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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________________ TO __________________
COMMISSION FILE NUMBER 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 ( )
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 (X) No ( )
At May 14, 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 MARCH 31, 1998
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION PAGE
- ------ ---------------------
Item 1. Financial Statements . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets at March 31, 1998 and
December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the three months
ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 1998 and 1997 . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . 11
PART II OTHER INFORMATION
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Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . 15
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets (Unaudited)
March 31, 1998 and December 31, 1997
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
(Thousands of dollars)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts and notes receivables, net 19,489 21,900
Accounts and advances receivable -- Affiliates 58,420 78,396
Inventories 49,589 57,443
Current income taxes 3,878 -
Deferred income taxes 5,477 5,543
Other current assets 19,385 20,062
---------- ----------
Total current assets 156,238 183,344
---------- ----------
Net properties, plant and equipment 780,066 727,418
Intangible assets, net 9,254 8,446
Other noncurrent assets 23,723 23,915
---------- ----------
Total assets $ 969,281 $ 943,123
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable $ 43,673 $ 52,740
Accounts payable -- Affiliates 5,222 6,404
Accrued liabilities 14,645 19,216
Accrued interest 6,860 1,723
--------- ----------
Total current liabilities 70,400 80,083
--------- ----------
Long-term debt 174,882 174,882
Long-term debt - Affiliates 350,300 309,590
Deferred income taxes 167,483 166,219
Other noncurrent liabilities 41,575 43,550
--------- ----------
Total liabilities 804,640 774,324
--------- ----------
Stockholder's equity:
Common Stock ($0.01 par value: 1 million shares authorized - -
1,000 shares issued and outstanding)
Additional paid-in capital 173,500 173,500
Retained earnings (deficit) (8,859) (4,701)
--------- ----------
Total stockholder's equity 164,641 168,799
--------- ----------
Total liabilities and stockholder's equity $ 969,281 $ 943,123
========== ==========
See accompanying notes to financial statements
</TABLE>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
THREE MONTHS ENDED THREE MONTHS ENDED
MARCH 31, 1998 MARCH 31, 1997
------------------ ------------------
(Thousands of dollars)
<S> <C> <C>
REVENUES
Trade sales and services $ 28,390 $ 125,316
Affiliate sales 71,970 -
---------- ----------
100,360 125,316
COST OF GOODS SOLD 93,762 108,223
---------- ----------
GROSS PROFIT 6,598 17,093
EXPENSES
Selling, general and administrative 3,573 8,460
Research and development 1,765 1,442
Reversal of environmental accrual - (9,000)
---------- ----------
OPERATING INCOME 1,260 16,191
INTEREST EXPENSE, NET
Affiliate interest (2,791) -
Other interest (5,172) (4,901)
Defense and merger costs - (1,208)
Other expense (3) (174)
---------- ----------
NET INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (6,706) 9,908
Income tax expense (benefit) (2,548) 3,762
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NET INCOME (LOSS) FROM CONTINUING OPERATIONS (4,158) 6,146
Loss from discontinued operations (net of income
tax benefit of $14) - (32)
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NET INCOME (LOSS) $ (4,158) $ 6,114
OTHER COMPREHENSIVE INCOME, NET OF TAX:
Foreign currency translation adjustment (net of income tax
benefit of $337) -- discontinued operations - (549)
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COMPREHENSIVE INCOME (LOSS) $ (4,158) $ 5,565
========== ==========
See accompanying notes to financial statements
</TABLE>
HUNTSMAN POLYMERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-------------------
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1998 MARCH 31, 1997
-------------- --------------
(Thousands of dollars)
<S> <C> <C>
Operating Activities
Net income (loss) $ (4,158) $ 6,114
Reconciliation to net cash provided by (used in) continuing operations:
Loss from discontinued operations - 27
Depreciation and amortization 10,958 5,383
Deferred income taxes 1,330 4,679
Amortization of debt issuance costs 198 430
Changes in operating working capital (net of acquisition):
Receivables (3,775) 157
Inventories 7,854 4,245
Other current assets 677 (2,254)
Accounts payable (10,249) (19,788)
Income taxes (3,878) 1,069
Other current liabilities 566 981
Deferred charges and other noncurrent assets (814) 846
Deferred credits and other noncurrent liabilities (1,975) (8,869)
--------- --------
Net cash (used in) continuing operations (3,266) (6,980)
Net cash provided by discontinued operations - 996
--------- --------
Net cash (used in) operating activities: (3,266) (5,984)
INVESTING ACTIVITIES
Advances receivable - affiliates 26,162 -
Capital expenditures of continuing operations (63,606) (19,861)
Capital expenditures of discontinued operations - (1,295)
--------- --------
Net cash used in investing activities (37,444) (21,156)
FINANCING ACTIVITIES
Intercompany borrowing from parent 40,710 -
Bank borrowing, net of repayment - 48,000
Debt issuance costs and other - (144)
Repayment of advance payment from customer - (900)
Cash dividends paid - (752)
Repurchase of common stock - (159)
Proceeds of issuance of common stock - 52
--------- ---------
Net cash provided by financing activities 40,710 46,097
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS - 18,957
CASH AND CASH EQUIVALENTS AT BEGINNING OF QUARTER - 714
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF QUARTER $ - $ 19,671
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ - $ 1,448
Cash paid for income taxes $ - $ 257
See accompanying notes to 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. Although none of the purchase price has been allocated to
intangible assets, valuation and other studies have not been finalized. It
is not expected that the final allocation of purchase price will produce
materially different results from those presented herein. 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) is summarized as follows (in thousands of dollars):
Current assets $ 100,140
CT Business 70,000
Plant and equipment 700,776
Other non-current assets 55,006
Liabilities assumed (617,533)
------------
Total $ 308,389
------------
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.
Three Months Ended March 31,
----------------------------
1998 1997
Actual Pro Forma
----------------------------
Revenues $ 100,360 $ 125,316
Net income (loss) (4,158) 353
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 $39,691 thousand for the three months ended March 31, 1997.
In connection with the sale, the Company received $70 million in cash, and
the buyer assumed approximately $8 million in current liabilities. No gain
or loss was realized on the sale of the CT Film assets because the value
assigned in the purchase accounting allocation was equal to the selling
price, as adjusted for September's operating results.
3. 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. 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.
Financial Instruments
The carrying amount reported in the balance sheets for cash and cash
equivalents, accounts receivable, and accounts payable approximates fair
value because of the immediate or short-term maturity of these financial
instruments. The carrying values of the affiliate loans and capital lease
approximate fair value as they bear interest at a floating rate plus an
applicable margin. The fair value of the Company's 11 3/4% Senior Notes due
2004 (the "11 3/4% Senior Notes") were derived from quoted market prices.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Raw materials $ 9,237 $ 11,297
Work in progress 6,792 7,952
Finished goods 33,560 38,194
--------- ---------
$ 49,589 $ 57,443
========= =========
</TABLE>
5. LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
March 31,1998 December 31, 1997
------------- -----------------
<S> <C> <C>
Intercompany borrowings $ 297,740 $ 258,055
Capital lease - Affiliate 50,000 50,000
11 3/4% Senior Notes due 2004 174,882 174,882
Other 2,560 1,535
--------- ---------
$ 525,182 $ 484,472
========= =========
</TABLE>
Intercompany loans are made pursuant to the Huntsman Polymers
Intercompany Loan Agreement, dated August 27, 1997, between HGHFC and
Huntsman Polymers Corporation. The loans accrue interest at prime rate
plus a margin of 0.75% and are payable upon demand. Management of HGHFC
has represented that HGHFC does not intend to require the Company to repay
the debt before January 1, 2002, accordingly, such amounts have been
classified as long-term. To the extent permitted by the indenture
governing the Company's 11 3/4% Senior Notes, the intercompany loans are
secured by all of the assets of the Company.
On March 8, 1997, the Company entered into a Capital Lease Agreement
with the Estherwood Corporation to finance the construction of the
Company's REXflexregistered trademarkFPO facility in Odessa, Texas. On
August 27, 1997, the agreement was amended and Estherwood Corporation
assigned all of its rights under the agreement to HGHFC. The principal
economic terms of the lease agreement were not altered. The Company is
obligated to make quarterly lease payments through September 30, 2002. The
lease is secured by all of the fixed assets associated with the FPO
facility.
The 11 3/4% Senior Notes rank pari passu in right of payment with all
senior unsecured borrowings of the Company, including a portion of the
borrowings under the intercompany loan agreement. The 11 3/4% Senior Notes
rank senior in right of payment to any subordinated indebtedness of the
Company. Interest is payable on the Senior Notes semiannually on June 1
and December 1 at an annual interest rate of 11 3/4%. The Company is not
required to make mandatory redemption or sinking fund payments with respect
to the 11 3/4% Senior Notes. The 11 3/4% Senior Notes are not redeemable, in
whole or in part, prior to December 31, 1999.
6. 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 $8.3 million accrued in the March 31, 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 received approval to allow closure of five solid waste management
units, which permitted a reduction in the accrual for potential
environmental liability of $9.0 million in the first quarter of 1997. The
Company historically disposed of its wastewater from the Odessa facility
through injection wells operated under permits from the Texas Natural
Resources Conservation Commission ("TNRCC"). Due to concerns by the agency
regarding the operation of these underground injection wells, and their
intention not to renew the permits after they expired in December 1997, the
Company entered into an agreement with the City of Odessa and the Gulf
Coast Water Disposal Authority pursuant to which the latter is currently
disposing of the wastewater through the refurbished Odessa South Wastewater
Treatment Facility, a publicly-owned-treatment-works ("POTW"). The cost of
refurbishing the City's wastewater treatment facility, which was
approximately $8.0 million, has been financed principally by the Company.
This facility was brought on-line in October and November of 1997.
Wastewater is pumped into this facility where it is mixed with City
effluent as well as other industrial discharges. The water is treated to
meet discharge standards before it is released to an intermittent-flowing
stream for further use. 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.
STOCKHOLDER LITIGATION
On July 23, 1996, the Company was served with a purported stockholder
class action lawsuit filed in the Chancery Court of the State of Delaware,
in and for New Castle County, arising from the Company's rejection of the
unsolicited offer from Huntsman Corporation to purchase the outstanding
shares of Common Stock. The lawsuit names the Company and each of its
directors as defendants. The complaint alleged that the defendant
directors breached their fiduciary duty to stockholders by refusing to
attempt in good faith to maximize stockholder value in the sale of the
Company and engaging in a plan to thwart and reject offers from third
parties, including Huntsman Corporation, in order to entrench management.
Plaintiff sought certification of the lawsuit as a class action, an order
requiring defendants to take various actions including exposing the Company
to the market place in an effort to create an auction of the Company and an
unspecified amount of damages. The Company is also aware of two other
similar lawsuits that are pending in the Chancery Court. Plaintiffs'
counsel in these cases has agreed to an indefinite extension of defendants'
answer date. Under the agreement, defendants do not need to respond to the
complaints until notified to do so by plaintiffs' counsel. Huntsman
Corporation acquired the Common Stock at a price $2.00 per share in excess
of that referred to in the complaint. Accordingly, the Company believes it
likely that this lawsuit will be dismissed.
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 titled "Preparation of
Block Copolymers," the last of which expired in 1994. This action, which
was originally filed in Illinois, was transferred to the United States
District Court for the Southern District of Texas, Houston Division. After
discovery proceedings were completed, the Company filed a motion for
summary judgment. Phillips filed a motion for partial summary judgment.
Pursuant to an agreement among the parties, the court appointed a special
master who conducted a hearing on these motions and thereafter recommended
to the court that the Company's motion be granted and Phillips' motion be
denied. Thereafter, Phillips filed motions to disqualify the special
master, to reject the recommendation of the special master and to enter
partial summary judgment for Phillips. In 1993, the court entered an order
denying Phillips' motion to disqualify the special master. In the
Company's bankruptcy proceeding in 1992, Phillips filed a proof of claim
seeking in excess of $108 million based upon the allegations in this
litigation. The Company objected to the claim and elected to leave the
legal, equitable and contractual rights of Phillips unaltered, thereby
allowing this litigation to proceed without regard to the bankruptcy
proceeding. 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. No
decision has been issued.
Although there can be no assurance of the final resolution of any of
these matters, the Company believes that, based upon its current knowledge
of the facts of each case, it has meritorious defenses to the various
claims made and intends to defend each suit vigorously, and the Company
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.
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 Film 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. 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. 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 are less sensitive to cyclical swings experienced by
commodity grades. Management believes that many of the factors
contributing to the lower selling prices experienced by the industry in
1997 will continue throughout 1998.
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 decreased from 38% for the first three months of 1997 to
29% for the first three months of 1998. Lower industry inventory levels of
crude oil, natural gas and NGL feedstocks and unexpected supply disruptions
caused feedstock prices to increase in late 1996 and remain high in early
1997. The Company's inability in the first quarter of 1997 to pass on the
full amount of the increase in feedstock costs to customers had a
significant impact on operating results for that period; however, feedstock
prices decreased midway through the first quarter of 1997 due to higher
inventory levels and a fairly mild winter season, favorably impacting the
Company's earnings. Management believes that feedstock prices will trend
downward through mid-second quarter 1998 and stabilize throughout the
remainder of the year.
RESULTS OF OPERATIONS
The Merger of Rexene and Centennial 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 affect 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 ended March 31, 1998 and 1997 in the
context of historical data adjusted for discontinued operations.
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
Revenues
The Company's revenue decreased by $24.9 million to $100.4 million
for the three months ended March 31, 1998 from $125.3 million for the three
months ended March 31, 1997 primarily due to decreases in sales of styrene,
polyethylene, polypropylene, and olefin/feedstock sales, partially offset
by an increase in FPO sales. Styrene sales decreased $6.9 million due to a
decrease in average sales price of 2.4 cents per pound and a decrease in
sales volumes of 19.5 million pounds, primarily the result of a transformer
outage at the styrene plant during the first quarter of 1998. Polyethylene
sales decreased $3.5 million due to a decrease in average sales price of
1.1 cents per pound and a decrease in sales volumes of 5.6 million pounds.
Polypropylene sales decreased $3.6 million due to a decrease in average
sales price of 3.9 cents per pound and a decrease in sales volumes of 3.9
million pounds. Olefin/feedstock and other sales decreased $15.2 million
primarily due to a decrease in the olefin average sales price of 3.3 cents
per pound and a decrease in the olefin sales volumes of 4.9 million pounds.
FPO sales increased $4.3 million primarily due to an increase in the
average sales price and sales volumes.
Gross Profit
The Company's gross profit decreased by $10.5 million to $6.6 million
for the three months ended March 31, 1998 from $17.1 million for the three
months ended March 31, 1997. The Company's gross profit as a percentage of
sales decreased from 13.8% for the three months ended March 31, 1997 to
6.6% for the three months ended March 31, 1998. This decrease was
principally due to decreases in sales prices and volumes sold of the
polyethylene, styrene and olefin/feedstock sales as described above,
partially offset by a decrease in manufacturing costs of $14.2 million for
the olefins/feedstocks. Additionally, $5.5 million of increased
depreciation resulting from the Merger was expensed during the three months
ended March 31, 1998, resulting in an equivalent decrease in the gross
profit for that period.
Selling, General and Administrative Expenses
The Company's selling, general and administrative expenses decreased
$4.9 million from $8.5 million for the three months ended March 31, 1997 to
$3.6 million for the three months ended March 31, 1998 principally due to
an administrative restructuring completed following the Merger.
Research and Development Expenses
The Company's research and development expenses increased $0.4
million from $1.4 million for the three months ended March 31, 1997 to $1.8
million for the three months ended March 31, 1998 principally due to
increased salary expense and an increased percentage of allocated corporate
overhead resulting from a reorganization of the research and development
expense structure.
Reversal of Environmental Accrual
An environmental accrual established in prior years was reduced by
$9.0 million during the three months ended March 31, 1997 as a result of
modifications to the Company's remedial action plans at the Company's
Odessa Facility that were approved by the Texas Natural Resources
Conservation Commission ("TNRCC").
Interest Expense, Net
The Company's net interest expense increased $3.1 million from $4.9
million for the three months ended March 31, 1997 to $8.0 million for the
three months ended March 31, 1998 principally due to increased interest
charges incurred in conjunction with the Company's intercompany debt for
the quarter ended March 31, 1998 as compared to the charges incurred in
conjunction with the bank debt held during the same period of the prior
year, as well as higher levels of debt outstanding.
Income Tax Expense
Income tax expense decreased from $3.8 million of expense for the
three months ended March 31, 1997 to $2.5 million of benefit for the three
months ended March 31, 1998 due to decreased operating results.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the three months ended
March 31, 1998 was $3.3 million, a decrease of $2.7 million over the same
period in 1997. This decrease was primarily attributable to a lower net
investment in working capital and an increase in noncurrent liabilities and
noncash items, partially offset by a decline in net income.
Net cash used in investing activities for the three months ended
March 31, 1998 was $37.4 million, an increase of $16.3 million over the
same period in 1997. This increase was primarily attributable to a higher
level of capital spending resulting from the Company's modernization and
expansion program, partially offset by a decrease in the advances
receivable due from an affiliate of the Company.
Net cash provided by financing activities for the three months ended
March 31, 1998 was $ 40.7 million, a decrease of $5.4 million over the same
period in 1997. This decrease was primarily attributable to a lower level
of intercompany borrowings for the quarter ended March 31, 1998 as compared
to bank borrowings incurred in the same period of the previous year.
In connection with the Merger, the Company entered into the
Intercompany Loan Agreement with HGHFC, a wholly-owned subsidiary of
Huntsman. As of March 31, 1998, the Company owed $297.7 million under the
Intercompany Loan Agreement. Subject to certain terms and conditions, the
Company may borrow additional amounts under the 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 three months ended March 31, 1998 were
$63.6 million. The $42.5 million increase in capital expenditures for the
three months ended March 31, 1998 compared to the same period in 1997 was
due primarily to additional spending in connection with the Company's
modernization and expansion program, partially offset by the absence of
capital spending at the Company's discontinued operations. The two primary
components remaining in 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 complete these
projects in the first quarter of 1999 and expects to incur an additional
$135 million in capital expenditures to $160 million in capital
expenditures in connection with these projects. Substantially all of such
additional spending will occur in the remainder of 1998.
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 11 3/4% 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
$8.3 million accrued in the March 31, 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.
The Company historically disposed of its wastewater from the Odessa
facility through injection wells operated under permits from the TNRCC.
Due to concerns by the agency regarding the operation of these underground
injection wells, and their intention not to renew the permits after they
expired in December 1997, the Company entered into an agreement with the
City of Odessa and the Gulf Coast Water Disposal Authority pursuant to
which the latter is currently disposing of the wastewater through the
refurbished Odessa South Wastewater Treatment Facility, a publicly-owned-
treatment-works. The cost of refurbishing the City's wastewater treatment
facility, which was approximately $8.0 million, has been financed
principally by the Company. This facility was brought on-line in October
and November of 1997. Wastewater is pumped into this facility where it is
mixed with City effluent as well as other industrial discharges. The water
is treated to meet discharge standards before it is released to an
intermittent-flowing stream for further use.
YEAR 2000 COMPLIANCE
In response to the year 2000 compliance issue, the Company has
completed an inventory and assessment of all internally developed or
externally acquired system components. The Company has dedicated the
resources to either replace or remediate all known problems. External
service providers have been contacted and have assured the Company that
they will be 2000 compliant. The total cost to the Company of these
efforts is estimated to be approximately $500,000, with the majority being
expensed in 1998.
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 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 first
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: May 14, 1998 By: /s/ J. Kimo Esplin
------------------
J. Kimo Esplin
Senior Vice President and
Chief Financial Officer
INDEX TO EXHIBITS
EXHIBIT
NUMBER EXHIBIT
------- -------
27. Financial Data Schedul
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial
information extracted from the first quarter 10-Q
and is qualified in its entirety by reference to
such 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Mar-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 79,601
<ALLOWANCES> (1,692)
<INVENTORY> 49,589
<CURRENT-ASSETS> 156,238
<PP&E> 805,822
<DEPRECIATION> (25,756)
<TOTAL-ASSETS> 969,281
<CURRENT-LIABILITIES> 70,400
<BONDS> 174,882
<COMMON> 0
0
0
<OTHER-SE> 164,641
<TOTAL-LIABILITY-AND-EQUITY> 969,281
<SALES> 100,360
<TOTAL-REVENUES> 100,360
<CGS> 93,762
<TOTAL-COSTS> 93,762
<OTHER-EXPENSES> 5,341
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,963
<INCOME-PRETAX> (6,706)
<INCOME-TAX> (2,548)
<INCOME-CONTINUING> (4,158)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,158)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
