, financial condition and results of operations would be materially adversely affected. However, an estimate of the dollar amount of such an adverse effect cannot be practically determined at this time. CAUTIONARY STATEMENT FOR FORWARD-LOOKING INFORMATION Certain information set forth in this report contains "forward-looking statements" within the meaning of federal securities laws. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, financing needs, plans or intentions relating to acquisitions and other information that is not historical information. When used in this report, the words "estimates," "expects," "anticipates," "forecasts," "plans," "intends," "believes" and variations of such words or similar expressions are intended to identify forward-looking statements. We may also make additional forward-looking statements from time to time. All such subsequent forward-looking statements, whether written or oral, by or on behalf of Huntsman Packaging, are also expressly qualified by these cautionary statements. 24 25 All forward-looking statements, including without limitation, management's examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. But, there can be no assurance that management's expectations, beliefs and projections will result or be achieved. All forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in or contemplated by this report. These risks include, but are not limited to, Huntsman Packaging's high degree of leverage and its ability to service indebtedness, restrictions under the Huntsman Packaging's credit facilities, fluctuations in the price of resins (our primary raw materials) and the availability of resin supplies, competition, customer relationships, risks associated with acquisitions and risks associated with international operations. These risks and certain other uncertainties are discussed in more detail in the 1998 10-K. There may also be other factors, including those discussed elsewhere in this report, that may cause our actual results to differ materially from the forward-looking statements. Any forward-looking statements should be considered in light of these factors. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We are exposed to various interest rate and resin price risks that arise in the normal course of business. We finance our operations with borrowings comprised primarily of variable rate indebtedness. Our raw material costs are comprised primarily of resins. Significant increases in interest rates or the price of resins could adversely affect our operating margins, results of operations and ability to service our indebtedness. We enter into interest rate collar and swap agreements to manage interest rate market risks and commodity collar agreements to manage resin market risks. As of September 30, 1999, we had one interest rate collar agreement and two commodity collar agreements in place. The estimated fair market value of the interest rate collar was approximately $100,000 and the estimated aggregate fair market value of the two commodity collars was $300,000. 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. 25 26 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed with this report. 27 Financial Data Schedule (b) No report on Form 8-K was filed during the quarter for which this report is filed. 26 27 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. HUNTSMAN PACKAGING CORPORATION /s/ SCOTT K. SORENSEN ------------------------------------------- SCOTT K. SORENSEN Executive Vice President and Chief Financial Officer, Treasurer (Authorized Signatory and Principal Financial and Accounting Officer) Date: November 15, 1999 27 28 INDEX TO EXHIBITS
Exhibits 27 Financial Data Schedule.
28 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS CONTAINED IN THE BODY OF THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS. 1,000 9-MOS DEC-31-1999 SEP-30-1999 13,677 0 117,835 1,610 77,177 216,783 377,184 70,404 762,294 109,586 125,000 0 0 63,676 22,285 762,294 561,765 561,765 445,506 505,544 (323) 0 32,273 24,271 10,721 13,550 0 0 0 13,550 0 0
-----END PRIVACY-ENHANCED MESSAGE-----