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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
----------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the
quarterly period ended September 30, 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 1-9988
HUNTSMAN POLYMERS
CORPORATION
(Exact name of registrant as specified in charter)
Delaware 75-2104131
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
500 Huntsman Way
Salt Lake City, Utah 84108
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (801) 532-5200
Indicate by a 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 o
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all
documents and reports required to be filed by Section 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes |_| No |_|
At November 13, 1998, 1,000 Shares of Common Stock, par value $0.01
per Share, of Huntsman Polymers Corporation were outstanding.
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HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
FORM 10-Q FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION..............................................3
Item 1.Financial Statements.........................................3
Consolidated Balance Sheets as of September 30, 1998
(unaudited) and December 31, 1997..............................3
Consolidated Statements of Operations (unaudited) ...............4
Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1998 and 1997 (unaudited)......5
Notes to Consolidated Financial Statements (unaudited)...........6
Item 2.Management's Discussion and Analysis of
Financial Condition and Results of Operations....................12
PART II -- OTHER INFORMATION...............................................19
Item 1. Legal Proceedings.........................................19
Item 6. Exhibits and Reports on Form 8-K..........................20
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Unaudited)
September 30, 1998 December 31, 1997
------------------ -----------------
(Thousands of dollars)
ASSETS
Current assets:
<S> <C> <C>
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 15,007 21,900
Accounts and advances receivable - affiliates 88,491 78,396
Inventories 63,443 57,443
Deferred income taxes 8,090 5,543
Other current assets 12,870 20,062
---------------- -----------------
Total current assets 187,901 183,344
---------------- -----------------
Properties, plant and equipment, net 837,315 727,418
Intangible assets, net 49,902 8,446
Other noncurrent assets 24,975 23,915
---------------- -----------------
Total assets $1,100,093 $ 943,123
================ =================
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 18,753 $ 52,740
Accounts payable - affiliates 105 6,404
Accrued liabilities 17,602 19,216
Accrued interest 6,860 1,723
---------------- -----------------
Total current liabilities 43,320 80,083
---------------- -----------------
Long-term debt 174,882 174,882
Long-term debt - affiliates 382,128 309,590
Deferred income taxes 146,502 166,219
Other noncurrent liabilities 42,831 43,550
Total liabilities 789,663 774,324
---------------- -----------------
Stockholder's equity:
Common Stock, $0.01 par value, 1 million shares - -
authorized
1,000 shares issued and outstanding
Additional paid-in capital 323,500 173,500
Accumulated deficit (13,070) (4,701)
---------------- -----------------
Total stockholder's equity 310,430 168,799
---------------- -----------------
Total liabilities and stockholder's equity $1,100,093 $ 943,123
================ =================
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations (Unaudited)
Predecessor Predecessor
Company Company
Three Months One Month Two Months Nine Months Eight Months
Ended Ended Ended Ended Ended
September 30, September 30, August 31, September 30, August 31,
1998 1997 1997 1998 1997
------------ ------------ ----------- ------------- --------------
(Thousands of dollars)
Revenues
<S> <C> <C> <C> <C> <C>
Trade sales and services $ 24,094 $ 11,573 $ 71,304 $ 79,392 $ 307,603
Affiliate sales 64,389 24,758 - 200,827 -
------------ ------------ ----------- ------------- --------------
88,483 36,331 71,304 280,219 307,603
Cost of goods sold 84,738 28,976 64,222 265,022 250,887
------------ ------------ ----------- ------------- --------------
Gross profit 3,745 7,355 7,082 15,197 56,716
Expenses
Selling, general and
administrative 2,285 2,962 3,527 9,542 19,064
Research and development 2,165 592 1,124 5,804 4,012
Reversal of environmental
accrual - - - - (9,000)
------------ ------------ ----------- ------------- --------------
Operating income (loss) (705) 3,801 2,431 (149) 42,640
Interest expense, net
Affiliate interest (1,092) (1,103) - (6,871) -
Other interest (5,278) (1,477) (3,416) (15,598) (13,890)
Defense and merger costs - (5,719) - (8,500)
Other income (expense) 1,641 (111) (13,396) 8,902 (13,447)
------------ ------------ ----------- ------------- --------------
Net income (loss) from continuing (5,434) 1,110 (20,100) (13,716) 6,803
operations before income taxes
------------ ------------ ----------- ------------- --------------
Income tax expense (benefit) (2,201) 373 (7,769) (5,347) 3,648
------------ ------------ ----------- ------------- --------------
Net income (loss) from continuing (3,233) 737 (12,331) (8,369) 3,155
operations
Loss (income) from discontinued - 218 566 - 2,692
operations (net of income
tax benefits of $55, $141
and $673, respectively)
------------ ------------ ----------- ------------- --------------
Net income (loss) before (3,233) 519 (12,897) (8,369) 463
extraordinary loss
Extraordinary loss (net of - - - - (694)
income tax benefit of $425)
------------ ------------ ----------- ------------- --------------
Net income (loss) $ (3,233) $ 519 $ (12,897) $ (8,369) $ (231)
Other comprehensive income, net
of tax: Foreign currency
translation adjustment (net of
income tax benefits of $323,
$108 and $433, respectively) -
discontinued operations - (527) (177) - (707)
------------ ------------ ----------- ------------- --------------
Comprehensive income (loss) $ (3,233) $ (8) $ (13,074) $ (8,369) $ (938)
============ ============ =========== ============= ==============
See accompanying notes to consolidated financial statements
</TABLE>
<TABLE>
<CAPTION>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited)
Predecessor
Company
Nine Months One Month Eight Months
Ended Ended Ended
September 30, September 30, August 31,
1998 1997 1997
--------------- --------------- -------------
(Thousands of dollars)
Operating Activities
<S> <C> <C> <C>
Net income (loss) $ (8,369) $ 519 $ (231)
Reconciliation to net cash provided by (used in)
continuing operations:
Loss from discontinued operations - 218 2,692
Depreciation and amortization 31,344 3,096 14,808
Deferred income taxes 3,606 187 (2,160)
Amortization of debt issuance costs 651 - 1,130
Extraordinary loss, net of income taxes - - 694
Changes in operating working capital (net of acquisition):
Receivables 7,377 2,618 1,303
Inventories (6,000) (1,701) 2,554
Other current assets 7,192 (1,962) 17
Accounts payable (41,754) (3,777) (7,884)
Other current liabilities 3,523 (10,510) 20,252
Deferred charges and other noncurrent assets (3,459) (279) (20,795)
Deferred credits and other noncurrent liabilities ( 719) (583) (9,191)
--------------- --------------- -------------
Net cash provided by (used in) continuing (6,608) (12,174) 3,189
operations
Net cash provided by (used in) discontinued operations - 649 (5,565)
--------------- --------------- -------------
Net cash provided by operating activities: (6,608) (11,525) (2,376)
Investing Activities
Acquisition of Rexene (see Note 1) - (308,369) -
Advances receivable - affiliates (16,456) - -
Capital expenditures of continuing operations (199,474) (5,736) (72,063)
Capital expenditures of discontinued operations - (147) (3,312)
Proceeds from sale of discontinued operations - 70,000 -
Purchase of intangible assets - - (1,271)
--------------- --------------- -------------
Net cash used in investing activities (215,930) (244,252) (76,646)
Financing Activities
Intercompany borrowing from parent 72,538 252,357 -
Bank borrowing, net of repayment - (100,080) 83,916
Debt issuance costs and other - - (3,182)
Repayment of intercompany borrowings from parent - (70,000) -
Repayment of advance payment from customer - -
Cash dividends paid - (2,259)
Repurchase of common stock - (166)
Proceeds of capital contribution by parent 150,000 173,500 -
Proceeds of issuance of common stock, net - - 251
--------------- --------------- -------------
Net cash provided by financing activities 222,538 255,777 78,560
Increase (Decrease) in Cash and Cash Equivalents - (462)
Cash and Cash Equivalents at Beginning of Period - - 714
Cash and Cash Equivalents at Beginning of Period for
Discontinued Operations - - (252)
--------------- --------------- -------------
Cash and Cash Equivalents at End of Period $ - $ - $ -
=============== =============== =============
Supplemental Cash Flow Information:
Cash paid for interest $ 10,274 - $ 16,160
Cash paid for income taxes $ 180 $ 2,927 $ 1,064
See accompanying notes to consolidated financial statements
</TABLE>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Merger
Effective September 1, 1997 (the "Effective Date") for financial
accounting purposes, pursuant to an Agreement and Plan of Merger (the
"Merger Agreement") by and with Rexene Corporation ("Rexene"), Huntsman
Corporation ("HC") and Huntsman Centennial Corporation ("HCC"), a wholly
owned subsidiary of HC, HCC was merged with and into Rexene, and Rexene
changed its name to Huntsman Polymers Corporation (the "Company"). Pursuant
to the merger, stockholders of Rexene received from HCC $16.00 in cash for
each outstanding share of common stock of Rexene (the "Merger"). As a
result of the Merger, HC indirectly owns all of the presently issued common
stock of the Company. The accounting treatment of the cash consideration
paid by HCC in connection with the Merger is shown under "push-down"
accounting rules.
To finance the Merger, HCC entered into a loan agreement with an
affiliate, Huntsman Group Holdings Finance Company ("HGHFC"). HCC borrowed
approximately $131.1 million under this loan agreement. Additionally, HCC
received an equity contribution from its parent company, Huntsman Polymers
Holding Corporation ("HPHC"), in the amount of $173.5 million. After the
Merger, the Company entered into a loan agreement with HGHFC, and borrowed
$225.1 million (the "Intercompany Loan"). The proceeds of this borrowing
were used to repay debt of HCC assumed by the Company in the Merger and
bank debt of Rexene.
The Merger closed on August 27, 1997.
The sources and applications of funds required to consummate the
Merger are summarized below in thousands of dollars.
Sources of Funds:
Loan agreement with HGHFC $ 225,067
Equity Contribution 173,500
Rexene Working Capital 3,382
----------------
Total $ 401,949
================
Uses of Funds:
Payment of the Merger Consideration $ 301,614
Liquidation of Rexene debt 100,080
Transaction fees and expenses (1)
255
----------------
Total $ 401,949
================
- -------------------
(1) Total transaction fees and expenses totaled $6.8 million,
of which $0.3 million was paid on August 27, 1997. The
remainder were paid using funds provided by operations.
The Merger has been accounted for as a purchase transaction, and
accordingly, the consolidated financial statements subsequent to the
Effective Date reflect the purchase price, including transaction costs and
liabilities assumed based on their estimated fair values as of the
Effective Date. The combined financial statements for periods prior to
September 1, 1997 have been prepared on the historical cost basis.
Operating results subsequent to the Merger are comparable to the operating
results prior to the Merger except for depreciation expense, amortization
of intangible assets, pensions, and interest expense. In addition, Rexene's
pre-Merger common stock was canceled and replaced with 1,000 shares of
common stock (all of which are owned by HPHC), rendering the presentation
of per share data no longer meaningful.
The allocation of the $308 million Merger consideration (including
fees and expenses) was finalized during the three months ended September
30, 1998 and differs from the original allocation as follows (in thousands
of dollars):
Final Allocation Original Allocation
September 30, 1998 August 27, 1997
---------------------- -------------------
Current assets $ 95,770 $ 95,569
CT Business 70,000 70,000
Plant and equipment 639,800 701,697
Other non-current assets 97,215 40,254
Liabilities assumed (594,396) (599,131)
---------------------- -------------------
Total $ 308,389 $ 308,389
====================== ===================
Of the $308 million Merger consideration, $42 million has been
allocated to Goodwill and will be amortized over a period of 20 years.
The following unaudited pro forma data has been prepared assuming
that the Merger and related financing and the sale of the Company's polymer
film manufacturing business known as the CT Film Division ("CT Business")
(see note two) were consummated on January 1, 1997. Amounts are in
thousands.
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
Actual Pro Forma Actual Pro Forma
---------- ------------------ ---------------- --------------
<S> <C> <C> <C> <C>
Revenues $88,483 $107,635 $280,219 $ 343,934
Net income (loss) (3,233) (12,378) (8,369) (8,333)
</TABLE>
The accompanying financial statements of Huntsman Polymers
Corporation and Subsidiaries are unaudited; however, in management's
opinion, all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation of results of operations, financial
position and cash flows for the periods shown, have been made. Results for
interim periods are not necessarily indicative of those to be expected for
the full year.
2. Discontinued Operations
The Company sold its CT Business effective September 30, 1997. The
results of operations for the CT Business have been reclassified as
discontinued operations for all periods presented in the Consolidated
Statements of Operations prior to the Effective Date. Revenues of the CT
Business were $134.0 million for the three months ended September 30, 1997.
In connection with the sale, the Company received $70.0 million in cash,
and the buyer assumed approximately $8.0 million in current liabilities. No
gain or loss was realized on the sale of the CT Business assets because the
value assigned in the purchase accounting allocation was equal to the
selling price, as adjusted for September's operating results.
3. Extraordinary Loss
The Company recorded a non-cash charge of $0.7 million (after tax)
in the second quarter of 1997 to write-off certain deferred debt issuance
costs as a result of a May 8, 1997 amendment to its loan agreement.
4. Summary of Significant Accounting Policies
Description of Business
The Company manufactures products used in a wide variety of
industrial and consumer-related applications. The Company's principal
products are polyethylene, polypropylene, amorphous polyalphaolefins
("APAO"), flexible polyolefin
("FPO") and styrene.
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 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.
Principles of Consolidation
The consolidated financial statements of the Company include its
wholly-owned subsidiaries. Intercompany transactions and balances are
eliminated.
Cash and Cash Equivalents
Highly liquid investments with an original maturity of three
months or less when purchased are considered to be cash equivalents.
Inventories
Inventories are stated at the lower of cost or market using the
first-in, first-out method.
Plant and Equipment and Depreciation and Amortization
Property, plant and equipment is stated at cost. Depreciation is
provided utilizing the straight line method over the estimated useful lives
of the assets, ranging from 3 to 20 years. Improvements are capitalized as
part of major construction projects. Upon disposal of assets, the cost and
related accumulated depreciation are removed from the accounts and
resulting gain or loss is included in income.
Intangible Assets
Debt issuance costs are amortized over the term of the related
debt, ranging from five to ten years. Goodwill is amortized over a period
of 20 years. Other intangible assets are stated at their fair market values
at the time of the Merger and are amortized using the straight-line method
over their estimated useful lives of five to fifteen years or over the life
of the related agreement and are included in "Intangible assets, net."
Income Taxes
Deferred income taxes are provided for temporary differences
between financial statement income and taxable income using the asset and
liability method in accordance with Statement of Financial Accounting
Standards No. 109, "Accounting for
Income Taxes."
Environmental Expenditures
Environmental related restoration and remediation costs are
recorded as liabilities and expensed when site restoration and
environmental remediation and clean-up obligations are either known or
considered probable and the related costs can be reasonably estimated.
Other environmental expenditures, which are principally maintenance or
preventative in nature, are recorded when expended and are expensed or
capitalized as appropriate.
Reclassifications
Certain reclassifications in the 1997 financial statements and
related footnotes have been made to conform to the 1998 presentation.
5. Inventories
Inventories consist of the following (in thousands):
September 30, 1998 December 31, 1997
------------------ --------------------
Raw materials $ 8,590 $ 11,297
Work in progress 11,341 7,952
Finished goods 43,512 38,194
------------------ --------------------
$ 63,443 $ 57,443
================== ====================
6. Property, Plant and Equipment
The cost and accumulated depreciation of property, plant and
equipment are as follows (in thousands):
September 30, December 31, 1997
1998
------------------ --------------------
Property, plant and equipment $ 880,536 $741,954
Less accumulated depreciation (43,221) (14,536)
------------------ --------------------
$ 837,315 $ 727,418
================== ====================
7. Long-Term Debt
Long-term debt consists of the following (in thousands):
September 30,1998 December 31, 1997
------------------ --------------------
Intercompany borrowings $ 327,518 $ 258,055
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due 2004 174,882 174,882
Other 4,610 1,535
------------------ --------------------
$ 557,010 $ 484,472
================== ====================
8. Intangible Assets
Intangible assets, net of accumulated amortization are (in
thousands):
September 30, 1998 December 31, 1997
------------------ --------------------
Debt issuance costs $ 7,173 $ 7,173
Less accumulated amortization (2,472) (1,821)
------------------ --------------------
$ 4,701 $ 5,352
------------------ --------------------
Goodwill $ 42,406 $
-
Less accumulated amortization (2,286) -
------------------ --------------------
$ 40,120 $
-
------------------ --------------------
Other intangible assets $ 5,147 $ 3,105
Less accumulated amortization (66) (11)
------------------ --------------------
$ 5,081 $ 3,094
------------------ --------------------
$ 49,902 $ 8,446
================== ====================
9. Contingencies
The Company and the industry in which it competes are subject to
extensive environmental laws and regulations concerning, for example,
emissions to the air, discharges to surface and subsurface waters and the
generation, handling, storage, transportation, treatment and disposal of
waste and other materials. The Company believes that, in light of its
historical expenditures, it will have adequate resources to conduct its
operations in compliance with currently applicable environmental and health
and safety laws and regulations. However, in order to comply with changing
facility permitting and regulatory standards, the Company may be required
to make additional significant site or operational modifications. Further,
the Company has incurred and may in the future incur liability to
investigate and clean up waste or contamination at its current or former
facilities, or which it may have disposed of at facilities operated by
third parties. On the basis of its investigation and analysis, management
believes that the approximately $8.1 million accrued in September 30, 1998
balance sheet is adequate for the total potential environmental liability
with respect to contaminated sites. Extensive environmental investigation
of the groundwater, soils and solid waste management has been conducted at
the Odessa facility. Risk assessments and corrective measures pertaining to
groundwater and solid waste management units continue to be developed and
implemented respectively. Costs associated with these unit closures are
included in the aforementioned environmental accrual figure. The Company
continually reviews its estimates of potential environmental liabilities.
However, no assurance can be given that all potential liabilities arising
out of the Company's present or past operations have been identified or
fully assessed or that the amounts that might be required to investigate
and remediate such sites will not be significant to the Company.
Railroad Commission Enforcement Action
On May 20, 1998, the Company received a Notice of Opportunity for
Hearing and Original Complaint in an administrative enforcement action
initiated by the Railroad Commission of Texas (the "Railroad Commission").
The action arose from an incident occurring on February 5, 1998 when
ethylene was released from an underground storage facility located at the
Company's plant in Odessa, Texas. The ethylene ignited when it came in
contact with an electrical power line. There were no injuries, and no
significant property damage resulted. The Railroad Commission contended
that the release resulted from violations of Statewide Rule 95 relating to
underground storage of hydrocarbons. The Railroad Commission sought
administrative penalties in the amount of $345,000. On November 3, 1998 the
action was resolved through the entry of a Compromise Settlement Agreement
and Final Order (the "Agreement") by the Railroad Commission. Pursuant to
the Agreement, the allegations were settled and compromised, the Company
paid an administrative penalty of $85,000 and the Railroad Commission
acknowledges that the facility is now in compliance with Statewide Rule 95.
The Agreement does not constitute an admission of fault.
Phillips Block Copolymer Litigation
In March 1984, Phillips Petroleum Company ("Phillips") filed a
lawsuit against the Company seeking injunctive relief, an unspecified
amount of compensatory damages and treble damages. The complaint alleged
that the Company was infringing two Phillips patents titles "Preparation of
Block Copolymers," the last of which expired in 1994. After discovery
proceedings were completed, the Company filed a motion for summary judgment
in the United States District Court for the Southern District of Texas,
Houston Division (the "Court"). On December 23, 1996, the Court entered a
final judgment in favor of the Company after granting the Company's motion
for summary judgment. Phillips appealed the judgment. The appeal was argued
before the Court of Appeals for the Federal Circuit on November 5, 1997. On
September 22, 1998, the Court of Appeals for the Federal Circuit decided
the appeal in favor of the Company, affirming the summary judgment. To the
knowledge of Management, Phillips has taken no further action.
The Company is also a party to various lawsuits arising in the
ordinary course of business and does not believe that the outcome of any of
these lawsuits will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
Through September 30, 1997, Huntsman Polymers Corporation,
formerly Rexene Corporation, conducted its business through two operating
divisions: the Rexene Products division, which manufactured polyethylene,
polypropylene, APAO, FPO, styrene, and olefins and the CT Film division,
which manufactured plastic film. On September 30, 1997, the Company sold
the CT Business to Huntsman Packaging Corporation, an affiliate of the
Company ("Huntsman Packaging"). The Company now consists solely of those
assets which formerly comprised Rexene Products division. Consequently,
management believes that a description of the CT Business' results and
financial condition of the CT Business is not meaningful to an evaluation
of the Company's results of operations or financial condition.
The markets in which the Company competes are generally cyclical
markets that are sensitive to relative changes in supply and demand as well
as general economic conditions. Historically, these products have
experienced alternating periods of tight supply, rising prices and
increased profits followed by periods of large capacity additions resulting
in oversupply, lower selling prices and lower profits. Certain of the
Company's products, such as APAO, are generally less sensitive to economic
cycles. In addition, the Company's polyethylene and polypropylene
businesses are geared toward higher value-added, specialty grades, which
generally are sold at a premium over prices for commodity grades.
Management believes that many of the factors contributing to the lower
selling prices experienced by the industry in the first nine months of 1998
will continue throughout the balance of 1998 and 1999. Like most of the
companies in the industry, the Company's operations have been affected by
the shortages and delay of rail transportation into and out of the Odessa
plant.
Principal raw materials purchased by the Company consist of ethane
and propane extracted from natural gas liquids ("NGLs"), propylene and
benzene (all four of which are referred to as "feedstocks") for the
polyethylene, polypropylene and styrene businesses. Management believes the
feedstock supplies available in Odessa, Texas are currently adequate for
the Company's requirements. The percentage of feedstock costs compared to
the Company's total cost of sales excluding those costs associated with the
CT Business increased from 27% for the first nine months ended September
30, 1997 to 29% for the same period in 1998.
Results of Operations
The Merger of Rexene and HCC effective on the Effective Date for
financial accounting purposes, resulted in the implementation of a new
basis of accounting and thus new carrying values for certain of the
Company's assets, liabilities, and equity. The Company's consolidated
financial statements reflect this new basis of accounting beginning with
the date of the Merger. The Company's operations after the Effective Date
are significantly affected by (1) the incremental depreciation associated
with the net increase in property, plant and equipment, (2) the impact on
interest expense of the replacement of selected debt vehicles with
intercompany debt, and (3) the deferred income tax adjustments associated
with these adjustments. For these reasons, among others, certain financial
information for periods before and after the Effective Date is not
comparable.
Effective September 30, 1997, the Company sold the assets of the
CT Business. The operations of the CT Business are presented as
discontinued operations for all periods presented. The following discussion
is based on a comparison of the three months and nine months ended
September 30, 1998 and 1997 in the context of historical data adjusted for
discontinued operations.
Three months ended September 30, 1998 compared to three months ended
September 30, 1997
Revenues
The Company's revenue decreased $19.1 million to $88.5 million for
the three months ended September 30, 1998 from $107.6 million for the same
period in 1997. The major factors contributing to the decline in revenue
were the continued erosion of prices due in part to the industry's
over-capacity resulting from new capacity additions and continued lower
demand from other world markets, principally Asia. Sales revenue was lower
in all of the Company's product lines except FPO. Polyethylene sales
decreased $3.6 million to $37.9 million primarily due to lower sales
prices. Polypropylene sales decreased $3.2 million to $16.9 million
primarily because of a decrease in sales price. Olefins sales decreased
$8.4 million to $11.9 million also resulting from a decrease in sales
prices. Styrene sales decreased $6.9 million to $11.7 million primarily
because of a decrease in sales volume due primarily to operating issues
resulting from the transformer fire in the first quarter. The Company
continues to achieve premium pricing for its polypropylene and polyethylene
products significantly greater than current commodity prices.
Gross Profit
The Company's gross profit decreased $10.7 to $3.7 million for the
three months ended September 30, 1998 from $14.4 million for the same
period in 1997. The Company's gross profit, as a percentage of sales,
decreased to 4.2% for the three months ended September 30, 1998 from 13.4%
for the three months ended September 30, 1997. This decrease was
principally due to decreases in sales prices of polyethylene, polypropylene
and olefins and volumes for styrene as described above as a result of
downward pressure on pricing and weak export markets.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses
decreased $4.2 million to $2.3 million for the three months ended September
30, 1998 from $6.5 million for the same period in 1997 principally due to
administrative restructuring following the Merger.
Other Income (Expense)
The Company's other income (expense) changed to an income of $1.6
million for the three months ended September 30, 1998 from an expense of
$13.5 million for the same period in 1997. The change is primarily due to
the $13.0 million expense incurred in September 1997 in connection with the
settlement of a lawsuit with Phillips.
Net Income
The Company's net income increased $9.2 million to a loss of $3.2
million for the three months ended September 30, 1998 from a loss of $12.4
million for the same period in 1997. The increase is a result of the
reasons stated above.
Nine months ended September 30, 1998 compared to nine months ended
September 30, 1997
Revenues
The Company's revenue decreased $63.7 million to $280.2 million
for the nine months ended September 30, 1998 from $343.9 million for the
same period in 1997. The major factors contributing to the decline in
revenue were the continued decline in olefins sales prices as well as
reduced selling prices resulting from new capacity additions and continued
lower demand from other world markets, principally Asia. Sales revenue were
lower in all of the Company's product lines except FPO. Polyethylene sales
decreased $11.5 million to $118.4 million primarily due to lower sales
prices. Polypropylene sales decreased $14.2 million to $52.2 primarily
because of a decrease in sales prices. Olefin sales decreased $25.7 million
to $36.1 million also resulting from a decrease in sales prices. Styrene
sales decreased $20.7 million to $41.9 million due primarily to a decrease
in volume due to operating issues resulting from the transformer fire at
the Odessa facility.
Gross Profit
The Company's gross profit decreased $48.9 million to $15.2
million for the nine months ended September 30, 1998 from $64.1 million for
the same period in 1997. The Company's gross profit, as a percentage of
sales, decreased to 5.4% for the nine months ended September 30, 1998 from
18.6% for the nine months ended September 30, 1997. This decrease was
primarily due to decreases in sales prices and volumes of polyethylene,
polypropylene, styrene and olefins sales as described above due mainly to
higher manufacturing costs due in part to plant upsets, downward pressure
on pricing and a weak export market.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses
decreased $12.5 million to $9.5 million for the nine months ended September
30, 1998 from $22.0 million for the same period in 1997 principally due to
administrative restructuring following the Merger.
Reversal of Environmental Accrual
An environmental accrual established in prior years was reduced by
$9.0 million during the first quarter of 1997 as a result of modifications
to the Company's remedial action plans at the Company's Odessa Facility.
These modifications were approved by the Texas Natural Resources
Conservation Commission ("TNRCC").
Other Income (Expense)
The Company's other income (expense) changed to an income of $8.9
million for the nine months ended September 30, 1998 from an expense of
$13.6 million for the same period in 1997. The change is primarily due to
the $13.0 million expense incurred in September 1997 in connection with the
settlement of a lawsuit with Phillips, with additional income in 1998 from
one-time items relating to the licensing of technology and settlements of
commercial disputes and other agreements related to production and
distribution costs.
Interest Expense, Net
The Company's net interest expense increased $6.0 million to $22.5
million for the nine months ended September 30, 1998 from $16.5 million for
the same period in 1997. This increase was principally due to higher
interest rates on the Company's intercompany debt for the nine months ended
September 30, 1998 as compared to the interest rates on the bank debt held
during the same period of the prior year, as well as higher levels of debt
outstanding.
Net Income
The Company's net income decreased $8.7 million to a loss of $8.4
million for the nine months ended September 30, 1998 from an income of $0.3
million for the same period in 1997. The decline is a result of the reasons
stated above.
Liquidity and Capital Resources
Net cash used in operating activities for the nine months ended
September 30, 1998 was $8.7 million, as compared to $13.9 million in the
same period in 1997. Although the net loss and the net investment in
working capital were greater in the 1998 period than the 1997 period, these
were substantially offset by higher depreciation resulting from the
additional capital investment under the Company's expansion and
modernization program.
Net cash used in investing activities for the nine months ended
September 30, 1998 was $215.9 million, as compared to $320.9 million for
the same period in 1997. This decrease is due to the fact that the
investing activities were abnormally high in the 1997 period as a result of
the accounting treatment of the cash consideration paid by HCC in
connection with the Merger under "push-down" accounting rules. Excluding
the effects of the Merger and the proceeds received from the sale of the CT
Business in the 1997 period, investing activities in the 1998 period
increased $133.4 million due primarily to the Company's investment in its
expansion and modernization program.
Net cash provided by financing activities for the nine months
ended September 30, 1998 was $222.5 million, as compared to $334.3 million
for the same period in 1997. This decrease was primarily attributable to a
lower level of intercompany borrowings for the nine months ended September
30, 1998. In addition to intercompany borrowings, the Company received
$173.5 million and $150.0 million in capital contributions from its parent
in the nine months ended September 20, 1997 and 1998, respectively.
In connection with the Merger, the Company entered into an
intercompany loan agreement with HGHFC (the "Intercompany Loan Agreement"),
a wholly-owned subsidiary of Huntsman Corporation. As of September 30,
1998, the Company owed $382.1 million under the Intercompany Loan
Agreement. Subject to certain terms and conditions, the Company may borrow
additional amounts under the Intercompany Loan Agreement. The Company has
guaranteed on a secured basis, subject to the limitations imposed by the
indenture (the "Indenture") governing the Company's 11 3/4% Senior Notes
(the "Senior Notes"), Huntsman Corporation's senior secured borrowings on a
pari passu basis with substantially all of Huntsman Corporation's domestic
subsidiaries.
Capital expenditures for the nine months ended September 30, 1998
were $199.5 million. The $121.7 million increase in capital expenditures
for the nine months ended September 30, 1998 compared to the same period in
1997 was due primarily to additional spending in connection with the
Company's modernization and expansion program. The two primary components
of the Company's modernization and expansion program include the
modernization of the Company's olefins facility and the building of a new
LLDPE facility. The Company expects to spend approximately $90 million
during the fourth quarter of 1998 in connection with these projects. These
projects are scheduled for completion in December of this year.
The Company believes that, based on current levels of operation
and anticipated growth, its cash flow from operations, together with other
available sources of liquidity, will be adequate to make scheduled payments
of interest on the Senior Notes, to permit anticipated capital expenditures
and to fund working capital requirements. However, the ability of the
Company to satisfy these obligations depends on a number of significant
assumptions, including but not limited to, the demand for the Company's
products and raw material costs.
A number of potential environmental liabilities exist which relate
to certain contaminated property. In addition, a number of potential
environmental costs relate to pending or proposed environmental
regulations. No assurance can be given that all of the potential
liabilities arising out of the Company's present or past operations have
been identified or that the amounts that might be required to investigate
and remediate such sites or comply with pending or proposed environmental
regulations can be accurately estimated. The Company has approximately $8.1
million accrued in the September 30, 1998 balance sheet as an estimate of
its total potential environmental liability with respect to investigating
and remediating known and assessed site contamination. Extensive
environmental investigation of the groundwater, soils and solid waste
management has been conducted at the Odessa facility. Risk assessments have
been completed for a number of these facilities and corrective measures
have been defined and conducted. If, however, additional liabilities with
respect to environmental contamination are identified, there is no
assurance that additional amounts that might be required to investigate and
remediate such potential sites would not have a material adverse effect on
the financial position, results of operations or cash flows of the Company.
In addition, future regulatory developments could restrict or possibly
prohibit existing methods of environmental compliance. At this time, the
Company is unable to determine the potential consequences such possible
future regulatory developments would have on its financial condition.
Management continually reviews its estimates of potential environmental
liabilities. The Company carries Pollution Legal Liability insurance to
address many of the potential environmental liabilities, subject to its
terms, limits, exclusions and deductibles, on both a sudden and accidental
basis and on a gradual basis for occurrences first commencing after July 1,
1997 on its operations. The Company also carries Pollution Legal Liability
and Closure and Post Closure insurance on certain facilities at the Odessa
manufacturing location which are regulated by the TNRCC. This insurance
satisfies requirements of the TNRCC governing operations at this location.
Year 2000 Software Compliance
State of Readiness
In 1997, the Company initiated a project to address its readiness
for the year 2000. The Company has managed its Y2K compliance effort in
four primary areas: (1) management information systems, (2) desktops, and
enterprise servers and networks, (3) process operations and control systems
and (4) physical facilities systems.
Management information systems. The Company identified certain Y2K
compliance deficiencies in its Unisys based customer service application.
These problems are being corrected, with testing of the revised system to
be completed in the first quarter of 1999. In addition, the Company's
external data center operator is in the process of upgrading its operating
systems software to achieve Y2K compliance. The operator is currently on
schedule for completing this project in the first quarter of 1999. The
Company believes the balance of applications in the business support
portfolio are compliant.
Desktops and enterprise servers and networks. Desktop and network concerns
relating to Y2K have been identified and are being remedied through a new
desktop and network rollout, which is currently in progress. The rollout is
scheduled for completion in early 1999.
Process operations and control systems. Y2K concerns relating to the
Company's major process control systems have been identified. A significant
portion of these concerns are being addressed in connection with the design
and construction of the Company's new LLDPE facility and the modernization
of the Company's olefins unit. The modernization and expansion program is
planned for completion in December 1998. The Company believes it has
dedicated the necessary resources through the modernization and expansion
program and through retaining outside consultants to render all of the
Company's major process control systems Y2K compliant by mid-1999. All
significant outside suppliers have also been surveyed regarding their Y2K
compliance status. None of these inquiries have revealed significant
deficiencies to date.
Physical facilities systems. The Company has nearly completed a survey of
its physical facilities systems, including telecommunication, security and
uninterruptible power supply systems. To date, no significant Y2K concerns
have been identified in these areas. Preliminary surveys of the two major
infrastructure-related suppliers to the Company's facility, Texas Utilities
and Union Pacific Railroad, have not revealed significant concerns to date.
The Company will continue to investigate these suppliers until it is
satisfied that full Y2K compliance is expected.
Cost to Address the Year 2000 Problem
The majority of the cost of addressing the Company's Y2K issues is
imbedded in the Company's $400 million modernization and expansion program.
This program requires the installation of modern systems, which are already
fully Y2K compliant. While difficult to break out the exact Y2K-specific
costs, the Company estimates the amount to be approximately $2 million.
Beyond the modernization and expansion costs, the Company expects to spend
an additional $1 million, the majority of which will be expensed in 1998.
Of this amount, approximately 50% will be spent on applications. The
balance will be spent on a third party inventory and assessment system
("TAVA"), desktop systems, and manufacturing distributed control systems
("DCS").
Risks and contingency plans
The number and age of the Company's previously installed DCSs
introduce the greatest amount of risk. The Company expects the corrections
to these systems to be complete in early 1999 through upgrades from the
original vendors. The primary focus of the Company's efforts is on the
completion of the modernization and expansion program by the end of 1998.
As a result, internal experts are in short supply. Upon the completion of
the modernization and expansion program, the Company will refocus its
efforts in order to complete its Y2K compliance project by the end of the
second quarter of 1999.
In the event of Y2K-related failures, the Company's primary
contingency plan is to rely on proven manual methods for completing
necessary functions as has been done in past systems outages. While
historically, manual controls have resulted in reduced production, the
Company does not anticipate that such contingency will result in any
material adverse effect on its business. The Company is working to develop
an awareness and sensitivity for potential Y2K-related disruptions among
its employees in order to minimize operational problems in the event Y2K
disruptions occur.
Readers are cautioned that forward-looking statements contained in
the Year 2000 Software Compliance should be read in conjunction with the
Company's disclosure under the heading "Other Matters" shown below.
Other Matters
The Company is including the following cautionary statement in
this Form 10-Q to make applicable and take advantage of the safe harbor
provisions of the Private Securities Litigation Report Act of 1995 for any
forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements included statements concerning plans,
objectives, goals, strategies, future events or performance, and underlying
assumptions and other statements which are other than statements of
historical facts. From time to time, the Company may publish or otherwise
make available forward-looking statements of this nature. All such
subsequent forward-looking statements, whether written or oral and whether
made by or on behalf of the Company, are also expressly qualified by these
cautionary statements. Certain statements contained herein are
forward-looking statements and accordingly involve risk and uncertainties
which could cause actual results or outcomes to differ materially from
those expressed in the forward-looking statements. The forward-looking
statements contained herein are based on various assumptions, many of which
are based, in turn, upon further assumptions. The Company's expectations,
beliefs and projections are expressed in good faith and are believed by the
Company to have a reasonable basis, including without limitation,
management's examination of historical operating trends, data contained in
the Company's records and other data available from third parties, but
there can be no assurance that management's expectations, beliefs or
projections will result or be achieved or accomplished. In addition to the
other factors and matters discussed elsewhere herein, the following are
important factors that, in the view of the Company, could cause actual
results to differ materially from those discussed in the forward-looking
statements:
1. Changes in economic conditions and weather conditions;
2. Changes in the availability and/or price of feedstocks;
3. Changes in management ownership or control of the Company;
4. Inability to obtain new customers or retain existing ones;
5. Significant changes in competitive factors affecting the Company;
6. Environmental/safety requirements;
7. Significant changes from expectations in actual capital
expenditures and operating expenses and unanticipated project delays;
8. Occurrences affecting the Company's ability to obtain funds from
operations, debt or equity to finance needed capital expenditures
and other investments;
9. The cyclical nature of the Company's business;
10. Significant changes in tax rates or policies or in rates of
inflation or interest;
11. Significant changes in the Company's relationship with its
employees and the potential adverse effects if labor disputes or
grievances were to occur;
12. Changes in accounting principles and/or the application of such
principles to the Company;
13. Unavailability of, and substantial delays in, transportation of
raw materials and products.
The Company disclaims any obligation to update any forward-looking
statements to reflect events or circumstances after the date hereof.
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
On May 20, 1998, the Company received a Notice of Opportunity
for Hearing and Original Complaint in an administrative enforcement action
initiated by the Railroad Commission. The action arose from an incident
occurring on February 5, 1998 when ethylene was released from an
underground storage facility located at the Company's plant in Odessa,
Texas. The ethylene ignited when it came in contact with an electrical
power line. There were no injuries, and no significant property damage
resulted. The Railroad Commission contended that the release resulted from
violations of Statewide Rule 95 relating to underground storage of
hydrocarbons. The Railroad Commission sought administrative penalties in
the amount of $345,000. On November 3, 1998 the action was resolved through
the entry of a Compromise Settlement Agreement and Final Order
("Agreement") by the Railroad Commission. Pursuant to the Agreement, the
allegations were settled and compromised, the Company paid an
administrative penalty of $85,000 and the Railroad Commission acknowledges
that the facility is now in compliance with Statewide Rule 95. The
Agreement does not constitute an admission of fault.
In March 1984, Phillips filed a lawsuit against the Company
seeking injunctive relief, an unspecified amount of compensatory damages
and treble damages. The complaint alleged that the Company was infringing
two Phillips patents titles "Preparation of Block Copolymers," the last of
which expired in 1994. After discovery proceedings were completed, the
Company filed a motion for summary judgment in the United States District
Court for the Southern District of Texas, Houston Division (the "Court").
On December 23, 1996, the Court entered a final judgment in favor of the
Company after granting the Company's motion for summary judgment. Phillips
appealed the judgment. The appeal was argued before the Court of Appeals
for the Federal Circuit on November 5, 1997. On September 22, 1998, the
Court of Appeals for the Federal Circuit decided the appeal in favor of the
Company, affirming the summary judgment. To the knowledge of Management,
Phillips has taken no further action.
The Company is also a party to various lawsuits arising in the
ordinary course of business and does not believe that the outcome of any of
these lawsuits will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibits
-------- --------
27 Financial Data Schedule
(b) Reports Submitted on Form 8-K:
There were no reports submitted on Form 8-K during the third
quarter of 1998.
SIGNATURE
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 POLYMERS CORPORATION
Registrant
Date: November 13, 1998 By: /s/ J. Kimo Esplin
---------------------
J. Kimo Esplin
Senior Vice President and
Chief Financial Officer
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